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Monday, December 23, 2019

The Ups and Downs of Houston’s Commercial Real Estate Market in 2019


By Rand Stephens (Houston)


The commercial real estate market in Houston had another good year in 2019. Houston’s economy and job growth remain healthy, despite a lackluster energy market. Industrial continues to be the top-performing sector of commercial real estate while the recovery in the office market is still moving at a snail's pace.

Energy Industry Recovery Hits the Pause Button
The energy industry has a big impact on the office market. Recovery for the oil and gas market slowed to a standstill in 2019, with stock prices down and oil prices in the $50 - $60 range. When oil prices took a nose dive in 2014, the ripple effect trickled into job growth and the office leasing market. It seems to be two steps forward and one step back ever since. Back then, capital markets provided the liquidity for recovery, but today energy companies must restructure and finance themselves. An upswing of the office market is contingent upon job growth in the energy sector and while there were some flickers, it was not sustainable throughout 2019.

Vacancy Rates Spur Positive Changes
Houston office vacancy rates hovered within the scale of 16% most of the year and construction was limited with 1.3 million square feet (msf) completed in 2019, as of mid-December. Employers continue to woo younger employees with amenity-rich office buildings, including food services, mobility services and environmentally-friendly components. Older class A buildings have responded to the newer, modernized buildings, like Capital Tower and 609 Main, by undergoing upgrades and transformations. While this bodes well for tenants, in the long run, it’s not clear whether making significant investments to older buildings will prove out from an investment standpoint.

The trend of tenants upgrading their facilities while becoming more efficient with their space continued in 2019. For example, Direct Energy left their 191,000-square-foot (sf) space in Greenway Plaza for a 105,000-sf office space in Houston Center, which is undergoing a facelift. Companies are now expanding their headcount while using considerably less space. Overall, the better buildings will be the winners, but this trend is a loser for the market as a whole.

Industrial Leads the Way
The industrial market continued to be the driving force for the commercial real estate sector in Houston in 2019. E-commerce and Port Houston maintain their “bread-and-butter” status for the industrial sector. We saw major distribution center commitments by big retailers such as Home Depot and Costco. As was the case in 2018, the fundamentals of Houston’s industrial market had a strong year and are consistent with the performance of the market nationally. Currently, there is close to 20 msf of industrial construction in the works which is expected to be completed in 2020, and more than 50% of that space is unoccupied. The industrial market undoubtedly has a healthy supply of industrial product going into 2020 but absorption continues to be excellent.

Summary
Houston’s commercial real estate industry had a solid year in 2019 despite a stagnant energy sector Our local economy stood strong due to increased population and job growth. What challenges and successes are in store for commercial real estate in 2020? Stay tuned for forecasts and predictions for 2020 in January’s blog. Happy holidays and cheers to a prosperous new year!

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

Tuesday, December 17, 2019

Toronto Real Estate Forum: 2020 Outlook for European Investment Markets

By Tim Francis (London, U.K.)

Last week, I attended Canada’s largest annual national conference on real estate capital markets and investment management. The Toronto Real Estate Forum provides an international outlook on major trends, strategies, risks and opportunities in real estate, including insights on European real estate investment markets. Global geopolitical factors, investment appetites and emerging sectors were at the forefront of conversations.

Current geopolitical and economic drivers influence the risk premiums that are being applied to the required returns investors care about. Factors like Brexit, new European Central Bank leadership and a new European Parliament are increasing levels of uncertainty. Global investors are looking at Europe, which has traditionally been viewed as a safe haven for real estate investment, with a new perspective. While continuously low interest rates have served to sustain investment and compress yields across the continent (2% is the new 3% for core assets), many investors voiced concerns over the high values of European real estate and the current position of the global economy, 12 years out of a 10 year cycle post the previous global financial crash.

However, sustained positivity and appetite to invest were clear throughout the forum. With extremely low, sometimes negative, bond yields, investors are increasingly looking for stabilised income producing assets, which is driving the real estate markets. On top of low bond yields, strong rental growth in many core and secondary markets is alleviating the effects of low real estate yields and driving investment flows. Take Stockholm: the central business district has seen c.40% rental growth in the last three years, providing investors with huge uplift to their return profile. Another driver of demand is the undersupply of Grade A office space across all major European cities. Vacancy rates remain below 2% in most locations, resulting in assets that are still performing well, despite trading at low yields.

