by Mark E. Rose (Toronto)
Take me out to the ball game!
It is only fitting that, in a year full of upsets, the
Chicago Cubs celebrated their first World Series win in 108 years. The nine
innings of American baseball have become a metaphor for the global real estate
market cycle, but given the many variables of the current climate, just like
the World Series finale, this cycle may be going into overtime.
Redux, or changes ahead?
The commercial real estate industry will end 2016 as
it began – with low interest rates, low cap rates and moderate GDP growth in
most nations. But it does not feel like the same environment heading into 2017.
Rising protectionism and political unrest have introduced a healthy dose of
fear and skepticism as to where we are in the current market cycle and what
comes next. Despite job growth, improving market fundamentals and superior
yields to alternative investments, commercial real estate owners, occupiers and
investors disagree about how long this cycle could – and should – continue.
Pundits have taken both sides of the interest rate
debate – from low rates indefinitely to a gradual return to historical levels
(normalization). Meanwhile, virtually all developed countries piled on
additional debt, ensuring that no government would lead the charge to raise
rates. Economists disagree about how best to proceed, but a majority of
business executives understand that we need to normalize rates one day – and
sooner rather than later. It is hard to conceive a climate with less consensus.
Buyers and sellers used Brexit and the U.S.
presidential election to pause and gather data points. Decision-making might
have slowed in 2016 but, as we discovered while compiling the Avison Young 2017 North America, U.K. and Germany Commercial
Real Estate Forecast (due out January 12, 2017), the appetite
for investment in real estate continues unabated. The overarching themes of
global financial growth from a depressed base and global population topping 10
billion in the next few decades provide strong support for everything related
to real estate. Technology is a game-changer, potentially impacting what, where
and how properties get used and constructed. If history is a guide, technology
– like immigration – has redistributive impacts but can create meaningful
positive economic growth for decades to come.
We will start off from a similar place in 2017. Prices
are at historic highs, liquidity is available, but natural tensions are rising.
Decision-making has slowed and fear of this cycle coming to a close is
stressing financial models and generating negativity. New York-based retail and
housing are examples of city-specific product types that are going through a
correction, but retail and housing in general are alive and well. Investor Sam
(Grave Dancer) Zell is calling a top again, but the timing of such predictions
remains to be seen. It is likely that markets that enjoyed disproportionate
gains earlier in the cycle are taking a pause as investors look more broadly
for opportunities. In a classic cycle, what we would expect next is a wave of
consolidation that pushes prices even higher prior to a broad-based market
reset.
The case for extra innings
Let’s pivot back to the baseball analogy. The widely
held opinion is that real estate is in the seventh inning. At Avison Young, we
disagree. We see something very different. We might be in the seventh or eighth
inning from a pricing perspective, but given the market forces and attributes that
currently exist, we could be in the seventh inning of a very long extra-innings
game for our industry. Real estate is a legitimate investment alternative and
is currently producing higher current yields than stocks and bonds. In
fairness, interest rates are providing support, if not stimulating
over-performance, due to the capital intensity of property investments. As long
as rates hover near zero in most advanced industrialized countries, real estate
will remain a preferred option for pension funds and other global
investors.
Geopolitical events, such as Brexit, are mainly
playing out in the currency markets with the British pound and the euro taking
significant hits against the U.S. dollar. Energy and commodity volatility are
also repricing countries like Canada, whose currency lost ground against the
U.S. dollar. But in each case, the change in currency has made these countries
more competitive for exports and, effectively, put hard assets “on sale” to
investors flush with cash and benefiting from a stronger currency. The U.K.,
Germany and Western Europe, Canada and Mexico boast some of the largest GDP
markets in the world and global trade has not seized up – nor will it. The U.S.
and Canada, in particular, are blessed with resources, technology hubs and
growing workforces. As a result of these factors, along with safe-haven status
and low interest rates, North America has been the preferred destination for
global capital, and will continue to be in 2017.
Additionally, investors in this region are beginning
to harvest gains, creating a “wall of capital” to take advantage of any
dislocations in the marketplace. This wall is one of the reasons we are
predicting that North American global investors will have the U.K. and,
specifically, London in their sights in 2017. We believe that well-timed
portfolio acquisitions could produce significant returns.
To get the full story on Avison Young’s outlook for
2017, including forecasts for the office, retail, industrial and investment
markets throughout North America, the U.K. and Germany, watch for our 2017
Forecast Report on January 12, 2017. To ensure
that you receive a copy, please contact the Research Manager at your local
Avison Young office or sign up here: http://www.avisonyoung.com/research/subscribe-research-reports.
On behalf of the board of directors, Principals and
the entire Avison Young family, we wish you the happiest, healthiest and most
prosperous 2017!
