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Thursday, December 29, 2016

Toronto Real Estate Forum: The Ying and the Yang?

By Robin White (Toronto)

The 25th Toronto Real Estate Forum wrapped up earlier this month, and a soldout audience was treated to a potpourri of executives from major real estate companies, banks and pension funds; developers, economists and politicians opining on a variety of topics relating to the real estate business.

Having attended all 25 Forums, as well as many of the Property Forums that preceded the Real Estate Forum, I always found that I came away with a consensus on the state of the real estate markets, and where the business was headed.  

This time, it felt different. There were many contradictory opinions; here are just a few:

·         Interest rates were going up; interest rates were going to stay lower for longer.

·         Bond yields were heading up leading to higher financing costs; therefore, higher cap rates and, thus, lower prices. The recent rise in bond yields is short term, and they will revert to their previous levels or drop even lower, thereby reducing financing costs and, consequently, cap rates.

·         There will be an ongoing trend towards urban development as millennials seek opportunities to live and work in the urban core; the suburbs will experience a rebirth as millennials seek more attractively priced homes in which to raise a family.

·         The effects of the Trump presidency and Brexit will have a major impact on the future of the U.S. and European economies; the powerful secular forces that are present around the world will transcend any of the impact of Trump or Brexit.

·         Canada is in a wonderful place right now. We are seen as a good place to invest, because of our stable and transparent government and economy; Canada is irrelevant in the global scheme of things.

·         All levels of government have massive levels of debt to contend with, and are still running deficits; we have never amassed such a high level of cash looking for a home.

·         In the next 10 to 20 years, technology could affect up to 70% to 80% of the existing workforce; unemployment levels in the U.S. are at a low point.

My father used to say if you are not confused, it is because you have not been paying attention.  There is no question that anyone who was paying attention at the forum must have been somewhat confused.

So what are we to make of it all?

In my career, I have been through four recessions. Some have been more severe than others. Looking back at all of them, there were telltale signs in advance of the recession that should have been harbingers of things to come. These signs included companies overleveraging, undisciplined financing, speculative development, undercapitalized developers, junk bond activities, commercial mortgage- backed securities and so on.

There will be another recession. That is a fact. The questions are: When? And what can we do to prepare?

Coming away from this year's forum, although there were many conflicting views expressed, it is difficult to pinpoint any particular reason why we will see a recession in the near term. I am in the camp of interest rates being lower, at least for the next few years. There may be some short-term corrections, as we saw with the recent rise in bond yields, but I do not see any major forces likely to increase long-term interest rates – a situation that is good for our business.

Possibly, the biggest takeaway for me was the air of positivity that existed throughout the conference. Despite the confusing signals expressed in the breakout sessions, my many conversations with attendees at the coffee breaks, the cocktail parties and the dinners were all extremely positive and uplifting. 

And, perhaps, this is the most important takeaway of the 25th Real Estate Forum. When the attendees are positive and the mood is uplifting, they generally spell a positive outlook moving forward.

So let's make a toast to that, and may I wish everyone the best for a very happy and prosperous New Year.

(Robin White is Chair of Avison Young’s capital markets group and a founding Principal of the firm. He is also a Company Board Member and sits on the firm’s Executive Committee. During his career, which began in 1977, he has co-ordinated the sale of more than $5 billion worth of commercial real estate and completed several significant lease transactions, including several high-profile office buildings and industrial properties.) 

Friday, December 9, 2016

Outlook for 2017: It’s the seventh inning, but how long is this ballgame?

by Mark E. Rose (Toronto)

Take me out to the ball game!

It is only fitting that, in a year full of upsets, the Chicago Cubs celebrated their first World Series win in 108 years. The nine innings of American baseball have become a metaphor for the global real estate market cycle, but given the many variables of the current climate, just like the World Series finale, this cycle may be going into overtime.

Redux, or changes ahead?
The commercial real estate industry will end 2016 as it began – with low interest rates, low cap rates and moderate GDP growth in most nations. But it does not feel like the same environment heading into 2017. Rising protectionism and political unrest have introduced a healthy dose of fear and skepticism as to where we are in the current market cycle and what comes next. Despite job growth, improving market fundamentals and superior yields to alternative investments, commercial real estate owners, occupiers and investors disagree about how long this cycle could – and should – continue.

Pundits have taken both sides of the interest rate debate – from low rates indefinitely to a gradual return to historical levels (normalization). Meanwhile, virtually all developed countries piled on additional debt, ensuring that no government would lead the charge to raise rates. Economists disagree about how best to proceed, but a majority of business executives understand that we need to normalize rates one day – and sooner rather than later. It is hard to conceive a climate with less consensus.

