By
Mark E. Rose (Toronto)
I recently delivered Avison Young’s Q2 2015
audiocast message, discussing commercial real estate trends in Canada, the
U.S., U.K. and Germany http://www.avisonyoung.com/media-room/ceo-video-audiocasts . A couple of days ago, I shared with you some of the Canadian trends.
Today, I would like to share some of the U.S., U.K. and German market findings.
Starting with the
U.S....
As a preview to Avison
Young’s Spring 2015 Canada, U.S. and U.K. Industrial Market Report, to
be released this week, the 9.2-billion-square-foot (bsf) U.S. industrial sector
demonstrated strength in all of our firm’s major markets year-over-year. In
spite of a sharp uptick in development, rents are rising and demand for class A
product has been broad based. As a result, several markets report a return to
landlord-friendly conditions, or nearly so.
Specific report
highlights include the following:
·
Atlanta has 17 million square feet (msf) under
construction, half of which is being built speculatively.
·
Detroit’s industrial market continues to
improve, and vacancy dropped to the single digits, falling by 170 basis points
(bps) year-over-year to 8.4%.
·
Industrial powerhouse Los Angeles reported a
sub-4% vacancy rate – its lowest level in over a decade – and has 18 msf under
construction.
·
The 10.5-bsf U.S. office market reports similar
improvement, with overall vacancy falling below 11%, compared with 11.5% one
year ago.
U.S.
development on the rise
Although 2015 overall
U.S. commercial real estate development remains well below historical averages,
it rose sharply in the past year. As of first-quarter 2015, there was 116 msf
of office inventory under construction. Given the strength of the growing U.S.
economy and the level of preleasing in projects under construction, we expect a
nominal impact on the vacancy rate from the expanded development pipeline.
U.S.
investment sales off to strong start
Investment sales in the
U.S. are off to a strong start in 2015. Through February, total volume exceeded
$88.4 billion and was on pace to surpass the 2014 figure. Office sales alone
accounted for 25% of the two-month total. Foreign investor interest in U.S. real
estate continues, with cross-border sales year-to-date accounting for more than
$26 billion. Thus far, Singapore has invested $8 billion, leading all other
countries by far. Canada is second with $4 billion; however, Canada leads
acquisitions of office properties year-to-date.
U.K.
recovery puts pressure on London properties
Now, let’s take a look
at the U.K. market, where Avison Young has offices in London and Thames Valley.
The U.K. economic
recovery continues, but it is placing new pressures on property markets – especially
in London and England’s South East, where the issue now is about managing
growth effectively. This trend is clearly demonstrated by press headlines about
rental growth and new rental “highs” across the region.
In the Central London
office market, the West End is now the most expensive location in the world. In
its St. James submarket, a series of deals are expected to cement the £150 per
square foot (psf) yearly rental rate as the new benchmark rent, although small
suites have hit as high as £185 psf. The previous record rent was £140 psf, set
in 2007.
We are also seeing the
revival of Regent Street shopping, which has attracted affordable luxury brands
due to the availability of large units. The next phase of this trend will be
the move of key international retailers south of Piccadilly and into Lower
Regent Street.
Motorway
location carries premium
For industrial
occupiers, being inside the M25 orbital motorway carries a premium, with grade
A property securing monthly rents up to £13.75 psf (Park Royal) and Heathrow
hitting £13 psf for the first time at the end of 2014. In our opinion, rents
will increase by a further £0.25 psf over the next 12 to 18 months.
In the U.K. investment
market, where much rides on confidence, many overseas buyers may take a wait-and-see
approach. Like it or not, we live in interesting times.
German
debt market highly liquid
To wrap up, here are a
few key takeaways from Germany, where Avison Young now has offices in
Frankfurt, Munich and Duesseldorf.
The German economy is
strong, with record low unemployment and inflation rates and higher wage
increases than in previous years. Meanwhile, the 10-year government bond rate is
at an all-time low, and the debt market is highly liquid.
German
investment volume remains strong
Consequently, first-quarter
2015 investment dollar volume remained as strong as it was in the first quarter
of 2014, reaching almost €10 billion, with 42% of that total driven by foreign
investors. There is a shortage of trophy-class product, and cap rates for
retail and residential core product are in the 2.5% to 4% cap rate range.
Office cap rates are in the 4.5% to 5.5% range, and industrial has the highest
yield compression year-over-year, with cap rates between 6% and 6.5%.
German
industrial spec development climbs
The industrial market
is strong throughout Germany with increasing speculative space development.
However, the office leasing market is weaker than in previous upswing cycles,
as tenants tend to stay in current locations and extend existing occupancy.
Speculative office development is low. In seven major German cities, the residential
market is on fire, fuelled by population growth and ultra-low refinancing
costs. The retail market also remains strong, supported by wage increases and
low inflation.
