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Friday, August 31, 2018

Are open office layouts hindering collaboration?

By Dominic Perkovic (New York City)

Office co-working space has garnered much attention recently. Through the first half of 2018, co-working made up 10% of all leasing activity in Manhattan. The previous year, co-working space accounted for just 3% of overall leasing activity in the borough, as reported in Avison Young's Second Quarter 2018 Manhattan Office Leasing Snapshot Avison Young's Second Quarter 2018 Manhattan Office Leasing Snapshot . WeWork completed two deals in the 30,000 to 45,000-square-foot (sf) range while Knotel signed five deals in the 13,000 to 45,000-sf range.

                                                                                     Source: Stockphoto LP

WeWork, the behemoth co-working company valued at $20 billion, has no desire to slow down its expansion as it moves into development, leasing, and property management services.  Amidst the expansion, WeWork is in talks with SoftBank for a potential investment that could double the firm's valuation to $40 billion.

With companies like WeWork and Knotel taking up large swaths of square footage in New York and across North America, it is safe to say that co-working development once considered a fad, has become mainstream. Co-working space lease activity shows no sign of slowing down, but does a co-working environment actually do what it is intended to do?

The rationale behind open plan office layouts is that they increase connectivity between workers by breaking down barriers. A lack of cubicles and partitions should, in theory, increase engagement between workers, allowing for more teamwork and higher levels of productivity.

                                                                                    Source: iStockphoto LP

Knotel, the new kid on the block, began its ascent in 2015.  Today, the firm has grown to more than 40 locations in New York, San Francisco, and London.                                                                           

A new Harvard Business School study  demonstrates that, in fact, the opposite occurs. Examining the employees of two Fortune 500 companies, researchers discovered that face-to-face interaction decreased approximately 70% following the adoption of open layouts. Meanwhile, e-mail use increased 22% to 50%. Fifteen days before the office redesigns, participants averaged approximately 5.8 hours of face-to-face contact. After the switch to an open-office layout, participants’ face-to-face contact dropped to approximately 1.7 hours on average. To make matters worse, executives reported, productivity (as defined by the metrics used by the firms’ internal performance-management systems) declined after the office-layout redesigns. Instead of increasing collaboration, it seems, open office layouts trigger a natural response to withdraw socially from colleagues due to a lack of privacy. Despite the study’s limited sample size, these results are compelling. 

This is the first study that empirically measures both face-to-face and electronic contact before and after a company’s adoption of open-office architecture. Co-working environments are relatively new; and as time moves on, more research will emerge on their feasibility.

What is your take on open architecture in the workplace? 

(Dominic Perkovic is an Associate based in Avison Young’s New York office. He specializes in office real estate advisory and transaction services.)

Wednesday, August 29, 2018

Canada’s office sector: Technology and co-working craze augment traditional demand drivers.

by Bill Argeropoulos (Toronto)

Canada’s office property markets remained sound through the first half of 2018, supported by stable macroeconomic indicators, including healthy employment numbers, GDP growth and a rebounding Alberta economy. The overheated housing market, which had concerned some observers, is now cooling thanks to the implementation of new federal and provincial measures. On the other hand, U.S. protectionist policies and escalating tariffs pose a risk to the Canadian economy and global trade flows and may lead to moderating growth ahead. 

Intense competition for office space continues to bolster office market fundamentals across Canada – especially in downtown markets. Demand from traditional sectors is being augmented by the proliferation of domestic and global technology and co-working firms, ongoing urbanization and a burgeoning millennial workforce – all part of Canada’s emerging innovation economy.

Overall office vacancy rates declined in more than half of the Canadian office markets surveyed with suburban markets outpacing downtown markets in terms of absorption (led by Montreal and Vancouver) and new deliveries (led by Toronto, Vancouver and Montreal) during the past 12 months. However, the amount of downtown space under construction at mid-year (led by Toronto) outstripped the suburbs by a significant margin. Toronto and Vancouver are outperforming the country’s other markets in almost every metric.

Urbanization – partly attributable to growth in the technology sector – has created a noticeable gulf between downtown and suburban vacancy rates in emerging tech hubs such as Vancouver, Toronto, Waterloo Region, Ottawa and Montreal.

Aside from Edmonton and Calgary, the nation’s suburban markets expanded by varying degrees with strong results in Montreal and Vancouver. Outpacing downtowns, suburban markets combined for positive 12-month absorption of nearly 3.4 msf – slightly behind the previous 12 months’ pace. Suburban vacancy fell 50 bps during the year to close first-half 2018 at 13.1%. Though double-digit vacancy prevailed in all but two suburban markets, six of 11 suburban markets recorded lower vacancy levels year-over-year – with Winnipeg being the tightest (5.5%).

Most downtown markets posted positive results, combining for more than 2.2 msf of absorption in the 12 months ending at mid-year 2018 – led by Toronto, Vancouver and Edmonton. Consequently, Canada’s downtown vacancy rate declined 80 bps year-over-year to reach 10.5% at mid-year 2018. Vacancy was lower in seven of 11 downtown markets; four remained in single digits and below the national downtown average, while Toronto (2.2%) registered the lowest downtown vacancy – not just in Canada, but North America.