The alternative sector has emerged in the last five years as a pathway to achieve opportunistic and core plus returns in Europe. The defensive attributes of alternatives like residential, senior living, or hotels, provide an attractive option for global investors, especially North American capital, due to an under-established investment market when compared to the US. Interestingly, global investors are looking at London as the biggest opportunity in Europe right now. The uncertainty derived from Brexit and the general election has provided opportunity in the market across all sectors. The current discount on Pound Sterling is considered by global investors as providing a ‘double return’, as the currency will inevitably bounce back to higher values in the coming years, although this is not being priced into transactions.

Finally, sustainable investment is growing globally. Many fund managers now have commitments to their own investors to attain certain targets around environmental, social and governance issues. Sustainable investments must align with a commitment to promote sustainable business practices and the conservation of natural resources. Impact investing practices are at the centre of this shift, illustrated through the rise of investment portfolios increasing their exposure to GRESB (Global Real Estate Sustainability Benchmark) assessed infrastructure assets, which increased from 51 global funds in 2016 to 107 in 2019, totalling $471bn this year.

Tim Francis is a Financial Analyst at Avison Young’s London office

Tuesday, December 10, 2019

What the BTR sector can learn from tech

By Arthur Zargaryan (London, U.K.)

Built to Rent (BTR) has been taking over the real estate market and pushing both traditional house builders and institutional investors into this emerging sector. BTR brings along a major paradigm shift, a move from a primary focus on the physical space, to placing increased importance on the provision of a service.

Why would someone pay what might seem a premium for a BTR unit over a regular flat? The answer is almost always the same – convenience. This trend for convenience and bundling is happening across many industries, including tech, where all-you-can consume content providers offer a new level of service to users. While the underlying economics of tech and real estate companies are different, there are still many transferrable lessons. Here are a few.

Economies of scale

Bundling services is only possible at a certain scale. Netflix for instance is only able to make its operation profitable because it has 158 million users worldwide. Real estate can also benefit from economies of scale and bundled experiences.

BTR works best at large scale, with the average size of a completed site in 2019 encompassing 133 units. The average size under construction is 245 units and for schemes currently in planning this rises to 325 units. Larger schemes are better able to support the cost associated with operating such buildings, allowing landlords to negotiate better per unit deals for utilities, furniture and more.

Significant benefits also exist when expanding a portfolio geographically and creating a network of buildings. As people move from city to city, change jobs or start a family, they can always remain within a provider’s BTR ecosystem. This reduces customer acquisition costs while increasing occupancy rates.

Big Tech Data in BTR

Gathering and analyzing the right data can greatly benefit the Built-to-Rent sector, as it has the world of tech. Netflix, for example, uses the data it gains from millions of users to understand what content becomes popular and why, and consequently creating its own shows and movies in its in-house studio.

BTR has huge data opportunities, covering both how physical assets behave, as well as how tenants interact with a building. BTR developments need to be built to a standard that minimizes maintenance and repair costs, while offering attractive design. It is therefore crucial to find materials, appliances and furnishings at the best best price to performance ratio. Key metrics such as power usage or life time of an appliance are crucial in calculating costs and informing future fit-out decisions.

The second data point covers how tenants interact with a space. Key card access or sensors on furniture can track the movement of tenants throughout the building in an anonymised manner. This allows landlords to calculate the occupancy of different common areas and understand how amenities are used. For example if tenants aren’t using spacious common areas as much as anticipated, additional qualitative data collection can help operators understand how to improve spaces in the current and future developments. Capturing and analyzing available data benefits the developer / operator’s bottom line, as well as improving the tenant experience.

Brand Premium

Brand premium charged on BTR is not necessarily achieved through physical design or prime locations. While these help, brand premium is built by putting into place certain processes that ensure better customer service and facilities.

Services such as a concierge or receptionist can add significant value towards the brand premium. Some of the most requested services from front of house staff are parcel management, key management, and security. Parcel Tracker, an app developed by Deepfinity, which is part of Avison Young’s Entrepreneurs in Residence scheme, ensures parcels can be processed more efficiently. Thanks to the simplification of the internal process, up to 70% of staff processing time is saved.

