January 3rd - 2011

Uncertain forecast for commercial markets in 2011

Wishing they had a crystal ball, many commercial real estate experts expressed uncertainty about 2011 market prospects in the North American and global economies at the Annual Global Property Market and Toronto Real Estate Forum.

Wishing they had a crystal ball, many commercial real estate experts expressed uncertainty about 2011 market prospects in the North American and global economies at the Annual Global Property Market and Toronto Real Estate Forum.

Attracting almost 2,200 commercial real estate professionals from Canada and the U.S., the forum was held at Toronto’s Metro Convention Centre recently. More than 70 per cent of delegates were at the level of vice president or higher within their organizations.

“Unprecedented uncertainty for 2011” was the phrase used by Peter Hobbs, Senior Director of Group Business Development at Investment Property Databank. “Real estate predictions for 2010 have generally been wrong, missing out on the scale of events as well as on major turning points. We don’t know what will happen with either the economic outlook or the markets.”

The majority of speakers and panelists expressed the same sentiment: Although a sense of optimism for 2011 exists, the pace of recovery is expected to be slow and irregular. Economists say the worst is over, yet unemployment is stubbornly high while debt-burdened governments are simultaneously cutting spending and stimulus funds.

Just as the availability of capital for property is returning, the supply and demand for real estate remains weak, agreed panelists at the session titled “What does the future hold for investment activity in the Canadian market?” A stalled global economy has undermined the strength of property fundamentals and questions remain about mortgage refinancing and how it will affect property markets in 2011, they said.

On an optimistic note, panelist Trevor Blakely, Managing Director of BMO Capital Markets Real Estate Group in Toronto said he feels the market has improved dramatically since 2009. He foresees renewal in commercial real estate and is encouraged by greater consumer confidence with more credit and capital available, although the fundamentals “are still relatively weak. Prices for the most secure, well-located, highest quality real estate have improved and will continue to improve.”

As 2010 drew to a close, nothing much had changed in recent commercial markets, said John O’Bryan, Vice Chairman of CB Richard Ellis Limited, in a session titled “Cheap debt drives liquidity.” Lenders remembered they had to be prudent even in a more competitive landscape so that credit for the most part was not as readily available, nor in the quantities borrowers hoped for – although there was enough improvement in recent months to create what he described as a healthy credit market. “The intended consequence is that we have all this capital with nowhere to go,” O’Bryan said. “Fixed financial instruments are hardly an alternative source of investment, not when they’re in the one to 1 ½ per cent interest range, which doesn’t excite anybody.”

Predictions for 2011 remain difficult, according to Jacques Gordon, Global Investment Strategist at LaSalle Investment Management. He hosted a session titled “What have global real estate markets been doing during the economic volatility of 2010? What is the outlook for the future? Where should you be looking?” Gordon told delegates that more than $34 trillion in investment-grade commercial real estate exists around the world, of which only $6 trillion is owned or professionally managed by an institutional investor. Currently $2 trillion is publicly listed, primarily as REITs, which are experiencing astronomical growth.

He described guarded optimism among U.S. property investors for 2011. In cities like Washington, New York and Los Angeles, commercial real estate has bounced back from the recession and recovered its value as institutional investors have bid up and acquired a small but significant number of Class A properties. But as concerns increase about bidding wars for more stable investment properties, other investment strategies are being pursued. Gordon noted that “We’re still in the midst of a crisis and we can’t use the past to judge the future.”

Delegates also learned that in Canada, aging office properties have emerged as both issue and opportunity. Recently-renovated office buildings -- particularly those that have pursued green building practices -- are experiencing lower vacancy rates than other buildings. These lower vacancy rates for green renos are most notable in Toronto and Ottawa.

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Ontario Real Estate Association

Jean-Adrien Delicano

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JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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