Avison Young releases 2013 commercial real estate forecast for Canada, U.S.

Stability and opportunity will drive Canada’s commercial real estate markets in 2013,éwhile select U. S. markets and sectors are poised for growth, even while caution persists.

Against a global backdrop of financial uncertainty stemming from continuing issues with stability in
Europe, a potential slowdown in China, the debt ceiling and new “fiscal cliffs” in the U. S. and potential
plateauing in Canada, North American real estate markets still appear to be the most stable – with a
healthy balance of risk and opportunity.
These are some of the key trends noted in Avison Young’s 2013 Canada, U.S. Forecast, released
today. The annual report covers the office, retail, industrial and investment markets in 29 Canadian
and U. S. metropolitan regions: Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montreal,
Ottawa, Quebec City, Regina, Toronto, Vancouver, Winnipeg, Atlanta, Boston, Charleston,
Chicago, Dallas, Detroit, Houston, Las Vegas, Los Angeles, New Jersey, New York, Pittsburgh,
Raleigh-Durham, Reno, San Francisco, South Florida and Washington, DC.
“With all the headwinds that continue to plague our industry, what we at Avison Young have been
advising for the last three years will continue to be our mantra: stay patient, risk-manage your strategy
on the buy-side, and take advantage of off-market and distressed opportunities when they present
themselves, ” comments Mark E. Rose, Chair and CEO of Avison Young.
He continues: “As a seller, do not be afraid to take some profits. Core assets in the major markets are
highly sought-after and, therefore, aggressively priced when up for competitive bid. Plenty of
opportunities can still be found in off-market transactions, if one knows where to look. At Avison
Young, we have been very successful in helping our clients do just that. ” 
According to the report, in Canada, the shortage of product (evidenced by real estate investment
trusts (REITs) buying portfolios and private funds buying REITs) and very low current vacancy rates
suggest more demand-side price upside, even though the large development pipeline may temper
rent growth. The strong Canadian dollar is a problem for the domestic economy, though positive for
Canadian institutions going global – a trend expected to increase in 2013.
These factors, combined with pervasive condo overbuilding, are resulting in “Are we at the top? ”
questions in Canada. On the other hand, in the U. S., the early signs of a housing recovery are
triggering the question: “Is the U. S. at the bottom? ” The lack of development is providing confidence
for investors making value-add acquisitions, and core class A product is expensive everywhere. Thus,
as Canada appears to have reached a short-term top in pricing, the U. S. is just beginning to get its
sea legs.
Rose adds: “Amid uncertainty and risk lies opportunity. This is not to say that we should write off
2013, or sit on the sidelines. Quite the opposite: there is much to be transacted in 2013 while
strengthening positions for the future, as the ongoing issues domestically and abroad see some form
of resolution. ”
“What we are recommending to clients is clear and consistent. Focus on building capital positions in
2013, perhaps selling non-strategic assets to fund a war chest; and arrange for access to additional
debt and equity, as 2014 appears bright. Continue to execute on current plans in 2013 as the
environment is likely to remain stable. Re-balance investment portfolios according to a five-year
strategy horizon and adjust your corporate real estate occupancy. If you are financing or re-financing,
seek longer-term maturities at today’s unprecedented low rates. ”
The report goes on to show that office and industrial vacancy rates in Canada continue to be half of
those in the U. S.; however, U.S. markets are expected to improve – some more quickly than others –
narrowing the spread.
Across the 12 Canadian office markets tracked by Avison Young, vacancy sat at 7.1% as 2012 drew
to a close. By comparison, the 17 U. S. office markets collectively displayed a vacancy of 15.1%. A
distinct gap also exists in the industrial markets, with Canada posting a vacancy rate of 4.7%,
compared with 8.8% in the U. S.
“Those of us who follow the markets closely are beginning to sound a bit like a broken record when it
comes to praising Canada’s well-being. Relative to the rest of the world, Canada is seen as a picture
of economic health, and nowhere is this more evident than in the performance of the commercial real
estate market, which continues to display sound and improving market fundamentals across most
sectors and asset classes, ” says Bill Argeropoulos, Vice-President and Director of Research
(Canada) for Avison Young.
