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Thursday, December 14, 2017

State of Atlanta market discussed at Bisnow event

By Nadine Melo (Atlanta) 

The room was teeming with excitement on December 5th, an odd sight given the time of day –7:30 am to be exact. 

Atlanta real estate professionals gathered by the entrance of Bisnow’s state-of-the-market event, grabbing their badges and greeting fellow peers as they made their way to the coffee station to continue their conversations. Some even provided their own projections on what can be expected of the market in the upcoming year. 

After an hour of networking, The Ardent Companies CEO and event host Mark Shulman kicked off a three-panel discussion.

“Today, Bisnow is all about projects and predicting the future,” he said. 

Here are some of the topics discussed on where the Atlanta market is today and where it will be in 2018: 

While the first panel made it a point to discuss all commercial real estate asset classes, panelists did so through the use of mixed-used developments. Mixed-used projects, and in particular retail, served as the framework for most of the discussion, and it was not surprising why. 

In fact, retail, more than any other asset class, serves as the foundation for most mixed-use developments that we see today in Atlanta and elsewhere. Look at Avalon, the Battery and Colony Square and retail is, indeed, the common denominator. However, panelists stressed that, to be successful, mixed-use properties must provide consumers with an experience. 

“For retail, it's the overall experience that developers have to create to get people in there,” said BBG Director Grant Griffin. 

A fact which was furthered addressed by Franklin Street Director Reid Mason, who attributed the success of Avalon, a mixed-use development located in Alpharetta, GA, to the marketing and programming of the project.

“It goes back to the consumers and the consumers these days want an experience,” said Mason. “They want something unique. These developers are looking for that (uniqueness) to put in their center.”

HFF Senior Director Chip Sykes opened the capital markets discussion with the following statement: “You are going to hear as a general theme that capital is abundant and that it’s being put thoughtfully and with discipline, and very unlike what we saw in the previous cycle.” 

“Office has been restrained and is good, because markets like Atlanta can get in trouble for overbuilding,” said PCCP Director John Randall. 

In addition to the change in real estate fundamentals, there has been an increase in insurance companies lending money to developers and landlords seeking debt financing outside of the typical CMBS loan.

“Insurance companies are lending more money now on an annual basis than they ever had previously – about $80 billion annually over the past three years, which is a high-water mark for the industry,” said Sykes.

Later, the developing southside of Atlanta’s downtown area, along with the issue of affordability and transportation, dominated much of the third panel discussion. While most panelists agreed that the burgeoning renaissance of south downtown is a huge boost for the overall marketability of the city as Amazon considers Atlanta for its HQ2 site, the fact remains that the city’s growth can be stymied if the issues of affordability and transportation are not dealt with now. 

“I think we do have an affordability issue, both on the development and the production side of our business,” said Shelton McNally, Principal of Conor McNally, “It’s just harder to make yields work on the more expensive, in-fill, higher-cost deals right now.” 

McNally went on to say: “If you do have a good transportation infrastructure you can move people around the city effectively, and you can deal with the affordability issue.” 

Despite the growing concerns over affordability, transportation and overbuilding, panelists projected a positive outlook for commercial real estate in 2018.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her office’s capital markets group.)

Tuesday, December 12, 2017

Senior Housing Reaches New Heights

By Dan Baker (Washington, DC)

The senior housing industry has reached new heights in its relatively youthful existence as a real estate asset class as it continues to distinguish itself from multi-family, health care and hospitality as a viable institutional investment.

A multitude of factors have combined to create one of the largest bull runs in the history of the senior housing market, making it a great time for owners and/or operators to sell, refinance, or otherwise recapitalize their properties: 

  • Low interest rates for construction, bridge and permanent financing;
  • New entrants and capital to the space;
  • Increasingly favorable long-term demographics;
  • Turmoil, high pricing, and decreasing yields in other real estate assets; and
  • A dramatic increase in operator sophistication and transparency.

 Much of the new product being developed today is different from most of the existing inventory in the market. Amenities, such as bistros, game rooms, theaters and outdoor space, are becoming standard. Key-card access, advances in lighting, Wi-Fi, telemedicine, and the use of electronic health records are also commonplace. Larger units and fewer studios (except in memory-care facilities) are what one would expect in a recently constructed senior housing community.

However, the sky is not all blue for the industry, which is beset with challenges from numerous angles. Increasing regulations and media coverage in the wake of recent natural disasters in Florida, Texas, and California have required operators to invest resources into emergency preparedness. Incorporating quickly evolving technologies into communities to be a more appealing partner to other operators in the healthcare space also requires investment in resources and personnel. Additional headwinds are:

  • Labor, in terms of both availability and quality, is the dominant challenge for large and small operators alike;
  • Affordability remains a pressing issue that the industry has yet to resolve, as middle- class prospective residents, who account for the majority of the baby boomer generation, have enough assets to not qualify for government assistance, but not quite enough to afford the high-end product that is mostly being developed today. As one industry observer said: “They’re too rich to be poor – and too poor to be rich.”
  • When entering a senior housing community, the typical resident is increasingly older and more frail, with more complex medical requirements and in need of assistance with daily living activities, further encumbering an already thin labor force.
  • A tremendous inventory of first-generation senior housing, built in the 1980s and 1990s, is on the market seeking a buyer, and there is concern about the competitive abilities of that real estate in the future due to physical-plant limitations.

These factors are often much more burdensome on smaller, individual owner-operators than larger, regional or national operators due to a lack of efficiencies and economies of scale. As a result, a typical seller in today’s senior housing market has only one property, or a small number of them, and is faced with the decision to grow to remain competitive or sell to capture a market where valuations are historically high.

