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Friday, June 24, 2011

Post Financial Crisis Regulatory Reform Encounters Resistance Everywhere

By Amy Erixon, Toronto

This week's finger pointing game returned to Greece, with the new revelation that the high levels of exposure to Greek debt at the French and German banks may be insured by US and UK banks who, in turn, have purchased credit default swaps from US based hedge funds who may not be good for the possibility of 240 billion Euros of anticipated defaults. All of this serves as a reminder how complicated and global these issues and instruments have become. Even assets that are relatively straightforward to value, such as mortgages and properties have valuation metrics that are being tested by quantitative easing on one hand and regulatory uncertainty on the other.

The most recent issue of Avison Young Global Capital Market Newsletter highlights reform efforts and setbacks faced by German regulators in their efforts to put more conservative controls on financial instruments backed by real estate sold to the German public. The initial regulatory proposals spooked investors about possible limitations on liquidity and in doing so triggered the very thing it was trying to head off - a run for the exits.

Those of us schooled during the last century can't help but notice with alarm the collapse of confidence in the government's ability to stabilize the markets. I for one find that it is impossible to take seriously the finger wagging by US officials concerning everybody else's fiscal situation when the US government continues to borrow staggering sums of money for current activities, poo poos the need to address taxes, and sweeps under the carpet mention of the unfunded (but legally owed) future obligations such as public sector pensions, social security and Medicare. A recent and well researched article in The Globe and Mail by Neil Reynolds, June 22, 2011 suggested that prominent US economists, such as Laurence Kotlikoff at Boston University put estimates of US unfunded liabilities at $200 trillion, or more than $1 million per US household. This is nothing short of astonishing.

Which leads me back to what I was taught in school. Investing is not a form of legalized gambling. Only lend money to businesses and people who have a sound plan to pay the money back. Borrow conservatively and stagger maturities. Focus on increasing income, that's where the money is made. Those were the days.

Wednesday, June 22, 2011

What Happens Next...

What Happens Next... by Norm Arychuk, Debt Capital Markets (Toronto)

Today the U.S. central bank said that it would complete the planned purchase of $600 billion in Treasury securities next week as scheduled, and then suspend its economic rescue campaign. This action will leave in place the aid it has already committed; however, it will do nothing more for now to boost growth and spur the needed economic recovery.

The Fed will maintain its commitment to hold the benchmark interest rate near zero for an extended period of time, whatever that means – at least for the next two meetings, probably out as long as November. Relying on employment growth to occur organically to pull the economy along is the stated goal of the Fed. With the housing market generally continuing to spiral downward in the U.S., there appears to be a disconnect between anticipated increased employment and the housing market.

With the Fed not participating with a QE 2.5 or 3.0, will the lack of further government stimulus drive up bond yields to satisfy requirements of investors, thus causing an unwanted increase in all interest rates and further pressuring the recovery? Or will we see the market continue to take a flight to quality that has evolved to a large degree from the countries that cannot seem to get their financial houses in order.

My best guess is that we are in for a prolonged period of low interest rates.

“The postings on this site are my own and do not represent the views or opinions of my employer.”

Download Debt Market Monitor

Wednesday, June 15, 2011

Water water everywhere and not a drop to drink

By: Norm Arychuk, Debt Capital Markets (Toronto)

Everyone talks of the substantial liquidity for real estate debt in the Canadian market today, but is it true? Two of the four largest life insurance companies are currently not lending, while the other two are only lending on “super AAA” product, and then only on a very conservative basis. Canadian banks all have their own idiosyncrasies for real estate lending. Second and third tier lenders are segmented in their underwriting approach. Yet it appears to be all getting done. Will it last?
The Canadian real estate market has moved so fast and far over the past year (as compared to many other markets including the US) that some of the biggest names are running into lending ceilings from their most relied upon institutions. Some new players have appeared on the national landscape, with the likelihood of more new name lenders on the horizon; which will go a long way in helping.
The waves that are forming offshore will bring a substantial flow of mortgage maturities over and above those delivered by conventional lending sources. These waves aka CMBS maturities, which will start to appear in meaningful volumes in 2015 and 2016, will ramp up to the highest level in 2017. This barrage of maturing debt is likely to add some stress to the Canadian lending markets. A higher interest rate environment and the lack of an efficient CMBS market may contribute additional challenges for these property owners who will need refinancing. Balancing these challenges is the velocity of real estate values, moving positively to reduce the leverage that will be necessary for mortgage refinancing.
The Canadian CMBS market has poked its head out, albeit for only a brief period. With the US nurturing the return of their CMBS market slowly, a spillover into the Canadian market will hopefully occur in the not too distant future.

