Market Perspectives: U.S. and Canada Real Estate Outlook
History happens on the nines. That was the theme for Douglas Poutasse’s keynote presentation at NAIOP’s National Forums Symposium in Vancouver.
Poutasse, executive vice president and head of strategy and research for Bentall Kennedy, wanted to study history in college but joked that, “I wasn’t a good enough student, so I ended up in real estate research instead.”
To prove his point about history on the nines, Poutasse took the audience on a tour of world history since 1919.
Some of his highlights:
1929: Dow Jones Industrial Average peaked at 381.17 points. It would not pass that mark again until 1954.
1939: World War II started in Europe.
1969: The first baby boomers entered the workforce. Inflation began to mount after a decade of low levels.
1989: The Soviet Union started to fall; record levels of construction drove vacancy rates to historic peaks.
1999: The Nasdaq hit 4000 points – 9-times its 1989 level. The Dow passed 10,000 points for the first time.
2009: The Great Recession hit hard and 8 million jobs were lost in two years.
Will 2019 be another “notable nine?”
Poutasse said he expects the U.S. economy to ease back to recent trend growth. “Look for 2019 to be slightly lower than recent trends, and lower still in 2020.”
The general consensus is for a recession of some kind starting in late 2020 or early 2021. Poutasse wasn’t ready to officially join that consensus, but he said he did anticipate a recession “before Tom Brady retires.”
“The fact is cycles don’t die of old age,” he said. “Even if they did, this expansion isn’t that old.”
By some metrics, we are in the longest economic expansion in U.S. history. But Poutasse noted that the recoveries that started in February 1960, March 1980 and June 1990 all saw 11 years of job growth. We are only in year 10 of job growth starting from the recovery that began in January 2008.
To set a new record we need fuel – and that fuel is labor. The problem? For the first time since 2001 – the first year this statistic was tracked – we have more job openings than we have unemployed people.
So this growth cycle may not die of old age but it might burn out for want of labor, at least in the United States. Canada, however, has an advantage that allows it to “punch above their weight.”
Why? A key source of new labor has been foreign students coming to the U.S. and staying to add to the labor pool. The number of students coming the U.S. started to decline in 2016 after years of steady growth. Canada, on the other hand, saw a spike of students in 2017 – the year after the U.S. leveled off.
This means Canada is enjoying its best population growth in 30 years. Canada has seen population booms before, but they were usually centered on the oil and gas industries – known to bust as quickly as they boomed. Technology is the core of this latest boom, and that is seen to be more stable than the energy sector.
Though labor looms as the biggest challenge facing the economy, the built environment continues to post solid numbers. Poutasse noted that commercial real estate market conditions are generally healthy and industrial, especially, continues to power forward. Vacancy rates for industrial are at record lows powered by the continued growth of e-commerce.
“You can pretty much name your price if you have vacant space in a warehouse,” he said. This is especially true in Canada. Toronto, Vancouver, Montreal and Ottawa all have sub-4% vacancy rates, the lowest in North America.
Two sectors stand out in retail sales: e-commerce, growing at a 14.5 % clip year-over-year, and bars and restaurants, posting 8.6 % growth.
“That’s why you see so many bars and restaurants going into shopping centers and malls – it’s where the growth is right now,” Poutasse explained.
Turning to office real estate, Poutasse noted that coworking is an increasing driver of space absorption. “It’s not just freelancers anymore; small and midsized businesses and large enterprise firms are taking coworking space.”
Most major office markets in North America have sub-10% office vacancy rates except for the “oil-patch markets” of Edmonton, Houston and Calgary with 18, 23 and 26% vacancy rates, respectively.
Poutasse concluded his remarks with his thoughts on Opportunity Zones. “They have the potential to set a new standard for triple bottom-line investing,” he said. “But not all opportunity zones are equal. It is easy to lose a lot of money while trying to save a few tax dollars.”
In summary:
Healthy U.S. Economic Growth Coming under Pressure
A more dovish Federal Reserve stance has calmed markets somewhat and economic fundamentals are strong, however risks remain due to global slowdown, trade wars and other factors.
Space Market Conditions are Healthy
Vacancy rates are generally below long-term averages and rents are rising as a growing economy supports healthy demand for space.
Investment Activity is Robust Even as Returns Moderate
The NCREIF Property Index’s total return came in slightly below consensus expectations. Industrial property is outperforming dramatically, while retail lags. The forecast shows modest, if any, appreciation.
