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Thursday, January 23, 2020

2020 Outlook for the Houston Market


By Rand Stephens (Houston)


Commercial real estate in Houston, with the exception of the office market, was solid in 2019, and 2020 will be more of the same barring any major surprises. The economy over the last couple of years has been generally healthy with solid job growth and low unemployment. Withstanding a struggling upstream energy business, the overall Houston economy will continue to be positive in 2020.

Office Market Stalemate
The resiliency of the Houston economy amid a stagnant energy sector will likely stay on a positive track in 2020. However, annual job growth will decline to around 50,000 jobs from the approximate 80,000 jobs that were created in 2019. Job growth is the leading indicator for commercial real estate; however, don’t expect the office market to show major strides in 2020. It will be a flat, tenant-driven market that is still reeling from the downturn in upstream energy. Capital markets for upstream energy companies are basically shutdown, leaving merely companies’ available cashflow for restructuring. As a result, the office market is in for a slow, protracted recovery, without much of an improvement for 2020.

That said, there are factors that actually bode well for new construction. On the surface, with the high vacancy rate, it’s not clear why there would be any new construction at all. However, large companies are looking for more efficient floorplans as well as buildings that offer a cool, experiential workplace to attract and retain the best and brightest employees. It’s difficult for Houston’s 1980’s vintage inventory of class A buildings to compete with the new class AA buildings like Skanska’s Bank of America Tower or Hines’ new Texas Tower in Downtown Houston. Expect property management platforms to play a key role in achieving this experiential workplace environment in 2020. Relative to the size of the overall Houston office market, new development is certainly more of an aberration than the norm, but there is a strong likelihood that the Bayou City will see more new development in 2020, albeit, on a very limited basis.

Industrial Heavyweight
The industrial sector had a robust 2019, but there are some cautionary signs of over development as we enter 2020. With approximately 20 (msf) million square feet under development, supply is significantly outpacing demand. So, we expect that new construction will slow down this year to let demand catch up with supply. This “overbuilt” scenario will level out due to the ongoing need for space by industrial companies and retailers that are expanding their e-commerce platforms. Houston’s positive growth in population and jobs will keep pushing the demand for distribution facilities throughout 2020, and with a slowdown in development, demand will catch up with supply. 

Houston – Investor Interest
The overbuilt multifamily and industrial markets combined with the decline in fundamentals in the office and retail markets may reduce investor sentiment for Houston in 2020. Fortunately, capital investors recognize that these challenges do not outweigh the value of Houston’s inexpensive real estate as compared to other major U.S. markets. As a result , Avison Young’s research says that investment activity will stay strong in 2020.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

Monday, December 23, 2019

The Ups and Downs of Houston’s Commercial Real Estate Market in 2019


By Rand Stephens (Houston)


The commercial real estate market in Houston had another good year in 2019. Houston’s economy and job growth remain healthy, despite a lackluster energy market. Industrial continues to be the top-performing sector of commercial real estate while the recovery in the office market is still moving at a snail's pace.

Energy Industry Recovery Hits the Pause Button
The energy industry has a big impact on the office market. Recovery for the oil and gas market slowed to a standstill in 2019, with stock prices down and oil prices in the $50 - $60 range. When oil prices took a nose dive in 2014, the ripple effect trickled into job growth and the office leasing market. It seems to be two steps forward and one step back ever since. Back then, capital markets provided the liquidity for recovery, but today energy companies must restructure and finance themselves. An upswing of the office market is contingent upon job growth in the energy sector and while there were some flickers, it was not sustainable throughout 2019.

Vacancy Rates Spur Positive Changes
Houston office vacancy rates hovered within the scale of 16% most of the year and construction was limited with 1.3 million square feet (msf) completed in 2019, as of mid-December. Employers continue to woo younger employees with amenity-rich office buildings, including food services, mobility services and environmentally-friendly components. Older class A buildings have responded to the newer, modernized buildings, like Capital Tower and 609 Main, by undergoing upgrades and transformations. While this bodes well for tenants, in the long run, it’s not clear whether making significant investments to older buildings will prove out from an investment standpoint.

