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Friday, January 23, 2015

2014 in Review: The Dallas Office Market

By: Greg Langston (Dallas)

There’s no better way to start off the new year than by taking a look back and reviewing the one we just had. While the Dallas commercial real estate market as a whole had a strong 2014, nowhere was this success more notable than in the region’s nation-leading office market.

According to DTX, Dallas had the fourth highest amount of net office leasing in the country last year. With over 4 million sq-ft of office space leased, the Dallas market grew at an average rate of 5.5 percent, with growth ramping up further during the fourth quarter. Overall, there is more than 6 million sq-ft of office space currently being constructed in North Dallas, which is the highest figure for the region since the ‘90s.

“If one annualizes the second half of 2014, the office sector has been absorbing space at nearly twice its historical average,” says economist Kevin Thorpe.

On a similar note, last year saw record low vacancy rates. By the end of the year, Dallas office vacancy rates were down to 16 percent, with overall commercial vacancy in North Dallas hovering around 9 percent. This comes thanks, in no small part, to record-breaking leasing numbers: 2014’s total of nearly 5 million sq-ft of leased space was the region’s highest in fifteen years.

Overall, the Dallas office market had a stellar year, with leasing and construction rates both nearing record levels. Furthermore, the notable acceleration of growth that began in the second half of the year seem to point to another strong year of growth for the region.

That being said, some analysts are cautious about projecting a repeat year of record growth. In a piece for the Dallas Morning News, Steve Brown points to two major factors that could limit further growth in the region. The first is a potential federal interest rate hike that could place a damper on new construction. The second is perhaps more worrying: falling energy prices. While the energy sector has been a boon for the region over the past several years, falling oil prices could have a broad negative effect on the local economy.

Regardless of these factors, the Dallas office market experienced a top-notch 2014, with all indicators leaning positive. While it remains to be seen if this growth continues, record-breaking vacancy and construction numbers reflect the rising economic fortunes of the D-FW market.

Job Growth: How it Affects the Dallas-Fort Worth Commercial Real Estate Market

By: Greg Langston (Dallas)

Strong job growth has been one of the main drivers of the Dallas commercial real estate market, with analysts expecting this trend to continue in 2015.

The Dallas market experienced broad job growth in 2014. A recent study from the W. P. Carey School of Business at Arizona State University ranks Dallas third among U.S. metropolitan areas in terms of job growth, with notable gains coming from the “‘professional and business services’” industries. The region’s small businesses also had a very strong year, holding the top spot on the Paychex/IHS Small Business Jobs Index from October 2014 to January 2015.

This job growth has been driven by favorable business conditions in the Metroplex, which in turn bolsters business growth. A recent piece by the Dallas Morning News attributes this to Dallas’ growing status as major tech hub, prompting more growing corporations and startups to flock to the city while simultaneously becoming an attractive place to live for potential new residents. Furthermore, this growing job pool primarily draws from well-paying white collar jobs, providing more support for commercial and residential real estate markets alike.

With that being said, the only question that remains is whether Dallas job numbers will continue their upward trajectory in 2015. We’ve already seen early job numbers for small businesses and, although Dallas remains well above the national average, national growth has notably slowed. In terms of larger corporations, however, this will remain to be seen--though, to be fair, the commercial real estate market is showing no signs of slowing at the moment.

The relationship between steady job growth and favorable business conditions has been absolutely crucial to the success of the Dallas commercial real estate market over the past several years. The Dallas market experienced a stellar 2014, with its office market ranking among the most vibrant in the nation. While it remains to be seen whether this robust growth will continue in the year 2015, expect job numbers to provide some potential insight when they are released.

Tuesday, January 20, 2015

U.S. Market Conditions Spark Optimism

by Mark E. Rose (Toronto)

At Avison Young, we believe that improving conditions bode well for U.S. commercial real estate in the year ahead.  We’re basing this strong belief on the findings of our 2015 Canada, U.S. and U.K. Forecast

Why are we so bullish?

The U.S. economy expanded further in 2014 with business investment bolstering economic progress. The national unemployment rate was less than 6% near year-end and job growth accelerated with employment reaching pre-recession levels. The recent drop in oil prices could hurt energy-driven markets, such as Houston, but will benefit consumers and the retail sector. 

In 2014, American leasing markets witnessed widespread absorption and recovery. Vacancies across all asset types fell and, with a relatively robust employment, rental rates increased, driving values higher. 

We must remind ourselves that a good deal of this recovery in rents and asset values is driven by the continued Federal Reserve policy of low interest rates. 

