Avison Young 2016 Forecast Commercial Real Estate Canada, U.S. and U.K - 2015 ANNUAL REVIEW
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2015 ANNUAL REVIEW Avison Young 2016 Forecast Commercial Real Estate Canada, U.S. and U.K. Partnership. Performance.
Contents
United States cont’d.
Message from the CEO 4
Fairfield County 40
Fort Lauderdale 41
Message from the President, U.S. Operations 6
Greenville 42
Message from the Managing Directors 7 Hartford 43
Houston 44
Property Management, Debt, Joint Venture & 8 Indianapolis 45
Structured Capital
Knoxville 46
Message from Investment Management 9 Las Vegas 47
Long Island 48
Canada Overview & Forecast 10 Los Angeles 49
Miami 50
U.S. Overview & Forecast 12 Minneapolis 51
Canada 14 Nashville 52
Calgary 15 New Jersey 53
Edmonton 16 New York 54
Halifax 17 Oakland 55
Lethbridge 18 Orange County 56
Montreal 19 Orlando 57
Ottawa 20 Philadelphia 58
Quebec City 21 Pittsburgh 59
Regina 22 Raleigh-Durham 60
Toronto 23 Reno 61
Toronto West (Mississauga) 24 Sacramento 62
Vancouver 25 San Antonio 63
Waterloo Region 26 San Diego County 64
Winnipeg 27 San Francisco 65
United States 28 San Mateo 66
Atlanta 29 Tampa 67
Austin 30 Washington, DC 68
Boston 31 West Palm Beach 69
Charleston 32 United Kingdom 70
Charlotte 33 London 71
Chicago 34
Avison Young Research 72
Cleveland 35
Columbus, OH 36 About Avison Young 73
Dallas 37
Denver 38 Our Contacts 74
Detroit 39
Message from the CEO
Uncertainty, diligence, resilience… opportunity
As the books close on another strong year for commercial real rapidly increasing interest rate
estate, 2016 opens differently – with some uncertainty and environment. 2016 is also a
unresolved questions that could impact the way owners and presidential election year, and
occupiers invest and operate. The variables, however, are both politics and rhetoric will choke
positive and negative. To successfully navigate the real estate the airwaves – for, against and
markets in 2016, we will need to keep a global perspective, neutral to business.
stay abreast of changes in the broader environment and, Canada has lowered its interest
increasingly, devise innovative solutions to complex rates and employed a low-dollar approach to spur investment
problems. and buffer oil and other commodity weakness. The potential
With this Forecast, we hope to provide insight into some of for budget surpluses will give way to government-sponsored
those trends and risks, and identify markets and strategies investment under new Prime Minister Justin Trudeau. In
to watch in the year ahead. Often, uncertainty delivers Alberta, the New Democratic Party (NDP) is in the majority
exceptional opportunities to those who are diligent in and has moved its government to the left as energy
anticipating and adapting to it. companies continue to struggle with low prices. Significant
A period of transition infrastructure commitments under new governments total
$10 billion in Alberta, and more at the federal level.
The global real estate industry has had a tremendous run.
It has been more than six years since the Great Recession. The United Kingdom (U.K.) continues with a low-interest-rate
During the steady climb back up, interest rates continued policy. Economic growth in London and southern regions
to decline, central banks unleashed quantitative easing, will continue to outpace the rest of the U.K.; however, the
employment recovered and economies rebounded. The post- economic ripple effect from the south to the north means
recession years have marked a period of rebuilding balance that opportunities in the areas of the “Northern Powerhouse”
sheets and personal wealth, and relative peace in much of the and “Midlands Engine” will only increase.
Western world. Germany continues to be the stabilizing force in continental
The financial and real estate markets appear stable as we Europe, but shoulders the burdens of other countries in the
begin 2016, but variables now surfacing could undermine EU. And rounding out our Avison Young markets, Mexico is
short-term prosperity. The year ahead seems to be the waning stable and opportunities to grow are available as the Mexican
days of a prosperous cycle, perhaps even a cyclical top in economy matures.
liquidity, pricing and transaction velocity. As difficult as it is to Across the board, fundamentals continue to be strong.
acknowledge that we are entering a period of transition, we Occupiers, other than energy companies, are stable and
must remain clear-eyed as we undertake our 2016 strategic employment is growing in most sectors. For oil and gas, while
planning. Our industry has always been cyclical, and factors we may see a long period of very low prices in a marketplace
that negatively affect pricing or trading velocity are, in turn, especially vulnerable to political and speculator effects, once
countered with opportunistic buyers and lessees. drilling slows (as it will), and weaker regions (South America,
Business environment Africa, Russia) pass a breaking point, we will see stability and
possibly upward movement. The question is timing.
At Avison Young, we believe that 2016 will be a very choppy,
but ultimately stable, year. Global capital flows remain strong
Interest rates, elections and the spread of terrorism will As 2015 came to a close, global capital flows to real estate were
continue to dominate headlines throughout 2016. At the top up by double digits year-over-year, with Germany (up 50%
of the list are interest rates and government policy. There are year-over-year) and New York City (up 33% year-over-year)
consistent trends in some areas, but uncertainty in others. the stellar beneficiaries. Cross-border flows are accelerating
for many reasons, but foremost is the perceived, or real, lack
In the U.S., interest rate increases mark a return to monetary of opportunities in certain domestic markets. Investor surveys
normalization. The U.S. interest rate increase could actually suggest these trends are accelerating in the short term despite
have a positive impact on the markets. Following December’s some suggestions that prices are very toppy.
initial hike, the Federal Reserve has communicated a
neutral stance and worked to alleviate any fears of a Continued...
4 Avison Young 2016 Forecast
Message from the CEO
Message from the CEO continued...
