Avison Young 2016 Forecast Commercial Real Estate Canada, U.S.

Transcription

2015 ANNUAL REVIEW
Avison Young 2016 Forecast
Commercial Real Estate
Canada, U.S. and U.K.
Partnership. Performance.
Contents
Message from the CEO
4
United States cont’d.
Fairfield County
40
6
Fort Lauderdale
41
Greenville
42
Message from the Managing Directors
7
Hartford
43
Property Management, Debt, Joint Venture &
Structured Capital
Houston
44
8
Indianapolis
45
Knoxville
46
Message from Investment Management
9
Las Vegas
47
Long Island
48
Los Angeles
49
Miami
50
Minneapolis
51
Message from the President, U.S. Operations
Canada Overview & Forecast
10
U.S. Overview & Forecast
12
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
Cleveland
35
Avison Young Research
72
Columbus, OH
36
Dallas
37
About Avison Young
73
Denver
38
Our Contacts
74
Detroit
39
Uncertainty, diligence, resilience… opportunity
As the books close on another strong year for commercial real
estate, 2016 opens differently – with some uncertainty and
unresolved questions that could impact the way owners and
occupiers invest and operate. The variables, however, are both
positive and negative. To successfully navigate the real estate
markets in 2016, we will need to keep a global perspective,
stay abreast of changes in the broader environment and,
increasingly, devise innovative solutions to complex
problems.
With this Forecast, we hope to provide insight into some of
those trends and risks, and identify markets and strategies
to watch in the year ahead. Often, uncertainty delivers
exceptional opportunities to those who are diligent in
anticipating and adapting to it.
A period of transition
The global real estate industry has had a tremendous run.
It has been more than six years since the Great Recession.
During the steady climb back up, interest rates continued
to decline, central banks unleashed quantitative easing,
employment recovered and economies rebounded. The postrecession years have marked a period of rebuilding balance
sheets and personal wealth, and relative peace in much of the
Western world.
The financial and real estate markets appear stable as we
begin 2016, but variables now surfacing could undermine
short-term prosperity. The year ahead seems to be the waning
days of a prosperous cycle, perhaps even a cyclical top in
liquidity, pricing and transaction velocity. As difficult as it is to
acknowledge that we are entering a period of transition, we
must remain clear-eyed as we undertake our 2016 strategic
planning. Our industry has always been cyclical, and factors
that negatively affect pricing or trading velocity are, in turn,
countered with opportunistic buyers and lessees.
Business environment
At Avison Young, we believe that 2016 will be a very choppy,
but ultimately stable, year.
Interest rates, elections and the spread of terrorism will
continue to dominate headlines throughout 2016. At the top
of the list are interest rates and government policy. There are
consistent trends in some areas, but uncertainty in others.
In the U.S., interest rate increases mark a return to monetary
normalization. The U.S. interest rate increase could actually
have a positive impact on the markets. Following December’s
initial hike, the Federal Reserve has communicated a
neutral stance and worked to alleviate any fears of a
4
rapidly increasing interest rate
environment. 2016 is also a
presidential election year, and
politics and rhetoric will choke
the airwaves – for, against and
neutral to business.
Canada has lowered its interest
rates and employed a low-dollar approach to spur investment
and buffer oil and other commodity weakness. The potential
for budget surpluses will give way to government-sponsored
investment under new Prime Minister Justin Trudeau. In
Alberta, the New Democratic Party (NDP) is in the majority
and has moved its government to the left as energy
companies continue to struggle with low prices. Significant
infrastructure commitments under new governments total
$10 billion in Alberta, and more at the federal level.
The United Kingdom (U.K.) continues with a low-interest-rate
policy. Economic growth in London and southern regions
will continue to outpace the rest of the U.K.; however, the
economic ripple effect from the south to the north means
that opportunities in the areas of the “Northern Powerhouse”
and “Midlands Engine” will only increase.
Germany continues to be the stabilizing force in continental
Europe, but shoulders the burdens of other countries in the
EU. And rounding out our Avison Young markets, Mexico is
stable and opportunities to grow are available as the Mexican
economy matures.
Across the board, fundamentals continue to be strong.
Occupiers, other than energy companies, are stable and
employment is growing in most sectors. For oil and gas, while
we may see a long period of very low prices in a marketplace
especially vulnerable to political and speculator effects, once
drilling slows (as it will), and weaker regions (South America,
Africa, Russia) pass a breaking point, we will see stability and
possibly upward movement. The question is timing.
Global capital flows remain strong
As 2015 came to a close, global capital flows to real estate were
up by double digits year-over-year, with Germany (up 50%
year-over-year) and New York City (up 33% year-over-year)
the stellar beneficiaries. Cross-border flows are accelerating
for many reasons, but foremost is the perceived, or real, lack
of opportunities in certain domestic markets. Investor surveys
suggest these trends are accelerating in the short term despite
some suggestions that prices are very toppy. Continued...
Message from the CEO continued...
Global real estate and capital markets have benefitted from
extreme liquidity, historically low interest rates and, thus,
historic high pricing. In 2016, we will likely see continued
capitalization rate compression as too much demand chases
too little core and core-plus inventory. Investors and users who
have been reluctant to act may find sticker shock an unpleasant
reality, as in many markets and sectors construction is not
keeping pace with demand, and pricing power is shifting to
owners.
Consolidation and M&A in the cards
Another theme could very well be a reduction in individual
asset sale velocity as large investors seek to deploy capital
through joint-venture partnerships and mergers and
acquisitions (M&A). In 2015, public (REIT) markets gave
back some prior gains, largely in anticipation of interest rate
increases, which have been slow to arrive. We believe this
situation will lead to an increase in M&A activity to relieve some
of the pressure in overheated capital markets. Look for a year
of REIT consolidation and private equity taking an interest in,
or buying out, public vehicles. Service industry consolidation is
expected to continue unabated.
Impact of technology accelerating
Technology’s impact on real estate is accelerating as we head
into 2016. Tech company valuations and space absorption
have reached record levels. It remains to be seen where
valuations will go, but many companies are now expanding
into more affordable locations to satisfy their workforce needs.
As technology changes the workplace across other sectors, the
buildings and locations they occupy will evolve as well. Some
business activities are moving out of buildings and onto the
Web, while others such as hydroponic farming and data storage
are expanding rapidly into specialized facilities.
Growing experimentation and rollout of real estate apps,
especially in the residential and crowdfunding arenas, and
increasing utilization of high-performance materials and
modular techniques to construct highly performing buildings for
lower cost, are just two instances of the vast impact technology
will have on real estate. The kind of technology advances that
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.
Building resilience key to planning
Building resilience into our business plans and adapting real
estate strategies to the evolving demographic, technological
and political realities around the world will be critical. Taking the
time to determine precisely which risks are most relevant to your
business will be time well spent. For example, with new patterns
of terrorism, operations and planning will need to address not
only physical, but cyber safety to protect people and enterprise
systems. More closed international borders could substantially
increase costs for global logistics providers and their customers.
Migration of business functions to the Internet could mean
more flexible lease structures. Meaningful progress in the
climate change arena could lead to regulatory changes such
as mandatory carbon reporting and/or building upgrades.
Implementation could either result in cost increases – or produce
operating cost savings, depending on the skills of your real
estate provider. Our Avison Young professionals can tap a world
of expertise to help guide your real estate decisions in these
watchful times and help unlock the opportunities lurking amid
uncertainty.
It has been a great year for Avison Young as we continue to grow
and add significant resources to our fast-growing platform. We
now boast more than 2,100 professionals in 75 offices in five
countries. The United Kingdom, Germany and Mexico were
growth areas in 2015, with more to come throughout Europe
and then Asia. We are building a global footprint and are
currently executing for clients in all parts of the world. While I
have outlined a few macro trends here, within the pages of this
Forecast you will find a wealth of insights into local markets and
specific sectors. Please contact us to learn more about the Avison
Young difference and how we may assist you.
We wish you all a happy, healthy and prosperous 2016.
Sincerely,
Mark E. Rose
Chairman and CEO
Avison Young
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
we serve. We continued to selectively acquire companies
that fit well into our culture, such as Chicago-based Mesa
Development, LLC and Philadelphia-based Remington Group,
Inc. In addition, we opened new U.S. offices in Minneapolis,
Indianapolis, Nashville, Knoxville, Hartford, San Antonio and
Memphis by attracting the right leadership in each region and
strategically adding key professionals around them.
Consolidation was a major force across the commercial real
estate sector in 2015, among other service providers as well as
with our clients. Major service providers merged and purchased
smaller, regional operations in a rush to gain market share and
a global footprint. Similarly, clients have utilized attractive
funding costs to gain scale, synergies and breadth through
mergers and acquisitions. This trend has fed neatly into Avison
Young’s strategic, value-added, Principal-led approach to
business. We don’t believe “bigger” is better; we believe “better”
is better, and our recruiting and client service successes have
proven that point. For our occupier clients, we continue to
handle many complex, mission-critical assignments. We have
also helped our investor clients enter new markets carefully
and profitably, while enabling others to maximize value.
As we had forecast for 2015, we saw continued growth
in positive absorption across most U.S. markets with a
stabilization of cap rates for all property types. 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.
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
these factors may continue the
occupier tendency toward risk
aversion, shorter leases and
optimization of space usage.
In addition, there will be ongoing
demand for technology-related
and services-sector jobs. U.S. presidential election years
tend to be years with less dramatic economic movement, a
factor which 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. Caprate 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.
I hope everyone has a very successful 2016. We at Avison Young
look forward to working with you to identify opportunities,
deliver results and optimize your business outcomes in the
ever-changing environment that will typify much of 2016.
Sincerely,
Earl Webb
President, U.S. Operations
Avison Young
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
large mergers and acquisitions as the pace of industry
consolidation continued to accelerate. On the other hand,
we stuck to our core principle of growing at the right time,
with the right people and in the right locations with our
differentiated Principal-led structure. We were able to expand
in all of the regions in which we operate – Canada, the U.S.,
U.K. and Germany – and also strategically move into Mexico.
As a result, in 2015, we grew from 62 to 74 offices and from
1,700 to more than 2,100 real estate professionals.
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
geopolitical landscape will present numerous challenges.
These challenges could include the upcoming U.S.
presidential election, uncertainty with the U.S. Federal
Reserve policy and the impact of further interest-rate hikes,
an imbalance between pricing and fundamentals, and more
hardship for North American resource-based economies.
However, Avison Young’s desire to provide its clients with
trusted advice through a nimble and cohesive approach will
never waver.
We achieved this growth through a combination of new
office openings, acquisitions and organic growth. It is readily
apparent that our Principal-led, collaborative culture, bestin-class service and client-first business model continue
to resonate with clients, business partners and real estate
professionals alike. There is a great deal of buzz about our
platform, and many professionals chose to join Avison Young
in 2015 to play leading roles in our expansion.
We are ready to meet the challenges ahead.
We also continued to build out our service-delivery model,
add new corporate accounts and multi-market assignments,
and increase our presence in such non-brokerage areas as
property management, project management, appraisal,
consulting, tax and mortgage-placement services. Going
forward with our global expansion template, the task is to
continue to fill in those business lines in each Avison Young
market to enable our valued clients to achieve all of their
business goals.
While continuing to focus on our growth, we must also
continue to assist our communities and the less fortunate. As
Managing Directors, we were thrilled to lead Avison Young’s
second-annual Global Day of Giving in October 2015, holding
more local philanthropic events in all of our firm’s markets.
Altogether, 71 Avison Young offices volunteered more than
5,400 hours to more than 60 charities. The Global Day of
Giving, and many other community events in which Avison
Young employees participate each year, again demonstrate
that we are not solely focused on the bottom line. We
understand the need to embrace sustainability, philanthropy,
open communication, inclusiveness, diversity, leveraged
technology and, at times, fun-filled social activities.
Sincerely,
The Managing Directors
Avison Young
Donna Abood | Thomas Aguer | Charlie Allen | James Becker
Michael Brown | Markus Bruckner | Sean Cahill
Michael Church | Nick Cook | Christopher Cooper
Marshall Davidson | Ted L. Davis | Steve Dils | Martin Dockrill
Bill Ehret | Mark Evanoff | Mark Evenson | David Fahey
Michael Fay | Mark Fieder | Christopher Fraser
David Gonzales | Stephan Heinen | Jeffrey L. Heller
Rob Howell | Richard Jankowski | Michael Keenan
Randy Keller | Michael Kennedy | George “Duke” Kingsley
Joseph Kupiec | Ken Lane lll | Greg Langston
Jonathan Larsen | John Linderman | Keith Lipton
Christopher Livingston | Frank Loeblein | Thomas Loeffler
Tim McShea | Doug Mereska | Greg Morrison | Daniel Nikitas
Denis Perreault | Josh Peyton | Scott Pickett | John Pinjuv
John Ross | Pike Rowley | Jonathan Satter | Wes Schollenberg
Guillermo Sepulveda | Ted Simpson | Nick Slonek
Michael Smith | Warren Smith | Rand Stephens
Udo Stoeckl | Ted Stratigos | Todd Throndson
Edward Walsh | Thomas Walsh | Clay Witherspoon
Alec Wynne | Stan Yoshihara
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
role today encompasses budgeting, cash management, collections,
reporting, contractor management, staffing, day-to-day operations,
and – most importantly – tenant satisfaction. Without question, the
ultimate goal of a property manager is tenant renewal.
Strategies for building strong tenant relationships include a
combination of amenities, shared facilities and operational retrofits.
Amenities now include Wi-Fi cafés, food halls, fitness centres and
charging stations for electric vehicles. Whereas landlords once
catered to the car, more consideration is now being given to bikesharing programs and repair shops as well as shower and changeroom facilities to service the growing community of cyclists.
with innovative approaches utilizing social media – create a retail
centre’s brand.
Industrial tenants see all of these improvements taking place and
no longer want to be excluded. They, too, are seeking enhanced
amenities. Some innovative industrial landlords have introduced
food trucks, mobile car washes and tenant barbeques.
In building strong tenant relationships, a property manager must
be open and responsive to tenants’ needs. Tenants are increasingly
seeking to have a voice in determining the levels of service that
landlords provide and a role in developing strategies that control
occupancy costs.
Peter Leroux
Retail property managers are challenged to create a memorable
Executive VP, Managing Director
Real Estate Management Services
shopping and entertainment experience for their visitors. Enhanced
way-finding systems, valet and preferred parking, safety and
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security in a comfortable shopping environment – combined
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
moving higher again towards year-end 2015. Although debt
capital was in good supply, lenders were cautious in their
underwriting approaches. In particular, transactions in Alberta
received much higher scrutiny from lenders as a result of
ongoing energy price volatility. Continued pressure from the
U.S. Federal Reserve to move away from a zero-interest-rate
policy will cast a shadow on where rates will go in 2016. Money
supply in the form of debt should remain strong throughout
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
(CMBS) spreads, concerns about potential oversupply in the
development pipeline and further interest-rate hikes by the
U.S. Federal Reserve. The volume of new debt origination
8
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
lenders’ terms remain attractive and early CMBS issuances
mature. Meanwhile, alternative debt funding vehicles such as
ground lease structures, EB-5 funding, foreign bond financing
and crowdfunded lending platforms are gaining acceptance
in the marketplace. Limited partner equity providers should
continue to increase activity as they become more willing to
enter new markets and expand their strategy into general
partner and ownership positions.
Norman Arychuk
Broker
Debt Capital Markets Group
Aaron Prager
Vice-President
Real Estate Investment Banking
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Joint Venture and Structured Capital Group
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.
While all of the markets we cover are seeing record-low cap
rates, divergence is growing. The U.K. is coming off blistering
returns and the U.S. market may have peaked in 2015, but
conditions are not at all homogeneous. Canada saw no
appreciation in 2015 as construction eclipsed demand and oil
prices faltered. As usual, Germany offered stable conditions.
Mexico, which is largely a dual story of a growing middle class
and drafting off the U.S. economy, is also benefiting from
increased North American company relocations as operating
costs rise in the other two NAFTA locations.
Debt remains the market’s Achilles heel
Record-low interest rates have pushed debt levels high and
pricing ahead of fundamentals. Like the proverbial frog
brought to boil slowly, the market developed complacency
around “historic spreads to bond yields”, ignoring the role of
quantitative easing. As rates begin to rise, points of strain will
begin to manifest in 2016.
Meanwhile, investor failure to properly account for future
capital investment requirements, due to functional and
operational obsolescence, is widespread. The savviest
investors are developing new high-performance assets, and
ignoring the lure of the cheap-debt environment. While
commercial mortgage-backed security (CMBS) 2.0 has yet to
take hold in Europe and Canada, the U.S. has returned to 2007
underwriting standards of high loan-to-value ratios, interestonly loans and variable-rate products against a backdrop of
rising interest rates.
In Canada, rates are dropping as lenders continue to subsidize
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
refinancing into a more normalized environment is required.
Discipline will be rewarded.
Digital Disruption
Three technological trends will also be important to watch in
2016:
1. Cloud-based apps will proliferate.
The MIT Center for Real Estate reports it is currently
tracking more than 2,500 real estate apps in development
across the entire spectrum of real estate services, data and
processes.
2. Equity and debt crowdfunding, which raised an estimated
US$34.4 billion globally in 2015, according to Massolution
(2015CF – Crowdfunding Industry Report) will become
more mainstream.
More than 77 crowdfunding sites are presently active in
the real estate space in the U.S. alone, funding mortgages,
property acquisitions and even development projects.
3. A resurgence in interest in renewable energy and energy
management will occur.
Globally, buildings represent more than 25% of the carbon
footprint, according to UN Environmental Programme.
Improvements in solar and wind power generation have
resulted in a 75% decrease in costs over the past five
years, according to the International Renewable Energy
Agency, making these technologies more compelling.
Digital disruption will continue to reshape the global
economy and companies. Expect major transformations in
everything from finance, healthcare and transportation to
design and construction and property marketing.
These trends and transformations will influence where and
how companies do business in 2016 and beyond.
Amy Erixon
Principal & Managing Director
Investment Management Group
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Investment Management Group
9
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
commercial real estate (CRE) sector. After entering and exiting a
“technical recession” in 2015, Canada’s economy will endure another
volatile year in 2016, leading to disparities in regional performance.
A weaker-than-expected economy and an active development
pipeline stymied the Canadian office market in 2015 – and will do so
again in 2016 – as the sector undergoes structural, rather than cyclical,
changes. Commodity-based and development-laden markets will
likely experience a flight to quality, downward pressure on rental rates,
rising vacancy and a shifting tenant-landlord balance. With almost 20
million square feet (msf) under construction across Canada, vacancy
is projected to climb to slightly more than 12% by year-end 2016
from 10.6% in late 2015. Scarcity of urban land will shift developers’
focus from single-purpose towards mixed-use, transit-oriented
projects, spurring joint-ventures, while LEED is joined by the WELL
Building Standard, and optimizing and future-proofing premises
will remain paramount. Depth of demand will stem from expanding
requirements, a growing trend toward co-working spaces enabled by
a mobile workforce, a race to attract talented millennials, intensifying
urban-suburban competition, and American tenants looking to
establish a foothold in Canada.
The retail sector saw new entrants operating alongside closures and
downsizings. Traditional high-street retailers are bringing luxury to
Canada’s regional malls: Nordstrom, Saks Fifth Avenue and Simons are
all new anchors. Canadian Tire, Walmart and Lowe’s acquired strategic
locations following Target’s retreat. Omni-channel retail is growing,
with retailers streamlining and providing better deals as pricing
trumps brand loyalty and fickle customers comparison-shop instantly
using apps. Meanwhile, brick-and-mortar stakeholders (e.g. Best Buy
and Canada Post) are leveraging their geographical reach. Heavy
investment in regional malls includes “experiential” stores as landlords
and retailers aim to increase “dwell time” and pay more attention to
immigrants and items that appeal to ethnic groups. Suburban bigbox development has slowed, but smaller urban formats are gaining
momentum.
Positives for retail in 2016 include Canada’s low dollar (which is
discouraging Canadian consumers from U.S. cross-border shopping
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
costs and squeeze profits.
10
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
owner-occupiers. An established and expanding distribution and
logistics-driven industry and a sustained U.S. recovery will provide
upside, and a low Canadian dollar will fuel exports and boost a smaller,
but more productive manufacturing sector. However, manufacturers
linked to the oil and gas sector will face headwinds.
Development trends include bigger, taller, greener facilities.
E-commerce continues to transform industrial real estate as the retail
and industrial sectors co-ordinate to dot the landscape with large and
technologically advanced distribution centres (the “first mile”) and to
leverage older existing facilities near urban centres to shorten delivery
to consumers (the “last mile”). In some instances, developers have
been awarded redevelopment credits for infill sites, offsetting some
jurisdictions’ rising development charges. Confidence in anticipated
demand is demonstrated by ongoing construction with more than 19
msf underway across the country. Despite a healthy supply-demand
balance, vacancy will rise to 4.6% by year-end 2016 from 4.1% in late
2015, based on current trends.
Investment capital continues to flow – constrained mainly by a lack
of available quality product. Approximately $24 billion worth of
property was sold through mid-December 2015, down from the
2014 total of $26 billion. Domestic investors increasingly face off
with foreign investors who are increasing their real estate investment
allocations. Mainland Chinese capital has impacted values, particularly
in Vancouver and Toronto. Given high prices, investors are less likely
to purchase assets above replacement cost (aside from trophy-grade
properties), instead looking across the Canada-U.S. border or overseas.
Investment will still gravitate to development, which generally yields
higher returns than acquisitions, despite an inventory build-up. The
refinancing of properties and culling of non-core assets continue.
In 2016, prime assets will be contested, with greater emphasis on
urban land and development potential. More partial-interest sales
are anticipated as owners reduce risk and take profits, attracting
reluctant buyers back into the market. Competition may encourage
more off-market activity, while emerging CRE crowdfunding platforms
(e.g. NexusCrowd and R2CROWD) are set to revolutionize online
investment offerings.
Bill Argeropoulos
Principal
Practice Leader, Research (Canada)
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11
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
growth, maintaining the U.S. unemployment rate’s downward
trajectory, which bottomed out at 5% in November 2015 – down
from 5.8% a year earlier. While professional and business services
along with education and health services added the most jobs in
2015, the construction sector had the largest percentage increase
in jobs (4.2%). This trend is likely to persist as long as the shortage
of qualified construction workers across the nation continues,
according to the Associated General Contractors of America. Elevated
construction costs are expected in 2016 and until the supply of
workers achieves equilibrium with demand.
