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Wednesday, April 26, 2017

My take on the Trump Effect

 By Blake Thomas (Raleigh)  

For the business community, and more specifically the capital markets, 2017 began with a lot of optimism.

Much of this increase in market confidence could be attributed to the unprecedented November 2016 election of President Donald Trump and of Republican majorities on both sides of Congress. The decisive victories represented a drastic shift within the federal government, gave the Republicans a clear path to policy reform, and signaled to the world that the American people were tired of business as usual, or to be more precise, gridlock as usual, in Washington, DC. Trump’s agenda on the campaign trail and during his first few months in office has been focused on pro-business, pro-growth policies. The pillars of Trump’s Republican agenda have been centered around tax reform, a rollback of Obama-era regulations (specifically in the banking and healthcare sectors), increased defense and infrastructure spending (with corresponding cuts to entitlements and various government agencies), and revised trade policy (think: China and Mexico). The markets are now reflecting the potential impact of these policies as though reform is actually possible in Washington. But, to date, reform largely remains to be seen – outside of executive orders.

Market exuberance was evident immediately following the election results when the 10-year treasury (10-Yr UST) jumped to 2.063% on November 9 from 1.857% on November 8 – a 20.6-basis-point surge overnight. This increase in the long end of the yield curve was not driven by a massive selloff of this financial safe haven by global institutions due to some economic crisis or policy but, rather, a clear signal from investors of strong economic growth expectations.

Remember that nominal interest rates, like the 10-Yr UST yield, comprise two components: real interest and inflation, both of which are impacted by anticipated economic growth. Investors now have higher real interest rate expectations due to greater opportunity costs within the broader capital markets. Moreover, since the U.S. economy had been bouncing along the bottom for the last eight years with inflation below the Fed growth target of just 2%, it does not seem like a stretch to say that the market began suddenly pricing in higher inflation given the expectations for a faster-growing economy. More good economic news came within five days of President Trump’s inauguration, when the Dow Jones industrial average (Dow) crossed 20,000 for the first time in U.S. history. For all but a few days in late January since, the Dow has stayed above this historic mark, peaking at more than 21,000 on March 1. This equity market run-up enforces the notion that there are greater yielding opportunities for capital markets participants. And recently, another key economic indicator, the Conference Board’s U.S. consumer sentiment index, reached its highest level in 16 years.

But what do these gains mean for commercial real estate (CRE)? While the current administration is focused on promoting faster gains in the economy, there will be pluses and minuses for CRE – as well as winners and losers. Following the Reaganomics formula, tax reform should be a boon for overall economic growth by making the U.S. a more competitive environment for businesses in the global marketplace. Proposed corporate tax rate cuts should encourage companies to reinvest in their core businesses, providing additional job and wage growth as well as capital investments in plants and equipment. As such, tax reform is expected to help drive demand for CRE space and continued rent growth. However, along with these proposed tax reforms there have been discussions regarding the elimination of tax deferrals like 1031 exchanges – a move that would negatively impact CRE liquidity and affect all market participants and product types.

Rolling back banking regulations, such as the new risk retention rules of Dodd-Frank and Basil III, would increase liquidity and promote further investment and development in CRE. Although some might argue that, due to the increased regulations, fundamentals have remained in check and helped prolong this latest cycle. Infrastructure investment in roads, bridges and railroads should also provide a lift to CRE as long as commodity prices do not rise significantly due to increased demand for raw materials to support the new public works projects. This type of government spending is designed to not only address our nation’s aging and decaying infrastructure, but also to aid the president’s push to bring back manufacturing and provide additional higher-than-average paying jobs to the U.S. economy. Increased infrastructure investment and wage growth have the potential to bolster CRE values further.

The big question mark surrounds trade and immigration reform. More restrictive trade and immigration policies could undermine economic growth – with the industrial and retail real estate sectors having the most to lose. A near-term reduction in U.S. trade would likely reduce industrial space demand. Ultimately, domestic manufacturing would need to satisfy consumer demand for goods if imports fall. A reduction in imports could lead to wholesale changes in location demand as companies reconfigure supply chains and distribution for domestic fulfillment. The proposed border tax could increase the costs of retailer inventories through a tax on imports, though the U.S. dollar could strengthen and offset the impact.

In most cases, I believe that long-tenure, single-tenant net leased (STNL) retail and healthcare properties could see the smallest benefits from the current administration’s pro-growth policies due to fixed-rent escalations already embedded into pre-existing lease agreements. STNL retail and healthcare properties could even suffer valuation declines if stronger economic growth is accompanied by higher inflation and interest rates – a situation that could increase cap rate spreads and, ultimately, negatively impact reversion values.

