Avison Young Canada US Commercial Real Estate Investment Review

FALL 2013

Avison Young Commercial Real Estate Investment Review Canada & U.S. Partnership. Performance.

Avison Young Commercial Real Estate Investment Review Canada & U.S. Fall 2013 Canada & U.S. Market Overview

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Avison Young Research

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Canada & U.S. Market Highlights

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Canada Calgary Edmonton Montreal Ottawa Toronto Vancouver

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United States Atlanta Boston Chicago Dallas Denver Houston Las Vegas Los Angeles New Jersey New York Orange County Pittsburgh Raleigh-Durham San Diego County San Francisco San Mateo South Florida Washington, DC

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About Avison Young

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Canada & U.S. Commercial Real Estate Investment Market Overview Investment capital flows into Canada and U.S. markets, defying initial interest-rate hike Canada has exceeded pre-credit crisis investment dollar volumes and pricing for most asset categories, while improving property market fundamentals continue to fuel investment activity in the U.S. There is no evidence that the recent rise in interest rates slowed activity on either side of the border in the first half of 2013. However, it will be interesting to see what the effect will be of the biggest buyer group – interest ratesensitive real estate investment trusts (REITs) - taking a break from their insatiable buying spree.

Canada Overview

U.S. Overview

ealthy market fundamentals continue to drive investment activity in Canada. Slightly more than $14.4 billion (CAD) worth of commercial real estate assets (office, industrial, retail, multi-residential and land, greater than $1 million) traded in the first half of 2013 – up $1 billion or 8% compared with the first half of 2012. Led by industrial transactions, Toronto’s $6.5 billion was the highest investment dollar volume in Canada – up 15% compared with the first half of 2012 and capturing 45% of the national total. Toronto led in every category except land. Active land sales helped Calgary ($2.2 billion / +4% / 15% share) displace Vancouver ($2 billion / -20% / 14%) from one year ago for second position. Land sales also boosted Edmonton ($1.6 billion / +28% / 11%) past Montreal ($1.6 billion / +46% / 11%), which saw a significant uptick in multi-residential sales. Despite a surge in industrial trades, Ottawa ($618 million / -29% / 4%) remained below the $1 billion mark. Nationally, industrial sales outpaced office with 24% of total firsthalf investment dollar volume. In all, $3.5 billion worth of industrial product sold – the greatest year-over-year increase at 92%. Industrial sales increased in every market. While Ottawa saw the most notable improvement (+351%), Toronto recorded the largest industrial dollar volume – $1.9 billion (53% of the national total). First-half office sales of $3.2 billion (22% share) were down 37% from an impressive $5.1 billion in the first half of 2012, falling everywhere except Montreal (+77%) and most sharply in Vancouver (-70%). Toronto was the most active office market, as sales reached $1.8 billion. Land was in demand (especially in Western Canada) with first-half sales of $3.1 billion (22% share) – up $925 million (42%) over 2012. Calgary was the hottest land market as sales jumped 249% to $902 million, 30% of the Canadian total. Retail transactions increased a modest 3% over 2012 to $2.3 billion (16% share). The eastern markets (Toronto, Ottawa and Montreal) were busiest, combining for $1.6 billion worth of retail trades – two-thirds of the national total. Toronto garnered $1.3 billion (55% of national total) – matching the sales volume for all of 2012. Rounding out the five sectors was multi-residential. Low vacancy rates, steady incomes and favourable mortgage rates lifted sales of multiresidential property 12% compared with 2012 to $2.2 billion (16% share). While Edmonton and Montreal witnessed annual sales growth of 184% and 124%, respectively, Toronto led all markets in total dollar volume with $986 million (44% of national total). Though capitalization rates (cap rates) are lower on average than one year ago, further interest rate hikes may moderate or even signal the end of cap-rate compression for some property types. Cap rates are lowest for multi-residential investments and Vancouver yields the lowest cap rates in every asset category except retail (tied with Toronto). Even if the interest rate-sensitive REITs take a pause from their frenzied buying, the void will more than likely be filled by pension funds and private equity players, who in some instances have lost out to REITs for top-tier assets. For 2013, investment volume is poised to match or exceed 2012’s record of $28 billion.