In all, the senior housing market is alive and well, with unprecedented levels of capital chasing returns in the space, but investors and operators must not believe that simple demographics will lead to success. Proactive operations, thoughtful design and development, and properly structured deals will succeed over the long run as new competition intensifies in the space.

(Dan Baker is a Vice-President in Avison Young’s Washington, DC office. He specializes in senior housing dispositions on behalf of REITs, private-equity firms, and individual owner-operators. His career in senior housing began in 2007 working for an operator in facilities.) 

Wednesday, November 15, 2017

2017 Highlights of the Canadian Apartment Renter Survey

By Amy Erixon, Toronto

On September 12, I presented the results from the second annual Apartment Renter Sentiment Survey, with surprising findings in many areas, among others - recycling commitments and rising tech savvy among tenants.   Across Canada, commute times decreased and so did the time to find an apartment, key findings in the 2017 pan-Canadian Apartment Rental Survey.  Overall, Canadians polled are less fussy than their US counterparts, and stay in place much longer.  A higher percentage of renters are married, at 50% compared to one-third south of the border, and nearly one third have children living in their units.  Nearly one-third of the 10,000 survey respondents indicated they had previously owned a home, and desire for a hassle-free life style led the list of reasons why they were renting.  A whopping two-thirds indicated they plan to stay in their current apartment, and 31% had been in place for more than 3 years.   Broadly representative of the Canadian population, by geography and other demographics, 25% of those surveyed were age 18-30, while 39% were over 50. 
While 20% of renters polled indicated they were highly satisfied, 70% indicated satisfaction with their current living arrangement, Vancouver landlords were ranked significantly better than their Toronto counterparts for service quality ad responsiveness.  Asked whether they would be willing to pay more for amenities they did not have, 43% of tenants said they would - including at the top of the list, high speed internet access, energy efficient lighting, fitness facilities and tri-slot garbage (recycling).   In terms of amenities targeting a subset of the population, 37% of renters have children,   35% have pets, and 59% said they would use package lockers, while fewer than 8% of units reported offering this service. 

Canadian landlords continue to lag their tenants in technology arenas.  While most renters initiated their search on-line, and half of all renters with access to on-line features utilize them, fewer than 20% of communities have tenant portals and on-line payment schemes.  Fifty-five percent of renters indicated that smart thermostats and in-unit alarm systems were important, which, for context nearly tied with desire for a walk-in closet and en-suite bathroom.   High speed Internet access, for the second consecutive year rated as the single most important feature, ahead of parking, proximity to a grocery store and access to transit (which closely followed).

I encourage all owners to sign up to participate in next year’s survey.  To view my 2017 presentation, click

To receive the white paper on the results, and to obtain access the underlying database, contact  

Wednesday, November 8, 2017

Key attributes of Atlanta’s industrial real estate market

By Nadine Melo (Atlanta)

Strong market fundamentals, stability and long-term growth have made industrial the most coveted real estate sector across the U.S. Nothing exemplifies this dynamic more than Atlanta’s industrial market.

Despite being one of the last markets to recover from the recession, Atlanta is not only the second most active market in the southeast, but it has absorbed a staggering 37.8 million square feet (msf) of industrial build-out in the past decade alone, according to GlobeSt.

The pace of Atlanta’s industrial market growth is even more astounding when you consider that the current year-to-date absorption of 16.8 msf has already surpassed the 2016 total by 23%, according to Avison Young Research.

Now, what exactly is driving Atlanta’s industrial growth when compared to other markets like L.A and Chicago? The panel from Atlanta’s industrial Bisnow event in September surmised that such factors as the growth of e-commerce, demographics, and location are primarily responsible.

One cannot mention the current industrial boom without talking about e-commerce first. Industrial’s growth is backed, in large part, by the changing dynamics occurring in the retail space. The internet has driven the creation of a globally inter-connected economy that has impacted both logistics and the supply chain, respectively. Resulting in smaller players competing on equal footing with their larger counterparts.

In turn, the demand generated from e-commerce is driving the need for modern building specs that requires the logistics of the industry to operate at optimal efficiency. As discussed by the panel, pricing, larger floorplates, separate entrances, drive-thru and higher clear ceiling heights (32 feet and above) are some of the prerequisites being issued by tenants today.

Big-box retailers, like Target and Amazon for example, are driving the growth of industrial product by searching for urban infill locations. As a result, retailers can fulfill orders within a 24-hour time frame and with increasing frequency, the same day, by being close to their demographic base – a marked contrast to the sector’s previous focus on location and access to infrastructure.

Proximity to a strong demographic base translates into instant access to not only your consumer, but also to talent, and Atlanta more than satisfies that need. Between 2015 to 2016, Atlanta’s population grew by 1.6%, statistically making it the ninth-largest metropolitan area in the country, according to the U.S. Census Bureau/

However, the current growth is not simply attributed to e-commerce and demographics. In fact, Atlanta has always been a major transportation hub for the U.S. As mentioned by Larry Callahan, a panelist at Bisnow’s September event and CEO of Pattillo Industrial Real Estate, Atlanta is a logistics hub by design. Since its inception in 1837, Atlanta was designed to serve as a strategic railroad junction, and its legacy is evidenced by the various railroad tracks that now comprise the Beltline.

When looking at a map, it's easy to see why Atlanta is attractive to national and foreign investors alike. Atlanta is home to the most visited airport in the world, according to Metro Atlanta Chamber, and located just 250 miles away from the Port of Savannah, the largest single container terminal in the U.S. In addition, three major interstate highways pass through the metro and provides access to 80% of the U.S market.

