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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 RealPage.com. 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.)

Tuesday, August 13, 2019

Slow and Steady – State of the Houston Office Market


By Rand Stephens (Houston)



It’s been nearly five years since the economic downturn began (Q3 2014 – Q2 2016). During the second quarter of 2016, the price of oil averaged $45/bbl, unemployment was nearly 5% and more than 11 million square feet (msf) of space was listed on the sublease market. Since then, Houston’s economy has gained momentum and remained strong.

The price of oil is now averaging above $50/bbl (a high in the $70s during October of 2018), unemployment has fallen to 3.8% and the available sublease space in Houston is down to 6.8 msf. We are moving at a snail’s pace, and fortunately, it’s in the right direction. The economic fundamentals are there, but cautious optimism lingers through the Bayou City.

There is no doubt that Houston currently has one of the highest vacancy rates in the country, hovering quarter to quarter between 16% to 18%, but we are inching our way back to recovery. The slow pace seems to be perpetuated by trends such as flight-to-quality, the pressure on class A heritage buildings to make incremental upgrades/add amenities, and the hesitancy of large companies to make long-term commitments.

There is light at the end of the tunnel as several submarkets, including the Katy Freeway West/Energy Corridor and the Woodlands, show encouraging signs of recovery with increased leasing activity and development. Near the Grand Parkway, Freeway Properties recently broke ground on Phase II of Katy Ranch Offices, signifying confidence in the submarket. Phase I of the office development is fully occupied.

The NASA/Clear Lake submarket has potential for new development as the robust industrial sector shows interest in office space closer to their warehouses and facilities. The Houston Spaceport and NASA’s Gateway program will also likely bring jobs to the area that will spur the need for more office space.

With record-breaking job and population growth and a booming economy, Houston’s office market should be poised for a speedy recovery, but it’s slow and steady. Don’t worry Houston, we’ll get there.


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

Saturday, July 20, 2019

Lunar Landing Impact, 50 Years Later


By Rand Stephens (Houston)

Fifty years ago, on July 20, 1969, Americans, and people all over the world celebrated American astronauts landing on the moon – a triumph for humankind. It will forever be the most famous footsteps in human history. The reminiscing, the celebrations, the activities and the news stories of the anniversary have Houston buzzing with excitement.

The inception of the Johnson Space Center (originally dubbed Manned Spacecraft Center), which is located southeast of Houston in Clear Lake, has also left an enormous footprint that created jobs, communities and transformed the commercial landscape of the Clear Lake region. Almost overnight, it went from oil town to Space City after President Kennedy’s historic, ‘We choose to go to the moon’ speech at Rice University in 1962.

 "Houston, your city of Houston, with its Manned Spacecraft Center, will become the heart of a large scientific and engineering community."    - President John F. Kennedy, Rice University, 1962
Along with the Johnson Space Center came aerospace and engineering companies that contract with NASA on space projects. Training centers, testing facilities, plants, office buildings and residential communities soon replaced the ranch land that previously covered the area. The growth of the area exploded following the lunar lift off and as NASA turned its focus to the Space Shuttle program. However, after the cancellation of the Constellation program in 2009, thousands of layoffs rippled through NASA and the research and engineering workforce. That kind of blow also had a major impact on the office market, which has struggled to recover.

The stars may be aligning once again for the Clear Lake area as NASA aims to return to the moon on the Orion and build a small space station called the Gateway as early as 2024. This could launch leasing activity in this area which has been lackluster for a decade.

Happy anniversary Apollo 11!

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

Friday, July 19, 2019

E-Commerce and How It Affects Real Estate in Latin America (LatAm)

By Guillermo Sepulveda (Mexico City)
This week I posted a video (embedded below) of an interview I conducted a couple of months ago, when I sat down with Andrew Strenk at the global leaders’ breakfast at ICSC RECon in Las Vegas.



Andrew is a retail expert and president of Strategic Planning Concepts International (SPCI), a prestigious consulting firm based in Southern California. His experience in Latin America (LatAm) over the past 30 years has made him an authority on retail real estate development in the region.

I wanted to take the opportunity to discuss with Andrew the manner in which e-commerce is growing in LatAm and the effects this phenomenon is already having on the region’s retailers and, consequently, its real estate market.

E-commerce in LatAm
An eMarketer (www.emarketer.com) forecast pegs Latin America’s 2019 e-commerce sales at US $85 billion from 155.5 million consumers. By 2022, the region’s annual online sales are expected to reach the US $95-billion mark.
Mexico, whose online sales represent 29% of LatAm’s total e-commerce sales according to the forecast ranked second in 2018 to regional leader Brazil, whose sales were 34% of the total and Argentina in third place with a distant 6%. However, Mexico is the fastest growing retail e-commerce market with an expected whopping 36% in 2019!

It is important to point out that Latin Americans still represent only 10.4% of all Internet users in the world. Hence, there is tremendous potential for growth as consumers have access to and become comfortable with the security of online transactions.

