In
both the U.S. and Canada, the recovery is progressing, but headwinds from
fiscal constraint, tax increases and reduced spending at the federal and local
levels are restraining growth to below normal levels. In the U.S., the
combined uncertainty contributed by discussion of “tapering” by the Federal
Reserve and delay in the implementation of Obamacare are adding to the
uncertainty facing employers, and show up in disappointing job growth levels
even as the stock market continues to push to new highs.
Employment stagnant, but with bright spots
The
Bureau of Labor Statistics released its regional and state unemployment
summary last week and reported a national unemployment rate for May of 7.6% – virtually
unchanged from what we reported last quarter.
That
said, several states demonstrated significant year–over-year improvement (from
June 2012 to June 2013) and are worth noting:
·
California’s unemployment rate dropped to 8.6% from 10.6%, the largest
U.S. decrease;
·
Nevada dropped from an 11.6% unemployment rate to single digits at
9.6%, although the rate remains the highest among the United States;
·
Florida improved to 7.1% from 8.8%; and,
·
In New York, the unemployment
rate fell to 7.5% from 8.7%.
Tenants remain in charge, even as vacancy improves
As
of the second quarter, many major U.S. office markets remain over-supplied with
tenant-favorable conditions, even while tours and deal velocity have increased
and several metro areas have moved into equilibrium.
Tenants
are looking to control occupancy costs as they move, by employing
collaborative work environments and reducing the
overall-square-foot-to-employee ratio. With the ongoing tenant “flight to
quality,” look for older vacant office properties to be converted to other
uses, razed or substantially upgraded.
On
the office side, vacancy for the 10.3-billion-square-foot U.S. market
decreased to 11.7% at the end of second quarter – representing another quarter
of ongoing improvement from levels just above 12% for most of 2012. Avison
Young anticipates that vacancy will continue on its downward trajectory through
year-end 2013.
Meanwhile,
the 20.8-billion-square-foot U.S. industrial market ended the second quarter
with vacancy decreasing to 8.5% from 9% in the third quarter of 2012, with
construction and deliveries below historical levels. In fact, in the first two
quarters of 2013 alone, net absorption was more than double the amount of
product delivered. The warehouse sector, comprising 18.6 billion square feet,
stood at 8.1% vacant at the end of the second quarter.
Investment sales continue steady improvement, and Canadian
investor appetite in U.S. grows
The
U.S. investment market continues to improve this year, with sales volume
through May of nearly $115 billion for all property types. This compares
favorably to sales of $91 billion for the same period in 2012, and has
increased each year since 2009 when January-May sales volume only reached $20.4
billion.
According
to Real Capital Analytics, Canadian investors purchased $5.4 billion of U.S.
assets year to date and are on pace to eclipse 2012’s transaction volume of
$8.8 billion. Manhattan (with Canadian transaction volume of $988
million) and Los Angeles (at $897 million), have garnered the most
Canadian capital thus far this year. Seattle,
Raleigh-Durham and Atlanta round out the top five capital
destination markets.
Now
a look at Canada…
As
we enter the “dog days of summer,” market fundamentals across most Canadian
markets remain relatively stable. However, tight market conditions in
major downtown office markets (Vancouver, Calgary and Toronto)
are challenging for tenants as they are faced with limited space options
and rising rental rates, even while favourable space and rental-rate
alternatives are commonplace in select suburban markets (such as suburban Toronto),
where demand has not kept pace with new supply.
Additional supply beginning to impact vacancy in some market,
but landlords still rule
We
are currently finalizing our figures for Avison Young’s upcoming Mid-Year
2013 Canada, U.S. Office Market Report. Canada’s office vacancy rate
finished the first half of 2013 just shy of 8% – a rise of almost 80 basis
points (bps) from one year ago.
Canada’s
downtown office markets collectively posted 5.6% vacancy compared with 5.2%
last year. (In contrast, the U.S. downtown vacancy is coming in at 12.5%.) Given
the current low vacancy rates in Canada, and with new supply in most markets 18
to 24 months away, especially in downtown core locations, landlords are
constantly pushing rents higher.
Turning
to Canada’s suburban markets, vacancy has jumped an estimated 130 bps to 10.6%.
This is despite positive performance in Regina, Quebec City and Ottawa, which are posting
vacancy well below the national average.
Developers
are very active, with more than 21 million square feet (msf) under construction
across the country – 4 msf more than last year, with Toronto and Calgary
accounting for more than half of the total office space construction underway.
Through the first six months of 2013, downtown is outpacing suburban
office construction with each market segment having an additional 2 msf under
development compared to one year ago.
The
heightened downtown construction levels in such markets as Toronto and Calgary
are raising concerns over the markets’ ability to absorb not only the remaining
new supply, but also the residual vacancy left behind by relocating
tenants.
Employment bumpy but trend is positive
Switching
to the labour front, despite May’s surprising and massive 95,000 job surge,
(which was the biggest gain in 11 years and just shy of the record of 95,100
set in Aug 2002), in June, employment was virtually unchanged with the
unemployment rate remaining at 7.1%. In the first half of 2013,
employment growth averaged 14,000 per month, slower than the average
of 27,000 in the last six months of 2012. Over
this 12-month period, employment grew by 1.4% (+242,000).
Investment volumes continue to increase
We
haven’t finalized overall sales figures for the first half of the year yet, but
the investment market in Canada remains busy. We can report first-half
investment volumes for Toronto, a barometer for the rest of the country,
with $6.5 billion worth of commercial real estate changing hands,
up 15% over the same period one year ago. In the most recent quarter,
sales volumes doubled for office, industrial and retail investments compared to
the first quarter.
While
Canadian REITs and Pension Funds continue to bid up assets north of the border,
they also continue to deploy their growth strategies south of the border in
markets such as Houston, Dallas, Atlanta, Phoenix, Seattle and Portland,
to name a few.
The
recent rise in interest rates (and bond yields) may curb capital flows and halt
any further cap rate compression. This will certainly have an impact on the
REIT sector where unit prices have come under pressure of late. We will be
monitoring this situation closely as we move into the second half of the year.
We
hope you enjoy the rest of your summer, and we look forward to helping you meet
your real estate goals as we enter the second half of the year.
