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Monday, June 17, 2019

Effective affordable housing delivery offers solution to crisis

By Patrick MacMahon (London, U.K.)

Introduction
A major housing crisis grips the U.K. and is set to have dramatic social and economic consequences for generations to come. 

In response, cabinet ministers are targeting the construction of 300,000 homes per year by 2025. After just 184,000 were constructed in 2016-17, the target remains a formidable challenge to overcome. 

In 2018, the Letwin review, an independent review of build-out rates led by MP Sir Oliver Letwin MP, highlighted the need for a variety of housing tenures to drive delivery rates, putting a particular emphasis on affordable housing. With private developers struggling to meet government targets alone, the key to unlocking the housing crisis lies in the delivery of more affordable homes and an increasingly interventionist approach from government at both a national and local level. Indeed, in a country with an abundance of empty homes (635,000, according to the U.K. government’s Ministry of Housing, Communities and Local Government ), the crisis is one of affordability, not just supply. 

Let’s discuss what defines the term affordable housing, how it can maximise delivery and consider what role garden cities may have in unlocking the delivery of homes that communities can afford.

What is affordable housing?
Affordable housing has become a somewhat dirty phrase in the residential development industry, lamented by some developers as the barrier to viable projects and by others as not being truly affordable at all. Affordable housing is defined by the government through three broad strata:
•  Social Rent – Well below market rent levels and set using an established formula based on local incomes, property values and the size of the property (on average c. 50% of market levels). 
•  Affordable Rent – Subject to rent controls keeping rent at a maximum of 80% of market rent (60-65% in London). 
•  Intermediate – Housing for rent or for sale which is above social rented levels but below market levels. These include shared equity and low-cost homes.  

It remains to be seen whether these tenures in isolation provide sufficient breadth to meet the needs of the population. Affordable rent was introduced in 2010 to stimulate the delivery of affordable housing; the increased rental income designed specifically to fund further development in lieu of government grants. However, occupants of affordable rented housing often required extra state support through housing benefits to pay the higher levels of rent compared to social rented housing. As a result, the veritable saving on the public purse was limited. In fact, the graph below shows that overall affordable housing delivery actually declined since affordable rent was introduced:   


Affordable housing and delivery rates
Diversity and affordability of housing product are widely accepted as the principle answers to accelerated housing delivery. Both the 2014 Lyons review, a report based on the findings of an independent group of 12 housing experts chaired by Sir Michael Lyons, and the Letwin review support this idea, stating that there is virtually limitless demand for affordable housing. However, a pertinent question remains: who is going to build it? 

Traditional volume homebuilders have increased total housing output by 55% in the last five years and have a big role to play in reaching the federal government’s target. However, developers will not deliver housing in excess of absorption rates to ensure their profit margins remain healthy. Furthermore there is little incentive for developers to deliver more affordable tenures than government policy requires.

Housing associations have reverted to a cross-subsidy model (i.e. market housing subsidises the affordable) which, aside from the social criticisms, exposes them to a cyclical housing market slowdown. Given the pressure that these organisations have come under, it is hardly surprising; the average cost to build an affordable home has risen 42% in the last 10 years, whilst simultaneously government grants have dropped by two thirds.  More grant funding is required to enable counter-cyclical sub-market rented homes to be built – which not only de-risks the housing associations’ position but also ensures that homes continue to be built during a market downturn. Homes England’s recent announcement that it will expand its range of interventions over and above grant funding provides encouragement that this trend can be reversed. 

Local authorities have a growing role to play. The recent abolition of the Housing Revenue Account (HRA) debt cap removed one of the biggest constraints on council house-building, with local authorities now able to borrow more money to invest in large-scale development. Collaboration and joint-ventures with the private sector can help to ensure that local authorities have the skills to capitalise on this situation. 

A garden city-based solution 
The garden city principle embeds well-planned sustainable communities with a mix of housing for all. The concept dates back to a vision by Ebenezer Howard in 1898 to combine the energy and dynamism of town life with the serenity of the countryside. This seemingly utopian vision led to a number of garden city experiments and, subsequently, to the New Towns programme in 1954, which was a groundbreaking achievement in large-scale planned development.

