Cautious optimism to guide Canada and U.S. commercial real estate markets in 2012; solid fundamentals abound in Canada, while U.S. looks for stability
Benefitting from strong fundamentals, Canada’s commercial real estate markets continued to enjoy stability and growth in 2011 despite global economic uncertainty. Meanwhile, the United States suffered from ongoing uncertainty, with limited good news concentrated in a few select markets.
Each country has its risks and concerns, but better days should be ahead for both as the world deals with its financial issues.
These are some of the key trends noted in Avison Young’s 2012 Canada, U.S. Forecast, released today. The annual report covers the Office, Retail, Industrial and Investment markets in 20 U.S. and Canadian metropolitan regions: Atlanta, Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Washington DC, Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver and Winnipeg.
“There is a dichotomy in the North American commercial real estate market. Canada is experiencing a period of stability and modest growth, while the United States continues to search for traction in the recovery process,” comments Mark E. Rose, Chair and CEO of Avison Young.
“Despite this disparity, things are looking up in both countries as global financial uncertainty is gradually resolved and clarity begins to emerge,” he says. “As Europe and the U.S. take steps to deal with their economic challenges and financial markets begin to rebound, there will be opportunities for commercial real estate markets to make further gains.”
According to Rose, 2011 saw solid demand in both countries’ investment markets, with a large pool of buyers driving the market in Canada, and U.S. buyers focusing on safe assets and avoiding risk.
“Given the relatively small investable universe in Canada, we continue to notice a growing trend of Canadian buyers heading south of the border,” notes Rose.
He continues: “A number of Canadian buyers, be they pension funds, life insurance companies or REITs, are identifying opportunities to expand their portfolios in and beyond Canada’s borders, especially into the U.S. While U.S. assets are currently available at more attractive pricing, their value is expected to rebound in the coming years, making them a good longer-term hold and convincing many that this is the time for cross-border deployment of capital.”
Across the 20 Canadian and U.S. markets that Avison Young tracks, office vacancy has trended lower, falling from 14.7% in 2010 to 13.6% in the closing months of 2011 – a 110-basis-points (bps) improvement.
“The double-digit office vacancy doesn’t tell the whole story, however,” says Bill Argeropoulos, Vice-President and Director of Research (Canada) for Avison Young. “The performance of the two countries is quite distinct when you break down the figures. While the overall office vacancy rate in Avison Young’s Canadian markets in 2011 settled at a respectable 7.6%, the rate is nearly double in Avison Young’s U.S. markets (15%). This is a clear sign of the different pace of recovery seen in the two countries.”
“Canada’s leasing markets have seen a swift recovery to the point where new development, particularly office, is either underway or announced in most markets. This is quite remarkable, given that we just came through one of the worst recessions since the Great Depression – a healthy sign of confidence from both the development and the business community,” continues Argeropoulos.
He adds: “A gap also exists between the two nations’ industrial sectors. Collectively, across Avison Young’s industrial markets, vacancy declined 50 bps between 2010 and 2011, ending 2011 at 8.3%. Once again, Canada’s market is in much better shape, displaying an overall vacancy of 4.9% versus 9.7% for the U.S.”
The report goes on to say that in Canada, confidence remains high coming off good results in 2011, and as long as businesses and consumers remain motivated by the underlying fundamentals and not the headlines, the country’s markets can anticipate ongoing improvement.
Meanwhile, progress is slower and unevenly distributed in the U.S., with recovery struggling for a foothold as caution prevails.
“2011 was a year of sporadic recovery in the U.S. with strong capital flows and historically-low interest rates. Market recovery was best seen in a handful of larger coastal markets while widespread caution persisted and many businesses deferred real estate decisions,” notes Earl Webb, Avison Young’s President, U.S. Operations.
He says the office market remains at a cyclical low point in most U.S. cities, and 2012 will be characterized once again by weak absorption and downward pressure on rental rates. “Even in the best-performing office markets, such as Washington DC, budget pressure and new cost-cutting initiatives could lead to a pullback in federal government and contractor leasing.”
He continues: “On the investment front, with an abundance of capital available for investment, along with low-cost financing, there was a continued decline in threshold cap rates and return hurdles for investors in core properties in 2011. Even non-coastal markets like Chicago experienced aggressively priced trades of core assets to large, institutional investors. There clearly exists a gap between the abundance of capital available for core investment and the modest amount of property available for acquisition.”
Webb says for 2012, overall U.S. real estate conditions are expected to mirror 2011 and demonstrate only modest improvement going into the election. “Post-election improvement may be seen in the event one of the two political parties controls the legislative and executive branches of government. Development should remain scarce in most markets and in all property types except apartments. Real estate, however, remains an attractive investment and, after a slow start, the U.S. will experience increased sales volume in 2012.”
Source: Market Watch