Search this blog:
Follow Avison Young:

Tuesday, September 10, 2019

Interest rate volatility affecting investment real estate in Alberta

By Brennan Yadlowski and Ron Dezman, AACI (Edmonton)

Reality has set in concerning Alberta’s investment market: it’s no longer as vibrant as we’d like it to be.

The provincial election in April brought in a government that is pro-business, but the outcome of the upcoming federal election in October is far from certain. Many buyers and vendors still have a disconnect of expectations on real estate investment opportunities in Alberta. Those investors who are showing confidence and making investments in our market will be rewarded in the future through significant cash flow, principal reduction and, in time, capital appreciation. Higher capitalization (cap) rates lead to positive leverage that is difficult to achieve in other major markets throughout Canada. In Alberta, the spread between cap rates and the cost of financing can equate to an excellent yield for investors.

That brings us to interest rates, which are among the most relevant factors in commercial real estate investment. Important as they are, interest rates also rank among the most difficult factors to predict and rely on consistently. In Edmonton’s capital markets (and those across Alberta), interest rates affect most financing assignments that we work on. Investors constantly base their investment decisions on the interest rates that they believe they will obtain after consulting with the debt capital markets team. In a volatile market, less compression on cap rates from market disrupters (such as private REITs) indicate that we are at the trough of an economic cycle.

It is well known that most lenders price their rates on the prime rate, the cost of funds relating to deposits, or as a spread over the Government of Canada (GOC) bond rate for any selected term. For the best assets with strong covenants attached to the transaction, tier 1 lenders such as life insurance companies and schedule A banks will usually base their five-year term rate on a spread of 140 to 180 basis points (bps) over the GOC five-year bond. Tier 2 lenders will usually base their interest rates on their respective cost of funds, resulting in a spread of 220 bps-250 bps over the GOC bond rate.

For example, a neighbourhood retail centre with a solid mix of tenants would trade in Edmonton in the 6.25% to 6.75% cap rate range, according to Altus. On this type of asset, the overall interest rate (based on the spreads listed above) would currently be 3.05% to 3.70%. This variance of 3.00% to 4.00% is attractive to many private investors in our market.

Lately, however, we have seen some Alberta lenders implement a floor rate around the current prime rate (3.95%). The trend in GOC bond rates through the first eight-plus months of 2019 has been volatile – to say the least. The wide swings that we have seen this year are reflected in the graph below. As indicated by the orange line, the yield curve today has inverted, as the five-year GOC rate was higher than the 10-year rate on August 15.

This trend could cause lenders to cut fixed interest rates relative to floating rates in the near future. Many investors prefer the certainty of a fixed rate when calculating their yields on a real estate asset. We are seeing interest rates on the A-class industrial, office and retail assets well under 4.00%, something that hasn’t happened in the last two years. This situation creates an excellent opportunity for many investors in Alberta to acquire industrial, office and retail assets at cap rates above 6.00%.


  • Investors: Be ready to set the interest rate.
  • As the federal election campaign gains steam, interest rates may begin to rise and continue to rise towards the end of the year.
  • Amid the downward trend in bond rates, the stock market has remained relatively strong.
  • We are five years into the last economic downturn in Alberta, and lease terms should be coming due for many tenancies that were on five-year terms. How these are dealt with can provide more income certainty and impact investment decisions.

(Ron Dezman is a senior vice-president in Avison Young’s Edmonton office. Brennan Yadlowski is an associate in Edmonton. Both are members of the company’s Alberta capital markets team.)

Tuesday, September 3, 2019

Working on a much bigger play for the time when AI will actually work!

By Mark E. Rose (Toronto)

In my last blog, I discussed how organizations are constantly adapting to the changing workforce and new technologies. At Avison Young, we have invested in PropTech, but we are working on a much bigger play for the time when AI will actually work. We have launched a project called Project 2021 and have a differentiated approach to what will be here soon -- and who should actually support it.

For a more in-depth commentary on the role of AI in commercial real estate, other macro and micro trends and drivers, and our company’s dramatic growth in recent years, you can listen to a recent podcast I was invited to speak on with journalist Steve Lubetkin: (start at 24:58-minute mark).

“The technology isn’t where the power is. It’s the behaviour and usage of the technology... The human beings, the top talent, the value-added provider who employs technology to deliver service and solutions – that’s the value, that is what clients are looking for today.”

“Clients value ‘value’ over commodity. Any company that isn’t focussing on the value-added service delivery to the client is doing so at its own peril.”

“I am extremely bullish. I would love for there to be a correction in terms of pricing, because I don’t think it’s sustainable for cap rates to be as low as they are. But with that said, I have never seen in my 35 years the amount of capital out there to be put to work in debt and equity. And that bodes really well for our industry.”

“If you think of a major market where real estate inventory and decision-makers sit, those are the geographies that we want to be in.”

