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Tuesday, August 13, 2019

Slow and Steady – State of the Houston Office Market

By Rand Stephens (Houston)

It’s been nearly five years since the economic downturn began (Q3 2014 – Q2 2016). During the second quarter of 2016, the price of oil averaged $45/bbl, unemployment was nearly 5% and more than 11 million square feet (msf) of space was listed on the sublease market. Since then, Houston’s economy has gained momentum and remained strong.

The price of oil is now averaging above $50/bbl (a high in the $70s during October of 2018), unemployment has fallen to 3.8% and the available sublease space in Houston is down to 6.8 msf. We are moving at a snail’s pace, and fortunately, it’s in the right direction. The economic fundamentals are there, but cautious optimism lingers through the Bayou City.

There is no doubt that Houston currently has one of the highest vacancy rates in the country, hovering quarter to quarter between 16% to 18%, but we are inching our way back to recovery. The slow pace seems to be perpetuated by trends such as flight-to-quality, the pressure on class A heritage buildings to make incremental upgrades/add amenities, and the hesitancy of large companies to make long-term commitments.

There is light at the end of the tunnel as several submarkets, including the Katy Freeway West/Energy Corridor and the Woodlands, show encouraging signs of recovery with increased leasing activity and development. Near the Grand Parkway, Freeway Properties recently broke ground on Phase II of Katy Ranch Offices, signifying confidence in the submarket. Phase I of the office development is fully occupied.

The NASA/Clear Lake submarket has potential for new development as the robust industrial sector shows interest in office space closer to their warehouses and facilities. The Houston Spaceport and NASA’s Gateway program will also likely bring jobs to the area that will spur the need for more office space.

With record-breaking job and population growth and a booming economy, Houston’s office market should be poised for a speedy recovery, but it’s slow and steady. Don’t worry Houston, we’ll get there.

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

Saturday, July 20, 2019

Lunar Landing Impact, 50 Years Later

By Rand Stephens (Houston)

Fifty years ago, on July 20, 1969, Americans, and people all over the world celebrated American astronauts landing on the moon – a triumph for humankind. It will forever be the most famous footsteps in human history. The reminiscing, the celebrations, the activities and the news stories of the anniversary have Houston buzzing with excitement.

The inception of the Johnson Space Center (originally dubbed Manned Spacecraft Center), which is located southeast of Houston in Clear Lake, has also left an enormous footprint that created jobs, communities and transformed the commercial landscape of the Clear Lake region. Almost overnight, it went from oil town to Space City after President Kennedy’s historic, ‘We choose to go to the moon’ speech at Rice University in 1962.

 "Houston, your city of Houston, with its Manned Spacecraft Center, will become the heart of a large scientific and engineering community."    - President John F. Kennedy, Rice University, 1962
Along with the Johnson Space Center came aerospace and engineering companies that contract with NASA on space projects. Training centers, testing facilities, plants, office buildings and residential communities soon replaced the ranch land that previously covered the area. The growth of the area exploded following the lunar lift off and as NASA turned its focus to the Space Shuttle program. However, after the cancellation of the Constellation program in 2009, thousands of layoffs rippled through NASA and the research and engineering workforce. That kind of blow also had a major impact on the office market, which has struggled to recover.

The stars may be aligning once again for the Clear Lake area as NASA aims to return to the moon on the Orion and build a small space station called the Gateway as early as 2024. This could launch leasing activity in this area which has been lackluster for a decade.

Happy anniversary Apollo 11!

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

Friday, July 19, 2019

E-Commerce and How It Affects Real Estate in Latin America (LatAm)

By Guillermo Sepulveda (Mexico City)
This week I posted a video (embedded below) of an interview I conducted a couple of months ago, when I sat down with Andrew Strenk at the global leaders’ breakfast at ICSC RECon in Las Vegas.

Andrew is a retail expert and president of Strategic Planning Concepts International (SPCI), a prestigious consulting firm based in Southern California. His experience in Latin America (LatAm) over the past 30 years has made him an authority on retail real estate development in the region.

I wanted to take the opportunity to discuss with Andrew the manner in which e-commerce is growing in LatAm and the effects this phenomenon is already having on the region’s retailers and, consequently, its real estate market.

