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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.    

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