Real Estate Forum - September 2011

NEWS FRONT
Canada Office Continues to Outperform US

TORONTO–The Canadian office market continues to trump the US office market, as less uncertainty, oil money and single-digit vacancy rates abound in Canada. Office vacancy in Canada has dropped to 7.8%, compared to 12.6% in the US market. Comparing CBDs, downtowns in Canada were even further occupied, with only 6.2% vacancy, while the US had its smallest vacancy rate in Washington, DC at 11.8%.

Development is also different for the two countries. While large-block opportunities are tight across North America, Canada has about eight million square feet under development. There’s 5. 6 million square feet under development in Washington, DC, but that’s very little compared to the total 10 billion square feet of inventory in the US.

Mark Rose, Toronto-based Avison & Young CEO, says that jobs have played a role in the market differences. “Canada has had strong growth and employment, where US unemployment numbers have been going the wrong way,” Rose says.

He cites Calgary as a beneficiary of the current economy. With oil barrel prices hitting $100 this year, the city benefits from having petroleum company headquarters with proximity to the Canada oil sands. Calgary saw 1. 2 million square feet of absorption in the first quarter of 2011, with another 2. 7 million square feet under construction.

However, preleasing has been key there,
as oil prices have been uneven. “If oil drops
to $60 a barrel because the states spiral into
a double-dip recession, that will have a dra-
matic effect on Calgary,” Rose says.

Asia Pacific Copes With Winds of Change

Signs of growing economic concern in the US and Europe have
evoked worries on their impact on the Asia-Pacific economy,
which have been the engine of most global growth thus far. While
we have lowered our forecasts in light of recent of events, at
Cushman & Wakefield we still maintain our
view that the region will weather—but possi-
bly not prevent—a global slowdown for the
following reasons.
First, strengthen-
ing domestic con-
sumption, expanding trade within the region
and strong foreign exchange reserves are
helping to underpin still-solid growth and
insulate the region from weaker demand from
the US and Europe. Second, the region’s economic powerhouses
have become “more decoupled” from the developed countries,
which is particularly apparent in the falling share of exports to the
US as a proportion of GDP. China is a case in point: its export
exposure to the US only amounts to a relatively modest 6% of
GDP. Much of China’s current growth is traced to a growing reli-
ance on investments (i.e. infrastructure) as policymakers attempt
to reduce the country’s dependence on exports. Even risks that
Japan and Australia face appear relatively manageable. Only the
smaller export-driven economies—including Hong Kong,
Singapore, Malaysia and Vietnam—look most susceptible to the
threat of a global economic slump.

Additionally, we examined US capital flows in the region. Though the volume has been rising over the past two years, the size of capital flows appeared insignificant relative to overall economic activity. In Japan and Hong Kong, the primary investment destinations, US capital flows were less than 1% of their GDP. The relatively low exposure (at 9%) to European sovereign debt suggests that the impact is likely to be minimal. Finally, prospects of

By Sigrid Zialcita

slowing growth are likely to cause inflationary pressures to recede, albeit levels will remain elevated; hence, we expect the region’s ccentral banks to shift to a neutral monetary policy, which should lead to a stable-to-positive yield outlook.

To be sure, our region faces a plethora of risks. Continued uncertainty could weigh on sentiment and lead to uneven growth throughout the region. Nonetheless, the region is less vulnerable today compared to the previous downturn. So we generally expect a relatively solid economic backdrop to perpetuate healthy real estate fundamentals, translating into steady occupier demand that will sustain high occupancies, rents and property values in most markets through the end of the year. At the same time, it should enable occupiers to generate healthy revenue growth and absorb the higher level of occupancy-related expenditures in most markets.

Of course, a persistently weak global economy or even a prolonged period of low growth could trigger caution among multinational companies headquartered in the region, and potentially restrain plans for expansion. But thus far, global companies that have recently announced cutbacks in non-performing locations in developed economies are still establishing or expanding their presence within the region.

On the investment side, while yields in core markets are expected to be stable going forward, relatively low interest rates, as well as healthy property fundamentals, increasing rental values and greater capital availability will continue to fuel investor interest in the region. Simply put, investors will remain keen on leveraging better growth opportunities in Asia as compared to the US and Europe.

Sigrid Zialcita is managing director, research, Asia Pacific, for Cushman & Wakefield, based in Singapore. She may be contacted at sigrid.zialcita@ ap.cushwake.com. The views expressed here are the author’s own.