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Pricing and cap rates for Class A industrial product are expected to stabilize for the remainder of this year, according to a new report from Cushman & Wakefield—though trophy properties in the Inland Empire of Southern California, New Jersey, South Florida, Seattle, and Dallas will reap the most aggressive overall rates.

Spring 2021 data from C&W shows that overall capitalization rates range widely by asset class, with a nearly 90 basis point difference between Class A and B industrial product and a 235 bps difference between Class A and C industrial facilities. And overall rates for Class C properties are clocking in 143 bps higher than their Class B counterparts.

Average cap rates for Class A assets ranged from between 3.25 and 5.5% in spring 2021 and declined by 33 basis points year over year, while Class B went down by 58 and Class C assets declined by 89 bps since last spring. And while demand for Class A product in core US cities has been strong, over the past five years rates began to stabilize.

“Little if any additional compression is expected for the remainder of 2021 and into 2022, with investors closely monitoring interest rates and 10- year Treasury yield rates,” the report states.

Cap rates for Class B and C product are logging the largest decreases as investors target more of the former to generate higher yields and returns from higher-priced Class A assets. The average for Class B product this spring fell between 4 and 7%, while the average cap rates for Class C assets ranged between 5 and 9%.

“Due to the lack of available and higher priced Class A product, investors are now targeting Class B and, in some cases, Class C product, seeking higher yields/returns—especially from those assets located near populated urban areas,” the report states. “Product close to urban areas has become the driver in order to reduce shipping and, more importantly, delivery times.”

 

 

Source: GlobeSt

New approaches from technology companies and co-working providers across North America and Europe are challenging occupiers’ and landlords’ office-space accommodation strategies, forcing players in more established sectors to adjust how they think about the size, physical form and operational function of their premises.

This transformation continues to encourage new development, which is racing to keep up with demand in some markets and being bolstered by a young, educated workforce gravitating to urban centres.

These are some of the key trends noted in Avison Young’s Mid-Year 2018 North America and Europe Office Market Report, that was just released.

The report covers the office markets in 67 metropolitan regions in Canada , the U.S., Mexico, the United Kingdom, Germany and Romania: Calgary, Edmonton, Halifax, Lethbridge, Montreal, Ottawa, Regina, Toronto, Vancouver, Waterloo Region, Winnipeg, Atlanta, Austin, Boston, Charleston, Charlotte, Chicago, Cleveland, Columbus, OH; Dallas, Denver, Detroit, Fairfield County, Fort Lauderdale, Greenville, Hartford, Houston, Indianapolis, Jacksonville, Las Vegas, Long Island, Los Angeles, Memphis, Miami, Minneapolis, Nashville, New Jersey, New York, Oakland, Orange County, Orlando, Philadelphia, Phoenix, Pittsburgh, Raleigh-Durham, Reno, Sacramento, San Antonio, San Diego County, San Francisco, San Jose, Silicon Valley, San Mateo, St. Louis, Tampa, Washington, DC; West Palm Beach, Westchester County, Mexico City, Coventry, London, U.K.; Manchester, Berlin, Duesseldorf, Frankfurt, Hamburg, Munich, and Bucharest.

“Against a backdrop of economic, geopolitical and financial volatility, the commercial property markets – for the most part – are functioning under relatively sound fundamentals,” comments Mark E. Rose, Chair and CEO of Avison Young. “Nowhere are we seeing more profound changes than in the office sector – especially in urban areas of major metropolitan markets across the six countries covered in our annual review. The impact can be seen on city skylines, which are changing rapidly as new construction picks up pace, driven by insatiable tenant demand from organizations adjusting their workplace strategies to a growing millennial workforce and their adaptability to innovative technologies.”

Rose continues: “At the same time, sectors that have historically accounted for a significant amount of demand for office space are now being both augmented and squeezed by ever-expanding technology and co-working industries. This phenomenon is being seen across national boundaries, particularly in markets with dense and growing urban populations.”

According to the report, of the 67 office markets tracked by Avison Young in North America and Europe, which comprise more than 6 billion square feet (bsf), market-wide vacancy rates declined in 38 markets, remained unchanged in seven, and increased in 22 markets as almost 74 million square feet (msf) was absorbed on an annualized basis.

The report goes on to say that construction cranes remained prominent fixtures across many skylines as nearly 74 msf of office space was completed during the 12-month period, while another 138 msf was under construction at mid-year 2018 – with 50% of the space preleased.

