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:
