Canada & U.S. Real Estate Forecast 2014

2013 Annual Review

Avison Young 2014 Forecast
Commercial Real Estate - Canada & U.S.
Partnership. Performance.

Contents
Message from the CEO

3

Message from the President, U.S. Operations

5

Message from the Managing Directors

6

Property Management, Mortgage Services

7

Canada Overview & Forecast

8

U.S. Overview & Forecast

10

Canada
Calgary
Edmonton
Lethbridge
Montreal
Ottawa
Quebec City
Regina
Toronto
Toronto West / Mississauga
Vancouver
Winnipeg

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13
14
15
16
17
18
19
20
21
22

United States
Atlanta
Boston
Charleston
Chicago
Columbus
Dallas
Denver
Detroit
Houston
Las Vegas
Long Island
Los Angeles
New Jersey
New York
Orange County
Philadelphia
Pittsburgh
Raleigh-Durham
Reno
San Diego County
San Francisco
San Mateo
South Florida
Tampa
Washington, DC

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27
28
29
30
31
32
33
34
35
36
37
38
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40
41
42
43
44
45
46
47

About Avison Young

48

Our Contacts

49

Avison Young Research

50

North American real estate in 2014: Higher interest rates,
Canadian stability and the U.S. recovery moves forward

O

ver the past few years, Avison Young has been advising
its clients to invest in Canada for stability, seek higher
return opportunities in the U.S., and plan for higher interest
rates as the North American financial markets pick up steam
and fiscal stimulus is removed. The last point was the most
important, as too many investors were fixated on quantitative
easing as a paradigm shift and a free-money right versus
an opportunity. The 15-year decline in interest rates and
related cap-rate compression that was the driver of returns
had to come to an end at some point. Once global financial
markets start to recover, employment will tick up and capital
investment will be around the corner. The great news is this:
Although delayed by a year due to political gridlock, the
return to normal operating conditions and the reduction of
monetary easing due to tapering are the catalysts necessary
to unlock the capital that has been building up on the balance
sheets of the investor and the occupier. Therefore, conditions
look solid for a return to the “real economy” in 2014.
For the past five years, real estate velocity has fallen from
a peak to a very low trough, and made its way back up in
markets and segments where investors believe there is
liquidity. Canada recovered and reached peak volumes and
pricing in the last two years. The U.S. is still behind on velocity,
but has returned to pre-crash pricing in certain markets. Zerointerest-rate and mortgage-buying policies emanating from
central banks generated meaningful liquidity that resulted
in higher returns to our industry and created a powerful
alternative investment bias towards real estate.
There are many positives and negatives associated with these
policies. Real estate again became a favoured asset class
and was somehow, if not shockingly, rediscovered as a core
holding. Real estate has always been an essential investment
and has provided diversification and yield for owners and
investors. On the negative side, “free money” has been the
driving force and fundamental investment management has
been overshadowed. This situation has led to speculation that
a pricing bubble is present, particularly for trophy assets in
gateway markets where pricing has reached unprecedented
levels. While it is true that interest-rate policies have boosted
returns significantly, pricing is stable as the voracious

appetites of the REITs are being
replaced by pension funds
and institutions, which have
significant discretionary capital
and use lower levels of debt
when making acquisitions.
What is strategically different today is the borrowed time our
industry is living on as we continue to trade in a historically
low interest-rate environment. As we often say at Avison
Young, “most people know what they know, but they don’t
know what they don’t know.” Strategy does matter, and
Avison Young has taken the opportunity to communicate
as frequently as possible with our clients to prepare them
for an inevitable change, even if it is unpopular to do so,
or it appears too distant for the decision-maker. Despite an
industry populated with very experienced investors, we have
turned a blind eye to the fact that this cycle is supported by
government monetary policy. It will taper and then end in
the near-to-mid term, and investment strategies will return to
fundamental real estate investing. Although not anticipated,
any cap-rate expansion or re-pricing would create an
opportunity for motivated investors (who have been on the
sidelines) to step in and acquire at more attractive values.
It does appear that we will have a far better financial
environment and marketplace to work in throughout 2014.
At the outset of 2013, most economists and pundits called for
significant improvements in the U.S. economy and real estate
markets. However, they missed the fact that payroll taxes had
just increased and the unknowns created by the Affordable
Healthcare Act, sequestration and debt-ceiling fights would
create enough uncertainty for decision-makers to keep their
fingers firmly on the pause button. As previously stated, all of
those factors were aggravated by a 15-year decline in interest
rates that was fuelled by excess liquidity and then interrupted
in May 2013 by the heightened risk of tapering. Now looking
back, it is no surprise that promising prognostications of
significantly improved market conditions in 2013 did not
become a reality. Although some improvements occurred in
2013, they were unspectacular at best.

3

Message from the CEO continued...
For 2014, we believe the negatives now become positives.
Tapering will occur during the first quarter of 2014, interest
rates will rise further and real estate debt will become
more expensive. It is important to note that this is now
expected and should not shock the system. For Canada,
solid leadership at the national level has positioned the
country for a potential budget surplus in 2015/2016,
which in and of itself could be inflationary. Yes, pricing
is challenging and feels a little “toppy,” but quality assets
with great covenants are in demand, and there is ample
capital willing to acquire long-term holdings.
The U.S. has not achieved the same stability and premium
pricing, but has continued to attract core and opportunistic
capital. Canada alone, as the No. 1 foreign investor in United
States real estate, put more than $9 billion to work in 2013.
Despite the continuation of political disruptions that
undermine significant progress, Washington DC appears to
be finding some common ground; and with the Democrats
and Republicans agreeing to a compromise budget, many
of the unknowns will be eliminated and the markets will
have a chance to grow. Investment and spending demand,
coupled with less angst from Obamacare and government
infighting, will create a positive environment for investing
– and, more importantly, growth and investment by
occupiers.
If we give users and occupiers of real estate a clearer,
stronger economy in which to grow, and investors a
stable underwriting environment that limits surprises and
allows for well-defined investment strategies founded in
fundamental real estate investing, we could be celebrating
a very happy new year in 2014.
From a global perspective, despite concerns over bubble
pricing for trophy assets in gateway markets, troubled
assets remain out of favour, and much of the debt overhang
from the last cycle has yet to be resolved, particularly in
Europe. Attractive opportunities will abound for investors
willing to move off prime assets toward secondary cities
and strategies, or out of the risk curve to address assets
still in need of capital and intelligent repositioning.
4


Finally, as is the case throughout this forecast, change is
inevitable and should be considered in near-term planning
as global investment flows change our investment theses
and best practices change our behaviour. For example,
user reconfiguration and technology-driven requirements
will continue to drive demand into new and updated
facilities. Expect to see retailers leasing more industrial
space to handle omni-channel distribution, and office
users paying up to access contemporary layouts, systems
and energy efficiency. Medical office and data centres may
be specialty sectors most directly benefiting from this
trend.
At Avison Young, we would like to thank our clients,
our people and our collaborative partners who have
made our growth possible. Five years ago, Avison Young
comprised 290 people in 11 Canadian offices, and now
our Canadian-based company operates out of 53 North
American and two European offices and boasts more
than 1,500 professionals. Our strategy is clear: Align
ourselves with the goals of our clients and our people,
and use a different, Principal-led client service structure to
exceed expectations. When we surround our clients with
collaborative experts and focus on long-term solutions,
we meet our clients’ objectives and make our leaders
accountable operationally, reputationally and financially
to our clients’ success.
Sincerely,

Mark E. Rose
Chairman and CEO
Avison Young

Message from the
President, U. S. Operations
Executing our growth strategy and adding strategic
service capabilities in 2014

O

ur growth in the U.S. continued at a rapid pace in 2013. We
opened in new markets including Philadelphia, Charlotte,
Tampa, Long Island, San Diego, Silicon Valley and Sacramento.
Additionally, we added significantly to existing operations in
such markets as New York, Washington DC, Los Angeles, Dallas,
Boston and Atlanta. We began 2013 with approximately 550
employees in the U.S., located in 21 U.S. markets, and ended
2013 with more than 1,000 people in 28 U.S. markets. The
depth of our resources continues to expand and, while we
have a way to go to have our business matrix residing in all of
our markets, we are rapidly building best-in-class operations
throughout the U.S.
As in the past, our growth has been accomplished through
a combination of strategic hiring as well as through mergers
and acquisitions. In 2013, we completed M&A transactions
in Dallas, Los Angeles, Washington DC, Florida, Houston and
South Carolina. We hired high-quality professionals in virtually
every Avison Young office. We have been very fortunate to
continue to find individuals and companies that are completely
collaborative and collegial, and driven to provide excellent
solutions for our clients. Additionally, our growth continues
to be executed within the boundaries of very conservative
financial guidelines, maintaining our strong balance sheet and
partnership structure.
I commented a year ago that we were moving into 2013
with a continued wariness of the market conditions, yet with
a belief that our markets were generally in a slow recovery
mode. Even with the vacillations in market conditions caused
by the sequester and national budget uncertainties, coupled
with state and local financial stresses, the real estate markets
continue to provide investors with a reasonable risk/return
investment alternative and, thus, continue to see significant
capital seeking investment in most major regions and across
all property types. Labor market growth is still far from robust,
yet there are monthly gains in employment that, to a small
degree, are driving incremental absorption. Sequestration,
in particular, has had a dampening effect in Washington,
DC where leasing has become short-term focused and
government-related occupants are reluctant to commit to
expansion.