The U.S. office markets tracked by Avison Young totaled 4.4 billion
square feet (bsf) at the close of 2015. Overall vacancy declined 60 bps
year-over-year to 12.4%. At year-end 2015, the amount of office space
under construction in the U.S. had increased to almost 86 msf (52%
preleased), up from 68 msf one year earlier; however, there is no real
threat of oversupply in the near term. Once again, New York, Houston,
Dallas and Washington, DC had the most development underway.
Common themes persisted such as a flight to quality and spacedesign efficiency, mixed-use and transit-oriented development
and occupiers’ preference for live/work/play environments. As well,
the emergence of creative office space in non-traditional locations
is growing in response to tenants’ desire for collaborative work
environments.
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.
Retail is both flourishing and evolving. E-commerce, a rise in
urban, amenity and lifestyle retail, and the consumer experience
are all factors in retail’s evolution. Suburban office parks are
adding amenities for occupiers and the uptick in multi-residential
developments can account for necessary retail expansion. As well,
there has been 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.
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
picking up online orders in nearby stores. Likewise, some traditional
12
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.
The U.S. industrial markets tracked by Avison Young comprise 10.3 bsf
with a low (6.3%) vacancy rate. Rental rates have been on an upward
trajectory in keeping with tight market conditions. Accordingly,
speculative construction has returned and, altogether, 130 msf is
underway. Development is also being driven by the need to be closer
to the consumer and for modern buildings to handle automated
individual- and bulk-order processing. Online retail leaders such as
Amazon are driving absorption and construction of distribution space
in multiple U.S. markets.
Demand for modern warehousing, distribution and even
manufacturing space is growing as reshoring – the practice of
bringing manufacturing and services back to the U.S. from overseas
– gains momentum. Companies are seeking to shorten the supply
chain and deliver goods to consumers more quickly. As with retail,
speed to delivery is key. 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 forms of development in
check. New deliveries should have little impact on overall vacancy in
2016 as nearly half of all projects are preleased.
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. Though transaction volume flattened in the later part of the
year, 2015 recorded double-digit percentage growth for U.S. sales,
which exceeded $425 billion. Investors sought income growth and
stability in transit-oriented markets with accessible amenities.
Market fundamentals will continue to rally with levels of construction
remaining in check, steady preleasing, rent gains and strong overall
investment activity as capital chases real estate’s higher yields and
relative stability in 2016.
Margaret Donkerbrook
Vice-President,
U.S. Research
Click Here For More Information About
U.S. - Overall Office Vacancy Rate Comparison
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13
CANADA
Calgary
Calgary Place
Resilience the new mantra for Calgary
C
algary’s economic climate continues to attract media
attention due to the ongoing volatility in energy
pricing, as layoffs totalled more than 36,000 jobs in the
oil and gas industry in 2015, according to the Canadian
Association of Petroleum Producers. This situation
has created many challenges for Calgary’s real estate
community.
All is not gloom and doom, however, as the retail market
remained strong with a record-low vacancy of 2.4% and a
rapidly increasing number of projects under development.
Industrial vacancy also remained relatively resilient at 6%
with 3.5 msf of new space under development in 2016.
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
saw the most volatility with investment volume down 35%
compared with 2014 and overall office vacancy reaching
15%, its highest level since 2008-09.
Office
The office market has been the hardest hit by energy price
volatility, as vacancy increased to 16% in the fourth quarter
of 2015 from 8.5% at year-end 2014. This increase is due to
significant layoffs in the oil and gas industry as well as some
significant mergers and acquisition activity that resulted
in additional sublease space being placed on the market.
New construction set for completion during the next 24
months will generate further instability with five projects
totalling 3.9 msf of class AA office space currently under
construction downtown.
With many companies focused on reducing costs, demand
for office space will remain limited in 2016 with some
improvement expected in 2017.
Retail
Calgary’s retail market remained the city’s strongest sector
as demand exceeded historic supply constraints. This
competitive market had a record-low vacancy rate of 2.4%
in the fourth quarter of 2015. Vacancy had risen to 2.9% in
the first half of 2015 with the closure of Target. However,
the departure produced only a temporary blip in vacancy
as most of Target’s leases were subsequently assumed by
other retailers.
Calgary Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
High demand for retail space and low vacancy are attractive
to developers in Calgary. More than 5 msf of new retail
development is proposed for completion between 2016
and 2018 and is being fuelled by Calgarians’ higher-thanaverage disposable incomes and continued net migration
into the city.
Industrial
Calgary’s industrial market remained relatively stable in
2015 with lease rates remaining steady across all product
types. There was 2.3 msf of negative absorption recorded
at the end of the first quarter after the exits of Target
and Kraft; however, with Home Depot taking possession
of its newly developed design-build facility, year-todate absorption had swung to positive 2 msf by the end
of the third quarter. Overall vacancy rose to 6% at the
third quarter of 2015 from 3.5% at year-end 2014. The
increase was attributed to the delivery of new industrial
developments.
Investment
Calgary’s economic performance in 2015 drastically slowed
the city’s investment market. Sales volume totalled $1.2
billion for all asset classes – down 35% from 2014. Of
this activity, 45% was attributed to the sale of industrial
properties and residential land investments. Low sales
volume was driven by fewer properties being offered for
sale as investors and developers remained confident that
Calgary will weather the storm and eventually bounce back.
15
Edmonton
ICE District
Edmonton market continues to adapt to changing economic landscape
T
he commercial and economic history of Edmonton
will mark 2015 as a pivotal year. With volatile energy
prices and little indication as to when the market may
return to the pricing highs of recent years, the city has
undergone a major shift in its commercial real estate
prospects. Unemployment increased 220 bps year-overyear to 6.6% as of October 2015 as several major projects
were either shelved or postponed. Despite the increase in
unemployment, Alberta still remained below the average
Canadian unemployment rate of 7% and those of some
of the larger provinces in Eastern Canada. Changes in
government at both the federal and provincial levels in
2015 further heightened uncertainty in Alberta’s economic
prospects in 2016.
Office
Construction at ICE District is now fully underway and on
track to transform the downtown core. Rogers Place, the
new home of the Edmonton Oilers, will open for the start
of the 2016-17 NHL season in September. Edmonton Tower
and Kelly Ramsey Tower are slated for completion at yearend 2016. Both buildings are more than 80% preleased.
Local landlords, such as Hokanson Capital Inc., the owner
of 9 Triple 8 Jasper, have upgraded their properties to
compete. With landlords anticipating a surplus of vacancy,
many repurposing initiatives appear set to gain momentum
throughout the city as new buildings start being delivered
at year-end 2016.
Retail
The retail segment remained fairly resilient in terms of new
construction and retailer demand throughout 2015. While
major retailers such as Future Shop, Mexx and Target closed
down due primarily to a downturn in profits, increased
competition and operational challenges, Edmonton has
seen continued demand for power centres to service
expanding residential communities throughout the
city. The Edmonton Brewery District - which is currently
under construction - is a prime example of this trend. The
development will house a two-storey Loblaws CityMarket
and established retailers such as MEC, Goodlife Fitness and
Winners. As more consumers tighten their budgets due to
Alberta’s slowing economy, spending habits may fluctuate
in 2016.
16
Edmonton Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
All metrics in Edmonton’s industrial real estate market
can be traced back to the price of oil, which dominated
local headlines in 2015. The market is viewing the year
ahead cautiously. Industrial vacancy rose to 4.4% as of
third-quarter 2015 from 3% a year earlier and is likely to
increase further in the coming months. As a result, real
estate cost management is expected to become a more
significant factor for the energy industry as time passes
without a recovery in oil prices. Mergers and acquisitions
are expected to dominate industrial real estate activity in
2016, along with right-sizing and lease renewals, as the oil
and gas sector adapts to new market trends.
Investment
Investment volume was down in 2015 and is expected
to slow further in 2016 due to negative factors affecting
the market. Since investors have taken a more vigilant
approach due to economic uncertainty in the province,
there has been a slight decrease in investor interest in
Alberta. Capitalization rates remained steady throughout
2015 and averaged 5.75% to 6.25% for industrial and retail
premises, 5.5% to 6% for multi-residential properties, and
6.5% to 7% for office assets. With near-term economic
headwinds, it is expected that cap rates will soften in most
asset classes until economic fundamentals improve.
Halifax
50 Garland Avenue
New development calls for balancing act
H
alifax’s commercial real estate market struck an
optimistic tone in 2015 with an “if you build it, they
will come” outlook. A growing construction pipeline in the
downtown market and competing incentives in outlying
urban areas are making landlords increasingly creative as
they aim to draw tenants back to the core to satisfy vacancy
demands.
Office
Halifax’s inventory of office space has continued to expand
due to construction in the downtown core. Several large
towers are under construction with others in the planning
and approval stages. The recently completed TD Centre
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
maintaining the status quo on rental incentives. Developers
are focusing on urbanization to offer more to tenants
who are seeking efficiently designed, tech-friendly space
downtown. Landlords will have to decide how to reposition
vacant space to compete with tenants’ upward migration.
The market is expected to remain soft with a 100- to 150bps rise in vacancy by year-end 2016.
Retail
The retail leasing market remained somewhat languid in
2015 with most tenant activity coming from regional and
local businesses. However, there is an abundance of listing
activity on the landlord side due to the relative paucity
of quality tenants. The marketing and branding of retail
developments have recently become more important as a
flexible, creative approach is required to attract the right
tenants. National retailers remain cautious on expansion
within Atlantic Canada – with the exception of large value
retailers and specific fitness facilities and the like, which
are looking for second-generation spaces that are easily
adapted to their uses. The outlook for 2016 suggests more
of the same with a possible uptick in activity and overall
stable vacancy.
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
Halifax Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
and trades move in. Given current market conditions, a
drastic change in rents is not anticipated for 2016. The
Conference Board of Canada’s Autumn 2015 Metropolitan
Outlook report suggests that Halifax’s economy will gain
momentum during the next two years, fuelled by strength
in the manufacturing and construction sectors. Stable
development is expected in 2016 as new product comes
online.
Investment
Demand for commercial and multi-residential investment
real estate will likely remain strong and steady
throughout 2016. The stable and diverse economy which
includes government, finance, education, military and
manufacturing, has created a safe haven for investors in the
past and continues to provide steady rates of return among
all asset classes. The likelihood of rising interest rates will
put upward pressure on capitalization rates, but costcutting measures by landlords and the modest beginnings
of federal shipbuilding contracts and offshore oil
exploration will largely leave investment rates unchanged.
Demand continues from Canadian, American and European
buyers with a limited number of quality investment-grade
assets available for purchase.
17
Lethbridge
SunRidge Corner
Market remains strong with continual growth expected
E
conomic conditions in the Lethbridge commercial real
estate market were steady and balanced throughout
2015. The Lethbridge economy has remained largely
unaffected by the effects of volatile energy prices on the
overall Albertan economy. This stability is largely due to the
fact that Lethbridge is fuelled primarily by the agricultural,
government and manufacturing sectors. Redevelopment of
large buildings to accommodate smaller users by demising
the space into sizes that were in higher demand was a
major trend in 2015. Competition to acquire these larger
commercial properties is aggressive as investors search for
higher yields on their capital. All sectors performed well
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
from 17% at year-end 2014. This decrease is a direct
reflection of landlords continuing to offer incentives
such as project management, free rent and improvement
allowances to attract new tenants. With the announcement
of a major tenant relocating to the United States, the
Lethbridge market may see 60,000 sf return to the market,
bringing the vacancy rate to an all-time high of 24% in
2016. Market trends in 2015 included an uptick in new
construction and the repurposing of industrial and retail
space for office use.
Retail
Lethbridge’s retail sector has been more active in certain
submarkets than others. The population in West Lethbridge
has been booming and this acceleration is fuelling the
growth of the Crossings, a 66-acre mixed-use development.
Meanwhile, the growth of retail developments in North
and South Lethbridge has slowed and stabilized. The
diverse demands of a growing population are keeping retail
investments attractive and supporting leasing activity.
Many redevelopment projects have converted large vacant
spaces into multiple smaller units. The retail market is
expected to remain steady in North and South Lethbridge
moving into 2016 with significant growth anticipated in
West Lethbridge.
18
Lethbridge Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Lethbridge’s economy continued to record steady growth
in 2015 while overall industrial activity remained strong.
The completion of several large commercial developments
led to a 3.1% increase in the city’s industrial inventory - to
slightly more than 4.4 msf - during 2015. Sale activity has
also been very active primarily due to owner-occupiers
taking advantage of low interest rates and aggressive
lending practices. Vacancy and rental rates are likely to
remain stable and will put upward pressure on prices in the
long term. A stable market is forecast through 2016.
Investment
Capital markets activity remained stable in 2015 with low
interest rates keeping cap rates compressed. Investor
interest is currently elevated, but with a lack of inventory,
investors are considering alternative options for placing
capital. Institutional and private investors have begun to
focus on location-specific redevelopments, creating higher
in-place returns. All asset classes are trading at healthy
levels although core assets in prime locations continue to
be favoured by investors. Lethbridge assets are expected
to continue to offer 7% to 9% capitalization rates through
2016.
Montreal
ABB Corporate Headquarters
Market slows down following record investment in 2014
L
ocal economic activity has recorded moderate growth
in the Greater Montreal Area (GMA) for the past few
years. Real estate investment activity decreased slightly
during 2015 due to investor disinterest and a lack of supply.
With pricing at all-time highs, the margin for error is small
for investors even if capital is easily accessible. However,
developers are still actively seeking opportunities in several
submarkets. Furthermore, the leasing market remained
strong. With a weakened Canadian dollar, low interest rates
and several development projects underway, investment
volume is expected to remain stable or even increase in
2016 and generate investment opportunities – especially in
the industrial sector.
Office
Vacancy rose to 12.7% in the third quarter of 2015 from
11.9% one year earlier due in part to a 950,000-sf increase
in inventory and demand from companies for smaller and
more efficient space along with the conversion of some
industrial space into loft-style offices. With 10 projects
totalling nearly 1.5 msf set to be delivered in 2016 and
more to follow in 2017, vacancy is expected to rise to
13.8%. Furthermore, demand for office space will remain
stable or even decline slightly.
Retail
Retail sales decreased slightly in 2015. The trend in the GMA
has been towards power centres – which typically feature
American and Canadian big-box retailers – and that has
impacted small neighbourhood centres and the retailers
located there. Small local specialty stores are increasingly
under pressure as consumers are drawn out of their
neighbourhoods to power centres. Some development
activity is expected in 2016 as the Town of Mount Royal
recently approved the Royalmount Centre, or Quinze40,
a $1.7-billion shopping and entertainment complex
proposed by the developer CarbonLeo. If completed, the
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
Montreal Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
will likely remain stable in 2016 due to the strong demand
for industrial space. The weak Canadian dollar is currently
favouring exports and should lead to industrial investment
opportunities.
Investment
Investment volume in the GMA declined in 2015 (with $1.7
billion in sales volume through mid-December) after having
reached a new high of $5.2 billion in 2014. The office,
retail and multi-residential markets all contributed to the
decrease. On the other hand, the number of investment
transactions in the industrial sector improved and the value
of land sales increased 17% from mid-year 2014 to midyear 2015. One of the most significant transactions was a
$70-million investment in Technoparc Montreal, which is
located in St-Laurent and was led by multinational firm ABB.
The new 300,000-sf facility will house the firm’s corporate
headquarters as well as research and development,
manufacturing, assembly and testing for ABB in Quebec.
After a moderate 2015 in terms of investment activity, 2016
should be modest but still provide investors with several
interesting opportunities.
19
Ottawa
90 Elgin Street
Office market recovering, other asset classes remain stable
O
ttawa’s commercial real estate market remains
relatively healthy when compared with other
metropolitan markets in Eastern Canada. Although regional
office vacancy rates are approximately 10% for the first time
in several decades, the general consensus is that the worst
has passed.
Office
Despite the high vacancy recorded in 2015, there are
pockets of the market that are recovering. The West
Kanata submarket is the best-performing in the region
with vacancy heading to less than 9% in 2016. However,
vacancy rose significantly in the Suburban East submarket
in 2015 with vacancy at year-end approaching 14%.
Tightening vacancy in downtown class A buildings may
be an indication that the federal government is starting to
occupy quality space again. The recent occupation of 90
Elgin Street by the federal Department of Finance as well as
a number of Crown-controlled NGOs taking space in class
A office buildings would suggest this is the case. Owners of
class B and C office space are subsequently feeling pressure
to upgrade their existing properties to achieve LEED for
Existing Buildings certification and improved accessibility
standards to remain competitive.
Retail
Ottawa’s retail market is on a strong footing and enjoys
tight vacancy, but is still viewed as an underserved market.
Nordstrom, a major U.S. retailer, opened in 2015 and
occupied 157,000 sf in Rideau Centre in the downtown
core. The redevelopment of Lansdowne Park resulted in
360,000 sf of commercial space, including a new 10-screen
movie theatre, being added to the market.
Industrial
Ottawa’s industrial market remained stable in 2015. Several
pockets of existing stock were absorbed, along with some
new-build speculative space that is generating leasing
interest. The price differential between existing buildings
and new-build product was not significant.
Strong demand from investors and owner-occupiers
continued to push sale prices upward. However, the latest
asking prices for some smaller industrial buildings may
have peaked. A softening in the leasing market in Ottawa’s
east end may start to manifest in 2016. A major industrial
user has announced its exit from Ottawa, which could
20
Ottawa Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
create significant vacancy in the next 18 months. In the
west end, the market will continue to perform reasonably
well with landlords enjoying high occupancy levels and
steady demand thanks to limited speculative development
and healthy occupancy levels in existing portfolios.
From an investment perspective, demand for acquisition
opportunities will remain strong. With owners reluctant
to sell, market values will remain stable and potentially
register upward pressure depending on interest rates.
Investment
Ottawa’s investment market remained stable throughout
2015 as investors continued to seek opportunities within
the National Capital Region. Certain owners are taking
advantage of a low-interest-rate-and-high-demand
environment to recapitalize assets.
The need for student housing is having an impact
in the Ottawa market. Investors have identified sites
close to Ottawa’s two main universities as targets for
redevelopment. This trend has resulted in a rise in land
values for properties near the two campuses and provided
exit opportunities for select condominium projects that
have stalled.
The progression of Ottawa’s current investment market will
continue in 2016, with institutional and private investors
competing for quality opportunities across most asset
classes and savvy managers targeting opportunistic and
development-oriented deals to chase higher returns.
Quebec City
Le Phare
Stability continues to define real estate and economic conditions
E
conomic stability continued to define the Quebec
City Region (QCR) in 2015. Fuelled by both the private
and public sectors, the QCR has an enthusiastic market
focusing on innovation and research. Quebec City has
one of the lowest unemployment rates in Canada at 4.9%
as of October 2015 compared with the Canadian average
of 7% and the province of Quebec at 7.7%. The real
estate market is stable in the QCR with steady demand,
low vacancy and many projects set to be delivered.
Office
With no major change in the overall inventory during
2015, demand in Quebec City’s office market remained
stable. Vacancy reached 6.7% as of third-quarter 2015
compared with 6.3% at the end of 2014. Exciting
developments are expected in 2016 as such projects as
the 65-storey Le Phare, which was submitted for study
and approval in the first half of 2015, start to come
to fruition. The tower, which is proposed by Groupe
Dallaire, would become Canada’s tallest skyscraper east
of Toronto. The $600-million development would offer
approximately 2 msf of office space. Furthermore, with
five other office projects totalling more than 315,000 sf
underway, vacancy is expected to rise slightly to 7.7% in
2016.
Retail
The retail market has undergone significant changes
in the last few years with the arrival of power centres,
which draw a large share of customers. Power centres
tend to offer most major brands and have a variety of
stores, which cater to many consumer needs. Target’s exit
from Canada was a major event in 2015 and left many
retail spaces available. However, Quebec City will benefit
from the purchase of two leases in the region by Walmart
and Canadian Tire, respectively. Due to the slow growth
of the retail sector in the City of Quebec during the
last few years and the expansion of e-commerce, local
retailers are expected to reduce their space requirements
and centralize locations for better exposure.
Quebec City Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
2016F
Office
Industrial
Quebec City’s industrial sector is mainly dominated by
owner-occupiers due to a lack of available land, which is
one concern facing the region. Quebec City is primarily
focused on the revitalization of its existing industrial
zones and the creation of new industrial parks that meet
specific criteria related to sustainability, green space,
infrastructure and energy consumption. Hence, new
construction and the expansion of current industrial
parks are expected in 2016 in order to accommodate
rising demand.
Investment
One of the major investments in 2015 was the
construction of the Centre Vidéotron, a $370-million
arena which cost $30 million less than originally planned.
Major activity is expected in 2016 with the $2.1-billion
renovation and expansion of the Hôpital Enfant Jésus. A
$130-million investment is planned for the headquarters
of the province’s health and employment security
commission, known by its French acronym CSST.
21
Regina
Agriculture Place
Office market expected to remain balanced
S
askatchewan’s economy was not immune to the rapid
decline in energy prices, a trend that impacted much of
Western Canada in 2015. Economic indicators are expected
to remain lukewarm well into 2016 despite a sustained
recovery in the mining and agricultural sectors, and an
increase in exports of manufactured goods. The full impact
of lower energy prices remains undetermined beyond
extensive job losses, as major infrastructure projects are
expected to offset at least a portion of the decline in
economic activity. Regina is expected to perform relatively
well, buoyed by large multi-year projects such as the
$1-billion downtown revitalization initiative (which includes
a new stadium), a $1.8-billion highway bypass route to
enhance export trade, and a new $181-million wastewater
treatment plant. The cooling economy has arguably been
a positive factor as construction costs appear to have
stabilized.
Office
A balanced market is expected to continue for the
foreseeable future. Regina’s newest office tower, Agriculture
Place, will add 160,000 sf of office and retail space to the
market upon completion. Harbour Landing Business
Park has added three campus-style buildings totalling
more than 119,000 sf in southwest Regina and a fourth
building is ready to kick off construction. Overall vacancy
increased to 7% in the third quarter of 2015 from 6.7% at
year-end 2014, and is expected to peak at 10.7% in 2016.
Lease rates for downtown and suburban space in all asset
classes were virtually unchanged, although net effective
rates (versus face rates) became more flexible as landlords
offered inducements where none were needed or offered
previously. Class A average net rates are $25 psf for existing
product with class B-plus assets achieving $19.50 psf and
class B buildings fetching $16.50 psf.
Retail
The retail market was a bright spot for the city in 2015.
