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2013 Annual Review

Avison Young 2014 Forecast
Commercial Real Estate - Canada & U.S.
Partnership. Performance.
Contents
Message from the CEO

3

Message from the President, U.S. Operations

5

Message from the Managing Directors

6

...
Message from the CEO
North American real estate in 2014: Higher interest rates,
Canadian stability and the U.S. recovery m...
Message from the CEO
Message from the CEO continued...
For 2014, we believe the negatives now become positives.
Tapering w...
Message from the
President, U. S. Operations
Executing our growth strategy and adding strategic
service capabilities in 20...
Message from the
Managing Directors
Experience shows growth plan works

A

s Managing Directors in 2013, we once again foc...
Property Management

T

he “Green Initiatives” management team broadened its
focus in 2013 from office buildings to encomp...
Canada Overview & Forecast
Guarded optimism as market carries mixed outlook into 2014
Canada’s commercial real estate mark...
Canada Overview & Forecast

2012

2013
2013

Ca
na
da

W
in
ni
pe
g

Va
nc
ou
ve
r

T
(M oro
iss nt
iss o W
au e
ga st
)

...
U.S. Overview & Forecast
U.S. commercial sectors demonstrate improved conditions in 2013
The U.S. commercial real estate m...
U.S. Overview & Forecast
U.S. - Overall Office Vacancy Rate Comparison
25%

Vacancy Rate (%)

20%
15%
10%
5%
0%

2012

201...
Calgary
The City of Calgary Water Centre

Strong economic performance bolsters retail and investment markets

T

he econom...
Edmonton
Kelly Ramsey Building

Shifts expected in all sectors

T

he Edmonton market performed as expected during 2013, i...
Lethbridge
Galt Museum

Market outlook remains promising for 2014

T

he Lethbridge commercial real estate market finished...
Montreal
Place Ville-Marie

New public administration seen as an encouraging sign

E

conomic activity in the Greater Mont...
Ottawa
Bayshore Shopping Centre

Office market softens as retail market surges

G

iven Ottawa’s position as the Canadian ...
Quebec City
Place de la Cité, Laurier Boulevard

Business as usual
The Quebec City area assured its potential for economic...
Regina
Viterra Building

Saskatchewan’s economy continues to grow

S

askatchewan will continue to be among the top provin...
Toronto
The Globe and Mail Centre

Market pause in 2013 sets up challenges for some sectors in 2014

R

obust during and s...
Toronto West (Mississauga)
Mississauga Gateway Centre - Building A

Moderate growth expected in 2014

T

oronto West’s com...
Vancouver
980 Howe Street

Strong demand driving market as premium assets remain scarce

D

emand for BC commercial real e...
Winnipeg
2445 Pembina Highway

Open for business

W

innipeg and Manitoba are indeed open for business. Office
towers are ...
Atlanta
Hammond Exchange

Business climate driving commercial real estate rebound

F

ueled by a steadily improving econom...
Boston
6 Tide Street

Boston strong in the midst of sluggish U.S. recovery

M

etropolitan Boston continues to enjoy econo...
Charleston
360 Concord Street

Region poised for explosive growth

T

he Charleston region is recognized internationally a...
Chicago
225 W. Wacker Drive

Improving economy, increased demand prompt further growth in 2014

T

he Chicago economy saw ...
Columbus
Columbia Gas Building

Slow and steady wins the recovery race

T

he Columbus, Ohio Metropolitan Statistical Area...
Dallas
Encana Plano Office

Corporate expansions fuel the Dallas economy

T

he Dallas-Fort Worth region recorded some of ...
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
Avison   commercial office leasing market report toronto 2014
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Transcript of "Avison commercial office leasing market report toronto 2014"