The Town and Country Planning Act’s garden city principles today require “mixed-tenure homes and housing types that are genuinely affordable, as well as a range of sustainable and community-stewardship priorities. Alok Sharma, the former housing secretary, estimates that the new garden cities can deliver around 220,000 homes and will be crucial to long-term housing delivery. With garden cities and new towns firmly back on the political agenda, they represent the opportunity to deliver affordable housing on a large scale, maximising the delivery of quality housing that people can afford to live in.  

In the current climate, crucial to the success of the new garden cities and the delivery of affordable housing as a whole is significant government funding. It is imperative that this funding is combined with intelligent intervention – and incorporates sustainable and social values which enable new communities to thrive. Unless such an approach is taken, the target of delivering 300,000 homes per year by 2025 will remain extremely difficult to achieve. 

(Patrick MacMahon is a Development Surveyor based in Avison Young’s London, U.K. office.)

Monday, June 3, 2019

Urban enclaves: Massive mixed-use transit-oriented developments taking root in Metro Vancouver, British Columbia


By Andrew Petrozzi (Vancouver)
There has been an ongoing process towards the establishment of what I’ve termed urban enclaves – massive mixed-use transit-oriented developments – throughout Metro Vancouver with the first phases of these projects being delivered in 2019; however, there have been a couple of key junctures in this process that led to this rise of ‘cities within the city.’
The birth of this process locally began with the July 2011 adoption of MetroVancouver 2040: Shaping Our Future by Metro Vancouver, a regional federation of 21 municipalities, one electoral area and one Treaty First Nation. (A Treaty First Nation refers to a First Nation that has signed a modern treaty with the Government of British Columbia.) This regional planning document laid out the details of a regional growth strategy (RGS) that provided recommendations to guide municipal development decisions in order to sustainably accommodate the addition of more than 1 million new residents anticipated to arrive by 2040. Among its many recommendations, the RGS laid out the locations and definitions for what it termed “urban centres (UCs)” and “frequent-transit development areas (FTDAs)” among several other similar designations for the entire region. These designations in the RGS, particularly UCs and FTDAs, provided direction to not only municipalities, but also developers and investors and specified where growth and density would be encouraged in Metro Vancouver’s highly land-constrained market.
The second phase in the evolution of urban enclaves, which ran from 2012 to 2017, was the result of a confluence of factors. Ongoing price increases for all commercial asset types, declining rental vacancy, rising house prices, the increasing pinch of the perennial region-wide shortage of developable land and (at last!) definitive planning direction that specified where higher densities could occur. This planning direction provided greater certainty to developers and investors, allowing them to re-examine retail assets with a large land-use component (primarily, but not exclusively, traditional car-centred regional shopping malls) that were located in many of the UCs and FTDAs outlined in the RGS. This (re)evaluation by developers and investors used different metrics than were previously utilized to determine the value of shopping centres. Developers and investors who understood the potential advantage in unlocking the new value of these sites positioned themselves during this period to acquire building assets or land and/or review their existing portfolio holdings in these areas (although a couple of key sites were acquired in 2010 – while the RGS planning document was in process – by purchasers who, perhaps saw the writing on the wall.)
Concurrently in this five-year period, municipalities in Metro Vancouver were responding to the RGS document that required them to update their respective zoning bylaws or, in many cases, the community or master plans for the UCs and FTDAs identified in their communities to mesh with the goals outlined in the RGS. The earliest of these plans were ready by 2012 and continued to be rolled out through 2017 in communities such as Burnaby, Vancouver and Surrey. Construction had largely commenced by 2015-16 on this first wave of urban enclaves with their first phases set for delivery in 2019. Similar developments in other municipalities, including Richmond and Coquitlam, remain in progress. The idea of building up density on nodes along rapid transit is not unique to Metro Vancouver – it has been occurring in some form or another in land-constrained markets around the world for years – but the scale and number of such developments occurring in such a small geographic area likely represent a phenomenon that is likely unique to the region.
These urban enclaves are the tangible manifestations of the future that Metro Vancouver staff envisioned and planned for back in 2011 in order to keep the region liveable as it grows and expands. As more and more people start to call these high-density nodes home, people’s expectations of how and where they live in the region will change. People moving to, and living in, Metro Vancouver in the coming decades will become more accustomed to tower living, but the expectations of what will be available at their doorstep is also evolving to include not only retail, hospitality and entertainment options, but parks, community centres, medical services and the transit options necessary to get around the city as the cost of owning and operating a vehicle becomes prohibitive. Effectively, these compact communities will evolve into microcities, a trend already present in much larger global cities such as New York, London and various Gulf State cities. Metro Vancouver’s urban enclaves have come to represent the beacons of density envisioned by city planners, progressive politicians and transit advocates alike.   
To learn more, please read Avison Young’s topical report Future Forward: The Rise of Urban Enclavesin Metro Vancouver.
(Andrew Petrozzi is a Principal of Avison Young and Practice Leader, Research (BC). He is based in the company’s Vancouver office.)