According to Brittany Holtzclaw, a panelist at the Bisnow event, current local industrial projects are being driven by e-commerce and investors’ desire to get close to the population base while keeping costs low. Therefore, Atlanta is a perfect market for international projects, as demonstrated by the foreign investment activity that we are seeing in the market today.

While Atlanta’s industrial market shows no signs of abating, with approximately 5.1 msf to be delivered by year-end 2017, real estate professionals can expect to face various challenges in the foreseeable future. Said challenges include: site location, construction costs, higher asking rents and traffic congestion as the metro region and industrial real estate demand continue to grow.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her office’s Capital Markets group.)

Monday, October 30, 2017

Multi-family real estate: past, present and future

By Gary Lyons and Craig Cadwallader (Raleigh-Durham)

As most readers understand, the multi-family property sector has been on a tear for the last seven years with primary growth indicators reflected in the last five years across much of the United States and, certainly, in Raleigh-Durham’s Research Triangle region.

Overall, the Triangle market has been fueled with an influx of new residents (and capital) seeking affordable and/or short-term housing solutions until they determine their long-term plans; many of the newcomers are millennials and baby boomers who are considering downsizing their homes. Between 2010 and 2015, the Raleigh-Durham area’s population grew by 16.5%, making it the fastest-growing metropolitan area in the nation, according to MPF Research.

As millennials quickly become the majority of the new entrants into the job market and family formation continues to be delayed, there is a continued increase in the relative demand for rental properties of all types, with apartments continuing to lead the way.

Developers have responded with a historic level of construction, delivering an average of 4,600 units per year between mid-year 2012 and mid-year 2017 with another 5,550 units slated to be completed over the next four quarters. In spite of this record level of deliveries, occupancy levels have held consistently between 94% to 95% since 2012, while lease rates have been climbing at an average of 3.5% per year since then, according to MPF Research.

Well-capitalized developers have had no problem securing favorable short-to-long-term financing solutions from a wide variety of lenders, including Fannie Mae, Freddie Mac, the Federal Housing Administration/Department of Housing and Urban Development, commercial mortgage-backed securities (CMBS), the U.S. Department of Agriculture and insurance-related loan product types. Lending terms have been extraordinarily favorable with common loan-to-value ratios of 65% to 75% and interest rates ranging from 3.26% to 4.85% based on loan type. For bridge loans, interest rates have ranged from 8.99% to 13.00%, with limited fixed periods available, and construction loans have hovered around 5.25%. Lenders’ overall appetite for writing new loans has diminished somewhat and will impact some developers’ ability to finance new projects, but we believe that there is no short-term end in sight to the continued growth of the sector in the Triangle.

According to a recent National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) study, North Carolina will need an additional 220,000 apartments by 2030. If one were to assume that the Triangle region will supply approximately a third of the statewide inventory, our region would need to add a total of 73,333 units, or 5,641 units per year, by 2030. If, however, the Triangle’s demand equates to 40% of the statewide production, developers would need to deliver an average of 6,769 units per year.

Finally, investors continue to be enthralled with our region’s multi-family assets with approximately $1.4 billion worth of inventory trading in 2016, according to MPF Research. Volume and prices have cooled from the peak of 2016 with volumes down 41.9% on average and prices down 6.5% ($125,000 per unit) year-over-year. As of mid-year 2017, the national average sales price was $151,000 per unit versus $125,000 per unit in the Triangle, with prices varying based on product type.

In recognition of the strong demand for multi-family properties, Avison Young is expanding its multi-family service offerings in Raleigh as part of a companywide initiative to expand Avison Young’s footprint in the sector.

(Gary Lyons and Craig Cadwallader are both members of Avison Young’s capital markets team in Raleigh-Durham. Lyons is a senior vice-president specializing in the marketing, disposition and acquisition of investment properties. Cadwallader is a vice-president specializing in multi-family properties. Recognizing the appeal of multi-family properties among the global investor community, Avison Young recently hired Cadwallader, a 15-year commercial real estate veteran, to lead the company’s multi-family practice in the Triangle.)

Houston, We Have a Problem

By Rand Stephens (Houston)

Jack Swigert suits-up
Jack Swigert Suits Up by NASA via Wikimedia Commons
The famous quote from the 1995 movie, Apollo 13, is a phrase that is often used to indicate an unforeseen problem. However, this iconic Hollywood tagline from Tom Hanks, who played Mission Commander Jim Lovell, is not only a misquote, it’s attributed to the wrong astronaut.

It was Jack Swigert (played by Kevin Bacon), who radioed NASA Mission Control Center and said, “Ok, Houston, we’ve had a problem here,” after they discovered an explosion had crippled their spacecraft.

Although Hollywood may have changed the tense of the phrase for dramatic effect, it didn’t change the substance of the event, but Swigert may have felt slighted for not getting the credit for his famous quote.

This brings to mind the recent unforeseen flooding problems brought on by Hurricane Harvey to the Greater Houston area. The famous tagline once again echoed throughout the city, and, the country. However, Houston’s resiliency demonstrated that we can take a hit, regroup and continue to grow and prosper even after being struck by the worst storm to hit Texas in more than a generation.

It’s not surprising that Houston can “take a licking and keep on ticking”. It has built a strong foundation with economic engines centered around energy and medicine, exemplary post-secondary education with world-class universities, an outstanding transportation system and an affordable cost of living.

Amazingly, commercial real estate was unaffected by Harvey’s flood waters. And, based on the market activity, investors are still very bullish on Houston.

Unfortunately, Harvey did the most damage to homes, flooding approximately 100,000 homes and causing tremendous personal loss. Also, there were an estimated 300,000 cars lost to the flood waters.

