Canadian Commercial Real Estate Investors Heading South to Buy or Lease

Recovery has been very slow in the United States commercial real estate office and industrial markets, but falling vacancy and limited new development, from constrained construction financing, should push rents up in 2014.  This will make the U.S. market more attractive to Canadian investors.

Canadian markets have slowed because of overbuilding and weaker demand although their vacancy rate currently is much lower than the United States at 8.3 percent for office and 4.6 percent for industrial. This will change because Canada has 27 million square feet of new office space in the pipeline that will force a slowdown in absorption.

The vacancy in the Canadian industrial market has actually increased slightly to 4.6 percent from 4.4 percent at the end of 2012.  The Canadian market is stable and has plateaued a bit because it bounced back from the recession much faster than the United States so there’s more room for growth in the U.S. market.

Canada leads, but with a significant margin in its investment in American commercial real estate for sale and while they prefer Canadian markets for common currency valuation, tax reasons, etc., they won’t hesitate coming to the United States. I’ve personally seen much Canadian presence in Los Angeles commercial real estate for sale and with Santa Monica commercial real estate for lease.  I’ve seen little with Columbus commercial real estate for sale or lease so they’re sticking with U.S. primary markets

Los Angeles Commercial Real Estate Construction jobs up sharply

The Los Angeles / long beach area added more real estate construction jobs than any other metro in the country with the exception of Atlanta.

The 8% increase places Los Angeles mid pack in rankings but in raw numbers, 9,100 new jobs was more than any other metro except Atlanta, which added 10,500, a 12% increase.

The Southern California gains weren’t just in the Los Angeles area as Orange County added 8,200 jobs and San Diego added 5,300.

The national primary markets of comparable jobs numbers added about half of the Los Angeles number.

We could use some additional Los Angeles commercial industrial / distribution / warehouse space from LAX north and also West Los Angeles and Santa Monica net leased retail property.

2013 Commercial Real Estate Review

It’s that time of the year again when everyone and their mother posts their yearend review for 2013 and/or forecast for next year, 2014.  I’m not going to do that, but instead linked is Deloitte’s 2014 commercial real estate forecast, which is long, detailed and usually fairly accurate.  I will summarize and editorialize a bit though.

Since I’m licensed in California and Ohio and have reciprocity in 11 other states, I read this report thoroughly as I find it helpful for the segments I work with – triple net, single tenant, retail and industrial / distribution / warehouse.  Plus medical office.  Columbus commercial real estate for sale or lease, and Los Angeles commercial real estate for sale or lease are my primary markets, but I’ll go anywhere.

Commercial Real Estate Fundamentals

The fundamentals have strengthened somewhat during 2013, especially in multifamily and hospitality.  Triple net leased, single tenant, national credit retail has also done very well.  Other segments have trended below historical averages when coming out of a downturn.  Multifamily is expected to peak and moderate as much new supply comes on line.   There’s still little new supply for single tenant, net leased retail and office so expect some tightening there for the foreseeable future.  Additionally, lending standards for construction loans remain stringent so that will contribute to restrained development.

GDP Growth

Forecasts for 4th quarter GDP growth are in the 2 percent to 2.5 percent at the high end, and around 2 percent for 1st quarter 2014.  This is still a very lackluster recovery and remains the weakest recovery since WW II.

What is not known yet is the effect that the increased out of pocket premiums for the ACA will have on growth in 2014.


While the commonly U3  reported unemployment rate has fallen to 7 percent,  the more important U6 rate remain exceeding high at 13.8% as of the end of November.  The labor participation rate is at a post 1978 low of 63.2.  The high structural unemployment is still a drag on the overall economy.

While the employment situation appears to be moving in the right direction, threats for 2014 include the fed backing off on the stimulus and the impact of sharply higher ACA health care premiums as a drag on the economy.


I generally work the national credit, net lease, single tenant market with Columbus triple net properties and Los Angeles triple net properties for sale or lease so the retail properties segment is of great interest to me.

For a quick summary, the vacancy rate overall is down 60 basis points year over year compared to 2012.  Effective rents actually dropped slightly at 0.3 percent year over year.  Net absorption was 8.1 million square feet year 2nd quarter 2013 over year as compared to 4.5 2nd quarter 2012.

New retail development is at a record low which should provide for some net increase in rents due to restrained supply tempered by a steady increase in online shopping.

Westerville, Worthington, Dublin, Powell, New Albany and Columbus triple net retail area markets have tightened considerably for the desirable properties plus we are seeing some new development in the East Broad Street, Columbus Commons, Olentangy River Road and Grandview Yard markets.   Most of this product is ground leased and not for sale.