Global real estate and capital markets have benefitted from Building resilience key to planning
extreme liquidity, historically low interest rates and, thus,
Building resilience into our business plans and adapting real
historic high pricing. In 2016, we will likely see continued
estate strategies to the evolving demographic, technological
capitalization rate compression as too much demand chases
and political realities around the world will be critical. Taking the
too little core and core-plus inventory. Investors and users who
time to determine precisely which risks are most relevant to your
have been reluctant to act may find sticker shock an unpleasant
business will be time well spent. For example, with new patterns
reality, as in many markets and sectors construction is not
of terrorism, operations and planning will need to address not
keeping pace with demand, and pricing power is shifting to
only physical, but cyber safety to protect people and enterprise
owners.
systems. More closed international borders could substantially
Consolidation and M&A in the cards increase costs for global logistics providers and their customers.
Another theme could very well be a reduction in individual Migration of business functions to the Internet could mean
asset sale velocity as large investors seek to deploy capital more flexible lease structures. Meaningful progress in the
through joint-venture partnerships and mergers and climate change arena could lead to regulatory changes such
acquisitions (M&A). In 2015, public (REIT) markets gave as mandatory carbon reporting and/or building upgrades.
back some prior gains, largely in anticipation of interest rate Implementation could either result in cost increases – or produce
increases, which have been slow to arrive. We believe this operating cost savings, depending on the skills of your real
situation will lead to an increase in M&A activity to relieve some estate provider. Our Avison Young professionals can tap a world
of the pressure in overheated capital markets. Look for a year of expertise to help guide your real estate decisions in these
of REIT consolidation and private equity taking an interest in, watchful times and help unlock the opportunities lurking amid
or buying out, public vehicles. Service industry consolidation is uncertainty.
expected to continue unabated.
It has been a great year for Avison Young as we continue to grow
Impact of technology accelerating and add significant resources to our fast-growing platform. We
Technology’s impact on real estate is accelerating as we head now boast more than 2,100 professionals in 75 offices in five
into 2016. Tech company valuations and space absorption countries. The United Kingdom, Germany and Mexico were
have reached record levels. It remains to be seen where growth areas in 2015, with more to come throughout Europe
valuations will go, but many companies are now expanding and then Asia. We are building a global footprint and are
into more affordable locations to satisfy their workforce needs. currently executing for clients in all parts of the world. While I
As technology changes the workplace across other sectors, the have outlined a few macro trends here, within the pages of this
buildings and locations they occupy will evolve as well. Some Forecast you will find a wealth of insights into local markets and
business activities are moving out of buildings and onto the specific sectors. Please contact us to learn more about the Avison
Web, while others such as hydroponic farming and data storage Young difference and how we may assist you.
are expanding rapidly into specialized facilities. We wish you all a happy, healthy and prosperous 2016.
Growing experimentation and rollout of real estate apps, Sincerely,
especially in the residential and crowdfunding arenas, and
increasing utilization of high-performance materials and
modular techniques to construct highly performing buildings for
Mark E. Rose
lower cost, are just two instances of the vast impact technology
Chairman and CEO
will have on real estate. The kind of technology advances that
Avison Young
have allowed us to produce more oil and gas will be needed on
an even greater scale to provide the drinkable water and food
necessary to address a global population of nine to 10 billion by
2030.
Avison Young 2016 Forecast 5
Message from the
President, U.S. Operations
Abundant opportunities await investors
A vison Young continued to grow and expand its capabilities
in 2015 as we entered select new U.S. regions and added
expertise across our service matrix in every market that
these factors may continue the
occupier tendency toward risk
aversion, shorter leases and
we serve. We continued to selectively acquire companies optimization of space usage.
that fit well into our culture, such as Chicago-based Mesa In addition, there will be ongoing
Development, LLC and Philadelphia-based Remington Group, demand for technology-related
Inc. In addition, we opened new U.S. offices in Minneapolis, and services-sector jobs. U.S. presidential election years
Indianapolis, Nashville, Knoxville, Hartford, San Antonio and tend to be years with less dramatic economic movement, a
Memphis by attracting the right leadership in each region and factor which we believe will hold true in 2016 – barring some
strategically adding key professionals around them. unforeseen out-of-market event that could disrupt financial
Consolidation was a major force across the commercial real markets. We foresee solid investment activity, continued
estate sector in 2015, among other service providers as well as job growth, and, as such, fundamental rent growth in the
with our clients. Major service providers merged and purchased office, industrial, retail and multi-residential sectors. Cap-
smaller, regional operations in a rush to gain market share and rate compression has largely run its course, but fundamental
a global footprint. Similarly, clients have utilized attractive growth has not – a situation that will create abundant
funding costs to gain scale, synergies and breadth through investment opportunities, provided that investors have realistic
mergers and acquisitions. This trend has fed neatly into Avison expectations, are creative and manage their investments
Young’s strategic, value-added, Principal-led approach to aggressively.
business. We don’t believe “bigger” is better; we believe “better” I hope everyone has a very successful 2016. We at Avison Young
is better, and our recruiting and client service successes have look forward to working with you to identify opportunities,
proven that point. For our occupier clients, we continue to deliver results and optimize your business outcomes in the
handle many complex, mission-critical assignments. We have ever-changing environment that will typify much of 2016.
also helped our investor clients enter new markets carefully
and profitably, while enabling others to maximize value. Sincerely,
As we had forecast for 2015, we saw continued growth
in positive absorption across most U.S. markets with a
Earl Webb
stabilization of cap rates for all property types. Job creation
President, U.S. Operations
continued during 2015, exerting downward pressure on
Avison Young
vacancy and driving rental rates steadily higher. Rising
property values predominantly reflected these strengthening
fundamentals rather than compressed cap rates. Demand
from foreign and domestic capital sources remained strong
and, as predicted, began to migrate into secondary markets as
investors sought higher yields.