Buyers and sellers used Brexit and the U.S. presidential election to pause and gather data points. Decision-making might have slowed in 2016 but, as we discovered while compiling the Avison Young 2017 North America, U.K. and Germany Commercial Real Estate Forecast (due out January 12, 2017), the appetite for investment in real estate continues unabated. The overarching themes of global financial growth from a depressed base and global population topping 10 billion in the next few decades provide strong support for everything related to real estate. Technology is a game-changer, potentially impacting what, where and how properties get used and constructed. If history is a guide, technology – like immigration – has redistributive impacts but can create meaningful positive economic growth for decades to come. 

We will start off from a similar place in 2017. Prices are at historic highs, liquidity is available, but natural tensions are rising. Decision-making has slowed and fear of this cycle coming to a close is stressing financial models and generating negativity. New York-based retail and housing are examples of city-specific product types that are going through a correction, but retail and housing in general are alive and well. Investor Sam (Grave Dancer) Zell is calling a top again, but the timing of such predictions remains to be seen. It is likely that markets that enjoyed disproportionate gains earlier in the cycle are taking a pause as investors look more broadly for opportunities. In a classic cycle, what we would expect next is a wave of consolidation that pushes prices even higher prior to a broad-based market reset.

The case for extra innings
Let’s pivot back to the baseball analogy. The widely held opinion is that real estate is in the seventh inning. At Avison Young, we disagree. We see something very different. We might be in the seventh or eighth inning from a pricing perspective, but given the market forces and attributes that currently exist, we could be in the seventh inning of a very long extra-innings game for our industry. Real estate is a legitimate investment alternative and is currently producing higher current yields than stocks and bonds. In fairness, interest rates are providing support, if not stimulating over-performance, due to the capital intensity of property investments. As long as rates hover near zero in most advanced industrialized countries, real estate will remain a preferred option for pension funds and other global investors. 

Geopolitical events, such as Brexit, are mainly playing out in the currency markets with the British pound and the euro taking significant hits against the U.S. dollar. Energy and commodity volatility are also repricing countries like Canada, whose currency lost ground against the U.S. dollar. But in each case, the change in currency has made these countries more competitive for exports and, effectively, put hard assets “on sale” to investors flush with cash and benefiting from a stronger currency. The U.K., Germany and Western Europe, Canada and Mexico boast some of the largest GDP markets in the world and global trade has not seized up – nor will it. The U.S. and Canada, in particular, are blessed with resources, technology hubs and growing workforces. As a result of these factors, along with safe-haven status and low interest rates, North America has been the preferred destination for global capital, and will continue to be in 2017.

Additionally, investors in this region are beginning to harvest gains, creating a “wall of capital” to take advantage of any dislocations in the marketplace. This wall is one of the reasons we are predicting that North American global investors will have the U.K. and, specifically, London in their sights in 2017. We believe that well-timed portfolio acquisitions could produce significant returns.

To get the full story on Avison Young’s outlook for 2017, including forecasts for the office, retail, industrial and investment markets throughout North America, the U.K. and Germany, watch for our 2017 Forecast Report on January 12, 2017. To ensure that you receive a copy, please contact the Research Manager at your local Avison Young office or sign up here:

On behalf of the board of directors, Principals and the entire Avison Young family, we wish you the happiest, healthiest and most prosperous 2017!

Monday, November 28, 2016

Riding the Maverick – Reframing how we Speak about Technology

By Amy Erixon, Toronto

Over the past month, I have spoken on technology trends in the Real Estate Industry at four events in four countries, which provided me with an important epiphany - how much our choice of language matters.   Words convey more than descriptors, they convey intentions, which stir up emotional reactions, even if subliminally.   We speak about technology as an "opportunity", "exponential game changer", as a "disruptor", or in some settings, we don't speak of it at all.  

The recent session in Dallas, TX at the Fall ULI Meeting was entitled:  Riding the Maverick – Surfing the Wave of Disruptive Technology (to view my remarks, click here).   The other panelists were from Google Fiber; Branch Technology (a 3D Printing based building systems contractor); and Green Street (Wall Street analysts) who addressed implications of autonomous vehicles, construction technologies and full access to the internet for our cities and society, respectively.  (The full session is available to view on the ULI website).   There is abundant good news here:  the price of commuting is expected to fall from 75 cents per mile to 15 cents per mile; significant improvements are likely in material performance (up to 50% greater insulation and 70% less cost and carbon footprint); and we may soon be in a position to provide equal access for all of society to “outside of the classroom” education and training opportunities – nearly for free.   But, regardless of how much benefit might accrue - the very title of the session, and much of what we read these days about technology is dystopian – suggesting a soul-less world that upends society as we know it  - a world filled with car robots that render work by actual people obsolete.   This image is misplaced.  