However, in my 30-plus years in
real estate, Washington, DC has
weathered many political and
economic storms, and I’m quite
convinced that this cloudiness,
too, shall pass. New York, the
other market where activity levels are typically high and values
increasing, also took a slight pause as the financial services
sector reacted to the fiscal uncertainties by restraining growth.
Generally, corporations are still sitting on significant liquidity
which, we feel, will be released for investment once the
government puts some firm rules in place on taxes, spending,
entitlements and healthcare.
Let’s not kid ourselves though. The U.S. commercial real estate
market is still dependent, to some degree, on the continued
historically low cost of borrowing. Both investors and occupiers
are benefitting from this debt market and should see these
conditions persist at least into the first half of 2014. The single
biggest risk to a short-term value correction in real estate
would be a 100- to 200-basis-point increase in borrowing rates.
However, there are a number of less debt-reliant investors
who will fill part of any void created by this inevitable upward
movement in borrowing costs. We are advising our investor
clients to borrow over longer terms and lock in favorable
rates if possible, assuming the corresponding investments
will support such matching of cash flows. We continue to see
opportunities in high-quality assets in second-tier markets,
as the returns are still 100 to 200 basis points above those
for similar properties in the top six or seven (largely coastal)
markets.
I hope that everyone has a very profitable and successful 2014.
Sincerely,

Earl Webb
President, U.S. Operations
Avison Young


5

Message from the
Managing Directors
Experience shows growth plan works

A

s Managing Directors in 2013, we once again focused on
our clients’ needs and delivered another strong period
of growth in Avison Young’s history as our firm successfully
executed the latest phase of its aggressive North American
expansion program.
As 2014 begins, we are excited about our continued systematic
growth plan as it will build on an already robust Avison Young
platform from which to serve our rapidly growing client base.
We look forward to the completion of several more strategic
acquisitions and opportunistic recruiting efforts that have
been set in motion for 2014. In all of the markets that we serve,
our differentiated, client-service model and innovative best
practices further strengthen Avison Young’s unique, Principalled collaborative culture.
In both Canada and the U.S., our motivation to serve clients
has never been stronger and we are planning for an American
economic recovery in 2014. The financial setbacks of 2013
caused by the impacts of the Affordable Care Act and the
federal government’s sequestration efforts will be replaced
with more certainty and normal operating conditions.
This stability will impact interest rates and real estate debt
negatively in the short term, but ultimately lead to growth.
There is just too much capital available and owners and
occupiers are motivated to put it to work.
Despite a long year of federal indecision and a lurching U.S.
economy that raised questions about the stability of the
post-recession recovery, we welcomed eight new Managing
Directors in the U.S. in 2013. As we made more inroads in the
U.S., our well-established Canadian offices continued to grow
through Canada’s strong market fundamentals. Overall, we
recruited senior real estate professionals in most Avison Young
markets while producing numerous big wins in the form of
large leases, management assignments and sales transactions
for our clients. In 2014, we will further expand our business
service lines, including project and property management, tax
assessment, mortgage brokerage and appraisal, offering more
to our growing client roster – and thus making us even more
accountable to our clients’ overall success.
Staff training remains a centre of focus with initiatives such
as Avison Young University and our “Young Guns” training
programs across the company. We continue to alter the industry
norm by differentiating our service structure through internal
Affinity Groups (which comprise Avison Young professionals
specializing in specific service disciplines) as communication

6


mechanisms to the company as a whole. Affinity Groups breed
collaborative environments at Avison Young, and eliminate the
unnatural tensions inherent in antiquated silo structures. We
also embrace sustainability as part of our daily operations. In
2013, we engaged our professionals to come together across
all business lines and from across North America to form our
Sustainability Affinity Group. We will remain committed to
environmental, social and economic sustainability while
continuing to expand in the U.S., Europe, Latin America and
Asia markets in the short and long terms.
Avison Young also increased its commitment to corporate
social responsibility in the past year. Each of our offices is
involved in a variety of events throughout the year and, in 2013,
we created a philanthropy committee comprising volunteer
Principals and employees from across Canada and the U.S. We
believe we can share our efforts with our clients and learn from
them the optimum way to support the causes that can have a
material impact on a global stage. We believe that the most
satisfying part of success, and one of the reasons we all work
so hard together to grow Avison Young, is the ability to give
back with conviction.
On behalf of the Managing Directors, we offer a collective
thank-you to our clients, who recognize that the Avison
Young culture is different, that the open-source and best-inclass platform places the client first while encouraging a team
approach on every level. We wish you a prosperous new year
and look forward to generating more growth opportunities for
your business in 2014 and beyond.
Sincerely,
The Managing Directors
Avison Young
James Becker | Reggie Bell | Laurent Benarrous | Dan Carlo
Michael Church | Christopher Cooper | Steve Dils | Martin Dockrill
Mark Evanoff | David Fahey | Mark Fieder | Chris Fraser
Jeffrey Heller | Richard Jankowski | Michael Keenan | Randy Keller
Richard Kimball | George Kingsley | Joseph Kupiec | Ken Lane
Greg Langston | John Linderman | Keith Lipton | Kenzie MacDonald
Michael McKiernan | Tim McShea | Doug Mereska | Arthur Mirante
Len Mongeon | Bruce Neel | Scott Pickett | John Pinjuv | Ray Robinson
John Ross | Pike Rowley | Jonathan Satter | Wes Schollenberg
Ted Simpson | Nick Slonek | Rand Stephens | Ted Stratigos
Todd Throndson | Jeremy Willits | Clay Witherspoon | Alec Wynne

Property Management

T

he “Green Initiatives” management team broadened its
focus in 2013 from office buildings to encompassing
all real estate asset classes. For a property manager today,
sustainability is an important part of his/her buildingoperations strategy. Not only does the strategy require
the ongoing training of staff in new building system
technologies, energy consumption, and waste and cleaning
management, the strategy needs to involve engaging
tenants in resource conservation. Many landlords are
turning to social media to engage with tenants and to gain
feedback on their properties, while utilizing the connection
to educate tenants about their shared responsibilities.
Green initiatives will continue to increase a property’s
leaseability, create long-term operational cost reductions,
and portray the owner as a good corporate citizen.

competitiveness with tangible improvements to common
areas, HVAC systems, lighting, signage and exterior
landscaping. Increased consideration will be given to
such green initiatives as bicycle storage and shower areas,
Wi-Fi systems, and even electric vehicle-charging stations.
Office-building lobbies will gradually transform from their
historically staid appearance to interactive spaces with
media walls and functional furniture.
Value for money will remain the economic driver in 2014
as managers seek creative and cost-effective approaches
to tenant retention, operational efficiencies and fiscal
restraint.

Peter Leroux

Property owners will look to continue to capitalize on
the improving real estate market in 2014. Those with
longer-term hold horizons will improve their buildings’

Executive VP, Managing Director
Real Estate Management Services

Mortgage Services

I

n the first half of 2013, economic growth appeared,
to some, to be gaining momentum in the U.S. By midyear, what should have been a predictable message was
delivered, preparing the markets for a return to the “new
normal”: removal of federal aid was to start. This situation
caused hysteria and U.S. Treasury and Government of
Canada bonds nearly doubled in yield. Almost immediately,
the Federal Reserve backpedaled, and bond prices settled
back slightly. There was little reaction on the North
American lending front, however.
Using history to determine what 2014 may look like will not
help, as we are in completely uncharted territory. Although
the Fed can influence certain interest rates, there are many
that remain at the will of the free market. Perceived or real,
a moderate rise in U.S. interest rates should not affect the
supply of debt capital. In Canada, the story may be a little
different. We could see a more shallow supply of longerterm funds of 10 years and beyond. These have been
limited in Canada in the past, and rising interest rates may

cause lenders to be more strategic with deployment and
withhold these funds for expected higher returns in the
near term.
The status quo in the debt capital markets will likely be
maintained for much of 2014 – directly tied to the slow
recovery of the North American economies.

Norman Arychuk

Mortgage Broker
Debt Capital Markets Group


7

Guarded optimism as market carries mixed outlook into 2014
Canada’s commercial real estate markets saw some changes in 2013
that could pose challenges in the year ahead. However, ongoing
development is an encouraging sign that the markets remain strong,
offering opportunities for occupiers, owners and investors.
The single-digit vacancy rates, robust demand and stable-to-rising
rental rates seen in many office markets may soon come under
pressure. In 2013, national average vacancy rose to slightly above 8%.
Leasing velocity tapered following a strong start and a burgeoning
sublet market emerged, especially in Toronto and Calgary. Tepid
demand, along with nearly 27 million square feet (msf) scheduled for
completion by 2017, will prompt modestly rising vacancy in 2014.
Corporate rightsizing and space-planning efficiency, both in existing
stock and new developments, are transforming office market
dynamics. As construction and consolidations continue, sublet
space will remain prominent. Buildings with impending vacancy will
experience downward pressure on rental rates. However, top-tier, lessexposed assets can expect rental rates to hold firm in 2014. Tenants will
continue to weigh new developments’ efficiencies against renewing
or expanding existing premises, with competition adding emphasis
to the landlord-tenant relationship. Meanwhile, LEED buildings have
narrowed the downtown/suburban cost gap, enticing suburban
tenants to consider downtown options.
Bricks-and-mortar retailers are focusing on staying relevant and
competitive against online options. Customers increasingly examine
products in stores but buy them online, and retailers are adapting
with new omni-channel strategies. Meanwhile, big-box retailers are
experimenting with small-format urban concepts.
Major retailers, including Staples, Best Buy and Sears, slashed jobs
and reduced footprints. Sears’ move provided domestic and foreign
retailers (including Nordstrom and Simon’s) opportunities for coveted
premier mall space. Landlords are investing in regional malls to
accommodate incoming tenants and attract new entrants to the
Canadian landscape. U.S. retailers should note the lessons being
learned by Target: Canadians are less likely than Americans to buy
goods in different categories in one store, and consumers expect the
same low U.S. prices.
Loblaw Companies and Canadian Tire monetized real estate holdings,
forming Choice Properties and CT REIT, respectively. Hudson’s
Bay Co. acquired Saks, and it will be interesting to see whether the
department-store chain will follow suit, given current REIT valuations.
Canada’s industrial market remained active in 2013 as vacancy
rose modestly in some markets and declined in others. The nation’s

