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Tuesday, January 20, 2015

U.S. Market Conditions Spark Optimism

by Mark E. Rose (Toronto)

At Avison Young, we believe that improving conditions bode well for U.S. commercial real estate in the year ahead.  We’re basing this strong belief on the findings of our 2015 Canada, U.S. and U.K. Forecast

Why are we so bullish?

The U.S. economy expanded further in 2014 with business investment bolstering economic progress. The national unemployment rate was less than 6% near year-end and job growth accelerated with employment reaching pre-recession levels. The recent drop in oil prices could hurt energy-driven markets, such as Houston, but will benefit consumers and the retail sector. 

In 2014, American leasing markets witnessed widespread absorption and recovery. Vacancies across all asset types fell and, with a relatively robust employment, rental rates increased, driving values higher. 

We must remind ourselves that a good deal of this recovery in rents and asset values is driven by the continued Federal Reserve policy of low interest rates. 

With the end of quantitative easing in the second half of 2014, we should start to see a gradual stabilization in bond rates and may begin to see a slight uptick in related borrowing costs as lenders begin to price-in forward rate increases. 

However, real estate remains a preferred asset class for most institutional investors – domestic and foreign – and the yields on quality assets remain well above comparable-risk bonds. As such, we feel that the demand for real estate investments will be able to withstand a gradual uptick in borrowing costs that will likely occur in 2015, and demand for assets will continue to outpace supply.

In office leasing, look for further improvement in overall fundamentals, 
for vacancy levels to maintain their gradual decline, and for rent growth throughout the year to drive values even higher. 

In the multi-family sector, vacancy may begin to creep upward in some markets, although we forecast this sector will continue to perform well. 

Retail continues to reconfigure itself to better compete with the still burgeoning online market, and we see excellent opportunities for well- located power centers and community centers. Resilient absorption rates and receding vacancy characterized the sector in 2014. 

It is worth noting that in addition to labor-market improvements, consumer confidence is at its highest level since the Great Recession. 

On the industrial front, supply-chain efficiencies and changing retail patterns are driving the need for more warehouses, distribution centers and storage facilities. 

Tight market conditions and a dearth of big-block opportunities are prompting warehouse construction by large occupiers such as Amazon.com, which has projects proceeding in multiple U.S. markets. 

The combination of economic growth and e-commerce, along with 
New Panamax-capable ports, will drive gains in industrial markets in 2015.

Overall, while many global factors may impact specific sectors of U.S. real estate markets in the near term, the maturing economic recovery has led to tightening availability in all sectors and positioned U.S. commercial real estate as the strongest in the world.

For more insights and detail for 46 markets worldwide, please check our 2015 Canada, U.S. and U.K. Forecast now available at www.avisonyoung.com .   You can also view my 3-part Videocast on the forecast.

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