The coastal Los Angeles market, including West LA, Santa Monica, Venice, Marina Del Rey, Beverly Hills has also gotten much tighter with major rent increases over the last year.  Most of this market is not ground leased so you’ll see Los Angeles retail properties for lease and sale.


The office vacancy rate has declined to 15.2 percent from 15.8 percent a year earlier and rent growth up to 2.1 percent versus 3 percent a year earlier.  As with net leased retail, new development is just about nil.


Vacancy has improved to 12 percent from 13.1 percent a year earlier and net absorption was a very strong 45 million square feet in 2nd quarter 2013 versus 24.2 million in 2nd quarter 2012.

Remember that even online retailers need warehouse, shipping and distribution space.

The link to the 32 page Deloitte report is below:

Deloitte 2014 Commercial Real Estate Outlook

Commercial Real Estate posted solid gains in 2012 as recovery spreads to more markets.

According to CoStar News, sales of commercial real estate in the United States reached $64 billion last year, which is the highest since 2004 and increased 22 percent from 2011.

The price gains spread beyond multifamily into industrial, office and retail.  Even commercial land showed signs of awakening mostly due to demand for multifamily with a 3.6 percent gain in the last quarter of 2012.

True, there was a big spike in December as sellers rushed to close deals due to the increase in capital gains tax rates for 2013.

Since the market fundamentals of larger class A properties in primary markets recovered first and competition has forced prices up and caps rates down, I expect more attention to move to secondary and tertiary in search of better returns.

Distressed sales were also down to 11.5 percent of total commercial real estate transactions, which is the lowest since late 2008, just as the crash was coming to commercial real estate.

There’s no question now that the recovery is broad based, but we will still have cycles like we have had through recorded history.  Given that primary markets and class A type properties recovered first, expect some softening as investors move investment dollars to class B properties in secondary markets.


West Coast Commercial Real Estate Recovery Strengthens.

The recovery is spreading west, which had been a deeply affect region of the country by the residential housing collapsed combined with the deep recession.

There has been a few technology and/or energy based markets in California and Texas that have done well over the last couple of years and that strength is broadening to large areas of the west.  Plus, this includes all segments of the commercial market from retail to multifamily. Triple net or absolute net, single tenant retail has been hot all year with cap rates falling well below 6% in the coastal California market.  Absolute net McDonalds have traded in the sub four cap rate range in California.  Triple net retail 7-11s have been trading in the mid fives for months now.  Even new construction is starting to show an uptick.

 The most recent CoStar Commercial Repeat Sales Indexes found that the west posted the biggest gains of the four U.S. regions.  The increase for second quarter Composite Index was a strong 5.5% with the west posting an 11.4% gain for the first half of 2012.

Commercial prices bottomed in the Northeast two years ago, but the CCRSI Composite Index has risen a cumulative 16.6% out ranking the rest of the nation.  However, the west’s apartment retail composite indexes have risen considerably by the end of second quarter 2012.  This has translated into strong positive net absorption and occupancy at midyear 2012.

“Clearly the strongest markets are being driven by technology related job growth, which is impacting the San Francisco, San Jose and Austin markets, with a smaller impact upon Orange County and Seattle,” said Walter Page, director of office research for Property and Portfolio Research (PPR), a CoStar company. “While this has been a strong demand driver, because of slowing venture capital funding, slumping stock prices for some tech firms, and the national elections, we are preparing for a slower second half of 2012 for nearly all office markets.”

Rent growth of office properties in the San Francisco bay area led the nation at 16.8% in the second quarter.  The Los Angeles metro and Silicon Valley weren’t far behind.

The San Francisco Bay area, Silicon Valley, Denver and Houston are some of the tightest markets in the United States due to strong absorption coupled with rent growth leading to a balanced market and fueling a new wave of speculative development.

Lackluster job and GDP growth will likely soften these numbers somewhat through the remainder of 2012, but it’s still looking like a pretty good year

Big Week For Industrial Real Estate

It was just announced by Mark Heschmeyer at CoStar News that Blackstone, DRA Advisors and AEW Capital invested in large industrial portfolios valued at a total of $1.5 billion.  That’s over one third of all industrial sales completed this year.

The industrial segment has been healing nicely this year with vacancy falling almost a full point during 2011.  Given the forecast for soft, but steady GDP growth coupled with virtually no new supply coming out of the ground makes 2012 a solid year for this segment.

The recovery is in primary and larger secondary markets favoring newer and larger properties.  “Bigger assets cater more to global trade and retail sales, both bright spots of the recovery since 2009,” PPR’s Nordby added. “Also, corporate profits are high and rents are low right now, so many tenants are inclined to trade up to newer space. On the other hand, smaller assets are often driven by the housing market – Joe the Plumber needs small bay space and definitely doesn’t need 32-ft. clear heights – and the local manufacturing environment.”