Going forward, the City of Houston, Harris County, as well as the state and federal governments will undoubtedly invest in a new water drainage infrastructure for the residential areas that were hardest hit. I am confident the system will be able to withstand future storms of Harvey’s magnitude. Downtown Houston and the Medical Center flooded badly during Allison, but withstood Harvey because of the infrastructure improvements that were made after Allison. We learned from Tropical Storm Allison and we will do the same with Harvey.

Owners of multi-family projects benefitted most from Hurricane Harvey, as occupancy has soared due to displaced homeowners leasing apartments. Many investors are concerned that there is a huge roll-over risk as short-term leases expire. However, by offering short-term leases to homeowners, and staggering lease expirations, many owners have ensured they are not burdened with a big inventory of units to lease at one time. Prior to Harvey, there was a balance of supply and demand, so it looks like natural absorption will buffer short-term lease expirations, thus, paving the way for another good development cycle for multi-family.

Harvey may have resurrected the phrase, “Houston, we have a problem,” but it also created a new one, “Houston Strong.”

Click here for third quarter reports on the Houston market.

(Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

Monday, October 16, 2017

Expo 2017: Thoughts from a regular attendee

By Robin White (Toronto)

I attended Expo Real again this year in Munich (October 4-6). It is a regular stop on my travel calendar, and in my opinion one of the better venues for transacting business.

For those who have not been there, picture a cluster of major aircraft hangars on the periphery of town, all populated with exhibitor booths of varying shapes and sizes. Exhibitors range from cities (i.e. municipal governments) to investment and asset managers to brokerages to banks to professional associations to a variety of service providers, all competing for the attention of a hoard of attendees --  reportedly more than 41,500 this year. A sea of dark suits clambering over each other in an effort to be on time for half-hour meetings that have been set up in the various booths within the complex. Sometimes if the weather is good, as it was this year, meetings can be rescheduled outside, where seats have been set up in a courtyard setting.

In typical German fashion, the discussions are extremely efficient. A half hour does not allow for much small talk. After initial pleasantries, it's time to get down to business. Introductions dispensed with, it is time to see if there are opportunities that might fit, services that can be provided, or further meetings that need to be set up. It is fascinating what can come out of such meetings when everyone knows there is only a limited time frame for discussions.

After a full day meeting with dozens of contacts, and bumping into several others on the way to such meetings, it is time to chill at the Munich or Düsseldorf stand and savour some excellent German beer while reviewing some of the takeaways from each meeting. It is a terrific setting to build networks that may grow into meaningful relationships. 

And the overall summation of this year's Expo? Very positive feedback from European investors with respect to the future of European real estate, especially in Germany. Not quite so bullish on North America. Lots of discussion on whether there will be housing corrections in Toronto and Vancouver. Are interest rates heading up? Will there be any capital growth in commercial real estate in Canada next year? Hedging costs are a significant dent in investor returns, especially in the U.S. 

Having said all of this, major investors will continue to seek out investment opportunities in North America as part of their overall global allocation to real estate. But they are likely going to be more wary, especially given the global geopolitical environment that we currently face.

Major investors will require up-to-the minute advice when it comes to seeking out suitable opportunities, and the best advice is provided face to face. Expo allows this interaction to happen in the most efficient manner, and as such will continue to be on my calendar. I am already planning for next year!

(Robin White is Chair of Avison Young’s capital markets group and a founding Principal of the firm. 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.) 

Toronto’s red-hot downtown market reached another milestone with overall availability and vacancy falling to historic lows

by Bill Argeropoulos (Toronto)

The Greater Toronto Area (GTA) office leasing market remained robust throughout the third quarter of 2017 as demand once again outstripped supply, resulting in a continuation of the downward trend in the region’s overall availability and vacancy rates. Heading into the year’s final quarter, a wide gulf in market dynamics (both tenant options and pricing) persists between the landlord-favouring Downtown and Midtown markets and the tenant-favouring suburban markets. Noteworthy during the quarter was Amazon’s search for a North American location for its second headquarters, which captured the attention of the Toronto market. A unified proposal is being prepared, with Amazon’s final decision not expected until sometime in 2018.

All five office districts contributed to the GTA’s positive third-quarter performance as occupied space increased by 827,000 square feet (sf) – with demand evenly distributed between downtown/midtown and the suburbs. As has been the case for much of the year, class A buildings captured the lion’s share of the growth. The GTA’s overall availability rate inched closer to single-digit territory, falling 60 basis points (bps) quarter-over-quarter to 10.4%, and is down 80 bps year-over-year. Already in single digits, GTA vacancy declined 40 bps to a nine-year low of 6.8% and continues to nudge down toward historic lows not seen since the beginning of this century.

Toronto West accounted for all the GTA’s new supply during the third quarter, comprising three buildings totalling 107,000 sf – bringing the year-to-date GTA-wide tally to 11 buildings and 1.9 million square feet (msf), of which 78% is leased. More than three quarters of the new supply (by office area) has been delivered in the downtown market. To keep pace with demand, construction is confirmed or underway on a further 26 office buildings amounting to 6.7 msf (49% preleased). The under-construction tally is now at its highest level since third-quarter 2008, when 7.1 msf was underway.

Toronto’s red-hot downtown market reached another milestone with overall availability (6.4%) and vacancy (2.7%) falling to historic lows – backed by a solid performance, this time, by class A buildings in the Financial Core and Downtown South. Large-block requirements for immediate occupancy are virtually non-existent, with little (or no) relief in sight for at least 24 to 36 months – keeping upward pressure on rents. Downtown’s robust growth is anchored not only by the traditional FIRE sector, but a growing interest from creative companies in the technology, advertising and media industries, which are attracting a steady diet of venture capital.