Development and redevelopment projects and expansions
in retail, commercial and food services have been strong,
including names such as Real Canadian Superstore, Costco,
Lowe’s, Canadian Brewhouse, JYSK, Save-On-Foods, Chop
Steakhouse & Bar, Mr. Mikes and Famoso Pizzeria. The city’s
northern and southern retail corridors were redeveloped
while the Grasslands and East Quance districts continued to
22
Regina Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
mature. Harvard Developments, Choice REIT and OneREIT’s
expansion plans were the major newsmakers in 2015. Lease
rates remained stable at approximately $18 psf to $25 psf
for existing space compared with rates ranging from $30
psf to $40 psf for new space.
Industrial
Activity in the industrial market experienced a lull by
mid-year 2015 as weak absorption and a tepid economy
deterred speculative development. Inventory reached
nearly 19 msf at third-quarter 2015 with a vacancy rate
of 2.9%. Approximately 580,000 sf of new space is under
construction, the bulk of the space being SaskPower’s
new built-to-suit distribution centre in the Global
Transportation Hub. Morguard’s TransLink Logistics Centre
is ready for occupancy. Development is at varying stages of
completion in Parker Industrial Park, Carson Business Park
and Great Plains Industrial Park in the east Regina census
metropolitan area. Serviced land ranges from $160,000 to
$450,000 per acre in the capital region, while net lease rates
on new space have declined slightly, ranging from $11.50
psf to $12 psf.
Investment
The investment market continues to suffer from a shortage
of supply, resulting in compressed cap rates. Activity is
expected to be slow despite strong interest from investors
with little movement in cap rates expected in 2016.
Toronto
Bay Park Centre
New year offers mix of challenges and opportunities
T
he Greater Toronto Area (GTA) market faces a mixed outlook
for 2016. Supply overhang, workplace strategies and
disruptive technologies will test the office sector as e-commerce
reshapes the retail and industrial landscapes. Investor demand
will be restrained only by a shortage of product.
Office
Steady leasing velocity characterized 2015 with demand
centred on class A product as a flight to quality continued
region-wide. New construction has focused landlords on
retaining tenants who are enjoying multiple price options.
New downtown buildings have created large-block backfill
space in coveted AAA towers, but landlords do not expect it to
linger given the assets’ stature, consistent tenant interest and
urban intensification. Some large tenants have restructured or
extended leases early, leveraging backfill space, availability in
new projects, and upcoming development to improve their
bargaining position. Ivanhoe Cambridge will likely announce
commencement of phase one of Bay Park Centre in first-half
2016, while across downtown, transit-oriented, brick-andbeam redevelopment and mixed-use projects are trendy. U.S.
tenants expanding or establishing a foothold in the market are
augmenting demand.
Challenging perceptions of a tenant migration to downtown,
the suburban markets’ good health is evident in the quick releasing of Target Canada’s former headquarters and a series of
100,000-sf-plus transactions, including renewed interest in wellpriced space from major banks. Developer confidence keeps the
speculative and design-build pipelines active.
Retail
The retail scene is as dynamic as ever. Target’s departure
left some landlords in the red, but created opportunities for
others. Significant investment continues in regional malls, with
ongoing expansions and renovations aimed at enhancing (and
prolonging) consumer experiences. Toronto’s “Mink Mile” on
Bloor Street West is attracting significant reinvestment while
movement among existing and newly arriving high-end brands
keeps area retail rents the highest in Canada. Meanwhile, MEC
has announced plans to relocate from King Street to a newbuild flagship store on hip Queen Street West.
Industrial
The GTA industrial market was a bright spot in 2015. Robust
demand fuelled large-block transactions and new construction
Toronto Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
flourished; however, vacancy will likely remain among the
tightest of North America’s major markets in 2016. Significant
lease transactions were led by big-box retailers and the
transportation/logistics industries, supported by an uptick in
medium-sized requirements. Greenbelt encroachment and land
scarcity increase the appeal of redeveloping obsolete facilities to
meet modern standards. Growing emphasis on older or smaller
distribution locations near dense urban areas is expected as
retailers seek to optimize supply chains.
Investment
Investment fluctuated throughout 2015, but historically low
interest rates, abundant capital, constrained product supply
and competitive bids remained consistent, resulting in recordlow cap rates. Prime assets receive multiple offers from both
domestic players and, increasingly, foreign buyers (mainly from
Asia). Despite supply constraints, $9.5 billion worth of property
had sold near year-end 2015, with the final tally likely to match
the three-year average of $10.6-billion. Major transactions,
including significant suburban properties as well as core
downtown assets, saw widely varied product and vendorpurchaser profiles. Almost a dozen $100-million-plus deals were
concluded, including a 30% interest in the TD Centre complex
downtown ($881 million) and RBC Meadowvale Campus
($278 million) in the suburbs. Scarce product has also led to an
increasing deployment of capital abroad, especially in the U.S.
23
Toronto West (Mississauga)
360 Oakville Place Drive
Low dollar, volatile energy prices influence market
C
hallenging economic conditions resulted in varied
performances in Toronto West commercial real estate
markets in 2015. A low Canadian dollar, volatile energy
prices and stagnant employment growth have been key
influencers in each sector’s performance and are likely to
remain so in 2016.
Office
After a difficult start to 2015, the Toronto West office
market environment remained quite bearish with softening
positive absorption and vacancy. Despite subsiding
conditions, increasing flight-to-quality demands, which
are noticeably being led by financial groups, are driving
inventory growth for class A and LEED product.
As the cost of development and construction increases,
new office availability is expected to slow its pace. While
this trend could help alleviate steadily rising vacancy rates,
if employers continue to maximize workplace efficiencies
and reduce footprints without growth in employment,
activity in 2016 may remain dormant.
Retail
An unusual amount of retail space was vacated during
2015, with most coming from Target, Future Shop, Tiger
Direct, Staples, Rona and XS Cargo. While the additional
availability has challenged the landlord community, betterlocated sites in strong dynamic trade areas are being
absorbed by existing Canadian retailers in the mid-to-largesize formats. The freed-up space is also providing more
options for tenants within existing centres to stay and grow
or stay and shrink, rather than relocate entirely.
The balance of surplus supply may take three to five years
to achieve equilibrium and low vacancy. Some U.S. retailers
are looking at taking 60,000-sf to 90,000-sf spaces in the
next two to three years as they enter the Ontario market.
New mixed-use projects will continue to be added in
strong urban nodes as planning and marketplace demands
continue to match up with annual residential absorption.
Industrial
The industrial market was the most attractive and active
asset class in 2015 after recording high leasing velocities
and rock-bottom vacancies despite a large volume of new
supply deliveries. Virtually all new speculative development
has been spoken for, and the large number of large-block
24
Toronto West Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
lease transactions in 2015 had not been seen since the early
2000s. Additionally, rental rates have fully recovered from
the plight of 2008-09, are stable, and continue to grow.
Moving into 2016, a healthy amount of new construction
is expected to be delivered in the GTA, with 85%
concentrated in the West end and geared towards largeblock users who require more than 200,000 sf. Under these
conditions, rental growth is expected to increase among
50,000-to-150,000-sf users due to limited supply and
increased competition.
Investment
Restricted opportunities for land investment have turned
developers’ attention towards infill development. Both
the office and industrial markets have benefitted from
this situation as 30% to 40% of new projects are taking
place on infill sites. Although these sites may require more
due diligence and present challenges with zoning and
site-plan approvals, the downside could be considerably
outweighed by the development-charge exemptions and
existing amenities that often come with an infill location.
Nonetheless, if the low cost of borrowing continues, the
investment sector is expected to remain a seller’s market.
Vancouver
Royal Centre
Peak pricing yet to be reached in active BC market
B
ritish Columbia commercial real estate remained highly
coveted by local and international investors in 2015
with deal and dollar volume approaching record highs.
All asset classes – particularly retail, multi-residential
and industrial – continued to attract investment despite
premium pricing and highly compressed capitalization
rates. Total dollar volume was set to exceed $2.3 billion in
2015 with record investment anticipated in 2016.
Office
Deal and dollar volume declined in 2015 relative to
previous years as supply remained severely constrained.
Land value is the determining factor in all investment
decisions (particularly in the Downtown core) when it
comes to office sales. The probable sales of Bentall Centre
and the Royal Centre in 2016 will push overall dollar volume
to previously unseen levels, but may well signal the apex of
a well-documented and significant run-up in pricing and
demand for trophy office assets in this market. Both assets
will very likely set new benchmarks and may produce the
first billion-dollar-plus commercial real estate transaction in
Vancouver’s history.
Downtown and suburban office leasing activity was
moderate in 2015 with absorption primarily driven by
companies occupying new space in recently completed
office towers. Sublease vacancy remained stable.
Retail
After a slow first half in terms of deal volume (relative to
previous years), the sale of retail assets accelerated in the
second half of 2015. While dollar volume was primarily
driven by the sale of significant retail assets of scale in
primarily suburban markets, 2015 ended up as one of
the most significant years in recent memory in terms of
the total value of retail assets transacted. A number of
significant retail assets remain in play, and strong sales
are expected to continue in 2016. Retail leasing remained
brisk and rents stable along primary urban corridors and in
centrally located enclosed shopping centres. Retailers on
Robson Street in Downtown Vancouver, the historic home
of the market’s highest retail rents, noted an eastward
migration of traffic due to the recent opening of Nordstrom.
Nearby Alberni Street continued to host downtown’s
expanding array of luxury retailers and could start to
challenge Robson Street in terms of highest rental rates.
Vancouver Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Strong demand, low vacancy and a constrained supply of
industrial land hampered sales activity and fuelled vendor
expectations, resulting in near-record dollar volume in
2015. Millions of square feet of new industrial development
were delivered in 2015, but had virtually no impact on
vacancy, which continued to tighten and declined on a
regional basis. Industrial leasing activity was very strong
in 2015 and generated record absorption. That demand is
not expected to weaken. Vacancy is expected to tighten
further in 2016 with limited new construction scheduled for
delivery. Industrial land prices continue to rise and supply
remains limited. This trend is expected to continue and
intensify in 2016.
Investment
While local capital has traditionally dominated BC’s
commercial real estate investment market, a rising tide of
offshore money took on a higher profile in Metro Vancouver
in 2015. Underlying land value has increasingly influenced
vendor expectations, which were fuelled further by
different investment criteria used by overseas buyers when
compared with the requirements of local investors. This
emphasis on land value is expected to continue in 2016.
Private investors, both local and foreign, were the dominant
players in 2015 and will remain so in 2016.
25
Waterloo Region
230 Boardwalk Drive, Kitchener
Market shows continued resurgence in 2015
T
he Southwestern Ontario market – made up of Guelph,
Kitchener, Cambridge, Waterloo and Brantford – was
stable in 2015 as results remained consistent with 2014
conditions. As expected, the area continued to provide
steady results for investors and developers in a strong
Southwestern Ontario economy, backed by a stable, welltrained workforce and diverse industries. The Southwestern
Ontario economy is expected to remain steady in 2016,
providing continued growth and opportunities for users
and investors alike.
Office
Though vacancy rates have stayed fairly consistent since
2014, the office market saw properties changing hands
and new U.S. investors such as Spear Street Capital being
attracted to the Southwestern Ontario region. The region
was recently voted a Top Ontario Investment Town by
the Real Estate Investment Network with tech, financial,
insurance, health and engineering industries all having a
significant presence in the area. This demand is directly
reflected by the continued growth of the 15-msf office
market.
Vacancy was relatively consistent at 10.7% at the third
quarter of 2015 compared with 10.1% at the end of 2014.
Despite limited development of new office product,
vacancies created by companies moving out of the area
or downsizing were balanced by steady leasing velocity
in 2015. Much of the vacated space was repurposed and
the vacancies absorbed. Asking rental rates are forecast to
remain stable with vacancy rates dropping slightly during
2016.
Retail
The Canadian retail landscape was altered significantly
in 2015 by closings and layoffs and this is apparent in the
Southwestern Ontario market as well. The uncertain future
of the industry has discouraged some developers, limiting
the number of new retail developments in the region.
However, growth in certain city nodes – specifically Guelph
– has been abundant, as have the redevelopment of a
number of vacant land and industrial sites. With increased
residential development and a strong local economy,
retailers continue to focus on the Southwestern Ontario
area as a market in which to expand. Expect to see existing,
new and redeveloped properties continue to lease up in
26
Waterloo Region Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
2016.
Industrial
Southwestern Ontario has long been an industrial
powerhouse with an inventory of more than 112 msf.
Vacancy in the industrial market was 5.8% in the third
quarter of 2015, while lease rates ranged from $5 psf to
$6.50 psf for most product. Industrial buildings are soughtafter by tenants and owner-occupiers from the local market
as well as the Greater Toronto Area (GTA) region.
Industrial land is abundant in Guelph and Cambridge as
local business parks continue to expand, while Brantford,
Kitchener and Waterloo have limited supply. Industrial
properties that include outside storage are in strong
demand and achieved record sale prices in 2015. Growth
and expansion of the Southwestern Ontario industrial
market will continue in 2016.
Investment
Investors continue to flock to Southwestern Ontario
seeking better value and more options versus other areas
more saturated with investors. Demand remained steady
across all asset classes in 2015. Capitalization rates ranged
from mid-5% for multi-residential properties up to 6% for
retail assets, 6.5% for office buildings and 7% for industrial
assets, depending on property performance and tenant
covenant. Lease rates in all classes rose during 2015, but
will likely plateau in 2016 and affect investors’ decisions.
Winnipeg
Medical Arts Building
Commercial real estate climate heating up
T
he commercial real estate market in Winnipeg and the
surrounding region is heating up as strong job growth is
yielding the lowest unemployment rate in Canada. Canada
Goose – maker of cold weather outerwear – recently
announced a doubling of its local workforce to more than
1,000. However, this is not the only garment-trade firm
experiencing growth. Pacesetter, Manitoba Mukluks, Pine
Falls Clothing and many more are also hungry for skilled
workers. In contrast to the volatility of Western Canadian
markets, Winnipeg remains a stable and attractive location
for investment in all sectors.
Office
Downtown Winnipeg’s class A and B vacancy rates were
9.2% and 11.3%, respectively, as of third-quarter 2015.
However, class C vacancy is quickly approaching a critical
point – 12.5% – as vacancy in several historical buildings
has increased due to a lack of leasing activity. In the
Winnipeg market as a whole, class A vacancy is expected to
drop to 5% in 2016 from 5.8% in the third quarter of 2015.
Class B and C vacancy rates, however, had deteriorated to
8.7% and 12%, respectively, as of the third quarter. One
highlight was the $7.9-million purchase of the former
Medical Arts building (a 15-storey building with attached
parkade and surface parking lot) by Manitoba Liquor and
Lotteries, a provincial Crown corporation, which plans to
spend an additional $66 million on renovations and an
80,000-sf expansion.
Retail
Vacancy rose in 2015 as all retail sectors, including strip,
power centres and enclosed malls, recorded a sharp
increase in vacancy – to 5.7% from 4.4% overall as of
the third quarter. Target’s departure from Canada was
responsible for part of the increase. While replacement
tenants will be found, retail vacancy rose to levels not
registered since the mid-1990s. However, vacancy is
expected to decline to 5% in early 2016 with Sobeys
opening a new large-format store and several Extra Food
stores being franchised and rebranded as No Frills. With
increased vacancy, retail landlords struggled with the delta
between high construction costs and market rents.
Winnipeg Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Some activity returned to the stable industrial market in
2015 with the relocations of existing tenants. Vacancy
ended the third quarter of 2015 at 3.1%, marginally higher
than at year-end 2014. Rental rates inched up by 5% during
2015 with new construction projects having difficulty
achieving a return on investment. Industrial parks with
buildings offering large column spacing and 26-foot-plus
ceiling heights are pushing rents into the double digits.
Investment
A lack of product and the continued abundance of
available capital are two features of the market that have
not changed, especially after the stock market hiccup in the
third quarter of 2015. Slate Properties has been an active
seller with the disposition of one rural shopping centre
and another under contract. Slate’s industrial portfolio also
entertained multiple bids with the sale closing late in 2015.
27
UNITED STATES
Atlanta
Ponce City Market
Businesses attracted by strong fundamentals
R
obust job growth and success in attracting corporate
relocations benefitted all sectors of Atlanta’s commercial
real estate market in 2015. Businesses are attracted to the
market by its strong economic fundamentals and highly
educated workforce. Atlanta added 72,300 jobs during the
12-month period ending September 2015. The recovery has
been broad-based, fueling a diverse economic resurgence.
With job growth projected to remain strong in 2016, the
market will continue to attract investor interest as falling
vacancy and rising rental rates drive increased values for
commercial property.
Office
Surging demand and historically low construction levels
placed Atlanta landlords back in the driver’s seat in 2015.
Net absorption totaled 2.3 msf through the third quarter,
driving vacancy down 200 bps year-over-year to 16.4%.
Tenants with large space needs face a lack of options and
asking rental rates are rising rapidly. The average class
A rental rate rose 5.7% year-over-year to end the third
quarter at $24.90 psf. With job growth robust and just two
buildings under construction, these conditions are likely to
persist well into 2017, leaving ample runway for additional
rent growth. In the near term, more tenants will be forced
to consider secondary options when securing space - a
situation which should drive further recovery in the class B
segment in 2016.
Retail
Retail vacancy ended the third quarter of 2015 at 7.6%,
down 90 bps year-over-year. Construction remains modest
by historical standards with 750,000 sf underway in the
third quarter. Activity was strong in Midtown where
tenants, including Anthropologie, West Elm and WilliamsSonoma, moved into the Ponce City Market adaptive
reuse development. There was also significant expansion
activity among grocers with established brands venturing
into urban areas and new brands such as Sprouts Farmers
Market and Earth Fare entering the market. Reduced
vacancy put a floor under asking rental rates and allowed
landlords to push rates higher in select markets. With
demand outpacing new construction, more widespread
increases in rental rates should occur in 2016.
Atlanta Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Atlanta’s industrial market continued to shine in 2015
with 9.1 msf absorbed through the first three quarters of
the year. Vacancy fell 100 bps to 8.9% despite a wave of
speculative construction completions. Limited availability,
particularly for large users, drove warehouse asking rental
rates up 7.3% year-over-year. With Atlanta serving as a key
logistics hub, local industrial activity is being driven largely
by e-commerce and the Port of Savannah, the fastestgrowing port in the nation by container volume, according
to the Georgia Ports Authority. The market may experience
an uptick in vacancy by late 2016 as more construction is
delivered, but fundamentals should remain strong.
Investment
Commercial sales totaled $10.2 billion through the first
three quarters of 2015 – a 40% increase compared with
the same period in 2014. Multi-residential led the way with
$4.3 billion in volume. Office sales totaled $3 billion, a 78%
increase over the first three quarters of 2014. The largest
transaction was Building & Land Technology’s $469-million
purchase of Concourse Corporate Center in the Central
Perimeter submarket. Industrial and retail sales were down
following unusually robust activity in 2014. Prices rose
across all asset classes, most notably for multi-residential
and retail properties. Investor demand is projected to
remain strong through 2016 with buyers increasingly
seeking value-add opportunities.
29
Austin
Colorado Tower
Robust economic growth creates high demand and rising rates
A
ustin’s commercial real estate market saw steady
demand and continued growth in occupancy and
inventory throughout 2015. As the 11th-fastest-growing
major U.S. metropolitan area by population in 2015,
according to the U.S. Census Bureau, private industry
sectors such as information technology and professional
and business services largely drove the area’s demand for
office space. Along with rising rental and occupancy rates,
Austin’s rapidly expanding leisure and hospitality industries
also contributed to a strengthening retail market during
2015.
If Austin’s economy continues to grow in 2016, rising
occupancy and rental rates along with positive absorption
are expected to continue.
Office
Austin’s office market was characterized by rising
occupancy, an increase in rental rates and significant levels
of positive absorption in 2015. Many of the new office
developments that were delivered in 2015 had little effect
on the city’s occupancy rates as the strong preleasing
trends recorded in 2014 continued into the first half of
2015.
Of the 3.1 msf of office space under construction and
expected to deliver over the course of 2016, 39% has been
preleased. With demand and increasing rents expected to
continue in 2016 – particularly in the CBD – the need for
more affordable space should spur increased development
activity in Austin’s peripheral submarkets. Austin’s East
submarket, which has more than 800,000 sf of office
development proposed, will be of particular interest for
tenants seeking lower rates in proximity to downtown.
Retail
With citywide occupancy surpassing 96% during the
third quarter of 2015, Austin’s retail market has shown
the highest levels of demand among all local commercial
sectors. In conjunction with the submarket’s multiresidential development surge, West Central Austin has
seen abundant retail development, resulting in the city’s
highest average retail rental rate of $29.91 psf. Barring
a slowdown of the local economy, the demand and
construction trends for retail recorded in 2015 will likely
continue in 2016.
30
Austin Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Austin’s industrial market remains the city’s smallest
commercial sector in terms of transactional and
construction activity, as the city is not well-positioned for
distribution initiatives. As 2015 came to an end, there was
281,000 sf of industrial product under construction with
roughly the same amount proposed for development.
As industrial construction in Austin is rarely built on a
speculative basis, the projects currently in development
are approximately 79% preleased. The most significant
trend to watch in 2016 will be the continued increase in
industrial sale prices. Interestingly, the spike in sale prices
for industrial product has been driven by the opportunity
to redevelop outdated industrial sites into mixed-use and
creative office space.
Investment
Commercial real estate investment activity highlighted
Austin as one of the top investment markets in the country
in 2015, according to the Urban Land Institute’s Emerging
Trends in Real Estate report. Multi-residential investment
volume significantly outpaced all other sectors, totaling
more than $2.4 billion of investment. Office investment
activity also surged during 2015, surpassing $1.5 billion for
the year. With cap rates continuing to perform in line with
national averages during 2015, Austin’s investment markets
should continue to register significant levels of activity
through 2016.
Boston
500 Boylston Street
Increasing presence of foreign capital to decrease trade frequency
The Greater Boston economy continued to outperform
the national average at the end of 2015, posting an aboveaverage consumer price index (CPI) score and lowering its
unemployment rate to 4.7%. With the highest number of
millennials and colleges/universities per capita in the U.S.,
Boston can attribute its robust growth to its intellectual capital
and innovative employment pool.
Despite the city withdrawing its 2024 Olympic bid, Greater
Boston’s commercial real estate market outlook remains
optimistic with continued accolades influencing the migration
of business to the market. Boston, traditionally a finance,
life-science and education-oriented market, is now among
the country’s top technology and innovation hubs due to the
rapid expansion of startup companies and co-working spaces.