  1. 1. 2013 Annual Review Avison Young 2014 Forecast Commercial Real Estate - Canada & U.S. Partnership. Performance.
  2. 2. Contents Message from the CEO 3 Message from the President, U.S. Operations 5 Message from the Managing Directors 6 Property Management, Mortgage Services 7 Canada Overview & Forecast 8 U.S. Overview & Forecast 10 Canada Calgary Edmonton Lethbridge Montreal Ottawa Quebec City Regina Toronto Toronto West / Mississauga Vancouver Winnipeg 12 13 14 15 16 17 18 19 20 21 22 United States Atlanta Boston Charleston Chicago Columbus Dallas Denver Detroit Houston Las Vegas Long Island Los Angeles New Jersey New York Orange County Philadelphia Pittsburgh Raleigh-Durham Reno San Diego County San Francisco San Mateo South Florida Tampa Washington, DC 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 About Avison Young 48 Our Contacts 49 Avison Young Research 50
  3. 3. Message from the CEO North American real estate in 2014: Higher interest rates, Canadian stability and the U.S. recovery moves forward O ver the past few years, Avison Young has been advising its clients to invest in Canada for stability, seek higher return opportunities in the U.S., and plan for higher interest rates as the North American financial markets pick up steam and fiscal stimulus is removed. The last point was the most important, as too many investors were fixated on quantitative easing as a paradigm shift and a free-money right versus an opportunity. The 15-year decline in interest rates and related cap-rate compression that was the driver of returns had to come to an end at some point. Once global financial markets start to recover, employment will tick up and capital investment will be around the corner. The great news is this: Although delayed by a year due to political gridlock, the return to normal operating conditions and the reduction of monetary easing due to tapering are the catalysts necessary to unlock the capital that has been building up on the balance sheets of the investor and the occupier. Therefore, conditions look solid for a return to the “real economy” in 2014. For the past five years, real estate velocity has fallen from a peak to a very low trough, and made its way back up in markets and segments where investors believe there is liquidity. Canada recovered and reached peak volumes and pricing in the last two years. The U.S. is still behind on velocity, but has returned to pre-crash pricing in certain markets. Zerointerest-rate and mortgage-buying policies emanating from central banks generated meaningful liquidity that resulted in higher returns to our industry and created a powerful alternative investment bias towards real estate. There are many positives and negatives associated with these policies. Real estate again became a favoured asset class and was somehow, if not shockingly, rediscovered as a core holding. Real estate has always been an essential investment and has provided diversification and yield for owners and investors. On the negative side, “free money” has been the driving force and fundamental investment management has been overshadowed. This situation has led to speculation that a pricing bubble is present, particularly for trophy assets in gateway markets where pricing has reached unprecedented levels. While it is true that interest-rate policies have boosted returns significantly, pricing is stable as the voracious appetites of the REITs are being replaced by pension funds and institutions, which have significant discretionary capital and use lower levels of debt when making acquisitions. What is strategically different today is the borrowed time our industry is living on as we continue to trade in a historically low interest-rate environment. As we often say at Avison Young, “most people know what they know, but they don’t know what they don’t know.” Strategy does matter, and Avison Young has taken the opportunity to communicate as frequently as possible with our clients to prepare them for an inevitable change, even if it is unpopular to do so, or it appears too distant for the decision-maker. Despite an industry populated with very experienced investors, we have turned a blind eye to the fact that this cycle is supported by government monetary policy. It will taper and then end in the near-to-mid term, and investment strategies will return to fundamental real estate investing. Although not anticipated, any cap-rate expansion or re-pricing would create an opportunity for motivated investors (who have been on the sidelines) to step in and acquire at more attractive values. It does appear that we will have a far better financial environment and marketplace to work in throughout 2014. At the outset of 2013, most economists and pundits called for significant improvements in the U.S. economy and real estate markets. However, they missed the fact that payroll taxes had just increased and the unknowns created by the Affordable Healthcare Act, sequestration and debt-ceiling fights would create enough uncertainty for decision-makers to keep their fingers firmly on the pause button. As previously stated, all of those factors were aggravated by a 15-year decline in interest rates that was fuelled by excess liquidity and then interrupted in May 2013 by the heightened risk of tapering. Now looking back, it is no surprise that promising prognostications of significantly improved market conditions in 2013 did not become a reality. Although some improvements occurred in 2013, they were unspectacular at best. Avison Young 2014 Forecast 3
  4. 4. Message from the CEO Message from the CEO continued... For 2014, we believe the negatives now become positives. Tapering will occur during the first quarter of 2014, interest rates will rise further and real estate debt will become more expensive. It is important to note that this is now expected and should not shock the system. For Canada, solid leadership at the national level has positioned the country for a potential budget surplus in 2015/2016, which in and of itself could be inflationary. Yes, pricing is challenging and feels a little “toppy,” but quality assets with great covenants are in demand, and there is ample capital willing to acquire long-term holdings. The U.S. has not achieved the same stability and premium pricing, but has continued to attract core and opportunistic capital. Canada alone, as the No. 1 foreign investor in United States real estate, put more than $9 billion to work in 2013. Despite the continuation of political disruptions that undermine significant progress, Washington DC appears to be finding some common ground; and with the Democrats and Republicans agreeing to a compromise budget, many of the unknowns will be eliminated and the markets will have a chance to grow. Investment and spending demand, coupled with less angst from Obamacare and government infighting, will create a positive environment for investing – and, more importantly, growth and investment by occupiers. If we give users and occupiers of real estate a clearer, stronger economy in which to grow, and investors a stable underwriting environment that limits surprises and allows for well-defined investment strategies founded in fundamental real estate investing, we could be celebrating a very happy new year in 2014. From a global perspective, despite concerns over bubble pricing for trophy assets in gateway markets, troubled assets remain out of favour, and much of the debt overhang from the last cycle has yet to be resolved, particularly in Europe. Attractive opportunities will abound for investors willing to move off prime assets toward secondary cities and strategies, or out of the risk curve to address assets still in need of capital and intelligent repositioning. 4 Avison Young 2014 Forecast Finally, as is the case throughout this forecast, change is inevitable and should be considered in near-term planning as global investment flows change our investment theses and best practices change our behaviour. For example, user reconfiguration and technology-driven requirements will continue to drive demand into new and updated facilities. Expect to see retailers leasing more industrial space to handle omni-channel distribution, and office users paying up to access contemporary layouts, systems and energy efficiency. Medical office and data centres may be specialty sectors most directly benefiting from this trend. At Avison Young, we would like to thank our clients, our people and our collaborative partners who have made our growth possible. Five years ago, Avison Young comprised 290 people in 11 Canadian offices, and now our Canadian-based company operates out of 53 North American and two European offices and boasts more than 1,500 professionals. Our strategy is clear: Align ourselves with the goals of our clients and our people, and use a different, Principal-led client service structure to exceed expectations. When we surround our clients with collaborative experts and focus on long-term solutions, we meet our clients’ objectives and make our leaders accountable operationally, reputationally and financially to our clients’ success. Sincerely, Mark E. Rose Chairman and CEO Avison Young
  5. 5. Message from the President, U. S. Operations Executing our growth strategy and adding strategic service capabilities in 2014 O ur growth in the U.S. continued at a rapid pace in 2013. We opened in new markets including Philadelphia, Charlotte, Tampa, Long Island, San Diego, Silicon Valley and Sacramento. Additionally, we added significantly to existing operations in such markets as New York, Washington DC, Los Angeles, Dallas, Boston and Atlanta. We began 2013 with approximately 550 employees in the U.S., located in 21 U.S. markets, and ended 2013 with more than 1,000 people in 28 U.S. markets. The depth of our resources continues to expand and, while we have a way to go to have our business matrix residing in all of our markets, we are rapidly building best-in-class operations throughout the U.S. As in the past, our growth has been accomplished through a combination of strategic hiring as well as through mergers and acquisitions. In 2013, we completed M&A transactions in Dallas, Los Angeles, Washington DC, Florida, Houston and South Carolina. We hired high-quality professionals in virtually every Avison Young office. We have been very fortunate to continue to find individuals and companies that are completely collaborative and collegial, and driven to provide excellent solutions for our clients. Additionally, our growth continues to be executed within the boundaries of very conservative financial guidelines, maintaining our strong balance sheet and partnership structure. I commented a year ago that we were moving into 2013 with a continued wariness of the market conditions, yet with a belief that our markets were generally in a slow recovery mode. Even with the vacillations in market conditions caused by the sequester and national budget uncertainties, coupled with state and local financial stresses, the real estate markets continue to provide investors with a reasonable risk/return investment alternative and, thus, continue to see significant capital seeking investment in most major regions and across all property types. Labor market growth is still far from robust, yet there are monthly gains in employment that, to a small degree, are driving incremental absorption. Sequestration, in particular, has had a dampening effect in Washington, DC where leasing has become short-term focused and government-related occupants are reluctant to commit to expansion. However, in my 30-plus years in real estate, Washington, DC has weathered many political and economic storms, and I’m quite convinced that this cloudiness, too, shall pass. New York, the other market where activity levels are typically high and values increasing, also took a slight pause as the financial services sector reacted to the fiscal uncertainties by restraining growth. Generally, corporations are still sitting on significant liquidity which, we feel, will be released for investment once the government puts some firm rules in place on taxes, spending, entitlements and healthcare. Let’s not kid ourselves though. The U.S. commercial real estate market is still dependent, to some degree, on the continued historically low cost of borrowing. Both investors and occupiers are benefitting from this debt market and should see these conditions persist at least into the first half of 2014. The single biggest risk to a short-term value correction in real estate would be a 100- to 200-basis-point increase in borrowing rates. However, there are a number of less debt-reliant investors who will fill part of any void created by this inevitable upward movement in borrowing costs. We are advising our investor clients to borrow over longer terms and lock in favorable rates if possible, assuming the corresponding investments will support such matching of cash flows. We continue to see opportunities in high-quality assets in second-tier markets, as the returns are still 100 to 200 basis points above those for similar properties in the top six or seven (largely coastal) markets. I hope that everyone has a very profitable and successful 2014. Sincerely, Earl Webb President, U.S. Operations Avison Young Avison Young 2014 Forecast 5