Property markets, while strongly linked to the availability
and cost of funds, appear capable of absorbing December’s
25-basis-point (bps) increase without dampening the volume
of transactions or negatively impacting pricing. From an
occupier perspective, we have seen a slight decrease in capital
deployment, primarily related to economic uncertainty. The
U.S. dollar will strengthen in 2016, perhaps dramatically, and
there is a risk of global malaise impacting U.S. growth. All of
6 Avison Young 2016 Forecast
Message from the
Managing Directors
Embracing sustainability, philanthropy and communication
I n 2015, we guided Avison Young through a period
of tremendous upheaval within the commercial real
estate industry. A number of our competitors completed
At the same time, we recognize that our company and our
clients’ businesses will face more volatility in the coming
year. As we move forward into 2016, the economic and
large mergers and acquisitions as the pace of industry geopolitical landscape will present numerous challenges.
consolidation continued to accelerate. On the other hand, These challenges could include the upcoming U.S.
we stuck to our core principle of growing at the right time, presidential election, uncertainty with the U.S. Federal
with the right people and in the right locations with our Reserve policy and the impact of further interest-rate hikes,
differentiated Principal-led structure. We were able to expand an imbalance between pricing and fundamentals, and more
in all of the regions in which we operate – Canada, the U.S., hardship for North American resource-based economies.
U.K. and Germany – and also strategically move into Mexico. However, Avison Young’s desire to provide its clients with
As a result, in 2015, we grew from 62 to 74 offices and from trusted advice through a nimble and cohesive approach will
1,700 to more than 2,100 real estate professionals. never waver.
We achieved this growth through a combination of new We are ready to meet the challenges ahead.
office openings, acquisitions and organic growth. It is readily
apparent that our Principal-led, collaborative culture, best-
Sincerely,
in-class service and client-first business model continue
to resonate with clients, business partners and real estate The Managing Directors
professionals alike. There is a great deal of buzz about our Avison Young
platform, and many professionals chose to join Avison Young
in 2015 to play leading roles in our expansion.
We also continued to build out our service-delivery model, Donna Abood | Thomas Aguer | Charlie Allen | James Becker
add new corporate accounts and multi-market assignments, Michael Brown | Markus Bruckner | Sean Cahill
and increase our presence in such non-brokerage areas as Michael Church | Nick Cook | Christopher Cooper
property management, project management, appraisal, Marshall Davidson | Ted L. Davis | Steve Dils | Martin Dockrill
consulting, tax and mortgage-placement services. Going Bill Ehret | Mark Evanoff | Mark Evenson | David Fahey
forward with our global expansion template, the task is to Michael Fay | Mark Fieder | Christopher Fraser
continue to fill in those business lines in each Avison Young David Gonzales | Stephan Heinen | Jeffrey L. Heller
market to enable our valued clients to achieve all of their Rob Howell | Richard Jankowski | Michael Keenan
business goals. Randy Keller | Michael Kennedy | George “Duke” Kingsley
Joseph Kupiec | Ken Lane lll | Greg Langston
While continuing to focus on our growth, we must also
Jonathan Larsen | John Linderman | Keith Lipton
continue to assist our communities and the less fortunate. As
Christopher Livingston | Frank Loeblein | Thomas Loeffler
Managing Directors, we were thrilled to lead Avison Young’s
Tim McShea | Doug Mereska | Greg Morrison | Daniel Nikitas
second-annual Global Day of Giving in October 2015, holding
Denis Perreault | Josh Peyton | Scott Pickett | John Pinjuv
more local philanthropic events in all of our firm’s markets.
John Ross | Pike Rowley | Jonathan Satter | Wes Schollenberg
Altogether, 71 Avison Young offices volunteered more than
Guillermo Sepulveda | Ted Simpson | Nick Slonek
5,400 hours to more than 60 charities. The Global Day of
Michael Smith | Warren Smith | Rand Stephens
Giving, and many other community events in which Avison
Udo Stoeckl | Ted Stratigos | Todd Throndson
Young employees participate each year, again demonstrate
Edward Walsh | Thomas Walsh | Clay Witherspoon
that we are not solely focused on the bottom line. We
Alec Wynne | Stan Yoshihara
understand the need to embrace sustainability, philanthropy,
open communication, inclusiveness, diversity, leveraged
technology and, at times, fun-filled social activities.
Avison Young 2016 Forecast 7
Property Management
P roperty managers need to think of themselves as the CEOs of
their properties. Like any CEO, property managers oversee and
direct financial and operational performance. A property manager’s
with innovative approaches utilizing social media – create a retail
centre’s brand.
Industrial tenants see all of these improvements taking place and
role today encompasses budgeting, cash management, collections, no longer want to be excluded. They, too, are seeking enhanced
reporting, contractor management, staffing, day-to-day operations, amenities. Some innovative industrial landlords have introduced
and – most importantly – tenant satisfaction. Without question, the food trucks, mobile car washes and tenant barbeques.
ultimate goal of a property manager is tenant renewal.
In building strong tenant relationships, a property manager must
Strategies for building strong tenant relationships include a be open and responsive to tenants’ needs. Tenants are increasingly
combination of amenities, shared facilities and operational retrofits. seeking to have a voice in determining the levels of service that
Amenities now include Wi-Fi cafés, food halls, fitness centres and landlords provide and a role in developing strategies that control
charging stations for electric vehicles. Whereas landlords once occupancy costs.
catered to the car, more consideration is now being given to bike-
sharing programs and repair shops as well as shower and change-
room facilities to service the growing community of cyclists.