Given tight conditions and upward pressure on rents in some of the nation’s downtown markets, and with little or no near-term supply relief, suburban markets – particularly those offering transit connectivity and other urban amenities – may be the beneficiaries of overflowing tenant demand during the next couple of years.

For additional insights into the Canadian office market, view our Mid-Year North America and Europe Office Market Report.

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

Higher Quality, Smaller Footprint

By Rand Stephens (Houston)

Despite Houston’s thriving economy and low unemployment rate, the city has one of the highest office vacancy rates in the country. The office vacancy rate for the second quarter of 2018 is at 18.3% (includes sublease’s available vacant space), which hasn’t been that high since the 1980s. With almost 40 million square feet of direct vacant space currently unoccupied in the Houston area, why are we seeing an increase in activity for new office development? And, why are employers opting to move to these new buildings?  There is a workplace revolution underway and companies are responding.

Employers are competing to attract and retain top talent by offering flexible work options, in-house fitness centers, caf├ęs and outdoor patios because studies have shown that is what employees want. Research also shows that employees are spending less time working at their desks and more time in kitchens, conference rooms and other collaborative areas. This trend is influencing office space design and impacting the amount of space being leased. Employers now have an opportunity to save money on office space by designing collaborative amenity-rich work environments with less square footage per employee while scoring the best and the brightest members of the workforce.

This trend is sparking an increased demand for superior space, and companies are leaning toward newer more efficient buildings with state-of-the-art interior design to capitalize on the shift in employees’ demand for a better workplace experience. However, the overall space needed ends up being smaller, resulting in a better value for the employer. This is not only happening in Houston, but a trend that is happening around the country, as noted in Avison Young’s Mid-Year 2018 Office Market Report.

This flight-to-quality is driving some demand for new office buildings. It’s not obvious that this would be the case in a market with an abundance of available space, but Houston’s class A building set is primarily 1980’s vintage.  So, if a company can move to a new high-quality building to satisfy its employees -- while reducing its space per employee --then it looks like an attractive solution.

Some new upscale projects underway in Houston include Skanska’s Capitol Tower at 811 Rusk St. and Hines’ 47-story tower on Texas Ave. Capitol Tower’s soon-to-be tenant in 2019, Bank of America, has preleased 210,000 sf –  that’s a 77,000-sf decrease from their previous offices. Vinson & Elkins will also be decreasing their office footprint from 338,920 sf at First City Tower to 212,000 sf at the new Hines building. United Airlines left their 360,000-sf dual offices to a consolidated 225,000-sf office at 609 Main. Preleasing these new projects and renovating heritage buildings is key to stabilizing the Houston office market, as high-profile tenants continue to vacate their older office buildings and opt for newer, modern buildings. As the workplace environment adapts, so will the office market.

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

Sunday, August 26, 2018

GTA industrial prices will remain strong

By Richard Chilcott and Jonathan Yuan (Toronto)

How hot can it get?

Through the 1990s and early 2000s, the Greater Toronto Area (GTA) industrial market was balancing supply with demand. Following a robust market performance throughout the past few years, rents and property values kicked into overdrive during the first half of 2018. The GTA’s industrial leasing market has experienced record demand, leading to historic-low vacancy and, percentage-wise, double-digit rental-rate growth. Strong market fundamentals and the prospect of further rental-rate growth have driven up demand from all investor types (institutional, private, condo developers and users), leading to further compression in industrial cap rates and new highs in land value.
Inventory in the GTA industrial market stands at approximately 874 million square feet, including all classes of space. This number represents just shy of half the industrial space in all major markets in Canada combined.  The GTA is the fourth-largest industrial market in North America, behind only Chicago, Los Angeles and Philadelphia. Through the last two decades, regional industrial investors and tenants have experienced near-flat returns in terms of rental-rate growth as a result of product demand being in equilibrium with supply.

GTA industrial stock currently boasts a 1.6% vacancy rate. Together, regional population growth, shifting distribution and retail trends have created extremely strong demand for small-, mid- and large-bay warehouse/distribution-centre space. At the same time, supply of new product has been constrained by restricted availability of developable land, higher development charges and, until recently, a lack of economic rents capable of encouraging development of anything other than distribution centres.

The Greenbelt surrounding most of the GTA and the competing economic powerhouse of residential development have created a scarcity of developable land near large population centres. Industrial land in prime locations has achieved prices above $1.9 million per acre, while a significant market-rent increase throughout the region has not yet provided enough of a driver to counteract land and construction costs for mid- and small-bay product. Retail shopping trends are attracting more and more buyers online with a knock-on demand for warehouse space and last-mile distribution locations a short drive from consumers in urban areas. Larger distribution-centre product has been leasing well with rental rates pushed high enough for developers and institutional investors to add a steady supply of new product. Municipalities across the region continue to increase development charges well above the inflation rate. As a result of increasing construction and land costs, we will need to see even more rental-rate growth to encourage developers to satisfy demand across the sector.

