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Friday, January 23, 2015

2014 in Review: The Dallas Office Market

By: Greg Langston (Dallas)

There’s no better way to start off the new year than by taking a look back and reviewing the one we just had. While the Dallas commercial real estate market as a whole had a strong 2014, nowhere was this success more notable than in the region’s nation-leading office market.

According to DTX, Dallas had the fourth highest amount of net office leasing in the country last year. With over 4 million sq-ft of office space leased, the Dallas market grew at an average rate of 5.5 percent, with growth ramping up further during the fourth quarter. Overall, there is more than 6 million sq-ft of office space currently being constructed in North Dallas, which is the highest figure for the region since the ‘90s.

“If one annualizes the second half of 2014, the office sector has been absorbing space at nearly twice its historical average,” says economist Kevin Thorpe.

On a similar note, last year saw record low vacancy rates. By the end of the year, Dallas office vacancy rates were down to 16 percent, with overall commercial vacancy in North Dallas hovering around 9 percent. This comes thanks, in no small part, to record-breaking leasing numbers: 2014’s total of nearly 5 million sq-ft of leased space was the region’s highest in fifteen years.

Overall, the Dallas office market had a stellar year, with leasing and construction rates both nearing record levels. Furthermore, the notable acceleration of growth that began in the second half of the year seem to point to another strong year of growth for the region.

That being said, some analysts are cautious about projecting a repeat year of record growth. In a piece for the Dallas Morning News, Steve Brown points to two major factors that could limit further growth in the region. The first is a potential federal interest rate hike that could place a damper on new construction. The second is perhaps more worrying: falling energy prices. While the energy sector has been a boon for the region over the past several years, falling oil prices could have a broad negative effect on the local economy.

Regardless of these factors, the Dallas office market experienced a top-notch 2014, with all indicators leaning positive. While it remains to be seen if this growth continues, record-breaking vacancy and construction numbers reflect the rising economic fortunes of the D-FW market.

Job Growth: How it Affects the Dallas-Fort Worth Commercial Real Estate Market

By: Greg Langston (Dallas)

Strong job growth has been one of the main drivers of the Dallas commercial real estate market, with analysts expecting this trend to continue in 2015.

The Dallas market experienced broad job growth in 2014. A recent study from the W. P. Carey School of Business at Arizona State University ranks Dallas third among U.S. metropolitan areas in terms of job growth, with notable gains coming from the “‘professional and business services’” industries. The region’s small businesses also had a very strong year, holding the top spot on the Paychex/IHS Small Business Jobs Index from October 2014 to January 2015.

This job growth has been driven by favorable business conditions in the Metroplex, which in turn bolsters business growth. A recent piece by the Dallas Morning News attributes this to Dallas’ growing status as major tech hub, prompting more growing corporations and startups to flock to the city while simultaneously becoming an attractive place to live for potential new residents. Furthermore, this growing job pool primarily draws from well-paying white collar jobs, providing more support for commercial and residential real estate markets alike.

With that being said, the only question that remains is whether Dallas job numbers will continue their upward trajectory in 2015. We’ve already seen early job numbers for small businesses and, although Dallas remains well above the national average, national growth has notably slowed. In terms of larger corporations, however, this will remain to be seen--though, to be fair, the commercial real estate market is showing no signs of slowing at the moment.

The relationship between steady job growth and favorable business conditions has been absolutely crucial to the success of the Dallas commercial real estate market over the past several years. The Dallas market experienced a stellar 2014, with its office market ranking among the most vibrant in the nation. While it remains to be seen whether this robust growth will continue in the year 2015, expect job numbers to provide some potential insight when they are released.

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, 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 .   You can also view my 3-part Videocast on the forecast.

Sunday, January 18, 2015

Canadian Commercial Real Estate Sector Will Face Headwinds in 2015

by Mark E. Rose (Toronto)

As we prepared our 2015 Canada Forecast report we made a key discovery on the Canadian marketplace.  After a terrific 2014 – with better-than-expected GDP growth and an unemployment rate that flirted with pre-recession levels at year-end – Canada's commercial real estate sector will face some headwinds in 2015. A weakening global economy, sliding oil prices, burgeoning development and a possible U.S. Federal Reserve-led interest-rate hike will create both risk and opportunity.