Office
The office market continued to tighten in 2015 despite a 2.7msf construction pipeline at the beginning of the year. This
situation has given way to all-time low vacancy rates and a
continued increase in rents, particularly for average-quality
assets in preferred areas. As of third-quarter 2015, vacancy in
Boston’s core was 7.2%, and rents for class B office space had
increased 25% year-over-year. Many tenants have chosen to
sacrifice quality for the sake of staying in the city at similar
rents, indicating that if these urban tenants are to be tempted
by the suburbs, first-class building quality is a requirement.
This trend should encourage landlords’ quality-enhancement
efforts, particularly along the 495 Belt, where second-tier office
product saw a 4.3% decrease in rents during 2015.
Retail
Retail properties continued to experience rent growth
throughout 2015 in both eminent city locations and emerging
live/work/play environments. The largest increases have
been recorded in areas surrounding the CBD, where the
developments of Seaport Square in Boston and Assembly
Row in Somerville have continued to attract local and national
retailers. In conjunction with Boston’s multi-residential
construction boom, the urban infill trend is expected to
continue and bolster the retail industry as amenities follow
population growth.
Boston Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Traditionally a secondary industrial market, the Greater Boston
area has registered an average rental rate increase with a
decrease in the urban inventory. Approximately 1 msf of
industrial product is demolished annually inside the 128 Belt,
which has left little opportunity for tenants looking to be in
proximity to Boston. As this trend continues, the remaining
urban inventory will be filled by produce- and transportationoriented companies that require proximity and are willing to
pay high rents. For other tenants, the 495 Belt, with slightly
more than 70% of overall inventory, will continue to be the
primary industrial submarket.
Investment
A diverse group of investors, taking part in some of the largest
transactions to date, helped make 2015 another active year.
In the suburbs, local investors such as the Gutierrez Company
have continued to claim high profits by capitalizing on an
increasing institutional presence, while the largest sale to
date in Boston was driven by foreign capital. Properties at
500 Boylston Street and 200 Berkeley Street were sold by
Blackstone to partners JP Morgan and Canadian-based Oxford
Properties for $1.3 billion. This deal followed an increasing
trend of foreign capital placing long-term holds on first-class
urban assets. In 2016, the number of trades will likely decrease
if there is a spike in interest rates. Trading is expected to slow,
particularly in the city with regard to top-tier urban towers
where foreign investors such as Oxford Properties and Norges
Bank have long-term-oriented portfolios.
31
Charleston
The Cigar Factory
Diverse economy shows continued growth
T
he Charleston region continues to experience growth,
outpacing most of the nation in new job creation,
population increase and sector expansion. In 2015,
in addition to Boeing’s continued expansion, Daimler
announced significant growth, the first North American
Volvo manufacturing facility was announced, and a host
of other supporting industries moved to the region. These
manufacturers are in their early-stage growth periods in
this region and substantial expansion is expected in the
years ahead. The Port of Charleston remains a key driver
in the growth of business, providing import and export
opportunities around the world.
Charleston also remains a top tourist destination, attracting
millions of visitors every year and will soon be supported by
an expanded and renovated airport, which also supports
Boeing and Joint Base Charleston. High-tech, biotech and
other research-based industries are experiencing rapid
growth, further diversifying a community that not long ago
was reliant on military and tourism activities as its main
economic drivers.
Office
Developers re-entered the office market in 2015, and that
trend is expected to continue in 2016. Charleston has
enjoyed a rebound from recession lows, resulting in low
vacancy and record-high rental rates. New construction and
creative renovations, aided by a thawing in the commercial
lending market, came online in 2015 and several class A
projects are slated to open in 2016. Rental rates are expected
to increase, although not dramatically. Vacancy is forecast to
remain stable as new office product gets absorbed.
Retail
Due to Charleston’s accolades (America’s No. 1 Small City
for five years running according to Conde Nast and Top City
in the U.S. and Canada in the Travel + Leisure 2015 World’s
Best Awards), individuals, families, restaurants and retailers
are making the region home. Big-box retailers are entering
the market and opening new stores. With this boom in the
market, new shopping centers are being built, older ones
are being redeveloped and retail space is being added.
Opportunities for retailers to expand, move and open
multiple locations are available at higher lease rates and
longer lease terms. Charleston will see continued growth,
high rental rates and new development in 2016.
32
Charleston Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The industrial market in 2016 will be vibrant and growing
with diverse industries. As the industrial sector has recovered,
demand for space has exceeded inventories, triggering
new construction, rental rate increases and minimal, if any,
concessions while pushing sale prices up to and beyond
replacement costs. As rents rise on new product, the
economics may begin to make sense to scrap old buildings
and redevelop the sites. For the next 18 months, barring an
outside shock to the economy, a landlord’s (or seller’s) market
is expected to persist. Investment in new infrastructure is
desperately needed across the state to support Charleston’s
economic growth.
Investment
Charleston is on the radar of institutional and private
investors. Demand for investment-grade properties,
especially in prime locations with quality tenants, heavily
outweighs supply, creating an advantageous market for
sellers. Properties are receiving multiple offers above the
asking price with favorable closing conditions for the seller.
The market has recorded mostly steady and compressing
capitalization rates since the start of 2015 for class A
properties. For 2016, as long as the present factors
compressing cap rates persist – low interest rates, a positive
economic outlook and constrained supply – cap rates are
expected to remain steady.
Charlotte
Charlotte Plaza
Vacancy expected to tighten in all sectors
S
trong population and job growth are fueling Charlotte’s
commercial real estate market. The region added more
than 38,000 jobs in the 12-month period ending September
2015. The region’s population has surged by 38% since 2000.
All asset classes have experienced significant occupancy
gains in the last two years, driving rental rates higher and
fueling new construction. Vacancy is expected to continue
to tighten for all product types in 2016 and tenants will need
to act decisively when competing for space.
Office
Office vacancy fell to 12.5% in the third quarter of 2015,
down 120 bps year-over-year. Large blocks of space have
become scarce, leading developers to fill the construction
pipeline. There was 2.2 msf of construction underway in the
third quarter with 54% preleased. Of this space, 900,000 sf
is contained in build-to-suit projects for LPL Financial, Lash
Group and AvidXchange. Much of the remaining speculative
space will not be delivered until 2017. As a result, tenants
could be faced with limited availability and rising occupancy
costs through 2016. Average asking rates rose more than
12% during 2015 and should remain on a steep upward
trajectory.
Retail
Charlotte’s retail vacancy ended the third quarter of 2015
at 5.4%, down 140 bps year-over-year. Large blocks of
recently vacated space have been quickly backfilled. The
redevelopment and renovation of infill sites has become
a prevailing trend. Construction activity remains low by
historical standards. Approximately 620,000 sf was underway
in the third quarter of 2015 – not enough to impact vacancy
in the near term. Tenants are anxious to enter the rapidly
growing Charlotte market, but are faced with limited options
and rising costs. The average asking rate stood at $15.72 psf
in the third quarter, up 8% year-over-year.
Industrial
Net positive absorption totaled 1.7 msf through the first
three quarters of 2015. Vacancy ended the quarter at
7.1%, down 30 bps from year-end 2014 and from a cyclical
high of 13.1%. Tenants making large lease commitments
included Camber Ridge (404,400 sf), Ta Chen International
(100,000 sf), DMSI (160,000 sf) and Project Tarheel (152,800
sf). The average asking rental rate rose by 5.3% to $3.79
psf. Rising demand and rental rates are driving a wave
Charlotte Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
of new construction with 1.1 msf delivered through the
third quarter of 2015 and 1 msf – the majority of which is
speculative – still underway. Nonetheless, vacancy will likely
fall below 7% in 2016 as demand outpaces new supply.
Tenants should be prepared for rents in the $4.50-psf range
for new construction. Concessions will be limited.
Investment
Commercial sales totaled $2.8 billion through the first three
quarters of 2015, a 20% increase compared with the same
period in 2014. The largest transaction was the sale of the
630,400-sf Charlotte Plaza office building for $160 million
($254 psf). Multi-residential sales totaled $1.1 billion, an
increase of 78% compared with the same period in 2014.
Office and industrial sales totaled $592 million and $525
million, respectively, and retail sales totaled $347 million.
Following a nationwide trend, investor demand for hotels
was robust, with sales totaling $177 million. Demand and
pricing should continue to strengthen in 2016 as Charlotte’s
sound leasing fundamentals and robust job growth
continue to attract investors.
33
Chicago
The Willis Tower
Economic growth triggers increased demand across all sectors
C
hicago’s commercial real estate market recorded substantial
growth in all sectors throughout 2015. Fundamentals
neared pre-recession levels as increased occupancy demand
pushed vacancy rates down. Economic recovery continued
to strengthen, propelled by strong job growth across several
key industries. According to World Business Chicago, the
metropolitan area benefits from a highly diversified economy
with no single industry employing more than 14% of the total
workforce. As of September 2015, the unemployment rate
stood at 4.9%, down 130 bps from 2014. Numerous corporate
relocations and expansions to Chicago were reported, including
several from out of state. Notably, ConAgra and Oscar Mayer are
bringing 700 and 250 jobs, respectively. This strong momentum
should continue into 2016.
Office
Chicago’s office market witnessed increased activity throughout
2015. Overall vacancy fell 110 bps to 12.3% at the end of the
third quarter. Much of the activity remains centered within the
West and Central Loop submarkets of the CBD. The East Loop
recorded the largest year-over-year increase in absorption,
pushing vacancy down considerably. The CBD continued to
outperform suburban markets, which recorded little change
throughout 2015.
As space continued to tighten, asking rental rates trended
upward, swaying market conditions in favor of landlords –
particularly in buildings where significant capital improvements
have been made. Class A rents saw the greatest increase – up
6% year-to-date in the third quarter of 2015. With space tight
and demand expected to remain strong, rents should continue
to increase as new product will not be delivered until late 2016.
Retail
Retail growth continues to be focused on city submarkets,
while many suburban markets continue to record high vacancy
rates. Outlet malls located throughout Chicagoland, by which
the Chicago metropolitan area is known, have witnessed
considerable growth, notably Fashion Outlets of Chicago, which
has announced a major expansion plan. Walmart is in talks
with several Chicago civic groups in hopes that a partnership
will help add several stores throughout the metropolitan area,
potentially creating up to 12,000 jobs over the next five years
and helping to eliminate so-called “food deserts.”
34
Chicago Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Strong fundamentals propelled the Chicago industrial
market to a record-breaking 2015. Demand drove vacancy
down 60 bps year-over-year to 6.8% at third-quarter 2015.
Rental rates in select submarkets have become increasingly
competitive. Absorption for the first three quarters of 2015 rose
50% compared with the same period in 2014. This increase
prompted strong construction activity throughout 2015, with
10.9 msf delivered and another 10 msf under construction.
While submarkets such as the I-80 and I-55 Corridors continue to
record much of the new development, construction is picking
up in submarkets that have previously been stagnant. Infill
development remained a key trend, especially within the O’Hare
submarket. The overall industrial market should continue to see
increased leasing and construction activity in 2016.
Investment
Investor interest remained strong throughout 2015. Capital
continued to pour into industrial product. With new and foreign
capital entering the market, 2015 transaction volume was
recorded at $2.4 billion – up 5.7% year-over-year. The purchase
of infill class B product continued to attract investor interest, a
trend likely to continue in 2016.
CBD office product continued to trade for high premiums as
market fundamentals drove investor appetite. Institutional
investors, including the Blackstone Group and Amtrust,
continue to increase their local footprints. Blackstone acquired
the Willis Tower, which traded for $1.3 billion ($336 psf), the
highest sale price of 2015. Competitive pricing is likely to
continue.
Cleveland
Key Tower
Downtown resurgence continues to fuel growth
A
population influx to downtown Cleveland continued in
2015, spurring commercial and residential real estate
activity. Residents, retailers and office users have turned
their attention towards downtown as the live/work/play
culture gains momentum.
More than 13,000 full-time residents now call downtown
Cleveland home. Despite adding more than 300 units
in 2015, the multi-residential market boasts a 97.6%
occupancy rate – a 2.5-percentage-point year-overyear increase. Several apartment buildings have waiting
lists; approximately 275 apartments are currently under
construction and roughly 4,000 more units are planned.
Regional grocer Heinen’s opened its doors at the former
Cleveland Trust Building, making it the only full-service
grocery store downtown.
The region continues to gear up for the Republican
National Convention to be hosted in July 2016. Several
hotel projects are underway with delivery scheduled in
time for the convention, including construction of the
$260-million, 600-room Downtown Hilton and the adaptive
reuse, $50-million, 122-room Kimpton. The 15-month,
$32-million renovation of Public Square, currently
underway, will provide a revitalized 10-acre green space in
the heart of downtown.
Office
The overall Cleveland office market recorded positive
net absorption of approximately 151,000 sf through the
third quarter of 2015. Office vacancy dropped to 13.4%
at the end of the third quarter of 2015 from 14.1% a year
previous. BakerHostetler will move into five floors, taking
approximately 115,000 sf, at Key Tower in early 2016.
StartMart occupied a 35,000-sf office in Terminal Tower
in the third quarter of 2015 with a focus on fostering
entrepreneurial growth in the region. The proposed
nuCLEus mixed-use project signed its first office tenant,
Benesch Law Firm, which agreed to lease 66,500 sf.
Retail
Cleveland’s retail market enjoyed a strong 2015, a trend
that is forecast to extend into 2016. Retail vacancy across
the region tightened to 9.9% at the end of the third
quarter of 2015 from 10.4% a year earlier. More than 20
new downtown restaurants and shops opened in 2015,
highlighted by the second phase of the Flats East Bank
Cleveland Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
redevelopment.
Industrial
The Greater Cleveland industrial market logged positive net
absorption for the fourth consecutive year in 2015. While
industrial vacancy of 5.5% at the end of the third quarter
of 2015 points to strong demand, there has been a lack of
new industrial product in recent years. Three speculative
industrial buildings are scheduled for delivery in 2016 – the
first of their kind in eight years.
Investment
The downtown core continued to attract out-of-state
investors in search of value-add opportunities. The property
at 925 Euclid Avenue was acquired by Florida-based
Hudson Holdings for $22 million. The group is planning a
$280-million renovation of the 1.3-msf former Huntington
Building. Hertz Investment Group of Santa Monica, CA
entered the Cleveland market through two acquisitions.
Hertz paid $53.75 million in April for the 27-floor Fifth
Third Center, followed by the September purchase of the
321,000-sf Skylight Office Tower for $34.2 million. Key
Tower, Cleveland’s tallest building, was listed for sale in
September. The complex includes 1.3 msf of office and a
400-room Marriott hotel.
35
Columbus, OH
Fifth Third Center
Market remains steady with multi-residential construction in urban areas
T
he Columbus market continues to thrive with steady
leasing activity due to a growing Central Ohio economy
and continued increase in the number of urban residential
units. With the completion of The Atlas Apartments located
on the corner of Long and High, 98 residential units were
added to the downtown community in addition to three
new retail spaces. The development at 250 S. High Street
will also add 121 residential units, making the Columbus
CBD an ideal location for young professionals to live and
work. Similar trends are happening in areas like the Short
North, Easton and Dublin submarkets, with high-end
apartment complexes attracting young professionals.
Office
Despite steady leasing activity, the forecast for 2016 is
for an increase in overall vacancy to 8.4%, similar to what
was recorded at year-end 2014. Wells Fargo officially filed
for foreclosure of the Fifth Third Center downtown after
the owner defaulted on the commercial mortgage. The
330,800-sf building was operating at 69.2% occupancy, but
hopes to attract new tenants.
Office space is popping up in areas previously heavy on
retail and residential uses, specifically in the Short North.
The offices at the Joseph, located at 629 N. High Street,
are fully occupied with the owner (Pizzuti Companies)
relocating its headquarters to the 60,000-sf office/retail
building. A new development project is in the works with
Schiff Capital Group and The Wood Companies set to build
an 11-story office building at 711 N. High Street where a
city-owned parking lot currently resides. The building will
include a small parking garage and rooftop bar.
Retail
Home to the headquarters of five large retail brands,
including L Brands and Abercrombie, the retail market is
on the upswing. Trendy outdoor shopping areas continue
to expand, with the new Dick’s and Field and Stream stores
near Easton shopping center and a proposed 6,000-sf-plus
strip center near the Shoppes on Lane.
Smaller retailers are finding success in the market as well.
The Italian Village favorite, Cravings Cafe, will be relocating
to a larger space downtown on the corner of Front and
High. Local Cantina recently opened its fourth location in
Columbus since 2012.
36
Columbus Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Industrial market activity in 2015 included Chicago-based
real estate firm Singerman purchasing two Columbus
distribution facilities from the Garrison Investment Group
at 3880 Groveport Road and 3800 Lockbourne Industrial
Parkway. Hillwood Investment Properties, a full-service
commercial real estate developer, acquired a warehouse
located at 6201 Green Point Drive from Opus Development.
With minimal new construction underway in the industrial
market, vacancy is continuing to tighten with an expected
year-end 2016 vacancy rate of 5.9%, down from 6.2% at the
end of the third quarter of 2015.
Investment
Anchored strip centers continue to be a driving force
in retail investment. As for office and retail assets, sales
activity should remain steady with cap rates achieving
approximately 7.7%, up 10 bps from year-end 2014.
Apartments and multi-residential properties continue to
lead investments with an average cap rate of approximately
8.5%.
Dallas
State Farm Campus
Booming local economy bodes well for CRE markets
I
mpressive employment growth continued in
the Dallas-Fort Worth (DFW) metroplex in 2015.
Employment gains were broad-based with most
economic sectors experiencing year-over-year job
growth. Large corporate relocations have made
headlines in recent years, highlighting companies such
as Toyota, State Farm and Liberty Mutual. The Urban
Land Institute (ULI) named Dallas as the No. 1 market to
watch in the U.S. in 2016 in its Emerging Trends in Real
Estate report, up from No. 5 in 2015. The report cited
impressive employment growth, which is supported by
a business-friendly environment with an attractive cost
of doing business and cost of living. The DFW market
is expected to progress even further in 2016 with the
financial services, technology and healthcare sectors
leading the way.
Office
Expansion in employment sectors that require office
space drove a significant amount of demand in 2015.
Absorption through the third quarter of 2015 totaled
more than 5.2 msf, already exceeding full-year 2014.
Absorption gains in 2016 will continue to be significant
as tenants take occupancy of the large build-to-suit
projects that are currently under construction. The
Dallas market’s building boom has upwards of 8 msf
under construction, the most development to occur
in more than 10 years. In previous years, most new
construction starts were geared towards build-to-suit
projects, but shifted toward increased speculative
development in 2015 due to pent-up demand. The
vacancy rate decreased to 14.6% in the third quarter of
2015 – its lowest point since 2006. Average asking rates
have increased substantially since 2014 due to demand
outpacing supply and higher operating costs. The
metroplex shows no signs of slowing, and the positive
market fundamentals registered in 2015 are expected to
continue in 2016.
Retail
Availability of retail space tightened further throughout
2015, particularly in Far North Dallas and near the
downtown area. Dallas is a corporate destination with
high-paying jobs, which will continue to benefit the
luxury retail market. Need-based retail continued to
Dallas Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
expand as well to support the growing population.
Average asking rates climbed throughout 2015 and are
expected to continue increasing through 2016.
Industrial
DFW’s central location and growing population make
the city an ideal location for warehouse and distribution
properties – the main drivers of the region’s industrial
market. As of the third quarter of 2015, the industrial
market posted 19 consecutive quarters of positive
net absorption. Significant positive net absorption is
expected to continue through 2016. Industrial space
continues to lease quickly with vacancy falling to 6.7% in
third-quarter 2015. More than 17.3 msf is currently under
construction, with 21% preleased. As this space delivers
throughout 2016, it will slightly alleviate the tight market
conditions. Average asking rates continued to appreciate
through 2015. High demand and increasing asking rates
are expected to continue in 2016.
Investment
Both foreign and domestic investors are taking notice
of the explosive growth that is occurring in Dallas. An
increased amount of capital has flowed into the market
in recent years. Investment volume totaled $11 billion
through the first three quarters of 2015. The Dallas
market is firing on all cylinders, a trend which will result
in increased investment interest in 2016.
37
Denver
1144 Fifteenth Street
Sustained growth leads to healthy CRE markets for 2016
T
he Denver economy has recorded robust expansion
in the years following the Great Recession. Since 2010,
the region has added more than 220,000 new jobs, and
unemployment fell to 3.6% in September 2015 from 8.8%
in January 2010. Hence, Denver is five years into its current
growth period. An increasing number of new companies
from outside Denver are drawn to the market due to its
educated and diverse workforce. Colorado is the secondhighest educated state in the U.S. behind Massachusetts,
with 38.3% of adults having at least a bachelor’s degree,
according to the U.S. Census Bureau. The population
continues to expand, mainly due to the quality of life that
Denver provides. Indicators such as a healthy housing
market, substantial employment gains and a growing
population are pointing towards sustained growth well into
2018 (barring a major national or international setback).
Office
Activity remained high in the Denver office market in 2015.
A substantial amount of growth occurred organically from
existing Denver companies with many opting to expand
and/or upgrade their office-space requirements. The
vacancy rate, which was 9.8% in the third quarter of 2015,
remains near historically low levels. Speculative construction
increased in 2015 to address the backlog created by the
demand for space. Compared with the amount of demand
in the Denver market, new development has remained
conservative and is not expected to have a significant impact
on vacancy. Asking rates continue to rise at an accelerated
pace due to strong demand, the delivery of new and more
expensive space, and rising operating costs from higher
taxes. Tight market conditions and rising asking rates are
expected throughout 2016.
Retail
Denver’s population boom is driving demand for retail
product. According to Metro Denver Economic Corp., the
local consumer confidence index was up by 27% as of
October 2015 compared with October 2014, a trend which is
expected to boost consumer spending in the area. Vacancy
in retail space continues to tighten, particularly in areas with
high walkability that support a live/work/play lifestyle. In
addition, grocery-anchored developments and other needbased retail establishments will continue to see demand to
support Denver’s growing population.
38
Denver Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Demand for local industrial space continued to outpace
supply in 2015. Industrial properties have recorded a
significant amount of absorption in recent years, posting 6.3
msf in 2014 and 2.5 msf through the third quarter of 2015.
The significant absorption in 2014 was due to new space
requirements brought on by the legalization of marijuana.
Absorption is on a healthy track that will continue into 2016.
Online retail growth and Denver’s population boom will
further boost warehouse and distribution properties in the
coming years. Although a sizeable amount of new product
was delivered in 2015, it was mostly preleased and did little
to alleviate the tight market. Average asking rates have
increased substantially in the past year and are expected to
continue to rise throughout 2016.
Investment
Denver’s booming economy has attracted foreign and
domestic investors to the area. An increasing amount
of investment came from China and Singapore in 2015.