On the development front, though not on the scale of Ivanhoé Cambridge and Hines’ CIBC Square (2.9-msf) construction and lease announcement (with CIBC for up to 1.75 msf) last quarter, Allied Properties REIT and Westbank have preleased 100% of the office space (146,000 sf) in their mixed-use development at 19 Duncan St. to Thomson Reuters for its Toronto Technology Centre, scheduled for completion in 2021. In other news, global management consulting firm Boston Consulting Group chose CIBC Square (phase 1 / 81 Bay St.) for its future Canadian headquarters (85,000 sf), while Cadillac Fairview renewed international business law firm Torys LLP (183,000 sf) at its TD Centre complex. Meanwhile, First Gulf began marketing The Shift – a 24-storey, 460,000-sf office tower at 25 Ontario St. – near its recently completed Globe & Mail Centre.

Demand for shared office and co-working space has spread to Toronto’s Midtown Bloor office node. Having opened its first location in Downtown West and with a deal imminent in the Financial Core, WeWork finalized a 36,300-sf lease at 33 Bloor St. E. Not available until mid-2018, Midtown’s largest block (180,000 sf) remains at 121 Bloor St. E. Nevertheless, Midtown is still tight, with overall availability and vacancy of 6.2% and 3.7%, respectively.

The suburban market contributed to the GTA’s positive third-quarter performance, with decent occupancy gains in each of Toronto North, East and West – sufficient to lower overall suburban availability and vacancy to 14.5% and 10.9%, respectively. While losing tenants to downtown is an ongoing concern for some landlords, the suburbs continue to secure their share of the GTA’s leasing activity. In Toronto North’s North Yonge node, CIBC renewed 141,000 sf at 5650 Yonge St., while Minto Group inked a 40,000-sf deal to relocate from 90 Sheppard Ave. E. to 4101 Yonge St. In Toronto East, Sony Canada finalized a deal for 40,300 sf at 2235 Sheppard Ave. E. in the Consumers Road node, vacating 145,000 sf at 111 Gordon Baker Rd. in the Highway 404 & Steeles node. In Toronto West’s Airport East node, Aecon Group explored the market but renewed at 20 Carlson Ct. (97,000 sf). These transactions and others are a testament to major users’ appetite for well-located and affordable suburban office product in the GTA.

These are some of the key trends noted in Avison Young releases Third-Quarter 2017 Greater Toronto Area Office Market Report

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)

Sunday, October 1, 2017

Healthy economy and property fundamentals buoy Investment activity in Canada

by Bill Argeropoulos (Toronto)

Investment in the Canadian commercial real estate sector is buoyed by a relatively healthy economy that is the envy of the G7 countries and a commercial property market that continues to see varying, but largely healthy, fundamentals across the country’s regions and asset classes.

With record amounts of capital still seeking a home, investors continue to find ways to buy into Canada’s finite investable commercial real estate sector. Capital from domestic and foreign investors continues to be largely directed towards Vancouver and Toronto, while the other major markets are also seeing their share of activity.

On the vendor side, capital recycling continues in order to reduce debt, upgrade asset quality and diversify investments geographically. Surplus capital that can’t be placed domestically often finds its way south of the border, as Canada has retaken its place as the primary source of foreign investment in U.S. commercial real estate. Canadian institutional buyers, such as Ivanhoé Cambridge, Oxford Properties and the Canada Pension Plan Investment Board – on their own or in joint-ventures – were active during the first half of 2017 across major U.S. markets, including Chicago, Los Angeles, New York, San Francisco and Washington, DC, with office properties being the most notable assets purchased.

Domestically, among the top-ranked transactions by dollar volume in Canada’s six major markets, office assets were the most numerous, followed by retail and multi-family. Office transactions ranked among the top five in all markets except Edmonton, comprising a combination of partial-interest, single-asset and portfolio sales.

Notable First-Half 2017 Canadian Investment Market Highlights:

  •  Following a record $28.4 billion in commercial real estate investment sales in 2016, Canada’s six major markets had first-half 2017 sales of almost $19 billion – up $4.3 billion, or 29%, compared with the first half of 2016. Investors coveted office and retail assets, which combined for more than $10 billion in trades, or 55% of the first-half investment tally. 
  • Vancouver ($7.8 billion/41% share) outpaced Toronto ($6.5 billion/34% share) with investment proceeds surging 75% year-over-year as vendors sought to capitalize on strong demand and peak pricing. With the exception of Ottawa (which saw investment activity plunge 57%), the remaining markets – Calgary, Edmonton and Montreal – all recorded increases year-over-year, and each exceeded the $1-billion mark. 
  • Supported by notable $200-million-plus transactions, office was once again the top investment sector with $5.3 billion in sales – an increase of 16% year-over-year – and captured 28% of total dollar volume. Toronto and Vancouver made up almost three-quarters of the national office total as investors poured nearly $2 billion into each market, mirroring the results registered one year earlier. 
  • Disrupted by e-commerce, the retail sector was a close second with $5.1 billion in transactions (27% share) as first-half investment more than doubled year-over-year. This result was bolstered by tremendous interest in Vancouver, which saw its country-leading retail investment total nearly quadruple year-over-year to $3.1 billion. Toronto was a distant second, with $1.3 billion in volume. 
  • First-half investment in industrial product came in at $3.3 billion (17% share) nationwide – up 35% year-over-year. All markets recorded growth in transaction volume with the greatest sales total in Toronto ($1.7 billion/53% of the national total). Accelerating industrial market drivers continue to be tenants’ demands for modern, high-ceiling logistics and fulfilment centres, and for facilities close to major urban centres for last-mile delivery service. 
  • The multi-family sector was not far behind with $3.2 billion in first-half transactions (17% share). Perhaps the most restrained markets by scarcity of available product, Ottawa and Toronto registered declines compared with first-half 2016; meanwhile, sales in Vancouver increased 146% to more than $1.5 billion, leading the country. 
  • Finally, the least-traded asset class was ICI Land as $2.1 billion worth of properties changed hands during the first half of 2017. Year-over-year, this was the only sector to record a decline in sales (-11%) as dollar volume decreased in all markets with the exception of Montreal. 
  • Average capitalization (cap) rates were marginally lower across all markets and all five asset types (with the exception of suburban class A office, which was flat) compared with one year earlier. Multi-family assets commanded the lowest yields – closely followed by retail – while overall rates showed the greatest compression year-over-year in Vancouver and Toronto. 