“While Canada has accelerated up the recovery curve and is now showing moderate signs of slowing,
the positive signals out of the U. S. – be it the housing market with rising starts, sales and pricing, or
improving employment levels – can only benefit Canada in the long run, ” he says.
“Coming off what will likely be a record year in commercial real estate investment sales in Canada,
and given the small investable universe and competitive climate that has emerged, cross-border
activity will grow further. Although 10-year bond yields are similar between Canada and the U. S., for
the most part, cap rates are generally higher in the U. S. The wider spread in investment yields will
intensify cross-border activity with more Canadian buyers looking for bargains in secondary markets,
while others will continue to bid for assets in fortress or gateway markets (Washington, DC and New
York), either alone or through joint-venture partnerships, ” adds Argeropoulos. Page 3 of 10
According to the report, the U. S. real estate markets survived the ambiguity of the election year and
looming so-called “fiscal cliff” in 2012 with modest growth in most sectors and markets, though
fluctuations in values persisted.
“The major coastal markets again seized the most capital interest, leaving the interior markets
lagging, ” notes Earl Webb, Avison Young’s President, U.S. Operations. “As we approached year-end
2012, sales volumes were on pace to eclipse 2011, led by multi-residential and office sales. ”
Webb states that absorption rates in most of the office markets were modest as corporate and
governmental occupiers remained very cautious, though cities buoyed by energy and tech sectors –
or “gateway” metropolitan areas – saw the strongest performance. “Even New York City, with its
diverse business base, saw a slowing of absorption and a flattening of rents – currently at $56 (USD)
per square foot (psf) on average with only Midtown South showing rental strength, ” he notes.
Webb says early 2013 will look and feel like 2012, with a great deal of uncertainty persisting and with
most markets only posting modest improvement. “The overall lack of development is a plus for real
estate markets, and recent job growth is encouraging; however, we’ll need sustained job growth for a
full and robust recovery. ”
Approaching nearly 500 million square feet (msf), Canada’s office market had another solid year,
characterized by mostly low- to mid-single-digit vacancy rates, relatively healthy demand, stable-torising rental rates and a growing urban supply pipeline driven by corporations following the migration
of younger workers who are increasingly living downtown. This has kicked off another development
cycle in almost every market with the majority of the space projected to come online in the next four
As 2012 was winding down, the national office vacancy rate settled at 7.1%, down from 7.3% in 2011
and from 2009’s recessionary peak of 9.2% – a 210-basis-point (bps) rebound. A west-east divide
persists not only in employment, but also in vacancy rates. Larger resource-rich and commoditybased Western markets (Vancouver, Calgary and Edmonton) had a combined market-wide vacancy
of 6% in 2012 – 110 bps below the national average. From this group, Calgary is by far the tightest
market with a vacancy rate of 4.4% (-160 bps since 2011). The lack of vacant large-block options in
downtown Calgary has pushed some tenants into the suburbs, including Imperial Oil, which made an
unprecedented decision to move to Quarry Park in the suburban south. Sitting some 230 bps higher
at 6.7% (-70 bps), Vancouver is in the midst of the largest downtown office-building construction cycle
it has ever experienced, with four new office towers and one major redevelopment underway.
Edmonton came in at 8.7% (-80 bps), and economic growth and the expansion of numerous
engineering and energy firms are expected to encourage leasing activity in 2013, pushing vacancy
The smaller, Prairie markets are booming as well. Despite the biggest jump (+320 bps) in vacancy of
any Canadian market last year, Regina once again recorded the lowest vacancy (4.2%) in the
country, beating out Calgary. Neighbouring Winnipeg finished at 6.3% (-70 bps), while Lethbridge saw
its vacancy rise 170 bps to 11.4%. 
For 2013, and in order of magnitude, vacancy rates are projected to rise in Vancouver (+70 bps to
7.4%), Winnipeg (+10 bps to 6.4%), fall in Calgary (-70 bps to 3.7%) and Edmonton (-40 bps to 8.3%)
and remain unchanged in Regina and Lethbridge.
