Stability and opportunity to drive Canada’s markets in 2013: Avison Young

Stability and opportunity will drive Canada’s commercial real estate markets in 2013, while 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. The annual report covers the office, retail, industrial and investment markets in 29 Canadian and U.S. metropolitan regions: Calgary, Edmonton, Halifax, Lethbridge, Mississauga, Montréal, 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 per cent as 2012 drew to a close. By comparison, the 17 U.S. office markets collectively displayed a vacancy of 15.1 per cent. A distinct gap also exists in the industrial markets, with Canada posting a vacancy rate of 4.7 per cent, compared with 8.8 per cent 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.

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-to-rising 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 years.

As 2012 was winding down, the national office vacancy rate settled at 7.1 per cent, down from 7.3 per cent in 2011 and from 2009’s recessionary peak of 9.2 per cent – a 210-basis-point (bps) rebound. A west-east divide persists not only in employment, but also in vacancy rates. Larger resource-rich and commodity-based Western markets (Vancouver, Calgary and Edmonton) had a combined market-wide vacancy of 6 per cent
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 per cent (-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 per cent (-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 per cent (-80 bps), and economic growth and the expansion of numerous engineering and energy firms are expected to encourage leasing activity in 2013, pushing vacancy lower.

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 per cent) in the country, beating out Calgary. Neighbouring Winnipeg finished at 6.3 per cent (-70 bps), while Lethbridge saw its vacancy rise 170 bps to 11.4 per cent.

For 2013, and in order of magnitude, vacancy rates are projected to rise in Vancouver (+70 bps to 7.4 per cent), Winnipeg (+10 bps to 6.4 per cent), fall in Calgary (-70 bps to 3.7 per cent) and Edmonton (-40 bps to 8.3 per cent) and remain unchanged in Regina and Lethbridge.

On the other hand, the major financial services and manufacturing-based markets in the East (Toronto, Montréal and Ottawa) collectively posted an office vacancy rate almost 200 bps higher (7.9 per cent) than their large Western counterparts. Despite seeing vacancy rise to 8.1 per cent (+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 Montréal (-30 bps to 8.2 per cent) is witnessing a mini-renaissance 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 per cent in 2012 – a modest increase from 5.6 per cent in 2011. Elsewhere in the East, vacancy inched up 10 bps to 12.8 per cent in Mississauga/Toronto West and stayed the same in Quebec City (5 per cent) and Halifax (5.5 per cent).

This year, vacancy is expected to hold firm in Halifax, decline in Ottawa (-20 bps to 6 per cent) and rise in Quebec City (+180 bps to 6.8 per cent), Montréal (+50 bps to 8.7 per cent), Toronto (+40 bps to 8.5 per cent) and Mississauga/Toronto West (+30 bps to 13.1 per cent).

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 per cent 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 per cent in 2009 to 4.7 per cent in late 2012. Space shortages are evident in the Western markets, which posted a combined vacancy rate of 3.7 per cent in 2012 – 100 bps below the national average. In the West, industrial vacancy rates ranged from a low of 2 per cent in Winnipeg (-10 bps) – edging out Lethbridge (-70 bps to 2.2 per cent) and Regina (+20 bps to 2.3 per cent) – to a high of 4.8 per cent in Calgary (-10 bps). The West’s largest industrial market, Vancouver, finished 2012 at 3.6 per cent, 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 per cent). 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 per cent – 40 bps above the national average. The country’s largest market, Toronto, saw its vacancy rate inch up 20 bps to 5.1 per cent towards the end of 2012, while Halifax recorded the biggest annual jump – up 100 bps to 6.6 per cent. Elsewhere in the East, vacancy rates trended downwards, led by the tightest market, Ottawa (-90 bps to 2.5 per cent), Montréal (-30 bps to 5.4 per cent) and Mississauga/Toronto West (-10 bps to 5.7 per cent). By the end of 2013, industrial vacancy rates are expected to fall in Halifax (-60 bps to 6 per cent), hold firm in Mississauga/Toronto West (5.7 per cent) and rise in Toronto (+40 bps to 5.5 per cent), Ottawa (+50 bps to 3 per cent) and Montréal (+10 bps to 5.5 per cent).

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 per cent 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 per cent interest) and TD Canada Trust Tower (50 per cent 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).

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