On the office front, changing demographics, technology and increased workspace efficiency are transforming Canadian market dynamics. To meet demand, landlords are offering new development and refurbishing existing product to remain competitive, with more than 22 million square feet under construction across Canada at year-end 2014. As a result, the Canadian office market vacancy rate is anticipated to rise to 10% from 9.4% by year-end 2015.

Although landlords will hold firm on rental rates, they'll be under pressure to increase incentives to retain and attract tenants.

Some of the most significant trends relate to retail. The retail landscape continues to change as a result of both urban intensification and adaptation to e-commerce.

Major mall owners and retailers are working to broaden the consumer experience, with bricks-and-clicks shopping options and new dining experiences, something not available through the Internet. Some retailers, including SmartCentres, Walmart and IKEA, are testing pick-up options for customer orders made electronically, to compete against online giants such as Amazon.

These trends spill over into the industrial real estate market. Larger, speculative, new industrial projects are aimed at major domestic and U.S. retailers planning to expand or establish distribution networks as part of e-commerce and omni-channel strategies.

While leasing will remain steady, new development will lift the national industrial vacancy rate slightly by year-end 2015. Growing demand from the U.S. and a weaker Canadian dollar clearly benefit the export sector. However, declining oil prices and volatility in global energy demand could put pressure on resource-based Western Canadian markets.

Investment continues to be driven by a healthy level of dispositions in most Canadian markets, with an estimated $25 billion of commercial real estate sold through all of 2014. 

REITs have lost some steam, but pension funds and private investors have filled the void, keeping demand high and cap rates low for core assets. Historically low yields and limited supply will continue to lead some Canadian institutional capital abroad, especially to the U.S.  Anxious capital will weigh core versus value-add opportunities in light of escalating development, potential moderating of rental growth and higher interest rates. This may force some over-leveraged Canadian owners to sell, spurring a new wave of transactions and, ultimately, a re-pricing of assets.

For more insights into the year ahead as well as detail for 46 markets worldwide, please check our 2015 Canada, U.S. and U.K. Forecast, now available at .

And  please watch for part 3 of my blog over the next few days, on the outlook for the U.S. commercial real estate market.

You can also click here to view my 3-part 2015 Commercial Real Estate Forecast VIDEOCAST, covering global and North American market trends: 

Friday, January 16, 2015

Time is Right to Exploit Market Opportunities

by Mark E. Rose (Toronto)

Avison Young’s 2015 Canada, U.S. and U.K. Forecast shows that most of the major markets are currently operating in a very positive, Goldilocks environment with liquidity strong and transactional volumes at high levels; property and employment fundamentals improving; and alternative investment choices offering lower or more volatile yields. 

As I mention in my Videocast this week, these background conditions suggest that now is the optimal time to pause and assess the positives, balance risk, potentially take profits, and redeploy resources to exploit future market opportunities. 

Whether you are a tenant, owner, investor or lender, we are advising our clients to focus on four key factors that will ultimately shape winners and losers from a location and performance standpoint in the years ahead:

First is the long-term level of investment demand for real estate. 

Real estate has earned its place as a core portfolio holding by continuing to produce favourable, stable total returns against alternative investment options. 

In fact, increased allocations – combined with an abundance of capital and historically low cap rates – have pushed pricing in gateway markets to new record levels – in some cases ahead of fundamentals. 

This produces risk, so while global demand remains strong, we advise watching closely for changes in regional demand. 

For example, the slowdown in Asia is resulting in the redeployment of capital into other parts of the world.

The second major trend is the obsolescence of certain types of real estate as the pace of technology adoption increases. Rising automation, e-commerce penetration and urbanization are having a major impact on where work gets done, and the need for traditional amounts of square footage per person is decreasing each day. We'll also see showroom and retail floorplates continue to shrink and transform into multi-brand showcases.

However, the growth of omni-channel distribution, including logistics and data-centre space for online sales, represents an opportunity for retailers to grow their non-traditional real estate, including the supply chain and distribution space. 

The third factor is shifting operational and locational considerations driven by changing demographics, urbanization and transit. Millennials pose the biggest risk – and opportunity – as their behaviours drive future planning. The urbanization of real estate is a real trend, with major developments underway as both millennials and empty-nester baby boomers move to downtown cores and/or close to transit. 

Fourth, and finally, we advise remaining vigilant about shifts in global monetary policy decisions, commodity pricing, interest rates and inflation. 

The pricing boost generated by low interest rates has produced a significant portion of the total returns for real estate investments during the last 15 years and will eventually reverse course. Interest-rate hikes likely will start in the U.S. in 2016, but could begin as early as the summer of 2015.