On the other hand, the major financial services and manufacturing-based markets in the East
(Toronto, Montreal and Ottawa) collectively posted an office vacancy rate almost 200 bps higher
(7.9%) than their large Western counterparts. Despite seeing vacancy rise to 8.1% (+30 bps) in the
closing months of 2012, Toronto, the nation’s largest city and office market, is once again
experiencing intense construction activity downtown – only a short time since the delivery of the last
cycle. A number of projects are currently underway, with other announcements – including this week’s
groundbreaking of 1 York Street by Menkes Developments and Healthcare of Ontario Pension Plan –
taking place in the opening months of 2013. Even Montreal (-30 bps to 8.2%) is witnessing a minirenaissance in downtown office development, following a long period of inactivity. Ottawa, the nation’s
capital, continued to weather the effects of the Conservative government’s downsizing better than
many predicted. Overall Ottawa office vacancy rose to 6.2% in 2012 – a modest increase from 5.6%
in 2011. Elsewhere in the East, vacancy inched up 10 bps to 12.8% in Mississauga/Toronto West and
stayed the same in Quebec City (5%) and Halifax (5.5%).
This year, vacancy is expected to hold firm in Halifax, decline in Ottawa (-20 bps to 6%) and rise in
Quebec City (+180 bps to 6.8%), Montreal (+50 bps to 8.7%), Toronto (+40 bps to 8.5%) and
Mississauga/Toronto West (+30 bps to 13.1%).
In 2013, demand will be frustrated in some Canadian markets by the shortage of available space,
putting upward pressure on rental rates in affected market segments until the developments currently
underway are delivered, starting in 2014. In the meantime, the national office vacancy rate is
expected to increase a modest 20 bps to 7.3% by the end of 2013.
Canada’s retail landscape remains a popular destination for many foreign retailers, especially those
south of the border in the U. S. (Nordstrom and Microsoft Store), lured by the resilience of the
Canadian economy and continuing low interest rates, which allow consumers to spend more.
The strong activity is taking place despite warnings about Canadian household debt levels rising to
the point where the ratio of household debt to disposable income is now higher than U. S. consumer
indebtedness prior to the crash. Two important metrics driving retailers to Canada from the U. S. may
well be the sizeable difference in retail sales per square foot, and the large spread in retail space per
capita between the two countries. Steadily rising retail sales growth in most Canadian markets,
coupled with aggressive U. S. expansion into Canada, has kept the Canadian retail stock almost fully
occupied and the development pipeline active. For example, in Calgary, up to 1 msf of retail space will
be completed this year at projects such as Sierra Springs.
While Canadian retailers are bracing for store openings from U. S. discount giant Target in 2013,
landlords are continually reinvesting in and repositioning retail centres to retain tenants and attract the
many new brands entering the country. Significant expenditures and redevelopment have been
completed or are underway, including: Bayshore and St. Laurent Centre in Ottawa; Yorkdale and
Sherway Gardens in Toronto; Southland Mall in Regina and Mic Mac and West End Malls in Halifax,
to name a few.
Live-work-play downtown lifestyles are increasingly popular, and urban retail intensification is
increasing, transforming urban centres as suburban retail players join forces with office and residential
experts to acquire sites for mixed-use developments. Going forward, retailers will continue their
balancing act between “bricks and clicks”, responding to evolving consumer habits with small-format 
stores, virtual stores, electronic coupons and mobile apps as emerging trends that will redefine the
retail landscape of the future.
Canada’s 1.8-billion-square-foot (bsf) industrial market has seen vacancy decline steadily from a
recession high of 6.3% in 2009 to 4.7% in late 2012. Space shortages are evident in the Western
markets, which posted a combined vacancy rate of 3.7% in 2012 – 100 bps below the national
average. In the West, industrial vacancy rates ranged from a low of 2% in Winnipeg (-10 bps) –
edging out Lethbridge (-70 bps to 2.2%) and Regina (+20 bps to 2.3%) – to a high of 4.8% in Calgary
(-10 bps). The West’s largest industrial market, Vancouver, finished 2012 at 3.6%, plunging 100 bps
during the last year – the most improved of any of the industrial markets. Rounding off the West was
Edmonton (+40 bps to 4.4%). This year, with the exception of Edmonton which will remain
unchanged, vacancy is expected to climb in the remaining Western markets by between 10 and 170
bps with the biggest jump coming in Calgary, owing largely to the delivery of new supply.