2016 Exponential Technologies for Real Estate                       Source: Cisco

By contrast, my Canadian program was entitled: Exponential Technology for Real Estate - Opening a World of Opportunity.  It is easy to be awed by the wonderful innovations around us, some of which are illustrated above.  But the more difficult truth is that technology is often equalizing, which by definition, is political, and herein lies the problem.  I am often asked why the populist revolt taking shape in many western economies isn’t gaining traction in Canada (so far).   This is not because technology is behind in Canada – on the contrary, some of these very technologies are quite advanced and in use in Canada.  In Canada the newspaper, public television and even the politicians go to great pains to explain how technology will facilitate the country's well being and global competitiveness instead of scare mongering that: foreigners are stealing jobs, competing unfairly or that there is nothing any of us can do about becoming a thriving part of the future other that return to a reimagined past.  

The US used to promote a culture that embraced equal opportunity, and it still reveres innovation (even if it is frightened by it).   Without a clear roadmap about how the economy will make the transition from the "old" to the "new" economy (which is inevitable) - together with the requirement that a share of the profits accrued from the "new" ways soften the blow, and provide retraining opportunities for those left behind (pretty basic economic policy in most of the developed world), it is understandable why the general population feels threatened.  

It is also true that many of the professions most “in harm’s way” if you choose to look at it from that perspective - are male dominated – truck and taxi drivers, construction workers and “the non-college educated”.   But the industries poised to see the most job growth in the near future:  health care, computational data analytics, green energy, social media, marketing and IT systems management are not gender or ethnicity biased, which is a blessing.  There will be far more jobs created than displaced by technology over the next 10 years - we know this, we understand this, the issue that needs to be addressed is the mismatch between the workforce skills, our educational systems and the jobs of the future.  For an insightful analysis of this topic see:

Technology adoption does not happen overnight, regardless of how compelling the value propositions might be. The reasons are myriad and sometimes complex, ranging from political clout of existing or future stakeholders, to lack of underlying infrastructure, to intractable funding schemes to lack of training opportunities.  Like it or not, most solutions will have to come from new models of collaboration between government, the non-profit and the private sectors.  Moving forward can pay big dividends if each is able and willing to contribute its creativity, ingenuity, flexibility and  expertise to fashioning solutions instead of letting these discussions devolve to women vs men, generational warfare, anti-immigrant rhetoric.    NOW is not too late for this important planning to begin.  

Friday, September 30, 2016

Avison Young Recieves GRESB Award

By Amy Erixon, Toronto

In 2015 Avison Young became a Green Star award recipient in the Global Real Estate Sustainability Benchmark, or “GRESB” Index.   Founded in 2009, the Benchmark is the gold standard for ESG reporting by institutional property investors and their advisors.  The Index currently includes 22,000 individual properties located on 6 continents in 37 countries valued at USD $ 2.3 Trillion.  GRESB is different from energy star and other types of environmental scorecards in that it evaluates corporate governance, social responsibility as well as environmental performance at the management, entity and property levels. 

Key Performance Indicators, GRESB Universe
Institutional owners in Canada, Australia and other leading countries are beginning to make concerted efforts to improve environmental performance and mitigate climate risks.  Same store portfolio performance within the GRESB index from 2014 to 2015 improved 1.2-2.0% for energy, CO2 emissions, water consumption and landfill waste.  Year over year same store Index Performance 
Indicators are detailed in the sidebar.  

The benchmark is used by members to optimize the risk return profile of its investments.    It assesses the management contribution (value add and risk mitigation effectiveness) on the part of 227 entities, 60 of whom are pension funds. The GRESB index assesses a large number of aspects – at the property level from building certifications to monitoring and EMS, at the management level examining ESG integration, risk mitigation, policies, disclosure and performance targets, and at the social level assessing communications, leadership, procurement and stakeholder engagement. 

In addition to providing a roadmap for companies looking to improve their ESG policies and reporting, GRESB provides a peer group ranking to provide context for investment decision making. More information about the benchnark and 2016 results can be found at:

Wednesday, August 24, 2016

Setting Things Straight on Crowdfunding

By Gary Lyons (Raleigh, NC)

The process of crowdfunding is often misunderstood. People are using this term loosely; as a result, there is a fair amount of confusion surrounding this capital-raising technique.

Many recognize the or websites, as they have received a great deal of publicity for the many worthy causes that they have supported. While Kickstarter and sites like it raise funds for worthy causes, they don't involve a promise of a return. In other words, no equity or debt position is being offered by the "sponsor" to the capital provider for his/her "investment."