Peter Leroux
Retail property managers are challenged to create a memorable Executive VP, Managing Director
shopping and entertainment experience for their visitors. Enhanced Real Estate Management Services
way-finding systems, valet and preferred parking, safety and
security in a comfortable shopping environment – combined Click Here For More Information About Avison Young’s
Property Management Group
Debt, Joint Venture &
Structured Capital
A continuation of low interest rates propelled transaction
velocity in 2015 with debt easy to secure. Overall, bond
rates drifted higher by mid-year and then retreated before
continued at a steady pace, and equity investors continued
to compete aggressively for assets. The volume of debt
originations is expected to continue at a high rate in 2016 as
moving higher again towards year-end 2015. Although debt lenders’ terms remain attractive and early CMBS issuances
capital was in good supply, lenders were cautious in their mature. Meanwhile, alternative debt funding vehicles such as
underwriting approaches. In particular, transactions in Alberta ground lease structures, EB-5 funding, foreign bond financing
received much higher scrutiny from lenders as a result of and crowdfunded lending platforms are gaining acceptance
ongoing energy price volatility. Continued pressure from the in the marketplace. Limited partner equity providers should
U.S. Federal Reserve to move away from a zero-interest-rate continue to increase activity as they become more willing to
policy will cast a shadow on where rates will go in 2016. Money enter new markets and expand their strategy into general
supply in the form of debt should remain strong throughout partner and ownership positions.
2016.
U.S. real estate capital markets posted a stable and strong
performance in 2015. Both domestic and foreign capital
providers continued to view U.S. markets favourably
despite widening commercial mortgage-backed securities Norman Arychuk Aaron Prager
Broker Vice-President
(CMBS) spreads, concerns about potential oversupply in the Debt Capital Markets Group Real Estate Investment Banking
development pipeline and further interest-rate hikes by the
U.S. Federal Reserve. The volume of new debt origination Click Here For More Information About Avison Young’s Debt,
Joint Venture and Structured Capital Group
8 Avison Young 2016 Forecast
Message from
Investment Management
Three investment trends to watch in 2016
T he three trends that will most influence investment
markets in 2016 are market divergence, debt levels and
digital disruption. Where there is change, there is opportunity.
Digital Disruption
Three technological trends will also be important to watch in
While all of the markets we cover are seeing record-low cap 2016:
rates, divergence is growing. The U.K. is coming off blistering 1. Cloud-based apps will proliferate.
returns and the U.S. market may have peaked in 2015, but The MIT Center for Real Estate reports it is currently
conditions are not at all homogeneous. Canada saw no tracking more than 2,500 real estate apps in development
appreciation in 2015 as construction eclipsed demand and oil across the entire spectrum of real estate services, data and
prices faltered. As usual, Germany offered stable conditions. processes.
Mexico, which is largely a dual story of a growing middle class
and drafting off the U.S. economy, is also benefiting from 2. Equity and debt crowdfunding, which raised an estimated
increased North American company relocations as operating US$34.4 billion globally in 2015, according to Massolution
costs rise in the other two NAFTA locations. (2015CF – Crowdfunding Industry Report) will become
more mainstream.
Debt remains the market’s Achilles heel
More than 77 crowdfunding sites are presently active in
Record-low interest rates have pushed debt levels high and the real estate space in the U.S. alone, funding mortgages,
pricing ahead of fundamentals. Like the proverbial frog property acquisitions and even development projects.
brought to boil slowly, the market developed complacency
around “historic spreads to bond yields”, ignoring the role of 3. A resurgence in interest in renewable energy and energy
quantitative easing. As rates begin to rise, points of strain will management will occur.
begin to manifest in 2016. Globally, buildings represent more than 25% of the carbon
Meanwhile, investor failure to properly account for future footprint, according to UN Environmental Programme.
capital investment requirements, due to functional and Improvements in solar and wind power generation have
operational obsolescence, is widespread. The savviest resulted in a 75% decrease in costs over the past five
investors are developing new high-performance assets, and years, according to the International Renewable Energy
ignoring the lure of the cheap-debt environment. While Agency, making these technologies more compelling.
commercial mortgage-backed security (CMBS) 2.0 has yet to Digital disruption will continue to reshape the global
take hold in Europe and Canada, the U.S. has returned to 2007 economy and companies. Expect major transformations in
underwriting standards of high loan-to-value ratios, interest- everything from finance, healthcare and transportation to
only loans and variable-rate products against a backdrop of design and construction and property marketing.
rising interest rates.
These trends and transformations will influence where and
In Canada, rates are dropping as lenders continue to subsidize how companies do business in 2016 and beyond.
users (including homebuyers), enabling users to acquire their
facilities with unusually high loan-to-value arrangements
at record-low rates such as fixed interest levels below 2%.
The same is true in Germany, where lenders are taking the
same approach with professional investors and offering an
attractive “spread instrument” to compensate for low growth,
high prices and fear that rates could go lower. These strategies
often do not end well when capital investment and/or Amy Erixon
Principal & Managing Director
refinancing into a more normalized environment is required. Investment Management Group
Discipline will be rewarded.
Click Here For More Information About Avison Young’s
Investment Management Group
Avison Young 2016 Forecast 9
Canada Overview & Forecast
Economic volatility looms over Canadian property markets
T he end of the commodities super cycle, uneven employment
growth, disruptive technologies, e-commerce and workplace
strategies – to name a few – are testing Canada’s otherwise stable
The industrial market displays low vacancy, stable-to-rising
rents, improving leasing velocity, a growing – but conservative
– development pipeline and strong demand from investors and
commercial real estate (CRE) sector. After entering and exiting a owner-occupiers. An established and expanding distribution and
“technical recession” in 2015, Canada’s economy will endure another logistics-driven industry and a sustained U.S. recovery will provide
volatile year in 2016, leading to disparities in regional performance. upside, and a low Canadian dollar will fuel exports and boost a smaller,
A weaker-than-expected economy and an active development but more productive manufacturing sector. However, manufacturers
pipeline stymied the Canadian office market in 2015 – and will do so linked to the oil and gas sector will face headwinds.
again in 2016 – as the sector undergoes structural, rather than cyclical, Development trends include bigger, taller, greener facilities.
