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Tuesday, September 18, 2018

Flexible Workspace - Survival of the Fittest

By Rand Stephens (Houston)

Co-working space, flexible offices, hot-desking, shared-open offices, communal office space – just a few buzzwords used to describe the latest trend to hit the office market that is appealing to tenants such as freelancers and startups because it provides flexible workspace and flexible lease terms. It’s also beneficial to larger companies in terms of “swing” space, providing easy options for the companies to ramp up or downsize, as needed. As the momentum continues, co-working companies will ultimately compete for supremacy. They will take on more space than demand warrants -- which may lead to a collapse, leaving a few survivors. Building owners need to be cautious about having too much exposure to co-working locations as tenants.

The new buzzwords are gathering a lot of attention, but the concept has been around for quite some time. Long before WeWork, there was Regus, which has an executive suite setup. Today’s co-working companies are a modernized version with upgrades and nuances that create a more collaborative work place. Regus had a successful run in the late 1990s, alongside the dotcom boom. (We all know how that ended.) It eventually fell victim to the economic downturn and was left with an over-supply of office space and was forced into Chapter 11. However, Regus (now IWG) survived and remains in business today with more than 40 locations in the Houston area and the largest flexible space provider in the country. Do today’s co-working companies have long-term staying power? Can they survive an economic downturn?

Courtesy of WeWork, Houston Galleria
There are an estimated 100-plus flexible working space companies in Houston that likely make up less than 1% of total office space inventory. Given the undersaturated market, there is potential for growth in the Bayou City. WeWork has two locations with a combined estimated 142,000 sf. Other newcomers include Reth!nk, slated to open its 42,000-sf space in Houston’s Midtown Arts District in spring 2019. Austin-based FirmSpace will take up 2 floors at 2200 Post Oak Boulevard for a total of 32,872 sf by the end of 2018, and Work Well, opened by Houston-based development company Caldwell Cos., has 23,000 sf at 13100 Wortham Center Drive in northwest Houston.

Whether the flexible space trend will continue to accelerate and assimilate into the office market landscape remains to be seen. Landlords may still want to take a cautious approach to making long-term investments with co-working companies. As with most new ventures, there is fierce competition within the market to rise to the top. There were winners and losers from the dotcom bust of the 1990s. Survivors that continue to thrive include Amazon, Priceline and Ebay. Will WeWork and Regus continue to dominate the co-working industry? We shall see.

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

Monday, September 10, 2018

Ecology and Economics Should (and generally do) Go Hand in Hand, and 5 Reasons Why Property Owners Need to Care about the Demise of the EPA

by Amy Erixon, Toronto

Great Recession of 1980 – Quarterly GDP 

When I began my commercial real estate career in 1979 the economy was rapidly falling apart.  Inflation moved through the teens; and interest rates, which started at 8%, finished off the year at 20%. These policies, designed to combat runaway inflation (due to the oil supply shock, removing wage and price controls and taking the US dollar off the gold standard), caused an extremely long and deep recession, lasting 3 years. (The 2008 recession lasted half as long). These conditions were destroying the banks, builders and material subcontractors indiscriminately.  

As grim as this situation was, I had a more serious threat unfolding in my Boston office portfolio: 6 x 24 feet concrete and granite panels weighing many tons were falling off the high-rise office buildings, creating life threatening street hazards.   Acid rain from mid-west coal furnaces and factories was dissolving the steel clips that secured the panels to building structures - 800 miles away.  Here is an image of the impact that same rain had on nearby on food crops and drinking water. 

Thankfully, today few people remember the conditions under which President Richard Nixon established the Federal Environmental Protection agency in 1970.  To begin the important work of finding alternative, less environmentally destructive, forms of energy production President Jimmy Carter (himself a nuclear engineer) established the National Renewable Energy Laboratory (NREL) and Solar Energy Research Institute (SERI) in Golden, Colorado in 1977.  These initiatives were well funded by 5 subsequent administrations from both political parties, and those investments have paid off.  Solar and Wind technology has reached the point where these sources cost half as much as producing energy with coal.  Pollution is a major problem in much of the world today.  But instead of capitalizing on the success of decades of research and forward-looking policies by promoting clean energy, the US seems to have all but forgotten about the need for vigilance against the known dire consequences of burning coal and polluting the water supply. 

