Monday, January 28, 2013
Avison Young's 2013 North American Forecast
By: Mark E. Rose (Whistler, BC)
Avison Young has just released its annual forecast of the Canadian and United States commercial real estate markets. Overall, we are seeing 2013 as a year to position for the future, looking much like 2012 -- but without the Mayan “end of the world” threat.
The North American real estate landscape was a bumpy one in 2012, with wide variations among markets and asset classes. We saw robust growth in the oil and gas regions, relative stability in the major coastal “gateway” markets, and a nascent revival in industrial markets, thanks to a manufacturing sector that began to offer glimmers of hope in 2011.
We are forecasting a similar scenario for 2013, including market specific highs and lows, and no discussion of the earth spontaneously combusting.
Against a global backdrop of financial uncertainty stemming from continuing issues with stability in Europe, uneven performance in China, the debt ceiling and “fiscal cliffs” that seem to be manufactured daily in the United States, and potential plateauing in Canada, North American real estate markets still appear to be the most stable – with a healthy balance of risk and opportunity.
We believe that the real estate community will – and should – position and reposition to take advantage of what will likely be an environment that is clear and healthier by 2014.
This is not to say that we should write off 2013, or sit on the sidelines. Quite the opposite: there is much to be transacted in 2013 while strengthening positions for the future, as economic and political issues in the United States and Europe see some form of resolution.
Most economists predict that Canada and the United States will grow their respective economies, as measured by Gross Domestic Product, at the rates of 2% and 2.8%, respectively. These rates are still anemic and have some observers worried. However, considering all of the economic and political uncertainty in the world, these rates should be considered positive and definitely on the right track.
What we at Avison Young have been advising for the last three years will continue to be our mantra: stay patient, risk-manage strategy on the buy-side, and take advantage of off-market and distressed opportunities when they present themselves. If selling, do not be afraid to take some profits. Core assets in the major markets are highly sought-after and, therefore, aggressively priced when up for competitive bid. Multi-family and high-end retail are favored assets, but significant office and industrial transactions are occurring. Plenty of opportunities can still be found in off-market transactions, if one knows where to look.
Let’s look more closely at the investment climate.
Starting in Canada, the shortage of product (as evidenced by REITs buying portfolios and private funds buying REITs) and very low current vacancy rates suggest that pricing will continue to climb given significant pressures created by the demand side. This, even though the large development pipeline may temper rent growth. The strong Canadian dollar is a problem for the domestic economy, though positive for Canadian institutions going global – a trend that we expect to increase in 2013. These factors, combined with pervasive condo overbuilding, are resulting in an “Are we at the top?” question north of the border.
On the other hand, in the United States, the early signs of a housing recovery are triggering the question: “Are we starting to bounce off the bottom?” The lack of development is providing confidence for investors making value-add acquisitions, and core class A product is expensive everywhere.
Thus, as Canada appears to have reached a short-term top in pricing, the United States is just beginning to get its sea legs. Assuming Washington can reach agreement and avoid inducing a recession, all signs point to an economy and a real estate environment that has plenty of capacity to recover and grow.
On the occupancy front, as we begin 2013, we see that leasing generally remains tilted in favor of the occupier, except in select oil and gas cities such as Houston and Calgary. Vancouver and Toronto are fairly balanced as well. However, most other markets have either been flat-to-down or in unstable recovery mode. We have not seen extraordinary growth in rental rates or a huge reduction in vacancy in any major market in North America. Instead, we continue to see markets that are poised for positive absorption and rental growth when global factors and benchmarks turn positive and decision-makers finally take action. However, there is still too much pessimism and uncertainty in the system for a full-blown recovery. It wants to happen, but confidence needs to lead the way.
And based on these trends, what we are recommending to clients is:
* First, focus on building capital positions in 2013, perhaps selling non-strategic assets to fund a war chest; and arrange for access to additional debt and equity, as 2014 appears bright.
* Second, continue to execute on current plans in 2013 as the environment is likely to remain stable. Re-balance investment portfolios according to a five-year strategy horizon. If financing or re-financing, seek longer-term maturities at today’s unprecedented low rates.
* Third, adjust corporate real estate occupancy. Alternative workplace strategies are the norm now, and corporations are well-advised to address the inefficiency of utilizing only 40% of their space on a day-to-day basis. State-of-the-art workplace strategies will pay for themselves.
The North American and world economies will face challenges in 2013, but if the pundits are correct, we will address these issues and move past stagnation and government paralysis to exit 2013 with more clarity and the momentum to invest and grow.
For more detail, a copy of the full 2013 Forecast report, including reviews of office, industrial, retail and multi-family trends from 30 major markets across Canada and the United States, is available here on our website:
Avison Young’s 2013 Canada US Forecast Report:
Or view my Videocast Message of the Forecast here:
Avison Young CEO Mark Rose’s Q1 2013 Commercial Real Estate Forecast videocast:
Posted by Mark E. Rose, AY Toronto at 3:01 PM