Search this blog:
Follow Avison Young:

Monday, October 31, 2011

Take the Hassle out of Owning a Vacation Home

By Michael Fonda - Chicago

This will be a very short post.

If you own a vacation home, you owe it to yourself to read Kathleen Hughes' article in today's Wall Street Journal (read here). She tells you how to avoid the pitfalls of owning a piece of real estate that is used very infrequently. (According to Kathleen, the average owner only spends 39 days out of 365 days at their second home.) You can follow Kathleen on Twitter at:!/kahhughes

Thursday, October 27, 2011

Get Ready - The Resurgence of U.S. Manufacturing

By Michael Fonda - Chicago

I bumped into my friend Mark Goode of Venture One Real Estate at the recent Fall Conference of the Society of Industrial and Office Realtors ("SIOR") that was held in Chicago. Mark showed me an article by Boston Consulting Group (“BCG”) entitled Made in America Again: Why Manufacturing Will Return to the U.S. In this article, BCG has prepared an eye-opening analysis of the future of U.S. manufacturing. The piece (click here to read) predicts that manufacturing will return to the U.S. in a meaningful way, beginning as soon as 2015.

A combination of escalating wage rates in China, higher transportation costs from China to the U.S., supply chain risks and the cost of industrial real estate is improving the competitive position of the U.S. relative to China.

China, with 1.34 billion people, is a market that has to be serviced (and it will be by both Chinese and U.S. manufacturing plants in China). Although some manufacturing will migrate from China to India, Southeast Asia and Mexico, the U.S. (according to BCG) will begin to recapture much of the manufacturing and employment that has been lost since the 1950’s when the U.S. produced 40% of the world’s manufactured goods. If Joseph Sternberg, editorial page writer for the Wall Street Journal, is correct in the assertions he made in the article he wrote for the Journal’s editorial page on Wednesday 10/26/11, “The Phony Success of China’s Stimulus”, U.S. resurgence might even be bigger than even BCG predicts. Couple China’s possible missteps with changes being proposed by Dave Camp (R-Michigan), Chairman of the House Ways and Means Committee, regarding a transition to a “territorial tax system” (which is also being proposed by Governor Rick Perry, who is running for the Republican nomination for President of the U.S.) and there might be a tidal wave of cash returning to American shores to fuel this resurgence in goods manufactured in the United States. (Watch Representative Camp talk about his plan with Andrew Ross Sorkin on Squawk Box here.)

Global manufacturers will think strategically when deciding where to locate. They will consider total landed cost of their products, they will design flexibility into their supply chains and they will locate close to the consumer. All of this bodes well for the future of U.S. manufacturing, as long as the U.S. provides a favorable investment climate (like the proposals for a territorial tax system) and the labor force remains flexible and is well-trained.

In the August edition of Inbound Logistics, Lisa Harrington wrote an interesting piece on manufacturing returning to the United States, Is U.S. Manufacturing Coming Back - read here. In her article, she highlights Stephen Rogers' "Nine Steps to Choosing a Manufacturing Location." Harrington quotes Rogers cautionary statement regarding "reshoring" in which Rogers says, "It's expensive and difficult to bring manufacturing back to the United States, even if you kept the building. Companies underestimate the difficulty of training workers and building self-directed manufacturing teams."

BCG’s analysis focused on states in the southern part of the U.S. – Alabama, Mississippi and South Carolina. States like Illinois, although blessed with great transportation infrastructure, a large population and a world-class city – Chicago, still has work to do with regard to its bloated government and high labor costs relative to its southern neighbors. The good news is that the UAW and the Big Three (now an anachronistic term) automakers have begun to address both labor costs and sclerotic labor work rules. (I blogged about this in at the conclusion of my June 10th post. Read here.) Government reform is next. When that happens, Illinois may not only be the Number 1 climate for business in the Midwest, as Crain’s Chicago Business asserted in last week’s issue (click here to read) but possibly could climb to Top Five in the U.S.

The resurgence of manufacturing in the U.S. and Illinois….talk about hope and change!

Monday, October 24, 2011

What's Going on in DC?

Dan Gonzalez - Tysons Corner, VA

This is my inaugural blog for Avison Young concerning the Washington D.C. market. I’m starting off with a quick overview of the market and subsequent blog entries will deal with DC area submarkets and property/tenant types.

In the Washington, D.C. region, commercial real estate leasing activity throughout 2010 was vigorous, but the reality is that the market lost steam in the first three quarters of 2011. Reduced tenant demand, coupled with a steady supply of office space, meant a small increase in vacancy rates and a slight decline in average rents. Not surprisingly, Class-A space in the region’s close-in markets outperformed properties in outlying markets (more on this in future blogs).

This less-than-positive overall commercial real estate picture mirrors the less-than-positive economic environment in the greater DC market: The region experienced three consecutive months of job losses and a divided Congress has stalled the passage of new legislation.

On the bright side....