When you combine the impact of interest-rate changes with volatile oil and other commodity prices, demographic shifts, technological developments, government intervention, rising global conflicts and terrorism, you get uncertainty and, accordingly, opportunity – at every turn. 

Look, we cannot kid ourselves, interest rates and liquidity are at levels that are priced to perfection. Rates cannot go lower and demand cannot get better. Given co-ordination in global monetary policy decisions, these go-go days could continue, but our clients must prepare for change. Inflation, higher interest rates and a repricing of core real estate assets are in the cards. It's just a matter of when, not if, they will occur.

For more insights into the year ahead as well as detail for 46 markets worldwide, please check our 2015 forecast now available at . And please watch for parts 2 and 3 of my blog over the next few days, on the outlook for the Canadian and U.S. commercial real estate markets.

From all of us at Avison Young, we wish you the very best in 2015 and beyond.

Tuesday, January 6, 2015

2015 Houston Market Predictions: Oil Prices, Real Estate Trends and Job Growth

By: Rand Stephens (Houston)

With a 50% drop in oil prices, the hot topic in Houston is “how low will it go”.  My Dad told me when I was a kid that “with every negative there’s a positive”.  Stay positive Houston…now is the time to roll-up your sleeves and look for opportunity! 

Below are my 2015 predictions:
  • There will not be a recovery in oil prices in 2015.  Clearly there’s a structural supply and demand issue that will take some time to work through.  Oil prices recently dipped below $50/barrel.  Even the energy analysts won’t make a call right now as to where prices will bottom-out.  However, I think the price will bottom-out this year and make a decent percentage gain off the bottom, but from a price per barrel standpoint, I don’t see that coming back this year anywhere close to the $90-$100/ barrel level.
  • Job growth in Houston will be positive but down considerably from the last several years.  There is still a large talent pool deficiency in the energy business as the baby boom generation moves through retirement.  Energy companies will hang on tightly to their talent in Houston.  Also, the petrochemical business expects a banner year in 2015, and Houston expects to see positive job growth in the Texas Medical Center.
  • Occupancy rates in the office and the industrial markets will decline but not enough to impact rental rates significantly.
  • Leasing volume will decline and landlords will offer more concessions like rent abatement and tenant improvement allowances to win lease deals.   Companies with good balance sheets who are expanding in 2015 will find attractive concession offers.
  • Sublease space will increase significantly as energy companies who tied up space anticipating future growth look to right-size their space in the short-term.
  • The vultures will be circling, but there won’t be blood in the streets with respect to real estate.  Everything is so much better capitalized since 2008, that it will take a dramatic drop in occupancy and rental rates for owners to feel the desperation of negative cash flow.  That said, there should be some better buying opportunities.  Most real estate investors will sit on the sidelines waiting to see what happens in Houston.  Smart investors will take advantage of less competition.
  • The Texans will make it to the play-offs!

Friday, January 2, 2015

A Look at the D-FW Industrial Real Estate Market

By Greg Langston (Dallas)

Record low levels of industrial vacancy and solid demand are giving real estate professionals reason to be optimistic about the future of the Dallas industrial real estate market.

That being said, the market still has a few hurdles to overcome before achieving potentially robust growth. While recent forecasts project that the D-FW market will experience rising demand across a wide range of commercial real estate sectors in the comings years, demand in the industrial market is expected to remain steady or even decline slightly. This is due, in part, to the fact that many current developments will not be completed for an extended period of time. Regardless, demand within the industrial market is already higher than it was in 2013, indicating that what we’re seeing is far from stagnation.

A recent report from Dallas Magazine is slightly more bullish in its view of the industrial market. The piece notes several converging factors that seem to lean in the market’s favor: the growth of e-commerce, a strong local labor market, and pent-up demand finally seeing a prospect of resolution. Most notably, South Dallas is experiencing strong growth within the industrial sector, with Alliance also named a potential hot-spot for the next wave of industrial expansion.

Despite this great potential, there are plenty of potential pitfalls that could be fallen into. For example, the piece from Dallas Magazine points to the need for infrastructure investment if development is to continue at its current pace. Similarly, rising construction costs are cited as another potential limiter of development. These issues shouldn’t be overblown--after all, all signs point to a healthy market in the coming years. Regardless, these forces are shaping the market in ways that must be observed and accounted for.

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.