True crowdfunding involves an offering (i.e. a sale of a security) to the "crowd" (e.g. private investors), which includes both accredited and non-accredited investors. The addition of non-accredited investors is an important development, because until recently sponsors were only allowed to raise investment dollars (in the form of equity or debt) from accredited investors. U.S. federal law limited the universe of potential investors to those individuals with at least $1 million in assets, excluding the equity held in their primary residence, or $200,000 in annual (individual) income.

This new development, to include non-accredited investors, came about as a result of the JOBS Act (Jumpstart Our Business Startups) of 2012. The Securities and Exchange Commission has been extraordinarily slow to finalize the guidelines for this new program; as a result, many states, including North Carolina, have elected to enact crowdfunding laws to permit limited offerings to investors. On June 29, 2016, the North Carolina legislature passed the NC PACES Act (Providing Access to Capital for Entrepreneurs and Small Business Act), which allows non-accredited investors to invest in startup companies or businesses (including real estate partnerships) in the same way that accredited investors have been able to do so for years. Governor Pat McCrory signed the bill into law on July 22, 2016.

The new law does place a number of restrictions on the non-accredited investor. For example, the non-accredited investor is limited to a maximum of $5,000 per offering in any 12-month period, and all information on the offering circular must be filed with state and federal regulators. The offering must contain all of the relevant risk disclosures and certifications, and it must also define the business model for the investment, including financial targets and projected returns. Furthermore, companies will be limited to raising $1 million in any 12-month period from non-accredited investors – unless they are willing to have their financials audited annually and available to investors.

We at Avison Young believe that crowdfunding will play an important role in stimulating additional real estate investment in North Carolina. Individuals who have historically been shut out of opportunities to invest in real estate will embrace this new investment vehicle as they seek to diversify the impact of their limited investment dollars. For more detailed information on crowdfunding, please refer to “Crowdfunding Law Made Simple” on the North Carolina Business and Banking Law Blog or view the U.S. Securities and Exchange Commission news release dated November 30, 2015.

The above article is for informational and educational purposes only and should not be construed as professional, legal or financial advice.

(Gary Lyons is a Senior Vice-President, specializing in Capital Markets, in Avison Young’s Raleigh, North Carolina office.)

Tuesday, August 16, 2016

Macy’s to close 100 stores: Is the department store dying?

By Beverly Keith (Raleigh, NC)

With last week’s announcement from Macy’s that the company will close 100, or 15%, of its 675 stores in the first quarter of 2017, the commercial real estate industry and consumers are questioning whether the department store is dying.

On the heels of other 2016 announced closures by Walmart, Kmart, Sears, J.C. Penney and Bon-Ton, the Macy’s decision may be cause for real concern.

Dillard’s, J.C. Penney, Nordstrom and Kohl’s have all experienced declining revenue for six straight quarters. Furthermore, all have announced store closures and/or delays of expansion plans. Continuing missed revenue targets are also impacting REITs, such as General Growth Properties (GGP), Kimco Realty Corp (KIM) and Simon Property Group (SPG), which own many of Amerca’s malls, as they realize the impact of lagging retail sales on their slumping unit prices.

A question of relevance

Are department stores relevant in today’s retail environment? Specialty retailers consistently outperform department stores by offering a better merchandise mix, better prices, better shopping experiences and much better customer service. Moreover, specialty retailers owe their success largely to sales of mixed apparel, which represents department stores’ core product and majority of merchandise. Apparel has become a highly competitive category as more and more discounters also gain significant market share.

For stand-alone department stores in primary and secondary retail markets, the question becomes: What is the overall value of this site? The store-closure decision becomes much easier when redevelopment of the site yields a higher return on investment, or if a sell-off of the asset provides a significant cash infusion to a corporation’s bottom line.      

Anchors away?

With department stores being anchor tenants in virtually every enclosed mall, what should REITs and other owners do? Many mall owners and observers are asking whether department stores can transform to meet ever-changing consumer demands. Shoppers want an integrated retail shopping experience – a connection between the typical in-store experience and the information gained from online research. Shoppers are also experiencing a time crunch like never before.  Shopping in 2016 is a lot more purposeful and, therefore, involves a lot less browsing, because shoppers just don’t have the time. In-store purchase opportunities must provide the same ease as an online shopping experience and validate the choices shoppers made in researching items. Retailers must also ensure that products available online are in stock when customers physically walk into bricks-and-mortar stores.    
Department stores have been very slow to adapt to, and meet, increasing consumer demand for updated and remodeled physical stores that reflect evolving brands; embrace omni-channel retailing; offer e-commerce; and fulfill the increasing need for instant gratification. For example, Amazon Prime’s RaaS (retail as a service), providing same day or next day delivery, includes drone dropship to satisfy shopper’s need for instant gratification or what is being called immediate retail gratification. If past performance is the best indicator of future performance, mall landlords may need to revise their strategic plans and look for ways to backfill anchor spaces.