There are a range of software applications such as Parcel Tracker that introduce processes that are simple to implement and can be scaled up from a single building into an entire portfolio, ensuring great and reliable services to tenants and further building upon the brand premium.

Arthur Zargaryan is Co-Founder of Deepfinity Ltd and an Entrepreneur in Residence at Avison Young’s London office

Monday, November 18, 2019

Fourth Annual Apartment Renter Survey Results

by Amy Erixon, Toronto


On September 5, for the fourth consecutive year I gave the Tenant Trends keynote at the Canadian Apartment Investment Conference.   If you would prefer to watch me give the presentation, here is a link: https://www.youtube.com/watch?v=DsrNlca4cr0&feature=youtu.be

Participation in the annual survey continues to climb with improved coverage across the country, and more than 20,000 responses this year.   The report contains numerous insightful findings ranging from large increases in tenant adoption of technology, significant increases in tenant engagement in building programs, and sharply rising evidence of the affordability squeeze.   The gap between what renters want to pay and what they must pay for a unit has been steadily increasing year over year. But this year, the reported percentage of income allocated to housing in all but three Provinces, now exceeds levels considered sustainable, despite incomes climbing for nearly half of all renters during that period.   The housing affordability squeeze cuts across all demographics; is especially acute in Ontario; and renters under age 30 are disproportionately hard hit.   


A second trend, evidencing increasing financial pressures was tenant attitudes and commentary concerning utilities.  In 2016, 80% of renters indicated a preference for utilities to be included in rent.  This year 80% indicated they would prefer to be individually metered to exercise more control over their energy consumption.   Furthermore some 45% expressed an interest in control over systems in their own unit via a mobile app, or smart home system such as Alexa or Google Home.  This is good news for landlords, where sustainability management practices have been thwarted by resistance to individual metering.   Another key affordability finding:  tenant would pay more rent to have free guest parking. 


Year over year we saw a major increase in tenant engagement in building-wide programming with eight categories scoring over 70% for regular or occasional participation by residents.   In descending order of take-up: Social events came in first at 92% participation, followed by cooking classes, volunteer activities, yoga classes, health and wellness speakers, board game & card clubs, and art classes all scoring over 75%, rounding out the list was book clubs at 70%.  Not surprisingly, renters gave their managers overall high marks.  

The most surprising new finding was that more than half of all residents who do not have in-suite laundries want one; and would be willing to pay more to obtain one.     Comments on the survey by on-site leasing personnel indicate that this is generally the first inquiry when a vacancy is posted, prior to asking rent, number of bedrooms or baths, and whether there is a balcony, a preferred amenity by 92% of all renters.  Managers reported that this trend is a reflection of the increasing diversity of the renter population in Canada, with a growing number of religious and ethnic groups showing sensitivity around this lifestyle issue.  

Interestingly, when asked about co-living, 81% of respondents indicated they would never consider it.  
Lack of affordable housing is a hot political topic at present as all parties recognize that this issue is compounding social pressures related to income inequality.   The Toronto Foundation’s annual Vital Signs Report was recently released.  It’s most significant finding was while showing that poverty has decreased dramatically over the past two decades across Canada, income inequality has spiked; most dramatically in the wealth disparity between homeowners versus renters.   The report points to housing prices rising four times faster than income while rents are rising twice as fast over the past decade.  Similar to the US, temporary jobs grew five times faster than permanent ones and part time work grew at twice the rate of full time.   Families facing income insecurity, regardless of their income level, are less likely to become homeowners, which leads to an increasing sense of falling behind. 

 The survey indicated only 17% of all renters have no interest in becoming owners (the “renters by choice, or lifestyle” preference), whereas 40% indicated they no longer believe they will ever be able to afford a condo or home.  The balance reported they are either saving for a downpayment, would not qualify for a mortgage, and/or are in a family transition situation.  

