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Monday, August 18, 2014

Canada maintains sub-10% office vacancy rate, while U.S. market shows improvement

By Mark E. Rose (Toronto)

Canada’s overall office market softened during the 12-month period ending at mid-year 2014, while the U.S. office market experienced strengthening tenant demand, positive net absorption and falling vacancy rates. Despite rising slightly, Canada’s average vacancy of 9.2% points to the ongoing health of the Canadian office market, and still compares favourably to the U.S. at 13.5%. The gap between Canadian and U.S. vacancy rates has narrowed during the past year.

These are some of the key trends noted in Avison Young’s Mid-Year 2014 Canada, U.S. Office Market Report, released last week.

Click here to view the full report.

The report covers the office markets in 39 Canadian and U.S. metropolitan regions: Calgary, Edmonton, Guelph (Southwestern Ontario), Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Austin, Boston, Charleston, Chicago, Columbus, Dallas, Denver, Detroit, Fairfield County, Houston, Las Vegas, Long Island, Los Angeles, New Jersey, New York, Orange County, Philadelphia, Pittsburgh, Raleigh-Durham, Reno, San Diego County, San Francisco, San Mateo, South Florida, Tampa and Washington, DC.

With improving economic conditions in the U.S. and Canada experiencing moderation, office markets across North America remain healthy – with strong indicators for downtown areas. As we have seen with industrial markets, quite a bit of momentum is building in the U.S., as increasing demand from tenants and falling vacancy rates have led to a substantial increase in new development. Construction is partially being driven by tenant demand for modern, efficient workspaces that are in transit-served and mixed-use environments.

Office job growth in the U.S., led by business and professional services employment, has continued to expand this year, buoying confidence in the leasing and investment sectors, and leading to rising rental rates and strengthening statistical performance for office product. Some Canadian markets have had the wind taken out of their sails lately, but an uptick in cross-border activity could help rectify the imbalance between supply and demand that some markets are witnessing, as considerable levels of new supply are scheduled for delivery over the next several years.

North America’s office markets are well-positioned to show further growth for the remainder of the year and into 2015. Even markets that have seen slower recovery, negative absorption or oversupply present opportunities for our tenant and investor clients.

According to the report, of the 39 office markets tracked by Avison Young across North America, 23 markets saw vacancy rates fall by varying degrees during the 12-month period ending June 30, 2014. The difference between the two countries’ year-over-year improvement was quite apparent as two-thirds of the U.S. markets posted vacancy decreases.

Collectively, the Canadian office market registered an overall vacancy rate of 9.2% at mid-year 2014 – up from 8% at mid-year 2013 – and is trending towards the recent recessionary peak of 9.9% in mid-year 2010. Though still in double-digit territory, the U.S. office market vacancy rate is trending lower, finishing the first half of 2014 at 13.5%, down from 14.2% one year earlier.

Improving market fundamentals in the U.S. office sector are a welcome respite, and although the recovery has not been moving as quickly as we would like it to, metrics are trending in the right direction. An improving U.S. economy and commercial real estate sector – in this case, the office sector – bodes well for Canada.

The report shows that more than 83 million square feet (msf) was under construction across Canada and the U.S. at mid-year 2014, up from 66 msf one year prior. In Canada, downtown areas account for roughly two-thirds of construction activity, whereas in the U.S., approximately 61% is focused in the suburbs. 

Click here to listen to my Q3 2014 audiocast. 

Monday, August 11, 2014

Rents continue to rise in London

By Mark E. Rose (Toronto)

As a follow-up to my blogs on the North American commercial real estate markets last week, I’d like to now have a closer look at the U.K., where Avison Young opened two offices this spring, in London and Thames Valley.

In Central London: The current office vacancy rate is 7.2%, with a sub 5% level in some districts, such as Victoria, Bloomsbury and Holborn. The average West End headline rents are £100 per square foot (psf), up from £65 psf at the low point in the market in the third quarter of 2009. The average City headline rent is £60 psf, up from £42.50 psf from that third-quarter 2009 low point.

There is 4.5 msf in the development pipeline, but take-up for new-build space was 5.5 msf in the last year, suggesting we are moving into a period of mismatch between demand and supply. Therefore, Central London offices’ shortfall is set to become acute from 2015 onwards, and this trend suggests that rents will continue to increase.

On the investment front, yields in prime office investments in the West End have remained steady at 3.75%, while yields in the City have hardened to 4.5, the lowest level since the second quarter of 2007. £2.2bn transacted across London in the first quarter of this year. Private Investors are prolific in the West End, transacting more than 60% of the deals in the first quarter for a total of £454 million. In the City, investment is led by pension and life insurance companies, which transacted £404 million, or approximately 35% of the total volume, in the first quarter.