n Avison Young’s U.S. markets, commercial sales rose during the first half of 2013 compared with the first half of 2012 primarily on the strength of multi-residential asset dispositions. Sales volumes for office, industrial, retail and multi-residential properties reached $77.5 billion (USD) by mid-year 2013, compared with $60.3 billion for the same period in 2012, a 28% increase. Three stand-out markets comprised 47% of all sales volume in the U.S.: New York ($14.6 billion / +59% / 19% share), Los Angeles ($11.3 billion / +54% / 15% share), and Washington, DC ($10.8 billion / +107% / 14% share). Other markets that registered notable yearover-year changes in volume included Las Vegas (+73%), Orange County (+66%), Atlanta (+63%) and San Mateo (+56%). Multi-residential and office sales comprised 79% of all sales volume by mid-year 2013. Multi-residential sales showed the most marked improvement, jumping to $31.9 billion in the first six months of 2013 (+88%) from $16.9 billion for the same period in 2012. All Avison Young markets, with the exception of four (Boston, -22%; San Francisco, -21%; San Diego County, -3%; Raleigh-Durham, no change), recorded gains in multi-residential sales volume. The leaders were San Mateo, which increased from $56 million to $611 million in volume (+990%) and Washington, DC, increasing from $1.7 billion to $7.6 billion (+355%). Overall office sales volume rose during the past year, reflecting strengthening market fundamentals in many U.S. cities, climbing to $29 billion in the first six months of 2013 (+37%) from $21.2 billion in the first half of 2012. Not surprisingly, New York ($9 billion / +76%), Los Angeles ($3.4 billion / +96%) and Washington, DC ($2.2 billion / -7%) led asset sales in this category as well. Atlanta, with overall office sales of $1.8 billion (+515%), and Orange County, with office sales volume of $1.6 billion (+208%), demonstrated the greatest year-over-year increases. First-half 2013 sales of retail properties declined by 35% to $9.4 billion from $14.4 billion in the first half of 2012. Only five Avison Young markets in the U.S. reported any uptick in volume (Raleigh-Durham, +191%; Las Vegas, +100%; Atlanta, +92%; Pittsburgh, +75%; New York, +3%). Lastly, industrial sales volume in the first half of 2013 declined slightly compared with firsthalf 2012, slipping 7% to $7.2 billion from $7.7 billion. While Los Angeles had the greatest volume with $1.2 billion in sales, New Jersey reported the greatest positive change with $909 million (+138%). Cap rates in the U.S. moved lower in the first half of 2013 for all asset classes (except multi-residential) and averaged 6.8% compared with 7% one year earlier. Multi-residential cap rates are the lowest (although they are experiencing upward pressure) on average for all of Avison Young’s U.S. markets. Of note, cap rates for office product fell significantly in Dallas (-160 bps), New Jersey (-140 bps), Orange County (-140 bps) and San Diego County (-110 bps). Look for further improvement in the second half of 2013, with overall sales volume likely to exceed 2012 levels. Office sales should be led by gateway and energy-driven markets with improving fundamentals, and multiresidential sales may begin to cool due to the increased development occurring in some markets.

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Fall 2013 Canada, U.S. Commercial Real Estate Investment Review

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Avison Young Research Canada & U.S. Publications Turning Information into Intelligence

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vison Young’s multi-disciplinary group of dedicated research professionals works collectively to deliver market analysis and insights that drive value in real estate decisions. We translate data into market intelligence to help our clients strategically solve their real estate concerns and concentrate on what their business does best. Avison Young regularly produces an array of local, regional and North American market research, including quarterly and special reports, and annual forecasts. Our research is quoted extensively in local, national, business and global media outlets. Through Avison Young’s professionals, our research team engages with a wide variety of corporate, investor and institutional clients to conduct customized research, due diligence and market assessments, as well as demographic and location analysis. Leveraging in-depth knowledge from our broad services platform with information from internal proprietary and independent third-party data-tracking systems, our clients’ real estate decisions are fully supported by best-inclass, interpreted data – true market intelligence. Atlanta Office Market