The homeownership ratio in Canada is 67.8%, having fallen by about 2.5% over the past ten years.  This places Canada 37th in the world; with home ownership levels 3% higher than the US, and 12% lower than Mexico, according to Wikipedia.  Interestingly, home ownership levels are highest in Communist or formerly Socialist nations in eastern Europe and Asia, where rental markets have been slow to develop, and the Nordic countries of Western Europe.   In capitalist economies, homeownership has been a distinctive wealth differentiator, and as home value increases have dramatically outpaced incomes.   In some locations, renting has become the economically rational choice, as well as the only real option.  But as rents outpace family incomes, more innovative solutions will be required, given the ones in place today (stabilized rents in the existing stock and limited incentives to increase supply) are insufficient to close the yawning gap.  

To obtain a copy of the survey data or a summary report, or sign up to participate in next year's survey contact Sarah.Segal@informa.com.  




Thursday, November 14, 2019

Do our cities support a healthy work life balance?

By Daryl Perry (London, U.K.)

Despite the continuous political headwinds, the demand for office space in central London continues to display strength. Take-up for Q3 2019 totalled 3.3 million sq ft, 29% higher than the ten-year quarterly average, with BT and Diageo, as well as WeWork, making large commitments to the city. The strength of the property market continues to be underpinned by London’s importance as a global centre of industry. While Brexit may have affected the short-term perception of the UK, London exhibits extraordinary resilience in its ability to attract and accommodate global occupiers.

For seven years running, London has been named the most powerful city in the world, sitting at the top of the Global Power City Index (GPCI) run by the Mori Memorial Foundation’s Institute for Urban Strategies, ahead of New York, Tokyo, Paris and Singapore.

Yet, while London, as well as other UK cities including Edinburgh, Manchester and Birmingham, is regularly featured in rankings of the top places to do business, the UK’s cities rarely score highly when it comes to their liveability rating. Is there a disconnect between where we can do business and where we can live well?

Consulting firm Mercer’s Quality of Life Survey, possibly the most comprehensive of its kind, placed London 41st for quality of life, with Edinburgh coming in 45th. Glasgow and Birmingham came in at 48th and 49th, respectively, on par with Kobe and Chicago. While London is often and unsurprisingly cited as one of the best cities for culture and leisure, it is burdened by its infrastructure, poverty, pollution and crime rates. It follows that its citizens also report experiencing higher levels of stress, the longest commutes in Europe and poor affordability.

If the success of an individual city is based on its ability to attract talent, what happens when talent either can no longer afford to live there or decides it wants to locate elsewhere? Furthermore, in a time when technology blurs the boundaries between our work and home life and reduces the need for workers to be in any one place, locational decisions for the 21st century workforce will be increasingly biased towards places that stimulate our mental and physical wellbeing.

Making a place desirable is of increasing importance for London – and every city – to future-proof itself. We need our cities to remain global in terms of our approach to business and in our economic outlook. However, the most liveable and pleasant cities also have the ability to feel local through their use of infrastructure, quality of amenities, and mix of businesses and property use types. This is no easy feat for a city of London’s size, but it is achievable through increased affordability, connectivity and creating a sense of place from the built environment – much of which is set out in the Draft London Plan due for adoption in early 2020.

The key to change will be within the plans for Outer London, where considered development can be used to transform the current centralised model. By creating diverse, mixed-use nodes in the Outer London boroughs that provide housing, appropriate workspaces, retail space and other amenities, we can partially negate the magnetic pull of the Central Activities Zone.

The resulting opportunities for growing proximate employment, leisure and living opportunities allow people to gain access to the amenities they need through micro-manufacturing, final mile delivery hubs and locally-specific services. It also encourages local place making, by creating affordable developments and spaces with high utility and appeal, as well as encouraging sustainable community growth.

The London plan outlines the increase in housing capacity that could be delivered in Outer London. However, there is also the need to deliver balance and the appropriate infrastructure required to allow people to work, live and play in the same areas. White City and Stratford, and in a different way, King’s Cross, are held up as case studies for others to follow, achieving a sense of place that allows communities to grow and develop organically.

Changing London’s development model to this more localised approach is pivotal to raising quality of life through encouraging a more equitable distribution of opportunities and amenities. Doing so will not only make places more liveable but will also bring reciprocal economic gains through increasing productivity, particularly in under-resourced areas.

Daryl Perry is an Associate and Head of Research and Client Engagement. He is based in our London, U.K. office.

Monday, November 11, 2019

Snapshot of the UK debt market for commercial property

By Alastair Carmichael (London, U.K.) 