8


1.8-billion-square-foot (bsf) industrial inventory posted 4.6% vacancy
– 200 basis points (bps) below 2009’s recession peak. Supply shortages
have encouraged build-to-suit and speculative development, with
more than 8 msf under construction, which will increase vacancy to
just below 5% in 2014. Demand is coming from domestic and U.S.
occupiers, especially major retailers expanding distribution networks.
The need for high-clear height, large-bay facilities will push rents
higher, resulting in challenges for less desirable existing product.
While the manufacturing sector re-tools, anticipating demand
from recovering U.S. consumers, other trends are emerging. Threedimensional printing, though not applicable to all industries, allows
mass customization of finished products. Implications for real estate
include smaller production footprints, perhaps bringing business,
production and distribution under one roof. The new omni-channel
strategy, increasingly being deployed by retailers, is blending retail,
warehouse/distribution and logistics. While e-commerce may result
in the closure or downsizing of more retail stores as bricks-and-mortar
and online retail converge, additional industrial space will be needed
for order fulfillment and merchandise-return points.
Interest rates began rising in spring 2013 and the impact became
more evident as the year progressed, with lower investment volumes
and a change in pricing trajectory. Slightly more than $20 billion worth
of assets traded through the first three quarters of 2013, and when the
final tally is made, 2012’s record $28 billion may be out of reach.
REITs, the most active buyers during the past four years, driving overall
investment volumes and pricing to record levels, are now faced with
flat or falling unit prices. Acquisition fundamentals have changed as
all investors (particularly REITs) confront a more challenging capital
environment and buying becomes more discriminating. With capital
more costly, investors will become more active asset managers to
enhance returns. As some REITs scale back acquisitions, others may cull
assets. Competition among pension funds/advisors, life companies
and emerging private equity players will intensify, while high pricing
leads more buyers towards development. Top-tier, well-leased assets
will hold their pricing and remain highly contested, while secondary
and/or challenged assets see upward cap rate adjustment. Despite
the prospect of higher interest rates, capital flows into commercial
real estate will remain stable in the year ahead.

Bill Argeropoulos

Vice-President &
Director of Research, Canada


2012

2013
2013

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Canada - Overall Office Vacancy Rate Comparison

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Vacancy Rate (%) (%)
Vacancy Rate

Canada - Overall Office Vacancy Rate Comparison
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18%
20%
16%
18%
14%
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Canada - Overall Industrial Vacancy Rate Comparison

Vacancy Rate (%) (%)
Vacancy Rate

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Canada - Overall Industrial Vacancy Rate Comparison

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Canada - Area Under Construction
Canada - Area Under Construction

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Industrial
Industrial


9

U.S. commercial sectors demonstrate improved conditions in 2013
The U.S. commercial real estate markets had a mixed performance in
2013, though most moved further towards recovery and there were
a handful of standout markets. Vacancy rates for the office, industrial
and retail sectors declined year-over-year, and unemployment
continued its slow downward trajectory. In late 2013, monthly job
growth figures were encouraging; however, businesses continued to
be cautious about capital expenditures in the face of ongoing political
and budget distractions. With construction levels suppressed, an
aging U.S. inventory saw a further emphasis on upgrades, retrofits and
modernization. That trend will persist in 2014. As well, forecasted GDP
growth bodes well for positive absorption of real estate this year.
Office markets covered by Avison Young tightened in 2013 and
concluded the year with an average vacancy rate of 13.9%. All markets,
except for Houston, New York, San Mateo and Washington, DC, recorded
a drop in vacancy, and three (Columbus, Pittsburgh and San Francisco)
reported vacancy in the single digits. That trend is forecast to continue
with two more cities (Denver and San Mateo, CA) also projecting singledigit vacancy by the end of 2014.
Many markets reported that tenant tours accelerated in 2013, though
business conditions spurred some short-term renewals. Going forward,
long-term renewals may be less likely as occupiers reconfigure and
rethink space use to obtain greater efficiencies and accommodate
evolving business practices.
Overall, construction and deliveries remained lower than the historical
average; however, the volume of construction increased by nearly
50% compared with 2012. Three markets have more than 5 msf apiece
under construction: Houston (11.8 msf), Washington, DC (7.5 msf) and
New York (6.3 msf).
The U.S. retail market saw vacancy tighten in all segments during 2013.
Importantly, absorption outpaced new deliveries for five consecutive
quarters, starting mid-year 2012, and nearly all retail segments were
posting vacancy rates in the mid-single digits last year. An exception
was shopping centers, but this asset class may get a boost in 2014 from
the growth of walk-in clinics and on-demand healthcare centers.
The combination of lower vacancy and strong absorption should result
in upward pressure on rental rates this year. One example of improved
retail conditions is The Shops at Summerlin project in Las Vegas.
Development of the 1.6-msf mixed-use mall stalled in 2008, but is now
underway for delivery in 2014. Urban concept stores, small inner-city
versions of big-box retail outlets, will remain an important trend in 2014
as consumers and businesses continue to shift from suburban locations
to core live/work/play communities that are served by public transit.

Industrial markets in cities Avison Young services totaled 6.5 bsf and
recorded a decrease in the vacancy rate to 9% from 9.9% in 2013. As
in the case of the office sector, improved fundamentals and increased
demand have spurred more development in the industrial market.
As well, occupiers are increasingly seeking buildings with the new
technologies needed for inventory management and logistics and that
is also a contributing factor. U.S. industrial projects under construction
at year-end 2013 totaled 43.2 msf and increased by a staggering 97%
compared with year-end 2012.
Avison Young industrial markets that demonstrated the most
improvement during 2013 included Charleston, Denver, Detroit and
Reno; however, the lowest vacancy rates at year-end were in San
Francisco, Long Island, NY, Houston and San Mateo.
Even with mixed market conditions, purchasers sought assets of all
product types and are becoming more comfortable with what is
described as the “new normal” in the post-recession era, referring
to improved conditions that, in some cases, are satisfactory but not
on par with pre-recession levels. Investors looked beyond the major
coastal markets in 2013 and expanded their focus to include quality
assets in secondary markets. The threat of rising interest rates has
not had an impact on the sales market thus far. Through November
2013, transaction volume in the U.S. had reached $305 billion – 26%
ahead of the same period in 2012. Washington, DC, a perennial top
market targeted by investors, has lost some favor (as demonstrated
by several quarters of declining sales volume), but sales rebounded in
the third quarter of 2013. Its position as the U.S. capital, coupled with
its low unemployment rate, will support Washington, DC’s ongoing
desirability to investors. Other top markets such as Manhattan, San
Francisco and Texas continue to garner investor interest that will be
sustained through 2014.
Canada led all other countries, by a significant margin, in capital
investment in the U.S. in 2013. Canadian purchases totaled $9.9 billion
in 2013, surpassing the total of $9.2 billion in 2012. Manhattan, Los
Angeles, Dallas and Chicago were the top destination markets.
Political uncertainty early in the year could lead to a slow start for the
U.S. real estate market in 2014; however, improvement will accelerate
in the second half.
Look for strengthening fundamentals in select markets to spur office,
retail and industrial development activity.

Margaret Donkerbrook
Vice-President,
U.S. Research

10


U.S. - Overall Office Vacancy Rate Comparison
25%

Vacancy Rate (%)

20%
15%
10%
5%
0%

2012

2013

2014F

U.S. - Overall Industrial Vacancy Rate Comparison
20%

Vacancy Rate (%)

15%

10%

5%

0%

2012

2013

2014F

U.S. - Area Under Construction

14
12
10
8
6
4
2
0

Office

Industrial


11

Calgary
The City of Calgary Water Centre

Strong economic performance bolsters retail and investment markets

T

he economic aftermath of the June floods in Alberta was
expected to be grim, but recent outlooks suggest the opposite.
RBC Economics reported in September 2013 that the province’s
resilience and post-flood spending are expected to more than
make up for the short-term challenges induced by the disaster.
With the announcement of the proposed new Energy East
pipeline, waning concerns about the “bitumen bubble,” real GDP
growth for the province projected at 4.1% in 2014, and pricing for
Western Canada Select crude oil averaging above $75 per barrel in
2013, the optimistic outlook within Alberta’s energy sector should
translate into continued demand for quality space by major oil
firms. Building booms in the Downtown, Beltline and Suburban
South areas of Calgary will see 21 new buildings erected, adding
more than 7 msf to the city’s office inventory.

Office
Overall vacancy within Calgary’s office leasing market rose in 2013,
reaching 6.6% in the third quarter. Downtown vacancy surpassed
5% after seven consecutive quarters of sub-5% levels. Class AA
space, however, remains extremely limited as appetite for the
top-quality product in the Downtown remains high, spurring a
surge in new office development. Eight projects in total are either
confirmed or under construction and represent 5.2 msf of leasable
office space, of which 61% is preleased.

Retail
A strong local economy, high consumer spending power, and
aggressive U.S. retailer expansions by Target and Nordstrom drove
retail market performance upward in 2013. TD Economics has
forecasted that Alberta will lead the country with annual average
retail sales growth of 6.5%. Issues related to Calgary’s urban sprawl,
new municipal guidelines and a growing demand for complete
communities - where people can live, work, shop and play - are
changing the face of urban and suburban retail. Developers are
now giving consideration to high-density, mixed-use projects that
include street-level retail with underground parking and office
and residential units above.

Industrial
Overall industrial vacancy climbed to 5.5% at the end of the
third quarter of 2013, up from 4.9% at the conclusion of 2012.
Developer confidence has been high in Calgary’s industrial
market. The Northeast market, in particular, has seen the highest
amount of construction activity, with approximately 3.5 msf of

12


Calgary Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

new construction in 2013. Vacancy is expected to rise slightly in
2014 with a number of new buildings either being proposed or
awaiting construction. As a result, tenants will have several new
options to consider.

Investment
The Calgary market witnessed a robust year on the investment sales
front, with land showing a significant increase as a percentage of
overall investment activity, and the sale of the Jacobs Engineering
building in Quarry Park setting a new historic low in terms of
suburban office capitalization rates in Alberta at 5.2%.
Several major institutional players made large investments in
development plays to generate yield in the absence of sufficient
existing commercial asset transactions. Several new masterplanned rental communities have been proposed for the edge
of Calgary’s downtown core after a decades-long trend of multiresidential condominium conversion and development.
REITs are likely to become active again in 2014 following the
decline in unit values and the rising cost of equity that led to the
investment vehicle’s exit from the buying scene for much of 2013.
That absence created a unique window of opportunity for private
investors, pension funds and other institutional players, many
of which are aggressively seeking yield-generating real estate
opportunities with exposure to Alberta’s thriving economy.