In contrast, the Eastern industrial markets were higher but respectable at 5.1% – 40 bps above the
national average. The country’s largest market, Toronto, saw its vacancy rate inch up 20 bps to 5.1%
towards the end of 2012, while Halifax recorded the biggest annual jump – up 100 bps to 6.6%.
Elsewhere in the East, vacancy rates trended downwards, led by the tightest market, Ottawa (-90 bps
to 2.5%), Montreal (-30 bps to 5.4%) and Mississauga/Toronto West (-10 bps to 5.7%). By the end of
2013, industrial vacancy rates are expected to fall in Halifax (-60 bps to 6%), hold firm in
Mississauga/Toronto West (5.7%) and rise in Toronto (+40 bps to 5.5%), Ottawa (+50 bps to 3%) and
Montreal (+10 bps to 5.5%).
Developers in most cities have responded to tight market conditions with build-to-suit and speculative
construction – with increased demand, especially from U. S.-based corporations, for facilities offering
higher clear heights and multiple large bays.
This year will be similar to 2012, with new supply prompting a moderate rise in vacancy, slightly above
the 5% range. Look for older, dysfunctional stock to be demolished, while manufacturing facilities are
repurposed for distribution uses.
Supported by healthy underlying property market fundamentals (low vacancy and stable-to-rising
rental rates), attractively priced capital and all-time-low borrowing costs, the commercial real estate
investment sector had an exceptional 2012, and with the overall tally still to come, it may very well end
up being a record year with sales volume (for office, industrial, retail and multi-residential assets)
exceeding the previous peak of $24 billion (CAD) in 2007. Early indications point to record investment
volumes for a number of markets, including Vancouver, Calgary, Toronto and Ottawa. No matter the
final result, 2012 was a year of big deals, ranging from blockbuster, single-asset acquisitions – Scotia
Plaza (100% interest) and TD Canada Trust Tower (50% interest) in the heart of Toronto’s financial
core by Dundee and H&R REITs and Public Sector Pension Investment Board, respectively – to
notable M & A activity, including the takeout of CANMARC and Whiterock by Cominar and Dundee,
respectively, to IPOs by Dundee Industrial REIT and Regal Lifestyle Communities.
While the investor profile remains varied, the $1.3-billion sale of Scotia Plaza, among others,
established REITs as aggressive buyers who can go head-to-head with – and outbid – the pension
funds for coveted assets. This environment has pushed capitalization rates for top-tier, well-leased
assets in core locations to historic levels, with every transaction setting a new benchmark low. Every
market had its special story or trend, be it in Edmonton, where land was the most actively traded
property type as development became an alternative to purchasing highly priced existing properties, 
or Vancouver, where the battle for yield pushed up pricing and the prevalence of off-market deals
increased again.
The same forces that were at play in 2012 will continue to fuel the flow of capital to real estate
throughout 2013. However, the usual risks remain: the threat of rising interest rates (though the
consensus is that they will remain low in the short- to medium-term), less product coming to the
market, and the possibility that prices for top-tier assets have already reached a plateau. Some
buyers are taking precautions by financing (or refinancing) assets over longer periods, while others
are opting for development. There is also a growing sense that the risk premium to real estate is
narrowing and that the focus will turn to driving net operating income. Further cap rate compression
will likely make acquisitions less accretive for REITs, laying the groundwork for increased M & A
activity (e. g. KingSett – Primaris) and REIT formations (e. g. Loblaws and HBC).
U. S.
The 10.2-bsf U. S. office market registered an overall vacancy rate of 12.1% as year-end 2012
approached, reflecting a slight improvement compared with 2011. Class A properties accounted for
the bulk of net absorption in 2012 as the flight-to-quality trend continued and tenants sought to lock-in
favorable rates. As a result, class A vacancy declined 50 bps to 13.6% from 14.1% at the end of 2011.
Tenants continued to enjoy favorable conditions with tech- and energy-driven markets experiencing
the greatest levels of positive absorption.
The 17 U. S. markets Avison Young tracked for this report comprise 2.8 bsf with an overall vacancy
rate of 15.1%, down slightly from that of year-end 2011. A majority of Avison Young markets are
forecasting further improvement in 2013; however, vacancy in the U. S. markets will likely remain
elevated overall when compared with Canada.