Wednesday, May 22, 2019

The Future of the Parking Garage

By Rand Stephens (Houston)

It is no longer a matter of “if” driverless cars will be on the road, it’s a matter of “when.” And, that “when” is sooner than most people think. Some grocery stores in the Houston area are already delivering groceries to homes using autonomous vehicles and in June, METRO along with Texas Southern University (TSU), will launch Phase 1 of their first driverless vehicle dubbed Generation 2. It won’t be long before private autonomous vehicles hit the road. Personal mobility will have implications reaching beyond the automotive industry. Some speculate that the parking landscape in metro areas will be fundamentally restructured, which can lead to new challenges and opportunities for commercial real estate.

Theoretically, a driverless car will rarely need to park because it will drop off passengers at their destination, then drive off to pick up another passenger or collect your groceries. Street parking could be replaced with drop-off/pick-up zones, and parking garages could become “urban mobility hubs” where autonomous vehicles will refuel, recharge and undergo cleaning and maintenance. All this is still dependent on how many will actually use this new technology. We know it’s coming, but it will be a while before it becomes an actual way of life. Cell phones have been around for a couple of decades, but not everyone has given up their land line yet.

Source: DowntownHouston.org
Almost 160,000 people work in Downtown Houston and roughly 60% drive to work. There are approximately 100,000 parking spaces in 42 existing properties classified as parking garages in the Central Business District, totaling 10,190,359 square feet.

With the population growth on the rise, it’s hard to imagine that parking areas will become obsolete. And, adaptive re-use of parking garages is much too costly. Some estimate it can cost as much as $90 to $100 per square foot. It would make more sense to tear it down.

It will be a gradual transition. It is likely to start with transforming street parking into mobility drop-off/pick-up spots, delivery zones, etc. Perhaps that will be the next “must have” amenity that tenants will be looking for. Parking lease clauses will be augmented with language providing for mobility usage that ensures building and garage access by autonomous electric vehicles. It will be interesting to see how developers, landlords, tenants and brokers will respond to this transportation revolution and what innovative solutions will emerge.

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

Monday, May 20, 2019

New RICS Service Charge Code Spells Change

By Nicky Knight and William Frost (Leeds, U.K.)

A new service charge code of practice (the Code) came into effect in the United Kingdom on April 1, 2019. So what were the changes and what do they mean for landlords and tenants?

There have been a number of changes and amendments to the Code over the years, but this latest update differs from the third edition primarily in that it is a “Professional Statement, which Royal Institution of Chartered Surveyors (RICS) members must act in accordance with”.

As responsible property managers and RICS members, Avison Young look to the appropriate guidance and best practice that RICS publicise and where possible, lease permitting, do not deviate from this. Given the status of the new Code now being a Practice Statement, it is now mandatory requirement for all RICS members to adhere to this and Avison Young have taken steps to ensure our processes and the information provided to tenants adheres to this updated advise.

The new Professional Statement sets out mandatory requirements. RICS members who do not follow these face the threat of legal or disciplinary consequences, along with potential allegations of professional negligence. In addition, the statement sets out obligations for acting on behalf of the landlord and the tenant. However as per previous editions, it cannot override the terms of the lease.

So, what are the major additions to the Professional Statement from previous versions of the Code?