changes. Commodity-based and development-laden markets will E-commerce continues to transform industrial real estate as the retail
likely experience a flight to quality, downward pressure on rental rates, and industrial sectors co-ordinate to dot the landscape with large and
rising vacancy and a shifting tenant-landlord balance. With almost 20 technologically advanced distribution centres (the “first mile”) and to
million square feet (msf) under construction across Canada, vacancy leverage older existing facilities near urban centres to shorten delivery
is projected to climb to slightly more than 12% by year-end 2016 to consumers (the “last mile”). In some instances, developers have
from 10.6% in late 2015. Scarcity of urban land will shift developers’ been awarded redevelopment credits for infill sites, offsetting some
focus from single-purpose towards mixed-use, transit-oriented jurisdictions’ rising development charges. Confidence in anticipated
projects, spurring joint-ventures, while LEED is joined by the WELL demand is demonstrated by ongoing construction with more than 19
Building Standard, and optimizing and future-proofing premises msf underway across the country. Despite a healthy supply-demand
will remain paramount. Depth of demand will stem from expanding balance, vacancy will rise to 4.6% by year-end 2016 from 4.1% in late
requirements, a growing trend toward co-working spaces enabled by 2015, based on current trends.
a mobile workforce, a race to attract talented millennials, intensifying Investment capital continues to flow – constrained mainly by a lack
urban-suburban competition, and American tenants looking to of available quality product. Approximately $24 billion worth of
establish a foothold in Canada. property was sold through mid-December 2015, down from the
The retail sector saw new entrants operating alongside closures and 2014 total of $26 billion. Domestic investors increasingly face off
downsizings. Traditional high-street retailers are bringing luxury to with foreign investors who are increasing their real estate investment
Canada’s regional malls: Nordstrom, Saks Fifth Avenue and Simons are allocations. Mainland Chinese capital has impacted values, particularly
all new anchors. Canadian Tire, Walmart and Lowe’s acquired strategic in Vancouver and Toronto. Given high prices, investors are less likely
locations following Target’s retreat. Omni-channel retail is growing, to purchase assets above replacement cost (aside from trophy-grade
with retailers streamlining and providing better deals as pricing properties), instead looking across the Canada-U.S. border or overseas.
trumps brand loyalty and fickle customers comparison-shop instantly Investment will still gravitate to development, which generally yields
using apps. Meanwhile, brick-and-mortar stakeholders (e.g. Best Buy higher returns than acquisitions, despite an inventory build-up. The
and Canada Post) are leveraging their geographical reach. Heavy refinancing of properties and culling of non-core assets continue.
investment in regional malls includes “experiential” stores as landlords In 2016, prime assets will be contested, with greater emphasis on
and retailers aim to increase “dwell time” and pay more attention to urban land and development potential. More partial-interest sales
immigrants and items that appeal to ethnic groups. Suburban big- are anticipated as owners reduce risk and take profits, attracting
box development has slowed, but smaller urban formats are gaining reluctant buyers back into the market. Competition may encourage
momentum. more off-market activity, while emerging CRE crowdfunding platforms
Positives for retail in 2016 include Canada’s low dollar (which is (e.g. NexusCrowd and R2CROWD) are set to revolutionize online
discouraging Canadian consumers from U.S. cross-border shopping investment offerings.
and boosting domestic sales), relatively low vacancy, controlled new
supply, solid population growth and strong mall performance. On the
downside, uneven retail sales and GDP growth, record-high consumer
debt and Canadian-U.S. exchange rates could lead to higher wholesale Bill Argeropoulos
costs and squeeze profits. Principal
Practice Leader, Research (Canada)
Click Here For More Information About
10 Avison Young 2016 Forecast
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Avison Young 2016 Forecast
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11U.S. Overview & Forecast
U.S. market conditions strengthen further
W hile 2014 marked a return to pre-recession employment levels
in the U.S., further economic growth solidified the nation’s
overall recovery in 2015. Nearly every market registered employment
malls plan to incorporate co-working and collaborative areas.
Continued progress in the sector is expected in 2016 as retailers
respond to shifting residential trends and lifestyle habits.
growth, maintaining the U.S. unemployment rate’s downward The U.S. industrial markets tracked by Avison Young comprise 10.3 bsf
trajectory, which bottomed out at 5% in November 2015 – down with a low (6.3%) vacancy rate. Rental rates have been on an upward
from 5.8% a year earlier. While professional and business services trajectory in keeping with tight market conditions. Accordingly,
along with education and health services added the most jobs in speculative construction has returned and, altogether, 130 msf is
2015, the construction sector had the largest percentage increase underway. Development is also being driven by the need to be closer
in jobs (4.2%). This trend is likely to persist as long as the shortage to the consumer and for modern buildings to handle automated
of qualified construction workers across the nation continues, individual- and bulk-order processing. Online retail leaders such as
according to the Associated General Contractors of America. Elevated Amazon are driving absorption and construction of distribution space
construction costs are expected in 2016 and until the supply of in multiple U.S. markets.
workers achieves equilibrium with demand.
Demand for modern warehousing, distribution and even
The U.S. office markets tracked by Avison Young totaled 4.4 billion manufacturing space is growing as reshoring – the practice of
square feet (bsf) at the close of 2015. Overall vacancy declined 60 bps bringing manufacturing and services back to the U.S. from overseas
year-over-year to 12.4%. At year-end 2015, the amount of office space – gains momentum. Companies are seeking to shorten the supply
under construction in the U.S. had increased to almost 86 msf (52% chain and deliver goods to consumers more quickly. As with retail,
preleased), up from 68 msf one year earlier; however, there is no real speed to delivery is key. Supply-chain logistics are triggering a rise
threat of oversupply in the near term. Once again, New York, Houston, in warehouse development and the construction of intermodal
Dallas and Washington, DC had the most development underway. facilities and inland ports that are designed to handle containerized
Common themes persisted such as a flight to quality and space- shipment transfers. Infill development is underway in mature markets
design efficiency, mixed-use and transit-oriented development such as Chicago; however, land constraints in the country’s major
and occupiers’ preference for live/work/play environments. As well, metropolitan areas will likely keep such forms of development in
the emergence of creative office space in non-traditional locations check. New deliveries should have little impact on overall vacancy in
is growing in response to tenants’ desire for collaborative work 2016 as nearly half of all projects are preleased.
environments. A significant amount of capital poured into U.S. commercial real
Modest improvement in the U.S. office vacancy rate is forecast for estate markets in 2015, and more of the same is expected in 2016.