Malls repositioning themselves

But does the demise of the department store only spell bad news for the consumer? Maybe not. Malls all across America are repositioning themselves. Whereas once there were four anchor stores in an enclosed mall, you may now start to see only one. The large blocks of space traditionally reserved for department stores are being backfilled with more shopping experiences – primarily restaurants, expanded food courts, movie theaters and concert venues – which offer an assortment of leisure activities and social interaction in addition to shopping.

These changes support the ever-changing consumer shopping paradigm shift by building a better shopping experience – a trend which is a huge plus for the future of retail.

(Beverly Keith is a Senior Vice President, specializing in retail real estate brokerage, based in Avison Young’s Raleigh, NC office.)

Tuesday, August 9, 2016

Berlin after Brexit: Still at the Top of the List

By Nicolai Baumann (Berlin) and Inga Schwarz (Hamburg)

With or without Brexit, Berlin remains at the top of national and international investors‘ list of commercial real estate investment markets.

Most, or all, foreign investors have kept Germany’s capital in their focus for a number of years now. They love the Berlin success story of the recent past. They are fascinated by Berlin’s urbanity, its international character and its dynamic marketplace. They are attracted by the possibilities that the city offers to its residents, visitors and the economy. They see change, creativity and the citywide desire to discover and try new things.

And the figures speak for themselves. Berlin’s population rose by almost 6% in the past five years. Currently, some 3.52 million people live in Berlin, and official forecasts predict an additional rise of 266,000 by the year 2030. Furthermore, Berlin is Germany‘s No.1 tourist destination. In 2015, a record 30 million overnight stays were tabulated in Berlin, and that number is also on the rise. Last but not least, Berlin is Germany’s start-up capital. In 2015 more than 42,000 new enterprises were registered, equating to 121 start-up companies per 10,000 residents or more than 115 registrations per day. This level is unmatched anywhere in Germany.

Accordingly, Berlin’s international character is highly attractive to young people and enterprises seeking to move from the U.K. to an EU country following the Brexit referendum.

Although Berlin’s residential rents have risen noticeably over the past few years, the overall rent level remains comparativiely low. Moreover, the academic landscape, with some 175,000 students, is an important pillar for further economic growth, as are the low office and location costs in comparison with international markets. A high quality of life and a vibrant cultural scene, which is second to none in Germany, complete the overall package. Young urban hipsters and millenials from across the globe have been drawn to Berlin for a number of years now, making English a language spoken in almost any local supermarket.

Pull factors that draw investors to Berlin: The city and its economy are growing, the standard of living is high and the local real estate markets only know one direction – up.

Take-up in the Berlin office market reached a historical high of 9.15 million square feet (msf) in 2015; and with 4.41 msf of office space taken up in the first half of 2016, the capital’s office market is on course for a strong second half. Meanwhile, the office vacancy rate is currently at 3.9% and will decrease further. Why? Berlin is in demand and we are in a landlord’s market these days. This trend is underpinned by the rise of class A central business district (CBD) office rents. They are currently at €26,00 per sq. m per month and will continue to increase, as there is continuing demand and no rise in supply in sight. The residential, retail, industrial and hotel sectors are growing in similar ways. Therefore, it should come as no surprise that, backed by strong leasing markets, Berlin’s commercial real estate investment sector has been on a high lately. In 2015, record investment volume of €8.2 billion was achieved. Foreign investors contributed more than € 4 billion of that total, representing a 49% market share. In the first half of 2016, foreign investors increased their market share to 60%.

Simply put, international investors love Berlin. While they have the entire German market and all of its possibilities and stability in their scope, Berlin will remain the top investment target. As the U.K. and EU work out the terms of Brexit, demand for investment product will rise further – across all real estate asset classes. With class A supply limited and becoming even tighter, investors will need to raise their visors to avoid missing out on opportunities.  Developable assets located outside the CBD will come into focus, and investors‘ appetite for development projects will increase further across all of the region‘s commercial real estate sectors.

Nicolai Baumann is Avison Young’s Head of Office Leasing in Berlin
Inga Schwarz is Head of Research Germany with Avison Young 

Friday, July 8, 2016

Technological Disruption and the Real Estate Industry

By Amy Erixon, Toronto

Many forces are combining to cause 2016 to be the year where even the most skeptical of observers is beginning to wonder, all this technological change – what do you suppose it means to me and the way I do my job?   For example, most real estate industry executives have tried Uber or Lyft and wondered, will there be companies in the business of renting space that aren’t actually landlords?  The answer is yes, and there are several.  