“It’s great to see so much confidence on the part of developers as they respond to the supply-demand imbalance in many markets,” says Rose. “As always in this industry, the inherent risk is that circumstances could change, resulting in an oversupply of product at the time of delivery. In many cases, this scenario is the result of external economic and geopolitical factors. This time around, however, the new influences of disruptive technologies and increasing co-working space availability are also affecting how and where people work, potentially impacting the office sector from within – and challenging conventional wisdom.”

Rose adds: “Generally sound office market fundamentals are being threatened on the North American front by ongoing NAFTA talks. In Europe, the looming Brexit deadline continues to dominate the headlines in the U.K., while in Germany, strong leasing activity continues to drive vacancy rates downward in all Avison Young markets. In Bucharest, Romania, development continues in response to demand.”

THE UNITED STATES

The U.S. office market has benefited from another strong 12-month period of positive economic indicators: Further business expansion and job growth, decades-low unemployment, and rising consumer and business spending. Business spending kept its momentum in the first half of 2018, boosted by corporate tax breaks even while the federal government moved toward greater isolationism and global trade uncertainty. As of June, U.S. unemployment averaged 4% and employment over the last 12 months grew by 2.4 million, supported by the office-occupying professional and business sector gaining 521,000 jobs.

The 5.2-bsf U.S. office market reported net absorption of 43 msf on the strength of gains in five markets each achieving more than 3 msf.

“In spite of this strong take-up, I’m not surprised that the overall vacancy rate remains elevated given the volume of construction underway and the continuing trend of more efficient space design,” says Earl Webb, Avison Young‘s President, U.S. Operations.

U.S. office market trends mirror those in Canada, registering an increasing impact from co-working firms. Occasionally, co-working companies have occupied large blocks of space in oversupplied markets, helping to keep vacancy in check, and the concept’s popularity with tenants has forced landlords to compete by adding conference rooms, tenant centers and social spaces.

Webb continues: “Flexible occupancy is key. We also see some national corporate tenants utilizing co-working space in order to control costs and create that flexibility. One co-working operator’s recent announcement that it is moving into brokerage operations could further disrupt the office market, and we’ll be watching that situation and other co-working developments as we head into 2019.”

The report goes on to discuss other recent and continuing trends, including the redevelopment of aging inventory and developers’ emphasis on offering transit-oriented mixed-use projects. Tenants continue to display a preference for amenity-laden buildings and geographies – an important recruiting strategy designed to appeal to the millennial workforce in the tight U.S. labor environment.

Notable Mid-Year 2018 U.S. Office Market Highlights:

  • Five U.S. markets each achieved more than 3 msf of net absorption. San Jose/Silicon Valley and San Francisco together represented 29% of the U.S. total with net absorption of 7.5 msf and 5 msf, respectively. As well, a handful of U.S. markets recorded negative net absorption. Of those, Houston lost the most ground with negative 2 msf during the last 12-month period.
  • Total vacancy in the U.S. was 12.1% as of June 30, 2018, a drop of 10 bps year-over-year. In spite of strong absorption, vacancy rates remained stubbornly high overall with the highest levels in Memphis(20.9%), Westchester County (19.5%) and Houston (18.3%). All but 13 of the 46 U.S. markets reported vacancy averaging more than 10%.
  • Improvement was centered in the downtown inventory (1.7 bsf) with average vacancy falling to 11.2% at mid-year 2018 compared with 11.4% one year earlier, while the bigger suburban market (3.5 bsf) recorded no change in vacancy year-over-year (12.6%).
  • Construction volume fell year-over-year although 96 msf remained under development across the U.S. In new projects overall, 53% of the space was preleased at mid-year 2018 compared with 49% one year earlier. The 379-msf Washington, DC region led the country with 11 msf underway. Demand for new product is high in Washington and preleasing in buildings under construction reached 69% by mid-year. This level was almost matched by New York, where 10.6 msf was under construction (47% preleased) at mid-year 2018.
  • Completions in the 12-month period ending at mid-year 2018 totaled 57.8 msf, increasing slightly from the prior year’s total (55.2 msf). Dallas and Northern California’sSan Jose/Silicon Valley led the country by delivering 7.5 msf each, followed by Washington’s 5.1 msf of completions.
  • Eleven U.S. markets reported asking rents that exceeded the downtown class A average of $48.04 psf full-service gross. Not surprisingly, tight leasing market conditions in Northern Californiaresulted in San Mateo ($84.96 psf), San Jose/Silicon Valley ($74.74psf), San Francisco ($76.54 psf) and Oakland ($57.56 psf) having some of the highest rents in the country. In the Northeast, Boston($66.91 psf), New York ($64.08 psf) and Fairfield County ($54.72psf) were the leaders.
  • Suburban class A rents tell a similar story with Northern Californiamarkets leading the country by far, while most U.S. markets hovered near the national average of $31.32 psf.