2016. While new construction is preleased, absorption may again be Canada led foreign investment in the U.S. in both 2014 and 2015.
tempered by tenants shifting to smaller and more efficient footprints. Through November 2015, Canadian investors had purchased $24
Retail is both flourishing and evolving. E-commerce, a rise in billion worth of U.S. assets, leading all other countries by a wide
urban, amenity and lifestyle retail, and the consumer experience margin. Though transaction volume flattened in the later part of the
are all factors in retail’s evolution. Suburban office parks are year, 2015 recorded double-digit percentage growth for U.S. sales,
adding amenities for occupiers and the uptick in multi-residential which exceeded $425 billion. Investors sought income growth and
developments can account for necessary retail expansion. As well, stability in transit-oriented markets with accessible amenities.
there has been an upswing in urban-centric and lifestyle retail Market fundamentals will continue to rally with levels of construction
following downtown residential development. Big-box stores, such remaining in check, steady preleasing, rent gains and strong overall
as Target and Walmart, continue to make inroads in these urban investment activity as capital chases real estate’s higher yields and
locations, creating additional competition for traditional department relative stability in 2016.
stores.
The place of brick-and-mortar outlets in retail commerce will evolve
further with store footprints shrinking and potentially adding a
distribution function, which will provide shoppers with the option of Margaret Donkerbrook
picking up online orders in nearby stores. Likewise, some traditional Vice-President,
U.S. Research
Click Here For More Information About
12 Avison Young 2016 Forecast
Avison Young ResearchU.S. - Overall Office Vacancy Rate Comparison
25%
20%
U.S. Overview & Forecast
Vacancy Rate (%)
15%
10%
5%
0%
U.S. - Overall Office Vacancy Rate Comparison
25%
20%
Vacancy Rate (%)
15%
U.S. - Overall Office Vacancy Rate Comparison
10%
25%
5%
20%
Vacancy Rate (%)
0%
15%
ts
ke
ar
M
S.
U.
10%
AY
2014 2015 2016F
5%
0%
U.S. - Overall Industrial Vacancy Rate Comparison
14%
12%
10%
Vacancy Rate (%)
8%
6%
4% 2014 2015 2016F
2%
0%
ts
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S.
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2014 2015 2016F
U.S. - Area
Canada - AreaUnder
UnderConstruction
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16
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(msf)
14
Construction
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Construction
12
4
10
3
8
Under
2
Under
6
Area
1 2014 2015 2016F
4
Area
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2
0
Office Industrial
Avison Young 2016 Forecast 13CANADA
Calgary
Calgary Place
Resilience the new mantra for Calgary
C
Calgary Vacancy Rates
algary’s economic climate continues to attract media 26%
attention due to the ongoing volatility in energy 24%
pricing, as layoffs totalled more than 36,000 jobs in the 22%
oil and gas industry in 2015, according to the Canadian 20%
18%
Association of Petroleum Producers. This situation 16%
has created many challenges for Calgary’s real estate 14%
community.
12%
10%
All is not gloom and doom, however, as the retail market 8%
remained strong with a record-low vacancy of 2.4% and a 6%
4%
rapidly increasing number of projects under development. 2%
Industrial vacancy also remained relatively resilient at 6% 0%
2014 2015 2016F
with 3.5 msf of new space under development in 2016. Office Industrial
While new development may result in fluctuating vacancy
in the short term, the market has historically shown an
ability to absorb space. The investment and office markets High demand for retail space and low vacancy are attractive
saw the most volatility with investment volume down 35% to developers in Calgary. More than 5 msf of new retail
compared with 2014 and overall office vacancy reaching development is proposed for completion between 2016
15%, its highest level since 2008-09. and 2018 and is being fuelled by Calgarians’ higher-than-
Office average disposable incomes and continued net migration
The office market has been the hardest hit by energy price into the city.
volatility, as vacancy increased to 16% in the fourth quarter Industrial
of 2015 from 8.5% at year-end 2014. This increase is due to Calgary’s industrial market remained relatively stable in
significant layoffs in the oil and gas industry as well as some 2015 with lease rates remaining steady across all product
significant mergers and acquisition activity that resulted types. There was 2.3 msf of negative absorption recorded
in additional sublease space being placed on the market. at the end of the first quarter after the exits of Target
New construction set for completion during the next 24 and Kraft; however, with Home Depot taking possession
months will generate further instability with five projects of its newly developed design-build facility, year-to-
totalling 3.9 msf of class AA office space currently under date absorption had swung to positive 2 msf by the end
construction downtown. of the third quarter. Overall vacancy rose to 6% at the
With many companies focused on reducing costs, demand third quarter of 2015 from 3.5% at year-end 2014. The
for office space will remain limited in 2016 with some increase was attributed to the delivery of new industrial
improvement expected in 2017. developments.
Retail Investment
Calgary’s retail market remained the city’s strongest sector Calgary’s economic performance in 2015 drastically slowed
as demand exceeded historic supply constraints. This the city’s investment market. Sales volume totalled $1.2
competitive market had a record-low vacancy rate of 2.4% billion for all asset classes – down 35% from 2014. Of
in the fourth quarter of 2015. Vacancy had risen to 2.9% in this activity, 45% was attributed to the sale of industrial
the first half of 2015 with the closure of Target. However, properties and residential land investments. Low sales
the departure produced only a temporary blip in vacancy volume was driven by fewer properties being offered for
as most of Target’s leases were subsequently assumed by sale as investors and developers remained confident that
other retailers. Calgary will weather the storm and eventually bounce back.