With the end of quantitative easing in the second half of 2014, we should start to see a gradual stabilization in bond rates and may begin to see a slight uptick in related borrowing costs as lenders begin to price-in forward rate increases. 

However, real estate remains a preferred asset class for most institutional investors – domestic and foreign – and the yields on quality assets remain well above comparable-risk bonds. As such, we feel that the demand for real estate investments will be able to withstand a gradual uptick in borrowing costs that will likely occur in 2015, and demand for assets will continue to outpace supply.

In office leasing, look for further improvement in overall fundamentals, 
for vacancy levels to maintain their gradual decline, and for rent growth throughout the year to drive values even higher. 

In the multi-family sector, vacancy may begin to creep upward in some markets, although we forecast this sector will continue to perform well. 

Retail continues to reconfigure itself to better compete with the still burgeoning online market, and we see excellent opportunities for well- located power centers and community centers. Resilient absorption rates and receding vacancy characterized the sector in 2014. 

It is worth noting that in addition to labor-market improvements, consumer confidence is at its highest level since the Great Recession. 

On the industrial front, supply-chain efficiencies and changing retail patterns are driving the need for more warehouses, distribution centers and storage facilities. 

Tight market conditions and a dearth of big-block opportunities are prompting warehouse construction by large occupiers such as, which has projects proceeding in multiple U.S. markets. 

The combination of economic growth and e-commerce, along with 
New Panamax-capable ports, will drive gains in industrial markets in 2015.

Overall, while many global factors may impact specific sectors of U.S. real estate markets in the near term, the maturing economic recovery has led to tightening availability in all sectors and positioned U.S. commercial real estate as the strongest in the world.

For more insights and detail for 46 markets worldwide, please check our 2015 Canada, U.S. and U.K. Forecast now available at .   You can also view my 3-part Videocast on the forecast.

Sunday, January 18, 2015

Canadian Commercial Real Estate Sector Will Face Headwinds in 2015

by Mark E. Rose (Toronto)

As we prepared our 2015 Canada Forecast report we made a key discovery on the Canadian marketplace.  After a terrific 2014 – with better-than-expected GDP growth and an unemployment rate that flirted with pre-recession levels at year-end – Canada's commercial real estate sector will face some headwinds in 2015. A weakening global economy, sliding oil prices, burgeoning development and a possible U.S. Federal Reserve-led interest-rate hike will create both risk and opportunity.

On the office front, changing demographics, technology and increased workspace efficiency are transforming Canadian market dynamics. To meet demand, landlords are offering new development and refurbishing existing product to remain competitive, with more than 22 million square feet under construction across Canada at year-end 2014. As a result, the Canadian office market vacancy rate is anticipated to rise to 10% from 9.4% by year-end 2015.

Although landlords will hold firm on rental rates, they'll be under pressure to increase incentives to retain and attract tenants.

Some of the most significant trends relate to retail. The retail landscape continues to change as a result of both urban intensification and adaptation to e-commerce.

Major mall owners and retailers are working to broaden the consumer experience, with bricks-and-clicks shopping options and new dining experiences, something not available through the Internet. Some retailers, including SmartCentres, Walmart and IKEA, are testing pick-up options for customer orders made electronically, to compete against online giants such as Amazon.

These trends spill over into the industrial real estate market. Larger, speculative, new industrial projects are aimed at major domestic and U.S. retailers planning to expand or establish distribution networks as part of e-commerce and omni-channel strategies.

While leasing will remain steady, new development will lift the national industrial vacancy rate slightly by year-end 2015. Growing demand from the U.S. and a weaker Canadian dollar clearly benefit the export sector. However, declining oil prices and volatility in global energy demand could put pressure on resource-based Western Canadian markets.

Investment continues to be driven by a healthy level of dispositions in most Canadian markets, with an estimated $25 billion of commercial real estate sold through all of 2014. 

REITs have lost some steam, but pension funds and private investors have filled the void, keeping demand high and cap rates low for core assets. Historically low yields and limited supply will continue to lead some Canadian institutional capital abroad, especially to the U.S.  Anxious capital will weigh core versus value-add opportunities in light of escalating development, potential moderating of rental growth and higher interest rates. This may force some over-leveraged Canadian owners to sell, spurring a new wave of transactions and, ultimately, a re-pricing of assets.

For more insights into the year ahead as well as detail for 46 markets worldwide, please check our 2015 Canada, U.S. and U.K. Forecast, now available at .

And  please watch for part 3 of my blog over the next few days, on the outlook for the U.S. commercial real estate market.

You can also click here to view my 3-part 2015 Commercial Real Estate Forecast VIDEOCAST, covering global and North American market trends: 

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.