Edmonton
Kelly Ramsey Building

Shifts expected in all sectors

T

he Edmonton market performed as expected during 2013, in
lockstep with predictions of moderate, but not extraordinary,
growth and stable economic indicators. As with the rest of the
province, Edmonton saw GDP growth of 3.5%, falling vacancy in
all sectors of the commercial real estate market, and an impressive
level of new construction.
As the majority of the Edmonton market is intrinsically tied to the
health of the energy sector, the region is expected to fare better
than the national average in 2014 as oil-price indicators remain
strong. High immigration and growth rates that significantly
outstrip the rest of the country indicate another robust year for
Edmonton’s commercial real estate market. As vacancy rates reach
critical lows, the region is primed for respectable expansion in all
sectors.

Edmonton Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

Office

Industrial

Edmonton’s office market had a strong year of consistent positive
absorption in 2013. By the close of the third quarter, overall vacancy
was down to 7.6%, compared with 8.8% one year previous. Lease
rates remained relatively stable during the same period; however,
free rent as a tenant inducement has become scarce.

Industrial vacancy in the Capital Region continues to inch
downwards, reaching 3.3% overall with a total inventory in excess
of 117 msf. Although rental rates held steady in 2013, the amount
of available land within the city has steadily dropped and has made
the outlying areas significantly more attractive for development.
New construction totalled approximately 1.7 msf, the majority of
which is expected to be easily absorbed.

The possibility of up to four new office towers in the downtown
core has raised speculation on the state of the market in 2014. It
remains to be seen what impact each of the four possible towers
will have, although the consensus is that class A and AA rental
rates will drop while vacancy rises. The extent to which this will
happen, however, remains uncertain.

Retail
Albertans continue to enjoy disposable income rates in excess
of 150% of the national average, and 2013 saw this exceptional
spending power brought to bear in the retail market. Overall
vacancy dipped below 2% during the year, indicating an excess of
demand and lack of space.
There are currently 42 significant new retail developments either
under construction or planned for the next two years. The majority
of these are on the outskirts of the city in new neighbourhoods
that have yet to be serviced by a local power centre. As these
developments start coming online, the market is expected to
reach a much healthier vacancy rate, though a significant shift may
yet be two years out.

With the energy sector continuing to lead development and create
substantial positive externalities in Edmonton, 2014 is expected
to be another strong year for the industrial market. Moreover, the
region’s outlying areas can expect to see a more significant share
of growth as the outward trend continues.

Investment
Much like in 2012, the investment market was bottlenecked not
by a lack of willing capital but, rather, by a shortage of available
investment opportunities in 2013. Though prices remained high
across the market, deal velocity was stagnant, particularly in multiresidential properties, where near-record-low vacancy pushed
rental rates and profitability up significantly. While interest rates
remain low, investment properties in Edmonton offer enticing
opportunities. This trend is expected to continue as the Bank of
Canada eyes the possibility of keeping rates low for the foreseeable
future.


13

Lethbridge
Galt Museum

Market outlook remains promising for 2014

T

he Lethbridge commercial real estate market finished the
year strongly once again in 2013. With the city awarding
a major retail and residential development (The Crossings) to
Royop, consumers remaining optimistic about the prospect of
purchasing a home, and investors confident in the Lethbridge
market, growth in all sectors is anticipated in 2014.

Office
Vacancy in office product is expected to be higher than for
regional retail and industrial assets in 2014. This situation is
largely attributed to 30,000 sf of new office space on a large infill
site in downtown Lethbridge, as well as 16,000 sf of additional
new construction slated for 2014.
Abundant availability downtown is giving tenants more options.
Demand is shifting to high-quality professional space. Medical
office users are looking for more opportunities to purchase – both
strata units and freestanding buildings. By the end of 2014, this
trend will translate into a significant increase in office vacancy to
approximately 18%.

Retail
Earlier projections for commercial development in West
Lethbridge were realized with the preleasing and construction of
two new developments, WestGate Centre and SunRidge Corner.
WestGate is approximately 90% leased and construction will be
complete with tenant occupancy in early 2014. SunRidge Corner
will see tenants open for business in 2014 with 70% of the project
leased.
In late 2013, the City of Lethbridge completed a transaction
with Royop Developments for a 65-acre mixed-use project with
approximately 45 acres earmarked for retail development during
the next several years. Construction is set to begin in 2014.
Overall, retail vacancy is sitting around 2% at the start of 2014.

Industrial
Demand in the industrial market was very strong in 2013 with
the manufacturing sector leading the growth in new space and
jobs. Vacancy rose slightly to 2.6% in 2013 with multiple new
developments becoming available. Vacancy is anticipated to rise
further with additional construction planned for 2014. Lease rates
are now steady at $8.50 per square foot (psf ), up from $7.50 psf in
2012, with niche or premium locations as high as $10 psf. Growth
inside the city has been matched by growth in the surrounding
county, as businesses were attracted by improved large-vehicle

14


Lethbridge Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

accessibility and lower land costs and taxes. Overall, the market
is well balanced in terms of sales and leasing, and this trend will
likely continue in 2014.

Investment
The uptick in interest rates in early 2013 led to a pause in
acquisition activity by some buyers. However, confidence
returned, as interest rates are expected to remain relatively
stable through 2014.
Industrial investment continues to be the most active. Small
investors are able to participate, as most sales are valued at less
than $1 million. However, a $6-million transaction is scheduled
to close in early 2014. As in past years, many transactions involve
owner/users. This trend will continue as interest rates remain low
and local industrial users want to own their space. There is limited
retail investment product currently available, but the sector
remains strong with two new developments in West Lethbridge
and one in South Lethbridge.
All new developments are expected to be open for business early
in 2014. Most of the investment activity targeting office product
will be in the strata office market. Current market office lease rates
do not necessarily work for new construction, but low interest
rates are pushing demand from owner/users seeking strata
units. Construction of several small strata office developments is
planned for 2014.
In 2014, Lethbridge assets will continue to offer 8% to 9%
capitalization rates, but properties will be harder to find.

Montreal
Place Ville-Marie

New public administration seen as an encouraging sign

E

conomic activity in the Greater Montreal Area (GMA)
experienced moderate growth in 2013; however, in 2014,
growth prospects look promising with the improvement of global
economic conditions.
The ongoing commission of inquiry on the awarding and
management of public contracts in the construction industry
and the recent elections in both Montreal and Laval suggest an
improvement in municipal government transparency. These recent
changes could result in the end of the gloominess surrounding the
management of public funds and provide an economic boost for
Montreal.

Montreal Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

Office
Nearly 3 msf of office space is currently under construction in
the GMA, 1 msf of which is located in the downtown core. The
most important project in the area is Cadillac Fairview’s new
Deloitte Tower, 70% preleased to Deloitte and the Rio Tinto Group.
Meanwhile, the overall vacancy rate increased to 10.9% in the third
quarter of 2013 from 9.8% in 2012.
The number of leasing transactions decreased slightly in 2013,
but there has been a significant increase in sublease activity in the
market, mainly due to rationalization of space. In this context, the
vacancy rate is expected to increase slightly to 11.9% in 2014.

Retail
Retail activity has increased slightly during the past few years.
Business types have diversified and, consequently, transformed
the retail real estate sector. Conventional shopping centres are
slowly making way for larger regional shopping centres, power
centres and lifestyle shopping centres.
The rest of Canada has seen the arrival of major American bigbox stores and e-commerce, and Montreal is no exception. This
increase in competition has increased retail vacancy and exerted
downward pressure on rental rates. In Mirabel, a suburb north of
Montreal, a 350,000-sf Premium Outlets centre is currently under
construction. Expected to be delivered in 2014, this $150-million
investment will comprise more than 80 stores.

2013

Office

2014F

Industrial

other well-located industrial buildings have been turned into retail
or wholesale stores. The re-industrialization occurring in the United
States could have a favourable impact on the Montreal market in
the years to come, given the city’s proximity to major U.S. markets.

Investment
In 2013, investment property transaction volumes were equivalent
to reported 2012 levels. The most significant transaction was
the acquisition of a 50% interest in Place Ville-Marie by Ivanhoé
Cambridge. Several other noteworthy buildings and real estate
portfolios came to market in 2013 and are expected to find a buyer
in 2014.
The Quebec government has also announced the construction
of a new institutional building at l’Îlot Voyageur, a $246-million
investment comprising 625,000 sf of office space. The building is
expected to be delivered in 2019. Despite some concerns about
an increase in interest rates, transaction volume in 2014 should
be similar to that recorded in the previous two years because of
capital available to pension funds and the number of REITs that
have become prominent players in the market, though acquisition
activity amongst REITs may be slightly muted.

Industrial
Vacancy in the GMA increased to 6.6% in the third quarter of 2013
from 5.4% at the end of 2012. This activity reflected part of a larger
trend which has seen a 1.7-msf decrease in the amount of occupied
industrial inventory since 2010. Once vacant, some of these former
warehouses have been converted into loft-style office space, while

15

Ottawa
Bayshore Shopping Centre

Office market softens as retail market surges

G

iven Ottawa’s position as the Canadian capital, the commercial
real estate market continues to be heavily influenced by federal
government tenancies in the core. Suburban relocation initiatives
and a flight to higher quality and/or energy-efficient buildings
are trends in the continued shift in the Ottawa office market. The
long-awaited construction of the light rail transit (LRT) system has
begun, while development surrounding transit stations was at the
forefront of many conversations throughout 2013 – and is sure to
remain a focus of new development initiatives going forward.

Office
Some uncertainty prevails in the downtown Ottawa office
market. In late 2013, continued downsizing by Public Works and
Government Services Canada (PWGSC), combined with another
anticipated large non-renewal, further added to local market
concerns. In 2014, core vacancy rates will likely escalate and
approach double digits for the first time in many years, creating
a market with significant tenant leverage coming at the expense
of any mid-tier landlords that are slow to react to a changing
marketplace.
Going into the final quarter of 2013, overall office vacancy stood
at 5.8% - with expectations that it will crest to 6% in 2014 - while
availability rose to 8.2%. Much of this increase could be attributed
to the continued rise of core vacancy rates as new construction
projects came to market and absorption levels remained negative
throughout 2013. The late expansion by Internet marketing
company Shopify in 2013, taking 100,000 sf in the core, was the
one bright absorption in 2013.
Meanwhile, on the other side of town, the suburban west market is
holding its collective breath as a major restructuring of BlackBerry
would negatively impact the Kanata North market, while stories
of further job cuts at Alcatel will have implications for the Kanata
market as a whole.

