Market Data

Market Trends

Canadian Investors Buy Elsewhere

Given the small size of Canada’s commercial real estate market, many domestic commercial real estate investors have been actively acquiring properties in the U.S. and other markets according to Jones Lang LaSalle. Canada’s assets are clustered in nine cities, with the domestic office market comprising only about 400 million sf, roughly the size of Manhattan’s office market, according to JLL. As a result, Canadians purchase more direct real estate outside of their country than inside. For 2013, Canadian institutional investors were on pace to invest more than $7.5 billion in direct commercial real estate investment in international properties. While Canadians have concentrated on U.S. and Western Europe for acquisitions, in recent years they have spread their geographic reach to Asia Pacific, Latin America, and Southern and Eastern Europe. In the U.S., Canadian investors have targeted assets in Chicago, Dallas, Denver, San Francisco, Phoenix, Portland, Ore., Seattle, and Sacramento, Calif.

CCIMs See an Improving Market

Based on their responses reported in 4Q13 CCIM Quarterly Market Trends, CCIM members say the commercial real estate market has decidedly improved.

CCIM member responses:

57% indicated more deals in 4Q13 compared to same period the year before.

46% reported higher prices for acquisitions

48% indicate higher rents versus the prior year

51% expect improving credit conditions

Look for the 1Q14 CCIM Quarterly Market Trends in early April.

Briefly Noted

Hospitality — Low new supply trends and an improving economy foretell a strong market for value-added hotel investors, according to CBRE. New product was about 1 percent of the national supply in 2013 and is expected to increase to 1.3 percent this year and 1.6 percent in 2015. Revenue per available room could grow between 6.0 and 7.7 percent this year and the trend of double-digit net operating income growth should also continue through 2015.

Industrial — If real GDP growth averages 3 percent this year as economists forecast, it will create a record year for industrial demand, one of the top three years since 1990, registering around 140 million sf in net absorption, says Cassidy Turley’s 4Q 2013 Industrial Report. E-commerce demand for large distribution centers accounted for 40 percent of 2013’s net absorption, a trend that should continue this year.

Multifamily — The recovery came later to low and mid-tiered apartments and secondary markets but those assets and markets enjoyed effective rents gains of 4.2 percent in 2013 while class A assets struggled against new product, posting only 2.6 percent in effective rent, according to Marcus & Millichap’s 2014 Annual Apartment Report.

Office — “By the second half of next year, the majority of the country will see [office] rents pushing upwards,” says Cassidy Turley’s 4Q13 U.S. Office Trends Report. In 2013, vacancy declined in 48 of the 82 markets CT tracked, and while top rent growth occurred in tech and energy markets, cities like Denver and Columbus, Ohio, saw respective 7.8 percent and 7.1 percent YOY jumps in office rent.

Retail — “Franchisee credit restaurant properties remain one of the few bright lights in the net lease sector as astute investors continue to seek out proven locations with the hopes of achieving cap rates of 7 percent or better,” says NNNet Advisors in its 4Q13 Net Lease Property Report. At the same time, cap rates on corporate backed leases dropped to “historical national lows” of 6.01 percent from 6.53 percent in 4Q12.

Medical Office Trends

“The medical office sector could reach a tipping point over the next several years, as many long-term tenants of aging medical office buildings, primarily independent physicians, retire or opt for hospital employment,” says Marcus & Millichap’s 2H 2013 Medical Office Report. A preference for post-2007 properties and larger hospital campus facilities is reducing the demand for older independent properties. “Properties built in 2007 or later comprise less than 15 percent of the nation’s medical office stock but accounted for nearly all net absorption in recent quarters,” the report says. While most new construction is driven by larger, hospital-related development, some speculative development is occurring in the 20,000-sf to 50,000-sf range. However only about 25 percent of this space is preleased, whereas larger affiliated facilities are close to 96 percent preleased.

“Over the next five to 10 years millennials will replace the baby boomer generation as the stewards of the office
market. … It makes buildings without a sense of place, without amenities, without transit, without a story probably a bit more challenged than what they’ve experienced over the past 20 years.”

—John Sikaitis, managing director local markets and office research, Jones Lang LaSalle