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Tuesday, January 16, 2018

Avison Young 2018 Forecast: Change and opportunity will abound in 2018

by Mark E. Rose (Toronto)

We just released our 2018 Forecast and I’d like to share a few perspectives on commercial real estate markets for the year ahead.

Our industry has spent the last three years debating where we are in the real estate cycle. In 2017, we concluded that the real estate industry was in the late stages of the ballgame, but could be headed into extra innings. As we start 2018, the game is still going, but change is underway and the dynamics on the field are definitely in flux.

In general, conditions remain positive. Yields on commercial real estate are still attractive when compared with alternative investments. Equity and debt capital are still plentiful and available, and there is no shortage of demand for real estate investment. Employment data looks good and economies are growing in the major countries in which we operate. While markets are still a little uncomfortable with certain aspects of both politics and central-bank policies, these trends are a continuation from 2017, and not new concerns.

Importantly, interest and capitalization rates are still at historic lows. Interest rates are moving up incrementally, as they really only have one way to go, but short-term interest rates are being properly – and effectively – normalized by central banks.

Capitalization rates are another story. Commercial real estate has printed trades at historically low cap rates, but the bid-ask spread is widening – and acting as a brake on transaction volumes in major markets. Cap rates and corresponding return requirements will eventually move as the financing of acquisitions becomes more expensive.

As we head into 2018, it’s critical to note that, everywhere, change is in motion – change that is positive, powerful and moving very quickly. This is the type of evolution that creates opportunity.

These changes are evident in occupier behaviour that is challenging the market and, we think, fundamentally driving innovation and performance. Alternative workplace strategies are finally being accepted as strategic, and have expanded from hoteling, mobile workforces and outsourcing to include flexible office and co-working alternatives. When we begin to anticipate the impact of autonomous vehicles on everything from suburban/urban dynamics to repurposing of parking lots and logistics configurations a host of real estate challenges and opportunities opens up. While potentially disruptive in the short term, these trends will ultimately result in real estate used more effectively and with greater cost efficiency… which leads us to technology.

Technology is, potentially, the most exciting element of change in our industry. Technology adoption – including artificial intelligence – is gaining so much momentum that it is driving profitability and expanding capabilities exponentially.

Finally, wellness in the workplace is an emerging trend that intersects with occupancy solutions, the hunt for talent and also with technology. Whole health, or the combination of physical and mental wellness, is critical to the success of all enterprises. Tenants have always observed that a workforce is happier with access to natural light, plants and fresher air, but studies using sensors that measure workplace conditions now also confirm the tangible economic benefits of employee wellness.

These are just a few of the trends we’re watching in 2018.

We invite you to read Avison Young’s 2018 North America and Europe Forecast, covering 67 markets, and my 2018 Forecast VIDEOCAST.

We wish you all a very happy, healthy and prosperous 2018.

(Mark E. Rose is Chair and CEO of Avison Young)

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