Retail
Ottawa’s retail market remained very active in 2013 with many
new developments coming on stream throughout the year. With
Ottawa remaining a focal point for national retailers, a battle for
positioning has emerged among the city’s major retail centres with expansion and redevelopment plans underway in order to
attract the likes of leading national and international retailers as
they eye expansion into the market.

16


Ottawa Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

In the west end of the city (adjacent to Canadian Tire Centre), a
multitude of new developments have been announced, including
the much-anticipated Tanger Outlet Mall and Bass Pro Shops,
which are sure to increase competition among existing retail
centres. Ottawa has also experienced major growth in the culinary
industry, which is evident by the elevated activity by both local and
national restaurant owners seeking to expand in the area. Looking
forward, historically low vacancy rates and ongoing development
are expected to continue as Ottawa remains one of the top choices
for national retailer expansion programs.

Industrial
Industrial demand remained strong in 2013, leading to a
significant decline in the overall vacancy rate to 1.9% at the end
of 2013 from 2.8% in 2012. Low vacancy rates, coupled with strong
net rental rates, continued to attract the attention of national real
estate investors looking for stable returns. Despite strong appetite,
limited product availability and a shortage of quality development
land have led to cap-rate compression across the city. As a result,
renovating and repurposing older stock will remain a focus of
Ottawa’s industrial market going forward.

Investment
Ottawa capital markets continued to perform well in 2013. The
local investment market saw an increase in owner/user offerings
late in the year, suggesting that those who held real estate as an
investment strategy in recent years decided to take advantage
of the continuing low interest rate environment, a trend that is
expected to continue in 2014.

Quebec City
Place de la Cité, Laurier Boulevard

Business as usual
The Quebec City area assured its potential for economic growth
with the re-election of Mayor Régis Labeaume in the fall of 2013.
The private sector has diversified during the past decade with an
emphasis on innovation and research, creating many high-skilled
jobs. Furthermore, the high concentration of public services
(education, health and government employment) will help
maintain the area’s stable economy and low unemployment rate.
The unemployment rate stood at 5% in the fourth quarter of 2013,
below the Canadian average of 7%.

Office
After adding 1 msf of new office space to inventory in 2011 and
2012, more than 480,000 sf is currently under construction in the
Quebec City region, with 50% preleased. With the construction
of these new office projects, there is a shift in activity from the
downtown core towards the suburban areas of Lebourgneuf and
Laurier Boulevard. This wave of construction will, undoubtedly,
place upward pressure on vacancy rates. At the end of 2013,
the city’s overall vacancy rate was 6.5%; however, in the present
context, a slight increase to 7.2% is expected in 2014.

Retail
Growth in the retail market has been weak during the past few
years. The retail landscape has been transformed with the arrival
of power centres, resulting in a diversification of retail product.
Construction in the retail market was non-existent in 2013 with
no new projects announced. The only activity was the renovation
of three former Zellers stores located in shopping centres that are
now occupied by Target. Consumers continue to be well-served
with more than 1,000 retail outlets dispersed among five regional
shopping centres and four power centres. Faced with increasing
competition from American big-box stores and e-commerce, it is
expected that retailers will attempt to reduce operating costs by
decreasing their square footage and rents.

Quebec City Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

2014F

Office

At the western extremity of the city, the industrial park in the suburb
of St. Augustin de Desmaures is growing, with the availability of
land expected to generate new construction in 2014.

Investment
Several major investment real estate transactions took place in the
Quebec City region in 2013. The main transactions were the sale of
two power centres (Méga Centre Lebourgneuf and RioCan SainteFoy) totalling 983,000 sf for $238 million; the sale of two multiresidential properties (Les Méandres and l’Aristocrate) comprising
417 units for $83.5 million; and the Bois-Fontaine office buildings
with an area of 350,000 sf, which sold for $50 million.
Construction of Quebec City’s new arena, an investment of $400
million, is underway. And Almerys recently announced plans to
construct a 400,000-sf data centre for $34.5 million.

Industrial
The area’s industrial parks are witnessing an abundance of activity.
Land parcels in industrial zones are 95% occupied. The market
is characterized mostly by owner/user properties with a limited
number of leased industrial or storage facilities. Furthermore,
there are few buildings in the market for sale. This situation is
putting upward pressure on rental rates and asset pricing, which
is now equivalent to the construction costs associated with a new
building.


17

Regina
Viterra Building

Saskatchewan’s economy continues to grow

S

askatchewan will continue to be among the top provinces in
growth, and the Conference Board of Canada has predicted the
province has entered a period of prolonged economic prosperity.
This is translating into growth in both major and secondary centres.
The City of Regina had average real GDP growth of 3.7% per year in
the 10-year period from 2003 to 2012, and is expected to surpass
5% in 2013, second in the country behind Saskatoon. This trend is
expected to peak in 2014 before levelling off into 2017, closer to the
predicted national average of 2.5%. These predictions align with
population growth (a five-year annualized average of 2.5%) and
unemployment (a five-year annualized average of 4%) statistics in
Regina and Saskatoon. Collectively, the perfect economic storm is
working to the benefit of the office, industrial and retail markets
in both cities.

Office
Regina’s office market continues to be active, with inventory close
to 7 msf and an overall vacancy rate of 5.2%. An additional 132,600
sf is expected to be added to the market in 2014, indicating that
developers see high demand in both the downtown and suburban
markets. Construction of an 80,000-sf office building at 1827 Albert
Street and a second 40,000-sf suburban office building at Harbour
Landing Business Park were completed in 2013. A three-storey,
20,000-sf medical office building is being constructed adjacent to
the Regina General Hospital, while Harbour Landing Business Park
is underway with its third of four planned buildings.
There are a few sublet options in the downtown fringe area that are
well-suited for a variety of specialty and professional users. A good
variety of downtown, fringe and suburban space is either coming
on stream or being constructed which, along with moderate
absorption, suggests the office market will remain healthy in 2014,
albeit with a slight increase in the overall vacancy rate.

Retail
There was little development activity on the retail front in 2013
due to a lack of available land. The majority of new development
continued to occur in Grasslands on Regina’s west side. As a
result of the limited supply and strong demand, land prices have
increased, and coupled with the lift in construction costs, rental
rates have increased to highs of $25 psf to $30 psf in certain areas
of the city.

18


Regina Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

Renovations at Southland Mall are complete with new tenants
entering the market. Target opened its doors in July 2013,
replacing Zellers. Cabela’s opened a new 50,000-sf building at
Grasslands Shopping Centre, where construction continues as
national retailers prepare to move in. Future tenants will include
Bouclair Home, PetSmart, Party City, GNC, Rogers and Dollarama.

Industrial
Regina’s existing industrial inventory exceeds 17 msf with a vacancy
rate of 3.6%. Morguard Investments Ltd. began construction in
the Global Transportation Hub on its development, the TransLink
Logistics Centre. Coupled with building costs, supply and demand
will always decide the rates, and although vacancy has risen yearover-year in recent times, 2014 will continue to see a shortage in
overall options to meet a variety of tenant demands. Look for rates
to hold steady in the short term and no increase in land prices that
now hover in the $425,000-per-acre range.

Investment
The Regina investment market was fairly dormant in 2013 with
limited transactions occurring, mainly due to a shortage of product
and solid income for current owners. This trend is expected to
continue in 2014.

Toronto
The Globe and Mail Centre

Market pause in 2013 sets up challenges for some sectors in 2014

R

obust during and since the recession, the commercial real estate
markets across the Greater Toronto Area (GTA) showed mixed
results in 2013. Corporate downsizing, consolidations and relocations
into more efficient footprints fuelled a burgeoning sublet market
in the wake of new supply, while interest-rate worries curtailed the
formerly bullish investment market. These factors will challenge the
market in 2014; however, market fundamentals will remain relatively
sound.

Office
Following a strong performance through the downturn, the office
market had less-than-stellar results in 2013. Leasing activity slowed,
demand waned, sublet space spiked, and vacancy increased across
most districts. While rental rates softened at the bottom end of the
space spectrum, they remain firm at the top end with historic highs
achieved in some top-tier towers in the core. Similar conditions
will likely prevail in 2014, as the market braces for another wave of
development (7.8 msf), delivering this year through 2017. With a
landlord-favourable 5.6% vacancy rate, Downtown Toronto will see the
bulk (5.8 msf) of new inventory. Notable construction announcements
in 2013 included Oxford Properties’ Ernst & Young Tower, Menkes
Developments’ 1 York Street and First Gulf’s Globe and Mail Centre.
A steady stream of new supply, especially in Toronto West, countered
any notable absorption, keeping suburban vacancy in double-digit
territory (11.9%). Developers are pursuing and developing sites
near existing or future transportation arteries, hoping to combat
downtown’s appeal by urbanizing the suburbs.

Retail
Sears Canada captured headlines late in 2013 with the announcement
that the leases for five major store locations will be sold back to the
landlord, Cadillac Fairview – with three (Eaton Centre, Sherway
Gardens and Markville Shopping Centre) in the GTA. Meanwhile,
Nordstrom added Yorkdale Shopping Centre to its Canadian expansion
plans. Target’s much-anticipated openings in former Zellers locations
met with mixed results, encountering stumbling blocks, including
consumers’ expectations regarding cross-border pricing parity.
Moving into 2014, Toronto’s retail landscape continues to evolve.
Exclusive Bloor/Yorkville is holding steady on rental rates, while trendy
Liberty Village west of downtown draws interest from retailers, with
several major new lease announcements pending. The overhaul
of Union Station, slated for 2015 completion ahead of the Pan Am
Games, promises approximately 165,000 sf of retail space for the
downtown core and opportunities to capitalize on station passenger

Toronto Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

traffic and the extensive highrise residential and office development
that has reshaped the south core district in recent years.