Although appetite is more subdued and lenders are more conservative, due in part to Brexit uncertainty, resilience continues to define the UK economy, and lenders remain keen to lend to UK commercial real estate. 

The number of deals available in the market for lenders is lower than usual as some investors aren’t actively taking decisions to buy or sell commercial property whilst the uncertainty of Brexit remains. As a consequence, lenders are competing for fewer deals, which is driving activity in the market. Lending is especially competitive for long-term leases and portfolios, where international, pension fund and insurer-backed lenders add to the mainstream lending pool. Income is still key for real estate investors and lenders are happy to lend against such property with good covenants. 

Margins are competitive for good sponsors and properties, albeit retail lending, London-based residential and speculative commercial development remains challenging to finance. Lenders are increasingly reducing their exposure to retail by not extending new loans to the sector or asking for more equity when refinancing existing loans. While just over a quarter of UK commercial property debt was secured against retail assets in 2007, that figure was closer to 15% in mid-2019. Nevertheless, a preference for the prime assets of this category remains. 

Loan-to-value (LTV) across most asset classes remains relatively conservative, with little real estate showing signs of over leverage in the way that it did during the Credit Crisis. This results from more prudent credit committees and stricter lending criteria post-crisis. That said, with limited transactional activity, the market value of many properties is difficult to determine, so the ‘true’ LTV may be masked. 

The lending markets are diverse with mainstream lenders complemented by challenger banks, debt funds, private equity, family offices and the public sector. The diversity of lenders has increased significantly since the Credit Crisis, filling the gap left by mainstream high-street lenders as well as other investors looking for better risk adjusted returns than the direct property investments available in the market. Each lender has a varying appetite depending on their historical presence, losses in the crisis and current credit policy, including their preference for lending to certain geographies or sectors. Non-bank lenders, most significantly insurance companies, played a large role in increasing loan origination in the past year, lending more to UK property than German banks, which are typically the second-largest lender. UK banks still lent the most, but tighter regulation now moderates bank appetite for property lending. 

International investors have seen a 15% discount investing in the UK from normalised exchange rates. This is leading to an increased appetite from international lenders, especially given the fundamentals of the UK remain the same despite Brexit. While most activity stills centres on the capital, some international lenders are looking to diversify their UK portfolio outside of London, seeking potential value growth in the regions, where loan margins are higher. 

Valuations are diverse with political and environmental uncertainty pushing valuers to consider the downside position. That downside potential is difficult to quantify, so valuers are often coming out with very different valuations for the same property; this is also as a result of the transactional property markets providing few comparable transactions.

Overall, despite a slightly more cautious approach, the fundamentals of lending in the UK, backed by favourable legislation, property ownership rights, and solid insolvency regime remain unchanged, providing a positive outlook for the year ahead.

(Alastair Carmichael is a Principal of Avison Young and Head of the Real Estate Finance team. He is based in the firm’s London City office.)

Tuesday, October 29, 2019

Roads, Rails and Routes

By Rand Stephens (Houston)

As Houston’s population continues to grow, so does our time spent in traffic. Approximately three million people make up the Houston-area workforce as of 2017. Whether you are driving from Katy, Clear Lake or The Heights, your commute stinks. So, what’s the solution? Build new roads? Add more lanes to existing freeways? Or, add more mass transit such as rail and busses? Those solutions have been implemented time and time again, but yet the situation doesn’t improve. In fact, it may even be worse.

This issue is very much on the minds of Houstonians with the November election on the horizon. On the city ballot is a $3.5 billion bond from Houston Metro to fund 75 miles of rapid bus service, 16 miles of light rail and $600 million into the bus system. The campaign has been dubbed MetroNext. The plan has three goals – take cars off the road, offer new service and travel options and continue to fund roadway projects. That sounds great, but I’m not sure that when it’s all said and done (which will be 20 years from now) that our traffic woes will be behind us.

The bottom line is that transportation infrastructure in the U.S. was designed for the automobile. When cars drove onto the scene in the 1920’s, it eventually led to a decline in transit ridership and transit companies could not compete. Then, the passage of the Interstate Highway Act in 1956, sparked the super highway transportation era and pretty much left mass transit in the rearview mirror.

As mobility continues to evolve in America, cars, busses and rail systems are still very much a part of our transportation culture. Will all three continue to share the road of mobility in the future? Probably.

