The next 12 months promise to be a healthy period for the U.S. commercial real estate market, according to a new market forecast issued by Avison Young, a Toronto-based commercial real estate services firm.
"As we had forecast for 2015, we saw continued positive absorption across most U.S. markets with a stabilization of cap rates for all property types," commented Earl Webb, president of U.S. Operations for Avison Young. "Job creation continued during 2015, exerting downward pressure on 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. U.S. presidential election years tend to be years with less dramatic economic movement, a factor that we believe will hold true in 2016 – barring some unforeseen out-of-market event that could disrupt financial markets. We foresee solid investment activity, continued job growth, and, as such, fundamental rent growth in the office, industrial, retail and multi-residential sectors."
Notable U.S. report highlights include:
Office
Common themes, such as a flight to quality and space design efficiency, mixed-use and transit-oriented development and occupiers' preference for live/work/play environments, persisted in 2015. As well, the emergence of creative office space in non-traditional locations is growing in response to tenants' desire for collaborative work environments.
- The U.S. office markets tracked by Avison Young totalled 4.4 billion square feet (bsf) at the close of 2015. Overall vacancy declined 60 bps year-over-year to 12.4 percent.
- All but six markets recorded lower rates when compared with year-end 2014. Only Houston displayed a substantial vacancy increase (27 percent), climbing to 13.1 percent at the close of 2015 from 10.3 percent one year earlier.
- At year-end 2015, the amount of office space under construction in the U.S. had increased to almost 86 msf (52 percent preleased), up from 68 msf one year earlier; however, there is no real threat of oversupply in the near term.
- Once again, New York (13.2 msf), Houston (9.7 msf), Dallas (8.1 msf) and Washington, DC (8 msf) had the most development underway.
- Modest improvement in the U.S. office vacancy rate is forecast for 2016. While new construction is preleased, absorption may again be tempered by tenants shifting to smaller and more efficient footprints.
"From an occupier perspective, we have seen a slight decrease in capital deployment, primarily related to economic uncertainty, and the occupier tendency toward risk aversion, shorter leases and optimization of space usage may continue in 2016," Webb added.
Retail
- Suburban office parks are adding amenities for occupiers and the uptick in multi-residential developments can account for necessary retail expansion.
- Several markets, such as Miami, are reporting low single-digit retail vacancy.
- There was an upswing in urban-centric and lifestyle retail following downtown residential development.
- Big-box stores, such as Target and Walmart, continue to make inroads in these urban locations, creating additional competition for traditional department stores.
- Continued progress in the sector is expected in 2016 as retailers respond to shifting residential trends and lifestyle habits.
Industrial
- The U.S. industrial markets tracked by Avison Young comprised 10.3 bsf with a low (6.3 percent) vacancy rate at year-end 2015, compared with 6.8 percent one year earlier, and tight market conditions have kept rental rates on the rise.
- Speculative construction has returned and, altogether, 130 msf is underway, driven by operators' need to be closer to the consumer and demand for modern buildings to handle automated individual- and bulk-order processing.
- Six U.S. markets each had construction volume equal to or exceeding 10 msf and together accounted for 64 percent of the nation's total: Dallas (17.4 msf), Los Angeles (17 msf), Atlanta (14.6 msf), Philadelphia (14.3 msf), Houston (10.7 msf) and Chicago (10 msf).
- Supply-chain logistics are triggering a rise in warehouse development and the construction of intermodal facilities and inland ports that are designed to handle containerized shipment transfers.
- Infill development is underway in mature markets such as Chicago; however, land constraints in the country's major metropolitan areas will likely keep such projects in check.
- New deliveries should have little impact on overall vacancy in 2016 as nearly half of all projects are already preleased.
Investment
- Though transaction volume flattened later in the year, 2015 recorded double-digit percentage growth for U.S. sales, which exceeded $425 billion.
- A significant amount of capital poured into U.S. commercial real estate markets in 2015, and more of the same is expected in 2016.
- Canada led foreign investment in the U.S. in both 2014 and 2015. Through November 2015, Canadian investors had purchased $24 billion worth of U.S. assets, leading all other countries by a wide margin.
"We foresee solid investment activity, continued job growth and, as such, fundamental rent growth in the office, industrial, retail and multi-residential sectors," said Webb. "Cap-rate compression has largely run its course, but fundamental growth has not – a situation that will create abundant investment opportunities, provided that investors have realistic expectations, are creative and manage their investments aggressively. While 2015 sales volume was on pace to reach the half-trillion-dollar mark as year-end approached, there remains an abundance of capital available for real estate's higher yields and relative stability in 2016."