Industrial
With vacancy below 5%, demand for modern distribution facilities has
led to a surge in development in response to the ongoing needs of
large domestic (Canadian Tire) and multinational (Amazon) retailers.
Despite high development charges, new industrial projects are
especially apparent in Toronto West, where distribution facilities in
the 1- to 1.5-msf range are either underway or imminent. Orlando
Corporation will soon deliver 7825 Winston Churchill Boulevard
(377,000 sf) – the first speculative building offering a 36-foot-clear
ceiling height. Vacancy will rise modestly in 2014 as users focus on
new projects, diminishing absorption for existing buildings.

Investment
The frenzied investment sales activity of recent years appears to be
winding down, largely because of volatile interest rates beginning in
early 2013 that curtailed the purchasing power of the biggest buyers
– the interest-rate-sensitive REITs. 2013 also signalled the end of caprate compression for secondary and/or challenged assets. With the
final tally to come, the $8.2 billion transacted through the first three
quarters of 2013 could leave the market short of the record-setting
$11 billion traded in 2012.
Notable transactions in 2013 included a sizeable portfolio of office and
industrial buildings by GE Canada Real Estate Equity. As REITs become
more discriminating in their acquisitions, competition will intensify
among pension funds/advisors, life companies and emerging privateequity players, keeping buyers and sellers active in 2014.


19

Toronto West (Mississauga)
Mississauga Gateway Centre - Building A

Moderate growth expected in 2014

T

oronto West’s commercial real estate market sent mixed signals
in 2013. While the office market raised concerns with rising
vacancy rates and an expanding sublease market, robust deal
velocity led to upward price movements in the industrial market.
Moderate growth is expected in the leasing and investment
markets in 2014. Average asking rates in premium class A assets
will remain at current levels as the market witnesses continued
demand for quality.

Toronto West Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%

Office

4%

The office market experienced a shift in market dynamics in 2013.
The market saw a continual rise in the availability rate, a substantial
third-quarter expansion in the sublease market, flat class A average
asking rental rates, and the delivery of approximately 560,000 sf.

0%

For 2014, a slight decrease in class A vacancy is expected, driven
by a continued flight to quality with users seeking high-quality
spaces in prime locations. This increased high-end activity
will come at the expense of second-generation class B spaces
encumbered with higher operating costs, larger vacancies and
deferred maintenance. The market will also see higher employee
density as users seek improved space efficiency.

Retail
Supported by the continued growth of home sales in the GTA
housing market, the Toronto West retail market had a modest
showing in 2013. Retail growth was reflective of the general
strength in demographics and steady demand for home
ownership. Following a rise in greenfield development in the
Halton Hills Planning Area, the 350,000-sf first phase of Toronto
Premium Outlets in Halton Hills, a major retail development, was
completed in the third quarter of 2013.
The growth of e-commerce continues to influence big-box retailers’
commercial real estate decisions. In April 2013, office supplies
giant Staples Canada issued its plan to shrink its brick-and-mortar
footprint by 39 retail stores. This trend will provide smaller and less
prominent retailers with leasing opportunities in a healthy market
that posts 1% to 3% vacancy.

Industrial
In 2013, rental and vacancy rates in the industrial market returned
to pre-recession levels. Robust deal velocity drove up rental
rates across all asset classes, encouraging a rise in speculative
construction. Upward pressure on rental rates for space larger than
100,000 sf was also a result of the lack of product in the market.

20


2%
2012

2013

Office

2014F

Industrial

In early 2014, a rise in tenant consolidations is expected, as new
industrial product comes to market. This will cause a slight uptick
in vacancy rates for existing buildings, while rental rates for these
buildings are expected to remain flat, just above $5.60 psf, with
newer product priced between $6 psf and $6.50 psf. With deal
velocity weakening during the course of the year, as multinational
retailers embrace the challenges of the U.S. economy, the market
will likely see a reduction in net absorption rates.

Investment
Entering 2014, investors will encounter difficulty in acquiring
class A industrial assets as the market continues a shift towards
lower-risk, high-quality assets with limited capital expenditure
requirements. Following this trend, pension funds are expected
to take a more aggressive approach to industrial acquisitions;
however, they will have limited interest in suburban office with
concern over leasing fundamentals. REITs will continue to take
a back seat, at least in early 2014, as they remain sensitive to
interest rates, the debt markets and unit pricing. Overall, premium
industrial assets will remain the most attractive target for investors
in 2014, due to strong leasing fundamentals.

Vancouver
980 Howe Street

Strong demand driving market as premium assets remain scarce

D

emand for BC commercial real estate attained near-record
levels in the first half of 2013 despite diminished dollar volume
due to a lack of trophy-asset transactions. Overall deal activity in
2013, however, remained elevated compared with previous years
as several significant transactions closed in the second half of the
year. This uptick in second-half sales and dollar volume is attributed
in part to the unexpected outcome of the provincial election in
May 2013, which served to reinforce business confidence and
provided additional momentum to an already active commercial
real estate market.

Office
In 2013, the office market remained calm in advance of a flurry of
activity in 2014. Limited new-build product was available in Metro
Vancouver in 2013, but numerous office buildings that were under
construction are set to start delivering new inventory in 2014 and
beyond.
With more than 2.1 msf of new office space in downtown
Vancouver alone under construction by year-end 2013, and more
than 3.5 msf regionally, there is likely to be a significant shift in the
downtown office market in terms of how assets are classified. In
addition, increases in sublease space and overall vacancy, and a
flight to quality, may result in downward pressure on lease rates,
particularly in older class A and B premises.

Retail
Demand for retail assets remained strong in 2013; but with few
premium assets available in primary markets, retail real estate
sales activity has diminished compared with previous years. Deal
volume is anticipated to remain steady going forward as vendors
seek to dispose of non-core assets and benefit from the strong
demand for real estate persisting in the market.
Purchasers are likely to buy more on fundamentals in 2014 and will
no longer be strictly focused on income and yield. A distinction
between primary markets and secondary/tertiary markets will
be drawn more sharply by purchasers, and sellers may find an
adjustment in pricing expectation necessary to clinch a deal.

Industrial
Confidence in Metro Vancouver’s industrial market surged,
particularly after May 2013. Despite millions of square feet of new
product added to inventory in 2013, overall vacancy was virtually
unchanged and remained below 4% region-wide. Vacancy in largefloorplate modern distribution buildings remained exceptionally

Vancouver Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

tight in all markets. The supply of industrial land remains a concern
moving forward.
New construction will remain a priority in 2014, particularly
next-generation logistics/distribution facilities that cater to the
needs of large users seeking to leverage investment in port and
transportation infrastructure in the region. This year will also mark
the opening of the South Fraser Perimeter Road, a new $1.3-billion
trucking route that connects an existing container terminal, a
second such terminal under development, a coal export facility
and various industrial nodes to existing highway infrastructure.

Investment
In 2013, the transition to a post-recovery financial environment
likely commenced. This controlled market normalization was
slowed somewhat by lacklustre economic and employment
indicators that manifested in mid-to-late 2013. The Metro
Vancouver commercial real estate market was impacted by the
retreat of Canadian REITs in 2013, which generally led to reduced
competition for top-tier assets. However, well-capitalized local
purchasers and institutional buyers stepped into the breach for
those quality premium assets that did come to market, and that
trend is expected to continue in 2014.
Metro Vancouver remains a key market for most investor types,
and the persistent lack of supply in all asset classes is expected to
support both elevated market demand and asset pricing.


21

Winnipeg
2445 Pembina Highway

Open for business

W

innipeg and Manitoba are indeed open for business. Office
towers are going up, condo projects are multiplying,
and the city has its fair share of wind turbines supplementing
the power grid. Condominium sales were up a record 14% in
2013; building permits increased 3.5% to $810 million; tens
of thousands of square feet of new retail and office space are
under construction; and the city’s new $200-million police
headquarters is nearing completion.
The city has had a new energy to it since the return of the NHL’s
Winnipeg Jets hockey franchise. Winnipeg’s Downtown Business
Improvement Zone started a pilot program with a weekly
downtown farmers’ market – a roaring success jammed with
customers that has been extended into the winter.

Office
The downtown market finally found some traction in the second
half of 2013 after a lacklustre first half, but finished the year
slightly off 2012 transaction totals. Vacancy remained steady,
rising slightly to 8.5%, with just under 162,000 sf of positive
absorption. Although class A buildings experienced slight
negative absorption of 8,300 sf in early 2013, this class remained
the tightest in the city, ending 2013 with the lowest vacancy.
Class B properties ended the year with the highest vacancy
(9.4% at the end of the third quarter of 2013). To mid-2013, class
C properties enjoyed positive absorption of more than 148,000
sf, causing the vacancy rate to drop 90 bps to 8.9%. Although
construction costs remain high, office vacancy rates in all classes
are expected to remain static through early 2014.

Retail
Retail sales increased 2.1% through early 2013, earning Manitoba
a ranking of fifth in the country. This increase can be attributed
to the sale of new vehicles, which grew by 9.6%. Despite this
growth in sales, retail vacancy rose by 450 bps as the arrival of a
U.S. retailer – Target – offset the departure of a Canadian retailer
– Zellers – to a large extent. On the flip side, big-box power
centres continue to have the lowest vacancy in the city at 0.3%.
The pace at which retailers absorb vacant space will be a good
indicator of the overall strength of the retail market in 2014.

Industrial
The market saw 140,000 sf of new supply and experienced
negative absorption of slightly more than 247,000 sf during
the first three quarters of 2013. Even though the market has

22


Winnipeg Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

experienced back-to-back reporting periods with negative
absorption and increased vacancy, the market has a strong
foundation exhibited by an overall vacancy rate of 2.6%.
Quality space in the city continues to be absorbed quickly
when it hits the open market. Part of the reason for the spike
in vacancy was the closure of a 200,000-sf property leased by a
U.S.-based tenant. However, this vacancy created an opportunity
for tenants to take advantage of a quality industrial building.
In such a tight market, this vacancy accounts for a significant
portion of the product available for lease. A recurring theme in
the Winnipeg industrial market is the amount of functionally
challenged space that continues to remain vacant.

