Sunday, January 24, 2016
Avison Young 2016 Forecast: Uncertainty may spell opportunity
By Mark Rose (Toronto)
As the books close on 2015, which was another strong year, 2016 opens differently – with some uncertainty and unresolved questions that could impact the way owners and occupiers operate and invest. To successfully navigate the real estate markets in 2016, stakeholders will need to:
· keep a global perspective;
· stay abreast of changes in the broader environment;
· and, increasingly, devise innovative solutions to complex problems.
The global real estate industry has had a tremendous run. It has been more than six years since the Great Recession.
However, while financial and real estate markets look stable as we begin 2016, variables now surfacing could undermine short-term prosperity.
• Click here to view Avison Young’s 2016 Canada, U.S. and U.K. Forecast, which includes detailed commentary on 55 markets in North America and the U.K.:
• Click here to view Avison Young CEO Mark Rose’s 2016 Commercial Real Estate Forecast VIDEOCAST, covering market trends in North America and Europe:
Real estate industry must remain clear-eyed
As reluctant as we might be to acknowledge that we’re entering a period of transition, we must remain clear-eyed. Our industry has always been cyclical, and factors that negatively affect pricing or trading velocity are, in turn, countered with opportunistic buyers and lessees.
At Avison Young, we believe that 2016 will be a very choppy, but ultimately stable, year. It’s important to note the following.
· The U.S. remains in a strong position. Continued economic growth in 2015 solidified the nation’s overall recovery. Nearly every market registered employment growth. This stronger economic performance was reflected in gains across all commercial property sectors.
· Overall office vacancy within the 4.4 billion square feet of inventory in the U.S. tracked by Avison Young declined to 12.4% at the close of 2015, and continued modest improvement is forecast for 2016. Industrial vacancy rates declined to 6.3% at year-end 2015, and tight market conditions have kept rental rates on the rise.
· U.S. sales in 2015 recorded double-digit percentage growth and approached the half- trillion-dollar mark at year-end 2015, although transaction volume did flatten somewhat in the latter part of the year.
· Importantly, long-anticipated, modest interest rate increases mark a return to monetary normalization. An abundance of capital remains available for real estate’s higher yields – and relative stability in the year ahead.
· In Canada, the end of the commodities supercycle, uneven employment growth, disruptive technologies and evolving workplace strategies are testing the country’s otherwise stable commercial real estate sector.
· Canada’s year-end 2015 overall office vacancy rate of 10.6% is expected to rise to 12.2% by year-end 2016, due in part to a continued strong development pipeline. Industrial vacancy remains tight. We anticipate a modest rise to 4.6% vacancy by year-end 2016 from 4.1% in late 2015.
· On the investment front, Canada is awash in capital. Despite a finite investable marketplace, Canada is very much on the investment radar screen, with domestic players increasingly facing off with foreign buyers who are raising their allocations to real estate.
Year will be choppy but stable
Interest rates, elections and the spread of terrorism will continue to dominate headlines throughout 2016. At the top of the list are interest rates and government policy. There are consistent trends in some areas, but uncertainty in others.
In the U.S., interest rate increases mark a return to monetary normalization. The U.S. interest rate increase could actually have a positive impact on the markets. Following December’s initial hike, the Federal Reserve has communicated a neutral stance and worked to alleviate any fears of a rapidly increasing interest-rate environment. This is also a presidential election year, and politics and rhetoric will choke the airwaves.
Canada has lowered its interest rates and employed a low-dollar approach to spur manufacturing. The potential for budget surpluses will give way to government-sponsored investment under new Prime Minister Justin Trudeau.
The United Kingdom continues with a low-interest-rate policy. Economic growth in London and southern regions will continue to outpace the rest of the U.K.; however, the economic ripple effect from the south to the north means that opportunities in the areas of the “Northern Powerhouse” and “Midlands Engine” will only increase.
Germany continues to be the stabilizing force in continental Europe, but shoulders the burdens of the countries of the EU.
And rounding out our Avison Young markets, Mexico is stable and opportunities to grow are available as the country’s economy matures.
Fundamentals, global capital flow remain strong
Turning to the broader environment, fundamentals continue to be generally strong.
Occupiers, other than energy companies, are stable and employment is growing in most sectors. For oil and gas, we may see a prolonged period of very low prices. Once drilling slows (as it will), and weaker regions (such as South America, Africa, and Russia) pass a breaking point, we will see stability and possibly upward movement.
As 2016 begins to unfold, global capital flows remain strong. Cross-border flows are accelerating for many reasons, but foremost is the perceived, or real, lack of opportunities in certain domestic markets. Despite some suggestions that prices are very toppy, investor surveys suggest that these trends are continuing to increase in the short term.
Technology’s impact accelerating
A key trend to watch is technology’s impact on real estate, which continues to accelerate as we head further into 2016.
Tech company valuations and space absorption have reached record levels. Some businesses are moving their operations out of buildings and onto the Web, while others such as hydroponic farming and data storage are expanding rapidly into specialized facilities.
Innovations are almost too numerous to mention. But the growing experimentation and the rollout of real estate apps – especially in the residential and crowdfunding areas – are notable. The same goes for the increasing utilization of cutting-edge materials and modular techniques to construct high-performance buildings for lower cost. But these are just some instances of the vast impact that technology is having on real estate.
Building resilience into our business plans and adapting real estate strategies to evolving demographic, technological and political realities around the world will be critical in the year ahead. For example, with new patterns of terrorism, operations and planning will need to address not only physical, but cyber safety to protect people and enterprise systems. And, more closed international borders could substantially increase costs for global logistics providers and their customers.
The bottom line?
Uncertainty often delivers exceptional opportunities to those who are diligent in anticipating and adapting to it. Our Avison Young professionals can tap a world of expertise to help guide your real estate decisions in these watchful times, and help unlock opportunities lurking amid the uncertainty.
From all of us at Avison Young (www.avisonyoung.com), we wish everyone a happy, healthy and prosperous 2016.
Posted by Mark E. Rose, AY Toronto at 1:46 PM