With summer now well behind us, please find below Avison Young’s summary overview of Q4 market conditions in North America.
In the U.S., all eyes and ears have turned to the looming
presidential election and the “fiscal cliff,” and in Canada, astonishingly, to rising consumer debt levels. These
factors, coupled with the on-going debt crisis in Europe and the potential
slowdown in China, are undoubtedly
altering business operations, which have and will temper real estate decisions
affecting the leasing and investment markets.
As
I will discuss, there are trends in the sector that directly impact how
positive or negative our markets will be. On the one hand, the lowest interest rates
in recent history have put a floor underneath fundamentals and valuations. On the other
hand, there is nowhere to go but up for interest rates. Despite this cheap
capital, the U.S. has not seen significant increases in transaction velocity
and continues to bounce along a cyclical trough.
Canada
has used its stable banking system and financial strength to weather the storm
and provide liquidity, which has led to a
recovery in investment activity and pricing that is meeting or exceeding 2007
levels.
Said
differently, North American investment opportunities most likely
shift to the U.S., which is bottoming, and away from Canada where risk is inherent and pricing is most
likely at a near-term top.
As
always, we communicate with clients to advise and provide solutions, and when we believe there is a need for them to
review and adjust their investment strategies.
So let’s move to the
details:
The
labour market is a key barometer for us and something we watch carefully, especially
with rising consumer-debt levels and the potential rise in interest rates, and
the impact they may have.
Following
strong gains in the spring, and a lull in the summer, Canada put together
two solid months of job creation to end the third quarter of 2012 on a positive
note. In all, 52,000 positions were created, mainly in full-time work.
However, the unemployment rate increased 10 basis points from the previous
month to 7.4% as more people participated in the labour market.
The
headline number of 52,100 jobs in September puts Canada on much more solid
footing than most of its peers. Compared with 12 months
earlier, employment is up 1% or 175,000, driven by an increase of 157,000
(+1.1%) in full-time work.
Now on to the real estate
markets….
Apart
from some soft patches here and there, we are not reporting any material slowdown
in the commercial real estate sector in Canada. The market, for now, remains
healthy.
While
leasing velocity has been steady to date (which is not entirely surprising
given the sound fundamentals), we are surprised at the amount of real estate
that continues to change hands. Though we haven’t finalized third quarter
figures yet, the first half of the year has been very good for Canada, with almost
every market reporting higher investment dollar volumes over the same
period one year ago.
Nearly
$12 billion in commercial real estate assets changed hands in the first half of
2012 – up 26% compared with the first half of 2011. While
the investor profile is varied, REITs remain very active, often competing
and outbidding pension funds and life companies for some of the most prized
assets in the country.
Given
the current deal pipeline, continued sound underlying market fundamentals, and
barring any deals being pushed into next year, 2012’s investment volumes may
very well match, if not exceed, the previous peak of $24 billion in 2007 – so
stay tuned!
As
I mentioned earlier, this could be the sign of a near-term top in the markets.
Now let’s look at the U.S….
The
typical summer slowdown coupled with the upcoming presidential election and
lingering economic woes translated into a loss of momentum and lackluster
performance for many of the U.S. commercial real estate markets.
In
mid-October, the Bureau of Labor Statistics released its regional and
state unemployment summary and reported a national unemployment rate for
September of 7.8%, 1.2 percentage points lower than in September 2011. Unemployment
is down, but we are not yet feeling the positive impact of job growth.
In 2012, employment growth has averaged
146,000 per month, compared with an average monthly gain of 153,000 in
2011.
The largest year-over-year job increases
occurred in Texas (+262,700 jobs), followed by California
(+262,000 jobs) and New York (+125,000 jobs.) Not surprisingly, these
are major real estate markets that are doing quite well on a relative basis
The
10-billion-square-foot U.S. office market stalled in the third quarter of
2012, with the 12.1% vacancy rate unchanged from the previous quarter, and
down slightly from the year-end 2011 rate of 12.3%.
On
a positive note, office construction remains constrained, and the volume
of new buildings being delivered has remained well below the historical average
since 2009.
The
20.6-billion-square-foot industrial market showed further improvement
during third quarter, ending with a 9.1% vacancy rate -- and, as with office, development
remains well below historical levels.
The
U.S. also continues to attract foreign investment. As of October, Canadian
investors dominated, with investments in the U.S. totaling $3.5 billion.
Illustrating
how unevenly markets in the U.S. are performing, here are some highlights from
select Avison Young major office markets:
A
negative trend ― Washington, DC, one of the country’s
safe havens of investment and strong commercial real estate fundamentals, felt
the slowdown with sales volume and leasing velocity both lower so far in 2012.
A positive trend ― In Chicago’s 1.1-billion-square-foot
industrial market, 2.3 million square feet of construction is underway ― including
speculative construction!
A neutral trend ―
In Manhattan, the office
market showed little movement through the third quarter as vacancy rates were
stable and overall absorption was relatively flat.
If the U.S. resolves the fiscal cliff by the
end of the year and a pro-business attitude is adopted out of Washington, the
possibilities and opportunities for recovery and growth are exciting. And given the size of the U.S.
market, any positive momentum in U.S. capital flows would have an
equally positive impact on Canadian and European capital flows.
Until then, and despite the safe-haven status of the U.S., most clients will still be worried
about investing in an uncertain U.S. environment and, hence, will continue to
gravitate to core products in core markets throughout the U.S. and Canada… and....... will have their fingers firmly on the pause
button.
Please also view our inaugural Fall 2012
Canada U.S. Commercial Real Estate Investment Review on our website at www.avisonyoung.com
You can also listen to this Q4 2012 Audiocast
Message on our website at www.avisonyoung.com