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uring the first half of 2013, Atlanta’s office market was buoyed by improved economic conditions. The city’s unemployment rate has decreased to 7.6%, the lowest since the Great Recession. Professional services and IT firms have been expanding their office space and bringing new jobs to Atlanta. Healthcare technology company athenahealth confirmed it will lease 75,000 sf at Ponce City Market, with the possibility of growing to 120,000 sf over the term of the lease. The healthcare IT group will eventually bring 500 new high-tech jobs to the city from Alpharetta, GA. Coca-Cola has announced that it will bring its IT center to Downtown Atlanta, consolidating multiple locations in 275,000 sf at SunTrust Plaza and bringing 2,000 jobs to the city. The positive economic improvements and a willingness expressed by firms to Canada & U.S. Market Highlights expand have led to gains in the Atlanta office market. Atlanta ended the second quarter of 2013 with a total inventory of 143.5 msf and a vacancy rate of 19.7%. The vacancy rate has decreased 200 bps during the last 12 months. Net absorption for the first half of 2013 totaled 595,445 sf, up slightly from 410,111 sf during the same period in 2012.

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Downtown Suburban Suburban Class A Average Asking Gross Rents When new construction begins to be delivered in the CBD later this year, a leveling-off in vacancy rates is expected downtown - with major tenants migrating to the new properties, returning excess square footage to the market, while landlords continue to trade vacancies. Meanwhile, the limited suburban development is almost entirely build-to-suit and should not impact vacancies greatly. However, as leasing activity is not expected to keep pace with the last several quarters, a leveling-off of vacancy rates may occur until the business community gains more comfort with federal fiscal policy. When this $40 occurs, office-using employment should resume its assault on Massachusetts’ overall unemployment rate of 6.6%, which still sits 400 bps above the historic low of 2.6% in October 2000. $70

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Recent Lease Transactions

VA Data, Inc., Ashburn (industrial) – 200,000 sf TNS, Inc., Reston (office) – 120,000 sf Northern Virginia Community College, Fairfax (office) – 84,900 sf Pacific Architects and Engineers, Courthouse (office) – 71,100 sf Level 3 Communications, Tysons Corner (office renewal) – 64,100 sf Arlington Public Schools, Arlington (office) – 62,300 sf Alion Science & Technology, Alexandria (office renewal) – 57,300 sf

Recent Exclusive Lease Listings

Trinity Centre 1-4, Trinity Parkway, Centreville (office) – 488,200 sf 5911 & 5971 Kingstowne Village Parkway, Alexandria (office) – 304,000 sf 3150 Fairview Park Drive, Merrifield (office) – 252,600 sf 10740 Parkridge Boulevard, Reston (office) – 215,700 sf 8609 Westwood Center Drive, Tysons Corner (office) – 159,300 sf 11790 Sunrise Valley Drive, Reston (office) – 139,500 sf

Recent Properties Sold

1900-1902 Campus Commons Drive, Reston (office) – 239,600 sf 10740 Parkridge Boulevard, Reston (office) – 215,700 sf 8609 Westwood Center Drive, Tysons Corner (office) – 159,300 sf 10800-10802 Parkridge Boulevard, Reston (office) – 121,700 sf 9990 Fairfax Boulevard, Fairfax (office) – 93,000 sf 607 Herndon Parkway, Herndon (office) – 78,300 sf

Washington, DC

Avison Young Commercial Real Estate Newsletter

Partnership. Performance.

Region in transition in 2013 as sequestration plays out

Avison Young acted on behalf of the buyer in the purchase of 10740 Parkridge Boulevard in May 2012 and has since represented the new landlord in three lease transactions totaling 170,000 sf.