In Houston, the Uptown Development Authority (Uptown) is building Bus Rapid Transit (BRT) and METRO will provide transit service when the project is completed. It will run from Westpark to the Northwest Transit Center (NWTC). Texas Department of Transportation (TXDOT) is building 1.5 miles of dedicated, elevated bus lanes from Post Oak Boulevard to North Post Oak Road along the West Loop where METRO bus lanes will connect to NWTC. Whether this project will actually increase ridership and take cars off the road remains to be seen, but the dedicated bus lane means that busses will definitely be out of the way of car traffic which should alleviate Galleria congestion.

Houston’s mobility issues will not be solved overnight, especially as the population continues to increase and job growth produces more commuters.  However, it will be interesting to see what kind of impact BRT will have on Uptown traffic. BRTs and rail are point to point systems and if people still have to walk a great distance to reach their final destination, MetroNext may have to consider ways to incentivize riders to use the system. Unfortunately, we won’t know how this all plays out before November 5th.


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

Friday, September 27, 2019

Avison Young backs global effort to reduce embodied carbon

By Tom Malcolm Green (London)
Avison Young has formally endorsed the World Green Building Council (WGBC) report entitled Bringing Embodied Carbon Upfront as one of more than 80 signatories. This endorsement coincides with the 10th annual World Green Building Week and comes in the wake of the Global Climate Strike (held September 20) demanding climate action to target net zero.

The report sets out a bold new vision for how buildings and infrastructure around the world can have 40% less embodied carbon emissions by 2030 and achieve 100% net zero emissions by 2050. In order to achieve these targets, the industry must act together, with owners, occupiers, developers, investors, architects and consultants all leading the charge on change.

There are signs that the industry is taking the global call to action seriously as well. On Friday, the Better Buildings Partnership (BBP) published the BBP Members Climate Commitment, a pledge by 23 owners – who, collectively, have more than £300 billion of assets under management (in excess of 11,000 buildings) – to reach net zero by 2050 and, in 2020, publish their pathways to reach that goal.

A fundamental part of the carbon reduction strategy is reducing (and, eventually, negating) the impact of embodied carbon, which the WGBC defines as carbon emitted during the construction process and material manufacturing; hence, Avison Young endorsed the WGBC report. Another key part of the strategy is to reduce upfront carbon, which the report refers to as carbon released before the built asset is used.

It is clear that a radical change in industry co-ordination and co-operation is needed to ensure the required market transformation to mainstream net zero, and that the real estate industry cannot act in isolation. Promoting cross-sector collaboration is crucial, particularly as governments look to embed targets into policy and other regulatory frameworks. Innovative approaches are necessary to engage and deliver across industries – and deliver tangible results that, as a minimum, impact and satisfy the required standards.

The result of all of this is a clear mandate for the real estate industry to take action and bring its sustainability agenda to the forefront of operations. Avison Young is well-positioned as an industry leader in sustainability consulting to assist our clients in both putting together net-zero-carbon pathways and delivering on them. We see this service as good business sense and an investment in assets as well as the planet, ensuring that all of our buildings are better for everyone whilst protecting the future for our planet. The recent industry focus on climate issues clearly shows that those organisations that don’t keep up risk falling behind and losing value over time.

To discuss how Avison Young can help your business lead the change and what services we can offer, please do get in touch.

You can read the WGBC Bringing Embodied Carbon Upfront report here.

(Tom Malcolm Green is a Graduate Surveyor based in Avison Young’s London-Gresham Street office. He is a member of the company’s U.K. sustainability team.)

Wednesday, September 18, 2019

Planes, Trains and Automobiles


By Rand Stephens (Houston)
Discussion of trains and busses utilized for traditional mass transit to alleviate traffic continues to be a hot topic around Houston. As discussed in earlier blogs, mass transit (Metro) in Houston isn’t working to ease traffic congestion. Metro buses that pull over at a bus stop, in the middle of traffic, with no riders getting on or off only worsens traffic congestion.  

Let’s face it, traditional mass transit is not being used enough to make a difference because it doesn’t save riders significant time, money, and nor is it a better travel experience to and from their destinations.

