Cautious Outlook for 2014

The US commercial market continues to show improvement while there’s guarded optimism on this side of the border, according to a 2014 real estate forecast report released by Avison Young this morning. (So don't say it out loud or you'll jinx it.)

The annual report covers the office, retail, industrial, and investment markets in 36 Canadian and US metro areas. Ongoing development on this side of the border remains an encouraging sign, AY chair and CEO Mark Rose says, but the impact of rising interest rates remains the overriding issue. (Rising interest rates have replaced the Boogeyman as the most frightening story to tell misbehaving children.) “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,” Mark says. Quality assets will remain in great demand going forward, he adds.

On the investment end, Mark points to pricing stability in the market resulting from healthy demand from pension funds and institutions and their substantial discretionary capital replacing what had been a voracious appetite of the REIT market. The pensions and institutions use lower levels of debt when making acquisitions. Also, out of the 36 office markets, 24 saw vacancy rates decline in 2013, with a greater number of US markets seeing an improvement compared to Canadian markets.

AY VP and director of research (Canada) Bill Argeropoulos says it's not surprising to see the commercial real estate market in Canada pull back a little. “Keep in mind, while other property markets around the world were wallowing in recession, Canada bounced back fairly quickly,” Bill says. “If anything, we are well positioned to exploit our proximity to the US, which is still the home of the globe’s largest economy.” (In the image is the Royal Bank Plaza at Bay and Front—according to the report, the Canadian office market vacancy rate was 8.3%, compared with 13.9% in the US.)