E-commerce in LatAm
An eMarketer ( forecast pegs Latin America’s 2019 e-commerce sales at US $85 billion from 155.5 million consumers. By 2022, the region’s annual online sales are expected to reach the US $95-billion mark.
Mexico, whose online sales represent 29% of LatAm’s total e-commerce sales according to the forecast ranked second in 2018 to regional leader Brazil, whose sales were 34% of the total and Argentina in third place with a distant 6%. However, Mexico is the fastest growing retail e-commerce market with an expected whopping 36% in 2019!

It is important to point out that Latin Americans still represent only 10.4% of all Internet users in the world. Hence, there is tremendous potential for growth as consumers have access to and become comfortable with the security of online transactions.

Growth factors
Three main factors are propelling e-commerce growth in the region:

  1. A young population: The average age in the LatAm region is 30, whereas this figure is 38 and 33 in the U.S. and Europe, respectively.
  2. Infrastructure: Better Internet hardware with more market penetration.
  3. Smartphones: The usage of these devices is spreading rapidly among an avid population.
This last point about rising smartphone usage is key, because transactions are not only being conducted from a laptop, but also – more frequently – from hand-held mobile devices under what has been referred to as “M-Commerce”. In 2018, according to eMarketer, 27.5% of LatAm’s retail e-commerce sales were conducted from cellular phones.

The challenges
However, retailers must overcome several challenges before they can propel the region’s online retail sales growth even further. Retailers will have to invest in logistics services and facilities that can ensure rapid delivery, a component that is key to consumer satisfaction in this type of sale. It is precisely in this logistics component where real estate plays a crucial role in the on-line sales model. Companies that can enhance this component will have a competitive advantage.

In the specific case of Mexico, we are already seeing companies such as Liverpool, Elektra, Amazon and others building or leasing large industrial spaces (in excess of 500,000 square feet feet) for distribution centers. In coming years, we will also see the growth of smaller facilities – not only on the outskirts of large cities, but also within the urban grid – that store inventory for last-mile-delivery, allowing retailers to be closer to their customers and ,thus, get their products to them faster and more efficiently.

Indeed, LatAm faces many e-commerce challenges in the near future, but that sector is also where the real estate opportunities lie.

(Guillermo Sepulveda is a Principal of Avison Young and Managing Director of the company’s Mexico region. Based in the firm’s Mexico City office, he specializes in investment sales, advisory, tenant representation and project management.)

Friday, July 12, 2019

Edmonton industrial market evolving and diversifying

By Corey Gay and Tony Randhawa (Edmonton)
Question: What do Amazon, cannabis, liquor, Ford truck parts and dog food have in common? 

Possible answer:
a) A long weekend in Edmonton.
b) Often used in jokes about Alberta.
c) Industrial build-to-suit tenants in the Edmonton region.

Correct answer: C

These are the largest build-to-suit industrial buildings that have been constructed, or were under construction, recently in the Edmonton industrial market. From largest to smallest, the largest build-to-suit tenants in square feet (sf) include:

Tenant/Occupier and Use
Rentable Area (sf)
1 million
Aurora Cannabis (production facility)
Alberta Liquor and Gaming Commission Distribution Centre
(parts distribution centre)
Champion Pet Foods
(production facility)
3.12 million

For the Edmonton industrial market, these are some very large buildings. To put things in perspective, the overall industrial market in the Edmonton region comprises 156 million sf.

An interesting observation is that none of these businesses are in the energy industry.

The market has been long been perceived as being directly tied to the energy industry (and there is certainly some truth to this viewpoint.) However, with the energy industry less robust than it has been in previous years, the leadership within the market has changed. The recent build-to-suit activity is a testament to the diversification in the market and how industrial development is now focused on supporting the overall economy in the Edmonton region (population: 1.4 million) and the northern half of the province.

In addition to these build-to-suit developments, a number of speculative multi-tenant properties are underway. These include: Rampart Industrial Park’s 121,000-sf Building 4 and 295,000 sf of multi-tenant warehouses in QEMT I and III buildings in Nisku, which highlight the major developments now online in the Greater Edmonton Area.

A recent industrial land acquisition in south Edmonton is further evidence of a renewed confidence in the Edmonton industrial story. Panattoni Developments, in conjunction with a financial partner, has recently acquired a site in south Edmonton that has approximately 148 acres of land available for industrial development.