However, people are amenable to alternative modes of transportation when saving time, money or improving their transportation experience. Vonlane, a luxury 22-passenger motor coach with routes between Houston and Dallas, running 8 times per day, hit the road in 2015 and business is doing well. They recently added a San Antonio to Houston route.

Why is the Vonlane having success?  Well, we’re not talking about your average bus. This is a high-end motor coach that provides a first-class experience at a similar cost and travel time as flying including navigating airport security. So, at an equal cost and travel time, people are willing to use alternative travel modes just for the improved experience -  amenities like Wi-Fi, leg room, outlets and a variety of food and beverage options.

Vonlane demonstrates that people in Texas will use alternative forms of mobility which bodes well for the high-speed rail project between Houston and Dallas. In less than 10 years, Texans may have this option that will transport them from Houston to Dallas in 90 minutes with ticket costs competitive with airlines. Still not clear whether train fares will spike for last minute purchases. (No last minute spikes for Japan’s high-speed rail.) Texas Central is closer than ever before to linking the two biggest economic powerhouses –Dallas/ Ft Worth and Houston with a bullet train using private investments. The company is expected to begin construction by the end of 2019 or early 2020 with a duration of up to five years.

Japanese bullet train – Courtesy of asia.nikkei.com
The Texas Bullet Train (would be the first U.S. high-speed train) faces several challenges such as eminent domain, cost and government regulations. But, once resolved, Houstonians could be boarding the high-speed train at U.S. 290 and Loop 610, former Northwest Mall site which is slated to be H-town’s railway station as early as 2026. Other stations will be in Dallas and in the Brazos Valley.

According to research conducted by L.E.K Consulting and released by Texas Central, 90% of trips between Houston and Dallas are made by car and 85% of those who made that trip within the last year would be willing to use high-speed rail, if it were available. The Texas train is expected to have 8 cars with the capacity for approximately 650 passengers per trip. That could translate to thousands of riders per day – Japan averages 452,000 daily riders.  That could have a huge impact on I-45 traffic between Texas’ two largest metro areas. The train cars are also expected to have tons of leg room, high ceilings, wide aisles, and reclining seats (It’s all about the experience!).

When travelling – near or far, most people want to save time, save money, perhaps be productive and have an overall great travel experience. Traffic gridlock will not be resolved with a single solution, such as adding more lanes to freeways and highways and adding more busses and bus lanes. It’s going to take an infrastructure overhaul that reimagines mobility using technological advancements to improve the whole travel experience – the Texas Bullet Train may be the first giant step we need to get on track.


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

Tuesday, September 17, 2019

Romania: the outsourcing valley of Europe


By Colin Lovering (Bucharest)

People say that Romania is like its wine.

You don’t realize how wonderful it is until you’ve tasted it.

That has definitely been the case for key global business players over the last few years as they discovered, tested and invested in the country’s unique, task-oriented and deeply skilled talent pool, which has a refreshing Latin flair for creativity and the courage to embrace new technologies, cultures and pioneering employers.

Now, that description of the talent base sounds very nice. But, of course, the pool’s qualities would be completely neutralized if it weren’t for equally courageous investment in real estate and diverse education that has provided a constant flow of high-end talent into state-of-the-art office buildings throughout Bucharest and Romania’s other major cities, including Cluj Napoca, Timisoara and Iasi. As result, Romania is becoming known as the outsourcing valley of Europe.

Each majestic scene of cranes across a skyline is a testament to Romania’s aforementioned qualities – but also a constant reminder of the need to continue to healthily and sustainably raise the proverbial bar in unison with new investors’ rising expectations.

As people discovered a few years ago about its wine, Romania is no longer a nice, quirky surprise. It’s the very calculated and value-added choice for companies seeking serious business performance in global outsourcing, business process outsourcing (BPO) and automotive manufacturing.

Like many things in life, the Romanian corporate landscape and its people have inherited certain traits and cultures, particularly in relation to the country’s incredible diversity, which has culminated with a business community heavily composed of key Austrian, German, Turkish, French, Greek and British companies – and, more recently, household-name American firms, including Microsoft, IBM, Kellogg’s and Oracle, etc.

The Romanian people’s natural curiosity and welcome approach to tourists and investors alike provide a solid platform for integration and healthy, speedy starts for organisations big and small arriving here. Romania’s goodwill extends to meeting the needs of ex-pats, particularly executives’ spouses and children who require support along with quality housing and education.