  6. 6. Message from the Managing Directors Experience shows growth plan works A s Managing Directors in 2013, we once again focused on our clients’ needs and delivered another strong period of growth in Avison Young’s history as our firm successfully executed the latest phase of its aggressive North American expansion program. As 2014 begins, we are excited about our continued systematic growth plan as it will build on an already robust Avison Young platform from which to serve our rapidly growing client base. We look forward to the completion of several more strategic acquisitions and opportunistic recruiting efforts that have been set in motion for 2014. In all of the markets that we serve, our differentiated, client-service model and innovative best practices further strengthen Avison Young’s unique, Principalled collaborative culture. In both Canada and the U.S., our motivation to serve clients has never been stronger and we are planning for an American economic recovery in 2014. The financial setbacks of 2013 caused by the impacts of the Affordable Care Act and the federal government’s sequestration efforts will be replaced with more certainty and normal operating conditions. This stability will impact interest rates and real estate debt negatively in the short term, but ultimately lead to growth. There is just too much capital available and owners and occupiers are motivated to put it to work. Despite a long year of federal indecision and a lurching U.S. economy that raised questions about the stability of the post-recession recovery, we welcomed eight new Managing Directors in the U.S. in 2013. As we made more inroads in the U.S., our well-established Canadian offices continued to grow through Canada’s strong market fundamentals. Overall, we recruited senior real estate professionals in most Avison Young markets while producing numerous big wins in the form of large leases, management assignments and sales transactions for our clients. In 2014, we will further expand our business service lines, including project and property management, tax assessment, mortgage brokerage and appraisal, offering more to our growing client roster – and thus making us even more accountable to our clients’ overall success. Staff training remains a centre of focus with initiatives such as Avison Young University and our “Young Guns” training programs across the company. We continue to alter the industry norm by differentiating our service structure through internal Affinity Groups (which comprise Avison Young professionals specializing in specific service disciplines) as communication 6 Avison Young 2014 Forecast mechanisms to the company as a whole. Affinity Groups breed collaborative environments at Avison Young, and eliminate the unnatural tensions inherent in antiquated silo structures. We also embrace sustainability as part of our daily operations. In 2013, we engaged our professionals to come together across all business lines and from across North America to form our Sustainability Affinity Group. We will remain committed to environmental, social and economic sustainability while continuing to expand in the U.S., Europe, Latin America and Asia markets in the short and long terms. Avison Young also increased its commitment to corporate social responsibility in the past year. Each of our offices is involved in a variety of events throughout the year and, in 2013, we created a philanthropy committee comprising volunteer Principals and employees from across Canada and the U.S. We believe we can share our efforts with our clients and learn from them the optimum way to support the causes that can have a material impact on a global stage. We believe that the most satisfying part of success, and one of the reasons we all work so hard together to grow Avison Young, is the ability to give back with conviction. On behalf of the Managing Directors, we offer a collective thank-you to our clients, who recognize that the Avison Young culture is different, that the open-source and best-inclass platform places the client first while encouraging a team approach on every level. We wish you a prosperous new year and look forward to generating more growth opportunities for your business in 2014 and beyond. Sincerely, The Managing Directors Avison Young James Becker | Reggie Bell | Laurent Benarrous | Dan Carlo Michael Church | Christopher Cooper | Steve Dils | Martin Dockrill Mark Evanoff | David Fahey | Mark Fieder | Chris Fraser Jeffrey Heller | Richard Jankowski | Michael Keenan | Randy Keller Richard Kimball | George Kingsley | Joseph Kupiec | Ken Lane Greg Langston | John Linderman | Keith Lipton | Kenzie MacDonald Michael McKiernan | Tim McShea | Doug Mereska | Arthur Mirante Len Mongeon | Bruce Neel | Scott Pickett | John Pinjuv | Ray Robinson John Ross | Pike Rowley | Jonathan Satter | Wes Schollenberg Ted Simpson | Nick Slonek | Rand Stephens | Ted Stratigos Todd Throndson | Jeremy Willits | Clay Witherspoon | Alec Wynne
  7. 7. Property Management T he “Green Initiatives” management team broadened its focus in 2013 from office buildings to encompassing all real estate asset classes. For a property manager today, sustainability is an important part of his/her buildingoperations strategy. Not only does the strategy require the ongoing training of staff in new building system technologies, energy consumption, and waste and cleaning management, the strategy needs to involve engaging tenants in resource conservation. Many landlords are turning to social media to engage with tenants and to gain feedback on their properties, while utilizing the connection to educate tenants about their shared responsibilities. Green initiatives will continue to increase a property’s leaseability, create long-term operational cost reductions, and portray the owner as a good corporate citizen. competitiveness with tangible improvements to common areas, HVAC systems, lighting, signage and exterior landscaping. Increased consideration will be given to such green initiatives as bicycle storage and shower areas, Wi-Fi systems, and even electric vehicle-charging stations. Office-building lobbies will gradually transform from their historically staid appearance to interactive spaces with media walls and functional furniture. Value for money will remain the economic driver in 2014 as managers seek creative and cost-effective approaches to tenant retention, operational efficiencies and fiscal restraint. Peter Leroux Property owners will look to continue to capitalize on the improving real estate market in 2014. Those with longer-term hold horizons will improve their buildings’ Executive VP, Managing Director Real Estate Management Services Mortgage Services I n the first half of 2013, economic growth appeared, to some, to be gaining momentum in the U.S. By midyear, what should have been a predictable message was delivered, preparing the markets for a return to the “new normal”: removal of federal aid was to start. This situation caused hysteria and U.S. Treasury and Government of Canada bonds nearly doubled in yield. Almost immediately, the Federal Reserve backpedaled, and bond prices settled back slightly. There was little reaction on the North American lending front, however. Using history to determine what 2014 may look like will not help, as we are in completely uncharted territory. Although the Fed can influence certain interest rates, there are many that remain at the will of the free market. Perceived or real, a moderate rise in U.S. interest rates should not affect the supply of debt capital. In Canada, the story may be a little different. We could see a more shallow supply of longerterm funds of 10 years and beyond. These have been limited in Canada in the past, and rising interest rates may cause lenders to be more strategic with deployment and withhold these funds for expected higher returns in the near term. The status quo in the debt capital markets will likely be maintained for much of 2014 – directly tied to the slow recovery of the North American economies. Norman Arychuk Mortgage Broker Debt Capital Markets Group Avison Young 2014 Forecast 7
  8. 8. Canada Overview & Forecast Guarded optimism as market carries mixed outlook into 2014 Canada’s commercial real estate markets saw some changes in 2013 that could pose challenges in the year ahead. However, ongoing development is an encouraging sign that the markets remain strong, offering opportunities for occupiers, owners and investors. The single-digit vacancy rates, robust demand and stable-to-rising rental rates seen in many office markets may soon come under pressure. In 2013, national average vacancy rose to slightly above 8%. Leasing velocity tapered following a strong start and a burgeoning sublet market emerged, especially in Toronto and Calgary. Tepid demand, along with nearly 27 million square feet (msf) scheduled for completion by 2017, will prompt modestly rising vacancy in 2014. Corporate rightsizing and space-planning efficiency, both in existing stock and new developments, are transforming office market dynamics. As construction and consolidations continue, sublet space will remain prominent. Buildings with impending vacancy will experience downward pressure on rental rates. However, top-tier, lessexposed assets can expect rental rates to hold firm in 2014. Tenants will continue to weigh new developments’ efficiencies against renewing or expanding existing premises, with competition adding emphasis to the landlord-tenant relationship. Meanwhile, LEED buildings have narrowed the downtown/suburban cost gap, enticing suburban tenants to consider downtown options. Bricks-and-mortar retailers are focusing on staying relevant and competitive against online options. Customers increasingly examine products in stores but buy them online, and retailers are adapting with new omni-channel strategies. Meanwhile, big-box retailers are experimenting with small-format urban concepts. Major retailers, including Staples, Best Buy and Sears, slashed jobs and reduced footprints. Sears’ move provided domestic and foreign retailers (including Nordstrom and Simon’s) opportunities for coveted premier mall space. Landlords are investing in regional malls to accommodate incoming tenants and attract new entrants to the Canadian landscape. U.S. retailers should note the lessons being learned by Target: Canadians are less likely than Americans to buy goods in different categories in one store, and consumers expect the same low U.S. prices. Loblaw Companies and Canadian Tire monetized real estate holdings, forming Choice Properties and CT REIT, respectively. Hudson’s Bay Co. acquired Saks, and it will be interesting to see whether the department-store chain will follow suit, given current REIT valuations. Canada’s industrial market remained active in 2013 as vacancy rose modestly in some markets and declined in others. The nation’s 8 Avison Young 2014 Forecast 1.8-billion-square-foot (bsf) industrial inventory posted 4.6% vacancy – 200 basis points (bps) below 2009’s recession peak. Supply shortages have encouraged build-to-suit and speculative development, with more than 8 msf under construction, which will increase vacancy to just below 5% in 2014. Demand is coming from domestic and U.S. occupiers, especially major retailers expanding distribution networks. The need for high-clear height, large-bay facilities will push rents higher, resulting in challenges for less desirable existing product. While the manufacturing sector re-tools, anticipating demand from recovering U.S. consumers, other trends are emerging. Threedimensional printing, though not applicable to all industries, allows mass customization of finished products. Implications for real estate include smaller production footprints, perhaps bringing business, production and distribution under one roof. The new omni-channel strategy, increasingly being deployed by retailers, is blending retail, warehouse/distribution and logistics. While e-commerce may result in the closure or downsizing of more retail stores as bricks-and-mortar and online retail converge, additional industrial space will be needed for order fulfillment and merchandise-return points. Interest rates began rising in spring 2013 and the impact became more evident as the year progressed, with lower investment volumes and a change in pricing trajectory. Slightly more than $20 billion worth of assets traded through the first three quarters of 2013, and when the final tally is made, 2012’s record $28 billion may be out of reach. REITs, the most active buyers during the past four years, driving overall investment volumes and pricing to record levels, are now faced with flat or falling unit prices. Acquisition fundamentals have changed as all investors (particularly REITs) confront a more challenging capital environment and buying becomes more discriminating. With capital more costly, investors will become more active asset managers to enhance returns. As some REITs scale back acquisitions, others may cull assets. Competition among pension funds/advisors, life companies and emerging private equity players will intensify, while high pricing leads more buyers towards development. Top-tier, well-leased assets will hold their pricing and remain highly contested, while secondary and/or challenged assets see upward cap rate adjustment. Despite the prospect of higher interest rates, capital flows into commercial real estate will remain stable in the year ahead. Bill Argeropoulos Vice-President & Director of Research, Canada
  9. 9. Canada Overview & Forecast 2012 2013 2013 Ca na da W in ni pe g Va nc ou ve r T (M oro iss nt iss o W au e ga st ) 2014F 2012 To ro nt o Re gi na Qu eb ec Ci ty O tta w a M on tre al Le th br id ge Ed m on to n Canada - Overall Office Vacancy Rate Comparison Ca lg ar y Vacancy Rate (%) (%) Vacancy Rate Canada - Overall Office Vacancy Rate Comparison 20% 18% 20% 16% 18% 14% 16% 12% 14% 10% 12% 8% 10% 6% 8% 4% 6% 2% 4% 0% 2% 0% 2014F Canada - Overall Industrial Vacancy Rate Comparison Vacancy Rate (%) (%) Vacancy Rate 8% Canada - Overall Industrial Vacancy Rate Comparison 8% 6% 6% 4% 4% 2% 2% 0% 2013 2013 Ca na da W in ni pe g Va nc ou ve r 2014F 2012 2014F Canada - Area Under Construction Canada - Area Under Construction 10 9 10 8 9 7 8 6 7 5 6 4 5 3 4 2 3 1 2 0 1 Office Office W in ni pe g Va nc ou ve r T (M oro iss nt iss o W au e ga st ) To ro nt o Re gi na Qu eb ec Ci ty O tta w a M on tre al Le th br id ge Ed m on to n 0 Ca lg ar y Area Under Construction (msf) Area Under Construction (msf) 2012 T (M oro iss nt iss o W au e ga st ) To ro nt o Re gi na O tta w a M on tre al Le th br id ge Ed m on to n Ca lg ar y 0% Industrial Industrial Avison Young 2014 Forecast 9