Mandatory requirements
The mandatory service charge requirements as outlined in the new Professional Statement are:

  • Service charge apportionments must not total more or less than 100%;
  • Service charge budgets, including commentary, must be provided;
  • Signed statements must be issued annually;
  • Apportionment matrices must be issued annually;
  • Expenditures must be in accordance with the lease terms;
  • Funds (i.e. reserve, sinking etc.) must be held in discrete bank accounts;
  • Interest must be credited to the service charge account;
  • Withheld amounts must reflect the disputed amount only; and
  • Managing agents must notify clients of any disputes and amend incorrect service charge without delay.
Previously, many of the above requirements were only recommendations in the third edition in accordance with best practice guidelines. Many requirements are welcome additions which, we hope, will help to reduce the number of service charge disputes that emerge between landlords and tenants over what are fundamental elements of managing service charges.

As part of Avison Young’s Service Charge Consultancy team, we have experienced difficulty – and even resistance – in all of these areas when trying to obtain information in the past. So, we see the addition of these mandatory requirements as a positive step and are optimistic that they will improve communication and transparency between landlords and tenants.

Ethics and professionalism
The new Professional Statement also includes a section on ethics and professionalism. Previous versions of the Code have not specifically outlined ethical principles that RICS members must abide by. In particular, the new Professional Statement outlines five ethical mandatory principles, which are as follows:

  • Act with integrity;
  • Always provide a high standard of service;
  • Act in a way that promotes trust in the profession;
  • Treat others with respect; and
  • Take responsibility.
Whilst these are mandatory for RICS members, we believe that non RICS members should also strive to follow the principles at all times.

Duty of care
The Professional Statement highlights the fact that managing agents have a duty of care to occupiers and owners. It reminds us that it is the occupiers’ money that is being utilised and from our experience this fact is often overlooked, be it in error or on purpose.

New leases
A section of the Professional Statement relates to new leases, the focus being on reviewing service charge clauses to bring them into the modern age. Our Avison Young Service Charge Consultancy team already reviews service charge terms in new leases for a number of our clients and we really welcome this addition. From our experience, without such reviews prior to the lease being completed, service charge clauses are often overlooked, leading to increased ambiguity and a greater likelihood of dispute. Such disputes are detrimental to the owner / occupier relationship.

Further clarity
Whilst we believe that the new Professional Statement takes positive steps to reduce service charge disputes, in particular setting out mandatory principles that RICS members must follow, there are some areas where we believe further clarity is required. For example:

Fixed percentage of fixed amount – the Professional Statement outlines within section 3.6 that in some instances, fixed service charges may lead to the total percentage being above or below 100%. Whilst the Professional Statement specifies that service charge apportionments must not total more or less than 100%, our interpretation of the wording is that it does not provide guidance on what to do in such circumstances. We believe that this could lead to potential dispute so would welcome further clarity.

Best Practice for shopping centres, retail and leisure – the Professional Statement provides more detail than previous editions in relation to marketing and promotions. Whilst this is a positive step and we welcome such clarity, it outlines items that would fall within the ‘marketing and promotions’ cost category. Some occupiers (such as a bank or a gym) would be bound by the Professional Statement but at a disadvantage when it comes to marketing and promotions because they do not see the benefit of use that other retail occupiers may. This situation is something that our Service Charge Consultancy team has disputed in the past on behalf of occupier clients.

Non-RICS members – the Code as a professional statement binds RICS members only. There is no obligation for non-RICS members to abide by the mandatory sections. Whilst we are optimistic that some non-RICS members will abide by the mandatory sections, there are many who will not. From our experience it is often individual landlords who are the worst offenders when dealing with service charges.

Conclusion

In conclusion, the new Code is a Professional Statement that all RICS members must act in accordance with. This means that it has progressed on from previous editions which were best practice guidelines. It outlines mandatory requirements that must be fulfilled, and these are all areas in which Avison Young’s Service Charge Consultancy team has previously experienced difficulty obtaining information. In addition, the new Professional Statement outlines that when dealing with new leases, there should be a focus on reviewing service charge clauses to bring them up to the modern age. From our experience, this area is often overlooked and careful consideration can reduce the likelihood of dispute.

The Professional Statement outlines five ethical principles that must be followed. These will apply to all RICS members and it is important that these are observed. We also believe that non RICS members should follow the principles at all times to ensure a high standard of service is provided.

Whilst there are areas where we believe further clarification is required, we are optimistic that the new Professional Statement is a positive progression from the previous edition and will improve communication and transparency between landlords and tenants – and we welcome this new approach.

