Avison Young Releases Commercial Real Estate Forecast

January 22,2013

CAP Member, Avison Young, has released its 2013 commercial real estate forecast for the U.S.  Here is a summary of the forecast:

Office
The 10.2-bsf U.S. office market registered an overall vacancy rate of 12.1% as year-end 2012 approached, reflecting a slight improvement compared with 2011. Class A properties accounted for the bulk of net absorption in 2012 as the flight-to-quality trend continued and tenants sought to lock-in favorable rates. As a result, class A vacancy declined 50 bps to 13.6% from 14.1% at the end of 2011. Tenants continued to enjoy favorable conditions with tech- and energy-driven markets experiencing the greatest levels of positive absorption.

The 17 U.S. markets Avison Young tracked for this report comprise 2.8 bsf with an overall vacancy rate of 15.1%, down slightly from that of year-end 2011. A majority of Avison Young markets are forecasting further improvement in 2013; however, vacancy in the U.S. markets will likely remain elevated overall when compared with Canada.

Among Avison Young markets, New Jersey recorded the highest 2012 vacancy (+50 bps to 25.5%), with flat market conditions expected in 2013. Although down slightly from 2011, vacancy rates in Atlanta (-100 bps to 19.9%) andDetroit (-70 bps to 19.8%) remained high in 2012. The lowest vacancy rates were recorded in Pittsburgh (8.1%), where rents have risen to new levels; San Francisco (9.9%), where large-tenant movement is driving the market; and Manhattan (10.6%).

Manhattan, the largest U.S. office market, reported flat absorption and rents in 2012; however, employment growth is leading to positive absorption and vacancy could return to single digits by year-end 2013. At the submarket level, the steady delivery of new space at World Trade Center and World Financial Center could push vacancy into the teens for downtown class A space.

With minimal new office construction and a lower unemployment rate, Reno experienced the biggest improvement (-330 bps to 16.4%) in office vacancy from 2011 to 2012. The Las Vegas market is showing signs of slow recovery; while 2012 saw no change in vacancy rates, there is a -90 bps projected change by year-end 2013. Only four markets expect to see increased vacancy in 2013, with the largest increase being in Washington, DC. (+60 bps), where there are threats of federal spending cutbacks and where 4 msf of office space is set to be delivered this year.

Retail
U.S. retail markets held steady with an average vacancy of 6.9% - unchanged for four quarters - and were kept in check by a dearth of new supply. Delivery of new retail product has fallen each year since 2008 and, in 2012, 46 msf was delivered. Power centers are outperforming retail as a whole and posted a 6.2% vacancy rate nationwide.

Many Avison Young markets are reporting the expansion of discount and big-box retailers. Select submarkets inCharleston and Houston have improving retail conditions due to population increases; Boston is seeing further stabilization; San Francisco is reporting a steady retail comeback and limited construction; and New Jerseywelcomed several new retailers and substantial development, with nearly 3.5 msf of new inventory going under construction in 2012. Two of Raleigh-Durham's largest malls finished 2012 with vacancy rates below 0.5%, and retail development activity there increased to the highest levels witnessed since 2008, with slightly more than 859,000 sf scheduled for delivery in 2013.

Industrial
Avison Young industrial markets totaled 6.6 bsf with an average vacancy rate of 8.8% as of third-quarter 2012 - nearly double the vacancy found in Avison Young's Canadian markets. Chicago (1.2 bsf) and Los Angeles (1.1 bsf) are the largest U.S. industrial markets, with vacancy rates of 9.6% and 4.5%, respectively. Charleston saw the biggest decrease in vacancy, ending 2011 at 12.1% and dropping to 9.9% in 2012. Reno was the only city to see an increase in industrial vacancy during 2012 (+20 bps) and all but two U.S. markets are expecting further declines in vacancy during 2013.

Dallas (+10 bps) is experiencing growth of warehouse/distribution space around the city's inland port and, in theHouston market (+30 bps), oil and gas drilling activity is fueling manufacturing and the Port of Houston's expansion.Atlanta should continue to experience positive absorption in 2013 with the largest projected drop (-400 bps) in vacancy. The anticipated expansion of the Panama Canal is spurring speculative development and aggressive land acquisitions in South Florida, while in Detroit, industrial rents are primed to rise following four quarters of positive absorption.

Investment
Through third-quarter 2012, total investment volume for multi-residential, office, industrial and retail properties topped $163 billion, demonstrating stabilization after second-quarter sales volumes for all property types (except multi-residential) fell year over year. Demand for core assets with stable cash flow exceeded the available product in many U.S. markets. Manhattan led the country in office sales with $7.8 billion, followed by San Francisco with $3.9 billion and Los Angeles with $3.1 billion. In Boston, the volume of industrial purchases doubled from 2011 to 2012. Capital flow into the U.S. continued in 2012 as cross-border investors accounted for $20.3 billion in sales by mid-December. Canadian buyers alone purchased $7.5 billion in multi-residential, office, industrial and retail assets. Avison Young anticipates growing opportunities in the U.S. for investors willing to look to non-coastal locations and expects most markets to experience uncertainty and further, albeit modest, recovery in 2013.

Courtesy, WNEM; Saginaw, MI