Investment volume totaled $6.8 billion through the first
three quarters of 2015 compared with more than $8.1
billion in sales in all of 2014. The average price per square
foot increased through 2015 as capitalization rates slowly
compressed. Pending deals and a healthy economy will likely
lead to increased investment sales through 2016.
Detroit
150 West Jefferson Avenue
All eyes on Detroit’s downtown
T
he Detroit CBD and New Center submarkets remain
focal points as suburban tenants contemplate a
downtown migration. Parking and municipal taxation
continue to be deterrents, even as space becomes
available through the renovation of outdated inventory
to accommodate the rising demand for office and
residential space downtown. The federal rehabilitation
tax credit, which includes a 20% credit to developers, is
a major economic incentive encouraging the conversion
of a plethora of historic downtown properties to multiresidential and office uses. As of November 2015,
there were five multi-residential developments and
renovations anticipating completion in 2016 and eight
more projects slated to break ground during the year.
Other than the government and healthcare sectors,
Quicken Loans and Rock Financial are the largest
employers in the city. Detroit is beginning to establish
itself as one of the most culturally diverse metro areas
and economies in the country. The third quarter of 2015
saw a significant drop in the metro area’s unemployment
rate as it fell to 5.7% from 8.2% in the third quarter of
2014.
Office
Detroit’s suburban market experienced a drop in its
collective class A and B vacancy rate to 17.1% in the third
quarter of 2015 from 18.5% in the third quarter of 2014.
The downtown class A and B office market vacancy rate
continued its decline in a steady and uniform fashion,
rounding out 2015 at 11.6%, collectively. This rate has
been decreasing an average of more than 100 bps
annually after reaching a peak of 17.2% in the second
quarter of 2010.
The tech boom finally surfaced in Metro Detroit as
Google signed a 90,000-sf office lease in Farmington Hills
in June 2015. In September 2015, Amazon announced its
commitment to Downtown Detroit with plans to double
its space at 150 W. Jefferson. Predictions for 2016 are
favorable, with more than 600,000 sf under construction
– 97% of which is preleased. The vacancy rate is expected
to continue to decline even more when new inventory
becomes available.
Detroit Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Retail
The excitement of Detroit’s turnaround continued its
momentum throughout 2015 as national retailers,
including Carhart, John Varvatos and Nike, all made
long-term commitments to flagship retail locations in
the downtown market. The suburban market has more
than 250,000 sf of new inventory slated for completion in
2016.
Industrial
The Metro Detroit market for industrial, flex, and
research and development space saw considerable
improvement as the vacancy rate in the third quarter
of 2015 dropped to 6.7% from 8% at year-end 2014. A
slight hiccup in this low rate is anticipated during 2016
as more than 2 msf of new inventory is scheduled to be
introduced to the market with 79% preleased. The lack of
modern industrial space is the reason for the increase in
construction activity.
Investment
Major investment activity remains centered on Detroit’s
CBD. After acquiring the Book Tower in August 2015,
Bedrock Real Estate Services now owns more than 40%
of downtown properties comprising slightly more than 7
msf. Cap rates have begun to stabilize at approximately
8%, down from 15% at the beginning of the decade.
39
Fairfield County
2200 Atlantic Street
Jobs and investment on the rise
C
onnecticut as a whole recovered 100,100 total non-farm
positions (or 84.1%) of the 119,000 jobs that were lost
during the last recession, according to the Connecticut
Department of Labor. The state has been averaging
nearly 1,500 new jobs per month since February 2010.
Employment in the private sector recovered at a faster
clip with approximately 1,584 new jobs per month and
regained 107,700 (96.5%) of the 111,600 private-sector jobs
lost.
Office
After a hot first quarter of 2015, leasing activity in Fairfield
County has cooled. However, with proximity to Manhattan
and an increase in demand for multi-residential space,
Fairfield County should continue to attract a workforce with
promising jobs in financial services and the technology,
advertising, media and information (TAMI) sector. Yearover-year, the overall vacancy rate decreased 440 bps to
15.7% as of the third quarter of 2015. The overall asking
rent fluctuated through 2015 and was at $28.87 psf by the
third quarter of 2015. The fluctuations can be linked to
landlords beginning to reduce asking rents based on the
potential for a surplus of office space in the market.
Through the third quarter of 2015, the largest lease
was Bridgewater Associates LP’s deal for 138,000 sf at
2200 Atlantic Street in Stamford, CT. Nearby, Harman
International leased 68,700 sf at 400 Atlantic Street.
Retail
Retail development saw an increase in demand in 2015.
At 467 West Avenue in Norwalk, CT, the Loehmann’s Plaza,
which is under renovation, signed three leases – bringing
the community center to almost 100% occupancy.
Nordstrom Rack led the way, leasing 52,700 sf, followed
by Ipic Theater (42,100 sf ) and Container Store (24,300 sf ).
Looking ahead, General Growth Properties Inc., received
approval to build a new shopping mall called the SoNo
Collection in Norwalk. The approved plan includes 625,000
sf of class A office space, 75,000 sf to 750,000 sf of retail
space (on a build-to-suit basis) with no more than 10%
being restaurants, 60 to 350 residential units and a 150room hotel.
40
Fairfield County Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
2016F
Office
Industrial
The Fairfield County industrial market continues to evolve.
Firms, especially within the TAMI sector, like to use wideopen industrial spaces to build out their open environment
areas similar to what WeWork has done with loft space in
Manhattan. Technology, biotech/healthcare and defenserelated contractors are still looking at the appeal of Fairfield
County, but have been slow to make commitments. A
10,000-sf warehouse at 29 Prospect Street in Woodstock,
CT and a 15,750-sf manufacturing facility at 1558 Barnum
Avenue in Bridgeport, CT are currently under construction.
Investment
Investment activity continues to grow in Fairfield County.
Through the first three quarters of 2015, there were 40
multi-residential transactions totaling $236.5 million. The
largest transaction was the sale of the TGM Anchor Point
Apartments at 150 Southfield Avenue in Stamford for
$114.7 million. This property has 323 units for a per-unit
sale price of $355,108. Looking ahead, seven apartment
buildings with more than 100 units apiece are under
construction. The largest of these is the Kennedy Flats at 1
Kennedy Avenue in Danbury, CT, which will have 379 units.
Fort Lauderdale
Casa Palma
Industrial sales more than double
C
ommercial real estate market fundamentals in
Fort Lauderdale continue to show improvement as
the economy demonstrates growth. Unemployment
declined steadily during 2015, creating demand for
additional space across all property types, but the
impacts associated with job growth were offset by
limited new supply.
Office
As of third-quarter 2015, Fort Lauderdale had more
than 1 msf of office space under construction – more
than twice the level seen at year-end 2014. Meanwhile,
demand continued to increase, leading to positive
absorption. Fort Lauderdale recorded a 30-bps decrease
in vacancy from year-end 2014 to third-quarter 2015,
landing at 11.4%. Even as market fundamentals trend
upward, office investment sales have declined. Cap
rates for office product during 2014 averaged 7.5%, but
increased to 7.9% through the first three quarters of
2015, while the average sale price per square foot fell to
$164 psf from $178 psf during the same period.
Considering the rising levels of new supply and an
improving economy, market fundamentals are expected
to continue to tighten during 2016.
Retail
Retail space remains in high demand as vacancy
continues to decline. As of third-quarter 2015, vacancy
was 5.9% – a 50-bps decrease from 6.4% at year-end
2014. Meanwhile, results for retail investment sales
have been mixed. Sale prices averaged $164 psf during
2014, but increased to $183 psf through the first three
quarters of 2015. On the other hand, average cap rates
increased 50 bps during the same period in 2015 to
6.3%. Continued demand for retail space means that
retail vacancy projections for 2016 anticipate falling
vacancy even as construction levels rise.
Industrial
Fort Lauderdale’s industrial asset class is gaining
momentum as market fundamentals tighten even as
construction levels are rising. The industrial market
recorded vacancy of 5.9% in the third quarter of 2015
– an 80-bps decrease from year-end 2014. The sector
Fort Lauderdale Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
registered more than 780,000 sf of new deliveries in
2014, and almost double that number – 1.2 msf – came
to market in 2015. The increase in industrial investment
has demonstrated the market’s strength. Through all
of 2014, Fort Lauderdale recorded approximately $317
million in industrial sales; however, in the first three
quarters of 2015, sales had already doubled that total.
In 2016, the strength of the local economy is expected
to lead to continued improvement and tightening of
industrial market fundamentals in Fort Lauderdale.
Vacancy is forecast to remain on a downward trend,
tightening to 5.4% by year-end 2016.
Investment
Total investment sales volume increased across all
segments in 2015; however, the only asset class that
posted cap-rate compression was the multi-residential
sector. Continuing restrained construction is expected
to help push office and industrial vacancy down further
during 2016.
Projections for 2016 are optimistic as the continually
improving economy is expected to bolster demand for
space across all asset classes and potentially lead to
further vacancy declines and increases in rental rates.
41
Greenville
River’s Edge
Diverse corporate base finds home in Upstate region
G
reater Greenville’s 10-county Upstate region of South
Carolina boasts one of the fastest-growing economies
in the U.S. Southeast and has a population of 1.3 million.
Thanks to its top-ranked business climate, a world-class
research environment and a superb quality of life, a diverse
corporate base has found a home in the Upstate region. In
the last decade, the key economic drivers have expanded
from automotive and engineering companies to more
robust and diverse firms in life sciences, research, plastics,
photonics, tourism and the service industry.
This expansion is creating a rising tide and spurring
development in all four commercial real estate sectors in
the region, where the cost of living is about 10% lower than
the national average.
Office
The third quarter of 2015 showed strength with vacancy
dropping to 8.1% from 9.1% year-over-year in the
Greenville-Spartanburg office market. In 2016, the existing
office inventory is expected to grow by 1%. With healthy
job growth prospects and the projected expansion of
the South Carolina economy, the office vacancy rate is
projected to decrease an additional 50 to100 bps in 2016.
Retail
Greenville’s population growth, strong economy and
declining unemployment contributed to the retail market’s
strength in 2015. Vacancy continued to decline, reaching
6.2% in the third quarter of 2015. Fueled by its renowned
downtown, local charm and nascent tourism industry,
Greenville is primed to absorb several mixed-use and multiresidential developments slated for 2016.
Likewise, infill development along Greenville’s Woodruff
Road will continue to drive new retail development and
redevelopment in the corridor. Positive absorption is also
expected in the Anderson, Powdersville and Simpsonville
submarkets, as well as along the Haywood, Laurens
and Pelham Road corridors, which are expected to see
substantial reinvestment both from municipal stakeholders
and private ownership groups.
Industrial
Greenville’s industrial sector continued to prosper after
the opening of the South Carolina Inland Port in 2015
generated new demand for high-quality distribution and
42
Greenville Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
manufacturing space. A steady stream of plant expansions
and relocations to the Upstate area also contributed to this
demand. Nearly 2.3 msf of new space was added during
2015, bringing total market inventory to almost 196 msf
of flex and industrial space. Despite the growth in supply,
vacancy remained stable at 7.4%. The majority of this
vacancy is located in economically obsolete assets.
The industrial inventory is projected to grow in 2016
while vacancy is expected to tick up slightly. However,
any additional new plant announcements would have a
positive effect on vacancy.
Investment
Strong investor appetite for stabilized leased assets with
quality tenants has substantially compressed cap rates
in core U.S. markets. Therefore, institutional investors’
willingness to venture into tertiary markets with strong
fundamentals and higher risk-adjusted cap rates bodes well
for increased investment sales in Greenville in 2016.
Likewise, as the economy continues to strengthen and
investment sales increase, so too will the demand for 1031
Exchange properties, which are eligible for federal income
tax deferrals. This heightened demand is likely to compress
cap rates further as a result of increased competition
among prospective buyers of replacement assets.
Hartford
City Place I
Urban market ripe for change while industrial fundamentals drive suburbs
T
he “Insurance City” made strides in lowering its
unemployment in 2015. The Hartford area, which
has experienced a sluggish recovery since 2008, showed
improvement in 2015 with its highest post-recession rate
of growth. With the greatest volume of growth occuring
in education and health services, the unemployment
rate fell to 5.1% as of November 2015 from 6.2% at the
beginning of the year, according to the Bureau of Labor
Statistics. Other industries, such as utilities and business
services, have contributed to the decrease, while the leisure
and hospitality sectors continue to show the greatest
percentage growth.
Looking forward, the value of the market’s location for
distribution and warehousing is likely to increase, while
urban investment sales activity could trigger downtown
revitalization efforts. With no construction currently in the
pipeline, rents are expected to rise slightly through 2016.
Office
Despite stable vacancy throughout 2015, average office
asking rents increased slightly. After hovering around 20%
for the last five years, vacancy is expected to decrease
slightly in 2016. Even though projects in the pipeline in
2015 were fully preleased, less than 100,000 sf of office
product was delivered with the latest and final completion
occurring at 15 North Main Street (19,000 sf ). Further
rental increases will be influenced by office tower trades
that occurred during the past two years as new landlords
reposition their assets.
Retail
The Greater Hartford retail market has traditionally been
driven by suburban activity with pockets along Interstates
84 and 91 offering amenities based on higher disposable
income levels in comparison with the city. Furthermore,
the City of Hartford had a 9.6% unemployment rate as of
November 2015 compared with 5.1% in the Greater Hartford
area overall, illustrating the stability found in the suburbs.
Looking to 2016, retail vacancy in the city will continue
to rise as the national urban infill trend struggles to take
hold locally. Traditionally a city which caters to commuters,
Hartford will require additional residential development in
order to attract and retain a healthy retail base.
Hartford Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Hartford’s industrial tenants take advantage of the city’s
location along three vital transportation corridors and
among three major urban centers (Boston, New York and
Providence, RI). In 2015, Amazon completed its 1.5-msf,
build-to-suit project in Windsor – the company’s first
fulfillment center for New England. This delivery marks
a turning point in the Hartford industrial market. Annual
absorption at year-end 2013 was negative 1.4 msf, but
more than 1.8 msf was absorbed in the subsequent 24
months.
Investment
Within the last two years, eight different office towers have
traded, and more than 8 msf of industrial product was
sold – in both cases, the most since 2008. The largest office
transaction was the sale of City Place I to Commonwealth
Equities, which paid $113.3 million for the trophy tower. The
largest industrial sale was Boston-based STAG Industrial’s
$57.7-million purchase of 300 Montowese Avenue. Moving
forward, sales activity is expected to remain stable in the
industrial and suburban markets, while acquisition activity
will likely decrease in the city due to the large number of
recently acquired properties being held long-term.
43
Houston
River Oaks District
Diverse economy offsets energy market downturn
T
he downturn in energy pricing deepened throughout
2015 with additional rounds of layoffs and cuts in capital
expenditures dominating the headlines. Employment
growth in 2015 slowed considerably compared with
the impressive job gains recorded in the past few years.
Healthcare, education and the petrochemical industry have
slightly offset the contraction underway in the struggling
energy and manufacturing sectors. Houston fell to No. 30 in
the Urban Land Institute’s Emerging Trends forecast for 2016
due to the downturn in the energy industry, down from
No. 1 in 2015. However, diversity in Houston’s economy is
expected to keep the city out of a recession while oil prices
remain depressed. Houston’s recent population boom will
continue to fuel the housing and retail markets.
Office
Although Houston entered the current energy downturn
from a position of strength, the office market softened
considerably in 2015. Leasing activity was far below
average, leading to negative absorption and rising vacancy
throughout the year. Leasing activity is expected to pick
up in 2016 as tenants approach lease expirations. A large
amount of available space has come back to the market in
the last 12 months. The majority of that space came online
in the first half of 2015, but abated during the second
half. Houston’s construction boom will continue to add
to the available space through the first quarter of 2017,
although this space is heavily preleased and the current
development cycle has ended. Direct asking rental rates are
expected to remain relatively flat until the energy industry
recovers.
Retail
The retail market is catching up with the demand caused
by Houston’s population boom. Although construction
activity picked up in 2015, the retail market tightened
further throughout the year. High demand for retail space
is expected to continue in 2016, particularly for groceryanchored sites. While need-based retail continues to grow,
luxury retailers have also established a greater presence in
Houston despite the current energy downturn. Most of the
tenants in the newly completed luxury River Oaks District
are new to Houston.
44
Houston Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Houston’s industrial market continued to perform well
throughout 2015 despite the volatility in the energy
industry. The industrial market experienced years of supply
struggling to meet demand, resulting in an extremely tight
market with sound fundamentals. Vacancy remained near
historic lows and asking rates continued to appreciate
in 2015. The majority of demand came from companies
outside the energy industry. Although the industrial market
is weathering the downturn better than expected, it is not
entirely in the clear. Leasing activity continued to slow
with tenants opting for short-term renewals rather than
signing long-term leases. Houston’s industrial pipeline has
remained conservative and is well-preleased. Even as new
space is delivered to the market throughout 2016, vacancy
is expected to remain near historic lows.
Investment
Investment activity remained elevated in 2015 for all
product types. Many investors cited resilience in the
economy, a diversifying market and an understanding of
Houston’s cyclical nature as reasons for investment. Since
2009, Houston has established itself as a gateway city
because of its global presence as a center for the world’s
energy industry. Houston continues to be an attractive
investment for international capital similar to other U.S.
gateway cities such as New York, Washington, DC and San
Francisco.
Indianapolis
BMO Plaza
Transaction activity expected to remain steady
T
he Indianapolis market is in recovery mode
with new multi-residential construction and the
suburban office and industrial warehousing sectors
leading the way. Business drivers for the Indianapolis
office market are access to labor and workers’ access
to jobs, making all property types near the city core
attractive as investment assets. As well-located
buildings have come into play in areas surrounding
the core, these properties have become more
desirable to tenants and buyers alike. Transaction
activity is expected to remain steady and stable
through 2016.
Office
The CBD submarket is registering positive signs with
continued growth in the multi-residential sector,
which is aimed at young professionals and emptynesters. Demand from employers following talent is
expected to result in an increase in office occupancy
in the near term. The most significant market news
in 2015 was the announcement of Salesforce.com’s
expansion plans. This expansion is expected to
be 250,000 sf or larger, with the location yet to be
determined.
Development of class A office space and multiresidential properties will be key to each other’s
continued success due to the symbiotic relationship
between the two asset types. The office market will
continue to be in recovery throughout 2016.
Retail
The big win for the Indianapolis retail market in 2015
was the construction and opening of outdoor retail
giant Cabela’s. The store was built on the north side of
the city, which has seen significant growth in the last
few years. Meanwhile, IKEA announced plans to open
a new superstore in 2017. There is much speculation
as to the impact that store will have on the local retail
sector.
Industrial
The market for distribution buildings greater than
200,000 sf experienced a lull in activity during 2015.
Consequently, some speculative developers are
uneasy about the potential to over-build product
targeting users seeking 200,000 sf to 500,000 sf. The
Indianapolis Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
mid-size user market (50,000 sf to 100,000 sf ) has
experienced a resurgence of availabilities, which is
healthy following a severe space shortage. Purchasers
continue to be frustrated by the lack of available
industrial product acquisitions in the 20,000-sf to
75,000-sf range, a situation which may lead to more
build-to-suit activity in 2016.
Investment
Investment opportunities have registered robust
activity led by multi-residential, industrial and class
A office buildings. Retail investors still have concerns
with regards to demand partly due to the growing
popularity of online shopping versus brick-and-mortar
shopping centers. Pricing for all asset classes is at or
near all-time highs given the availability of capital
and attractive financing rates. The challenge in 2016
will likely be the eroding of values that may occur
due to an increase in interest rates. While the spreads
between going-in capitalization rates and borrowing
rates remain at historic highs, values are expected to
be adjusted as interest rates rise.
45
Knoxville
Two Centre Square
Diverse economy continues to attract new business
K
noxville’s economy is well-diversified and very
stable with a population of 840,000 in the
metropolitan statistical area. The unemployment
rate runs consistently below the state and national
averages, and continued growth – particularly in
automotive manufacturing and media production –
supports vigorous job expansion.
The city’s low cost of living, low unemployment rate
and high livability rankings make Knoxville a top
contender on various “Best of” lists, including America’s
Second Most Affordable City, according to Forbes and
one of the 10 Fastest-Growing Cities, as ranked by CNN
Money. Among the companies headquartered in the
area are Scripps Networks Interactive, Regal Cinema,
Pilot Flying J and Sea Ray Boats. Knoxville’s diverse
economy will continue to attract new businesses with
major announcements expected in 2016.
Office
Knoxville’s office market comprises 10 submarkets and
approximately 16 msf of space. It has proven to be
a strong office market compared with other cities of
similar size due to its high concentration of national
corporate headquarters. Inbound corporate expansions
and relocations due to the city’s business-friendly
environment and ample technological and human
capital continue to make Knoxville a desirable business
location. This appeal has led to a revival of new office
construction in various submarkets.
After several years of strong leasing activity, the office
market continues to steady itself as current tenants
evaluate their choices and new tenants relocate to
Knoxville. Rental and vacancy rates may see slight
fluctuations, but will remain stable throughout 2016.
Retail
The local retail market comprises more than 52 msf of
inventory spread across 13 submarkets. The retail sector
has experienced continuous growth during the last five
years with many existing retailers expanding and many
more newcomers entering the market. The region’s high
employment rate and varied demographics make it a
great location for a variety of retail ventures. Though
the majority of new retail developments have been
focused in west Knoxville, future plans to develop
46
Knoxville Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Knoxville’s southern riverfront are expected to help
spur new retail development in the Downtown and
South submarkets.
Industrial
The industrial market, which consists of nearly 71 msf,
registered declining vacancy and rising rental rates in
2015. The city is home to a diverse group of companies
in such industries as automotive manufacturing,
food products, watercraft, medical devices and
manufactured housing.
Steady overall market activity is expected to continue,
but restricted supply will begin to take its toll.
With 100% of the space under construction already
preleased, it will become more challenging for
Knoxville to win projects. The tight supply may deter
some prospects from entering the market in 2016.
Investments
Investors, both institutional and private, are increasing
their exposure to the Knoxville market as they seek
higher yields. Since the city is home to a major research
university and the nation’s largest government research
laboratory, as well as the Tennessee Valley Authority
and four major hospitals, stability and resiliency are
the hallmarks of the local economy. Multi-residential
and industrial properties have been the most actively
traded asset classes. Investment sales are expected to
remain steady throughout 2016.