The trend of tenants upgrading their facilities while becoming more efficient with their space continued in 2019. For example, Direct Energy left their 191,000-square-foot (sf) space in Greenway Plaza for a 105,000-sf office space in Houston Center, which is undergoing a facelift. Companies are now expanding their headcount while using considerably less space. Overall, the better buildings will be the winners, but this trend is a loser for the market as a whole.

Industrial Leads the Way
The industrial market continued to be the driving force for the commercial real estate sector in Houston in 2019. E-commerce and Port Houston maintain their “bread-and-butter” status for the industrial sector. We saw major distribution center commitments by big retailers such as Home Depot and Costco. As was the case in 2018, the fundamentals of Houston’s industrial market had a strong year and are consistent with the performance of the market nationally. Currently, there is close to 20 msf of industrial construction in the works which is expected to be completed in 2020, and more than 50% of that space is unoccupied. The industrial market undoubtedly has a healthy supply of industrial product going into 2020 but absorption continues to be excellent.

Summary
Houston’s commercial real estate industry had a solid year in 2019 despite a stagnant energy sector Our local economy stood strong due to increased population and job growth. What challenges and successes are in store for commercial real estate in 2020? Stay tuned for forecasts and predictions for 2020 in January’s blog. Happy holidays and cheers to a prosperous new year!

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

Tuesday, December 17, 2019

Toronto Real Estate Forum: 2020 Outlook for European Investment Markets

By Tim Francis (London, U.K.)

Last week, I attended Canada’s largest annual national conference on real estate capital markets and investment management. The Toronto Real Estate Forum provides an international outlook on major trends, strategies, risks and opportunities in real estate, including insights on European real estate investment markets. Global geopolitical factors, investment appetites and emerging sectors were at the forefront of conversations.

Current geopolitical and economic drivers influence the risk premiums that are being applied to the required returns investors care about. Factors like Brexit, new European Central Bank leadership and a new European Parliament are increasing levels of uncertainty. Global investors are looking at Europe, which has traditionally been viewed as a safe haven for real estate investment, with a new perspective. While continuously low interest rates have served to sustain investment and compress yields across the continent (2% is the new 3% for core assets), many investors voiced concerns over the high values of European real estate and the current position of the global economy, 12 years out of a 10 year cycle post the previous global financial crash.

However, sustained positivity and appetite to invest were clear throughout the forum. With extremely low, sometimes negative, bond yields, investors are increasingly looking for stabilised income producing assets, which is driving the real estate markets. On top of low bond yields, strong rental growth in many core and secondary markets is alleviating the effects of low real estate yields and driving investment flows. Take Stockholm: the central business district has seen c.40% rental growth in the last three years, providing investors with huge uplift to their return profile. Another driver of demand is the undersupply of Grade A office space across all major European cities. Vacancy rates remain below 2% in most locations, resulting in assets that are still performing well, despite trading at low yields.

The alternative sector has emerged in the last five years as a pathway to achieve opportunistic and core plus returns in Europe. The defensive attributes of alternatives like residential, senior living, or hotels, provide an attractive option for global investors, especially North American capital, due to an under-established investment market when compared to the US. Interestingly, global investors are looking at London as the biggest opportunity in Europe right now. The uncertainty derived from Brexit and the general election has provided opportunity in the market across all sectors. The current discount on Pound Sterling is considered by global investors as providing a ‘double return’, as the currency will inevitably bounce back to higher values in the coming years, although this is not being priced into transactions.

Finally, sustainable investment is growing globally. Many fund managers now have commitments to their own investors to attain certain targets around environmental, social and governance issues. Sustainable investments must align with a commitment to promote sustainable business practices and the conservation of natural resources. Impact investing practices are at the centre of this shift, illustrated through the rise of investment portfolios increasing their exposure to GRESB (Global Real Estate Sustainability Benchmark) assessed infrastructure assets, which increased from 51 global funds in 2016 to 107 in 2019, totalling $471bn this year.