Avison Young 2016 Forecast 15Edmonton
ICE District
Edmonton market continues to adapt to changing economic landscape
T
Edmonton Vacancy Rates
he commercial and economic history of Edmonton 26%
will mark 2015 as a pivotal year. With volatile energy 24%
prices and little indication as to when the market may 22%
return to the pricing highs of recent years, the city has 20%
18%
undergone a major shift in its commercial real estate 16%
prospects. Unemployment increased 220 bps year-over- 14%
year to 6.6% as of October 2015 as several major projects
12%
10%
were either shelved or postponed. Despite the increase in 8%
unemployment, Alberta still remained below the average 6%
4%
Canadian unemployment rate of 7% and those of some 2%
of the larger provinces in Eastern Canada. Changes in 0%
government at both the federal and provincial levels in 2014 2015 2016F
Office Industrial
2015 further heightened uncertainty in Alberta’s economic
prospects in 2016.
Office Industrial
Construction at ICE District is now fully underway and on All metrics in Edmonton’s industrial real estate market
track to transform the downtown core. Rogers Place, the can be traced back to the price of oil, which dominated
new home of the Edmonton Oilers, will open for the start local headlines in 2015. The market is viewing the year
of the 2016-17 NHL season in September. Edmonton Tower ahead cautiously. Industrial vacancy rose to 4.4% as of
and Kelly Ramsey Tower are slated for completion at year- third-quarter 2015 from 3% a year earlier and is likely to
end 2016. Both buildings are more than 80% preleased. increase further in the coming months. As a result, real
Local landlords, such as Hokanson Capital Inc., the owner estate cost management is expected to become a more
of 9 Triple 8 Jasper, have upgraded their properties to significant factor for the energy industry as time passes
compete. With landlords anticipating a surplus of vacancy, without a recovery in oil prices. Mergers and acquisitions
many repurposing initiatives appear set to gain momentum are expected to dominate industrial real estate activity in
throughout the city as new buildings start being delivered 2016, along with right-sizing and lease renewals, as the oil
at year-end 2016. and gas sector adapts to new market trends.
Retail Investment
The retail segment remained fairly resilient in terms of new Investment volume was down in 2015 and is expected
construction and retailer demand throughout 2015. While to slow further in 2016 due to negative factors affecting
major retailers such as Future Shop, Mexx and Target closed the market. Since investors have taken a more vigilant
down due primarily to a downturn in profits, increased approach due to economic uncertainty in the province,
competition and operational challenges, Edmonton has there has been a slight decrease in investor interest in
seen continued demand for power centres to service Alberta. Capitalization rates remained steady throughout
expanding residential communities throughout the 2015 and averaged 5.75% to 6.25% for industrial and retail
city. The Edmonton Brewery District - which is currently premises, 5.5% to 6% for multi-residential properties, and
under construction - is a prime example of this trend. The 6.5% to 7% for office assets. With near-term economic
development will house a two-storey Loblaws CityMarket headwinds, it is expected that cap rates will soften in most
and established retailers such as MEC, Goodlife Fitness and asset classes until economic fundamentals improve.
Winners. As more consumers tighten their budgets due to
Alberta’s slowing economy, spending habits may fluctuate
in 2016.
16 Avison Young 2016 ForecastHalifax
50 Garland Avenue
New development calls for balancing act
H
Halifax Vacancy Rates
alifax’s commercial real estate market struck an 26%
optimistic tone in 2015 with an “if you build it, they 24%
will come” outlook. A growing construction pipeline in the 22%
downtown market and competing incentives in outlying 20%
18%
urban areas are making landlords increasingly creative as 16%
they aim to draw tenants back to the core to satisfy vacancy 14%
demands.
12%
10%
Office 8%
6%
Halifax’s inventory of office space has continued to expand 4%
due to construction in the downtown core. Several large 2%
towers are under construction with others in the planning 0%
2014 2015 2016F
and approval stages. The recently completed TD Centre Office Industrial
expansion brings 100,000 sf of additional space and
construction continues on Nova Centre, which will add
nearly 300,000 sf in late 2016 or early 2017. Landlords are and trades move in. Given current market conditions, a
maintaining the status quo on rental incentives. Developers drastic change in rents is not anticipated for 2016. The
are focusing on urbanization to offer more to tenants Conference Board of Canada’s Autumn 2015 Metropolitan
who are seeking efficiently designed, tech-friendly space Outlook report suggests that Halifax’s economy will gain
downtown. Landlords will have to decide how to reposition momentum during the next two years, fuelled by strength
vacant space to compete with tenants’ upward migration. in the manufacturing and construction sectors. Stable
The market is expected to remain soft with a 100- to 150- development is expected in 2016 as new product comes
bps rise in vacancy by year-end 2016. online.
Retail Investment
The retail leasing market remained somewhat languid in Demand for commercial and multi-residential investment
2015 with most tenant activity coming from regional and real estate will likely remain strong and steady
local businesses. However, there is an abundance of listing throughout 2016. The stable and diverse economy which
activity on the landlord side due to the relative paucity includes government, finance, education, military and
of quality tenants. The marketing and branding of retail manufacturing, has created a safe haven for investors in the
developments have recently become more important as a past and continues to provide steady rates of return among
flexible, creative approach is required to attract the right all asset classes. The likelihood of rising interest rates will
tenants. National retailers remain cautious on expansion put upward pressure on capitalization rates, but cost-
within Atlantic Canada – with the exception of large value cutting measures by landlords and the modest beginnings
retailers and specific fitness facilities and the like, which of federal shipbuilding contracts and offshore oil
are looking for second-generation spaces that are easily exploration will largely leave investment rates unchanged.
adapted to their uses. The outlook for 2016 suggests more Demand continues from Canadian, American and European
of the same with a possible uptick in activity and overall buyers with a limited number of quality investment-grade
stable vacancy. assets available for purchase.
