- Occupiers to benefit from below inflation rent increases in 2014-15 across the US. This is partly due to only slowly improving occupier demand, but mostly due to very limited amount of new space being delivered.
- There is little room for space efficiency across most high costs US markets, except in Atlanta and Phoenix. Occupiers will need to focus on achieving more operational flexibility across the region.
- Global investors benefit from relative value with the US as the most attractive region. Retail and industrial are back on the agenda. But, as interest rates rise in future, we do expect relative value to weaken.
- With limited time to take advantage of the opportunity, we expect more US investors to focus on the most liquid markets, like LA and San Francisco. For global cross-border investors, London ranks top for liquidity.
London, UK: DTZ Research today published its 2014 Annual Outlook highlighting that economic growth has picked up and the global macro outlook has improved. In North America, both the US and Canadian economies will continue to expand at a moderate rate, which will lead to more job growth and a related increase in demand for occupational space. Given the moderate job growth across the region, vacancy will only trend down slowly. This is partly due to the fact that building inventory has not changed in most markets over the last few years. Even with the recovery, there are still few new projects under construction across the office, retail and industrial sectors.
Occupiers across the region will remain in good bargaining positions over the next two years and occupancy costs will increase in line with inflation. They will continue to receive concessions as landlords compete to increase net operating income. Most cities in the US and Canada will remain desirable with a few exceptions. Notably, the US average office occupancy cost per workstation will remain slightly below the global average.
John Wickes, Americas Head of Research at DTZ and co-author of the report said: “With regards to office, most US markets will remain affordable throughout the next two years with rental growth in line with inflation. The most affordable markets will be Dallas, Minneapolis, Phoenix, Seattle and Atlanta. In New York and San Francisco, however, occupiers will face rental growth well above inflation. Demand from the TMT and professional services sectors have driven the vacancy down to single digits in these markets.”
Warren D’Souza, Canada Head of Research at DTZ said: “Overall, Canada has healthy commercial real estate markets. This will continue in the coming year albeit with job growth and space demand growing at a slower pace than we experienced in 2013. Vacancy rates are expected to rise in our core markets, as sublet space continues to increase. Face rents will remain steady in most markets, but increase in some markets with low vacancy rates.”
In both the US and Canada, occupiers will gravitate to the most affordable markets and continue to reduce their costs through more efficient internal space build outs. This trend places a higher premium on common work areas and less on space for individual workers. In the US, the space utilization standard (area per workstation) is already low in several markets including San Francisco, making further reductions unlikely. New York, on the other hand, should be able to realize more space efficiency across our forecast period.
With regards to investors, the report notes that most US markets remain attractive on a relative value basis. The DTZ Fair Value Index TM (FVI) indicates that most US markets are attractive. This is largely due to historically low government bond yields and good pricing across all property types. According to the FVI, the top-ranked “hot” markets (most attractive) include San Francisco office and retail, Houston retail, New York office, Los Angeles retail, and Chicago office.
Karyn Brooks, SVP of Research at DTZ said: “Despite the prospect of increased lending rates, we believe investment volumes will substantially increase over our forecast period. REITS and foreign investment, especially from China, will increase the competition for buildings with credit-worthy tenants in core and secondary markets. Investors will target the highest available yields wherever they can find them, including those beyond the core, tier one, CBD markets.”
Hans Vrensen, Global Head of Research and lead author of the report, concludes: “North America will benefit from a significantly improved macro and property market sentiment. It’s notable that US average occupancy costs are now lowest of the three main regions. With few exceptions, occupiers in most US markets can improve space efficiency. Nonetheless, occupiers regionally need to be more focused on operational flexibility to improve competitiveness. Some core investment markets in Asia Pacific and Europe have become more fully priced. But, many remain attractively prices, especially in the US. However, there is limited time to take advantage of this attractive pricing, as interest rate rises are looming. Investors need to be bold and focus on liquidity regardless of market focus. In North America, we do expect domestic investors to remain dominant, despite a step-up in international cross-border activity.”