Tim Francis is a Financial Analyst at Avison Young’s London office

Tuesday, December 10, 2019

What the BTR sector can learn from tech

By Arthur Zargaryan (London, U.K.)

Built to Rent (BTR) has been taking over the real estate market and pushing both traditional house builders and institutional investors into this emerging sector. BTR brings along a major paradigm shift, a move from a primary focus on the physical space, to placing increased importance on the provision of a service.

Why would someone pay what might seem a premium for a BTR unit over a regular flat? The answer is almost always the same – convenience. This trend for convenience and bundling is happening across many industries, including tech, where all-you-can consume content providers offer a new level of service to users. While the underlying economics of tech and real estate companies are different, there are still many transferrable lessons. Here are a few.

Economies of scale

Bundling services is only possible at a certain scale. Netflix for instance is only able to make its operation profitable because it has 158 million users worldwide. Real estate can also benefit from economies of scale and bundled experiences.

BTR works best at large scale, with the average size of a completed site in 2019 encompassing 133 units. The average size under construction is 245 units and for schemes currently in planning this rises to 325 units. Larger schemes are better able to support the cost associated with operating such buildings, allowing landlords to negotiate better per unit deals for utilities, furniture and more.

Significant benefits also exist when expanding a portfolio geographically and creating a network of buildings. As people move from city to city, change jobs or start a family, they can always remain within a provider’s BTR ecosystem. This reduces customer acquisition costs while increasing occupancy rates.

Big Tech Data in BTR

Gathering and analyzing the right data can greatly benefit the Built-to-Rent sector, as it has the world of tech. Netflix, for example, uses the data it gains from millions of users to understand what content becomes popular and why, and consequently creating its own shows and movies in its in-house studio.

BTR has huge data opportunities, covering both how physical assets behave, as well as how tenants interact with a building. BTR developments need to be built to a standard that minimizes maintenance and repair costs, while offering attractive design. It is therefore crucial to find materials, appliances and furnishings at the best best price to performance ratio. Key metrics such as power usage or life time of an appliance are crucial in calculating costs and informing future fit-out decisions.

The second data point covers how tenants interact with a space. Key card access or sensors on furniture can track the movement of tenants throughout the building in an anonymised manner. This allows landlords to calculate the occupancy of different common areas and understand how amenities are used. For example if tenants aren’t using spacious common areas as much as anticipated, additional qualitative data collection can help operators understand how to improve spaces in the current and future developments. Capturing and analyzing available data benefits the developer / operator’s bottom line, as well as improving the tenant experience.

Brand Premium

Brand premium charged on BTR is not necessarily achieved through physical design or prime locations. While these help, brand premium is built by putting into place certain processes that ensure better customer service and facilities.

Services such as a concierge or receptionist can add significant value towards the brand premium. Some of the most requested services from front of house staff are parcel management, key management, and security. Parcel Tracker, an app developed by Deepfinity, which is part of Avison Young’s Entrepreneurs in Residence scheme, ensures parcels can be processed more efficiently. Thanks to the simplification of the internal process, up to 70% of staff processing time is saved.

There are a range of software applications such as Parcel Tracker that introduce processes that are simple to implement and can be scaled up from a single building into an entire portfolio, ensuring great and reliable services to tenants and further building upon the brand premium.