Investment
Fortress Developments and Mady Development Corp. have
announced the construction of the tallest skyscraper in Winnipeg
at approximately 42 storeys – a retail, office and residential
condo project in the heart of downtown. This project, combined
with Centrepoint - a $75-million mixed-use complex being
developed jointly by Longboat Development Corp. and Artis
REIT - along with plans to double the size of the RBC Convention
Centre Winnipeg, are generating a lot of positive momentum.

Atlanta
Hammond Exchange

Business climate driving commercial real estate rebound

F

ueled by a steadily improving economy, Metro Atlanta’s office,
industrial and retail markets are gaining traction, and the multiresidential sector continues to shine. The city’s strategic location
within Georgia (which was voted the No. 1 business climate in the
U.S. by Site Selection magazine), enviable logistics assets, low cost
of energy and diversified economy are credited for attracting new
business. Eighty per cent of the U.S. can be reached within a twoday truck drive or two-hour flight from Atlanta Hartsfield-Jackson
International Airport.
Businesses are also considering Atlanta as a potential relocation
destination thanks to new statutory incentives, including energy
sales and use tax exemptions. As 2014 begins, one can finally be
optimistic about the future of the Atlanta commercial real estate
market in the post-recession era.

Atlanta Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

Office

Industrial

The Atlanta office market has turned a corner after being hit hard
by the Great Recession. While the sector has not fully recovered, it
is exhibiting significant signs of improvement. The overall office
vacancy rate continues to dip after spending much of the past five
years higher than 20%. At the end of the third quarter of 2013,
office vacancy stood at 18.6%, a decline of 150 bps compared with
year-end 2012. The average asking rent for Metro Atlanta office
space at the end of the third quarter of 2013 was $20.46 psf, the
highest since 2011.

Metro Atlanta’s industrial market continued to experience positive
absorption numbers in 2013. At the end of the third quarter, yearto-date net absorption totaled more than 8.6 msf. During the same
period, vacancy fell 50 bps to 11.5%. Rental rates remain stable.
The average quoted rental rate was $3.88 psf at the end of the third
quarter, up from $3.80 psf at year-end 2012. Atlanta’s industrial
sector should continue to rebound in 2014 as the city’s housing
market steadily improves, suppliers require more warehouse
space and retailers seek more distribution space to meet the needs
of their growing e-commerce business.

The Atlanta market showed positive net absorption throughout
2013. By the end of the third quarter, total net absorption reached
1.8 msf, outperforming all of 2012, and marking the eighth
consecutive quarter with positive absorption. This pace should
continue throughout 2014 as businesses hire more people and
require more space.

Retail
The Atlanta retail market also made gains in 2013. The vacancy
rate at the end of the third quarter of 2013 was 9.6% – a 60-bps
decrease from the same period in 2012 and the lowest vacancy
since 2008. Total positive net absorption for the third quarter was
889,486 sf, bringing the year-to-date 2013 total to 2 msf. Deliveries
expected in 2014 include Avalon in Alpharetta and Ponce City
Market in Midtown. Tenants will continue to show interest in
leasing space in these types of mixed-use properties that include
office and residential space.

Investment
Atlanta’s commercial real estate investment market experienced
a 67% increase in sales volume during the first three quarters of
2013 compared with the same period in 2012. Bolstered by the
$373-million sale of a partial interest in Terminus I & II and the
$82.5-million sale of Camden Vantage Apartments, investment
sales in all sectors topped $6.8 billion by the end of the third quarter
in 2013, the largest three-quarter total since 2007. Improved job
growth – 51,600 new jobs in the previous 12 months – due to
local business expansion and increased relocations are driving the
strong rebound in the Atlanta market.


23

Boston
6 Tide Street

Boston strong in the midst of sluggish U.S. recovery

M

etropolitan Boston continues to enjoy economic expansion
and improving real estate fundamentals. Upticks in
local housing prices, wages and consumer confidence during
2013, coupled with low inflation and increases in consumer
spending, will enable the economy’s growth to continue. With
an unemployment rate among the strongest in the U.S. (7.2% in
August), Massachusetts continues to thrive due to the presence of
world-class educational, medical and research institutions.

Boston Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%

State GDP grew an estimated 3.5% in the third quarter of 2013,
according to MassBenchmarks, following a revised 1.7% increase
in the second quarter of the year. The publication forecasts 3.4%
growth in state GDP from October 2013 to March 2014. Commercial
real estate saw falling vacancies, rising rents and new construction
across most property types. In 2013, a total of 5.5 msf of new
inventory was delivered, including 3.1 msf of multi-residential and
1.9 msf of office. More than 16 msf is under construction – three
times greater than the previous five-year average in Metro Boston,
including 7 msf of multi-residential, 6.9 msf of office and 2.2 msf of
new retail developments.

projects at both North and South Station, Landmark and Fenway
Centers bordering the Back Bay will add another 500,000 sf of
retail. Five new supermarkets are coming to Boston to feed the
demand created by 8,260 approved new housing units, including
1,346 already delivered in 2013.

Office

Industrial

Overall office vacancy fell 260 bps year-over-year to 11.9% while
rents increased 5.5% to $24.23 psf in the market as a whole, and
7.7% to $44.70 psf in the central business district (CBD). Expect
rents to continue increasing until new construction delivers
during 2014 and excess space, already being marketed, officially
vacates. Of the office space under construction, 78% is preleased
to notable-credit tenants, including Vertex Pharmaceuticals,
PricewaterhouseCoopers and State Street Corp.

The industrial sector absorbed 3.8 msf of space, including R&D
and flex space, in the 12 months ending in September 2013,
lowering vacancy to less than 14% for the first time since 2008.
Major leases to Preferred Freezer, Waste Management, NyPro,
O’Reilly Automotive, Double E, Williams-Sonoma, Jiffy Mix and
Artisan Industries were welcome relief along the battered Route
495 corridor. New construction is virtually non-existent, and it will
take several more quarterly gains like these to push rents or jumpstart development.

Limited suburban construction and strong leasing activity
brought suburban vacancy below 14% for the first time since
2008. Suburban rents grew 1.6% year-over-year to $19.82 psf
overall on the 11th consecutive quarter of occupancy growth.
Still, tenants can lease class A space in suburban markets for $30
psf versus $60 psf in the CBD’s financial district. Demand for live/
work/play centers continues to drive urban and suburban mixeduse developments.

Retail
New amenities are coming via new suburban lifestyle centers
underway in Burlington, Lynnfield, Westwood and Littleton. Urban
mixed-use projects at Seaport Square, the Ink Block, New Balance’s
Boston Landing and Assembly Row in Somerville all have retail
components underway. Major development and redevelopment

24


4%
2%
0%
2012

2013

Office

2014F

Industrial

Investment
At $5.4 billion through the first three quarters of 2013, sales volume
through October showed a slight increase compared with the first
half of the year. While core product remains the most in favor,
investors are now buying vacancy hoping to capture increasing
rents. Look for more owner/user deals, as a hedge against that rent
growth, like athenahealth’s purchase of its Watertown campus.
With the Federal Reserve’s stimulus policy of buying $85 billion
per month in bonds expected to continue through at least the first
quarter of 2014, low interest rates will continue to support capital
flowing into U.S. commercial real estate in general, and specifically
into gateway cities like Boston, which remains a top target for
investors worldwide.

Charleston
360 Concord Street

Region poised for explosive growth

T

he Charleston region is recognized internationally as a top
destination, recently garnering its third consecutive Condé
Nast Readers Choice Award as the No. 1 place to visit in the U.S.
Amplified visibility has spurred increased tourism and a boom in
hotel construction and investment.
Major growth in key industries, including port-related businesses,
manufacturing (led by Boeing and its suppliers), and both IT and
medical research, has made the Charleston region one of the fastestgrowing metro areas in North America during the last five years, and
the region is expected to outpace the nation in the coming decade.
With the top manufacturing job growth in the nation between the
first quarter of 2010 and the fourth quarter of 2011 according to
Brookings, as well as a top IT growth spot in the country, the region
will see new construction in all product types increasing in the
coming months and years.
Moreover, the Charleston region’s population will exceed 1 million
people in the coming decade, driving construction of apartment,
housing, retail and other product types, and requiring significant
investments in infrastructure.

Office
Demand for office space and the value of office properties are
linked closely to job growth. In 2014, office demand will continue to
outpace supply, which has been playing catch-up since the recession,
resulting in steadily declining vacancy and rising values. Absorption
will increase as developers create more class A space to meet the
burgeoning demand. Rental rates are expected to continue their
climb, further driving up values. The forthcoming year is shaping up
to be one of optimism and progress for Charleston as it caters to the
needs of a fast-growing population.

Retail
The Charleston retail market continues to flourish and is expected
to expand in 2014 and beyond. Fueled by accolades for Charleston’s
history, charm and fine food, the booming local tourist industry
has spurred a rush to build hotels, restaurants and retail outlets in
historic downtown. Charleston’s population and job growth have
outpaced the nation, which has prompted substantial single-family
and multi-residential construction, driving retail growth in the
suburban markets. The majority of the anticipated growth will occur
in the northern part of the Charleston Metropolitan Statistical Area
in the small, but growing, towns of Goose Creek, Summerville and
others.

Charleston Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

Industrial
The Charleston industrial market is poised for robust growth in
2014. Expansions have been announced by Boeing and others in
the aerospace and auto-related sectors. Expansion by BMW in the
upstate, and the inland port opening in October, will result in higher
export volumes and greater business for port-related industries.
The Port of Charleston terminal expansion, its dual-rail access
intermodal facility, and the harbor deepening will further enhance
Charleston as a destination for exporters and distribution centers.
The fundamentals are at a tipping point. Vacancy is below where
it was at the top of the market, and speculative development is
underway. Rent growth is expected to return in 2014 to justify
broader speculative growth.