Las Vegas
Ikea
Popular secondary market attracts investors
T
he Las Vegas commercial real estate market is poised
for yet another significant year in 2016 following
a strong 2015. Several economic indicators registered
positive gains in 2015 as consumer confidence and
interest from out-of-state investors grew. Monthly
visitors, convention attendance and gaming revenue, as
well as residential and commercial permit applications,
were all on the rise throughout 2015.
Office
Professional and medical-office vacancy continued its
slow decline throughout 2015. With very few projects
under construction at the end of 2015, office vacancy
is expected to dip below 18% by year-end 2016.
Asking lease rates for class B space rose slightly in
recent quarters; however, class A increases were more
noticeable. While legal and financial businesses have
been declining, healthcare, call centers, gaming and
employment services are gaining momentum.
Retail
Retail property sales and leasing were strong in
2015. By the end of the year, vacancy was declining
and asking lease rates were on the rise. In the fourth
quarter, approximately 800,000 sf of retail space was
under construction. Included in that total was the
351,000-sf IKEA furniture store, which is expected to
finish in late summer 2016. A majority of the retail
projects underway are expected to deliver in the first
half of 2016. Overall vacancy in 2016 is expected to
climb substantially due in part to 21 Fresh & Easy
and Haggen grocery store closures in late 2015. In
addition to existing vacancy, these empty stores will
take considerable time to find new national tenants,
creating more opportunities for new or existing
companies.
Industrial
After lagging other local sectors in recent years, the
once struggling industrial real estate market is gaining
the attention of local and out-of-state investors. Only
72,000 sf of new industrial product was completed
in 2014. However, as of the third quarter of 2015,
approximately 1.7 msf of industrial space was under
construction with 1.5 msf already completed during
the year. The majority of recently completed industrial
Las Vegas Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
product was already preleased due to demand for
available distribution spaces greater than 200,000 sf,
which have been extremely difficult to find for several
years. Industrial lease rates have risen significantly
in recent quarters, increasing the value of industrial
product across the valley. As vacancy continues to
fall, and lease rates and sale prices tick upward, the
industrial market is poised for strong leasing and sale
activity in the year ahead.
Investment
Multi-residential remains one of the top investment
products in the local market. There were approximately
1,430 multi-residential units completed in seven
buildings in 2014. At mid-year 2015, eight buildings
containing 2,205 units were under construction
with 1,135 units in another eight buildings already
completed. Rental apartment demand has refused to
subside, pushing asking rental rates upward – a trend
which is expected to continue in 2016. Since Las Vegas
is one of the most popular secondary markets in the
U.S., multi-residential investors from primary markets
continue to view the region as an opportunity to
achieve higher yields and returns for the purpose of
balancing their overall portfolios.
47
Long Island
Spirit Pharmaceuticals Headquarters
All property sectors improving as employment rises
T
he labor picture on Long Island continues
to strengthen and is fueling a slow-but-stillrecovering economy. Unemployment dropped yearover-year once again, falling 30 bps to 4.5% as of the
third quarter of 2015. These labor numbers indicate
continued economic growth, which is good news for
the real estate industry. The market’s almost nonexistent supply of new construction coupled with its
diminishing supply of existing inventory, suggests a
continued positive outlook for 2016.
Office
The Long Island office market, comprising just
less than 40 msf of class A and B space, has been
the slowest sector to improve following the Great
Recession, but the sector is strengthening. The office
market ended the third quarter of 2015 with a vacancy
rate of 10.4%, slightly lower than at year-end 2014.
In spite of this slow decline in vacancy, the growing
success of the healthcare, financial and energy sectors
has sparked activity in all submarkets. Asking and
effective rents are continuing their upward trend;
and with continued activity forthcoming, positive
absorption and lower vacancy rates are expected to
prevail in 2016.
Retail
The retail market is continuing its expansion with
big-box users and national and local retailers
still accounting for most of the activity. Small
neighborhood centers and regional shopping
centers continue to lease up the vacancies of several
years ago. This positive growth trend is expected to
continue in 2016 with established retailers continuing
their expansion and new players entering the market.
Industrial
Long Island has a unique industrial real estate market
consisting of more than 200 msf of warehousing and
distribution space with some regional manufacturing
remaining. The industrial market continues to lead the
other sectors in terms of leasing activity with the most
significant improvements coming in 2015 as vacancy
48
Long Island Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
continued to fall across Long Island. The industrial
vacancy for Nassau and Suffolk counties – if broken
out – would be 9.2%. There is a continued lack of
large-footprint product on the market, and both lease
rates and sale prices continue to rise significantly.
Speculative construction may be on the horizon in
2016 as activity continues and companies compete to
secure the remaining available high-quality buildings.
Demand is now pushing further east as availabilities
to the west become scarce.
Investment
Investment transaction activity picked up slightly in
2015 as new office buildings and retail complexes
were brought to the market. Investors maintain a
strong appetite for large multi-residential properties,
although acquisition opportunities are difficult to
secure. Cap rates for good product with quality
tenancies remain at historical lows. Decent retail,
industrial and office product will continue to attract
buyers in 2016 as demand heavily outweighs supply.
Los Angeles
U.S. Bank Tower
Investment activity to remain competitive in 2016 across all product types
U
nemployment in the Los Angeles market reached
6.5% in the third quarter of 2015, remaining higher
than the pre-recession rate of 4.8%. The improvement in
the local economy, however, is illustrated by the decrease
in the unemployment rate from 2010’s peak of 12.5%. The
majority of industries in Los Angeles should perform well,
leading to further decreases in unemployment during 2016.
Investor appetite for apartments and industrial buildings
remains high, yet sale product on the market remains
scarce. In response to the low-supply environment,
investors are placing capital through the acquisition of
portfolios or partial interests in properties.
Office
The Los Angeles office market saw a 100-bps decrease in
the vacancy rate between third-quarter 2014 and thirdquarter 2015. This downward trend is expected to continue
through 2016 as tenant demand remains strong. The
growth in tenants’ office space needs has become more
visible as business confidence improves. The tenant mix
in the West Los Angeles submarket has historically been
dominated by the media, entertainment and technology
industries. In 2016, these creative tenants are expected to
flow further into submarkets outside of West Los Angeles.
Nearly 2.5 msf of office space is expected to be delivered
in 2016. The vast majority of it is geared towards creative
tenants. Isolated suburban office parks are no longer
preferred among tenants. Tenants’ desire to be close to
amenities, public transit and housing for their employees
correlates well with the location of the majority of
construction deliveries in 2016.
Retail
Vacancy continued to decrease and hit 7.6% in the third
quarter of 2015. This is a 30-bps decrease year-over-year.
The declining unemployment rate and increasing rate
of household formation in Los Angeles are expected
to continue into 2016. As a result, rental and vacancy
rates should continue to strengthen. The most visible
improvement in retail leasing is in Downtown Los Angeles
as more and more residents decide to call the area home.
Los Angeles Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The fact that the Port of Los Angeles and the Port of Long
Beach combined are the ninth-busiest internationally has
fueled industrial fundamentals. The vacancy rate in the
third quarter of 2015 was 3.7%, a 50-bps decrease from one
year earlier. The tightening industrial market and strong
construction pipeline have translated to an increasing
rental rate environment. The trend to watch in 2016 is the
increasing amount of speculative industrial construction in
the Los Angeles market.
Investment
Foreign capital flows continue to play a significant role in
the Los Angeles investment sales market. In 2014, the office
sector received the most interest from foreign investors.
As of the third quarter of 2015, the industrial and retail
sectors displayed the most interest from foreign investors.
Transaction activity is expected to remain strong in 2016
even as investors anticipate an increasing interest rate
environment during the year.
49
Miami
East Hotel
Office market records strong fundamentals
M
iami’s commercial real estate market fundamentals
continued to strengthen in 2015 even as
unemployment recorded a slight uptick. The tightening
of the market seems to be aligned with the limited new
supply coming online coupled with growing demand for
additional space. Miami’s outlook remains positive as the
forecast anticipates improving conditions in the market.
Office
The Miami office market recorded positive net
absorption during 2015, leading to a decrease in
vacancy, as new supply is extremely constrained. The
overall office vacancy rate ended the third quarter of
2015 at 10.6%, down 80 bps from year-end 2014. Office
investment sales displayed improvement from 2014 to
2015 as sales volume increased, average price per square
foot increased and cap rates were compressed, with the
average falling 140 bps during the course of the year to
5.1%.
Forecasts for year-end 2016 remain optimistic in the
office market as occupancy rates are slated to continue
improving. Vacancy is expected to fall slightly more than
one full percentage point to 9.5% by year-end 2016,
demonstrating improving fundamentals for the asset
class.
Retail
The retail sector experienced positive net absorption
as demand remains high and construction levels are
constrained. Demand for retail space continued its slight
upward trend during 2015 as the vacancy rate landed at
3.4%, declining a minimal 10 bps from year-end 2014.
Retail sales volume improved as the average sale price
jumped to $544 psf in the first three quarters of 2015
from an average of $486 psf at year-end 2014.
Looking into 2016, the outlook continues to be positive
for Miami retail as new supply levels remain low, likely
pushing occupancy and pricing even higher in 2016.
Industrial
The industrial sector experienced strong demand from
year-end 2014 through third-quarter 2015 as vacancy
rates dropped 60 bps to 4.6%. Occupancy rates improved
during 2015 in part due to constrained construction
levels. Less than 500,000 sf of industrial construction
50
Miami Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
was delivered in 2015. Improving market fundamentals,
together with limited new supply, caused industrial sales
to increase by more than 40%, growing to $831 million in
2015 from $583 million in 2014.
In 2016, confidence in the industrial market remains
strong as estimates for the overall market forecast
vacancy falling 120 bps to 3.4% at year-end 2016 from
4.6% in third-quarter 2015.
Investment
Miami experienced growing investment activity across
all sectors except office in 2015. Investment activity
was heavily weighted towards the retail sector. The
constrained delivery of new supply across all segments
is expected to continue to push down vacancy in 2016.
Among the office, retail and multi-residential sectors, cap
rates have compressed.
The projections for 2016 are optimistic; however, any
slowing of the economy, or rise in unemployment,
could potentially lead to lower consumer confidence
and thereby create negative forces affecting investment
activity.
Minneapolis
Canadian Pacific Plaza
Strong market indicators reflect surging economy
The Minneapolis economy continues to be one of the
fastest-growing in the country. As of September 2015,
the Minneapolis Statistical Area (with a population of
3.8 million) was tied for the lowest unemployment rate
in the country at 3.1%, according to the Bureau of Labor
Statistics. In comparison with its Midwestern counterparts,
the Minneapolis housing market meets the demand for
an urban living environment at an affordable price. Since
2011, the City of Minneapolis has seen an average annual
increase of 1.6% in its population, according to the U.S.
Census Bureau.
Conversions of obsolete office and industrial inventory
to residential uses are prevalent in Minneapolis. As of
September, slightly more than 2,500 apartment units had
been completed in 2015, with construction continuing on
more than 4,000 units. Construction also continues on the
$1.1-billion U.S. Bank Stadium, which is poised for a midyear 2016 completion date. The NFL’s Minnesota Vikings’
new home will play host to Super Bowl LII in 2018 and the
Final Four segment of the NCAA Division 1 men’s basketball
championship in 2019.
Office
The Minneapolis office market saw a slight decrease in
its vacancy rate in the first three quarters of 2015, falling
50 bps from year-end 2014 to 9.6%. A slight increase in
vacancy is anticipated during 2016 as more than 2 msf is
slated for completion with 89% preleased. However, even
with vacancy still hovering around 10%, landlords have
been very bullish, raising asking rates by as much as 25%
in the three largest submarkets during 2015. Major leasing
activity during 2015 included Target Corporation renewing
its 890,000-sf lease at City Center. Target is one of 18
Fortune 500 companies that call Minneapolis home. Prime
Therapeutics, a pharmaceutical benefit manager, continues
to grow at an impressive rate, increasing its occupied area
in the metro area by 600,000 sf since 2010. The company
recently confirmed its commitment to the Minneapolis
market by committing to a 70,000-sf lease at the Crosswind
Centre Building located in Mendota Heights.
Retail
Lifetime Fitness sold three of its locations in June 2015 to
Realty Income Group, Angelo, Gordon & Company and
Gramercy Property Trust. The portfolio sold for a total of
Minneapolis Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
$124.4 million with a mean cap rate of 8.4%, which was
higher than the year’s average cap rate of 7.2%.
Industrial
The Minneapolis industrial market saw a slight increase
in vacancy in 2015, rising 40 bps to 7.9% as of the third
quarter of 2015 from year-end 2014. With only 420,000 sf of
construction scheduled for completion in 2016 and positive
absorption trends, vacancy is expected to tighten by 10
to 50 bps during the year. Major industrial activity making
headlines included the Walgreens Company shutting
down its 335,000-sf distribution center located in Rodgers,
taking 68 employees with it, according to the Minneapolis/
St. Paul Business Journal. However, several large blocks of
space totaling more than 2 msf were leased to companies
such as Polaris, Room and Board, and FedEx. Amazon.com
is entering the Minnesota market with two large facilities
slated for completion in 2016.
Investment
August was a big month for office sales, which accounted
for two of the overall market’s three largest sales. The
largest sale, however, occurred in November 2015 as the
394,000-sf Canadian Pacific Plaza office building sold for
$69 million with a cap rate of 6.7%. After registering higher
cap rates at the start of the decade, the market is now
showing signs of equilibrium.
51
Nashville
Terrazzo
Tight market shows no signs of slowing
T
he New York Times designated Nashville as the “It” city back
in 2013, and explosive growth continues in this dynamic
and diverse market. Nashville had a banner year in 2015. With
demand still rising, there are no signs of the market slowing in
2016.
The region is defined by a diverse economy, low cost of doing
business and living, a creative culture and a well-educated
population. Nashville benefits from economic diversity as
not one of its industries generates more than 20% of the
employment base, according to the Nashville Chamber of
Commerce. The city’s pro-business environment has not only
helped grow industry staples like healthcare, music, education
and transportation, but also has been a catalyst for corporate
relocations to Nashville.
Office
Nashville’s office market totals more than 40 msf of existing
space. The market has boasted the lowest suburban vacancy
in the U.S. Southeast for the past two years and leasing activity
remains strong. Office product ranges from large multitenant buildings in submarket CBDs to suburban office parks.
Nashville’s pro-business environment has aided in attracting
corporate office relocations with many headquarters calling
the city home, including Bridgestone Americas, Dollar General,
Hospital Corporation of America and Gibson Guitar. With
projects currently under construction already 79% preleased,
vacancy is expected to decline to record lows in 2016.
Retail
The expected surge in new retail square footage in metro
Nashville’s primary submarkets has not yet begun, leaving the
sky-high demand for quality space as yet unquenched. The
reason: vertical multi-residential and office demand is pricing
retail out of the development scene. The bulk of new retail
being added to the higher-demand submarkets is coming
in the form of ground-floor, mixed-use and infill, generally
smaller blocks of space with limited access and parking – often
described as “amenity” retail. With an average of 90 people per
day moving to the city (according to the Nashville Chamber
of Commerce), demand for infill retail, entertainment and
restaurant space and tourism-driven entertainment retail will
remain high in 2016.
52
Nashville Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Nashville’s industrial market comprises eight submarkets
totaling approximately 190 msf. Manufacturing, automotive
supply, e-commerce and regional distribution are the major
drivers in the market. With direct vacancy at 5.3%, choices for
companies looking to relocate or expand are quickly dwindling.
Landlords are raising rental rates, capitalizing on the current
boom’s high demand for new space and the limited supply.
Giants such as Under Armour have capitalized on Nashville’s
market dynamics, choosing the region as a destination for a
1-msf distribution facility with plans for expansion in the future.
With the supply-demand deficit growing, rental rates are
expected to achieve new highs in 2016.
Investment
Capital from both institutional and private investors is drawn
to all sectors in Nashville given its diversified industries and
strong economic drivers – particularly the healthcare sector
as well as the skilled workforce – fueled by a high number of
colleges and universities in the metro area. Institutional players,
including pension funds, REITs and private funds, dominate the
landscape thanks to Nashville’s trajectory as a rapidly growing,
high-end secondary market. Office and multi-residential
developments have attracted well-known institutional
investors while the private investor profile tends to be outof-state investors looking for yield and upside. The outlook
for 2016 is positive as Nashville’s economics are expected to
continue to improve with rising occupancy and rental rates.
New Jersey
545 Washington Boulevard
Falling unemployment provides optimism for CRE market
N
ew Jersey’s unemployment rate fell steadily throughout
2015, while demand for all commercial types increased
in response to the improving local economy. New Jersey’s
highly educated workforce, proximity to Manhattan and
strategic location on the I-95 corridor (bookended by
Boston and Washington, DC) continue to attract businesses.
Additionally, the New Jersey Economic Development
Authority has been aggressive in providing tax incentives
for companies considering relocation to the state. These
demand factors suggest a stable outlook for 2016.
Office
Overall vacancy reached 15.2% in the third quarter of
2015, down from 16.6% at year-end 2014. Among the
most active submarkets has been the Hudson Waterfront,
where tenants have shown a continued willingness to
pay premium rents to locate in an area that will attract
millennial employees. Beyond the Waterfront, locations
with nearby commuter rail access remain in high demand.
New construction has centered almost exclusively on buildto-suit projects.
Office occupancy is projected to increase by 680,000 sf
from the third quarter of 2015 to the end of 2016, building
on three years of positive net absorption. Statewide asking
rents have hovered around $26 psf with significant variance
based on submarket and building quality. The largest
question in New Jersey is the future of vacant, aging class
B suburban inventory. Tenants have shown a willingness
to consider these properties provided landlords commit to
making the capital investments necessary to modernize the
buildings.
Retail
Lower fuel prices contributed to increased retail activity
nationwide in 2015 with the effects felt throughout New
Jersey. One focus of new retail construction is surrounding
commuter rail stations where mixed-use developments
have been built. Traditional retail continues to face pressure
from e-commerce as consumers value having products
directly delivered.
Industrial
The market was white-hot in 2015, building on the
momentum of the preceding years. The vacancy rate
fell to 6.5% at the end of the third quarter of 2015, a 50bps improvement from year-end 2014. Flight to quality
New Jersey Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
continues to be the theme as older buildings are targeted
for redevelopment. Through the first three quarters of 2015,
net absorption was nearly 4.2 msf – the third consecutive
year this level has been reached.
Inventory in the Exit 8A submarket remains tight with
tenants seeking space further south on I-95. In many
submarkets, asking rents have reached or exceeded prerecession levels. The statewide average asking rent has
increased for four consecutive years and may exceed $6 psf
by year-end 2016. Lack of supply has led to significant new
construction along the northern I-95 corridor, including
the Meadowlands and Newark, often on a speculative
basis. More than 1.8 msf will be delivered from the fourth
quarter of 2015 through 2016. Roughly 35% of this new
construction is preleased.
Investment
Investment sales volume increased in 2015 with more than
$5.4 billion in transactions completed during the first half
of the year alone. Institutions in search of yield continued
to buy, while owners realized gains on appreciated assets.
Investors have favored industrial and multi-residential
portfolios. Additionally, real estate for the education and
medical sectors remains in high demand.
The investment sales outlook will depend in part on the
Federal Reserve’s interest rate strategy. Another rise in rates
may cool the pace and value of transactions, which have, in
some cases, reached pre-recession levels.
53
New York
51 Astor Place
Employment continues to rise
T
he New York City economy is in the midst of a
boom. Job numbers, always the best measure of the
economy, tell the tale. The growth in employment has
been continuous since the recovery began in 2009. The
economic expansion has now lasted six years and added
more jobs than any growth period in the city’s history.
As of September 2015, the unemployment rate was 5.1%
and is expected to decrease with upticks in retail and
hospitality employment.
Office
In Midtown, the class A vacancy rate improved to 10.3%
in the third quarter of 2015. A headline deal was LinkedIn
Corporation’s 130,000-sf expansion into space recently
vacated by Li & Fung in the Empire State Building (350
Fifth Avenue). The company will now occupy 280,000
sf. The largest block to come onto the market during
the third quarter was L’Oreal’s 367,600-sf space at 575
Fifth Avenue in the Grand Central market. Currently at
13.4% vacancy, the market is set to receive up to 2 msf of
available space during the next 18 months, which would
push vacancy to a staggering 20%. This space includes the
remassed 390 Madison Avenue (843,700 sf ).
The Midtown South market showed no signs of cooling
with overall vacancy shrinking modestly to 6.6% during
the third quarter. One notable transaction in this market
involved clothing manufacturer Ralph Lauren increasing
its footprint. The brand will occupy more than 100,000 sf
at 601 West 26th Street.
Although Downtown is a value play for tenants looking for
newer, quality space, core area leasing activity was quiet
in 2015 compared with the previous two years. Downtown
third-quarter class A direct asking rents were $62.87 psf –
nearly $15 psf less than Midtown South class A space. The
largest lease of the quarter was signed by The Associated
Press, which will relocate its global headquarters to
200 Liberty Street (172,000 sf ) from 450 W 33rd Street.
The catalyst for the move is the jump in asking rents
anticipated for the coming years due to the Hudson Yards
project.
54
New York Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
2016F
Office
Retail
In the third quarter of 2015, there was approximately
500,000 sf of available multi-level retail space, but new
leases appear set to absorb much of that space in 2016.
Most notably, Gap signed a lease at 1530 Broadway for
almost 80,000 sf, formerly occupied by Toys “R” Us. Due to
the already high rents and the limited number of stateside
retailers who can afford the rising rents in New York City,
an uptick of international retailers will likely enter the
market in the near future.
Investment
The Manhattan investment sales market had a slight
hiccup in the third quarter of 2015 in the midst of global
economic volatility and a looming Federal Reserve rate
hike (implemented in December). Although the Fed
interest rate hike did not come to fruition in the third
quarter, the possibility seemed to have some impact
on investment in Manhattan real estate. Following the
second-strongest first half in Manhattan investment
sales history behind 2007, the third quarter’s $8 billion in
volume fell off the pace of $13.8 and $13.5 billion in the
first and second quarters, respectively. Looking ahead,
investment sales in 2016 will be coming off a recordsetting 2015 with hopes of maintaining the same pace.
Oakland
555 12th Street
Positive absorption expected across all property types
T
he East Bay/Oakland market experienced tremendous
growth in 2015. Leasing activity in 2016 is expected to
follow suit with ongoing improvement in occupancy rates
resulting in positive absorption across all property types.
Tenant demand will likely keep office leasing levels above
average, while a broader range of office classes garner
investment appeal. Interest in industrial product will stay
strong as projects under construction come online in 2016.
