Real Estate Forum - October 2011

NEWS FRONT
Mexico Violence Also Assaults Commercial Success

MEXICO CITY—As violence wracks most towns in Mexico, including the capital Mexico City and affluent Monterrey, there is still commercial real estate activity. However, most firms acknowledge the drug gang violence is having an impact on investor and corporate tenant interest. About 35,000

people have reportedly been killed in drug-related violence since 2006.

In September, both Home Depot and

vacancy rate in Monterrey was at 3%, push-

ing developers to build new properties. The

recession hit the country hard, however, and the vacancy rate is now closer to 20%.

“We saw late last year and early this

200,000 square feet.”

Emerging Americas Markets Outpace US Growth

Commercial real estate transaction activity in the Americas has increased following a drop-off generated by the 2008-2009 recession. Growth is projected to continue in the near future—albeit at slower rates than during 2010 and early 2011—with robust activity in developing economies but comparatively slower growth in more developed nations.

The United States currently dominates the Americas CRE market in terms of transaction flow and capital market capabilities; however, following the 2008-

2009 recession and emergence of Latin American countries as the Americas’ growth engine, investor interest in Brazil and Mexico has increased. Brazil will likely continue to attract investors as it develops its capital markets and increases regulatory transparency. Canada’s economic recovery has outpaced the US, and its well-developed and transparent capital markets make CRE opportunities attractive to investors.

However, the US remains the most mature commercial property market and should continue to experience increased investments.

Gradual economic recovery and increased capital availability have resulted in favorable price discovery, cap rate compression and increased transaction activity. In 2010, transaction volume rose 130.9% year-over-year to $135.7 billion, led by the US, which accounted for 82.9% of the total, according to Real Capital Analytics. While year-over-year investment volume grew in Canada (192.5%) and Brazil (243.2%), it declined in Mexico (-12.3%).

Office CBD markets reported the highest sales volume as investors targeted core properties in gateway markets. Further, cap rates

By Robert T. O’Brien

market. In Canada, cap rates were stable, as the financial system was relatively less affected by the recession. For the remainder of 2011, growth in the Americas overall will likely continue, although perhaps at a slower pace, due to higher inflation in emerging economies and slow GDP growth in developed economies.

More developed markets such as the US have mature financial systems which offer varied financing options. In contrast, emerging markets such as Mexico rely heavily on traditional sources (banks and equity issuances) to meet their funding requirements. However, increased investor interest in Brazil and Mexico resulted in government efforts there to develop alternative CRE financing sources, such as Certificates of Real Estate Receivables (a form of mortgage-backed securities) and Capital Development Certificates (trust securities with variable returns linked to the underlying assets of the trust). Given the Americas’ anticipated high capital flows, the US and Canada are likely to see a recovery in structured financing and Latin America is expected to continue to deepen its capital markets.

The US is currently experiencing a rapid, but uneven, recovery. Canadian commercial real estate has performed relatively well through the downturn and into the subsequent recovery due to conservative lending practices and stronger economic growth than in the US. Investor interest in Brazil and Mexico is increasing and this trend is expected to continue, with further development of their capital market capabilities. In addition, Brazil’s CRE markets are expected to benefit from significant infrastructure build-up associated with the 2014 FIFA World Cup and 2016 Summer Olympics.

Robert T. O’Brien is a partner and vice chairman, US Real Estate Services Leader, for Deloitte & Touche LLP in Chicago. He may be contacted at robrien@deloitte.com. The views expressed here are the author’s own.