B CANADA OVERVIEW & FORECAST

y November 2012, the Washington metro area’s unemployment rate was 5.3%, one of the lowest levels in the U.S. Washington’s employment gains and other strong indicators belie the overall sense of caution that has existed since mid-year. In 2012, anticipated vacancies due to Base Closure and Realignment of 2005 (BRAC), constrained federal government leasing, new construction and private-sector tenant consolidation resulted in a softer real estate market. At the same time, strong tenant-favorable conditions created opportunities for occupiers, and some tenants restructured leases well in advance of expiration dates for significant savings.

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L to R: Tysons Tower, Constitution Center, 1812 North Moore

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The metroTORONTO market’s vacancy rose to 13.3% in 2012 from 12.2% at MISSISSAUGA year-end 2011, while transaction velocity fell and net absorption (TORONTO WEST) turned negative. Construction increased last HALIFAX year as 3.5 msf was completed, with roughly 65% preleased. Another 4 msf is OTTAWA scheduled to deliver this year. Notably, some sizable developments Decrease > 20 bps were started speculatively in 2012. Among them were Monday Canada Overall Office VacancyProperties’ Rate Comparison 540,000-sf 1812 North Moore Street in Rosslyn and 14% Macerich’s 530,000-sf Tysons Tower in Tysons Corner. transactions, if one knows where to look. At Avison Young, we have 12% been very successful in helping our clients do just that. With favorable conditions for tenants, renewals still dominated LETHBRIDGE

Flat -20 to 20 bps

Looking much like 2012, minus the Mayan end of the world

What we at Avison Young have been advising for the last three years will continue to be our mantra: stay patient, risk-manage your strategy on the buy-side, and take advantage of off-market and distressed opportunities when they present themselves. As a seller, do not be afraid to take some profits. Core assets in the major markets are highly sought-after and, therefore, aggressively priced when up for competitive bid. Multi-residential and high-end retail are the favoured assets, but significant office and industrial transactions are occurring. Plenty of opportunities can still be found in off-market

Vacancy Rate (%)

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Avison Young 2013 Canada, U.S. Forecast (2012 Annual Review)


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Thus, as Canada appears to have reached a short-term top in pricing, 8% the U.S. is just beginning to get its sea legs. Assuming Washington can reach agreement and avoid inducing a recession, all signs point 6% to an economy and a real estate environment that has plenty of 4% capacity to recover and grow.

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As we begin0% 2013, we see that leasing generally remains tilted in Calgary Edmonton Halifax Lethbridge Mississauga Montreal West)such as favour of the occupier, except in select oil and gas(Toronto cities Houston and Calgary. Vancouver and Toronto are fairly balanced as well. Most other markets have either been flat-to-down or in unstable recovery mode. We have not seen extraordinary growth in rental rates or a huge reduction in vacancy in any major market in North America. Instead, we continue to see markets that are poised for positive absorption and rental growth when global factors and benchmarks turn positive and decision-makers finally take action. However, there is still too much pessimism and uncertainty in the system for a full-blown recovery. It wants to happen, but confidence needs to lead the way. (To Mi ron ssi to ssa We ug st) a

Most economists predict that Canada and the U.S. will grow their respective economies, as measured by gross domestic product, at the rates of 2% and 2.8%, respectively. These rates are still anemic and have some observers worried. However, considering all of the economic and political uncertainty in the world, these rates should be considered positive and definitely on the right track.

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We believe that the real estate community will – and should – position and reposition to take advantage of what will likely be a healthier and clearer picture by 2014. This is not to say that we should write off 2013, or sit on the sidelines. Quite the opposite: there is much to be transacted in 2013 while strengthening positions for the future, as economic and political issues in the U.S. and Europe see some form of resolution.