Perhaps you have read about or seen an office where the workforce needs to reserve a spot to work at their regular office location, via a mobile app (for example:  Deloitte’s newest offices).  These types of digital applications have the potential to disrupt not only the way physical space is being utilized but the resulting work outcome and processes by which we undertake the work - in ways we haven’t yet conceived. 

Robotics is another field that has revolutionized manufacturing and more recently legal and journalistic research.  Are you aware of how it has disrupted logistics and is poised to disrupt the construction industry?  Likewise, revolutionary high performance materials and artificially intelligent operating systems are being utilized to substantially improve environmental performance of the newest state-of-the art projects to save occupants 50% or more on their electric bills – material in jurisdictions like Ontario where power costs are 2.5 times the North American average price.  

We have entered into an era known as the Fourth Industrial Revolution where cyber physical systems, streaming technologies, online marketplaces and artificial intelligence among other innovations are supplanting the way things used to get done.  Our infrastructure investment is lagging at the same time that the merger of scientific research and engineering applications are pushing the boundaries of what kinds of buildings and places of the future are conceivable.  All of these changes are ushering an era of great opportunity for those quick to notice the patterns and embrace new technologies. 

If you would like to learn more about a sampling of these technologies and major themes at work, I invite you to read my recent Topical Report.

Wednesday, June 29, 2016

BREXIT: Finding clarity in murky waters

By Mark Rose (Toronto)

I was in London on June 23, the day the British voted to leave the European Union, when my taxi driver confessed: “I don’t know why I voted to Leave, but I wanted to vote for my country.” His remarks summed up the mood behind the “Brexit” vote that seems to have caught markets, politicians, business leaders and even much of the public so off guard. In just the past few days, we have seen a dizzying array of dire reactions in the U.K., Europe and across the globe, including dramatic plunge of the pound sterling and trillions of dollars in global stock market losses.

This short-term disruption is the natural effect of fear of the unknown. The market chaos that we are witnessing is due to people not knowing what leaving the EU will mean. The day after the vote, CNN reported that the most Googled search in the UK was- “What is the EU?” Visibility is low, and it is difficult to discern the guideposts, much less the horizon. While this situation is understandable, we at Avison Young cannot emphasize too strongly that no one knows how the U.K. vote to Leave will play out. A complex series of political and economic negotiations will need to be navigated over a long period of time before clarity is restored.

Yet, disruption is always a time of opportunity as well as a time of risk. Smart money will pause, assess – and then formulate new strategies. Brexit is not the death of the U.K. or Europe, and it is not the death of real estate investment, either. Our industry will bounce along as negotiations and rhetoric between the U.K. and the EU start, but global commerce is alive and well – and the U.K. is a big part of it. We may or may not be in the midst of a long-term trend, but business does not cease for long periods.

From a commercial real estate perspective, in the short term, we expect the bid-ask spread to increase as buyers and sellers jockey for position with very different views on value. This trend will lead to a slower investment pace and lower volume of transactions – although we would not be surprised to see a few large, bold transactions from smart-money investors. Similarly, for leasing, most multinationals will pause to assess the situation and chart a new course. We anticipate a slower pace and lower volumes among occupiers as well as investors in the short term.

The U.S. dollar is the big beneficiary and, thus, makes North American investment in the U.K. and continental Europe enticing as events stabilize. Europe is effectively on sale to North American investors due to currency losses. Previously unavailable opportunities may suddenly open up.

North America will continue to represent the best port in the storm. Core markets in the U.S. and Canada, in particular, become safe havens for commercial real estate investors, and New York, Toronto, San Francisco, Vancouver and Los Angeles could be a huge beneficiaries. The U.S. has largely been the world's core market over the past 24 to 36 months, with the most aggressive investors making acquisitions for capital preservation as much as for yield. The Brexit vote aftershock will amplify that situation, and we will see more markets and assets that are not traditionally viewed as core – but increasingly exhibit core characteristics – begin to trade as such. Expect the research-driven core funds to lead the way followed by separate accounts and offshore funds. In major markets, smaller assets that have the right characteristics will see pricing previously reserved for larger properties, due to lack of investable assets on the market.
The interest-rate environment, which was beginning to see signs of uptick, will remain stable to down over the next two years, possibly even the next three to five years – another ultimately positive factor for real estate investment. Brexit has clearly impacted interest rates and may have dealt a death blow to central banks interested in raising rates any time soon. Real estate as an alternate investment just became that much stronger.
Some short-term trends may promote investment opportunities; however, over the longer term, it will be wise to take the time to assess the strategic factors in play. It is simply not known yet how tariffs, import-export regulations, security agreements and movement of labor will be affected. The political and legal decisions that will shape the new relationship between the U.K. and Europe are, at this stage, opaque.
Europe’s broader political landscape will make exit negotiations quite challenging. Upcoming elections in Spain, France and Germany are bound to exert pressure on European negotiators, and some member countries will be in a hurry to be, or at least look, punitive. It is not unthinkable that Russia might make another move to test the nerve of the West.