Industrial
The industrial market saw a marginal increase in vacancy
in Burnside Industrial Park and Bayers Lake Business Park
in 2015. As the first phase of construction on new Arctic
patrol vessels for the federal government begins, vacancy is
expected to decline as related manufacturing, construction
Avison Young 2016 Forecast 17Lethbridge
SunRidge Corner
Market remains strong with continual growth expected
E
Lethbridge Vacancy Rates
conomic conditions in the Lethbridge commercial real 26%
estate market were steady and balanced throughout 24%
2015. The Lethbridge economy has remained largely 22%
unaffected by the effects of volatile energy prices on the 20%
18%
overall Albertan economy. This stability is largely due to the 16%
fact that Lethbridge is fuelled primarily by the agricultural, 14%
government and manufacturing sectors. Redevelopment of
12%
10%
large buildings to accommodate smaller users by demising 8%
the space into sizes that were in higher demand was a 6%
4%
major trend in 2015. Competition to acquire these larger 2%
commercial properties is aggressive as investors search for 0%
higher yields on their capital. All sectors performed well 2014 2015 2016F
Office Industrial
and are expected to remain strong in 2016.
Office
Lethbridge’s office market comprises 830,500 sf. Vacancy
dipped to 16.6% at the end of the third quarter of 2015 Industrial
from 17% at year-end 2014. This decrease is a direct Lethbridge’s economy continued to record steady growth
reflection of landlords continuing to offer incentives in 2015 while overall industrial activity remained strong.
such as project management, free rent and improvement The completion of several large commercial developments
allowances to attract new tenants. With the announcement led to a 3.1% increase in the city’s industrial inventory - to
of a major tenant relocating to the United States, the slightly more than 4.4 msf - during 2015. Sale activity has
Lethbridge market may see 60,000 sf return to the market, also been very active primarily due to owner-occupiers
bringing the vacancy rate to an all-time high of 24% in taking advantage of low interest rates and aggressive
2016. Market trends in 2015 included an uptick in new lending practices. Vacancy and rental rates are likely to
construction and the repurposing of industrial and retail remain stable and will put upward pressure on prices in the
space for office use. long term. A stable market is forecast through 2016.
Retail Investment
Lethbridge’s retail sector has been more active in certain Capital markets activity remained stable in 2015 with low
submarkets than others. The population in West Lethbridge interest rates keeping cap rates compressed. Investor
has been booming and this acceleration is fuelling the interest is currently elevated, but with a lack of inventory,
growth of the Crossings, a 66-acre mixed-use development. investors are considering alternative options for placing
Meanwhile, the growth of retail developments in North capital. Institutional and private investors have begun to
and South Lethbridge has slowed and stabilized. The focus on location-specific redevelopments, creating higher
diverse demands of a growing population are keeping retail in-place returns. All asset classes are trading at healthy
investments attractive and supporting leasing activity. levels although core assets in prime locations continue to
Many redevelopment projects have converted large vacant be favoured by investors. Lethbridge assets are expected
spaces into multiple smaller units. The retail market is to continue to offer 7% to 9% capitalization rates through
expected to remain steady in North and South Lethbridge 2016.
moving into 2016 with significant growth anticipated in
West Lethbridge.
18 Avison Young 2016 ForecastMontreal
ABB Corporate Headquarters
Market slows down following record investment in 2014
L
Montreal Vacancy Rates
ocal economic activity has recorded moderate growth 26%
in the Greater Montreal Area (GMA) for the past few 24%
years. Real estate investment activity decreased slightly 22%
during 2015 due to investor disinterest and a lack of supply. 20%
18%
With pricing at all-time highs, the margin for error is small 16%
for investors even if capital is easily accessible. However, 14%
developers are still actively seeking opportunities in several
12%
10%
submarkets. Furthermore, the leasing market remained 8%
strong. With a weakened Canadian dollar, low interest rates 6%
4%
and several development projects underway, investment 2%
volume is expected to remain stable or even increase in 0%
2016 and generate investment opportunities – especially in 2014 2015 2016F
Office Industrial
the industrial sector.
Office
Vacancy rose to 12.7% in the third quarter of 2015 from will likely remain stable in 2016 due to the strong demand
11.9% one year earlier due in part to a 950,000-sf increase for industrial space. The weak Canadian dollar is currently
in inventory and demand from companies for smaller and favouring exports and should lead to industrial investment
more efficient space along with the conversion of some opportunities.
industrial space into loft-style offices. With 10 projects Investment
totalling nearly 1.5 msf set to be delivered in 2016 and
Investment volume in the GMA declined in 2015 (with $1.7
more to follow in 2017, vacancy is expected to rise to
billion in sales volume through mid-December) after having
13.8%. Furthermore, demand for office space will remain
reached a new high of $5.2 billion in 2014. The office,
stable or even decline slightly.
retail and multi-residential markets all contributed to the
Retail decrease. On the other hand, the number of investment
Retail sales decreased slightly in 2015. The trend in the GMA transactions in the industrial sector improved and the value
has been towards power centres – which typically feature of land sales increased 17% from mid-year 2014 to mid-
American and Canadian big-box retailers – and that has year 2015. One of the most significant transactions was a
impacted small neighbourhood centres and the retailers $70-million investment in Technoparc Montreal, which is
located there. Small local specialty stores are increasingly located in St-Laurent and was led by multinational firm ABB.
under pressure as consumers are drawn out of their The new 300,000-sf facility will house the firm’s corporate
neighbourhoods to power centres. Some development headquarters as well as research and development,
activity is expected in 2016 as the Town of Mount Royal manufacturing, assembly and testing for ABB in Quebec.
recently approved the Royalmount Centre, or Quinze40, After a moderate 2015 in terms of investment activity, 2016
a $1.7-billion shopping and entertainment complex should be modest but still provide investors with several
proposed by the developer CarbonLeo. If completed, the interesting opportunities.
development could further impact small neighbourhood
retailers in the GMA.
Industrial
Industrial space in the GMA was in strong demand in 2015.
Vacancy was low, hovering at about 6%. While inventory
remained stable throughout 2015, there are currently
five projects under construction that will be delivered in
2016 and add almost 365,000 sf. Nonetheless, vacancy
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