In 2013, some historically tight suburban Metrorail-served locations, such as Rosslyn-Ballston Corridor and Crystal City, will have further vacancy increases, while DC’s vacancy remains in the single digits. In the latter part of this year, deal velocity around the region will likely begin to accelerate, though many submarkets will remain U.S.: Are we at the bottom? Canada Overall Industrial Vacancy Rate Comparison oversupplied throughout the year. On the other14% hand, in the U.S., the early signs of a housing recovery are triggering the question: “Are we at the bottom?”. The lack of 40 Avison Young 2013 Forecast 12% development is providing confidence for investors making valueadd acquisitions, and core class A product is expensive everywhere. 10% (

We are forecasting a similar scenario for 2013, although without the doomsday predictions. Against a global backdrop of financial uncertainty stemming from continuing issues with stability in Europe, a potential slowdown in China, the debt ceiling and new fiscal cliffs in the U.S. and potential plateauing in Canada, North American real estate markets still appear to be the most stable – with a healthy balance of risk and opportunity.

leasing transaction activity, including the National Institutes of Health’s 356,000-sf lease in North Bethesda and the U.S. Small Business Administration’s 254,000-sf lease in Southwest DC. Bucking the renewal trend were TNS Inc., which signed for 120,000 2011 sf in Reston, and Corporate Executive Board’s expansion of 109,000 2012 sf in Rosslyn. 2013F

Canada: Are10% we at the top? In Canada, the shortage of product (evidenced by REITs buying 8% portfolios and private funds buying REITs) and very low current vacancy rates 6% suggest more demand-side price upside, even though the large development pipeline may temper rent growth. 4% The strong Canadian dollar is a problem for the domestic economy, though positive for Canadian institutions going global – a trend 2% that we expect to increase in 2013. These factors, combined with 0% pervasive condo overbuilding, are resulting in “Are we at the top?” questions north of the border.

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s we go to print with our 2013 Forecast, we at Avison Young are happy to report another year of dramatic growth and solid performance in 2012 for our company. We are proud to have helped clients successfully traverse a North American real estate landscape that was bumpy in some markets and asset classes. We are also pleased that we enabled clients to capitalize on robust growth in the oil and gas regions, relative stability in the major coastal “gateway” markets, and a nascent revival in industrial markets, thanks to a manufacturing sector that began to offer glimmers of hope in 2011.

Avison Young 2013 Forecast

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Office

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Increase > 20 bps

Commercial Real Estate - Canada & U.S.

Avison Young Commerical Real Estate Newsletter Canada, U.S. (Spring/Summer 2013)

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Office Vacancy Forecast 2013:

2013: A year to position for the future

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EDMONTON

AVISON YOUNG 2013 FORECAST 2012 Annual Review

The next 12 months will be a time of transition while the market waits out the budget impasse and the federal government implements new policies regarding space utilization, security standards and energy efficiency. The sense of uncertainty will persist in early 2013 with deal velocity gradually improving in the second half of the year.

MESSAGE FROM THE CEO

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Avison Young Office Market Report Canada, U.S. (Mid-Year 2013)