For more on the Debt Capital Markets, follow the monthly Debt Market Monitor available at:

Download June 2011 Debt Market Monitor

“The postings on this site are my own and do not represent the views or opinions of my employer.”

Friday, June 10, 2011

Machine Ready - The I-39 Corridor

By Michael Fonda (Chicago) with Christine Choi and Garrett Fonda

On Thursday June 2, Avison Young’s Chicago office hosted a group of developers, brokers, contractors and architects who are active in what has come to be known as the I-39 Corridor named for a section of the American Interstate Highway System and defined as the 150 miles between Beloit, WI and Bloomington, IL.

A very important insight came to light during the two hours of presentations that were delivered by the participants of the group. This insight, as articulated by Mark Goode of Venture One Real Estate, LLC (someone known for his thought-provoking insights into our business), was that the I-39 Corridor – although integral to the supply chain of many United States-based companies because the Corridor has all the elements required to help these companies deliver their products quickly and efficiently is more than simply a transportation corridor. It is an area of the United States that is particularly well-suited for manufacturing because of the area’s highly-skilled and productive workforce.

As Mark told the group, the I-39 Corridor is an area where:

· People know how to work with machines – you might say that it’s in their DNA.

· People prefer to work where they grew up and where they intend to raise their families.

· And they are people who understand, value, and enjoy working productively.

Because the people of the I-39 Corridor are skilled at working across a broad spectrum of production machinery platforms, we can say that this area of the country is “Machine Ready.” When companies bring the machinery and the capital, the I-39 Corridor has people who will operate and repair the machinery. Additionally, these people have the talent to innovate with existing machinery and even invent new machinery. This was Mark’s insight. The I-39 Corridor is much more than a center of transportation it can and will be a center of manufacturing.

Bill Gahlberg, the developer of Oak Brook, IL and Bolingbrook, IL preeminent places of commerce in metropolitan Chicago – and who is now the managing partner of the Woodland Path Fund (which is the largest owner of commercially entitled land in the I-39 Corridor) grasped the importance of Goode’s remarks immediately. There are many great land developers in America but there are none better than Gahlberg. He understands this corridor like no other and has chosen to put his fund’s capital squarely behind the next great land opportunity in the U.S. Midwest.

Woodland Path owns approximately 2,000 acres of land in the I-39 Corridor. Galhberg and his partners are willing to work with developers and corporate occupiers of real estate by providing exceptionally well-located and configured land parcels on terms that incentivize developers and users to locate on sites that Woodland Path owns in the Corridor. The first developer who worked with Woodland Path to create a Machine-Ready site is IDI – a national industrial real estate developer. IDI purchased 215 acres from Woodland Path at the southeast quadrant of a four-way interchange at Route 78 and I-80. Under the guidance of Tom George and Jeff Smith of IDI, this land parcel was zoned, entitled and improved so that construction can begin immediately. Utica Logistics Park is ready to accommodate industrial buildings as large as 1.2 million square feet (sf).

Many states are throwing very significant incentive packages at companies that will locate within their boundaries. Adam Roth of NAI Hiffman – who, along with Dan Leahy and Casey Baird, is responsible for marketing the CenterPoint Intermodal Center - Rochelle pointed out the fallacy in focusing too intently on these incentives. Adam explained that labor and transportation are the two most significant expense items in a company’s cost of goods sold. If the company doesn’t select the location with the best labor pool and the best access to inbound and outbound transportation, it will burn through those incentives very quickly.