The  Blackstone sale  at $770 million is about twice the size of the other two,  DRA Advisors and AEW.

Blackstone Group’s Blackstone Real Estate Partners VII bought  65 industrial properties totaling 16.6 million square feet from Dexus Property Group of Sydney, Australia. The price comes to about $46/square foot with an average property size of about 250,000 square feet.

Dexus strategy was to exit non-core US markets. The properties are scattered across secondary markets located for the most part in central and southeastern United States:

State, Total SqFt

Ohio, 4,338,000
Texas, 3,525,000
Florida, 1,894,000
Georgia, 1,626,000
Arizona, 1,586,000
Maryland, 1,420,000
Minnesota, 945,000
North Carolina, 691,000
Virginia, 595,000

Now, Dexus portfolio will be focused on core Western States markets.

Blackstone has been on a tear during the recession with $19 billion in acquisitions since the recession began.

For more detail see

CoStar News – Article – The Week That Industrial Took Center Stage

Strong Comeback for Commercial Real Estate

It’s back!  Business is cranking again and the phone is ringing.  CoStar news reports that the dollar volume of commercial real estate transactions are back up to historical long term average and that’s with a lousy third quarter 2011, due mostly to the debt limit impasse  That’s a total of $291.6 billion last year, which is an increase of 32% over 2010.   The 2011 number also beat the 12 year average by $40 billion.  It’s still lower than the record, and I might add, unsustainable $560.7 billion in 2007.

Every sector has improved.  Office was up 39%, retail up 43%, apartments up 46%, hospitality up 32% and industrial lagged a bit at an 8% increase.  Land sales were down 14% versus 2010

Retail was up 43% from 2010, but that’s only 25% the 2007 volume.   Plus, it’s only the triple net or absolute net leased, single tenant, national credit retail that’s recovered so well.  It would be more of a recovery if we had some product, but due to unavailability of construction financing, there was little new construction over the last three years.  It’s a feeding frenzy on what’s out there that meets very finite criteria.

If you want this type of net leased, single tenant, retail product, be prepared to move when you find something you like.  If you like it, generally, so will everyone else.

I must get prepared for a city council meeting this evening so I’ll wrap this up and turn it over to Mark Heschmeyer for more detail

CoStar News – Article – Back in Business – Commercial Real Estate Sales Volumes Make Strong Comeback

New Data Shows Broad Gains in Commercial Real Estate Construction

According to Randyl Drummer at CoStar News, non residential commercial construction posted a 4.5% gain in November over same month last year.  All segments showed solid gains.

Residential commercial construction starts for apartments resulted in the strongest monthly performance in 18 months.

According to Randyl, manufacturing expenditures on new construction was up 12.6% over last year, including retail, warehouse, and farm, was up 12% over a year ago.  Private educational facilities were up 10%, private transportation 9.2% and power 8.4% projects were all well above last year levels.

“Several segments of construction appear to be climbing out of a hole,” said Associated General Contractors of America Chief Economist Ken Simonson. “The new year should reinforce recent year-over-year gains in apartment, power, manufacturing, and private transportation construction.”

Associated Builders and Contractors Chief Economist Anirban Basu agreed that recovery in the nonresidential construction sector was solid and broad based in November, encompassing both private and public construction.

Basu pointed out that the data is seasonally adjusted and part of the improvement may be attributable to the relatively mild weather across the nation in November and extending through December rather than to economic factors.  So far in January the weather appears to remaining mild.

Despite the recent good news, commercial construction faces plenty of economic and financial hurdles, with tight underwriting for construction lending and continued stress on federal, state and local government budgets — “not a good combination to push the nonresidential construction industry out of the doldrums,” Basu said.

CoStar News – Article – New Data Shows Broad Gains in Commercial Construction

Warehouse Sector Continues to Strengthen

Top retail and office properties have been bid up over the last year to the point where it makes sense to find another commercial real estate alternative.  That possibly can be industrial where leasing has been healthy, but not to the point where it doesn’t make sense anymore.  I think this sector is the next stop on the commercial real estate train.

Investors have been interested in large industrial properties in core markets such as Chicago with $2 billion year to date, San Francisco and Los Angeles with $1.6 billion each, Atlanta with $1.3 billion and Southern California’s Inland Empire with $1.1 billion. 

Plus, we have the same difficulty in industrial that we have in every other section – no construction financing so not much new coming out of the ground.  With a pipeline this empty it’s sure to drive up prices on what’s there.

CoStar News – Article – BRIGHT SPOT Investor Appetite For Warehouse Property Continues to Grow