Almost three months into the second half of the year, we have already seen more than $3.5 billion change hands in Canada, including the likes of the 1.1-million-square-foot (msf) Constitution Square office complex in Ottawa for $480 million and Dream Office REIT’s estimated $1.4-billion office portfolio sale in Toronto, as well as a half-interest in Scotia Plaza.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)

Monday, September 25, 2017

The future of retail

By Nadine Melo (Atlanta)

For the past year and a half, we’ve been inundated with stories detailing the demise of retail.

But their accuracy is open to question.

Several published articles have painted a picture of large retailers going bankrupt and being unable to maintain sales as they scramble to compete with their digital peers. In fact, the latest acquisition of Whole Foods by Amazon – traditional retail’s proverbial grim reaper – has seemingly exacerbated this fear; yet, a myriad of data indicates that bricks-and-mortar retail stores are here to stay.

According to a July IHL report, there has been a total net increase of 4,080 stores in 2017, including traditional retail locations and restaurants. The report is based on a review of more than 1,800 retail chains with more than 50 U.S. stores in 10 retail vertical segments.

Even specialty apparel retailers, the most affected retail segment, will see 1.3 chains opening new stores for every chain closure – and the reason is quite simple.

Although people are choosing to forgo lines at the stores and shop online, the act of shopping is intrinsically a human experience. The idea that the Internet is going to supplant the physical need for space is erroneous, and that's because people want to gain the experience of touching an object before they make a purchase.

E-Commerce companies, for example, are looking for bricks-and-mortar space not to open a full-fledged department store, but to provide customers with a showroom experience. In other words, customers can come to a store, test preferred items, order said items at the retail location and then have them shipped to their homes. National bricks-and-mortar retailers like Nordstrom, Best Buy and Target have followed suit with similar strategies to remain competitive.

Most, if not all, retailers are using the Internet to diversify their marketing initiatives by opting to use omnichannel strategies. This diversification enables the savvy retailer to think beyond simple product placement and focus on consumer behavior. For example, Best Buy has taken a note out of Amazon’s book and has brought back the “traveling salesman,” in which a salesperson comes to your house and has you try out new products from the comfort of your home. The change in tactic helped Best Buy increase its domestic sales 4.9% in the second quarter of 2017 according to Chain Store Age.

Additionally, a large amount of industrial property absorption is occurring across the U.S. and globally as retailers look for industrial space where they can store products and fulfill online orders for delivery within 24 hours. In Atlanta alone, according to Biznow, about 13 million square feet (msf) of warehouse space has been leased by tenants like Tory Burch, Variety Wholesaler, and Duracell and another 10 msf of big-box warehouse space is currently under construction.

This is not the first time that the face of retail has changed. In the past, it was Sears who initially changed the game with the introduction of the catalogue, leading to the opening of the first department store. Then Walmart came along with its low and discounted prices, and today it's Amazon causing disruption. Amazon has impacted retailers by forcing them to abandon traditional modes of production, distribution and advertising to reach customers.

Therefore, what we are seeing is not the death of retail real estate – but, rather, its evolution.

(Nadine Melo is the marketing co-ordinator in Avison Young’s Atlanta office. She works closely with her Atlanta office’s capital markets group.)  

Friday, September 22, 2017

BC investment market’s remarkable stretch has likely run its course

By Andrew Petrozzi (Vancouver)

It’s been a hell of a run.

The past five years – 2012 to 2017 – will likely go down as one of the most prolific and profitable periods in history for Metro Vancouver’s commercial real estate market. Since 2012, almost $22.7 billion has been invested to acquire industrial, retail, office and multi-family assets in the province (and we still have six months to go!). In comparison, the previous five-year period, 2007 to 2011, totalled $7.03 billion. (For those really looking to have their minds blown: the first half of 2017 alone produced $5.09B in transactions.) These figures only include assets priced greater than $5 million. If properties that sold for less than $5 million are included, the total since 2012 would rapidly push north of $25 billion. Even more astonishing: the $22.7 billion does not include the billions spent by investors, developers, and private companies and individuals to acquire ICI land throughout the province. I’m not even considering the staggering value of residential land sales.

