Highlights from IRR’s Q2 2012 Viewpoint study
Jul 25, 2012
In Q2 2012, the top three U.S. cities that had the lowest CBD office vacancy rates were Raleigh, N.C., (6.2 percent); Portland, Ore., (7.6 percent); and Greensboro, N.C. (8 percent). The cities with the highest CBD office vacancy rates were Dayton, Ohio, (30 percent); Dallas (26.7 percent), and Hartford, Conn. (26 percent). That was one of the major findings in IRR’s Q2 2012 Viewpoint report.
Our quarterly reports compile data from our 63 international offices and take a deep look at the metrics that matter most to commercial real estate. This includes statistics on local vacancy rates, average asking rents, going-in cap rates, IRR’s discount rates, reversion rates, market rent growth rates, and expense growth rates.
We wanted to highlight some global markets included in our report to give you some insight into the states of their economies and real estate sectors. Those markets are Mexico, the Caribbean, and New York City. Here are some notable trends and developments for each area:
Mexico
Mexico’s economy has remained strong despite the instability of the global economies and the Euro crisis. The country’s economy is on pace to grow an estimated 4 percent by the end of 2012, according to the Latin American Economic Commission (CEPAL). This contrasts to Brazil’s forecasted growth of 2.5 percent, the United States’ forecasted growth of 2 percent, and the European Union’s likely negative growth. The key drivers in Mexico’s GDP growth include the manufacturing and export sectors.
Mexico’s real estate sector continued to grow during the second quarter, with only the vacation home market lagging behind in its overall recuperation. We believe the main reasons for this lag are the sluggish U.S. economy, coupled with the fear some American investors have to buy property in Mexico due to the widely publicized image of societal and political insecurity.
The Mexican office market has continued to experience impressive growth. The top three office markets in the second quarter in terms of total gross leasable area were Mexico City (41.336 million square feet), Monterrey (7.905 million square feet), and Guadalajara (4.038 million square feet).
Mexico’s retail market has also been on the upswing. It grew 11 percent during the past eight months and had 37 percent expansion in the past five years. This brings the total number of shopping centers in operation to 570 nationwide, representing 161.5 million square feet. Also, according to figures released by the Mexican retail association ANTAD, its member retailers reported accumulated sales of $29.15 billion during the first five months of 2012. These sales in the first five months resulted in an annual growth of 11.3 percent.
Mexico’s industrial market stabilized in the second quarter. The national average lease rate improved to $5 per square foot, due to a greater demand for industrial space. Industrial production in Mexico grew 4.5 percent in Q1 2012, according to INEGI. This can largely be attributed to Mexico’s auto industry growing 13.9 percent in the first half of 2012 and the country’s aerospace segment posting a 225 percent year over year growth to export $4.5 million by the end of the year. The Valle de Mexico and Queretaro markets continue to grow (to $5.17 per square foot and $4.74 per square foot, respectively), but Reynosa and Matamoros are still suffering from lack of security, causing high vacancies and depressed rents. The Puebla market is experiencing a shortage of Class A buildings, especially on units larger than 50,000 square feet, motivating rents to grow near the $4.50 per square foot range.
Caribbean
As we discussed in a previous blog post, the Caribbean is dominated by resort and residential real estate projects. Similar to the U.S., most of the Caribbean region is undergoing a slow recovery. Many successes appear to be in the markets, which involve high net worth investors in resort-residential real estate and in development projects not involving conventional financing.
The Q1 2012 statistics provided by Smith Travel Research indicate a very slight decline in the number of rooms, a modest increase in occupancy, and an even better increase in average daily rates (ADR). Together, these factors have led to a more than 10 percent increase in revenue. Statistics show that supply is not keeping up with increases in demand, even though historically the Caribbean adds to the room stock during downturns. Even still, ADR is not expected to recover for three years. Data from STR suggests that the upper-end segments of the scale are experiencing the best recovery in terms of rates and occupancy, perhaps as travelers with higher levels of income will be more likely to travel.
That said, other Caribbean development projects and properties of various types are being foreclosed or sold under duress at a pace not seen before in the Caribbean. There is concern in the commercial real estate sector that the mid-scale properties (or all those below the upscale, luxury level) will not be able to survive in the current and future climates. This is because rates and revenues are not expected to increase to a sustainable level in the foreseeable future due to increasing operating costs. This is especially true in the mid-scale, all-inclusive market, as these hotels are participating in a market where actual ADRs have failed to recover even to 2007 levels, while operating costs in the region have increased at rates greater than revenues or even general inflation in recent months. Further, all-inclusive hotels are finding it harder to compete with the attractiveness of cruise ship vacations, which are continually seen as more affordable and given the benefit of lower taxation and incentives from the governments of countries regularly on these itineraries.
The Caribbean’s two main economic segments, financial services and tourism, are currently driving the region’s recovery. The financial services industry is relatively stable, though somewhat uncertain due to increased pressure for transparency from the G20 and the Organization for Economic Co-operation and Development. In tourism, there is optimism in most markets where arrivals and occupancy are modestly increasing, though rates and pricing for real estate will take years to reach their peaks from 2006-2007.
New York City
The New York City commercial real estate market has seen positive movement in recent months. The city has regained 120 percent more jobs than it lost during the recession. In addition, tourism has been strong for New York, as it saw a record 50 million visitors in 2011.
Our Chairman and CEO Ray Cirz recently covered the New York City market in detail in his blog post, “NYC commercial real estate: 5 trends to watch in the Big Apple.” Check out his post to get his thoughts and forecasts for the New York City market.
Our Q2 2012 Viewpoint report discusses these and other findings in full. It also addresses property sectors, including office (both CBD and suburban), regional malls, neighborhood and community retail centers, bulk warehouses, R&D industrial, multifamily, and hospitality. You can download the full 25-page report for all the information. What are your thoughts on these markets and other trends you’re seeing playing out in the second quarter?