  10. 10. U.S. Overview & Forecast U.S. commercial sectors demonstrate improved conditions in 2013 The U.S. commercial real estate markets had a mixed performance in 2013, though most moved further towards recovery and there were a handful of standout markets. Vacancy rates for the office, industrial and retail sectors declined year-over-year, and unemployment continued its slow downward trajectory. In late 2013, monthly job growth figures were encouraging; however, businesses continued to be cautious about capital expenditures in the face of ongoing political and budget distractions. With construction levels suppressed, an aging U.S. inventory saw a further emphasis on upgrades, retrofits and modernization. That trend will persist in 2014. As well, forecasted GDP growth bodes well for positive absorption of real estate this year. Office markets covered by Avison Young tightened in 2013 and concluded the year with an average vacancy rate of 13.9%. All markets, except for Houston, New York, San Mateo and Washington, DC, recorded a drop in vacancy, and three (Columbus, Pittsburgh and San Francisco) reported vacancy in the single digits. That trend is forecast to continue with two more cities (Denver and San Mateo, CA) also projecting singledigit vacancy by the end of 2014. Many markets reported that tenant tours accelerated in 2013, though business conditions spurred some short-term renewals. Going forward, long-term renewals may be less likely as occupiers reconfigure and rethink space use to obtain greater efficiencies and accommodate evolving business practices. Overall, construction and deliveries remained lower than the historical average; however, the volume of construction increased by nearly 50% compared with 2012. Three markets have more than 5 msf apiece under construction: Houston (11.8 msf), Washington, DC (7.5 msf) and New York (6.3 msf). The U.S. retail market saw vacancy tighten in all segments during 2013. Importantly, absorption outpaced new deliveries for five consecutive quarters, starting mid-year 2012, and nearly all retail segments were posting vacancy rates in the mid-single digits last year. An exception was shopping centers, but this asset class may get a boost in 2014 from the growth of walk-in clinics and on-demand healthcare centers. The combination of lower vacancy and strong absorption should result in upward pressure on rental rates this year. One example of improved retail conditions is The Shops at Summerlin project in Las Vegas. Development of the 1.6-msf mixed-use mall stalled in 2008, but is now underway for delivery in 2014. Urban concept stores, small inner-city versions of big-box retail outlets, will remain an important trend in 2014 as consumers and businesses continue to shift from suburban locations to core live/work/play communities that are served by public transit. Industrial markets in cities Avison Young services totaled 6.5 bsf and recorded a decrease in the vacancy rate to 9% from 9.9% in 2013. As in the case of the office sector, improved fundamentals and increased demand have spurred more development in the industrial market. As well, occupiers are increasingly seeking buildings with the new technologies needed for inventory management and logistics and that is also a contributing factor. U.S. industrial projects under construction at year-end 2013 totaled 43.2 msf and increased by a staggering 97% compared with year-end 2012. Avison Young industrial markets that demonstrated the most improvement during 2013 included Charleston, Denver, Detroit and Reno; however, the lowest vacancy rates at year-end were in San Francisco, Long Island, NY, Houston and San Mateo. Even with mixed market conditions, purchasers sought assets of all product types and are becoming more comfortable with what is described as the “new normal” in the post-recession era, referring to improved conditions that, in some cases, are satisfactory but not on par with pre-recession levels. Investors looked beyond the major coastal markets in 2013 and expanded their focus to include quality assets in secondary markets. The threat of rising interest rates has not had an impact on the sales market thus far. Through November 2013, transaction volume in the U.S. had reached $305 billion – 26% ahead of the same period in 2012. Washington, DC, a perennial top market targeted by investors, has lost some favor (as demonstrated by several quarters of declining sales volume), but sales rebounded in the third quarter of 2013. Its position as the U.S. capital, coupled with its low unemployment rate, will support Washington, DC’s ongoing desirability to investors. Other top markets such as Manhattan, San Francisco and Texas continue to garner investor interest that will be sustained through 2014. Canada led all other countries, by a significant margin, in capital investment in the U.S. in 2013. Canadian purchases totaled $9.9 billion in 2013, surpassing the total of $9.2 billion in 2012. Manhattan, Los Angeles, Dallas and Chicago were the top destination markets. Political uncertainty early in the year could lead to a slow start for the U.S. real estate market in 2014; however, improvement will accelerate in the second half. Look for strengthening fundamentals in select markets to spur office, retail and industrial development activity. Margaret Donkerbrook Vice-President, U.S. Research 10 Avison Young 2014 Forecast
  11. 11. U.S. Overview & Forecast U.S. - Overall Office Vacancy Rate Comparison 25% Vacancy Rate (%) 20% 15% 10% 5% 0% 2012 2013 2014F U.S. - Overall Industrial Vacancy Rate Comparison 20% Vacancy Rate (%) 15% 10% 5% 0% 2012 2013 2014F U.S. - Area Under Construction Area Under Construction (msf) 14 12 10 8 6 4 2 0 Office Industrial Avison Young 2014 Forecast 11
  12. 12. Calgary The City of Calgary Water Centre Strong economic performance bolsters retail and investment markets T he economic aftermath of the June floods in Alberta was expected to be grim, but recent outlooks suggest the opposite. RBC Economics reported in September 2013 that the province’s resilience and post-flood spending are expected to more than make up for the short-term challenges induced by the disaster. With the announcement of the proposed new Energy East pipeline, waning concerns about the “bitumen bubble,” real GDP growth for the province projected at 4.1% in 2014, and pricing for Western Canada Select crude oil averaging above $75 per barrel in 2013, the optimistic outlook within Alberta’s energy sector should translate into continued demand for quality space by major oil firms. Building booms in the Downtown, Beltline and Suburban South areas of Calgary will see 21 new buildings erected, adding more than 7 msf to the city’s office inventory. Office Overall vacancy within Calgary’s office leasing market rose in 2013, reaching 6.6% in the third quarter. Downtown vacancy surpassed 5% after seven consecutive quarters of sub-5% levels. Class AA space, however, remains extremely limited as appetite for the top-quality product in the Downtown remains high, spurring a surge in new office development. Eight projects in total are either confirmed or under construction and represent 5.2 msf of leasable office space, of which 61% is preleased. Retail A strong local economy, high consumer spending power, and aggressive U.S. retailer expansions by Target and Nordstrom drove retail market performance upward in 2013. TD Economics has forecasted that Alberta will lead the country with annual average retail sales growth of 6.5%. Issues related to Calgary’s urban sprawl, new municipal guidelines and a growing demand for complete communities - where people can live, work, shop and play - are changing the face of urban and suburban retail. Developers are now giving consideration to high-density, mixed-use projects that include street-level retail with underground parking and office and residential units above. Industrial Overall industrial vacancy climbed to 5.5% at the end of the third quarter of 2013, up from 4.9% at the conclusion of 2012. Developer confidence has been high in Calgary’s industrial market. The Northeast market, in particular, has seen the highest amount of construction activity, with approximately 3.5 msf of 12 Avison Young 2014 Forecast Calgary Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial new construction in 2013. Vacancy is expected to rise slightly in 2014 with a number of new buildings either being proposed or awaiting construction. As a result, tenants will have several new options to consider. Investment The Calgary market witnessed a robust year on the investment sales front, with land showing a significant increase as a percentage of overall investment activity, and the sale of the Jacobs Engineering building in Quarry Park setting a new historic low in terms of suburban office capitalization rates in Alberta at 5.2%. Several major institutional players made large investments in development plays to generate yield in the absence of sufficient existing commercial asset transactions. Several new masterplanned rental communities have been proposed for the edge of Calgary’s downtown core after a decades-long trend of multiresidential condominium conversion and development. REITs are likely to become active again in 2014 following the decline in unit values and the rising cost of equity that led to the investment vehicle’s exit from the buying scene for much of 2013. That absence created a unique window of opportunity for private investors, pension funds and other institutional players, many of which are aggressively seeking yield-generating real estate opportunities with exposure to Alberta’s thriving economy.
  13. 13. Edmonton Kelly Ramsey Building Shifts expected in all sectors T he Edmonton market performed as expected during 2013, in lockstep with predictions of moderate, but not extraordinary, growth and stable economic indicators. As with the rest of the province, Edmonton saw GDP growth of 3.5%, falling vacancy in all sectors of the commercial real estate market, and an impressive level of new construction. As the majority of the Edmonton market is intrinsically tied to the health of the energy sector, the region is expected to fare better than the national average in 2014 as oil-price indicators remain strong. High immigration and growth rates that significantly outstrip the rest of the country indicate another robust year for Edmonton’s commercial real estate market. As vacancy rates reach critical lows, the region is primed for respectable expansion in all sectors. Edmonton Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial Office Industrial Edmonton’s office market had a strong year of consistent positive absorption in 2013. By the close of the third quarter, overall vacancy was down to 7.6%, compared with 8.8% one year previous. Lease rates remained relatively stable during the same period; however, free rent as a tenant inducement has become scarce. Industrial vacancy in the Capital Region continues to inch downwards, reaching 3.3% overall with a total inventory in excess of 117 msf. Although rental rates held steady in 2013, the amount of available land within the city has steadily dropped and has made the outlying areas significantly more attractive for development. New construction totalled approximately 1.7 msf, the majority of which is expected to be easily absorbed. The possibility of up to four new office towers in the downtown core has raised speculation on the state of the market in 2014. It remains to be seen what impact each of the four possible towers will have, although the consensus is that class A and AA rental rates will drop while vacancy rises. The extent to which this will happen, however, remains uncertain. Retail Albertans continue to enjoy disposable income rates in excess of 150% of the national average, and 2013 saw this exceptional spending power brought to bear in the retail market. Overall vacancy dipped below 2% during the year, indicating an excess of demand and lack of space. There are currently 42 significant new retail developments either under construction or planned for the next two years. The majority of these are on the outskirts of the city in new neighbourhoods that have yet to be serviced by a local power centre. As these developments start coming online, the market is expected to reach a much healthier vacancy rate, though a significant shift may yet be two years out. With the energy sector continuing to lead development and create substantial positive externalities in Edmonton, 2014 is expected to be another strong year for the industrial market. Moreover, the region’s outlying areas can expect to see a more significant share of growth as the outward trend continues. Investment Much like in 2012, the investment market was bottlenecked not by a lack of willing capital but, rather, by a shortage of available investment opportunities in 2013. Though prices remained high across the market, deal velocity was stagnant, particularly in multiresidential properties, where near-record-low vacancy pushed rental rates and profitability up significantly. While interest rates remain low, investment properties in Edmonton offer enticing opportunities. This trend is expected to continue as the Bank of Canada eyes the possibility of keeping rates low for the foreseeable future. Avison Young 2014 Forecast 13