“As we forecasted at mid-year 2017, the flight to quality and tenant demand for efficient, amenity-rich options carried into 2018 – and showed no signs of abatement, while class A rents, downtown and suburban, edged higher,” concludes Webb. “High-quality development will continue to boost tenant occupancy and garner higher rents and institutional interest while outperforming the market at large through year-end.”

CANADA

Canada’s office property markets remained sound through the first half of 2018, supported by stable macroeconomic indicators, including healthy employment numbers, GDP growth and a rebounding Alberta economy. However, U.S. protectionist policies and escalating tariffs pose a risk to the Canadian economy and global trade flows, and may lead to moderating growth ahead.

“Intense competition for office space continues to bolster office market fundamentals across Canada – especially in downtown markets,” states Bill Argeropoulos, Principal and Practice Leader, Research (Canada) for Avison Young. “Demand from traditional sectors is being augmented by the proliferation of domestic and global technology and co-working firms, ongoing urbanization and a burgeoning millennial workforce – all part of Canada’s emerging innovation economy.”

The report shows declining vacancy rates in more than half of the Canadian office markets with suburban markets outpacing downtown markets in terms of absorption (led by Montreal and Vancouver) and new deliveries (led by TorontoVancouver and Montreal) during the past 12 months. However, the amount of downtown space under construction at mid-year (led by Toronto) outstripped the suburbs by a significant margin.

Argeropoulos concludes: “Urbanization – partly attributable to growth in the technology sector – has created a noticeable gulf between downtown and suburban vacancy rates in emerging tech hubs such as Vancouver, Toronto, Waterloo Region, Ottawa and Montreal. Given tight conditions and upward pressure on rents in some of the nation’s downtown markets, and with little or no near-term supply relief, suburban markets – particularly those offering transit connectivity and other urban amenities – may be the beneficiaries of overflowing tenant demand during the next couple of years.”

Notable Mid-Year 2018 Canadian Office Market Highlights:

  • Canada’s 530-msf office market recorded positive absorption of almost 6 msf in the 12 months ending at June 30, 2018, led by strong gains in TorontoVancouver and Montreal – offsetting losses in the struggling, but stabilizing, Calgary market.
  • Canada’s overall office vacancy retreated 60 basis points (bps) year-over-year to finish the first half of 2018 at 11.5%. Vacancy declined in six of 11 markets. Unchanged from one year ago, Calgary (23.5%) maintained the highest vacancy rate, Toronto (6.2%) now has the lowest, while Waterloo Region (up 360 bps to 17.1%), Edmonton(down 320 bps to 14.1%) and Ottawa (down 320 bps to 9.5%) recorded the biggest swings.
  • Most downtown markets posted positive results, combining for more than 2.2 msf of absorption in the 12 months ending at mid-year 2018 – led by TorontoVancouver and Edmonton. Consequently, Canada’sdowntown vacancy rate declined 80 bps year-over-year to reach 10.5% at mid-year 2018. Vacancy was lower in seven of 11 downtown markets; four remained in single digits and below the national downtown average, while Toronto (2.2%) registered the lowest downtown vacancy – not just in Canada, but North America.
  • Aside from Edmonton and Calgary, the nation’s suburban markets expanded by varying degrees with strong results in Montreal and Vancouver. Outpacing downtowns, suburban markets combined for positive 12-month absorption of nearly 3.4 msf – slightly behind the previous 12 months’ pace. Suburban vacancy fell 50 bps during the year to close first-half 2018 at 13.1%. Though double-digit vacancy prevailed in all but two suburban markets, six of 11 suburban markets recorded lower vacancy levels year-over-year – with Winnipeg being the tightest (5.5%).
  • New office completions slowed to 3.6 msf delivered in the 12 months ending at mid-year 2018, down from nearly 10 msf in the previous 12-month period – aggravating the shortage of available space, especially in Vancouver’s and Toronto’s downtown markets. In a change from the prior period, suburban completions (led by TorontoVancouverand Montreal) overtook downtown completions, while Torontorecorded the most deliveries overall.
  • Trying to keep pace with demand, developers had more than 15 msf under construction (52% preleased, 3% of existing inventory) at mid-year 2018 as downtown construction outstripped the suburbs by a four-to-one margin. Toronto had the most overall (8.5 msf) and downtown (7.2 msf) office space under construction in Canada and was in good company globally with cities such as LondonMexico CityWashington, DC and New York.
  • Weighed down primarily by Calgary and, to a lesser degree, Ottawa, average class A gross rents softened collectively year-over-year. The downtown average was down $1.97 per square foot (psf) to $38.83psf, and the suburban dipped $0.43 psf to $31.86 psf. Similar to one year prior, Vancouver boasted the highest downtown class A gross rent at $59 psf and Regina edged out Vancouver for the highest suburban class A gross rent at $40 psf.

