“The economic world is on edge, with heightened concerns about the potential for a global economic slowdown,” said Spencer Levy, CBRE’s Americas head of research. “However, commercial real estate fundamentals are very good. Unlike in prior cycles, which were marked by excessive construction and financial leverage, occupancy and rents are at or near record levels, leverage is much lower and liquidity is ample. The market should be resilient in the event of any pause in activity.”Over the past year, the U.S. has averaged more than 210,000 new jobs created per month–slightly less than 2 percent of the workforce–while the past five years have seen GDP growth average more than 2 percent per annum. CBRE expects growth of 2-3 percent to hold through this year and next. Meanwhile, Canada will see growth of 1-2 percent this year, and Brazil’s growth will be negative. Mexico is one of the few countries in the hemisphere expected to grow at rates comparable to or even faster than the U.S.; its 2.5 percent growth in 2015 is expected to gain several percentage points in 2016 and 2017.
CBRE expects the Americas capital markets environment to face some challenges over the balance of 2016, but it will continue to reflect many strengths. For the U.S., investment is expected to remain very active and to register a new record volume. Investment activity should pick up pace in Latin America, while it is expected to drop slightly in Canada as investors become even more selective in their search for safe and stable returns.
Investment pricing may be affected slightly by higher interest rates in the U.S., but given the expected favorable economic expansion and steady flow of capital into the market, the overall impact will be quite modest. For the debt markets, “wall of maturities” may cause the market some slight disruption–particularly the CMBS market–but no major problems for the vast majority of real estate investors.
Industrial & Logistics
The Americas’ industrial and logistics sector has had a great run for the past few years. The U.S. market has achieved some impressive milestones: A recovery spanning 23 consecutive quarters of positive net absorption–the longest such stretch in history. Availability has fallen to 15-year lows, and the overall net rent figure is on track to regain its prior highs in the middle of 2016.
“With the sector meeting and surpassing many of these high water marks, some observers are understandably skeptical about how much runway is left in this cycle,” said Mr. Levy. “Our view is that conditions in the U.S. industrial market will continue to be favorable throughout 2016.”
Office markets across the Americas are likely to vary widely in their performance over the balance of 2016, according to each market’s unique supply and demand characteristics. Despite recent financial market volatility and fears regarding the impact of a global economic slowdown, the strongest performance is expected in the U.S., where consistent job growth and limited new supply are pushing vacancy rates to near pre-recession lows. The Canadian and Latin American markets have seen new supply delivered in greater amounts and are more exposed to the commodities markets–though these trends are not uniform across the regions. Developers have started to pull back on construction in many of these markets, which should bring supply and demand into better balance over the next several years.
“The recently diverging paths of the energy and technology sectors–the two initial driving forces of the current U.S. recovery–illustrate the impact on office markets of industries that drive local office-using job growth,” said Mr. Levy. “Going forward, any shifts in the primary industries driving individual metro areas and submarkets throughout the Americas will bear watching and could result in disparate performances of office markets across the region.”
A bright outlook for consumer spending in North America will help the Americas as a whole post a solid performance in 2016. U.S. consumers are a relative bright spot in the global economy, thanks largely to the rapidly improving U.S. labor market. Although the energy sectors in Canada and Mexico have been hurt more by the low oil prices, consumer spending in those countries should remain supportive of retail, as well. All countries in the Americas can expect retail sales to increase in 2016. Risks for the retail sector include interest rate increases; potential pullback in luxury demand from tourists due to the strong U.S. dollar and Chinese slowdown; and wage growth that could fail to materialize as expected.
“Retail is reinventing itself in the face of the ascendant e-commerce sector and changing shopping preferences,” said Mr. Levy. “Malls and shopping centers are focusing on their key advantage: the opportunity to provide an unparalleled consumer experience. Retail venues are being transformed–from simple places to sell merchandise into dynamic and diverse settings to which consumers will gravitate.”