On the home front, the U.K. has more than its fair share of homegrown problems. Scottish and Northern Irish voters, who strongly voted to Remain, are now rethinking their own alignment strategies. While the British economy has breadth and depth, according to The Economist, Britain sends more than 40% of its exports to Europe, while the EU sends only 7% of its exports to the UK.  Accordingly, Britain’s massive trade imbalance leaves it highly vulnerable to trade disputes.

Our advice to clients is to proceed with caution. History points to downward trends in the short term and a recovery in the medium term, but anyone who claims to know the details or the exact outcome over the long term is foolish. Brexit will play out in real time before us. The ending to this story is unknown.

With that said – although the emotions of this vote are high, the decline in markets around the world steep and the landscape one of uncertainty – capital flows have always found investable assets, and those who take advantage of the downturn will profit. Commercial real estate investment fundamentals remain very strong. At Avison Young, we encourage our clients to assess their situations carefully and develop a plan. Take time to pause and assess, seek out our experts. One thing is for sure- smart money has always taken advantage of disruptions in the marketplace.  

(Mark Rose is the Chair and CEO of Avison Young.)

Thursday, June 2, 2016

Smart Cities of the 21st Century

By Amy Erixon, Toronto

We are presently two-thirds of the way through “the urban century”; a period where the number of people living in cities worldwide will increase nearly 10-fold.   North America is the most urbanized region with 82% of its population currently living in cities, followed by Europe.  Most of the remaining urbanization will occur in Asia and Africa, the world’s most drought afflicted regions, and in the Middle East, the most geopolitically at-risk region.  These migrating populations pose significant challenges to be met by technology, social and economic policy.   If the problems are not solved regionally, then the existing cities of the world will need to be reshaped to accommodate this population surge. 

More than anything, it is the push and pull of technology that has triggered this demographic shift.  Electrification followed by Industrialization started the move off farms to cities.  The machine age triggered the growth of the services economy, and we have just entered the so-called 4th Industrial Revolution, moving beyond automation and global supply chains to additive manufacturing and artificial intelligence (AI), which, like previous disruptors will further realign the location, production, labor and service value chains and facilitate (or demand) that cities transform in response.    

It is from this point of view that technology will help us to address the most vexing of urban issues, including poverty, congestion, drought, and pollution; lack of access to recreation, education and affordable housing; and also address large scale climate risks, which while affecting us globally need to be implemented locally.  
Some countries, and communities are in a rush to get out in front of others on these issues.  China, for example, has for the last four years been the leader in developing and installing renewable energy.  India recently completed a global competition for teams to help meet their Smart Cities Challenge. 

 Rapidly urbanizing, the Government of India has approved US$15 billion of funding of “smart infrastructure” to improve quality of life – things including assured water and power supply, sanitation and solid waste management, efficient urban mobility and public transport, and robust IT connectivity.   E-governance and citizen participation along with safety of its citizens are some of the required attributes to secure funding for these smart cities.

Both white collar and blue collar workforces benefit greatly from the governmental implementation of IT tools to enhance quality of life; just as private sector employers have done to improve accuracy, speed and market reach of its workforce.   While some technology is being greeted with concerns - it frequently unfolds with disproportionate obsolescence and disruptive effects on certain job classifications (recently bank clerks and taxicab drivers) it also increases workforce in other areas (data analysis and programming).   But these shifts are inevitable when a technology offers more choice at lower cost.   Locations well positioned to make investments in new economy infrastructure (education and training, high speed universal broadband, cybersecurity and cyberphysical sensor networks) will be leaders in obtaining the coveted high value jobs of the future. 

Examples of current technologies causing disruption would include the sharing economy app based systems (like Uber and AirBNB); robo-finance and crowd sourcing/funding; driverless vehicles and AI smart systems.   When applied to cities - smart systems refer to cyber physical systems (CPS) - a network of sensors monitoring flows such as water, traffic, electric grid, and emergency rooms connected by wifi to a command center and communications hub where resources can be dispensed, controlled, ordered and optimized. 

May 4th, 2016 was the 100th birthday of Jayne Jacobs, the famed US and Canadian Urbanologist, and author of Death and Life of Great American Cities.  Her vision for creating livable cities that solve problems is getting a big shot in the arm toward becoming a reality, thanks in large part to advances in technology.    We should take heed and be challenging our leaders to provide constructive leadership during this transition period.  We need strategies to facilitate creation of purposeful places which facilitate positive social change and enhance economic competitiveness together with strategies to retool our workforce for the jobs of tomorrow.    

