Cautiously Optimistic CRE Forecast for North America and Europe in 2018

In a new report, 2018 North American and Europe Commercial Real Estate Forecast, Avison Young analysts predict that although the economy may continue to grow in 2018, real estate professionals need to be aware of changing dynamics and certain trends. Avison Young Chair and CEO Mark E. Rose cites technology adoption, specifically artificial intelligence, and wellness in the workplace as emerging trends that intersect with occupancy solutions. According to Rose, “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."

The report also includes the following U.S. and Canadian office market highlights:

  • "There was 103 msf under construction in the U.S. at year-end 2017 with the following five markets accounting for roughly half of that total: New York (15.3 msf); Washington, DC (11.6 msf); Dallas (8.7 msf); San Jose/Silicon Valley (7.8 msf) and San Francisco (6 msf). Office space under construction is 55% preleased with tenants demonstrating demand for new well-located and amenity-rich product."
  • "Avison Young is tracking 5.2 billion square feet (bsf) of office inventory in 46 U.S. markets that had an overall vacancy rate of 11.8% at the end of 2017, mirroring office vacancy in Canada, and falling 10 bps from year-end 2016's 11.9% rate. U.S. vacancy is forecasted to increase slightly to 12% by year-end 2018."
  • "With a market comprising more than 530 million square feet (msf), Canada's overall office vacancy rate increased 20 basis points (bps) from year-end 2016 to 11.8% near year-end 2017. The increase can be attributed to ongoing supply-demand imbalances. Vacancy was higher in five of 11 markets surveyed; four remained in single-digits, while five were below the national average. Calgary posted the highest vacancy rate (23.1%); Winnipeg the lowest (6.6%), and Waterloo Region the biggest change (+500 bps to 16.6%)."
  • "Taking a long-term point of view and unfazed by supply-demand imbalances, the [Canadian] development community remains busy. There was 12.5 msf (48% preleased) of office space under construction across Canada near the close of 2017 – mirroring construction levels at year-end 2016. More than half of the development pipeline is concentrated in the nation's biggest market, Toronto. This status ranks the city sixth among North America's most active development markets."