Some of the commercial real estate milestones achieved between 2012-2017:

·        Largest commercial real estate transaction in BC history: Cadillac Fairview’s sale of a 50% non-managing interest in Pacific Centre and a portfolio of 12 Downtown Vancouver office buildings to the Ontario Pension Plan (25%) and Workplace Safety & Insurance Board (25%): $1.9 billion (first-half 2017)
·        Largest retail real estate transaction in BC history: Ivanhoé Cambridge’s sale of Oakridge Centre to QuadReal Property Group: $961.3 million (first-half 2017)
·        Largest industrial real estate deal in BC history: KingSett Capital’s sale of Hopewell Distribution Centre I & II to PIRET: $102.5 million (year-end 2012)
·        Largest suburban office deal in BC history: Ivanhoe Cambridge's sale of Metrotower I & II in Burnaby to a private investor: $274.4 million (first-half 2017)
·        Largest secondary market retail deal in BC history: Canada Pension Plan’s sale of Hillside Centre in Victoria to Bentall Kennedy: Approximately $220 million (year-end 2013); followed by Morguard Investments & Greystone Managed Investments’ sale of Sevenoaks Shopping Centre in Abbotsford to a private purchaser: $214 million (first-half 2017)
·        First billion-dollar commercial real estate deal in BC: GWL and Ivanhoé Cambridge’s sale of the Bentall Centre office/retail complex in downtown Vancouver: $1.055 billion (first-half 2016)

These highlights do not include the sale of other prominent downtown office buildings during that five-year period, including (but not limited to) the Royal Centre ($427.5 million), Bentall V ($401 million), 1500 West Georgia ($120.5 million) and the UK Building ($115 million).

While demand remains strong and investment activity will continue to occur at healthy levels, the environment that nurtured this performance is starting to undergo fundamental changes in 2017. Interest rates in the U.S. and Canada are on the rise, which increases the cost of capital and reduces debt-financed leverage. Benchmark bond yields are improving, which offer less risk and more liquidity as an investment than commercial real estate does, particularly in a market with the most cap rate compression in Canada. The Canadian dollar is strengthening, reducing the currency discount that had been available to foreign investors, thereby making BC real estate assets less attractive from a pricing perspective. The federal and provincial governments have recently changed and new taxation and regulations are being introduced that will impact investor confidence and behaviour. Global capital controls are tightening, particularly in China, where large institutions and private investors alike had been moving significant amounts of capital out of the country and investing in real estate around the world, including BC.

What hasn’t changed is that commercial real estate assets in BC remain an integral part of any portfolio and remain sought after by local and foreign investors; however, the conditions that enabled the market to achieve record sale volume and pricing are shifting. Some investors may choose to take a pause in the next six to 12 months to get their bearings and prepare for what comes next.

(Andrew Petrozzi is Principal and Vice-President, Research (BC) in Avison Young's Vancouver office.)

Sunday, September 10, 2017

Strong demand lifts Calgary retail property values

By Kevin Morgans, Walsh Mannas and Ryan Swelin (Calgary)

Demand in Calgary’s retail real estate investment market continues to strengthen even as values approach all-time highs, capitalization rates compress and lease rates and occupancy levels remain strong.

Through large institutional-quality asset sales and small private-to-private transactions, Avison Young has been one of the most active groups in brokering retail asset transactions in the Calgary market.  This activity has kept us at the forefront of this trend line and allowed us to track the investment metrics changing quarter-over-quarter and almost week-over-week. The strong demand has led to multiple-bid scenarios, putting more upward pressure on property values as groups compete to control assets.  We have also seen interest come in from investors in Vancouver and Toronto as they pursue risk-adjusted returns not available to them in their home markets.

Since major enclosed malls and regional power centres rarely come to market, investors’ focus has been on strip centres along main thoroughfares and mature neighbourhood centres. The centres that have traded recently are all well-performing assets with multiple opportunities to increase returns through such value-add strategies as façade renovations, pad development, re-tenanting, long-term site redevelopment and/or densification.

One key factor in the upswing has been a consistent, record-breaking rise in Alberta’s monthly retail sales. As indicated in the graph below, sales have broken the previous record of $6.72 billion set in October 2014 every month this year (as of June 30) since March, with June sales reaching $7.15 billion. 

This is not to say that there is not pain being felt in Calgary’s retail market.  Downtown retail correlates directly to the strength of our office market, which still sits with a vacancy level at heights not seen in decades.  Restaurants and bars that once catered to the downtown crowd have been the most obvious casualties with a number of new entrants and landmarks closing their doors this year.

We predict that the remainder of 2017 will see retail real estate investors continue to chase well- positioned assets with more opportunistic buyers taking a serious look at downtown and inner-city opportunities to really try and add some value.

Kevin Morgans, Walsh Mannas and Ryan Swelin are Vice-Presidents in Avison Young‘s Calgary office and co-lead the capital markets group in Calgary.

Tuesday, August 29, 2017

Evolving trends and varying fundamentals challenge stakeholders to adapt

By Bill Argeropoulos (Toronto)

Trends prevalent in 2016 continued to play out in the first half of 2017 – and will likely shape Canada’s office market in the foreseeable future as the sector adjusts to the changing dynamics.

Evolving trends and varying fundamentals are challenging stakeholders to adapt more now than ever before – not just in Canada, but globally. On the Canadian front, the prevailing trends include urban intensification, transit-oriented development, consolidation, workplace design and millennials’ live-work-play preferences.

Though demand from traditional sectors has been patchy, technology and the co-working craze are transforming the marketplace, garnering an increasing share of the leasing pie. Co-working space providers have expanded rapidly due to the need to cater to startups, entrepreneurs and the increasing demand for affordable workplaces on flexible lease terms. Notably, U.S.-based WeWork has leased big blocks of space in Vancouver and Toronto after opening its first Canadian location in Montreal in 2016. Meanwhile, e-commerce is another ubiquitous driver, prompting firms such as Amazon (in Toronto) and home-grown Shopify (in Toronto and Ottawa) to grow their real estate footprints.

