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Friday, January 16, 2015

Time is Right to Exploit Market Opportunities

by Mark E. Rose (Toronto)

Avison Young’s 2015 Canada, U.S. and U.K. Forecast shows that most of the major markets are currently operating in a very positive, Goldilocks environment with liquidity strong and transactional volumes at high levels; property and employment fundamentals improving; and alternative investment choices offering lower or more volatile yields. 

As I mention in my Videocast this week, these background conditions suggest that now is the optimal time to pause and assess the positives, balance risk, potentially take profits, and redeploy resources to exploit future market opportunities. 

Whether you are a tenant, owner, investor or lender, we are advising our clients to focus on four key factors that will ultimately shape winners and losers from a location and performance standpoint in the years ahead:

First is the long-term level of investment demand for real estate. 

Real estate has earned its place as a core portfolio holding by continuing to produce favourable, stable total returns against alternative investment options. 

In fact, increased allocations – combined with an abundance of capital and historically low cap rates – have pushed pricing in gateway markets to new record levels – in some cases ahead of fundamentals. 

This produces risk, so while global demand remains strong, we advise watching closely for changes in regional demand. 

For example, the slowdown in Asia is resulting in the redeployment of capital into other parts of the world.

The second major trend is the obsolescence of certain types of real estate as the pace of technology adoption increases. Rising automation, e-commerce penetration and urbanization are having a major impact on where work gets done, and the need for traditional amounts of square footage per person is decreasing each day. We'll also see showroom and retail floorplates continue to shrink and transform into multi-brand showcases.

However, the growth of omni-channel distribution, including logistics and data-centre space for online sales, represents an opportunity for retailers to grow their non-traditional real estate, including the supply chain and distribution space. 

The third factor is shifting operational and locational considerations driven by changing demographics, urbanization and transit. Millennials pose the biggest risk – and opportunity – as their behaviours drive future planning. The urbanization of real estate is a real trend, with major developments underway as both millennials and empty-nester baby boomers move to downtown cores and/or close to transit. 

Fourth, and finally, we advise remaining vigilant about shifts in global monetary policy decisions, commodity pricing, interest rates and inflation. 

The pricing boost generated by low interest rates has produced a significant portion of the total returns for real estate investments during the last 15 years and will eventually reverse course. Interest-rate hikes likely will start in the U.S. in 2016, but could begin as early as the summer of 2015.

When you combine the impact of interest-rate changes with volatile oil and other commodity prices, demographic shifts, technological developments, government intervention, rising global conflicts and terrorism, you get uncertainty and, accordingly, opportunity – at every turn. 

Look, we cannot kid ourselves, interest rates and liquidity are at levels that are priced to perfection. Rates cannot go lower and demand cannot get better. Given co-ordination in global monetary policy decisions, these go-go days could continue, but our clients must prepare for change. Inflation, higher interest rates and a repricing of core real estate assets are in the cards. It's just a matter of when, not if, they will occur.

For more insights into the year ahead as well as detail for 46 markets worldwide, please check our 2015 forecast now available at www.avisonyoung.com . And please watch for parts 2 and 3 of my blog over the next few days, on the outlook for the Canadian and U.S. commercial real estate markets.

From all of us at Avison Young, we wish you the very best in 2015 and beyond.

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