Record-low vacancy across all property types, which has
resulted in a general lack of inventory for lease and sale,
may hamper leasing and sale totals for 2016. New tenants
will continue to feel pressure to finalize leases now as
competition for space grows. Very limited new (or sublease)
space is expected to come back to the market during 2016,
keeping occupancy high and rental rate growth strong.
Office
Tenant migration and organic growth took hold in 2015,
leading to improved occupancy and strong rental rate
growth. The flow of tenants leaving San Francisco grew
each quarter through 2015 and should continue into
2016. Lack of space in downtown Oakland will emerge as
a significant leasing factor in 2016. This situation could
prompt tenants to bypass Oakland and look further east to
markets located along transit lines with cheaper rents and
greater availability. With respect to office development,
demand certainly warrants new space, but developers will
have to overcome skyrocketing construction costs and
timing during the current cycle.
Retail
Bay Area retail demand remains high. In the East Bay,
demand will continue to be driven by the population
migration from San Francisco to the East Bay. This migration
has prompted interest in multi-residential housing projects
and the need for retail services to accommodate growth.
These projects, totaling nearly 14,000 units in Oakland
alone, have retail components that will add to the retail
base inventory. Approximately 108,000 sf of retail product
is currently under construction with 68% preleased. With
consumer confidence climbing, sustained job growth
projected for the region and retail vacancy near 4%,
demand is expected to improve occupancy while driving
up asking rents in 2016.
Oakland Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
In the third quarter of 2015, the industrial market had
its 13th consecutive quarter of positive net absorption,
prompting strong asking rent growth. Tenant demand
is expected to continue to outpace available supply in
2016. Historically low vacancy is likely to be sustained well
into 2016 even with new supply coming to market. The
industrial development pipeline is healthy with 2.6 msf
currently under construction. This will help relieve some of
the built-up demand for modern distribution space, which
is in short supply in this market.
Investment
Secondary markets such as Oakland will receive more
interest from national investors in 2016. Office owners
brought a variety of product to the market during 2015,
from multi-tenant towers to single-user buildings, that
hit the market vacant. Industrial assets will garner a
larger portion of investment dollars in 2016. Well-leased
properties will trade to investors while owner-occupier
activity expands as tenants seek ownership opportunities.
Dispositions may increase as more owners look to
sell in 2016 to take advantage of the strong demand
and abundance of capital in the market. Asset pricing,
competition from other investors and availability of
product for sale will continue to challenge investment in
this market.
55
Orange County
Park Place
Population, demand for space continue to escalate
O
ngoing demand for Orange County’s commercial real
estate continues to impact every sector. This thriving
hub for financial services, information technology, logistics
and healthcare has continued to attract a talented workforce.
Orange County maintains one of the lowest unemployment
rates in the state, at 4% as of September 2015. The draw of
employment is translating to increased population and a
rapidly increasing demand for space. Vacancy is improving
steadily as rents continue to climb and developers are slowly
becoming more active.
Office
Economic growth and improving employment rates are
fueling demand in the office market, which experienced
a sharp drop in vacancy and a surge in rental rates during
2015. Increasingly specific space requirements ensured
healthy movement. Construction is seeing an increase in
demand for flexible and mixed-use designs that cater to the
needs of the modern office worker. Increased demand for
medical-office space is another dynamic component of the
county’s leasing activity.
Vacancy has trended downward year-over-year since
the Great Recession ended. This trajectory is expected to
continue through 2016 as rents continue to rise. Total net
absorption stayed positive throughout 2015 and should
remain so in 2016. Deliveries of new development are still
modest. Sale pricing is expected to continue to make gains
throughout the year.
Retail
The diverse demands of a growing population are keeping
retail investments very attractive in Orange County.
Consumer demand is shifting from goods to services,
creating vendor movement without hindering demand
for space. Vacancy continued its slow-but-steady decline
quarter-over-quarter in 2015. In 2016, vacancy is likely
to tighten before it levels out in response to the current
increase in new development.
Orange County is the sixth most populous county in the
U.S. and the largest of the 100 wealthiest counties. As such,
retailers are highly motivated to maintain a presence in
the county, driving the positive absorption and escalating
rents that are still emerging post-recession. Rental rates rose
rapidly in 2015; however, they are expected to hold steady in
2016.
56
Orange County Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Orange County is the tightest U.S. industrial market tracked
by Avison Young, placing quality space at a premium.
Consistent demand for limited product propelled rents
upward throughout 2015. Construction, aerospace and
distribution firms continue to drive demand, especially for
buildings exceeding 100,000 sf.
These drivers are, in turn, heightening demand for new
inventory, especially as many older industrial buildings are
being converted to highly sought-after residential, creative
office and self-storage uses. Development picked up in
2015 and growing confidence in construction activity is
anticipated for 2016. The volume of additional inventory
coming online is not expected to impact the growing
valuation of existing inventory in 2016.
Investment
Quality assets in every sector are experiencing tightening
availability while tenants are willing to pay an increasing
premium for a presence in this vital region. This situation
has translated to heightened property values. Investors
continue to rally around every product type with exceptional
gains made in retail during 2015. Cap rates are expected to
remain compressed after contracting in each sector during
2015. Trading volume is expected to gain additional traction
during 2016 due to commercial real estate’s continuing
appeal compared with other investments.
Orlando
500 TownPark
Sound office fundamentals attract speculative construction
O
rlando is experiencing renewed health as the market
heads into 2016. Fundamentals are sound and job
growth is strong with the region leading the state with more
than 41,400 new jobs added in the trailing 12-month period
ending September 2015. The unemployment rate declined
a full percentage point during 2015, demand fundamentals
are in place for rent and NOI growth, and most key industries
have experienced job growth.
Orlando’s economy is well-positioned moving into 2016.
According to the Institute for Economic Competitiveness at
the University of Central Florida, consumer spending growth
is expected to accelerate in 2016 to around 3% – the highest
rate in 10 years.
Office
Fundamentals are solid heading into 2016 with leasing
activity gaining momentum, incremental gains in asking
rates, healthy net absorption levels and a modest amount of
speculative construction activity. The 500 TownPark building,
a 135,000-sf class A building 80% preleased by CNA, is being
developed in Lake Mary. The 21,400-sf Challenger One
project is nearing completion in the University/Research
submarket. Leasing activity was strongest in the Southwest,
Maitland and Lake Mary areas. The restrained pace of
development continued to assist the lease-up of larger
blocks of class A and B space.
Heading into 2016, solid market fundamentals, continued
job growth and limited new development will continue to
support declining vacancy.
Retail
Orlando’s 62-msf retail market saw healthy net absorption
in key areas, slowly diminishing leasing concessions and
continued high demand for space in prime locations during
2015. New development continues throughout the metro
area on a small scale. Tavistock Development Company has a
50-acre, 460,000-sf power center proposed in the Lake Nona
area.
Record tourism is expected to continue to support retail sales
in 2016, particularly in southwest Orlando. Increased housing
demand will likely spur additional new development plans.
Orlando Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The industrial market experienced a broad-based recovery
in 2015 with steady gains in asking rents, net absorption of
more than 500,000 sf, healthy leasing activity and a declining
vacancy rate, at 7.5% as of third-quarter 2015. Rents are at
their highest point in at least five years, and the speculative
construction underway is not expected to satisfy current
demand as there is a relative lack of large-block space.
Benefiting from its solid momentum moving into 2016, the
industrial market is well-poised for continued expansion
as Orlando’s job growth leads the state. Rents should also
continue to push upward in this tight market.
Investment
Investment activity during 2015 was substantial with more
than $1.4 billion transacted in the office, industrial and retail
sectors. Orlando’s overall average cap rate compressed by
20 bps year-over-year to 7.2% by the third quarter of 2015.
Nearly 40% of all investment sales activity was from private
investors, and approximately 25% was institutional, while
REITs and publicly listed companies accounted for 15%.
Cross-border capital is also flowing into Orlando, accounting
for nearly 20% of all investment sales. The most active buyers
are from Singapore, Canada and China.
As demand for office and industrial real estate continues to
increase in 2016, cap rates are expected to compress further
albeit with less movement than in late 2015. Pricing should
continue to climb.
57
Philadelphia
FMC Tower at Cira Centre South
Industrial market continues to surge
P
hiladelphia, the fifth-largest city in the U.S., lies in the
seventh-largest metropolitan area in the country.
Comprising 13 counties, the Philadelphia region stretches
into northern Delaware, southern New Jersey and central
Pennsylvania (PA), while also running up the I-81 corridor
into northeast PA. As the economic recovery continues
to strengthen, continued gradual employment growth
is expected. Unemployment declined to 5.3% as of
September 2015, down from 7.1% one year earlier.
Office
Philadelphia’s office market consists of 236 msf. Class A
office space comprises 54.8% of the region’s inventory. CBD
and non-CBD markets both posted lower vacancy rates
(8.8% and 10.4%, respectively, as of the third quarter of
2015) when compared with the same period in 2014. The
Main Line, West Chester, Conshohocken, Outer Chester
County and Lancaster County all reported vacancies in the
5% to 7.5% range. Harrisburg, Lehigh/Northampton and
the I-81 corridor together posted a vacancy rate of 9%,
down from 9.4% in third-quarter 2014.
The redevelopment of existing product in Philadelphia’s
established suburbs and CBD is expected to continue in
2016. Vacancy, typically well below the U.S. average, is
expected to finish 2016 around 9.8%.
Two major projects in Philadelphia continued through
2015. Comcast continued construction at the Innovation
and Technology Center, a 1.3-msf tower; and Brandywine
Realty Trust’s FMC Tower, an 861,000-sf multi-purpose
building, is scheduled for delivery mid-year 2016.
Retail
At the conclusion of the third quarter of 2015, Philadelphia’s
retail vacancy dipped marginally to 5.7% with 10 msf
vacant throughout the large market and rental rates
averaging $13.67 psf. The biggest lease signings of 2015
included a 60,000-sf deal signed by Hobby Lobby, a 49,000sf lease by Fresh Market and 40,000 sf leased by Bob’s
Discount Furniture. One of the largest transactions of 2015
was the sale of the Gallery at Market East, a 427,600-sf retail
center that sits above Philadelphia’s Jefferson Station, for
$71.5 million. With nearly 2 msf under construction at the
end of the third quarter, the retail market is expected to
deliver consistent numbers in 2015.
58
Philadelphia Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
Philadelphia’s industrial market continues to surge as
Eastern Pennsylvania emerges as a major industrial hub
within the Northeast. The market, comprising 756 msf,
reported a vacancy rate of 8.1% in third-quarter 2015.
The large Philadelphia market currently has 31 industrial
buildings under construction (comprising 14 msf ). With
downward-trending vacancy across the board, new
construction, leasing and sales are expected to continue
their upswings in 2016. One major property currently under
construction is a 600,000-sf FedEx distribution center in
Conshohocken.
Investment
Single-property office investment sales grew in dollar
volume along with the average price per square foot. Office
sales comprised two of the three largest transactions of
2015. The property at 1818 Beneficial Bank Place sold for
$203 million and 833 Chestnut Street sold for $160 million.
The mean cap rate for office investments is 6.4%, slightly
lower than the U.S. average. It is anticipated that the
purchase and redevelopment of class A and B buildings in
areas accessible to public transit will play a large role in the
transactional activity of 2016.
Pittsburgh
PNC Tower
Pittsburgh market remains strong, with very low vacancy rates
P
ittsburgh’s market continues to focus on future
expansion as promising growth in technology and
energy provides an active investment climate. However,
some uncertainty within the energy sector, along with
rising interest rates, will continue to affect the marketplace
during the next few years.
As some corporations consolidate their space, this situation
will place upward pressure on vacancy rates. Rental rates
are expected to remain somewhat flat while Pittsburgh
experiences a likely shift from a landlord-driven market to
one favoring tenants in 2016. Pittsburgh’s vibrant servicedriven economy continues to make the city an attractive
investment market.
Office
Strong office market activity continues as vacancy remains
stable. KraftHeinz, EDMC, Big Heart Pet Brands and Verizon
placed nearly 500,000 sf of sublease space on the market
and there is a high level of interest in these spaces. Larger
tenants that previously had few options can expect many
more available at below-market rental rates in 2016.
Despite a potential slowdown in the energy and
manufacturing industries, Pittsburgh continues to thrive
on the renewed commitment of organizations such as PNC
Bank and PPG Industries and the continued activity in the
healthcare and education sectors. The food sector still has
a large footprint in Pittsburgh as Treehouse, Bay Valley,
Starkist and Giant Eagle all maintain significant operations
in the area.
Retail
Pittsburgh’s retail market recorded a 3.6% vacancy rate
though absorption slowed during 2015. The market is tight
with relatively low amounts of new retail construction
available to lease – resulting in increasing rental rates.
One of the largest transactions was the $15-million sale of
Macy’s’ 1.2-msf building in the CBD to Core Realty.
Market growth has been primarily filled by new store
developments, significant restaurant startups, expansions
and new big-box locations, including Hobby Lobby, Field
and Stream (Dick’s) and Aldi’s. Retail growth in the CBD
continues to be challenging due to limited space.
Pittsburgh Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
One of the most notable changes in the industrial market is
the emergence of speculative development. Ashley
Capital is preparing to construct a 316,000-sf warehouse/
distribution facility in Findlay, while Al. Neyer LLC is
developing 252,000 sf of warehouse/distribution space at
the Clinton Commerce Center. The northern submarkets
also experienced a strong increase in new construction
with the continued success of the Buncher Company’s
Jackson’s Pointe development and FedEx’s 305,000-sf buildto-suit.
Factors influencing further industrial development include
Shell’s proposed multi-billion-dollar ethane cracker plant
and increases in local investments in the technology and
advanced manufacturing sectors.
Investment
Pittsburgh investment activity totaled slightly more than
$746 million in 2015, up 60% compared with 2014. Outof-town investors continue to be active with major CBD
buildings on the market, including One Oxford Centre
and 525 William Penn Place. The level of investment in the
Pittsburgh market is brisk as properties trade at less than
replacement cost and at a relative discount to many of the
comparable markets across the country. The investment
market should remain strong through 2016 with the multiresidential sector continuing to outperform all other asset
classes.
59
Raleigh-Durham
Perimeter Three (Duke Realty Portfolio)
Class A office vacancy sinks to 15-year low
A
rebounding economy and robust population growth are
driving strong fundamentals across all segments of the
commercial real estate industry in the Triangle, an eightcounty region anchored by Raleigh, Durham, Chapel Hill
and Research Triangle Park. The region’s quality of life, highly
educated workforce and favorable business climate are
attracting residents and companies alike. The Triangle added
30,100 jobs during the 12 months ending September 2015
– a growth rate of 3.1%. Continued increases in occupancy
costs for all product types are expected during 2016. Tenants
will need to act decisively when securing space.
Office
Net absorption in the Triangle’s office market surged to
1.1 msf through the first three quarters of 2015, more than
double the amount witnessed during the same period in
2014. Much of the activity was driven by the completion
of build-to-suit projects for MetLife and Biologics. Vacancy
ended the third quarter at 13.5%, down 190 bps year-overyear. Class A vacancy sank to a 15-year low of just 9.5%.
While construction has increased, development activity
remains below historical norms. Tenants face a market where
competition for quality space is fierce and occupancy costs
are rising. The average class A rental rate ended the third
quarter at $23.24 psf – a record high for the region. These
conditions will likely persist through at least 2016.
Retail
Low vacancy and limited construction deliveries kept a lid
on absorption through the first three quarters of 2015. Net
absorption totaled 284,100 sf, sending vacancy down 10
bps year-over-year to 6.5%. Construction deliveries will drive
absorption higher in 2016. Construction underway as of the
third quarter of 2015 totaled 1.1 msf with 47% reported as
preleased. Restaurants continue to dominate activity as retail
centers become more entertainment-oriented. The Triangle’s
strong demographics and economic growth will continue
to draw retailers to the market. Their biggest challenge
will be finding spaces in quality centers that meet retailers’
requirements.
60
Raleigh-Durham Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The industrial market witnessed strong activity, driven
primarily by organic growth in the region’s existing tenant
base, in 2015. Net absorption totaled 742,500 sf through the
first three quarters, up 57% over the same period in 2014.
Vacancy fell by 130 bps to 7.4%. Warehouse asking rates
rose 9.4% year-over-year and flex rates increased 6.5%, the
strongest rent growth witnessed in more than a decade.
Construction activity in the Triangle is at its highest level
since 2001 with 733,200 sf underway as of the third quarter
of 2015. Strong tenant demand should keep vacancy on a
downward track over the next 12 months, but the rate of
decline will likely slow as new space is delivered.
Investment
Triangle investment volume totaled $3.2 billion during the
first three quarters of 2015, a 23% increase over the same
period in 2014. Office sales increased 110% year-over-year,
driven largely by the $476-million sale of Duke Realty’s
3-msf local office portfolio. Hotel sales surged to $373
million, representing an unusually high 11% of total volume.
Multi-residential sales remained robust, totaling $1.3 billion
through the third quarter. This sector is likely at or near
its peak. Pricing rose across all product types in 2015 with
the exception of multi-residential, which held steady. With
investor demand strong and capital abundant, activity and
pricing are expected to remain strong in 2016 even if the U.S.
Federal Reserve announces another interest hike.
Reno
Downtown Reno
Expansions and relocations fuel growth
N
orthern Nevada is expected to continue its recovery
in 2016 with expansion plans and relocations of
several large companies fueling growth. Tesla Motors
announced plans in 2014 to build a 5-msf “gigafactory”
in the area. Construction is now underway – and the
project’s total size is projected to exceed 10 msf. The 6,500
new jobs initially projected for this facility will also grow
substantially. Switch has also increased the size of its new
data center project to 7 msf from 3 msf. Numerous smaller
companies are also moving to the area, generating
thousands more jobs.
New construction continues with three 700,000-sf facilities
set for completion in 2016. Lease rates for all property
types will likely escalate during the year. Investment
sales may also increase, depending on the availability of
product. Cap rates have fallen due to high demand and a
lack of investment-grade properties. Multi-residential and
industrial assets will continue to be favored by investors.
Office
The Reno office market continued to absorb available
office space at a steady rate. Absorption during the past
few years has averaged more than 200,000 sf annually,
predominantly in class A space. As of the third quarter of
2015, class A vacancy had fallen to 13.8% compared with
16.1% overall. The class A market has a shortage of large,
contiguous spaces. If the absorption trend continues
in 2016, vacancy will reach 13% and likely spur new
speculative construction.
Retail
The retail market continued to register positive indicators.
New tenants are entering the marketplace, and positive
absorption was recorded in 2015. Northern Nevada has
seen an uptick in commercial sales. Inventories will likely
continue to shrink, pushing up sale prices. Retail vacancy
ended 2014 at 16.9% and declined 70 bps during 2015.
Rental rates continued to increase, averaging $17.04 psf as
of the third quarter. Overall, 2015 was a positive year for
both retail leasing and sales. Vacancy will likely continue
to decline as average rental rates increase in 2016.
Industrial
The industrial market is experiencing solid growth and
is expected to continue growing at 5% per year for at
least the next five years. More than 100 companies
Reno Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
have relocated or expanded in Northern Nevada
since 2011, including Tesla, Switch and others in the
drone-development, plastic-extrusion, medical-devicemanufacturing, e-commerce and electric-vehicle
industries. To keep up with demand, 2.1 msf of speculative
development is at various stages of construction. Buildto-suit activity is also up with 3.4 msf underway and more
expected to be announced during the first quarter of
2016.
Investments
A flurry of investment activity occurred in Northern
Nevada in 2015 as interest from outside the region
substantially increased throughout the year. The same
level of activity is expected for 2016 with well-located
office and retail product capturing more investment
dollars as vacancy for both property types continues to
tighten. In addition, cap rates for multi-residential and
industrial product have dropped so low that investors are
seeking higher cap rates from other asset classes. With
falling vacancy, construction will finally hit full speed in
2016 as several large projects kicked off in 2015 reach
completion. In addition, as demand continues to grow,
developers will likely pull the trigger on several large
projects that stalled during the recession.
61
Sacramento
Sacramento Kings Development
Arena promises to revitalize Downtown market
D
owntown Sacramento is preparing for a rebirth. The
market surrounding the state capital has traditionally
been a government town; however, with the new Golden
1 Arena set for delivery in the fall of 2016, many are hoping
that private companies will be attracted downtown and
existing companies will expand within this submarket.
The NBA’s Sacramento Kings have plans to develop up to
475,000 sf of office space, a 250-room hotel, 550 housing
units and 350,000 sf of retail adjacent to the arena. New
companies trying to attract young talent want to be in
locations with a 24/7 environment. Downtown Sacramento
looks to be the next submarket in Northern California that
can provide that environment at a discounted rate when
compared with some neighboring submarkets in the Bay
Area.
Office
The Sacramento Valley office market ended the third
quarter of 2015 with a vacancy rate of 14%, down a
full percentage point from year-end 2014. This market
continues to inch closer to where it was before the
recession in 2008. After experiencing its first occupancy
loss in 15 quarters during the final quarter of 2014, the
Roseville/Rocklin submarket was back in the black in each
of the first three quarters of 2015, resulting in 125,000 sf
of occupancy gains during that time period. From firstquarter 2012 to the third quarter of 2015, this submarket
experienced 1.1 msf of positive absorption – the most
of any submarket in the valley. Despite positive growth
throughout the valley, rental rates have been flat for the
past five years, ending third-quarter 2015 with an average
asking rate of $21.48 psf full service. The market set to see
the biggest increase in demand in 2016 and beyond is
Downtown Sacramento, where the new aforementioned
arena will be located.
Retail
Retailer demand has increased in the Sacramento
Valley over the past 24 months due in large part to the
improvement of the local economy. With the recent success
and absorption of space in this sector, developers have
taken notice. Slightly less than 400,000 sf of new retail
space is under construction with almost 50% of that new
product preleased. Current tenant demand points to
continued occupancy growth in 2016.
62
Sacramento Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The industrial market remains healthy with 9.7% vacancy
at the end of the third quarter of 2015 after recording
more than 170,000 sf of positive absorption through the
first three quarters of the year. Industrial developers are
active in this region, having broken ground on multiple
speculative industrial projects in the past 24 months. More
than 1 msf of new product will be delivered by year-end
2016 with the majority expected to be preleased upon
completion.
Investment
The Sacramento Valley investment market has been
dominated by multi-residential investors due to extremely
low interest rates for this type of property compared with
office, retail and industrial properties. Historically, the local
multi-residential market has had low vacancy, and this
trend is expected to continue. As the office and industrial
sectors continue to record positive absorption, they will
start to register increased activity in the investment market,
but not until conditions have stabilized in their markets in
late 2016 or even 2017.