A couple of positive items to share are:

1. As noted in the Avison Young fall newsletter, “over the last 24 months, several newsworthy tenants have chosen to relocate their headquarters to Northern Virginia, most notably Hilton Hotels Corp. (from Beverly Hills, CA to McLean, VA; 323,000sf ), Northrop Grumman (from Los Angeles, CA to Falls Church, VA; 334,000 sf), Verisign Inc. (from Mountain View, CA to Reston, VA; 221,000 sf), and Alliant Techsystems, Inc. (from Minneapolis, MN to Arlington, VA; approximately 50,000 sf total).”

2. And the new economic realities in the region have afforded tenants an opportunity to renegotiate and “rightsize” their space requirements, thus saving on real estate costs; or “trade up” to higher quality facilities with little or no change to their current office space outlays.

Thursday, October 6, 2011

We Have Hit The Wall...Again

By Norm Arychuk, Debt Capital Markets Toronto

We were going along reasonably nicely – relatively speaking, here in Canada, in spite of European banking issues, in spite of U.S. jobless numbers and in spite of a lack of growth in our economy. Then, as we went barreling down the road, it became apparent that we could not see the light at the tunnel’s end. As a result, we have our foot on the brake, ready to stop to avoid a crash. We are in many respects, starting to feel the world economy hitting repeated speed bumps. Will we be able to speed up again soon?

It seems that then news is not new. Issues do not get solved and put away, they seem to simmer their way to the top, time and time again. When and how will the cycle be broken? A Euro bailout for Greece, led by Germany? A Resolution Trust Corp. like solution to the U.S. housing catastrophe? Or a significant infrastructure jobs initiative in the U.S.? What will it be?

The side effect of all of this if you will, has been a major falling out of in the sputtering CMBS market in the U.S. where refinancing risks could threaten to be another straw on the already weakened camel’s back. In Europe, roughly 7% of commercial real estate financing is handled by CMBS, where as in the U.S. it is over 20%. By 2014 there will be $1.4T worth of real estate loans maturing, many of which will have to find a new home.

To date, U.S. banks have been very reluctant to foreclose and have been involved a lengthy extend-and-pretend game. All of these underwater mortgages have to “go through the system” in order to reinstate market basics and return fundamentals to the real estate market. We need a transparent, reliable and understandable debt securitization market that can be counted on. It is an efficient vehicle for financing real estate that is very much needed to return.

For more commentary on the current debt market click on:

Tuesday, October 4, 2011

Debt and Democracy

By Amy Erixon, Toronto, October 4, 2011

My 17 year old daughter came home with an interesting debate assignment last Thursday - to advocate “How Debt Destroyed Capitalism”. Not surprisingly, she was pretty confused by the number of contradictory opinions she had come upon in just a few hours of research on the internet.

Among the opinions she found were some of my personal pet peeves: Sovereign debt doesn’t count because governments can just print their way out of the problem…Bank debt doesn’t count because it’s possible to purchase credit default swaps to insure over those risks…and lastly, personal defaults don’t really matter because everyone is overextended days, lenders are incorporating this into their pricing (like that explains why your credit card company charges 14.5% interest while the government can borrow for around 2%).

I assured her that not everyone is defaulting these days; credit default swaps are not insurance; and sovereign debt counts just the same as other debts regardless of how much money is printed. Since all forms of debt compete for scarce resources, in an era of deleveraging what government elects to do or not to do really matters. We are finding ourselves in a world where increasingly instead of bankers deciding who will and won’t have access to credit it is politicians making those decisions, with a different set of criteria from traditional Capitalist rule-books.

In an interview yesterday on Bloomberg about widening spreads on Morgan Stanley credit default swaps, the interviewer kept talking about the increasing cost “of insuring” these bonds. The person being interviewed pointed out that the daily swap spreads are really more indicative of hedge funds betting on short term political risks the bank might be exposed to than underlying credit strength of the institution relative to its peers. This very technical discussion highlights Problem #1 – poor understanding of the role and array of contemporary credit instruments and Problem #2 - the proliferation of ways to bet on the market, and huge daily movements of capital which affect outcomes.

At a conference last week here in Toronto, an executive from JP Morgan was asked to explain why the modifications demanded by the rating agencies to their latest CMBS issue reduced investor demand for their product. His answer - the rating agencies are crunching numbers through a diversification test whereas investors are looking at underlying asset quality – fundamentally different approaches. He further noted - this explains why the US debt downgrade created such a rally in Treasuries. Which brings us to Problem #3 - Government regulator and rating agency seem to have lost focus on the fundamentals of repayment and long term viability of the borrower. I don’t like paying taxes any more than the next guy but austerity alone can’t produce the cash flow required to heal the government balance sheets. This seems as obvious as the nose on our face.

Much of what is currently being touted as a “debt crisis” is in fact, a political crisis - that is the inability and/or unwillingness to find palatable solutions that involve collective sacrifice to achieve collective outcomes. Because these discussions get instantly polarized into “winners and losers” they strike at the heart of what is undermining confidence that is so essential to smooth functioning of what is increasingly a global marketplace. In today's world we are all interconnected, the fortunes of the least impact us all. Since political risk is the hardest of all to gauge accurately, it’s no wonder markets are touching new lows.

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