Sunday, May 15, 2016

Industrial fundamentals stable in North America and U.K.

By Mark Rose (Toronto)

New Avison Young research shows that the North American and U.K. industrial real estate markets are operating in a position of relative strength.

While local, regional and global economic headwinds continue to impact commercial property markets, the industrial sector is operating in a position of relative strength, evolving rapidly as owners and occupiers alike respond to changing demand. Traditional buildings are being viewed in a different light as they compete with new, innovative facilities catering to the burgeoning e-commerce, logistics and distribution sectors.

Our Spring2016 North America and U.K. Industrial Market Reportreleased today, provides in-depth analysis of the industrial markets in 51 North American and U.K. metropolitan regions.

Of the 51 industrial markets, vacancy declined in 38 markets, increased in 12, and remained unchanged in one, during the 12-month period ending March 31, 2016.

U.S. fundamentals continue to rebound; the Canadian market’s diversity appears to be buffering the setback in the resource sector; and Mexico City and the U.K. are both seeing strong demand for logistics and distribution space.

First-Quarter 2016 Canadian Industrial Market Highlights:

·        Demand for industrial space is robust, with 12-month absorption totalling almost 25 million square feet (msf) – nearly double the total for the previous 12-month period. Toronto led all markets by a wide margin, followed by Vancouver and Edmonton, as the East outpaced the West.

·        Ten of the 11 Canadian markets surveyed display single-digit vacancy rates (with four markets posting rates below the national average) compared with seven one year earlier. Western markets combined for a modest vacancy increase (+10 bps to 4.2%) during the past year, compared with a decline by Eastern markets (-80 bps to 3.8%).

·        Year-over-year, vacancy declined in five markets and increased in six. Toronto claimed the country’s lowest rate (2.7%), Halifax the highest (11.9%) and greatest swing (+200 bps), while Vancouver (2.8%) showed the biggest improvement (-120 bps).  

·        Keeping pace with demand, developers completed almost 16 msf of new industrial product in the past year with three-quarters delivered in Toronto, Edmonton and Vancouver. 

·        More than 10 msf is under construction – equating to only 0.5% of the existing inventory.  Only 12% of this product is preleased, pointing to the speculative nature of development across the country. Toronto and Vancouver account for 75% of the total industrial area under construction.

·        Downward pressure on asking net rental rates, especially in Calgary and Edmonton, and to a lesser extent in Regina, helped lower the national average $0.05 per square foot (psf) year-over-year to $8.04 psf. Despite weakness in the oil patch, the West ($9 psf) maintains a healthy, but narrowing, spread over the East ($6.89 psf).

First-Quarter 2016 U.S. Industrial Market Highlights:

·        The 10.6-bsf U.S. industrial market ended first-quarter 2016 with an average vacancy rate of 5.9%, and seven of the 37 markets tracked by Avison Young report vacancy of 4% or less. West Coast markets lead the country with the lowest vacancy reported: San Mateo (36 msf / 2%), Orange County (218 msf / 2.2%) and powerhouse Los Angeles (1.4 bsf / 2.6%).

·        Net U.S. absorption for the prior four quarters approached 200 msf, nearly 4% higher than the previous reporting period and an amount roughly equal to 2% of the total inventory. Los Angeles (27.5 msf), Chicago (23.3 msf) and Dallas (19.7 msf) achieved the highest net absorption.

·        Despite a faltering energy market, the rapid growth of e-commerce fulfillment and high-tech manufacturing has been able to backfill demand – and, in many cases, drive vacancy and rental rates to new records. The highest average asking triple net rent in the U.S. was recorded in land-constrained San Francisco ($16.28 psf), and the markets that reported the greatest gains in rent year-over-year were San Mateo (+$3 psf), San Francisco (+$1.74 psf), Los Angeles (+$1.56 psf), Oakland (+$1.44 psf) and Denver (+$0.92 psf). 

·        A quality gap between existing buildings and new developments has created pent-up demand for high-quality product. This trend is likely to continue for several years, as industrial developers are often priced out of the rare development sites available in primary markets.

·        Altogether, the U.S. delivered 130 msf in the 12-month period ending March 31, 2016. Another 136 msf is under construction with preleasing levels at 45%. Dallas and Los Angeles each have 20.4 msf underway.

·        In an unusual twist, tight market conditions have led some owners to begin converting office buildings for industrial use (Long Island), while other municipalities have begun enforcing zoning ordinance fines to ensure that limited industrial space is not misappropriated by office tenants (San Francisco). 

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(Mark Rose is the chair and CEO of Avison Young.)

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