  14. 14. Lethbridge Galt Museum Market outlook remains promising for 2014 T he Lethbridge commercial real estate market finished the year strongly once again in 2013. With the city awarding a major retail and residential development (The Crossings) to Royop, consumers remaining optimistic about the prospect of purchasing a home, and investors confident in the Lethbridge market, growth in all sectors is anticipated in 2014. Office Vacancy in office product is expected to be higher than for regional retail and industrial assets in 2014. This situation is largely attributed to 30,000 sf of new office space on a large infill site in downtown Lethbridge, as well as 16,000 sf of additional new construction slated for 2014. Abundant availability downtown is giving tenants more options. Demand is shifting to high-quality professional space. Medical office users are looking for more opportunities to purchase – both strata units and freestanding buildings. By the end of 2014, this trend will translate into a significant increase in office vacancy to approximately 18%. Retail Earlier projections for commercial development in West Lethbridge were realized with the preleasing and construction of two new developments, WestGate Centre and SunRidge Corner. WestGate is approximately 90% leased and construction will be complete with tenant occupancy in early 2014. SunRidge Corner will see tenants open for business in 2014 with 70% of the project leased. In late 2013, the City of Lethbridge completed a transaction with Royop Developments for a 65-acre mixed-use project with approximately 45 acres earmarked for retail development during the next several years. Construction is set to begin in 2014. Overall, retail vacancy is sitting around 2% at the start of 2014. Industrial Demand in the industrial market was very strong in 2013 with the manufacturing sector leading the growth in new space and jobs. Vacancy rose slightly to 2.6% in 2013 with multiple new developments becoming available. Vacancy is anticipated to rise further with additional construction planned for 2014. Lease rates are now steady at $8.50 per square foot (psf ), up from $7.50 psf in 2012, with niche or premium locations as high as $10 psf. Growth inside the city has been matched by growth in the surrounding county, as businesses were attracted by improved large-vehicle 14 Avison Young 2014 Forecast Lethbridge Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial accessibility and lower land costs and taxes. Overall, the market is well balanced in terms of sales and leasing, and this trend will likely continue in 2014. Investment The uptick in interest rates in early 2013 led to a pause in acquisition activity by some buyers. However, confidence returned, as interest rates are expected to remain relatively stable through 2014. Industrial investment continues to be the most active. Small investors are able to participate, as most sales are valued at less than $1 million. However, a $6-million transaction is scheduled to close in early 2014. As in past years, many transactions involve owner/users. This trend will continue as interest rates remain low and local industrial users want to own their space. There is limited retail investment product currently available, but the sector remains strong with two new developments in West Lethbridge and one in South Lethbridge. All new developments are expected to be open for business early in 2014. Most of the investment activity targeting office product will be in the strata office market. Current market office lease rates do not necessarily work for new construction, but low interest rates are pushing demand from owner/users seeking strata units. Construction of several small strata office developments is planned for 2014. In 2014, Lethbridge assets will continue to offer 8% to 9% capitalization rates, but properties will be harder to find.
  15. 15. Montreal Place Ville-Marie New public administration seen as an encouraging sign E conomic activity in the Greater Montreal Area (GMA) experienced moderate growth in 2013; however, in 2014, growth prospects look promising with the improvement of global economic conditions. The ongoing commission of inquiry on the awarding and management of public contracts in the construction industry and the recent elections in both Montreal and Laval suggest an improvement in municipal government transparency. These recent changes could result in the end of the gloominess surrounding the management of public funds and provide an economic boost for Montreal. Montreal Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 Office Nearly 3 msf of office space is currently under construction in the GMA, 1 msf of which is located in the downtown core. The most important project in the area is Cadillac Fairview’s new Deloitte Tower, 70% preleased to Deloitte and the Rio Tinto Group. Meanwhile, the overall vacancy rate increased to 10.9% in the third quarter of 2013 from 9.8% in 2012. The number of leasing transactions decreased slightly in 2013, but there has been a significant increase in sublease activity in the market, mainly due to rationalization of space. In this context, the vacancy rate is expected to increase slightly to 11.9% in 2014. Retail Retail activity has increased slightly during the past few years. Business types have diversified and, consequently, transformed the retail real estate sector. Conventional shopping centres are slowly making way for larger regional shopping centres, power centres and lifestyle shopping centres. The rest of Canada has seen the arrival of major American bigbox stores and e-commerce, and Montreal is no exception. This increase in competition has increased retail vacancy and exerted downward pressure on rental rates. In Mirabel, a suburb north of Montreal, a 350,000-sf Premium Outlets centre is currently under construction. Expected to be delivered in 2014, this $150-million investment will comprise more than 80 stores. 2013 Office 2014F Industrial other well-located industrial buildings have been turned into retail or wholesale stores. The re-industrialization occurring in the United States could have a favourable impact on the Montreal market in the years to come, given the city’s proximity to major U.S. markets. Investment In 2013, investment property transaction volumes were equivalent to reported 2012 levels. The most significant transaction was the acquisition of a 50% interest in Place Ville-Marie by Ivanhoé Cambridge. Several other noteworthy buildings and real estate portfolios came to market in 2013 and are expected to find a buyer in 2014. The Quebec government has also announced the construction of a new institutional building at l’Îlot Voyageur, a $246-million investment comprising 625,000 sf of office space. The building is expected to be delivered in 2019. Despite some concerns about an increase in interest rates, transaction volume in 2014 should be similar to that recorded in the previous two years because of capital available to pension funds and the number of REITs that have become prominent players in the market, though acquisition activity amongst REITs may be slightly muted. Industrial Vacancy in the GMA increased to 6.6% in the third quarter of 2013 from 5.4% at the end of 2012. This activity reflected part of a larger trend which has seen a 1.7-msf decrease in the amount of occupied industrial inventory since 2010. Once vacant, some of these former warehouses have been converted into loft-style office space, while Avison Young 2014 Forecast 15
  16. 16. Ottawa Bayshore Shopping Centre Office market softens as retail market surges G iven Ottawa’s position as the Canadian capital, the commercial real estate market continues to be heavily influenced by federal government tenancies in the core. Suburban relocation initiatives and a flight to higher quality and/or energy-efficient buildings are trends in the continued shift in the Ottawa office market. The long-awaited construction of the light rail transit (LRT) system has begun, while development surrounding transit stations was at the forefront of many conversations throughout 2013 – and is sure to remain a focus of new development initiatives going forward. Office Some uncertainty prevails in the downtown Ottawa office market. In late 2013, continued downsizing by Public Works and Government Services Canada (PWGSC), combined with another anticipated large non-renewal, further added to local market concerns. In 2014, core vacancy rates will likely escalate and approach double digits for the first time in many years, creating a market with significant tenant leverage coming at the expense of any mid-tier landlords that are slow to react to a changing marketplace. Going into the final quarter of 2013, overall office vacancy stood at 5.8% - with expectations that it will crest to 6% in 2014 - while availability rose to 8.2%. Much of this increase could be attributed to the continued rise of core vacancy rates as new construction projects came to market and absorption levels remained negative throughout 2013. The late expansion by Internet marketing company Shopify in 2013, taking 100,000 sf in the core, was the one bright absorption in 2013. Meanwhile, on the other side of town, the suburban west market is holding its collective breath as a major restructuring of BlackBerry would negatively impact the Kanata North market, while stories of further job cuts at Alcatel will have implications for the Kanata market as a whole. Retail Ottawa’s retail market remained very active in 2013 with many new developments coming on stream throughout the year. With Ottawa remaining a focal point for national retailers, a battle for positioning has emerged among the city’s major retail centres with expansion and redevelopment plans underway in order to attract the likes of leading national and international retailers as they eye expansion into the market. 16 Avison Young 2014 Forecast Ottawa Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial In the west end of the city (adjacent to Canadian Tire Centre), a multitude of new developments have been announced, including the much-anticipated Tanger Outlet Mall and Bass Pro Shops, which are sure to increase competition among existing retail centres. Ottawa has also experienced major growth in the culinary industry, which is evident by the elevated activity by both local and national restaurant owners seeking to expand in the area. Looking forward, historically low vacancy rates and ongoing development are expected to continue as Ottawa remains one of the top choices for national retailer expansion programs. Industrial Industrial demand remained strong in 2013, leading to a significant decline in the overall vacancy rate to 1.9% at the end of 2013 from 2.8% in 2012. Low vacancy rates, coupled with strong net rental rates, continued to attract the attention of national real estate investors looking for stable returns. Despite strong appetite, limited product availability and a shortage of quality development land have led to cap-rate compression across the city. As a result, renovating and repurposing older stock will remain a focus of Ottawa’s industrial market going forward. Investment Ottawa capital markets continued to perform well in 2013. The local investment market saw an increase in owner/user offerings late in the year, suggesting that those who held real estate as an investment strategy in recent years decided to take advantage of the continuing low interest rate environment, a trend that is expected to continue in 2014.
  17. 17. Quebec City Place de la Cité, Laurier Boulevard Business as usual The Quebec City area assured its potential for economic growth with the re-election of Mayor Régis Labeaume in the fall of 2013. The private sector has diversified during the past decade with an emphasis on innovation and research, creating many high-skilled jobs. Furthermore, the high concentration of public services (education, health and government employment) will help maintain the area’s stable economy and low unemployment rate. The unemployment rate stood at 5% in the fourth quarter of 2013, below the Canadian average of 7%. Office After adding 1 msf of new office space to inventory in 2011 and 2012, more than 480,000 sf is currently under construction in the Quebec City region, with 50% preleased. With the construction of these new office projects, there is a shift in activity from the downtown core towards the suburban areas of Lebourgneuf and Laurier Boulevard. This wave of construction will, undoubtedly, place upward pressure on vacancy rates. At the end of 2013, the city’s overall vacancy rate was 6.5%; however, in the present context, a slight increase to 7.2% is expected in 2014. Retail Growth in the retail market has been weak during the past few years. The retail landscape has been transformed with the arrival of power centres, resulting in a diversification of retail product. Construction in the retail market was non-existent in 2013 with no new projects announced. The only activity was the renovation of three former Zellers stores located in shopping centres that are now occupied by Target. Consumers continue to be well-served with more than 1,000 retail outlets dispersed among five regional shopping centres and four power centres. Faced with increasing competition from American big-box stores and e-commerce, it is expected that retailers will attempt to reduce operating costs by decreasing their square footage and rents. Quebec City Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 2014F Office At the western extremity of the city, the industrial park in the suburb of St. Augustin de Desmaures is growing, with the availability of land expected to generate new construction in 2014. Investment Several major investment real estate transactions took place in the Quebec City region in 2013. The main transactions were the sale of two power centres (Méga Centre Lebourgneuf and RioCan SainteFoy) totalling 983,000 sf for $238 million; the sale of two multiresidential properties (Les Méandres and l’Aristocrate) comprising 417 units for $83.5 million; and the Bois-Fontaine office buildings with an area of 350,000 sf, which sold for $50 million. Construction of Quebec City’s new arena, an investment of $400 million, is underway. And Almerys recently announced plans to construct a 400,000-sf data centre for $34.5 million. Industrial The area’s industrial parks are witnessing an abundance of activity. Land parcels in industrial zones are 95% occupied. The market is characterized mostly by owner/user properties with a limited number of leased industrial or storage facilities. Furthermore, there are few buildings in the market for sale. This situation is putting upward pressure on rental rates and asset pricing, which is now equivalent to the construction costs associated with a new building. Avison Young 2014 Forecast 17
