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Tuesday, July 31, 2012

Third Quarter 2012 North American Market Update

by Mark E. Rose (Toronto)

As August approaches and the summer seems to be slipping away, please find below Avison Young's summary overview of Q3 market conditions in North America.

Let’s start with the United States….

In July, the Bureau of Labor Statistics reported a national unemployment rate of 8.2% in June, unchanged from May, but down from 9.1% a year earlier.

Slower job growth in the second quarter occurred in most major industries; however, the Professional and Business Services sector added 47,000 jobs in June -- with temporary help services accounting for 25,000 of the increase.

Employment in Professional and Business Services has added 1.5 million jobs since its most recent low point in September 2009.

With office construction generally slow across the U.S., the 10 billion square foot U.S. office market continued its slow but gradual improvement and ended the second quarter with an average overall vacancy rate of 12.1%.

Improvement has been uneven however, with a handful of markets seeing the greatest gains.

Here are some highlights from select Avison Young office markets:

Indicators were mixed for the Manhattan office market as the second quarter drew to a close.  Leasing activity rebounded from record-low levels in the first quarter, yet the vacancy rate rose to 10.8%, while absorption finished in negative territory. We expect, however, that tenants will be back in the market in the fall to lock in rates before the market moves out of their favor.

In Boston, with no speculative construction and growing high-tech and biotech sectors, one can expect to see further improvement.

In Chicago, the office market vacancy rate improved to 14% from nearly 16% a year ago, with the market seeing leasing activity from several significant occupiers in the CBD.

Houston is benefiting from the expanding energy sector and ended the second quarter with an 11.4% vacancy rate.  Class A vacancy in some key submarkets is now in the single digits. 

Pittsburgh’s metropolitan area has a vacancy rate under 10%, the lowest of the Avison Young markets as of mid-year.

In metropolitan Washington, D.C., more than 7 million square feet is under construction with approximately 50% preleased. 
According to Real Capital Analytics, sales volume in the U.S. for all property types and markets was approximately $84 billion through May, with the metro areas of New York, Washington, DC, Los Angeles, San Francisco and Chicago comprising the top five markets.
Canadian investors have purchased more than 100 properties for a total volume of nearly $4.7 billion thus far in 2012, and seem to be on-track to reach 2011’s total of 235 properties for $8.2 billion.
Overall office market fundamentals improved by mid-year. However, the upcoming presidential election and instability abroad is fueling uncertainty.

Now let’s look at Canada….

As we turn to the second half of 2012, Canada’s commercial real estate markets remain robust and on a stable footing, in spite of negative economic news streaming in from the Euro-zone, the general economic malaise in the U.S. and civil unrest in places such as Syria.
The labour market and business confidence are two key metrics that we continue to watch carefully. 
On the labour front, employment changed little for the second consecutive month.
The unemployment rate edged down 10 basis points to finish the midway point of 2012 at 7.2.
Compared with 12 months earlier, employment increased 1% or 181,000. At the same time, full-time work was up 222,000 (+1.6%), while part-time work changed little. More importantly, employment growth over the previous 12 months was mostly among private sector employees, up 149,000 (+1.3%).
Although business confidence has waned of late, dictated largely by headlines abroad and the potential impact at home, most corporations sport positive balance sheets and are flush with cash, ready to expand their operations. This is evidenced by the single-digit office vacancy rates displayed by most of Canada’s major markets.
At the end of June, Canada’s office vacancy rate sat just above 7% and is down some 70 bps from the same period one year ago, and down 280 bps from the height of the recession in June 2009. 
Downtown markets are especially tight, collectively exhibiting a vacancy rate just above 5%.
This has spurred on a new development cycle in most downtown markets. Almost 11 million square feet of additional product has been announced or is under construction, with Calgary and Toronto accounting for just over 70% of the development activity.
With sound leasing fundamentals and rising rents, the buying and selling of commercial real estate assets has not abated. The drop in long-term interest rates has been greater than we could have anticipated and has led to still lower cap rates and higher real estate values across markets and asset types.
The highlight for the second quarter and for 2012 was the sale of Scotia Plaza – the 2-million square-foot office complex located in the heart of Toronto’s Financial Core. Despite all the rumors and speculation, two of Canada’s largest REITs, Dundee (66%) and H&R (33%) bought the coveted complex for a record $1.266 billion -- the highest price ever paid for a single commercial real estate asset in Canada.
While hard assets continue to change hands, REITs/corps have issued or announced $4.6 billion in capital raisings through the midway point of July – up from $2.8 billion over the same period one year prior – a clear signal that investors view real estate as a stable investment vehicle, versus the roller coaster ride of the stock market.  
Looking ahead to the second half of 2012, we don’t expect any dramatic change in market conditions other than the traditional slowdown in leasing activity attributed to the delay in decision-making associated with the summer months.
You can now listen to our Q3 2012 Audiocast Message on our website (link on home page and also under Media Room):   

Thank you for listening, and please continue to follow us on our AY Blog and AY Twitter sites, both of which you can access on our home page at 

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