“We are looking at the U.S., which is still a dominant force in the real estate services field; the U.K. Germany, France, China obviously and Hong Kong, Japan, India, Singapore, but all of the sudden, South Korea is a dominant force. Capital flows are moving out of South Korea all across the globe, clearly into the U.S., clearly into Canada, clearly into the U.K…. Where you have population, where you have the headquarters of businesses, these are the places where real estate thrives.”

“We hand-pick who comes in… We are actively reviewing over $2 billion of run-rate revenue of people who would like to join Avison Young. That’s in addition to what we already have.”

(Mark E. Rose is Chair and CEO of Avison Young.)

Wednesday, August 28, 2019

Office space constrained across global markets as co-working and knowledge economy continue to expand

By Mark E. Rose (Toronto)

Despite increasing headwinds and political uncertainty, the relative health of the economy and labour markets continues to provide a positive foundation for office space demand across major global markets. We continue to see significant development in urban areas of major metropolitan markets across all countries in which we operate.

The impact can be seen on city skylines, which are changing rapidly, and in the delivery of new forms of workspace driven by organizations that are constantly adapting to their changing workforces and new technologies.

The large development pipeline is being more than offset by robust demand. This situation is particularly true for good-quality class A space with pre-leasing levels at historic highs.

The most significant story now is the proliferation of co-working space. The ever-increasing demand for flexibility from occupiers, as well as the evolution of technology, has resulted in a co-working boom across the globe. This growth has led to new markets being opened for providers of shared workspace.

Office market fundamentals continue to be sound across both the U.S. and Canada, with robust demand continuing to drive down vacancy levels in most major markets. In the U.K., the looming Brexit deadline has done little to stymie demand, while in Germany, leasing activity continues to be above average.

You can read more here in my interview with this month:

(Mark E. Rose is Chair and CEO of Avison Young.)

Tuesday, August 20, 2019

Triangle remains outstanding class A apartment value play

By Marcus Jackson (Raleigh, NC)

North Carolina’s Research Triangle metropolitan area is enjoying significant positive momentum across all real estate market sectors.

In fact, I believe the Great Recession improved our region’s competitive position against the nation’s larger cities. Before the recession, we were considered a second-tier city, both in terms of size and investment climate. Now, we are an institutional investor darling and ranked by the Urban Land Institute (ULI) as the No. 3 U.S. market to watch for real estate prospects in 2019.

Our rapidly growing region has witnessed strong rent appreciation while remaining an outstanding class A apartment value play for tenants and investors alike. The Triangle has also undergone rapid urbanization in the last decade, with billions of dollars of public-private investment in our cities’ urban cores. The ULI now classifies the Triangle as an 18-hour city, increasing our attractiveness to potential talent and investment dollars. There are always silver linings to our down cycles.

Historically, the top driver for the Triangle has been Research Triangle Park (RTP). Founded in 1959 and situated centrally among the region’s anchor cities of Raleigh, Durham and Chapel Hill, RTP is one of the top technology and pharma parks in the world. RTP spans 7,000 acres and is home to 250 companies and 50,000 employees. The Triangle is also known as a top global destination for healthcare and education, thanks to the presence of three tier-one research universities and two teaching hospitals.

Our metro area is dominated by Durham and Raleigh which are the subject of this blog post. Founded in 1792, Raleigh has a population of 471,317 and a land mass of 144 square miles. The city serves as North Carolina’s state capital and is home to North Carolina State University. Raleigh’s central business district (CBD) has 5.1 msf of leasable office space and is 14 miles from RTP, via seven traffic lights.

Founded in 1869, Durham has a population of 275,758 and a land mass of 108 square miles with a downtown office market comprising 4.2 msf, of which more than 1 msf is occupied by Duke entities. Durham is home to Duke University and Duke Medical Center/VA Hospital (included in the downtown) with 1,600 beds. The CBD is just six miles from RTP, via the Durham Expressway.

Perhaps the number one question that I receive regarding our unrelenting growth is focused on the intense level of multi-family construction taking place Triangle wide, but especially in our urbanized areas. In spite of our heavy construction pace, our entire metro area is ranked No. 4 in the nation in terms of apartment rental growth, according to Since the Great Recession, the vast majority of construction in our CBDs has been multi-family, along with public-sector new investment. Only recently have office towers begun to rise. This article examines how our new urban apartments are performing, and what opportunities and challenges may lie ahead.

Prior to 2012, downtown Durham, including the Duke University area, had an inventory of 1,127 apartments in three communities. Since that time, 3,684 units have been added to the downtown area. Current effective rents average $1.82 per square foot (psf) with an average unit size of 903 square feet (sf) and an average unit monthly rent of $1,700. Four communities achieve more than  $2 psf. Two high-rise projects have been delivered in the last year, with One City Center achieving average rents of $2.39 psf, plus $70 per space per month for parking. One City Center is a 26-story vertical mixed-use development with retail, office, apartments and condos. The second project, Van Alen, is achieving $2.04 psf, but just delivered in April 2019. Class A vacancy stands at 16%, which is not surprising given that 1,021 units have been delivered since January 2018.  Another 506 units are under construction.