  18. 18. Regina Viterra Building Saskatchewan’s economy continues to grow S askatchewan will continue to be among the top provinces in growth, and the Conference Board of Canada has predicted the province has entered a period of prolonged economic prosperity. This is translating into growth in both major and secondary centres. The City of Regina had average real GDP growth of 3.7% per year in the 10-year period from 2003 to 2012, and is expected to surpass 5% in 2013, second in the country behind Saskatoon. This trend is expected to peak in 2014 before levelling off into 2017, closer to the predicted national average of 2.5%. These predictions align with population growth (a five-year annualized average of 2.5%) and unemployment (a five-year annualized average of 4%) statistics in Regina and Saskatoon. Collectively, the perfect economic storm is working to the benefit of the office, industrial and retail markets in both cities. Office Regina’s office market continues to be active, with inventory close to 7 msf and an overall vacancy rate of 5.2%. An additional 132,600 sf is expected to be added to the market in 2014, indicating that developers see high demand in both the downtown and suburban markets. Construction of an 80,000-sf office building at 1827 Albert Street and a second 40,000-sf suburban office building at Harbour Landing Business Park were completed in 2013. A three-storey, 20,000-sf medical office building is being constructed adjacent to the Regina General Hospital, while Harbour Landing Business Park is underway with its third of four planned buildings. There are a few sublet options in the downtown fringe area that are well-suited for a variety of specialty and professional users. A good variety of downtown, fringe and suburban space is either coming on stream or being constructed which, along with moderate absorption, suggests the office market will remain healthy in 2014, albeit with a slight increase in the overall vacancy rate. Retail There was little development activity on the retail front in 2013 due to a lack of available land. The majority of new development continued to occur in Grasslands on Regina’s west side. As a result of the limited supply and strong demand, land prices have increased, and coupled with the lift in construction costs, rental rates have increased to highs of $25 psf to $30 psf in certain areas of the city. 18 Avison Young 2014 Forecast Regina Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial Renovations at Southland Mall are complete with new tenants entering the market. Target opened its doors in July 2013, replacing Zellers. Cabela’s opened a new 50,000-sf building at Grasslands Shopping Centre, where construction continues as national retailers prepare to move in. Future tenants will include Bouclair Home, PetSmart, Party City, GNC, Rogers and Dollarama. Industrial Regina’s existing industrial inventory exceeds 17 msf with a vacancy rate of 3.6%. Morguard Investments Ltd. began construction in the Global Transportation Hub on its development, the TransLink Logistics Centre. Coupled with building costs, supply and demand will always decide the rates, and although vacancy has risen yearover-year in recent times, 2014 will continue to see a shortage in overall options to meet a variety of tenant demands. Look for rates to hold steady in the short term and no increase in land prices that now hover in the $425,000-per-acre range. Investment The Regina investment market was fairly dormant in 2013 with limited transactions occurring, mainly due to a shortage of product and solid income for current owners. This trend is expected to continue in 2014.
  19. 19. Toronto The Globe and Mail Centre Market pause in 2013 sets up challenges for some sectors in 2014 R obust during and since the recession, the commercial real estate markets across the Greater Toronto Area (GTA) showed mixed results in 2013. Corporate downsizing, consolidations and relocations into more efficient footprints fuelled a burgeoning sublet market in the wake of new supply, while interest-rate worries curtailed the formerly bullish investment market. These factors will challenge the market in 2014; however, market fundamentals will remain relatively sound. Office Following a strong performance through the downturn, the office market had less-than-stellar results in 2013. Leasing activity slowed, demand waned, sublet space spiked, and vacancy increased across most districts. While rental rates softened at the bottom end of the space spectrum, they remain firm at the top end with historic highs achieved in some top-tier towers in the core. Similar conditions will likely prevail in 2014, as the market braces for another wave of development (7.8 msf), delivering this year through 2017. With a landlord-favourable 5.6% vacancy rate, Downtown Toronto will see the bulk (5.8 msf) of new inventory. Notable construction announcements in 2013 included Oxford Properties’ Ernst & Young Tower, Menkes Developments’ 1 York Street and First Gulf’s Globe and Mail Centre. A steady stream of new supply, especially in Toronto West, countered any notable absorption, keeping suburban vacancy in double-digit territory (11.9%). Developers are pursuing and developing sites near existing or future transportation arteries, hoping to combat downtown’s appeal by urbanizing the suburbs. Retail Sears Canada captured headlines late in 2013 with the announcement that the leases for five major store locations will be sold back to the landlord, Cadillac Fairview – with three (Eaton Centre, Sherway Gardens and Markville Shopping Centre) in the GTA. Meanwhile, Nordstrom added Yorkdale Shopping Centre to its Canadian expansion plans. Target’s much-anticipated openings in former Zellers locations met with mixed results, encountering stumbling blocks, including consumers’ expectations regarding cross-border pricing parity. Moving into 2014, Toronto’s retail landscape continues to evolve. Exclusive Bloor/Yorkville is holding steady on rental rates, while trendy Liberty Village west of downtown draws interest from retailers, with several major new lease announcements pending. The overhaul of Union Station, slated for 2015 completion ahead of the Pan Am Games, promises approximately 165,000 sf of retail space for the downtown core and opportunities to capitalize on station passenger Toronto Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial traffic and the extensive highrise residential and office development that has reshaped the south core district in recent years. Industrial With vacancy below 5%, demand for modern distribution facilities has led to a surge in development in response to the ongoing needs of large domestic (Canadian Tire) and multinational (Amazon) retailers. Despite high development charges, new industrial projects are especially apparent in Toronto West, where distribution facilities in the 1- to 1.5-msf range are either underway or imminent. Orlando Corporation will soon deliver 7825 Winston Churchill Boulevard (377,000 sf) – the first speculative building offering a 36-foot-clear ceiling height. Vacancy will rise modestly in 2014 as users focus on new projects, diminishing absorption for existing buildings. Investment The frenzied investment sales activity of recent years appears to be winding down, largely because of volatile interest rates beginning in early 2013 that curtailed the purchasing power of the biggest buyers – the interest-rate-sensitive REITs. 2013 also signalled the end of caprate compression for secondary and/or challenged assets. With the final tally to come, the $8.2 billion transacted through the first three quarters of 2013 could leave the market short of the record-setting $11 billion traded in 2012. Notable transactions in 2013 included a sizeable portfolio of office and industrial buildings by GE Canada Real Estate Equity. As REITs become more discriminating in their acquisitions, competition will intensify among pension funds/advisors, life companies and emerging privateequity players, keeping buyers and sellers active in 2014. Avison Young 2014 Forecast 19
  20. 20. Toronto West (Mississauga) Mississauga Gateway Centre - Building A Moderate growth expected in 2014 T oronto West’s commercial real estate market sent mixed signals in 2013. While the office market raised concerns with rising vacancy rates and an expanding sublease market, robust deal velocity led to upward price movements in the industrial market. Moderate growth is expected in the leasing and investment markets in 2014. Average asking rates in premium class A assets will remain at current levels as the market witnesses continued demand for quality. Toronto West Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% Office 4% The office market experienced a shift in market dynamics in 2013. The market saw a continual rise in the availability rate, a substantial third-quarter expansion in the sublease market, flat class A average asking rental rates, and the delivery of approximately 560,000 sf. 0% For 2014, a slight decrease in class A vacancy is expected, driven by a continued flight to quality with users seeking high-quality spaces in prime locations. This increased high-end activity will come at the expense of second-generation class B spaces encumbered with higher operating costs, larger vacancies and deferred maintenance. The market will also see higher employee density as users seek improved space efficiency. Retail Supported by the continued growth of home sales in the GTA housing market, the Toronto West retail market had a modest showing in 2013. Retail growth was reflective of the general strength in demographics and steady demand for home ownership. Following a rise in greenfield development in the Halton Hills Planning Area, the 350,000-sf first phase of Toronto Premium Outlets in Halton Hills, a major retail development, was completed in the third quarter of 2013. The growth of e-commerce continues to influence big-box retailers’ commercial real estate decisions. In April 2013, office supplies giant Staples Canada issued its plan to shrink its brick-and-mortar footprint by 39 retail stores. This trend will provide smaller and less prominent retailers with leasing opportunities in a healthy market that posts 1% to 3% vacancy. Industrial In 2013, rental and vacancy rates in the industrial market returned to pre-recession levels. Robust deal velocity drove up rental rates across all asset classes, encouraging a rise in speculative construction. Upward pressure on rental rates for space larger than 100,000 sf was also a result of the lack of product in the market. 20 Avison Young 2014 Forecast 2% 2012 2013 Office 2014F Industrial In early 2014, a rise in tenant consolidations is expected, as new industrial product comes to market. This will cause a slight uptick in vacancy rates for existing buildings, while rental rates for these buildings are expected to remain flat, just above $5.60 psf, with newer product priced between $6 psf and $6.50 psf. With deal velocity weakening during the course of the year, as multinational retailers embrace the challenges of the U.S. economy, the market will likely see a reduction in net absorption rates. Investment Entering 2014, investors will encounter difficulty in acquiring class A industrial assets as the market continues a shift towards lower-risk, high-quality assets with limited capital expenditure requirements. Following this trend, pension funds are expected to take a more aggressive approach to industrial acquisitions; however, they will have limited interest in suburban office with concern over leasing fundamentals. REITs will continue to take a back seat, at least in early 2014, as they remain sensitive to interest rates, the debt markets and unit pricing. Overall, premium industrial assets will remain the most attractive target for investors in 2014, due to strong leasing fundamentals.
  21. 21. Vancouver 980 Howe Street Strong demand driving market as premium assets remain scarce D emand for BC commercial real estate attained near-record levels in the first half of 2013 despite diminished dollar volume due to a lack of trophy-asset transactions. Overall deal activity in 2013, however, remained elevated compared with previous years as several significant transactions closed in the second half of the year. This uptick in second-half sales and dollar volume is attributed in part to the unexpected outcome of the provincial election in May 2013, which served to reinforce business confidence and provided additional momentum to an already active commercial real estate market. Office In 2013, the office market remained calm in advance of a flurry of activity in 2014. Limited new-build product was available in Metro Vancouver in 2013, but numerous office buildings that were under construction are set to start delivering new inventory in 2014 and beyond. With more than 2.1 msf of new office space in downtown Vancouver alone under construction by year-end 2013, and more than 3.5 msf regionally, there is likely to be a significant shift in the downtown office market in terms of how assets are classified. In addition, increases in sublease space and overall vacancy, and a flight to quality, may result in downward pressure on lease rates, particularly in older class A and B premises. Retail Demand for retail assets remained strong in 2013; but with few premium assets available in primary markets, retail real estate sales activity has diminished compared with previous years. Deal volume is anticipated to remain steady going forward as vendors seek to dispose of non-core assets and benefit from the strong demand for real estate persisting in the market. Purchasers are likely to buy more on fundamentals in 2014 and will no longer be strictly focused on income and yield. A distinction between primary markets and secondary/tertiary markets will be drawn more sharply by purchasers, and sellers may find an adjustment in pricing expectation necessary to clinch a deal. Industrial Confidence in Metro Vancouver’s industrial market surged, particularly after May 2013. Despite millions of square feet of new product added to inventory in 2013, overall vacancy was virtually unchanged and remained below 4% region-wide. Vacancy in largefloorplate modern distribution buildings remained exceptionally Vancouver Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial tight in all markets. The supply of industrial land remains a concern moving forward. New construction will remain a priority in 2014, particularly next-generation logistics/distribution facilities that cater to the needs of large users seeking to leverage investment in port and transportation infrastructure in the region. This year will also mark the opening of the South Fraser Perimeter Road, a new $1.3-billion trucking route that connects an existing container terminal, a second such terminal under development, a coal export facility and various industrial nodes to existing highway infrastructure. Investment In 2013, the transition to a post-recovery financial environment likely commenced. This controlled market normalization was slowed somewhat by lacklustre economic and employment indicators that manifested in mid-to-late 2013. The Metro Vancouver commercial real estate market was impacted by the retreat of Canadian REITs in 2013, which generally led to reduced competition for top-tier assets. However, well-capitalized local purchasers and institutional buyers stepped into the breach for those quality premium assets that did come to market, and that trend is expected to continue in 2014. Metro Vancouver remains a key market for most investor types, and the persistent lack of supply in all asset classes is expected to support both elevated market demand and asset pricing. Avison Young 2014 Forecast 21