(Nicky Knight is an Associate based in Avison Young’s Leeds, U.K. office, and William Frost is a Senior Service Charge Consultant, also based in Leeds. Both are part of Avison Young’s U.K. Service Charge Consultancy team. For more information: Contact Nicky Knight at Nicky.knight@avisonyoung.com +44 (0)113 280 8058; or William Frost at William.frost@avisonyoung.com or +44 (0)113 280 8089.)

Monday, May 13, 2019

Canada – E-commerce demand sparks tight conditions, investor appetite


By Bill Argeropoulos (Toronto)
Canada’s industrial market has started 2019 on a strong footing, building on the exceptional results achieved in 2018. While Vancouver and Toronto remain key markets for occupiers and investors, scarcity of product was evident in the single-digit vacancy rates posted across the country in the first quarter of 2019.

Nationally, the industrial sector remains undersupplied – demand is outpacing new development and will continue to do so, even though almost twice as much space is under construction compared with spring 2018. This supply-demand imbalance has pushed rental rates higher in almost all markets, attracting investors and resulting in low yields and rising asset values.


E-commerce remains the industrial sector’s catalyst for success as retailers and developers strive to perfect the supply chain. Online giants such as Amazon are impacting market dynamics in terms of scale and location with their demand for large distribution/fulfilment facilities near urban centres, resulting in rising land and development costs amid dwindling supply of developable land. This situation is most apparent in Toronto and in Vancouver, where strata units increasingly offer the only opportunities for developers to justify their land costs. 

Record-Low Vacancy – Canada’s industrial vacancy rate remains at a historic low, ending first-quarter 2019 at 3% – down 70 basis points (bps) from the same quarter in 2018. Ten of the 11 markets surveyed reported lower vacancy year-over-year and single-digit vacancy rates (with four markets posting rates below the national average.) In the North American context, Canadian markets – Vancouver, Toronto and Ottawa – recorded the three lowest vacancy rates through the first three months of 2019.

Absorption Totals Up  Twelve-month absorption totalled more than 27 million square feet (msf) – up from almost 20 msf in the previous 12-month periodToronto accounted for slightly more than half (52%) of the nation’s absorption tally, while strong year-over-year gains were posted by Vancouver, Calgary and Montreal.


Strong tenant demand and limited supply boost net asking rents – Strong tenant demand in Montreal, Toronto and Vancouver lifted Canada’s average net asking rental rate to a high of $8.66 per square foot (psf) at the end of the first quarter of 2019. Five markets posted rents above the national average. Rents were highest in Vancouver ($11.49 psf). Regina ($10.94 psf) and Ottawa ($10.66 psf) were the other two markets achieving more than $10 psf, while Montreal ($6.71 psf) registered the biggest annual rental-rate increase – up 11%.

Development pipeline remains robust – Year-over-year, the total industrial area under construction jumped to 27 msf (66% preleased) from 16 msf. The 27 msf total equated to only 1.3% of Canada’s existing industrial stock of 2 billion square feet (bsf). Total area under construction more than doubled in the country’s largest industrial market, Toronto (12.2 msf ). Vancouver (5.2 msf ) led the West, while construction doubled in Montreal (3 msf ).



Inbound Capital Investors poured $7.8 billion into the Canadian industrial property sector during the 12 months ending in March 2019 (up 7% year-over-year). Nearly two-thirds of that total was directed to Toronto and Vancouver, which also recorded the lowest yields among large North American markets (4.6% and 3.9%, respectively).

Sale Prices Increase The national average sale price per square foot (psf) increased $20, or 15%, year-over-year to $154 psf. Vancouver’s figure (up 37% to $387 psf) was more than twice the national average, while Calgary (up 32% to $209 psf) was the only other Canadian market to breach the $200-psf mark.

Canada’s industrial market is expected to remain active throughout 2019 with restricted supply posing challenges for occupiers and investors. However, necessity is the mother of invention, and these circumstances may lead to creative and innovative solutions for the thriving industrial sector.
These are some of the key trends noted in Avison Young’s Spring 2019 Global industrial Market Report covering 64 markets in seven countries across the globe: Canada, the United States, Mexico, Poland, Romania, the United Kingdom and South Korea.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Canadian Research Practice Leader. He is based in the company’s global headquarters in Toronto.)

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