Traditionally having occupied funky, older premises or brick-and-beam product on the fringes of major urban cores, this sector is now seeking a larger presence in major towers, primarily in the country’s downtown markets. These trends will challenge owners and occupiers to adapt to evolving circumstances and varying fundamentals in markets from coast to coast.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Practice Leader, Research (Canada). He is based in the company’s global headquarters in Toronto.)

Thursday, August 24, 2017

Atlanta’s BeltLine serves as model for other cities

By Nadine Melo (Atlanta)

One wouldn’t usually equate parks and cultural activities with real estate investment, but Atlanta has been setting the pace for what that correlation looks like.

Since 2005, Atlanta BeltLine Inc. has used the manifesto created in Ryan Gravel’s 1999 Georgia Tech master’s thesis on architecture and city planning to put into practice a sustainable redevelopment project that will connect 45 local neighborhoods via a 22-mile loop of multi-use trails and parks.

The project, aptly named the BeltLine, stems from the idea of new urbanism, which takes a human-centric focus when it comes to designing and planning urban areas. New urbanism takes into consideration land use, transportation, and urban form to create communities that encourage sustainability, a sense of place, economic progress and historical preservation.

Since the BeltLine’s inception, more than $3.7 billion of new and private development has been generated within a half mile of it. The project has also created an influx of approximately $450 million of public and private dollars into the creation of infrastructure that helps connect Atlanta’s inner neighborhoods.  

In particular, the area of Inman Park has seen demand for creative office space as companies flock to the area to attract and appeal to the next up-and-coming workforce, millennials. As much as we hate the dreaded M-word, the fact of the matter is that millennials are impacting the real estate industry by forcing companies to not only change how they work, but also where they work.

Urban developments like the BeltLine are attractive to Millennials because it appeals to their sense of work-life balance and the market is responding to that demand. This trend is best evidenced by the Jamestown award-winning Ponce City Market project, which redeveloped a former Sears regional distribution center into a 2.1 million-sf mixed-use project featuring specialty retailers, office spaces, restaurants, and apartments – all while sitting parallel to the BeltLine.

Additionally, the project has spurred other development activities, such as the redevelopment of a new Kroger grocery store that will feature 360,000 sf of office space on a lot adjacent to the BeltLine. In fact, the influence of the BeltLine has managed to reach the suburbs, which aim to replicate the same type of growth and development that the project has initiated within Atlanta’s city limits.

The BeltLine’s success has enabled Atlanta to act as an incubator for these types of projects and a model for other cities to follow. For example, in Alabama, the City of Birmingham recently opened Railroad Park in 2010 and Rotary Trail in 2016. These projects borrow from the BeltLine concept of repurposing an old railroad bed in Magic City’s downtown area into a walkable space that connects two of the city’s major historical attractions while providing outdoor amenities for people to enjoy.

So what is it about these types of urban developments that make them so lucrative for the real estate industry? Redevelopment projects like the BeltLine help provide value to a city, making it easier for us in the real estate industry to sell, lease or manage space. They also help create a healthy economic environment that is sure to attract – and please – investors.

If you would like more information on where the BeltLine is heading next and the development projects following suit, check out for more information.

(Nadine Melo is a Marketing Co-ordinator based in Avison Young’s Atlanta office. She works closely with the Atlanta office’s capital markets group.)

Tuesday, August 22, 2017

Office sector undergoing important shift in dynamics as trends transform both demand and supply

By Mark E. Rose (Toronto)

Amid varying economic performances and property fundamentals, North American and European office leasing markets are generally performing well as they undergo an important shift in dynamics influenced by trends transforming both occupier demand and the supply of new product. Traditional drivers of demand are being joined by emerging disruptors that will increasingly shape the future of the office-space market and commercial real estate as a whole.

The office sector and commercial real estate, in general, are not immune to the effects of globalization and technological innovation. The world is transitioning into a more distributed, automated and digital economy, which impacts how occupiers conduct business and think about their workplaces, and this transition may have profound implications on the role and intrinsic value of property. In turn, owners and developers are finding ways to adapt and provide flexible work environments that meet these changing requirements.

Rapid change has given rise to the idea that technological advances could render physical real estate increasingly obsolete. However, historical evidence suggests that technology is just as likely to create new jobs as to displace them. For example, the likes of Amazon and WeWork are among the occupiers that feature most frequently in our report’s survey of the largest lease transactions across Avison Young markets.

Amazon’s success in the digital realm is translating into increasing demand for physical space – not only in the retail arena, but also the industrial and, now, office sectors, pointing to a new driver of demand in the office market as the e-commerce industry continues to grow. Meanwhile, the growth of WeWork and other providers of co-working and space-sharing services demonstrates that business will still require physical workplaces, even as we move toward an interconnected world offering anywhere-anytime access to skills on demand.

With Canada and the U.S. intertwined by close economic ties, the aforementioned disruptive trends continue to shape the Canadian and U.S. office markets, while in Mexico City, oversupply has led to the postponement of some new construction projects. Turning to Europe, the U.K. market is in flux one year on from the Brexit vote; Germany’s markets are reporting strong performances with declining vacancy rates year-over-year; and in Romania, the newest country on the Avison Young map, solid results in Bucharest have been driven by the information-technology and communications sector.

According to the report, of the 64 office markets tracked by Avison Young in North America and Europe, which comprise almost 6 billion square feet, market-wide vacancy rates decreased in 40 of the markets as nearly 52 million square feet (msf) was absorbed on an annualized basis.

Occupiers’ desire for new product remains strong and the development community has responded, as more than 62 msf of office space was completed during the 12-month period ending June 30, 2017. Meanwhile, another 134 msf was under construction at mid-year 2017 – with 50% of the space preleased. 

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

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