Despite the passage in 1948 and 1955 respectively, of the Federal Water Pollution Control and the Air Pollution Control Acts, in the decades that followed state enforcement was ineffective. In 1969 the Cuyahoga river in Cleveland literally caught on fire.  By 1973 the everglades were also burning,  (see image at left).    
Everglades Fires, 1973
Recognizing that water and air do not limit themselves to state (or even country) lines, President Nixon called for a more comprehensive and cost-effective solution - federal oversight.    It was clear that states were grossly underfunded and are unable to meet the challenge of managing pollution originating from sources beyond their jurisdiction. 

Forty-eight years later, the Trump administration is proposing returning air and water pollution oversight to the states; and has repealed critical environmental protections such as:  prohibiting polluting water supply headwaters with mining effluent; ignoring contamination risks to aquifers and other key bodies of drinking and recreational waterways from fracking and pipelines; setting aside consideration of human risks from lung diseases caused by 189 known  ”deregulated” carcinogens and poisonous airborne chemicals being newly released via factories, farms, and tailpipes.   The stated rationale for such ill advised policies is “restoring” economic prosperity, as though ecology and economics are adversaries instead of partners.    This is not the way to achieve either objective. 

Is the EPA infallible? Of course not.   But over my career I have completed environmental assessments for approximately 40 million sf of development entitlements in the US across 4 regions., and accommodating EPA concerns was never an issue.   There are at least 5 reasons why real estate owners, insurers, business leaders and voters need to care about the continuation of the fight against environmental impairment.  

  •           Environmental quality affects our health, lifespan and our productivity - directly.  Administration documents acknowledge likely adverse health effects from its new coal provisions will likely lead to an additional 1500 deaths annually and 50,000+ person increase in suffering from lung disease of all kinds – asthma, emphysema and cancers.   No estimates have been developed regarding drinking water or airborne toxin risks, because human risks are no longer being assessed in these determinations. 
  •           Property values are directly affected by quality of life considerations including health, safety, recreational access and lack of environmental contamination.  Tourism is directly impacted by environmental problems from fires to pollution alerts.   If you have ever acquired a contaminated property and attempted mitigation of an off-site source contaminant, you have some sense of the valuation and liquidity impairment this entails, and complex mitigation difficulties presented by this situation.   Today, superfund proceeds are available to remediate hazards left by a defunct perpetrator organization, but what happens when the government authorizes companies to return to these polluting ways.  Buyer beware!
  •          While ecological conditions are markedly better than in 1970, as recently as 2016, 10 people died and 87 developed Legionnaires disease from lead and bacteria in the drinking water in Flint, Michigan.  Congress passed the Safe Drinking Water Act in 1974, under which the EPA establishes water quality standards and funds local water protection programs, whose safety, (underfunded) is far but ensured.  Trump administration officials have proposed abolishing the funding for safe drinking water programs.   Building owners can be sued if these sorts of health hazards develop in our buildings.  Shifting the burden of continuous water quality testing to owners, who have no jurisdiction to do anything about the public water supply makes no sense and is likely to also increase the cost of insuring our properties. 
  •          Recent studies from the Harvard School of Public Health, among others, underscore the major improvements to cognitive function healthy buildings can provide.    These findings suggest that urban fresh air has a long way to go before it can be considered “healthful”.  “Fresh filtered air” inside high performance buildings has been shown in academic studies to increase alertness, reduce absenteeism and 9 other health benefits from 20-80%, depending on the parameter studied.  Since air quality is sure to suffer further from the current regulatory repeals, investing in air filtering systems becomes all-the-more imperative. 
  •           While the burning of coal is unlikely to increase in America due to the fact it is no longer cost competitive, the loosening of regulations regarding effluents and pollution means three possible outcomes – later phase out of coal fired plants; possible return of the ill effects of acid rain; and future grid disruption as conscientious owners move to renewable energy sources to protect their investment portfolios. 
These are not trivial concerns.  According to the Harvard Law School’s Environmental Regulation Rollback Tracker, and Columbia Law School’s Climate Deregulation Tracker - as confirmed by the Brookings Institution, the US Chamber of Commerce and the EPA: since taking office 20 months ago, the Trump administration has reversed, diluted or repealed 76 significant environmental rules that Canadians and Americans should be worried about, such as limits on toxic discharge, including mercury, a known neuro-toxin and carcinogen, from power plants into public waterways. 

