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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.  




Thursday, November 14, 2019

Do our cities support a healthy work life balance?

By Daryl Perry (London, U.K.)

Despite the continuous political headwinds, the demand for office space in central London continues to display strength. Take-up for Q3 2019 totalled 3.3 million sq ft, 29% higher than the ten-year quarterly average, with BT and Diageo, as well as WeWork, making large commitments to the city. The strength of the property market continues to be underpinned by London’s importance as a global centre of industry. While Brexit may have affected the short-term perception of the UK, London exhibits extraordinary resilience in its ability to attract and accommodate global occupiers.

For seven years running, London has been named the most powerful city in the world, sitting at the top of the Global Power City Index (GPCI) run by the Mori Memorial Foundation’s Institute for Urban Strategies, ahead of New York, Tokyo, Paris and Singapore.

Yet, while London, as well as other UK cities including Edinburgh, Manchester and Birmingham, is regularly featured in rankings of the top places to do business, the UK’s cities rarely score highly when it comes to their liveability rating. Is there a disconnect between where we can do business and where we can live well?

Consulting firm Mercer’s Quality of Life Survey, possibly the most comprehensive of its kind, placed London 41st for quality of life, with Edinburgh coming in 45th. Glasgow and Birmingham came in at 48th and 49th, respectively, on par with Kobe and Chicago. While London is often and unsurprisingly cited as one of the best cities for culture and leisure, it is burdened by its infrastructure, poverty, pollution and crime rates. It follows that its citizens also report experiencing higher levels of stress, the longest commutes in Europe and poor affordability.

If the success of an individual city is based on its ability to attract talent, what happens when talent either can no longer afford to live there or decides it wants to locate elsewhere? Furthermore, in a time when technology blurs the boundaries between our work and home life and reduces the need for workers to be in any one place, locational decisions for the 21st century workforce will be increasingly biased towards places that stimulate our mental and physical wellbeing.

Making a place desirable is of increasing importance for London – and every city – to future-proof itself. We need our cities to remain global in terms of our approach to business and in our economic outlook. However, the most liveable and pleasant cities also have the ability to feel local through their use of infrastructure, quality of amenities, and mix of businesses and property use types. This is no easy feat for a city of London’s size, but it is achievable through increased affordability, connectivity and creating a sense of place from the built environment – much of which is set out in the Draft London Plan due for adoption in early 2020.

The key to change will be within the plans for Outer London, where considered development can be used to transform the current centralised model. By creating diverse, mixed-use nodes in the Outer London boroughs that provide housing, appropriate workspaces, retail space and other amenities, we can partially negate the magnetic pull of the Central Activities Zone.

The resulting opportunities for growing proximate employment, leisure and living opportunities allow people to gain access to the amenities they need through micro-manufacturing, final mile delivery hubs and locally-specific services. It also encourages local place making, by creating affordable developments and spaces with high utility and appeal, as well as encouraging sustainable community growth.

The London plan outlines the increase in housing capacity that could be delivered in Outer London. However, there is also the need to deliver balance and the appropriate infrastructure required to allow people to work, live and play in the same areas. White City and Stratford, and in a different way, King’s Cross, are held up as case studies for others to follow, achieving a sense of place that allows communities to grow and develop organically.

Changing London’s development model to this more localised approach is pivotal to raising quality of life through encouraging a more equitable distribution of opportunities and amenities. Doing so will not only make places more liveable but will also bring reciprocal economic gains through increasing productivity, particularly in under-resourced areas.

Daryl Perry is an Associate and Head of Research and Client Engagement. He is based in our London, U.K. office.

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