When it comes to investment in industrial properties, rapid rental-rate growth is driving investor valuations, pricing in future market rents today.

Owner-users continue to play a significant role in higher-price-per-square-foot transactions. This group can rationalize its pricing metrics by comparing the gross leasing cost of occupancy with the cost of ownership and the ability to build personal wealth over time through capital acquisitions. It remains to be seen whether recent debt-cost increases will affect owner-users. Users seeking to buy smaller units have turned to the burgeoning industrial-condo market, where vendors are, in some cases, requesting prices near $400 per square foot. Will Vancouver-type pricing be seen in the GTA next? And, will we see more efficient use of land with multi-storey industrial units in this market following their emergence elsewhere in recent years?

Given the region’s population growth, and the physical and political constraints restricting new supply, we forecast that the upward pricing trend of the past few years will continue for some time to come.

(Richard Chilcott, a Principal of Avison Young, and Jonathan Yuan, a Vice President, are based in the company’s Toronto office. Both specialize in investment property brokerage and are members of the company’s Canadian capital markets group.)

Wednesday, August 22, 2018

Evolving workplace trends force office occupiers and owners to adjust traditional strategies

By Mark E. Rose (Toronto)

New approaches from technology companies and co-working providers across North America and Europe are challenging occupiers’ and landlords’ office-space accommodation strategies, forcing players in more established sectors to adjust how they think about the size, physical form and operational function of their premises. This transformation continues to encourage new development, which is racing to keep up with demand in some markets and being bolstered by a young, educated workforce gravitating to urban centres.

These are some of the key trends noted in AvisonYoung’s Mid-Year 2018 North America and Europe Office Market Report. The report covers the office markets in 67 metropolitan regions in Canada, the U.S., Mexico, the United Kingdom, Germany and Romania.

Against a backdrop of economic, geopolitical and financial volatility, the commercial property markets – for the most part – are functioning under relatively sound fundamentals. Nowhere are we seeing more profound changes than in the office sector – especially in urban areas of major metropolitan markets across the six countries covered in our annual review. The impact can be seen on city skylines, which are changing rapidly as new construction picks up pace, driven by insatiable tenant demand from organizations adjusting their workplace strategies to a growing millennial workforce and their adaptability to innovative technologies.

At the same time, sectors that have historically accounted for a significant amount of demand for office space are now being both augmented and squeezed by ever-expanding technology and co-working industries. This phenomenon is being seen across national boundaries, particularly in markets with dense and growing urban populations.

Of the 67 office markets tracked by Avison Young in North America and Europe, which comprise more than 6 billion square feet, market-wide vacancy rates declined in 38 markets, remained unchanged in seven, and increased in 22 markets as almost 74 million square feet (msf) was absorbed on an annualized basis.

Construction cranes remained prominent fixtures across many skylines as nearly 74 msf of office space was completed during the 12-month period, while another 138 msf was under construction at mid-year 2018 – with 50% of the space preleased.

It’s great to see so much confidence on the part of developers as they respond to the supply-demand imbalance in many markets. As always in this industry, the inherent risk is that circumstances could change, resulting in an oversupply of product at the time of delivery. In many cases, this scenario is the result of external economic and geopolitical factors. This time around, however, the new influences of disruptive technologies and increasing co-working space availability are also affecting how and where people work, potentially impacting the office sector from within – and challenging conventional wisdom.

Generally sound office market fundamentals are being threatened on the North American front by ongoing NAFTA talks. In Europe, the looming Brexit deadline continues to dominate the headlines in the U.K., while in Germany, strong leasing activity continues to drive vacancy rates downward in all Avison Young markets. In Bucharest, Romania, development continues in response to demand.

(Mark Rose is chair and CEO of Avison Young)

Saturday, August 18, 2018

Avison Young showing progress in integrating sustainability criteria into its own and clients’ planning, decision-making processes and operations

By Mark E. Rose (Toronto)

Avison Young is very proud to release its fourth annualGlobal Citizenship report.

Global Citizenship is the umbrella name of our firm’s corporate social responsibility, sustainability and philanthropy strategy.

The report provides a comprehensive picture of who we are, how we work and what we care about. It’s also an opportunity to recognize the work of our talented and committed team.

Our Global Citizenship strategy encompasses our commitment to good corporate governance, operational sustainability, corporate and employee philanthropy, diversity and inclusion, continuous training, and employee health and wellness, including mental health.

While helping clients on their sustainability journey is a clear priority, our approach also leverages our differentiated structure – and our caring and collaborative culture – to make a broader, lasting contribution to our communities.

Since introducing this annual report in 2014, we’ve been embedding Global Citizenship in the fabric of our organization. We’re getting better at integrating sustainability criteria into our planning, decision-making processes and operations – and at helping our clients do the same.

It’s clear that our approach resonates with clients who, like us, want to be both financially successful and socially and environmentally responsible.

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

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