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Thursday, January 24, 2019

Houston Poised for 2019 Market Challenges & Transformations

By Rand Stephens (Houston)

It was a solid year for the commercial real estate industry in Houston. The office market maintained a slow and steady recovery track, and the industrial market ended 2018 on a strong and healthy note. Houston’s vigorous and diverse economy deserves most of the credit, with unemployment under 4% and nearly 115,000 jobs created over the last year. So, will 2019 continue to bring the Bayou City good (economic) health and prosperity? Several key factors unique to the Houston metro certainly have it well-positioned for another banner year (if not better). Houston’s zoning and land-use regulations are appealing to investors and developers.

Industrial Revolution
Courtesy of
The industrial distribution market is undergoing a transformation, not only locally, but around the country, largely due to population growth, e-commerce and great transportation infrastructure. Warehouse/distribution space is expected to account for most new buildings and net absorption for 2019. Distribution centers are being built closer to higher populated areas and designed to serve consumers directly. The Katy area seems to be the hot spot for distribution sites such as Costco, Amazon and CVS. Meanwhile, the areas around the Port of Houston are experiencing a different kind of revolution. There is a large demand for rail-service space due to higher shipping costs. Trains are a more cost-effective means of shipping oil by-products such as resin and plastics. Distribution facilities are the most popular investment category and will continue to be for some time. With a 5% vacancy rate, Houston will continue to be a prime market for development, however, as a result, we may see overbuilding in 2019.

Office Market Two-Step
It’s two steps forward and one step back for the office sector. The recovery is taking place, but oil prices and flight-to-quality factors make it a bit complicated. 2019 will continue to be a tenant driven market and vintage building owners will be facing renovation challenges to compete with newer offices with efficient layouts. The Energy Corridor will see increased leasing activity, as companies seek offices closer to where their employees live. Overall, the office market will continue a slow recovery in 2019, but we don’t see a full recovery in occupancy until late 2020, or even into 2021.

Houston is THE place to invest
Interest rates, energy prices and the trade war are variables that investors will be watching in 2019. Strong economy, continued job growth, and less burdensome land-use regulations make Houston an attractive city for investment, particularly for industrial, retail and anything residential. The live-work-play and e-commerce/retail evolution will benefit from Houston’s adaptable zoning and land-use regulatory environment. Houston will see continued strong investment in all product types from all types of investors.

Forecasts and predictions can always be tricky, but 2019 looks to be like 2018…a straightforward year with nice economic growth.  We don’t see any surprises looming on the horizon.

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

Monday, January 21, 2019

Commercial Real Estate 2019: Opportunities abound amidst strong demand, anticipated repricing and strategic change

By Mark E. Rose (Toronto)

Set against the backdrop of a rapidly increasing world population, global GDP growth, relatively strong economies and heightened job creation, real estate markets are thriving. Fundamentals continue to show great strength amidst restrained building activity, strong demand and accordant rising rents. Despite political headwinds such as trade disputes, Brexit, currency fluctuations and interest-rate hikes, quality real estate continues to be occupied and in demand.

These are some of the key trends noted in Avison Young’s 2019 North America, Europe and Asia Commercial Real Estate Forecast, released last week. The annual report covers the office, retail, industrial and investment sectors in 68 markets within seven countries on three continents.

While the last few weeks have certainly been a rollercoaster ride for the world’s equity markets, the headline is: we continue to feel very positive about opportunities in the real estate environment for the year ahead. At Avison Young, we believe that more capital is available to move into real estate debt and equity than at any other time. The next wave of investment is not a matter of if or when – it’s just a matter of price.

Understanding demand is the key to navigating the current market. While workplace changes can be confusing – driven by technology, generational trends and the new economy – they largely represent positive developments for our industry. As co-working and flexible-office providers take down a significant amount of space, what we are seeing is a change in tenancy – not a slowdown in occupancy. Leasing is stable – and longer-term in nature – and most businesses retain their office footprint throughout economic cycles.

An office experience is taking the place of the static workplace of prior generations, states the report. Energy, light, collaboration, purpose, sustainability, and health and wellness are as much drivers of the work experience as the underlying businesses.

Industrial is today’s property class of choice and will probably regress to the mean, but will still be a driving force as methods of production and distribution continue to evolve. Distribution to the home and the last mile are top of mind among industrial owners and occupiers; accordingly, same-day delivery is the goal of retailers and consumers as the world’s population continues to increase.

On the investment side, as pundits have noted, we are at a pricing top and have been there for a few years. Rising interest rates should be pushing cap rates up and prices down, but demand for real estate and longer-term views on a potential global recession are working to keep pricing within a narrow band. The real estate industry has matured: buyers hold more equity and are generally not chasing deals. This situation has created a tug-of-war between the bid and the ask, and sets up a modest – but healthy – pricing correction even as economic growth takes hold and interest rates rise globally.

On the North American front, though trade was discussed ad nauseam, property markets in the U.S., Mexico and Canada performed well in 2018. The Mexican economy has continued to exhibit resilience in a complex environment despite the volatility and uncertainty surrounding the federal-government-transition process in Mexico and other international factors. 

Across the Atlantic, despite a healthy property sector, the U.K. market remains susceptible to political risk – namely Brexit. German markets are exhibiting healthy leasing and investment demand, while a lack of product hinders stronger growth. Significant construction, industrial expansion and sustained prices are forecasted to have positive impacts in Bucharest, Romania.

Meanwhile, co-working office providers have become core occupiers in Seoul, South Korea – the location of Avison Young’s first office in Asia. 

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

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