Against a global backdrop of financial uncertainty stemming from continuing issues with stability in Europe, a potential slowdown in China, the debt ceiling and new “fiscal cliffs” in the U.S. and potential plateauing in Canada, North American real estate markets still appear to be the most stable – with a healthy balance of risk and opportunity.
These are some of the key trends noted in Avison Young’s 2013 Canada, U.S. Forecast, released today. The annual report covers the office, retail, industrial and investment markets in 29 Canadian and U.S. metropolitan regions: Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montreal, Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Boston, Charleston, Chicago, Dallas, Detroit, Houston, Las Vegas, Los Angeles, New Jersey, New York, Pittsburgh, Raleigh-Durham, Reno, San Francisco, South Florida and Washington, DC.
“With all the headwinds that continue to plague our industry, what we at Avison Young have been advising for the last three years will continue to be our mantra: stay patient, risk-manage your strategy on the buy-side, and take advantage of off-market and distressed opportunities when they present themselves,”
He continues: “As a seller, do not be afraid to take some profits. Core assets in the major markets are highly sought-after and, therefore, aggressively priced when up for competitive bid. Plenty of opportunities can still be found in off-market transactions, if one knows where to look. At Avison Young, we have been very successful in helping our clients do just that.”
According to the report, the U.S. real estate markets survived the ambiguity of the election year and looming so-called “fiscal cliff” in 2012 with modest growth in most sectors and markets, though fluctuations in values persisted.
“The major coastal markets again seized the most capital interest, leaving the interior markets lagging,” notes Earl Webb, Avison Young’s President, U.S. Operations. “As we approached year-end 2012, sales volumes were on pace to eclipse 2011, led by multi-residential and office sales.”
Webb states that absorption rates in most of the office markets were modest as corporate and governmental occupiers remained very cautious, though cities buoyed by energy and tech sectors – or “gateway” metropolitan areas – saw the strongest performance. “Even New York City, with its diverse business base, saw a slowing of absorption and a flattening of rents – currently at $56 (USD) per square foot (psf) on average with only Midtown South showing rental strength,” he notes.
Webb says early 2013 will look and feel like 2012, with a great deal of uncertainty persisting and with most markets only posting modest improvement. “The overall lack of development is a plus for real estate markets, and recent job growth is encouraging;
The 10.2-bsf U.S. office market registered an overall vacancy rate of 12.1% as year-end 2012 approached, reflecting a slight improvement compared with 2011. Class A properties accounted for the bulk of net absorption in 2012 as the flight-to-quality trend continued and tenants sought to lock-in favorable rates. As a result, class A vacancy declined 50 bps to 13.6% from 14.1% at the end of 2011. Tenants continued to enjoy favorable conditions with tech- and energy-driven markets experiencing the greatest levels of positive absorption.
The 17 U.S. markets Avison Young tracked for this report comprise 2.8 bsf with an overall vacancy rate of 15.1%, down slightly from that of year-end 2011. A majority of Avison Young markets are forecasting further improvement in 2013; however, vacancy in the U.S. markets will likely remain elevated overall when compared with Canada.
Among Avison Young markets, New Jersey recorded the highest 2012 vacancy (+50 bps to 25.5%), with flat market conditions expected in 2013. Although down slightly from 2011, vacancy rates in Atlanta (-100 bps to 19.9%) and Detroit (-70 bps to 19.8%) remained high in 2012. The lowest vacancy rates were recorded in Pittsburgh (8.1%), where rents have risen to new levels; San Francisco (9.9%), where large-tenant movement is driving the market; and Manhattan (10.6%).
Manhattan, the largest U.S. office market, reported flat absorption and rents in 2012; however, employment growth is leading to positive absorption and vacancy could return to single digits by year-end 2013. At the submarket level, the steady delivery of new space at World Trade Center and World Financial Center could push vacancy into the teens for downtown class A space.
Only four markets expect to see increased vacancy in 2013, with the largest increase being in Washington, DC. (+60 bps), where there are threats of federal spending cutbacks and where 4 msf of office space is set to be delivered this year.
U.S. retail markets held steady with an average vacancy of 6.9% – unchanged for four quarters – and were kept in check by a dearth of new supply. Delivery of new retail product has fallen each year since 2008 and, in 2012, 46 msf was delivered. Power centers are outperforming retail as a whole and posted a 6.2% vacancy rate nationwide.
Many Avison Young markets are reporting the expansion of discount and big-box retailers. Select submarkets in Charleston and Houston have improving retail conditions due to population increases; Boston is seeing further stabilization;
Avison Young industrial markets totaled 6.6 bsf with an average vacancy rate of 8.8% as of third-quarter 2012 – nearly double the vacancy found in Avison Young’s Canadian markets. Chicago (1.2 bsf) and Los Angeles (1.1 bsf) are the largest U.S. industrial markets, with vacancy rates of 9.6% and 4.5%, respectively. Charleston saw the biggest decrease in vacancy, ending 2011 at 12.1% and dropping to 9.9% in 2012. Reno was the only city to see an increase in industrial vacancy during 2012 (+20 bps) and all but two U.S. markets are expecting further declines in vacancy during 2013.
Through third-quarter 2012, total investment volume for multi-residential, office, industrial and retail properties topped $163 billion, demonstrating stabilization after second-quarter sales volumes for all property types (except multi-residential)