All of this recent activity is pointing to a subtle confidence in the market. With a vacancy rate dipping below 6%, the market is healthier than many perceive it to be.

Another interesting observation is that employment in Edmonton is now higher than what it was before oil prices collapsed in 2014. Please see the table below, which was published by Statistics Canada.

As long as we are back to the energy industry, at the time of writing this blog, the Trans Mountain Pipeline expansion has just been approved by the federal cabinet. The expansion will create a pipeline system with the nominal capacity nearly tripling from 300,000 barrels per day to 890,000 barrels per day and is expected to cost approximately $7.4 billion.

As of now, the approval means little in terms of immediate material impact on the province, but sentiment has certainly improved.
The bottom line is that yes, Alberta industrial real estate has been impacted by the energy industry. However, as discussed, nearly all of the large major development projects in the region have no ties to the energy business at all. The industrial market is evolving, maturing, and diversifying.

(Corey Gay is a Principal of Avison Young and Tony Randhawa is an Associate in the company’s Edmonton office. Members of the firm’s capital markets group, they work as a team while specializing in industrial investment property sales, including build-to-suit projects.)

Thursday, June 20, 2019

Opportunity Zone Investors Get Answers

By Gerry Schauer (Charleston, SC)
Flexibility and clarity are two welcome takeaways from the second set of proposed Opportunity Zone (OZ) regulations. In April, the Internal Revenue Service and Treasury Department issued this follow-up to the first set of proposed regulations, which were introduced last October. Investors, developers, legal and accounting advisors and community leaders now have many of the answers they need to confidently move forward with real estate and business investment in OZs. This second set reads like, and is meant to be, a complement to the first round. It has answered many questions raised since October and provides greater guidance, which will bring investors off the sidelines.

Ever since the OZ program was first outlined in the Tax Cuts and Jobs Act of 2017, the bulk of the conversation and investment has been in real estate, though business investment is equally represented in the legislation. For real estate investment, the foundation was set early on, with modest additions and many clarifications in round two of the proposed regulations. To review, an investor sells an asset, which can be real estate, stocks and even art, that would normally trigger capital gains tax. The gain is rolled into a qualified Opportunity Fund (QOF) within 180 days. Next, those funds are used to purchase real estate in an OZ (low-income areas that qualify for this program.) The initial capital gain is deferred until Dec 31, 2026 and potentially reduced up to 15%. The real estate is held for at least 10 years to avoid capital gains tax on the appreciation of the OZ real estate. The second set of regulations doesn’t change that, but it addresses a number of questions surrounding “original use,” property that straddles an OZ, depreciation, exit structuring, leases and timelines (including the relaxation of some of those timelines). For example, it is now clear that a property that has been vacant for more than five years and is put back into service falls under “original use” and is exempt from triggering the cost of “substantial improvement.”

Since the first set of proposed regulations came out last October, there have been many questions about how to invest in qualified Opportunity Zone business (QOZB) and stay within the lines. For example, one of the initial key requirements for businesses to be eligible was that half of their gross income must be derived from business activities in an opportunity zone. That leaves a lot up for interpretation. After conducting public comment sessions and gathering feedback, the Treasury listened and responded. In response, it created three safe harbors that clear up the confusion and provide flexibility. Essentially, businesses qualify if half of the hours worked take place within the OZ, half of the compensation paid is for services performed within the OZ or if significant management and operational functions are in the OZ. Answering another question, businesses may use the working capital safe harbor to use cash for business development. That can range from obtaining a fast-food franchise to paying software engineers in a new technology company. The upside for businesses in OZs is substantial. No question: business owners are turning to their advisors and considering the move.

The first set of proposed regulations laid the initial groundwork. The second set, enhanced by community feedback and comment, has addressed many questions, added flexibility and provided needed clarity. Treasury has another public hearing set for July 9 and, perhaps, another set will follow this summer, but there will likely to be tweaks rather than significant new material. The good news is that the guidance is here now. That’s good for investors and good for communities.

(This story was originally published in the Charleston Regional Business Journal on June 10, 2019. Gerry Schauer is a vice-president in Avison Young’s Charleston office. He specializes in office and investment real estate leasing and sales.)

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