Investment
Charleston is on the radar screen for institutional investors as well
as private investors seeking a growth market. Led primarily by the
multi-residential and hospitality sectors, new construction and sales
of existing properties are driving market capitalization rates down
and creating a shortage of opportunity. Investors who purchased
in the early stages of the recession and have re-tenanted their
properties will find buyers eager to provide them handsome returns
while still allowing ample upside as rents continue to rise back to
pre-recessionary levels.
As rents continue to rise, and vacancy trends improve, land sales and
new construction will dot the horizon in the region as the continued
strong population and job growth propel Charleston forward.


25

Chicago
225 W. Wacker Drive

Improving economy, increased demand prompt further growth in 2014

T

he Chicago economy saw modest growth during the course
of 2013: employment jumped 120 bps (53,700 jobs) in the
12 months ending in October 2013; unemployment remained
slightly above the national average; and job growth was led by
both the professional and business services sectors, adding 28,700
positions through October. The software and technology sector also
witnessed strong growth, which is projected to continue through
2014.
Both the office and industrial sectors remained consistently active
throughout the year, prompting several significant developments to
commence construction – confirming that the market has stabilized.
Throughout 2014, the Chicago market will likely see considerable
growth as the local economy continues to improve.

Office
The office market recorded a third-quarter 2013 vacancy rate of
13.9%, a minor uptick compared with year-end 2012. Both the
central business district (CBD) and suburban markets witnessed
strong leasing activity, resulting in positive absorption in the last
several quarters. Notable 2013 transactions included McDermott
Will & Emery’s 232,000-sf lease at River Point, Google’s 223,000-sf
lease at 1K Fulton, and Denton’s 217,000-sf lease at Willis Tower.
Capital One continued expanding its suburban footprint, which
now totals 150,000 sf. Rental rates are tightening and forecasted to
rise throughout 2014, especially in limited class A product.
Luckily, construction has returned after a hiatus of several years.
Currently, there are two projects under development within the
CBD, representing 1.7 msf.

Retail
Chicago’s retail market remained fairly active throughout 2013.
Vacancy fell 30 bps through the first three quarters of the year.
Retail activity shifted from the suburban markets into the CBD and
surrounding submarkets, following both businesses and consumers.
Big-box retailers continued modest expansion in key suburbs while
also reducing their footprint to expand into areas surrounding the
CBD.
The regional grocery chain Dominick’s will close all stores by mid2014, likely causing vacancy to rise slightly in the next several
quarters and then fall, as both national and local specialty grocery
chains have been showing interest in acquiring many locations.

26


Chicago Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

Industrial
With an inventory of more than 1 bsf, Chicago’s industrial market
experienced steady growth during 2013. Vacancy fell to 8.5% at the
end of the third quarter from 9.2% at year-end 2012. There was a
total of 2.8 msf under construction as of the third quarter of 2013,
with an additional 1.9 msf expected throughout 2014. The number
of speculative projects has risen since the recession; build-to-suits
remain the predominant choice for landlords.
E-commerce continues to be a market driver – many retailers are
expanding their distribution capabilities to accommodate growth.
Amazon has confirmed plans for a 1-msf build-to-suit within the
Southern Wisconsin submarket, bringing 1,000 new jobs. Looking
ahead, positive net absorption and lower vacancy are expected,
especially in key submarkets.

Investment
As market conditions stabilized, the Chicago office market
recorded an uptick in investment sale transactions in 2013. Owners
that successfully repositioned their properties began selling for
premiums. Foreign investors continued to acquire office product.
Notably, 225 W. Wacker Drive was purchased by South Koreanbased Mirae Asset Global Investments, and Canada’s Ivanhoé
Cambridge purchased 10 and 120 S. Riverside. Several large assets
under contract in late 2013 were expected to close by year-end
2013 or in early 2014.
Demand for industrial assets remains strong as vacancy falls to
pre-recession levels. Investors with sufficient capital continued to
acquire fully leased big-box assets while also considering value-add
opportunities, a trend which should carry on through 2014.

Columbus
Columbia Gas Building

Slow and steady wins the recovery race

T

he Columbus, Ohio Metropolitan Statistical Area (MSA) is
currently experiencing a slow and steady recovery that should
continue through the first half of 2014. The unemployment rate
dropped to 6% in the third quarter of 2013, which was attributed to
hiring in the public sector and in opposition to the State of Ohio’s
unemployment rate, which increased to 7.5%. The Columbus MSA
comprises approximately 1.7 million residents and is expected to
break 2 million by 2015. Columbus is the 15th-largest city in the
nation with a diverse economy driven by education, insurance,
banking, fashion, defense, aviation, logistics, healthcare and
technology. The city’s growth has been focused primarily in five
submarkets: Downtown, Easton, New Albany, Dublin and Polaris.

Columbus Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

Office
The Columbus office market is made up of almost 64 msf of space.
The sector’s recovery is being led by Nationwide Insurance’s
426,000-sf development of a class A office building in the Arena
district downtown. Columbia Gas has preleased 246,400 sf in the
project. Additional planned projects include 250 S. High Street
(160,000-sf mixed-use building in the Columbus Commons),
Westar V (a 103,000-sf class A office building in Polaris), and The
Joseph (a 55,000-sf mixed-use project in the Short North).
There was approximately 800,000 sf of positive absorption in 2013,
causing the vacancy rate to drop to 9.3% at the end of the third
quarter of 2013. The average quoted rate for class A office space
was $18.04 psf.

Retail
The retail market comprises approximately 88 msf and experienced
approximately 1 msf of positive absorption during the first three
quarters of 2013. Total vacancy dropped to 7.5% and average
rental rates rose to $11.36 psf. The retail recovery is being led by
the Easton Gateway, a new 54-acre development that is expected
to open in 2014. Costco opened a 150,000-sf store on a 17-acre site
purchased by the warehouse retailer. REI, Saks Off 5th and Dick’s
Sporting Goods are set to open in mid-2014, while Whole Foods
will open in May 2015. The City of Dublin has announced plans
for a new $300-million, mixed-use development to break ground
in 2014 on the northeast corner of Riverside Drive and Dublin
Road along the Scioto River. The project will include retail, multiresidential and office components.

2013

Office

2014F

Industrial

Industrial
The Columbus industrial market contains 243 msf in 5,034
buildings. The industrial market recorded 4.4 msf of absorption
and 2.2 msf of new construction during the first three quarters of
2013. The vacancy rate declined to 8.2% with an average rental
rate of $3.21 psf net. The largest new deals included Speed FC LLC,
which signed a 767,000-sf lease; and Exel Global Logistics, which
signed two leases for 338,000 sf and 313,000 sf, respectively.

Investment
Through the first three quarters of 2013 there were approximately
$81 million in office sales and a total of 50 transactions with cap
rates up slightly, averaging 9.5% compared with 9.3% in 2012. A
total of 295 retail assets with a combined value of $125 million
changed hands in the first three quarters of 2013. Cap rates for
retail product averaged just below 10%, compared with slightly
more than 13% one year prior. In the industrial investment sector,
3.2 msf sold during the first half of 2013, according to CoStar. The
total space was traded in 22 transactions totaling $70 million at an
average price of $21.72 psf. Average cap rates increased to 7.8% at
the end of the third quarter from 7% in late 2012.


27

Dallas
Encana Plano Office

Corporate expansions fuel the Dallas economy

T

he Dallas-Fort Worth region recorded some of the highest
employment gains in the United States in 2013 as large
corporations expanded in the area. The favorable business climate
led to further population growth, and Dallas-Fort Worth is currently
the fourth-largest metro in the U.S. The increased activity from
large corporate users (who were either expanding or relocating)
created a ripple effect, pushing the unemployment rate down to
6% and increasing the need for space across all product types.
Housing is one of the foundations of a healthy market, and
according to the S&P/Case-Shiller Home Price Index, home prices
have surpassed those seen before the recession. The Dallas market
will likely continue its expansion in 2014 along with the positive
market fundamentals.

Office
The Dallas office market recorded healthy absorption in 2013,
causing vacancy to stabilize and asking rates to appreciate. Many
large corporate users expanded in the area, with State Farm’s
900,000-sf lease in the Richardson submarket among the more
notable transactions. The company is also constructing a 1.5-msf
campus in Richardson, which will deliver in 2015.
Sustained low natural-gas prices are beginning to have an effect on
the Dallas office market. Encana, the Canadian natural-gas giant,
announced plans to close its Plano office, a new building totaling
320,000 sf. The large block of space hitting the market could
dampen the viability of new projects in the area. However, space
in Plano is in high demand and the office market should adapt
quickly. Decreasing vacancy has caused speculative construction
to return to the market, but until new space delivers in 2014, the
strong demand will cause upward pressure on asking rates.

Retail
Retail growth has begun to echo the population growth in the
metro, and the significant employment gains have boosted
consumer spending. Mixed-use developments in urban growth
areas have attracted additional retail tenants, particularly in
Uptown where consumers live, work and play. Demand for retail
space will continue to grow in 2014, resulting in declining vacancy.

Industrial
Dallas’ centralized location and busy airport have turned the city
into a continually growing major inland port. The City of Dallas has
a $33-million project in the works to improve infrastructure near
the inland port. Warehouse and distribution users have expanded

28


Dallas Vacancy Rates
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2012

2013

Office

2014F

Industrial

in the Dallas market due to the favorable logistics and trade routes.
The demand for space has caused the vacancy rate to fall to its
lowest point since 2002.
Construction was conservative in 2012, but increased in
momentum throughout 2013. Even when this space delivers in
2014, it will not likely offset the ongoing strong demand in the
industrial market. Vacancy is projected to remain near historically
low levels throughout 2014.

Investment
Considered by economists to be one of the nation’s most dynamic
markets, Dallas continues to capture the interest of both foreign
and domestic investors. Core assets in prime locations have
typically been a favorite among investors. However, value-add
properties are gaining traction, particularly among market-entry
buyers who want to place capital in an economy that continues
to demonstrate strong fundamentals. Thanksgiving Tower in
Downtown Dallas was sold to Woods Capital Management in
July 2013, and the company plans to invest a significant amount
of capital towards improving the building. Rising interest rates
remain a concern in the Dallas investment market, but as long as
interest rates remain relatively low, investment activity will remain
elevated.

Canada & U.S. Real Estate Forecast 2014

Canada & U.S. Real Estate Forecast 2014

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