Arthur Zargaryan is Co-Founder of Deepfinity Ltd and an Entrepreneur in Residence at Avison Young’s London office

Monday, November 18, 2019

Fourth Annual Apartment Renter Survey Results

by Amy Erixon, Toronto


On September 5, for the fourth consecutive year I gave the Tenant Trends keynote at the Canadian Apartment Investment Conference.   If you would prefer to watch me give the presentation, here is a link: https://www.youtube.com/watch?v=DsrNlca4cr0&feature=youtu.be

Participation in the annual survey continues to climb with improved coverage across the country, and more than 20,000 responses this year.   The report contains numerous insightful findings ranging from large increases in tenant adoption of technology, significant increases in tenant engagement in building programs, and sharply rising evidence of the affordability squeeze.   The gap between what renters want to pay and what they must pay for a unit has been steadily increasing year over year. But this year, the reported percentage of income allocated to housing in all but three Provinces, now exceeds levels considered sustainable, despite incomes climbing for nearly half of all renters during that period.   The housing affordability squeeze cuts across all demographics; is especially acute in Ontario; and renters under age 30 are disproportionately hard hit.   


A second trend, evidencing increasing financial pressures was tenant attitudes and commentary concerning utilities.  In 2016, 80% of renters indicated a preference for utilities to be included in rent.  This year 80% indicated they would prefer to be individually metered to exercise more control over their energy consumption.   Furthermore some 45% expressed an interest in control over systems in their own unit via a mobile app, or smart home system such as Alexa or Google Home.  This is good news for landlords, where sustainability management practices have been thwarted by resistance to individual metering.   Another key affordability finding:  tenant would pay more rent to have free guest parking. 


Year over year we saw a major increase in tenant engagement in building-wide programming with eight categories scoring over 70% for regular or occasional participation by residents.   In descending order of take-up: Social events came in first at 92% participation, followed by cooking classes, volunteer activities, yoga classes, health and wellness speakers, board game & card clubs, and art classes all scoring over 75%, rounding out the list was book clubs at 70%.  Not surprisingly, renters gave their managers overall high marks.  

The most surprising new finding was that more than half of all residents who do not have in-suite laundries want one; and would be willing to pay more to obtain one.     Comments on the survey by on-site leasing personnel indicate that this is generally the first inquiry when a vacancy is posted, prior to asking rent, number of bedrooms or baths, and whether there is a balcony, a preferred amenity by 92% of all renters.  Managers reported that this trend is a reflection of the increasing diversity of the renter population in Canada, with a growing number of religious and ethnic groups showing sensitivity around this lifestyle issue.  

Interestingly, when asked about co-living, 81% of respondents indicated they would never consider it.  
Lack of affordable housing is a hot political topic at present as all parties recognize that this issue is compounding social pressures related to income inequality.   The Toronto Foundation’s annual Vital Signs Report was recently released.  It’s most significant finding was while showing that poverty has decreased dramatically over the past two decades across Canada, income inequality has spiked; most dramatically in the wealth disparity between homeowners versus renters.   The report points to housing prices rising four times faster than income while rents are rising twice as fast over the past decade.  Similar to the US, temporary jobs grew five times faster than permanent ones and part time work grew at twice the rate of full time.   Families facing income insecurity, regardless of their income level, are less likely to become homeowners, which leads to an increasing sense of falling behind. 

 The survey indicated only 17% of all renters have no interest in becoming owners (the “renters by choice, or lifestyle” preference), whereas 40% indicated they no longer believe they will ever be able to afford a condo or home.  The balance reported they are either saving for a downpayment, would not qualify for a mortgage, and/or are in a family transition situation.  

The homeownership ratio in Canada is 67.8%, having fallen by about 2.5% over the past ten years.  This places Canada 37th in the world; with home ownership levels 3% higher than the US, and 12% lower than Mexico, according to Wikipedia.  Interestingly, home ownership levels are highest in Communist or formerly Socialist nations in eastern Europe and Asia, where rental markets have been slow to develop, and the Nordic countries of Western Europe.   In capitalist economies, homeownership has been a distinctive wealth differentiator, and as home value increases have dramatically outpaced incomes.   In some locations, renting has become the economically rational choice, as well as the only real option.  But as rents outpace family incomes, more innovative solutions will be required, given the ones in place today (stabilized rents in the existing stock and limited incentives to increase supply) are insufficient to close the yawning gap.  

To obtain a copy of the survey data or a summary report, or sign up to participate in next year's survey contact Sarah.Segal@informa.com.  




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