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Monday, May 21, 2018

Making the Connection

By Rand Stephens (Houston)

The economy in Houston is looking strong.  Unemployment is down. The energy sector is bouncing back and 
Memorial Park Connector - Land Bridge
the city is close to full recovery from Hurricane Harvey. And now, Houston is about to get a little greener, thanks to Rich and Nancy Kinder, the Houston Parks and Recreation Department, the Memorial Park Conservancy and the Uptown Development Authority. Recently, the Kinders, via the Kinder Foundation, pledged an historic
$70 million to the Memorial Park Conservancy for improving the 1,500 acre urban park – the largest in the nation and double the size of New York’s Central Park.  This collaborative effort will have a long-lasting impact on the community and visitors for generations to come.  Connecting public and private resources and partnerships produce innovative results.

Established in the 1920s, Memorial Park is the only former WWI training camp in the country that has not been completely developed. With more than 4 million visitors a year enjoying its running and bike trails, and sports facilities for volleyball, baseball, swimming and golf, it makes sense to invest in a plan that will connect neighborhoods to neighborhoods, link the park to Houston’s expanding hike-and-bike networks and provide access points to the hundreds of acres of inaccessible land.  Although not part of the plan, connecting Memorial Park to Buffalo Bayou Park would mean approximately six miles of park trails extending from downtown Houston to uptown Houston – a bold concept to make this city an even better place to live, work and play.
Houston leads the nation in implementing public-private partnerships to improve and care for public assets.  Each member in this alliance is to be commended for transforming their vision into reality.  Having the foresight to include Memorial Park to the Uptown Houston Tax Increment Reinvestment Zone (TIRZ) was critical to making this plan happen.  [Unique to Texas, the state tax code allows a county or municipality to designate a geographic area a TIRZ to promote development or redevelopment of the area.Connecting group resources of government, non-profits and private philanthropy is no easy feat, but Houston emerges as a shining star for this collaboration which, will have a lasting positive impact on the community for generations to come.

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

Thursday, May 17, 2018

Sound fundamentals, e-commerce and innovation drive rapidly evolving North American and European industrial sectors

by Mark E. Rose (Toronto)

Sound fundamentals, the logistics requirements of e-commerce, and innovations in building design and utilization continue to drive the rapid evolution of the industrial property sector across North America and Europe. An under-supply of available space remains a central issue in most markets, and developers have responded with notable new construction to anticipate occupiers’ growing needs. Major online players are altering the supply chain, and new technologies and innovations are determining how, where and what type of industrial product is being built. Meanwhile, the needs of big data and the cannabis industry (in some markets) are adding to an already crowded playing field. Unknown factors potentially impacting the sector – and the global economy in general – include geopolitical changes such as the renegotiation of NAFTA and the U.K.’s exit from the European Union.

These are some of the key trends noted in Avison Young’s Spring 2018 North America and Europe Industrial Market Report, which covers the industrial markets in 59 North American and European metropolitan regions.

The push to find cost-effective solutions for same-day or next-day delivery to consumers is continuously challenging the retail sector – and, by association, the industrial sector, which frankly are becoming more intermingled than ever before. Although e-commerce sales make up only a small, but rapidly growing, fraction of overall retail sales, stakeholders looking to service the retail sector are thinking long-term. Strong demand is reflected in declining vacancy rates which, by the way, are at or approaching historic lows in many markets and countries, leading to rising rental rates for industrial space. This situation has increased asset values – a fact that has made industrial assets hot commodities among investors and users as well as occupiers.

Confidence in the long-term viability of the industrial sector and e-commerce has recently been demonstrated not only by the sheer leasing velocity and demand for space, but also by some notable M&A activity, such as the all-cash transaction valued at C$3.8 billion, including debt, between Blackstone and PIRET earlier this year in Canada, as well as a recently announced merger agreement in which Prologis will acquire DCT and its 71 million square feet (msf) of real estate in a US$8.4-billion stock transaction, including the assumption of debt, in the U.S.

According to the report, of the 59 industrial markets surveyed by Avison Young across North America and Europe, vacancy declined in 38 markets, remained unchanged in three, and increased in 18 during the 12-month period ending March 31, 2018.

The analysis also revealed that, with demand in most markets outpacing new supply, the development of new product has escalated. Nearly 235 msf was completed across all markets surveyed by Avison Young in the 12 months ending with the first quarter of 2018 – an increase of more than 5 msf compared with the prior 12-month period. Meanwhile, the amount of space under construction increased more sharply, jumping more than 13 msf year-over-year to nearly 234 msf.

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

Monday, May 7, 2018

Is the complacency in the bond market really over?

By Norm Arychuk (Toronto, Debt Capital Markets Group)

Bonds have an inverted relationship between price and yield.  With interest rates and bond yields poised to increase, bond prices will take a hit – the longer the maturity of the bond, the larger the hit.  A 10-year bond that is subjected to a 2% increase in yield will suffer a 20% loss in value – not an investment for the faint of heart in the current environment.  Imagine if you were the manager of a major bond fund like Pacific Investment Management Co. – arguably the world’s largest actively managed bond fund at nearly $80 billion and over $1.4 trillion in managed assets.  What would your reaction be to the current market conditions and the forecast of rising rates?
Inflation and interest rates are closely linked.  The higher the inflation rate, the more likely interest rates are to rise.  The U.S. Federal Reserve Bank (“the Fed”) has strongly signalled that further multiple rate increases will be delivered this year and in 2019.  Notwithstanding this clear sign and that rate increases that have already been implemented, 10-year U.S. treasury bonds have been volatile and have recently fallen to levels well off their February 2018 peak only to ocellate higher in April – volatility at its finest. The Fed and bond market investors give the impression that they are at odds with their respective views of the near term – someone appears to be wrong.  It looks as though relatively lower yields in the bond market are projecting bond investors sentiment that inflation and a strong U.S. economy are not quite as worrisome as the Fed might have us believe.   The bond market is more than just an economic indicator and it has been known to be dreadfully wrong – check the 2007 – 2008 records.
Investors’ views and economic reality do not seem to be aligned at present.  Long term treasury yields are slightly in excess of 3% and are nowhere near the Fed’s inflation target of 2% plus the real economic growth of 2-3%.  Historically, long term interest rates tend to fluctuate around the rate of nominal GDP growth.  This rule of thumb implies that 30-year rates should be in the 4-5% range – if inflation were actually 2%.  Sooner or later the disconnect will align and the gap between bond yields and GDP growth will close – either growth will weaken dramatically or interest rates will rise significantly – place your bets. 

(Norm Arychuk heads up Avison Young’s debt capital markets group, specializing in debt placement of all types.)

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