In the South East, the vacancy rate ranges from 6.8% to 8.3%, and take-up is being led by the financial and business services, who represent 28% of the market. Rents range from £18 psf in Basingstoke to £32 psf in Maidenhead. Prime headline rents increased by an average of 5% over the past 12 months, and they are expected to continue increasing due to the ripple effect of tenants being priced out of Central London. On the investment front, there is a lack of buying opportunities in the South East, putting pressure on the pricing, and yields have therefore hardened to 5.25%. UK Funds remain the dominate buyer in the South East market, but overseas buyers are starting to compete there.

Thank you and please watch for the Avison Young Mid-Year 2014 Canada, U.S. Office Market Report next week. 

You can also now listen to my Q3 2014 Commercial Real Estate Audiocast “New office supply outpacing demand in Canada, int’l capital continues to favour U.S., rents continue to rise in London” here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts

Sunday, August 10, 2014

International capital continues to favour the U.S.

by Mark E.Rose (Toronto)

As a follow-up to my blog last week, which offered a glimpse into our Mid-Year 2014 Canada, U.S Office Market Report, to be released next week, I would like to turn to the U.S. now…

All but two U.S. markets recorded positive net absorption for the 12-month period ending June 30, 2014. The lack of construction and an uptick in tenant demand resulted in vacancy decreases for the majority of U.S. markets – a trend we expect to see continue through year-end.

At mid-year 2014, the U.S. office vacancy rate was 13.5% compared with 14.4% a year earlier. Meanwhile, construction volume currently averages only about 1.5% of the existing inventory base. However, four markets have disproportionate shares of the nearly 60 msf underway in the U.S. – and together represent 56% of the total square footage under construction.  Energy-driven Houston tops the chart with 13.7 msf, or more than 23% of the U.S. construction total, while New York ranks second with 13%, or 7.7 msf. Dallas and Washington, DC each account for roughly 10% of the total, with 5.5 and 5.9 msf, respectively, under construction.

On the investment side, international capital continues to prefer American markets. To date, international buyers have invested more than $26 billion in 500-plus properties. This total compares favorably with 2013, when nearly $37 billion was invested in roughly 900 properties during the year. Thus far, Manhattan, Boston, Los Angeles, and Washington DC have been the top destinations for international capital this year. And, according to Real Capital Analytics, Canadian buyers remain the investment leader by far and, to date, have purchased $7.5 billion worth of assets in 2014. Canadian capital has also displayed a preference for Manhattan and Boston.

Please watch for my blog tomorrow on rents continue rising in London

You can also now listen to my Q3 2014 Commercial Real Estate Audiocast “New office supply outpacing demand in Canada, int’l capital continues to favour U.S., rents continue to rise in London” here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts

Thursday, August 7, 2014

New office supply outpacing demand in Canada

By Mark E. Rose (Toronto)

In this blog post, I would like offer a glimpse into our Mid-Year 2014 Canada, U.S Office Market Report, to be released next week.

Canada’s office vacancy rate finished the first half of 2014 at 9.2% – up 120 bps from one year ago. This shift is not entirely surprising and is largely attributed to new supply outpacing demand, coupled with workplace strategies resulting in the release of excess space via a burgeoning sublet market. However, the ongoing rationalization of space is something we will watch carefully, as it will moderate future absorption levels. Remember the old cliché: Past performance is no indication of future results.

Collectively, Canada’s downtown office markets posted a vacancy rate of 7.2% at mid-year 2014, compared with 5.7% 12 months ago – with vacancy rising to varying degrees in all but two downtown markets, namely Guelph and Regina. In Canada’s suburban markets, vacancy jumped an estimated 120 bps to 11.8% at mid-year 2014 – with Quebec City the tightest, coming in at just under 5%.

However, any demand-supply imbalances experienced by the markets to date have not deterred the development community, which is reflected in construction figures. Nationally, almost 6 million square feet (msf) of new office space was delivered over the past 12 months. Of this 6 msf, approximately three-quarters was completed in the suburbs – with Vancouver, Calgary and Montreal accounting for two-thirds of the completed area.

Through the first six months of 2014, more than 22 msf was under construction across Canada, with downtown product outpacing suburban construction by nearly a two-to-one margin. This discrepancy reflects the ongoing phenomenon of major employers seeking to be closer to the Millennials who are living and working in increasing numbers in major urban cores.

Please watch for my blog tomorrow on U.S. office vacancy expected to dip further…

You can also now listen to my Q3 2014 Commercial Real Estate Audiocast “New office supply outpacing demand in Canada, int’l capital continues to favour U.S., rents continue to rise in London” here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts

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