DENVER — Rapid change is underway in the world’s commercial real estate industry, and the dynamics are in flux as the current investment cycle enters its latter stage. The industry continues to contend with differing property fundamentals across asset types, markets and regions, with occupier behavior, innovation and technology acting as key sources of change that are taxing the sector. The current interest-rate environment is another contributor to this change – albeit a somewhat limited factor.
These are some of the key trends noted in Avison Young’s 2018 North America and Europe Commercial Real Estate Forecast, released today. The annual report covers the office, retail, industrial and investment sectors in 67 markets in six countries on two continents and includes the City of Denver.
“We have spent the better part of three years debating where we are in the real estate cycle; for 2017, we dragged out a baseball analogy, pondering what inning we were in,” comments Mark E. Rose, chair and CEO of Avison Young. “We concluded that the real estate industry was in the late stages of the game, but could be headed into extra innings. As we start 2018, the game is still going, but there is a clear and palpable difference. Change is underway and the dynamics on the field are in flux. Our industry needs to decide what to do next.”
“As we greet the New Year, however, a critical difference is that change is in motion – change that is positive, powerful and moving very quickly. This is the type of change that creates opportunity and allows for success. Those who cannot accept this new reality will dismiss it at their own peril,” says Rose. “Interest rates are at historic lows and continue to stay low, but are moving up incrementally, as they really only have one way to go. Short-term interest rates are being properly – and effectively – normalized by central banks. There is stability and growth in the GDP of the G7, and rising interest rates are typical in this environment. Capitalization rates are another story. Commercial real estate has printed trades at historically low cap rates, but the bid-ask spread is widening – and acting as a brake on transaction volumes in major markets. The theory that interest rates will rise at the short end, but thinning spreads will keep cap rates in place, is not logical or supportable over the mid-to-long term. Cap rates and corresponding return requirements will eventually move as financing acquisitions becomes more expensive.”
Occupier behavior, states the report, is another source of change that is challenging the market and more fundamentally driving innovation and performance.
“Ultimately, these trends will prove beneficial as real estate is used more effectively and with greater cost efficiency,” says Rose.
Technology, including its impact on real estate solutions, is potentially the most exciting element of change in the commercial real estate industry. Technology adoption – including artificial intelligence – is gaining so much momentum that it is driving profitability and expanding capabilities exponentially.
Wellness in the workplace is another emerging trend that intersects with occupancy solutions, the hunt for talent and technology. Whole health, or the combination of physical and mental wellness, is critical to the success of all enterprises.
Rose concludes: “Change is good when it benefits an industry and its stakeholders. Rising interest rates and capitalization rates in 2018 – and beyond – will allow for more traditional pricing of assets based on a risk-adjusted real rate of return. Once the stalemate over prior cycle strategies and underwriting ends, growth should fuel more demand, reduce vacancies and cause rental rates to rise. When this change is combined with efficiencies captured by the latest technologies, we will welcome a new wave of demand, performance and innovation.”
Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 2,400 real estate professionals in 80 offices — including one in downtown Denver — providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial, multi-family and hospitality properties.