I know this from experience, by collaborating with Jim Reeb of Institute St. Onge on site selection. We found the ideal location for Valspar Corporation that was a balance of labor, transportation and real estate cost. Although incentives were part of the equation, they were not the driver. In addition to working with Jim on the Valspar site selection, we worked with Jim and St. Onge in the preparation of two studies on labor and transportation for the I-39 Corridor. One of the studies was prepared for Woodland Path and the other for Venture One. Jim is well versed in the advantages of this unique geographic area.

There are many companies that require rail service. The I-39 Corridor has an abundance of rail. The primary nodes are located in Ottawa, Rochelle, and Peru, Illinois. The CSX serves the Ottawa Industrial Park. The Union Pacific and BNSF serve both ProLogis Park Rochelle and CenterPoint Intermodal Center – Rochelle. Union Pacific Global III Intermodal is located in Rochelle. BNSF also serves Peru via the Illinois Railway short line railroad. George Cibula of Darwin Realty pointed out that although there are many companies that require rail, few have the volume to grab the attention of the six tier-one railroads.

Fortunately, there are alternatives. George and Adam Haefner are marketing the I-80 / I-39 Rail Center for Janko Group. Short-line rail companies like Illinois Railway will handle the switching of cars from a company’s spur track – like The I-80/I-39 Rail Center to one of the Big Six. According to Cibula, being on a spur track serviced by a short-line railroad works to the advantage of the small-volume rail user. The smaller short-line railroad’s business model is focused on serving the small-volume rail car user, whereas the Big Six concentrate on only the biggest users. Janko is working with development consultant and design-builder Peak Construction to create opportunities for rail users. With almost 4000 feet of track on this 100-acre parcel, the site can accommodate both large volume and smaller volume users.

The biggest news to come out of the I-39 Corridor is the groundbreaking for Nippon Sharyo’s new railcar manufacturing plant in ProLogis’ Park Rochelle. Kajima USA Group is building a 400,000 square foot rail served (naturally) facility on 35 acres for Nippon Sharyo to receive rail car bodies that are built in Japan, outfitted with all the accouterments in Rochelle and shipped out to customers (transit authorities) in Toronto, Minneapolis/St. Paul, Chicago and Europe. Jim Planey of Lee & Associates offered interesting commentary on Rochelle’s pursuit process of Nippon Sharyo. He told our group that Rockford sent their economic development officials to Rochelle for Rochelle’s presentation to Nippon Sharyo. This was not to compete with Rochelle but to collaborate with Rochelle in order to help convince Nippon Sharyo to select Rochelle for Nippon’s new facility. Rockford officials explained to the executives of Nippon Sharyo that there was a talented manufacturing community (Rockford) only 30 miles to the north that would be readily available as a support network of machine operators, engineers and managers to assist Nippon Sharyo in its endeavors. The cooperation among the communities of the I-39 Corridor is outstanding.

Rockford is always re-inventing itself. It starts at the top with a mayor, Larry Morrissey, who works diligently to attract business to his community. He is backed up by an excellent workforce and enlightened group of community leaders. Paul Ahern of Ahern Development has developed a first-class cargo center on the Rockford International Airport. He has benefited by working closely with Rockford’s leadership in the development of this new 70,000-sf air freight facility on-tarmac at the airport and contiguous to the second largest UPS airport freight operation in the United States. This facility is configured to park two Boeing 747-800 cargo jets. Between vectoring time, taxi time and landing fees, it costs approximately $20,000 less to land and park a jet at Rockford than it does at O’Hare, according to Paul Ahern.

Many new facilities have been built in the I-39 Corridor in the last four years including distribution centers for Staples, Lowe’s, Target, PetSmart and Bay Valley Foods. In the last year, manufacturing plants are being built by Nippon Sharyo for rail cars (mentioned previously) and Wanxiang America Corporation for a new solar panel plant in Rockford, proving that companies are recognizing the value of the I-39 Corridor as a center for industrial production.

Shovel ready? The I-39 Corridor is way beyond shovel ready. It’s Machine Ready powered by one of the greatest groups of skilled workers in the United States and underpinned by infrastructure that is world class.