Growth factors
Three main factors are propelling e-commerce growth in the region:

  1. A young population: The average age in the LatAm region is 30, whereas this figure is 38 and 33 in the U.S. and Europe, respectively.
  2. Infrastructure: Better Internet hardware with more market penetration.
  3. Smartphones: The usage of these devices is spreading rapidly among an avid population.
M-commerce
This last point about rising smartphone usage is key, because transactions are not only being conducted from a laptop, but also – more frequently – from hand-held mobile devices under what has been referred to as “M-Commerce”. In 2018, according to eMarketer, 27.5% of LatAm’s retail e-commerce sales were conducted from cellular phones.

The challenges
However, retailers must overcome several challenges before they can propel the region’s online retail sales growth even further. Retailers will have to invest in logistics services and facilities that can ensure rapid delivery, a component that is key to consumer satisfaction in this type of sale. It is precisely in this logistics component where real estate plays a crucial role in the on-line sales model. Companies that can enhance this component will have a competitive advantage.

In the specific case of Mexico, we are already seeing companies such as Liverpool, Elektra, Amazon and others building or leasing large industrial spaces (in excess of 500,000 square feet feet) for distribution centers. In coming years, we will also see the growth of smaller facilities – not only on the outskirts of large cities, but also within the urban grid – that store inventory for last-mile-delivery, allowing retailers to be closer to their customers and ,thus, get their products to them faster and more efficiently.

Indeed, LatAm faces many e-commerce challenges in the near future, but that sector is also where the real estate opportunities lie.

(Guillermo Sepulveda is a Principal of Avison Young and Managing Director of the company’s Mexico region. Based in the firm’s Mexico City office, he specializes in investment sales, advisory, tenant representation and project management.)

Friday, July 12, 2019

Edmonton industrial market evolving and diversifying

By Corey Gay and Tony Randhawa (Edmonton)
Question: What do Amazon, cannabis, liquor, Ford truck parts and dog food have in common? 

Possible answer:
a) A long weekend in Edmonton.
b) Often used in jokes about Alberta.
c) Industrial build-to-suit tenants in the Edmonton region.

Correct answer: C

These are the largest build-to-suit industrial buildings that have been constructed, or were under construction, recently in the Edmonton industrial market. From largest to smallest, the largest build-to-suit tenants in square feet (sf) include:

Tenant/Occupier and Use
Rentable Area (sf)
Amazon
1 million
Aurora Cannabis (production facility)
800,000
Alberta Liquor and Gaming Commission Distribution Centre
546,000
Ford
(parts distribution centre)
403,000
Champion Pet Foods
(production facility)
371,000
Total
3.12 million

For the Edmonton industrial market, these are some very large buildings. To put things in perspective, the overall industrial market in the Edmonton region comprises 156 million sf.

An interesting observation is that none of these businesses are in the energy industry.

The market has been long been perceived as being directly tied to the energy industry (and there is certainly some truth to this viewpoint.) However, with the energy industry less robust than it has been in previous years, the leadership within the market has changed. The recent build-to-suit activity is a testament to the diversification in the market and how industrial development is now focused on supporting the overall economy in the Edmonton region (population: 1.4 million) and the northern half of the province.

In addition to these build-to-suit developments, a number of speculative multi-tenant properties are underway. These include: Rampart Industrial Park’s 121,000-sf Building 4 and 295,000 sf of multi-tenant warehouses in QEMT I and III buildings in Nisku, which highlight the major developments now online in the Greater Edmonton Area.

A recent industrial land acquisition in south Edmonton is further evidence of a renewed confidence in the Edmonton industrial story. Panattoni Developments, in conjunction with a financial partner, has recently acquired a site in south Edmonton that has approximately 148 acres of land available for industrial development.

All of this recent activity is pointing to a subtle confidence in the market. With a vacancy rate dipping below 6%, the market is healthier than many perceive it to be.

Another interesting observation is that employment in Edmonton is now higher than what it was before oil prices collapsed in 2014. Please see the table below, which was published by Statistics Canada.



As long as we are back to the energy industry, at the time of writing this blog, the Trans Mountain Pipeline expansion has just been approved by the federal cabinet. The expansion will create a pipeline system with the nominal capacity nearly tripling from 300,000 barrels per day to 890,000 barrels per day and is expected to cost approximately $7.4 billion.

As of now, the approval means little in terms of immediate material impact on the province, but sentiment has certainly improved.
The bottom line is that yes, Alberta industrial real estate has been impacted by the energy industry. However, as discussed, nearly all of the large major development projects in the region have no ties to the energy business at all. The industrial market is evolving, maturing, and diversifying.

(Corey Gay is a Principal of Avison Young and Tony Randhawa is an Associate in the company’s Edmonton office. Members of the firm’s capital markets group, they work as a team while specializing in industrial investment property sales, including build-to-suit projects.)

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