  22. 22. Winnipeg 2445 Pembina Highway Open for business W innipeg and Manitoba are indeed open for business. Office towers are going up, condo projects are multiplying, and the city has its fair share of wind turbines supplementing the power grid. Condominium sales were up a record 14% in 2013; building permits increased 3.5% to $810 million; tens of thousands of square feet of new retail and office space are under construction; and the city’s new $200-million police headquarters is nearing completion. The city has had a new energy to it since the return of the NHL’s Winnipeg Jets hockey franchise. Winnipeg’s Downtown Business Improvement Zone started a pilot program with a weekly downtown farmers’ market – a roaring success jammed with customers that has been extended into the winter. Office The downtown market finally found some traction in the second half of 2013 after a lacklustre first half, but finished the year slightly off 2012 transaction totals. Vacancy remained steady, rising slightly to 8.5%, with just under 162,000 sf of positive absorption. Although class A buildings experienced slight negative absorption of 8,300 sf in early 2013, this class remained the tightest in the city, ending 2013 with the lowest vacancy. Class B properties ended the year with the highest vacancy (9.4% at the end of the third quarter of 2013). To mid-2013, class C properties enjoyed positive absorption of more than 148,000 sf, causing the vacancy rate to drop 90 bps to 8.9%. Although construction costs remain high, office vacancy rates in all classes are expected to remain static through early 2014. Retail Retail sales increased 2.1% through early 2013, earning Manitoba a ranking of fifth in the country. This increase can be attributed to the sale of new vehicles, which grew by 9.6%. Despite this growth in sales, retail vacancy rose by 450 bps as the arrival of a U.S. retailer – Target – offset the departure of a Canadian retailer – Zellers – to a large extent. On the flip side, big-box power centres continue to have the lowest vacancy in the city at 0.3%. The pace at which retailers absorb vacant space will be a good indicator of the overall strength of the retail market in 2014. Industrial The market saw 140,000 sf of new supply and experienced negative absorption of slightly more than 247,000 sf during the first three quarters of 2013. Even though the market has 22 Avison Young 2014 Forecast Winnipeg Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial experienced back-to-back reporting periods with negative absorption and increased vacancy, the market has a strong foundation exhibited by an overall vacancy rate of 2.6%. Quality space in the city continues to be absorbed quickly when it hits the open market. Part of the reason for the spike in vacancy was the closure of a 200,000-sf property leased by a U.S.-based tenant. However, this vacancy created an opportunity for tenants to take advantage of a quality industrial building. In such a tight market, this vacancy accounts for a significant portion of the product available for lease. A recurring theme in the Winnipeg industrial market is the amount of functionally challenged space that continues to remain vacant. Investment Fortress Developments and Mady Development Corp. have announced the construction of the tallest skyscraper in Winnipeg at approximately 42 storeys – a retail, office and residential condo project in the heart of downtown. This project, combined with Centrepoint - a $75-million mixed-use complex being developed jointly by Longboat Development Corp. and Artis REIT - along with plans to double the size of the RBC Convention Centre Winnipeg, are generating a lot of positive momentum.
  23. 23. Atlanta Hammond Exchange Business climate driving commercial real estate rebound F ueled by a steadily improving economy, Metro Atlanta’s office, industrial and retail markets are gaining traction, and the multiresidential sector continues to shine. The city’s strategic location within Georgia (which was voted the No. 1 business climate in the U.S. by Site Selection magazine), enviable logistics assets, low cost of energy and diversified economy are credited for attracting new business. Eighty per cent of the U.S. can be reached within a twoday truck drive or two-hour flight from Atlanta Hartsfield-Jackson International Airport. Businesses are also considering Atlanta as a potential relocation destination thanks to new statutory incentives, including energy sales and use tax exemptions. As 2014 begins, one can finally be optimistic about the future of the Atlanta commercial real estate market in the post-recession era. Atlanta Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial Office Industrial The Atlanta office market has turned a corner after being hit hard by the Great Recession. While the sector has not fully recovered, it is exhibiting significant signs of improvement. The overall office vacancy rate continues to dip after spending much of the past five years higher than 20%. At the end of the third quarter of 2013, office vacancy stood at 18.6%, a decline of 150 bps compared with year-end 2012. The average asking rent for Metro Atlanta office space at the end of the third quarter of 2013 was $20.46 psf, the highest since 2011. Metro Atlanta’s industrial market continued to experience positive absorption numbers in 2013. At the end of the third quarter, yearto-date net absorption totaled more than 8.6 msf. During the same period, vacancy fell 50 bps to 11.5%. Rental rates remain stable. The average quoted rental rate was $3.88 psf at the end of the third quarter, up from $3.80 psf at year-end 2012. Atlanta’s industrial sector should continue to rebound in 2014 as the city’s housing market steadily improves, suppliers require more warehouse space and retailers seek more distribution space to meet the needs of their growing e-commerce business. The Atlanta market showed positive net absorption throughout 2013. By the end of the third quarter, total net absorption reached 1.8 msf, outperforming all of 2012, and marking the eighth consecutive quarter with positive absorption. This pace should continue throughout 2014 as businesses hire more people and require more space. Retail The Atlanta retail market also made gains in 2013. The vacancy rate at the end of the third quarter of 2013 was 9.6% – a 60-bps decrease from the same period in 2012 and the lowest vacancy since 2008. Total positive net absorption for the third quarter was 889,486 sf, bringing the year-to-date 2013 total to 2 msf. Deliveries expected in 2014 include Avalon in Alpharetta and Ponce City Market in Midtown. Tenants will continue to show interest in leasing space in these types of mixed-use properties that include office and residential space. Investment Atlanta’s commercial real estate investment market experienced a 67% increase in sales volume during the first three quarters of 2013 compared with the same period in 2012. Bolstered by the $373-million sale of a partial interest in Terminus I & II and the $82.5-million sale of Camden Vantage Apartments, investment sales in all sectors topped $6.8 billion by the end of the third quarter in 2013, the largest three-quarter total since 2007. Improved job growth – 51,600 new jobs in the previous 12 months – due to local business expansion and increased relocations are driving the strong rebound in the Atlanta market. Avison Young 2014 Forecast 23
  24. 24. Boston 6 Tide Street Boston strong in the midst of sluggish U.S. recovery M etropolitan Boston continues to enjoy economic expansion and improving real estate fundamentals. Upticks in local housing prices, wages and consumer confidence during 2013, coupled with low inflation and increases in consumer spending, will enable the economy’s growth to continue. With an unemployment rate among the strongest in the U.S. (7.2% in August), Massachusetts continues to thrive due to the presence of world-class educational, medical and research institutions. Boston Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% State GDP grew an estimated 3.5% in the third quarter of 2013, according to MassBenchmarks, following a revised 1.7% increase in the second quarter of the year. The publication forecasts 3.4% growth in state GDP from October 2013 to March 2014. Commercial real estate saw falling vacancies, rising rents and new construction across most property types. In 2013, a total of 5.5 msf of new inventory was delivered, including 3.1 msf of multi-residential and 1.9 msf of office. More than 16 msf is under construction – three times greater than the previous five-year average in Metro Boston, including 7 msf of multi-residential, 6.9 msf of office and 2.2 msf of new retail developments. projects at both North and South Station, Landmark and Fenway Centers bordering the Back Bay will add another 500,000 sf of retail. Five new supermarkets are coming to Boston to feed the demand created by 8,260 approved new housing units, including 1,346 already delivered in 2013. Office Industrial Overall office vacancy fell 260 bps year-over-year to 11.9% while rents increased 5.5% to $24.23 psf in the market as a whole, and 7.7% to $44.70 psf in the central business district (CBD). Expect rents to continue increasing until new construction delivers during 2014 and excess space, already being marketed, officially vacates. Of the office space under construction, 78% is preleased to notable-credit tenants, including Vertex Pharmaceuticals, PricewaterhouseCoopers and State Street Corp. The industrial sector absorbed 3.8 msf of space, including R&D and flex space, in the 12 months ending in September 2013, lowering vacancy to less than 14% for the first time since 2008. Major leases to Preferred Freezer, Waste Management, NyPro, O’Reilly Automotive, Double E, Williams-Sonoma, Jiffy Mix and Artisan Industries were welcome relief along the battered Route 495 corridor. New construction is virtually non-existent, and it will take several more quarterly gains like these to push rents or jumpstart development. Limited suburban construction and strong leasing activity brought suburban vacancy below 14% for the first time since 2008. Suburban rents grew 1.6% year-over-year to $19.82 psf overall on the 11th consecutive quarter of occupancy growth. Still, tenants can lease class A space in suburban markets for $30 psf versus $60 psf in the CBD’s financial district. Demand for live/ work/play centers continues to drive urban and suburban mixeduse developments. Retail New amenities are coming via new suburban lifestyle centers underway in Burlington, Lynnfield, Westwood and Littleton. Urban mixed-use projects at Seaport Square, the Ink Block, New Balance’s Boston Landing and Assembly Row in Somerville all have retail components underway. Major development and redevelopment 24 Avison Young 2014 Forecast 4% 2% 0% 2012 2013 Office 2014F Industrial Investment At $5.4 billion through the first three quarters of 2013, sales volume through October showed a slight increase compared with the first half of the year. While core product remains the most in favor, investors are now buying vacancy hoping to capture increasing rents. Look for more owner/user deals, as a hedge against that rent growth, like athenahealth’s purchase of its Watertown campus. With the Federal Reserve’s stimulus policy of buying $85 billion per month in bonds expected to continue through at least the first quarter of 2014, low interest rates will continue to support capital flowing into U.S. commercial real estate in general, and specifically into gateway cities like Boston, which remains a top target for investors worldwide.