Click here to read an article authored by Matthew Dolan in the June 10, 2011 issue of the Wall Street Journal. I have never been involved in labor negotiations so I don't know if it's possible for management and labor work cooperatively toward a common goal of producing wealth for all stakeholders in the organization. But if Bob King and the UAW now see the value in a profit-based pay plan, good times may be in the offing for shareholders, labor and management.

Thursday, June 9, 2011

Target's Impact

by Martin Dockrill (Mississauga)

It is always interesting to consider how one large tenant can impact the commercial real estate market.

In January of this year The Globe & Mail reported that U.S. department store chain Target had, after years of searching for an entry into Canada, finally set up Canada's retail landscape for a massive makeover. Indeed, Target's purchase of Zellers and plans to open 200 outlets in Canada appears to have changed the retail landscape by adding a strong competitor to the marketplace, and, as The Globe & Mail suggested, Target's entrance into Canada underscored the growing demand by foreign retailers to capitalize on a relatively healthy economy.

More recently, Target announced that it would be locating its new Canadian head office at 5550 Explorer Drive in Mississauga, Ontario. While the ink is not yet dry on this transaction and terms have not been disclosed by the parties involved, the positive implications of this new office location on the Mississauga marketplace is significant.

5550 Explorer Drive was built on a speculative basis by HOOPP and, while it offered tenants the many positive environmental benefits of LEED Gold Certification, the lease-up of this building with an acre of space per floor has been a struggle. The project added new inventory to the Airport Corporate Centre (ACC) market, resulting in an availability rate in excess of 20%.

Target's commitment is rumored to be for the remainder of the 180,000 square feet (sf) of space in the building, and this together with the occupancy by Pepsico, will have the building 100% leased. This transaction, together with other transactions in the market, will have a positive effect on vacancy. On its own, the Target transaction could lower the vacancy rate in the ACC by approximately 4 percentage points in 2012 and, together with recent activity it could be the start of a recovery in this Mississauga submarket.

The next step for Target will be distribution. Rumors in the market suggest that Target is in the process of lining up its distribution network in Canada by starting with a 1 million plus square foot, 100 plus acre location in or just outside the Greater Toronto Area, a significant investment. The GTA requirement will likely be followed with distribution centre requirements in Western Canada as well.

In the days and weeks to come we are all going to hear a lot about the threat of a double-dip recession in the U.S.. Pundits will debate whether the U.S. Fed should commence with a third phase of quantitative easing. In Ottawa, the new Conservative government has just presented a budget forecasting the elimination of the federal deficit a year earlier than expected in 2014 - 2015 and pundits north of the border will debate whether this is actually possible.

Target is just one tenant and in the chaos of any market it is difficult to determine where the next 9 to 12 months will take us. Nonetheless, one cannot argue that Target's decision to move north of the border is having a positive impact in and around the commercial real estate markets the leading retailer is deciding to enter.

Tuesday, June 7, 2011

Property Management – Today’s Focus – Cost Containment & Sustainability

by Peter Leroux (Toronto)

For Property Managers today, our focus is very much is on cost containment and sustainability. While not always mutually inclusive, energy conservation is an initiative that achieves both of these objectives. In Ontario, there are currently a number of grants and incentives available to assist managers in improving their building’s energy efficiencies.

For example, Hydro One offers up to $25,000 in incentives to conduct an electricity survey and analysis of your building. Based upon your findings, for buildings greater than 50,000 square feet in size, there is a further incentive of up to $35,000 available for capital improvements that provide long term hydro savings. Hydro One also offers a Retrofit Program that provides building owners with financial incentives to replace existing inefficient building equipment with new high efficiency replacements, as well as funds are available for system design improvements that produce electricity consumption savings.

Enbridge Gas is currently offering incentives of up to $100,000 for capital improvements that substantially reduces your building’s gas consumption. Funding of up to $30,000 can also be obtained to replace your existing building boiler system with new condenser boiler technology and equipment.

These are just a few of the incentive programs out there to help you improve your energy efficiency and lower your costs. The key to taking advantage of these programs is to study and complete the required application forms. The requirements can vary by municipality and energy provider, so stay focused on the task. The good news is, even though it is a process, the utilities have people to assist you in formalizing your program. Do not lose sight that there is money to be had.

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