In general, market confidence in CRE is warranted in the near term, with significant positive impacts to all product types expected. If some proposed pillars of the Republican agenda promoting wide-scale economic growth come to fruition, then office, industrial and multi-tenant retail properties should see continued healthy rent growth – a trend that would likely offset a cap-rate expansion. Tax reform already seems to have been priced into the markets, and if the administration is unable to push legislation through, a pullback in debt and equities will likely occur.

However, if tax reform is approved by Congress, then the CRE sector may see additional lift due to the removal of the uncertainty surrounding tax reform.

(Blake Thomas is a Vice-President with Avison Young’s capital markets team in Raleigh.)



Thursday, April 20, 2017

Where does sustainability fit into your investment strategy?

By Amy Erixon and Rodney McDonald (Toronto)

As weather patterns become increasingly difficult to predict, and extreme weather events begin to wreak greater havoc on buildings across the globe, the time has come for all real estate investors – not just a few developers or institutions – to incorporate sustainability into their investment decision-making process.

If you’re still wondering if such a shift in thinking is worth it, consider these facts:

More clients and tenants looking for sustainable real estate
If you operate a real estate investment management company, you likely field questions regularly about sustainability options. This situation arises because many investment funds – such as the Healthcare of Ontario Pension Plan – today have their own investment sustainability criteria that guide their investment decision-making process across diverse assets, including real estate, stocks and bonds.

Similarly, many tenants are increasingly attracted to green buildings. In a recent PGIM survey, 78% of tenants said that energy efficiency and green building operations are either important or very important to them.

Sustainability has positive impact on returns
Yes, more sustainable buildings are good for the environment – but they’re good for investors’ bottom lines, too. A 2016 study by Drs. Nils Kok and Avis Devine, published in the September 2016 issue of the Journal of Portfolio Management, looked at 10 years of financial performance data for landlord Bentall Kennedy’s North American office portfolio. The study showed that by reducing energy consumption by 14%, the company was able to increase renewal rates (5.6%), tenant satisfaction (7%), rent (3.7%) and occupancy (4%) – and decrease concessions 4% as well.

In today’s era of rapid social, economic, global and geopolitical change, it’s essential to do your due diligence when acquiring and managing an asset. While many investors and investment management companies use data to guide their decision-making process, they often continue to overlook climate data. Such an omission could be costly down the road. Using climate maps as data points today can help you protect your long-term returns – for example, by helping you to identify areas prone to flooding and take proactive measures to mitigate the financial impacts of severe flooding on your real asset portfolio.

Such foresight will not only help protect your building(s) from environmental damage in the future, but also allow you to avoid higher insurance premiums.


(Amy Erixon is a Principal of Avison Young and Managing Director, Investments. Rodney McDonald is a Principal of Avison Young and leads the firm’s consulting and project management services in Ontario. He also leads Avison Young’s Global Citizenship affinity group, implementing the firm’s corporate social responsibility, sustainability and philanthropy strategy. Both Erixon and McDonald are based in Toronto and can be reached at (416) 955-0000.)

Sunday, April 9, 2017

Calgary Stampede chuckwagon tarp auction an indicator of local business confidence

By Susan Thompson (Calgary)

While not a widely analyzed or recognized economic indicator, the annual Calgary Stampede tarp auction for the chuckwagon races is a solid indicator of business confidence in Calgary.

Chuckwagon racing is one of the most exciting events held annually at the Calgary Stampede, with teams vying for more than $1 million dollars in prize money. Every year, businesses bid on the opportunity to be a sponsor for, and have their logo displayed on, one of the chuckwagons participating in the GMC Rangeland Derby.

Because Calgary’s economy is so strongly tied to the world price of oil, WTI crude oil is one of the most tracked commodities locally. When WTI prices are high, the economy booms. When WTI prices are low, things slow down substantially. As a result, the total amount spent each year on chuckwagon sponsorship packages actually ends up tracking well for economic confidence in the Calgary market.






The monthly average WTI spot price was $30.32 per barrel in February 2016 and $37.55 per barrel in March 2016, while the spot price for February 2017 was $53.47 and $47.70 at close on March 23, 2017, the day of the auction. The total spent on the chuckwagon tarp auction for 2017 was approximately $2.4 million, a better result than the $2.3 million total for 2016 and the low of $1.7 million recorded in 2009.


While recovery remains a long way away, it would appear that thanks, in part, to the recent increase in oil prices, confidence is increasing in Calgary’s business community. It is hoped that this confidence can be maintained and strengthened in the months to come.

(Susan Thompson is the Research Manager in Avison Young’s Calgary office.)


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