  25. 25. Charleston 360 Concord Street Region poised for explosive growth T he Charleston region is recognized internationally as a top destination, recently garnering its third consecutive Condé Nast Readers Choice Award as the No. 1 place to visit in the U.S. Amplified visibility has spurred increased tourism and a boom in hotel construction and investment. Major growth in key industries, including port-related businesses, manufacturing (led by Boeing and its suppliers), and both IT and medical research, has made the Charleston region one of the fastestgrowing metro areas in North America during the last five years, and the region is expected to outpace the nation in the coming decade. With the top manufacturing job growth in the nation between the first quarter of 2010 and the fourth quarter of 2011 according to Brookings, as well as a top IT growth spot in the country, the region will see new construction in all product types increasing in the coming months and years. Moreover, the Charleston region’s population will exceed 1 million people in the coming decade, driving construction of apartment, housing, retail and other product types, and requiring significant investments in infrastructure. Office Demand for office space and the value of office properties are linked closely to job growth. In 2014, office demand will continue to outpace supply, which has been playing catch-up since the recession, resulting in steadily declining vacancy and rising values. Absorption will increase as developers create more class A space to meet the burgeoning demand. Rental rates are expected to continue their climb, further driving up values. The forthcoming year is shaping up to be one of optimism and progress for Charleston as it caters to the needs of a fast-growing population. Retail The Charleston retail market continues to flourish and is expected to expand in 2014 and beyond. Fueled by accolades for Charleston’s history, charm and fine food, the booming local tourist industry has spurred a rush to build hotels, restaurants and retail outlets in historic downtown. Charleston’s population and job growth have outpaced the nation, which has prompted substantial single-family and multi-residential construction, driving retail growth in the suburban markets. The majority of the anticipated growth will occur in the northern part of the Charleston Metropolitan Statistical Area in the small, but growing, towns of Goose Creek, Summerville and others. Charleston Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial Industrial The Charleston industrial market is poised for robust growth in 2014. Expansions have been announced by Boeing and others in the aerospace and auto-related sectors. Expansion by BMW in the upstate, and the inland port opening in October, will result in higher export volumes and greater business for port-related industries. The Port of Charleston terminal expansion, its dual-rail access intermodal facility, and the harbor deepening will further enhance Charleston as a destination for exporters and distribution centers. The fundamentals are at a tipping point. Vacancy is below where it was at the top of the market, and speculative development is underway. Rent growth is expected to return in 2014 to justify broader speculative growth. Investment Charleston is on the radar screen for institutional investors as well as private investors seeking a growth market. Led primarily by the multi-residential and hospitality sectors, new construction and sales of existing properties are driving market capitalization rates down and creating a shortage of opportunity. Investors who purchased in the early stages of the recession and have re-tenanted their properties will find buyers eager to provide them handsome returns while still allowing ample upside as rents continue to rise back to pre-recessionary levels. As rents continue to rise, and vacancy trends improve, land sales and new construction will dot the horizon in the region as the continued strong population and job growth propel Charleston forward. Avison Young 2014 Forecast 25
  26. 26. Chicago 225 W. Wacker Drive Improving economy, increased demand prompt further growth in 2014 T he Chicago economy saw modest growth during the course of 2013: employment jumped 120 bps (53,700 jobs) in the 12 months ending in October 2013; unemployment remained slightly above the national average; and job growth was led by both the professional and business services sectors, adding 28,700 positions through October. The software and technology sector also witnessed strong growth, which is projected to continue through 2014. Both the office and industrial sectors remained consistently active throughout the year, prompting several significant developments to commence construction – confirming that the market has stabilized. Throughout 2014, the Chicago market will likely see considerable growth as the local economy continues to improve. Office The office market recorded a third-quarter 2013 vacancy rate of 13.9%, a minor uptick compared with year-end 2012. Both the central business district (CBD) and suburban markets witnessed strong leasing activity, resulting in positive absorption in the last several quarters. Notable 2013 transactions included McDermott Will & Emery’s 232,000-sf lease at River Point, Google’s 223,000-sf lease at 1K Fulton, and Denton’s 217,000-sf lease at Willis Tower. Capital One continued expanding its suburban footprint, which now totals 150,000 sf. Rental rates are tightening and forecasted to rise throughout 2014, especially in limited class A product. Luckily, construction has returned after a hiatus of several years. Currently, there are two projects under development within the CBD, representing 1.7 msf. Retail Chicago’s retail market remained fairly active throughout 2013. Vacancy fell 30 bps through the first three quarters of the year. Retail activity shifted from the suburban markets into the CBD and surrounding submarkets, following both businesses and consumers. Big-box retailers continued modest expansion in key suburbs while also reducing their footprint to expand into areas surrounding the CBD. The regional grocery chain Dominick’s will close all stores by mid2014, likely causing vacancy to rise slightly in the next several quarters and then fall, as both national and local specialty grocery chains have been showing interest in acquiring many locations. 26 Avison Young 2014 Forecast Chicago Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial Industrial With an inventory of more than 1 bsf, Chicago’s industrial market experienced steady growth during 2013. Vacancy fell to 8.5% at the end of the third quarter from 9.2% at year-end 2012. There was a total of 2.8 msf under construction as of the third quarter of 2013, with an additional 1.9 msf expected throughout 2014. The number of speculative projects has risen since the recession; build-to-suits remain the predominant choice for landlords. E-commerce continues to be a market driver – many retailers are expanding their distribution capabilities to accommodate growth. Amazon has confirmed plans for a 1-msf build-to-suit within the Southern Wisconsin submarket, bringing 1,000 new jobs. Looking ahead, positive net absorption and lower vacancy are expected, especially in key submarkets. Investment As market conditions stabilized, the Chicago office market recorded an uptick in investment sale transactions in 2013. Owners that successfully repositioned their properties began selling for premiums. Foreign investors continued to acquire office product. Notably, 225 W. Wacker Drive was purchased by South Koreanbased Mirae Asset Global Investments, and Canada’s Ivanhoé Cambridge purchased 10 and 120 S. Riverside. Several large assets under contract in late 2013 were expected to close by year-end 2013 or in early 2014. Demand for industrial assets remains strong as vacancy falls to pre-recession levels. Investors with sufficient capital continued to acquire fully leased big-box assets while also considering value-add opportunities, a trend which should carry on through 2014.
  27. 27. Columbus Columbia Gas Building Slow and steady wins the recovery race T he Columbus, Ohio Metropolitan Statistical Area (MSA) is currently experiencing a slow and steady recovery that should continue through the first half of 2014. The unemployment rate dropped to 6% in the third quarter of 2013, which was attributed to hiring in the public sector and in opposition to the State of Ohio’s unemployment rate, which increased to 7.5%. The Columbus MSA comprises approximately 1.7 million residents and is expected to break 2 million by 2015. Columbus is the 15th-largest city in the nation with a diverse economy driven by education, insurance, banking, fashion, defense, aviation, logistics, healthcare and technology. The city’s growth has been focused primarily in five submarkets: Downtown, Easton, New Albany, Dublin and Polaris. Columbus Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 Office The Columbus office market is made up of almost 64 msf of space. The sector’s recovery is being led by Nationwide Insurance’s 426,000-sf development of a class A office building in the Arena district downtown. Columbia Gas has preleased 246,400 sf in the project. Additional planned projects include 250 S. High Street (160,000-sf mixed-use building in the Columbus Commons), Westar V (a 103,000-sf class A office building in Polaris), and The Joseph (a 55,000-sf mixed-use project in the Short North). There was approximately 800,000 sf of positive absorption in 2013, causing the vacancy rate to drop to 9.3% at the end of the third quarter of 2013. The average quoted rate for class A office space was $18.04 psf. Retail The retail market comprises approximately 88 msf and experienced approximately 1 msf of positive absorption during the first three quarters of 2013. Total vacancy dropped to 7.5% and average rental rates rose to $11.36 psf. The retail recovery is being led by the Easton Gateway, a new 54-acre development that is expected to open in 2014. Costco opened a 150,000-sf store on a 17-acre site purchased by the warehouse retailer. REI, Saks Off 5th and Dick’s Sporting Goods are set to open in mid-2014, while Whole Foods will open in May 2015. The City of Dublin has announced plans for a new $300-million, mixed-use development to break ground in 2014 on the northeast corner of Riverside Drive and Dublin Road along the Scioto River. The project will include retail, multiresidential and office components. 2013 Office 2014F Industrial Industrial The Columbus industrial market contains 243 msf in 5,034 buildings. The industrial market recorded 4.4 msf of absorption and 2.2 msf of new construction during the first three quarters of 2013. The vacancy rate declined to 8.2% with an average rental rate of $3.21 psf net. The largest new deals included Speed FC LLC, which signed a 767,000-sf lease; and Exel Global Logistics, which signed two leases for 338,000 sf and 313,000 sf, respectively. Investment Through the first three quarters of 2013 there were approximately $81 million in office sales and a total of 50 transactions with cap rates up slightly, averaging 9.5% compared with 9.3% in 2012. A total of 295 retail assets with a combined value of $125 million changed hands in the first three quarters of 2013. Cap rates for retail product averaged just below 10%, compared with slightly more than 13% one year prior. In the industrial investment sector, 3.2 msf sold during the first half of 2013, according to CoStar. The total space was traded in 22 transactions totaling $70 million at an average price of $21.72 psf. Average cap rates increased to 7.8% at the end of the third quarter from 7% in late 2012. Avison Young 2014 Forecast 27
  28. 28. Dallas Encana Plano Office Corporate expansions fuel the Dallas economy T he Dallas-Fort Worth region recorded some of the highest employment gains in the United States in 2013 as large corporations expanded in the area. The favorable business climate led to further population growth, and Dallas-Fort Worth is currently the fourth-largest metro in the U.S. The increased activity from large corporate users (who were either expanding or relocating) created a ripple effect, pushing the unemployment rate down to 6% and increasing the need for space across all product types. Housing is one of the foundations of a healthy market, and according to the S&P/Case-Shiller Home Price Index, home prices have surpassed those seen before the recession. The Dallas market will likely continue its expansion in 2014 along with the positive market fundamentals. Office The Dallas office market recorded healthy absorption in 2013, causing vacancy to stabilize and asking rates to appreciate. Many large corporate users expanded in the area, with State Farm’s 900,000-sf lease in the Richardson submarket among the more notable transactions. The company is also constructing a 1.5-msf campus in Richardson, which will deliver in 2015. Sustained low natural-gas prices are beginning to have an effect on the Dallas office market. Encana, the Canadian natural-gas giant, announced plans to close its Plano office, a new building totaling 320,000 sf. The large block of space hitting the market could dampen the viability of new projects in the area. However, space in Plano is in high demand and the office market should adapt quickly. Decreasing vacancy has caused speculative construction to return to the market, but until new space delivers in 2014, the strong demand will cause upward pressure on asking rates. Retail Retail growth has begun to echo the population growth in the metro, and the significant employment gains have boosted consumer spending. Mixed-use developments in urban growth areas have attracted additional retail tenants, particularly in Uptown where consumers live, work and play. Demand for retail space will continue to grow in 2014, resulting in declining vacancy. Industrial Dallas’ centralized location and busy airport have turned the city into a continually growing major inland port. The City of Dallas has a $33-million project in the works to improve infrastructure near the inland port. Warehouse and distribution users have expanded 28 Avison Young 2014 Forecast Dallas Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012 2013 Office 2014F Industrial in the Dallas market due to the favorable logistics and trade routes. The demand for space has caused the vacancy rate to fall to its lowest point since 2002. Construction was conservative in 2012, but increased in momentum throughout 2013. Even when this space delivers in 2014, it will not likely offset the ongoing strong demand in the industrial market. Vacancy is projected to remain near historically low levels throughout 2014. Investment Considered by economists to be one of the nation’s most dynamic markets, Dallas continues to capture the interest of both foreign and domestic investors. Core assets in prime locations have typically been a favorite among investors. However, value-add properties are gaining traction, particularly among market-entry buyers who want to place capital in an economy that continues to demonstrate strong fundamentals. Thanksgiving Tower in Downtown Dallas was sold to Woods Capital Management in July 2013, and the company plans to invest a significant amount of capital towards improving the building. Rising interest rates remain a concern in the Dallas investment market, but as long as interest rates remain relatively low, investment activity will remain elevated.

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