San Antonio
Bank of America Plaza
Continued in-migration boosts real estate demand
T
he San Antonio market hit its stride in 2015. While San
Antonio took longer to recover than other Texas markets
following the Great Recession, the city is in a growth mode
that is just getting started. Fortunately, the commercial
real estate market has remained largely unaffected by the
slowdown in the nearby Eagle Ford shale play. San Antonio
is benefitting from a continued in-migration of companies
and people, which is fueling demand for all commercial real
estate product types. The San Antonio metropolitan area
has a population of 2.8 million people, which is expected
to grow by more than 7% by 2020. Active job growth in the
region has been driven by employment gains in healthcare,
bioscience, aerospace, financial services and information
technology. These indicators point towards a period of
sustained growth in 2016.
Office
The San Antonio office market experienced significant
demand in 2015. After years of limited development, office
construction has ramped up. In 2015, the market digested
what was being built, leading to a relatively stable vacancy
rate throughout 2015 even as new space was delivered.
Vacancy registered 10.6% in the third quarter of 2015. The
vacancy rate will likely decrease to single digits by year-end
2016 due to high demand and healthy preleasing for new
construction. Average class A asking rates climbed steadily
throughout 2015 and registered $23.96 psf in the third
quarter. They are expected to continue climbing in 2016
due to healthy market conditions. Construction activity is
expected to remain active with several new buildings set
to break ground. Most notably, the 400,000-sf Frost Bank
Tower is scheduled for completion in 2017.
Retail
San Antonio has traditionally been a tourist destination,
but the city is starting to be known for its restaurant and
bar scene. This new reputation is boosting demand for
retail, particularly in the downtown area where a significant
number of new infill multi-residential developments have
been delivered and absorbed. The result: a live/work/play
concept has grown in popularity. Restaurant and retail
demand, particularly in areas with robust foot traffic, is
expected to remain elevated in 2016.
San Antonio Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The industrial market remained tight throughout 2015,
benefitting from the population explosion in the Austin-San
Antonio Interstate 35 growth corridor and increased trade
with Mexico, and is poised to become a distribution hub.
Rail traffic from Mexico leads to San Antonio and is then
dispersed across the U.S. As trade continues to increase, the
need for additional warehouse and distribution space will
increase as well. Average asking rates increased slowly in
2015. Asking rates are projected to increase at a faster pace
in 2016 due to continued demand for modern industrial
warehouse product.
Investment
San Antonio, a healthy secondary market, has become a
target for yield-hungry investors who have been squeezed
in primary markets. The San Antonio market is in high
demand from investors seeking product, but there is a
limited supply for sale, particularly buildings with solid,
long-term tenants. As a result, properties do not remain on
the market for long and command above-market prices.
Sale prices have remained steady, but are beginning to
increase as the market attracts a more diverse mix of
national and international investors.
63
San Diego County
488 8th Avenue
Value increases across San Diego’s CRE markets
S
an Diego experienced another year of rent growth
and steadily declining vacancy across all commercial
real estate sectors in 2015. The county is known for its
desirable geography and is a vital hub for biotechnology,
telecommunication, defense and tourism, which have
contributed to the resilience of the market since the
recession.
Population growth and improving employment rates help
drive the market higher in San Diego, which continues to
see an increase in leasing activity. Unemployment remained
low through 2015, reaching 4.6% as of September, and is
expected to decline further through 2016.
Office
Employment continues to fuel the office market. There
is demand for flexible space as businesses strive to use
their premises more efficiently while providing improved
amenities for employees. Technology companies,
healthcare innovators and independent research institutes
are at the forefront of the region’s growth.
Vacancy declined at a slower pace in 2015 than in 2014 as
the market responded to the downsizing of Qualcomm
in the Central Coast markets. However, rental rates rose
significantly in 2015 with the highest rates, by far, still
seen in the Central Coast area. Further rent increases are
expected in all submarkets in 2016. Development projects
totaling 1.5 msf will complete in 2016 and result in a slow
increase in construction activity.
Retail
Demand for retail space, bolstered by population growth
and high median household income, remains constant. As
traditional consumer demand remains reserved, retailers
are shifting toward service-oriented retail. While leasing
activity was solid in 2015, rental rates have yet to see a
significant rebound post-recession and are expected to
remain flat in 2016.
Vacancy remained less than 4% throughout 2015, reaching
its lowest point post-recession. Vacancy is anticipated
to stay low, matching the historical rates that were more
typical pre-recession. The volume of deliveries increased
only slightly during 2015 as developers remained cautious.
Renovation projects are nearing the volume of new
construction in this tight, established market.
64
San Diego County Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
San Diego’s industrial base supports the military,
biotechnology and telecommunication sectors. Rents have
been trending upward quarter-over-quarter relative to
the decrease in vacancy, which in 2015 reached the lowest
levels seen this millennium. Total net absorption remained
positive throughout 2015 and, in 2016, should track
similarly.
Demand for industrial space is gradually encouraging
developer confidence. Currently, San Diego’s North County
area is seeing the bulk of active construction progress,
while the South Bay area is expected to follow suit as the
economy continues to improve. Industrial sale pricing in
San Diego is currently below peak and expected to grow as
leasing activity picks up in 2016.
Investment
Trading volume, on the rise since 2010, continues to surge
in San Diego. Markets like San Diego are becoming more
popular as investors look beyond larger metropolitan
locales for more resilient, high-value assets. In 2015,
the office sector outpaced other property types in sales
volume. This trend is expected to continue through 2016.
Office and industrial cap rates experienced the greatest
compression. In 2016, there is room for more cap-rate
compression as competition for fewer properties drives the
asking price per square foot to pre-recession levels. Even
with new inventory, demand will outpace supply in this
historically tight market.
San Francisco
Twitter Headquarters
Developers face pressure to keep up with demand
S
an Francisco remains a highly competitive market
due to its strong workforce, continued tech demand
and proximity to venture capital funding. The city’s
unemployment rate as of the third quarter of 2015 dropped
to 3.2%, down from 4.6% during the third quarter of
2014. Vacancy rates are low across all sectors with office
vacancy seeing its lowest rates since the dot-com boom of
2000. With diminishing space and nearly 25 office tenants
currently in the market for more than 100,000 sf, the San
Francisco market is expected to continue to thrive.
Office
The San Francisco office market remains one of the hottest
markets in the country with the technology sector as its
driving force, accounting for three of the top five leases
through the first three quarters of 2015. Vacancy dropped
60 bps during the same period, falling to 5.1% at the end
of the third quarter of 2015. The third quarter also marked
the 19th consecutive quarter of increasing rental rates with
class A rates ending the quarter at a $68.16-psf average.
Preleasing continues to be a preferred method for claiming
large blocks of space as little existing product remains
available for expanding tenants. Stripe’s 270,000-sf prelease
at 510 Townsend Street was the largest lease in the first
three quarters of 2015 and is a testament to the eagerness
of companies to snatch up future expansion space. As of
the third quarter of 2015, more than 55% of the 3.7 msf
under construction was preleased, and an estimated 3.8
msf is expected to be under construction by year-end 2016.
With current office development limitations due to Prop M
in San Francisco, most companies will be forced to prelease
new construction.
Retail
International tourism is one of the top contributors to San
Francisco’s thriving retail market; and with virtually no new
retail developments expected in 2016, vacancy should
remain low. Union Square continues to be San Francisco’s
retail hotspot, but with retail space being included in
various developments such as the NBA’s Golden State
Warriors’ arena site and MLB’s San Francisco Giants’ new
ballpark site, Mission Bay could be the next top retail
destination.
San Francisco Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The San Francisco brand continues to be a driving force
behind companies’ willingness to pay a premium to stay
within city limits. However, limited leasing opportunities
and high land costs for new industrial development remain
problems for many companies looking to enter or remain
in the San Francisco industrial market. With San Francisco’s
restricted industrial supply, expect vacancy levels to hold
extremely tight through 2016.
Investment
Investment activity remains strong with more than $2.5
billion worth of sale transactions completed in the first
three quarters of 2015 – with more than half occurring in
the third quarter alone. JP Morgan headlined the year’s
investments with the purchase of Twitter’s headquarters
(1355 Market Street and 1 Tenth Street) from Shorenstein
Properties for an impressive $990 million ($900 psf ) in the
third quarter. Investment activity is expected to stay lively
as investors look to take advantage of rising rental rates and
high demand. A significant increase in interest rates is the
only factor with the potential to slow this sector down.
65
San Mateo
Bay Meadows Station 4
New deliveries set to hit market
S
an Mateo development activity is at its highest point
since the fourth quarter of 2002. Developers have
responded to tenant demand for more class A office
space, especially within walking distance of Caltrain
stations.
At the end of the third quarter of 2015, more than 1.4
msf of office product was under construction with 69%
of that preleased. Cloud storage company Box Inc.
preleased all 334,000 sf of the two-building Crossing/900
office project in Downtown Redwood City, while onlinesurvey company SurveyMonkey leased the entire first
phase (210,000 sf ) of San Mateo’s Bay Meadows office
project. Both will relocate from Silicon Valley. The
completion of the SurveyMonkey deal resulted in the
commencement of speculative construction on the
second phase of the Bay Meadows project, which will
add another 174,000 sf.
Office
Overall office vacancy at the end of the third quarter
of 2015 stood at 8.7%, down significantly from 2011,
when vacancy stood at 12.5%. Since then, nearly 2.5 msf
of positive absorption has been registered. The office
market has also posted increasing average asking rates
in 17 of the last 18 quarters, ending the third quarter of
2015 at $47.28 psf full service.
During the first three quarters of 2015, leasing activity
in San Mateo County’s existing office inventory was flat;
however, tenants were active, closing large transactions
on new developments. Asking rates for existing
properties skyrocketed during the first three quarters of
2015, increasing by almost 10%. Demand in this market
is at one of the highest levels noted in the past two
decades. As of the third quarter, more than 20 companies
in and around San Mateo County were looking for more
than 25,000 sf of office space.
Retail
Retail vacancy remained extremely low in 2015 and will
continue to be low moving forward due to extremely
strict development policies in San Mateo County.
Developers have steered clear of this market during
the past few years due to the strict policies and lack of
available vacant land. This trend has resulted in a lack of
available options for retailers. Demand will remain strong
66
San Mateo Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
in 2016 with rental rates expected to climb throughout
the year due to limited availability.
Industrial
The San Mateo County industrial market remains
extremely tight with a 3.7% vacancy rate at the
conclusion of the third quarter of 2015. This sector
recorded slightly more than 170,000 sf of positive
absorption through the first three quarters of 2015. With
no new product set to deliver due to high land costs,
asking rates continued to increase as a result of the
limited number of options available.
Investment
San Mateo County recorded almost $2.2 billion worth
of investment activity during the first three quarters of
2015 compared with $1.9 billion during the same period
in 2014. Hudson Pacific Properties was the headliner of
2015, closing in April on Equity Office’s $3.5-billion Bay
Area portfolio, which included approximately 3.2 msf
of office space in San Mateo County. With the Hudson
Pacific Properties purchase and strong interest from
investors, 2015 was one of the most active investment
years on record.
Tampa
SunTrust Financial Center
Market fundamentals showing steady improvement
T
ampa Bay’s economy continues to register marked
improvement as demonstrated by the sustained decline in
the unemployment rate, which stood at 5% as of September
2015 – a healthy 90-bps decrease year-over-year. Economic
fundamentals are strong and employment growth continues
with 28,500 new jobs added in the trailing 12-month period –
an increase of 2.3%. In the commercial real estate sector, healthy
leasing activity continues as speculative construction occurs at a
restrained pace.
The Tampa Bay economy is well-positioned heading into 2016.
According to the Institute for Economic Competitiveness at
the University of Central Florida, consumer spending growth is
expected to accelerate to around 3% in 2016, the highest rate in
10 years.
Office
Office fundamentals remain sound with a sustained decline in
vacancy, healthy net absorption, increasing tenant confidence
and incremental gains in asking rents. The majority of net
absorption during 2015 was concentrated in the Westshore, I-75
Corridor and Downtown Tampa submarkets with class A net
absorption in the Westshore area alone accounting for roughly
one-third of the total. The direct vacancy rate in the third quarter
of 2015 represented the lowest figure recorded for several years.
Heading into 2016, a relative lack of construction will continue
to support a declining vacancy rate. Several new office
development projects are planned in the urban core. It is
anticipated that the first new speculative office construction in
Westshore will break ground in 2016.
Retail
Tampa Bay’s 67-msf retail market ended 2015 with strong
net absorption, 70% of which occurred in the Southeast
Hillsborough and South Pinellas submarkets. The most widely
anticipated openings included Bass Pro Shops’ inaugural Bay
area location alongside I-75 in Brandon and the completion of
Tampa Premium Outlets in Wesley Chapel. Additionally, several
national and regional fast-casual dining concepts now view
Tampa as a viable option for expansion due to robust growth
and increased consumer spending.
In 2016, the more than 2 msf of new construction in the pipeline
and grocery-anchored centers will continue to achieve higher
rents and the strongest occupancies as a greater proportion of
the retail market becomes functionally obsolete.
Tampa Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial
The Tampa Bay industrial market continues to exhibit
improving health with tightening vacancy, positive absorption,
constrained speculative development and rental rates posting
incremental gains. Warehouse/distribution space accounted for
approximately 80% of all net space absorbed during 2015 with
the strongest leasing activity occurring on the East Side.
A continued downward trend in vacancy and a slight uptick in
rents are expected in 2016. New construction will continue in
2016 with nearly 750,000 sf of new product being built in East
Tampa.
Investment
Investment activity was substantial in 2015 with more than $1.9
billion transacted in the office, industrial and retail sectors. There
were several noteworthy office transactions in the Downtown
Tampa and Westshore submarkets with the largest sale being
Highwoods Properties’ acquisition of the SunTrust Financial
Center in Downtown Tampa. The 533,900-sf class A tower sold
for nearly $116 million (or $217 psf).
Both institutional and private investors are placing increasing
levels of equity into acquisitions. It is anticipated that class A
warehouse product and well-positioned suburban office buildings
will continue to be targeted by institutional buyers throughout
2016.
67
Washington, DC
1776 Eye Street, NW
Metro-centric and high-quality assets will lead market recovery
W
ashington’s regional commercial real estate market
registered varied improvement in 2015. The passage
of a two-year bipartisan budget will return some certainty
to the region’s largest employers and allow federal agencies
to operate with more clarity. There is increased data center
and warehouse demand with leasing activity only bridled
by limited supply, indicating an auspicious 2016 for these
property types. Conversely, the multi-residential market is
approaching its saturation point after a year of substantial
absorption and pricing has begun to soften. The bifurcation
of existing office product is pervasive with high-quality,
transit-oriented assets outperforming the market.
Office
The office market recorded little improvement in 2015
when compared with year-end 2014. Net absorption was
relatively flat, and overall vacancy remained at 14.9% in the
third quarter of 2015. Recent trends persisted, including a
flight to quality and efficiency, along with tenants’ distinct
preference for amenity-rich and Metrorail-served locations.
New demand by the federal government stalled in 2015, but
dominated the largest leases list when short-term renewals
were included.
The District of Columbia (DC) witnessed stronger office
leasing conditions, while the region’s suburban markets
remained tenant-favorable and oversupplied. A significant
3.2 msf of office development is expected to be completed
region-wide in 2016, but with a preleasing rate of
approximately 51%, the additional inventory should have
little impact on overall vacancy.
Retail
In Washington’s suburbs, mixed-use projects are the largest
contributors to new retail space. Tysons Corner’s live/
work/play developments continue to expand, especially in
areas near Metrorail’s Silver Line stations. In DC, the retail
market has stayed competitive across high street retailers
with rents exceeding $200 psf in certain sections; however,
creative and adaptive reuse developments are emerging in
several submarkets like the north side of Capitol Hill and are
successfully attracting tenants and creating market buzz.
Industrial
Vacancy in the industrial market has been on a downward
trajectory and was well into the single digits (sub-9%) as
year-end 2015 approached. New demand has come from
68
Washington, DC Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
the region’s strong service economy, but also a rapidly
growing consumer goods supply chain, e-commerce
distribution seeking rapid delivery, data centers and even
government contractors. Both occupiers and investors are
seeking modern, state-of-the-art building designs and
features. Speculative development is well underway, and
market fundamentals support it, considering the area’s
access to airports, major transportation corridors and lack of
developable land that has kept new deliveries in sync with
absorption. With solid demand for limited available stock and
new construction constrained, the positive outlook for stable
rents and high occupancy rates should continue in 2016.
Investment
Sales of trophy office assets in downtown DC broke the
$1,000-psf threshold and demonstrated the ongoing flight
to quality. Approaching year-end 2015, office sales were on
pace to achieve the highest transaction volume since 2007.
Sales volume also improved in the retail, multi-residential
and industrial sectors year-over-year. As with leasing,
location has become a vital factor for investors. Institutional
buyers have shown a preference for transit-served assets
downtown, the close-in suburbs or established office centers
such as the Dulles Toll Road market.
Continued bifurcation in Washington’s commercial real
estate is expected as overall market conditions hold their
current course with select submarkets and product types
outperforming the regional average in 2016.
West Palm Beach
Phillips Point
Investment sales ramp up across all asset classes
W
est Palm Beach’s commercial real estate market
fundamentals continued to improve as vacancy across
all asset classes declined during 2015. As construction
levels begin to rise, the improvement will be slightly less
pronounced. The forecast remains optimistic for West Palm
Beach during 2016 as fairly steady market conditions are
expected.
Office
Limited new construction and rising demand continued
to improve fundamentals in the local office market. At the
end of the third quarter of 2015, office vacancy fell a full
percentage point to 13.3% from 14.3% at year-end 2014.
Office investment sales volume tapered off to $679 million
in the first three quarters of 2015 from $845 million during
all of 2014. Though total sales volume has decreased, the
average price increased to $251 psf through the third
quarter of 2015 from an average of $226 psf in 2014. Cap
rates compressed, averaging 6.5% through the first three
quarters of 2015 in comparison with 7.1% during 2014.
Constrained construction levels, together with a slight
improvement in the economy, led to an optimistic 2016
forecast. The office sector is slated to see vacancy levels fall
to 12% by year-end 2016.
Retail
Demand for retail space remained strong in 2015 even as
construction levels began to rise. Vacancy fell 50 bps to
5.6% during the first three quarters of 2015. The strength
of the asset class is demonstrated by the investment sales
being recorded. The average retail property sale price
increased to $294 psf through third-quarter 2015 – a
significant improvement from $249 psf on average during
2014. The retail market recorded cap rate compression in
2015 as cap rates through third-quarter 2015 averaged
5.1% compared with 6.9% on average during 2014.
Vacancy is expected to remain steady in 2016 as
construction ramps up and new supply is delivered to the
market.
Industrial
West Palm Beach’s industrial market recorded
strengthening fundamentals in 2015 despite rising
construction levels. From year-end 2014, vacancy rates
declined 40 bps, landing at 4.7% by third-quarter 2015.
West Palm Beach Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
Industrial sales rose to $164 million through third-quarter
2015 from $120 million in all of 2014. Most notable was the
average per-square-foot price, which improved to $81 psf
in the first three quarters of 2015 from $65 psf at year-end
2014.
The forecast for 2016 is slightly less optimistic as the market
is anticipating rising vacancy. The uncharacteristically high
levels of construction recorded in 2015 are expected to
push vacancy back up to 5.4% during 2016 – higher than
the levels posted in 2014 and 2015.
Investment
West Palm Beach real estate was in high demand during
2015. Increased investment sales volumes were recorded
across all asset classes. Constrained supply levels across all
asset classes led to significant cap-rate compression during
2015.
The projections for 2016 are mostly optimistic due to low
construction and delivery levels. Together with a steadily
improving economy, these factors could aid in pushing
vacancy and capitalization rates down further.
69
UNITED KINGDOM
London, U.K.
8 St. James’s Square
Structured imbalances to prevail in 2016
T
he London property market is overheating with
record levels of capital inflows, strong rental growth
and low availability. These structural imbalances will be a
feature of the market in 2016 and beyond.
Office
City of London prime rents have now increased to £66.50
psf per annum. West End prime core rents are £115 psf
per annum, although the ceiling for most occupiers is
closer to £90 psf. Premium rents continue to be achieved
in trophy buildings (for example, £180 psf at 8 St. James
Square, SW1). Reduced occupier choice is leading some
tenants to focus on new workplace strategies to reduce
their property footprint with agile, remote and homeworking being the most popular methods.
With the combination of strong demand and a limited
pipeline of supply – although construction activity is at
its highest level since the financial crisis – it is likely that
strong rental growth will continue for the next two years.
Retail
Overseas retailers continue to look to open flagship
stores in the prime retail pitches of Bond Street, Regent
Street and Oxford Street. In Mayfair, streets previously
considered to be secondary are also seeing high
demand from luxury brands with new rental levels being
achieved regularly. Simone Rocha recently acquired
space in Mount Street at a rent 10% higher than what
was achieved in the street earlier in the year.
Consumer confidence is above the long-term average,
and 2015 has seen strong wage growth. With limited
inflationary pressure, the outlook for 2016 remains
strong.
Industrial
Availability has been on a downward trend around
the capital for the last six years despite an uptick in
supply. On the west side of London, rental growth
is leading to sites being released for redevelopment
with approximately 880,000 sf under development.
Property owners are also working on larger build-to-suit
projects (such as Slough International Freight Exchange
Goodman’s 150-acre, 2-msf scheme near Heathrow).
On the east side of London, SEGRO is set to develop
industrial space under a deal signed with the Greater
London Vacancy Rates
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2014
2015
Office
2016F
Industrial
London Authority. Five sites, collectively known as East
Plus, total 86 acres and could be capable of supporting
1.4 msf of industrial and logistics space.
While the potential supply is large, very tight supply is
still expected in 2016 with a knock-on effect of pushing
rents upwards.
Investment
Investment volumes had another very strong year in
2015 as investor demand remained high. Overseas
investors continued to be the principal source of
demand as London maintained its reputation as a safe
haven for investment. There was a greater supply of
product in the second half of the year as vendors sought
to take advantage of cyclical highs in capital values. In
2016, it will be interesting to see how the greater supply
of product is absorbed by the market.
It is expected that the investment case for London will
remain intact; however, with a more equal balance
between supply and demand, there will be little yield
movement over the next 12 months with performance
mainly being driven through rental growth.
71
Canada, U.S. and U.K. Publications
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Avison Young’s Canada, U.S. and U.K. Publications
SPRING 2015
MID-YEAR 2015
FALL 2015
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Canada, U.S. & U.K.
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Avison Young 2016 Forecast Commercial Real Estate Canada, U.S.

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