Lac Megantic train derailment fire
  More than 1600 EPA staff have resigned, and public safety appears to be a major loser in these repeals, as epitomized by reversal of the low-cost rule requiring braking system upgrades to trains carrying highly inflammable fuels, such as fracked oil (this law was passed by Congress following the Lac-Megantic, Quebec disaster; (image left).   Other unconscionable acts include overturning bans on harmful pesticides known to cause birth defects, respiratory ailments and cancer; and downgrading of safety standards for 189 hazardous airborne chemicals, such as benzene, dioxin and arsenic; all of which can work their way into Canadian communities via the Great Lakes, the jet stream and weather patterns.

The point is, like other residents of Canada, I am not immune to health risks stemming from repeal of pollution and safety regulations in America.  Just this morning the authorities in Canada reported banned pesticides are turning up in common Canadian food products, due to cross-border ingredients.   It happens fast and unfortunately, the effects of ingested poisons are often cumulative.  

Congress is currently in the process of confirming Judge Kavanaugh to the Supreme Court.  He has a track record of aggressive judicial activism to curb authority of the EPA.   Current and future generations of North Americans need an EPA that does a competent job of executing regulatory enforcement and achieves a win-win solution.  Ecology and economy must, and generally do, go hand in hand.    

Wednesday, September 5, 2018

Do banks need advice on selling foreclosure properties?

By Janko Pahlitzsch (Berlin)

The world´s economy is booming and modern living and commercial spaces are in short supply.

But do investors really need advice regarding foreclosure/forced sales in Germany and other countries nowadays?

The problem we face today is that demand for space is much higher than what the market can provide. Most development projects underway are presold or preleased before they are even built.

Low interest rates – in other words, cheap funds to borrow – are widely available, and real estate investors are on the hunt for assets all over the world, inflating market prices.

During the global economic crisis in 2008, more than 55.000 court-ordered foreclosure auctions/forced sales of real estate properties occurred in Germany alone. This figure has decreased significantly, to an estimated 20.000 this year.

However, my answer to the question of whether investors need advisory services regarding forced sales and insolvency is yes!

Yes, there is high demand for advising banks and insolvency administrators throughout Germany, and elsewhere, on properties that do not seem to be the preferred choices of national and international investors.

Vacancy, capex, short-term leases, taxes and legal issues are just a few factors that explain why investor interest cools down quickly. But that’s the type of real estate where we don’t give up – and can verify an added value. There are tailor-made solutions for each problem.

These properties still can be sold by virtue of the best market conditions available now.

I would like to point to the example of a property in Mainz-Hechtsheim, Germany, which Avison Young is listing exclusively on behalf of a bank. It is a commercial property that will be sold by the trial court of Mainz on September 27, 2018. The light-industrial, flex-office building will be vacant February 1, 2019 – a factor that is supposedly the reason for a low number of prospective buyers thus far. However, through our multi-channel strategy, we already found several parties interested in renting space in this building close to Germany´s biggest airport, Frankfurt am Main.

We are trying to stabilize rental revenues by deploying a multi-tenant leasing strategy as opposed to a single-tenant leasing strategy.  In other words, we are not just trying to provide a space for a prospective buyer. We are also seeking several prospective lessees to protect the value of the investment while saving the investor time, effort and money. This strategy has worked for the property, located on Carl-Zeiss Strasse in Mainz-Hechtsheim, quite well so far. We have already found prospective lessees who are interested in signing long-term tenancy agreements, and negotiations are proceeding with potential new owners before the September 27 auction date.

This success story is just one example of how strategic advice regarding foreclosure/forced sales can pay off for banks, insolvency administrators and investors in Germany – and throughout the world.

(Janko Pahlitzsch is an Associate Director in Avison Young’s Berlin office with 13 years of commercial real estate investment sales experience. He specializes in advising banks and insolvency administrators on foreclosure/forced property sales throughout Germany.)

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