 

Source: MarketsInsider

The real estate market is one of the most in-tune economic barometers; its transactions add up to nearly 15 percent of GPD.

As globalization and digitization continue to disrupt established labor and business patterns, housing needs and investment opportunities evolve as well. In certain go-to metro areas like Silicon Valley or Dallas Fort Worth, the workforce struggles with a housing impasse. Historic luxury property magnets like New York or Los Angeles are seeing a heated bidding war between domestic and international buyers, competing for investment.

While regional hubs benefit from available housing to attract talent, there is a growing body of evidence to suggest a direct correlation between rising housing costs and stagnating job rates. That’s a worrisome prospect. In better news, millennials are finally beginning to transition from renting to buying,rejuvenating upscale home sales. But that still raises a few questions, like is 2018 gearing up to be a good year to invest in real estate? If so, where should one look? What incongruities should buyers watch out for?

To navigate a market fraught with mixed messages, the Observer turned to Justin Fichelson, luxury real estate advisor and TV personality on Bravo’s Million Dollar Listing San Francisco, who’s built a thriving business on referrals and exclusive repeat clients.

With markets rallying and prices rising, is it a good time to buy?

Absolutely! The real estate markets in the major urban centers in the United States have increased dramatically; $300K in the mid-1980s in San Francisco could get you a house that’s worth over $5 million today. Long-term, real estate will only go up if you buy wisely in resilient markets connected to innovation-driven industries. For example, the West Village in NYC saw townhouse values soar 150 times, within one generation. If you think ahead, strategic real estate purchasing is key to peace of mind for you and your family. If we map the economy dynamics now, Austin, Texas continues to grow as does Charlotte, North Carolina and many towns around the Bay Area including Vallejo, Walnut Creek and Petaluma.

How will price hikes affect real estate markets in 2018?

The phenomenon of being priced out of a neighborhood is real, both for older longtime residents and people starting their professional lives in a new place. Look for areas where young people are moving next. For example, San Francisco with its strict zoning laws has a highly coveted and extremely limited stock. As a result, people are moving to outlying areas within strong transportation networks which are being developed to accommodate such expansion. Places like Vallejo and Richmond are attractive for those looking to flip a property. Of course, there are always safe bets in historic neighborhoods like Pacific Heights or SoHo.

Is there a difference between clients based in New York versus San Francisco?

Bay Area clients are mostly in tech-related industries, while NYC customers come from a far more diverse array of industries like finance, entertainment and fashion; they often originate from abroad, which makes sense. The American market is one of the most resilient due to being supported by perhaps the most diverse economy in the world. People are still looking to live the American dream! NYC clients also tend to have a more sophisticated eye, when it comes to the architecture and design of high-end new development projects.

So, what does a million dollars buy in the USA?

That depends on where you’re looking to explore. A million in San Francisco is a good one-bedroom or a mediocre two-bedroom apartment. In NYC, that may be a one-bedroom in more accessible areas or a shoebox in the hot spots. In Miami, that’s a spacious two-bedroom or a decent home away from the beach. In LA, a million-dollar property can range from a small single-family home to a tiny plot of dirt in a commercially lucrative area. In most urban places, the pricing varies dramatically, depending on the neighborhood.

What questions should prospective buyers ask themselves?

What are you trying to achieve with this purchase? Is it a family home or something convenient for a couple years with the goal of getting a larger space later? Realistically, how much are you comfortable spending and how will that alter your lifestyle? Then, think about who you are going to work with to accomplish this. For example, a home in the trendy Cow Hollow area of San Francisco sold for a million over its asking price the day before it was to be brought on the market…the West Coast is gaining popularity as an international home-buying destination, so buyer competition is real. It’s all about knowing the right local experts and building a relationship with an agent you trust.

If you were to retire now, where would you live and what would you do?

I’d split my time between San Francisco, NYC and London. I’m a San Francisco native, NYC is the center of the world, full stop, meanwhile, London has the perfect combination of urban beauty, world history and the geographic convenience of getting anywhere in Europe within a few hours. I’d probably increase my involvement with charitable causes. I am a founding member of the Exploratorium Lab which raises money for the Exploratorium, one of the world’s premier interactive science museums. I believe that education, ultimately, is the key to success in any undertaking—including buying a home.

 

Source: Observer