Speaking of starts, startup firms are generating big buzz across Romania. Startups are inspired by young Romanians’ incredible technical abilities. Many organisations frequently tap into the country’s large millennial talent pool in their ongoing push to innovate and stay one step ahead of the competition. Young experts can quite often be found in the many co-working spaces scattered around the city.

Getting back to our wine analogy, Romania’s business community is definitely maturing nicely. Its continental flavours are distinct and diverse. Meanwhile, more organisations are hearing about it – and definitely want a taste for themselves.

Cheers, everyone!

(Colin Lovering is a senior vice-president of enterprise solutions and advisory services in Avison Young’s Bucharest office.)

Tuesday, September 10, 2019

Interest rate volatility affecting investment real estate in Alberta


By Brennan Yadlowski and Ron Dezman, AACI (Edmonton)

Reality has set in concerning Alberta’s investment market: it’s no longer as vibrant as we’d like it to be.

The provincial election in April brought in a government that is pro-business, but the outcome of the upcoming federal election in October is far from certain. Many buyers and vendors still have a disconnect of expectations on real estate investment opportunities in Alberta. Those investors who are showing confidence and making investments in our market will be rewarded in the future through significant cash flow, principal reduction and, in time, capital appreciation. Higher capitalization (cap) rates lead to positive leverage that is difficult to achieve in other major markets throughout Canada. In Alberta, the spread between cap rates and the cost of financing can equate to an excellent yield for investors.

That brings us to interest rates, which are among the most relevant factors in commercial real estate investment. Important as they are, interest rates also rank among the most difficult factors to predict and rely on consistently. In Edmonton’s capital markets (and those across Alberta), interest rates affect most financing assignments that we work on. Investors constantly base their investment decisions on the interest rates that they believe they will obtain after consulting with the debt capital markets team. In a volatile market, less compression on cap rates from market disrupters (such as private REITs) indicate that we are at the trough of an economic cycle.

It is well known that most lenders price their rates on the prime rate, the cost of funds relating to deposits, or as a spread over the Government of Canada (GOC) bond rate for any selected term. For the best assets with strong covenants attached to the transaction, tier 1 lenders such as life insurance companies and schedule A banks will usually base their five-year term rate on a spread of 140 to 180 basis points (bps) over the GOC five-year bond. Tier 2 lenders will usually base their interest rates on their respective cost of funds, resulting in a spread of 220 bps-250 bps over the GOC bond rate.

For example, a neighbourhood retail centre with a solid mix of tenants would trade in Edmonton in the 6.25% to 6.75% cap rate range, according to Altus. On this type of asset, the overall interest rate (based on the spreads listed above) would currently be 3.05% to 3.70%. This variance of 3.00% to 4.00% is attractive to many private investors in our market.

Lately, however, we have seen some Alberta lenders implement a floor rate around the current prime rate (3.95%). The trend in GOC bond rates through the first eight-plus months of 2019 has been volatile – to say the least. The wide swings that we have seen this year are reflected in the graph below. As indicated by the orange line, the yield curve today has inverted, as the five-year GOC rate was higher than the 10-year rate on August 15.



This trend could cause lenders to cut fixed interest rates relative to floating rates in the near future. Many investors prefer the certainty of a fixed rate when calculating their yields on a real estate asset. We are seeing interest rates on the A-class industrial, office and retail assets well under 4.00%, something that hasn’t happened in the last two years. This situation creates an excellent opportunity for many investors in Alberta to acquire industrial, office and retail assets at cap rates above 6.00%.

Conclusions:

  • Investors: Be ready to set the interest rate.
  • As the federal election campaign gains steam, interest rates may begin to rise and continue to rise towards the end of the year.
  • Amid the downward trend in bond rates, the stock market has remained relatively strong.
  • We are five years into the last economic downturn in Alberta, and lease terms should be coming due for many tenancies that were on five-year terms. How these are dealt with can provide more income certainty and impact investment decisions.

(Ron Dezman is a senior vice-president in Avison Young’s Edmonton office. Brennan Yadlowski is an associate in Edmonton. Both are members of the company’s Alberta capital markets team.)



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