Downtown Raleigh, including the Cameron Village area, had an inventory of just 753 apartment units in three communities prior to 2012. Since that time, 3,255 units have been added to the submarket. Current effective rents average $1.94 psf, with an average unit size of 810 sf and an average unit monthly rent of $1,588. Two communities are achieving more than $2 psf in rent. Concessions in this CBD are also minimal. Downtown Raleigh has just one high-rise community – SkyHouse –and it achieves effective rents of $2.12 psf. Class A vacancy stands at 7.9%, with 260 units having been delivered since January 2018. Another 1,201 units are under construction.

To a great extent, both downtown Raleigh’s and Downtown Durham’s growth figures have paralleled each other. Both CBDs include units under construction representing about 20% of in-place inventory. The weighted average walk score (WS) is 84 for downtown Raleigh and 74 for downtown Durham.

One profound structural difference between the two CBDs is the fact that downtown Raleigh is impacted by a quickly rising trend of urbanizing suburbs. Durham currently has no high-walkability suburban nodes, where structured parking is demanded by constrained large-site availability. Raleigh has four rapidly urbanizing suburban nodes: North Hills (WS: 64), The Trader Joe’s area (WS: now 27 but likely to rise quickly), the Crabtree Valley Mall area (WS: 40) and Olde Raleigh (WS: 44). Combined, these nodes have a class A inventory of 5,057 units with a vacancy rate of 10.2%. The weighted average effective rent is approximately $1.61 psf, and many projects are dominated by surface parking, making them more affordable than their urban competitors. With the combination of affordability and high coverage ride-sharing options, these urbanizing nodes provide indirect competition to downtown.

For a variety of reasons, downtown Raleigh’s and downtown Durham’s growth marches are at a crossroads with regard to high-end apartment sectors. The institutional-investor viewpoint is that the local market has performed exceptionally well despite abundant new supply. In fact, there is a bullishness only driven higher by our region’s robust population and economic growth. At the same time, rising costs are becoming a significant factor.

“All the easy sites are gone” is an increasingly common refrain from developers. As wrap product sites have been absorbed, podium-style construction has become more common, as it will work on smaller sites. But, even now, the podium sites are starting to dwindle quickly. Construction costs are rising rapidly, and ongoing tariff concerns are exacerbating the issue. From a regulatory standpoint, timeframes continue to extend for zoning and entitlement, and risks associated with anti-growth sentiment are rising along with a louder and louder drumbeat to promote affordable housing.

As with many of the non-gateway cities, the question for the Research Triangle region is: can it graduate from primarily stick-built structures to concrete and high-rise construction? The general rule of thumb here is that we need rents in excess of $2.25 psf to achieve that goal; however, we are clearly not there yet. If rents do not yet justify high-rise construction, how does our market handle the continued in-migration and employment growth that are fueling demand?

The answers to the above two questions depend upon developer creativity and our early success. The three high-rise projects that have been built are responding well to needed high rents. Secondly, we are also seeing a flight to more edgy areas of both CBDs, where land is less expensive and parcel sizes are larger, thus enabling less expensive construction. Traditional boundaries for downtowns will have to be expanded in Raleigh and Durham, as well as in many cities across the U.S. With the proliferation of ride-sharing services such as Uber and Lyft, tenants can occupy these projects just outside the traditional boundaries of the CBD and still have great access to a downtown core’s exceptional amenities.

Thirdly, co-living and smaller unit sizes are starting to emerge to create new multi-family target markets. But here in the Triangle, we are early at this point in our evolution. Lastly, I believe that we will begin to see boutique communities where, to some extent, exceptional locations will replace the need for more expensive, land-intensive amenities, such as pools. Boutique apartments also have more design flexibility and can occupy sites even smaller than those needed for podium construction.

Change is the only norm in our challenging profession, and the rate of change is unrelenting. As noted above, many pressures are bearing down on the multi-family sector. And just when the trend line says a developer’s job is getting more difficult, millennials are starting to age and go through life changes. They are marrying later but are increasingly having kids before marriage. And, these young people are showing signs of wanting to move to adapt to a future family. Some will move to urbanized suburbia, but some are starting to buy. We are also seeing a rapid rise in urban townhome development. All of these challenges are also creating opportunities.

The key question now is: which developers will recognize those opportunities early enough to convert them into successful projects?

(Marcus Jackson is a Principal of Avison Young based in Raleigh-Durham. A member of the firm’s capital markets group, Jackson specializes in urban investment services, including brokerage, capital-markets solutions, asset repositioning and development advisory services.)

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.