Among Avison Young markets, New Jersey recorded the highest 2012 vacancy (+50 bps to 25.5%),
with flat market conditions expected in 2013. Although down slightly from 2011, vacancy rates in
Atlanta (-100 bps to 19.9%) and Detroit (-70 bps to 19.8%) remained high in 2012. The lowest
vacancy rates were recorded in Pittsburgh (8.1%), where rents have risen to new levels; San
Francisco (9.9%), where large-tenant movement is driving the market; and Manhattan (10.6%).
Manhattan, the largest U. S. office market, reported flat absorption and rents in 2012; however,
employment growth is leading to positive absorption and vacancy could return to single digits by yearend 2013. At the submarket level, the steady delivery of new space at World Trade Center and World
Financial Center could push vacancy into the teens for downtown class A space.
With minimal new office construction and a lower unemployment rate, Reno experienced the biggest
improvement (-330 bps to 16.4%) in office vacancy from 2011 to 2012. The Las Vegas market is
showing signs of slow recovery; while 2012 saw no change in vacancy rates, there is a -90 bps
projected change by year-end 2013. Only four markets expect to see increased vacancy in 2013, with
the largest increase being in Washington, DC. (+60 bps), where there are threats of federal spending
cutbacks and where 4 msf of office space is set to be delivered this year.
U. S. retail markets held steady with an average vacancy of 6.9% – unchanged for four quarters – and
were kept in check by a dearth of new supply. Delivery of new retail product has fallen each year 
since 2008 and, in 2012, 46 msf was delivered. Power centers are outperforming retail as a whole and
posted a 6.2% vacancy rate nationwide.
Many Avison Young markets are reporting the expansion of discount and big-box retailers. Select
submarkets in Charleston and Houston have improving retail conditions due to population increases;
Boston is seeing further stabilization; San Francisco is reporting a steady retail comeback and limited
construction; and New Jersey welcomed several new retailers and substantial development, with
nearly 3.5 msf of new inventory going under construction in 2012. Two of Raleigh-Durham’s largest
malls finished 2012 with vacancy rates below 0.5%, and retail development activity there increased to
the highest levels witnessed since 2008, with slightly more than 859,000 sf scheduled for delivery in
Avison Young industrial markets totaled 6.6 bsf with an average vacancy rate of 8.8% as of thirdquarter 2012 – nearly double the vacancy found in Avison Young’s Canadian markets. Chicago (1.2
bsf) and Los Angeles (1.1 bsf) are the largest U. S. industrial markets, with vacancy rates of 9.6% and
4.5%, respectively. Charleston saw the biggest decrease in vacancy, ending 2011 at 12.1% and
dropping to 9.9% in 2012. Reno was the only city to see an increase in industrial vacancy during 2012
(+20 bps) and all but two U. S. markets are expecting further declines in vacancy during 2013.
Dallas (+10 bps) is experiencing growth of warehouse/distribution space around the city’s inland port
and, in the Houston market (+30 bps), oil and gas drilling activity is fueling manufacturing and the Port
of Houston’s expansion. Atlanta should continue to experience positive absorption in 2013 with the
largest projected drop (-400 bps) in vacancy. The anticipated expansion of the Panama Canal is
spurring speculative development and aggressive land acquisitions in South Florida, while in Detroit,
industrial rents are primed to rise following four quarters of positive absorption.
Through third-quarter 2012, total investment volume for multi-residential, office, industrial and retail
properties topped $163 billion, demonstrating stabilization after second-quarter sales volumes for all
property types (except multi-residential) fell year over year. Demand for core assets with stable cash
flow exceeded the available product in many U. S. markets. Manhattan led the country in office sales
with $7.8 billion, followed by San Francisco with $3.9 billion and Los Angeles with $3.1 billion. In
Boston, the volume of industrial purchases doubled from 2011 to 2012. Capital flow into the U. S.
continued in 2012 as cross-border investors accounted for $20.3 billion in sales by mid-December.
Canadian buyers alone purchased $7.5 billion in multi-residential, office, industrial and retail assets.
Avison Young anticipates growing opportunities in the U. S. for investors willing to look to non-coastal
locations and expects most markets to experience uncertainty and further, albeit modest, recovery in

on January 18, 2013