National Real Estate Forecast Released for U.S., Canada

Canadian real estate market fundamentals, though shaken, remain relatively intact while U.S. markets continue to shoulder the brunt of the downturn, with recovery expected to be longer and drawn out, according to Avison Young’s recently released 2010 National Forecast. The annual report covers U.S. and Canadian office, industrial, retail, and investment markets in 13 regions: Chicago, Washington, D.C., Vancouver, Calgary, Edmonton, Regina, Winnipeg, Toronto, GTA West/Mississauga, Ottawa, Montreal, Quebec City, and Halifax.

The forecast noted that the U.S. recession took its toll on real estate markets on both sides of the border in 2009, with the United States continuing to shoulder the worst of the storm. The Canadian real estate sector has not been entirely immune, but appears to be weathering the downturn thanks to relatively sound--though shaken--market fundamentals.

“If anyone needs to be reminded, commercial real estate is a cyclical industry,” Mark E. Rose, Avison Young’s Chair and CEO, comments. “In our 2009 Forecast last January, we predicted one overriding theme: decision-making would grind to a halt until key metrics stabilized and new trends appeared,” says Rose. He pointed out that the dislocation in real estate lending and investing was so severe in March and April that the markets looked to be on the verge of collapse, although Canada weathered the storm better than the United States.

According to the report, mounting job losses in the corporate arena and the corresponding fall in the demand for office space have led to higher vacancy rates in markets across the United States. Avison Young’s coverage of its two U.S. markets--Chicago and Washington, DC--revealed vacancy rates of 15.3 percent and 13.5 percent, respectively, up from 13.2 percent and 11.3 percent in 2008. These rates are indicative of the double-digit vacancy rates in other major U.S. markets. For the year ahead, vacancy is expected to stabilize, trending slightly higher for Chicago, but falling marginally in Washington, D.C.

A sharp decline in retail sales, the result of conservative spending from consumers, has driven up nationwide vacancy rates for retail space. Occupancy of industrial space is also down, with some markets harder hit than others. According to the Avison Young report, Washington, D.C, will see its vacancy rate retreat to 10 percent this year, and Chicago’s is anticipated to rise slightly above 12 percent. In all, demand for industrial space is variable by location even within a given market, and demand for certain types of well-located industrial property remains robust.

“The U.S. market continues to be in a falling-value state where asset values have dropped from their peaks in 2007 by between 35 percent and 50 percent, depending on the type of property and the market,” explains Earl Webb, president of Avison Young’s U.S. Operations. Sales transaction volume has continued to decline, down approximately 70 percent from 2008 which, in itself, was down almost 80 percent from 2007, and financing continues to be scarce for office, industrial, retail, and hotel properties, especially when seeking loans in excess of $50 million, he says.

Webb points out that employment statistics are the leading indicator of real estate recovery, and the United States has yet to see any increase in employment. He predicts that any job loss during 2010 will put pressure on real estate fundamentals. It seems as though, even with moderate employment gains, there will be sufficient shadow vacancy in most markets to absorb any additional employees without the need for additional space, at least through 2010.

The report shows that on the retail front in 2009 consumer spending was more resilient in Canada than United States. While some national chains fell victim to the recession, extensive discounting by Canadian retailers attempting to lure customers was common, especially in the months leading up to the holiday shopping season. Though final figures have not yet been determined for its overall performance in 2009, the Canadian retail market is expected to remain stable or show modest growth this year. However, there is a difference in opinion about whether Canada’s economy will see the beginning of a sustainable recovery in 2010, notes Bill Argeropoulos, Avison Young’s vice president and director of research in Canada. “Notwithstanding this, Canada remains in better shape than its neighbor to the south and many other real estate markets around the world, and is poised for a more rapid recovery,” he adds. Ultimately, both the U.S. and Canadian markets are expected to rebound as the economic cycle starts its next upswing.