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ollowing several years of less than 7% vacancy, Northern Virginia’s 22-msf Rosslyn-Ballston (R-B) Corridor saw vacancy begin to climb in 2011 and reach 15% by the first quarter of 2013. Many factors contributed to this dramatic change and will likely test the market for years to come. $30 The consolidation related to the Base Closure and Realignment $20 legislation of 2005 (BRAC) – Mid-Year 2013 Canada, U.S. Office Market Report 15 $10 wherein defense agencies vacate Multi-residential development leads market leased space in the private-sector Recent Lease Transactions $0 Casto Investments Company, LLP (retail) – 126,400 sfmarket and move to governmentowned facilities – was to have he unending wave of multiLNRNorth Property Corporation - 28,100 In late 2012, 4040 Fairfax Drive (retail) felt the effectssf been completed in 2011. The residential development Call Experts, LLC (office) 26,500 sf of BRAC whenInBound the entire building was –vacated. program will now carry on at least that took place Renovations in South areTNHYIF REIVinKilo sf attract planned an(office) effort–to16,700 better Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) through 2015 with some 2 msf of Florida during recent tenantsyears to backfill the space. LFC Development, LLC (office) – 12,900 sf Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) additional move-outs planned in brought with it some concern Boca R & D Project (office) – 12,600 sf * Rental rates are shown in U.S. $ this submarket. 4040 North Fairfax as to whether the market could MS Eastchester, LLC (retail) – 12,300 sf Drive activity. is a prime example. A back-office function for the Department of Defense vacated the handle such robust Boca R & D Project 7, LLC (office) – 10,500 sf entire 184,000-sf building at the end of 2012 and moved to a neighboring submarket. As the South Florida Business Recent Exclusive Lease Listings Newrecently, development activity is currently outpacing absorption. The R-B Corridor’s 10-year average Journal reported 3998 FAU Boulevard, Raton – 283,900 sf sf of speculative construction annual is 273,000 sf and Boca by the end(office) of 2013, 538,000 development activity hasabsorption been 5900 N. Andrews Avenue, Lauderdale (office) (nearly two years’ supply) is slated toFt.be delivered in –a215,000 singlesfbuilding at 1812 North Moore strong and experts believe the 100 W. Cypress Creek Road, Ft. Lauderdale (office) – 215,000 sf by Monday Properties. market is ready forStreet, it. being developed 8051 Congress Avenue, Boca Raton (office) – 160,000 sf That being said, owners of new buildings can expect to attract a fair share of tenants. A significant Musical chairs for startups and techs One of those experts, Alliance Recent Lease Transactions 1875 NW Corporate Boulevard, Boca Ratonproperties and older ones beyond the View of Sunny Isles, Florida - home to many of South dichotomy exists between the performance of newer Caliper Life Sciences (office/R&D) – 198,300 sf Residential chief operating (office)trend – 123,800 Florida’s marquee condominiums. general flight-to-quality also sfat play. The 22 newest buildings in the R-B Corridor, which officer Brad Cribbins, pointed 900 Broken Sound, Boca Raton (office) – 120,700 sf ewly founded tech-focused athenahealth, Inc. (office) – 83,000 sf were delivered between 2002 and 2012, averaged 424,000 sf of absorption annually during that fueling the 1100, 2200 & 2100 Park Central Boulevard, companies have specific needs Emerson Hospital (office/medical) – 80,800 sf out one trend period and boasted an 8.6% vacancy rate at year-end 2012, compared with 14.9% for buildings market public demand: “Much of what is getting built is midrise downtown/urban buildings. in choosing a location: Beach (office) –are 112,500 sf PayPal (office) – 62,800 sf completed prior toPompano 2002. Able landlords renovating or repositioning older assets to help What’s drawing people to that particular building type is mobility. ” He adds that “the transportation, downtown access, Sawgrassthem Corporate Parkway, them stand out or1300 converting to other uses Sunrise such as multi-residential projects. Proto-Pac Engineering Inc. (industrial) – 45,900 sf 25- to 35-year-old group is redefining how long they want to be tied down to a home.” affordable living accommodations (office) – 106,600 sf Additional market challenges include Metrorail’s Silver Line extension into Tysons Corner which, A.I.M. Mutual Insurance Companies (office) – 34,500 sf and, of course, access toFurther inexpensive supporting the claim that demand in the multi-residential market Universitymore Drive, Coral Springs (office) – 105,900 sf whenremains completed,3201 willN. create affordable leasing opportunities for occupiers seeking Zwicker & Associates PC (office) – 34,400 sf real estate – be it office, healthy lab or flexible is CVR Realty’s report that South Florida is on pace to surpass the 100 proposed locations. 150 S. Pine Island Plantation (office) – 102,000 sf from federal tenants due to a Metrorail-served ThereRoad, is also a pullback, beyond BRAC, Acacia Communications – 28,200 sf as many as 15 condominium space. Years ago, Eastcondominium Cambridge developments threshold(office) in 2013 with 2307space-use W. Browardefficiencies Boulevard, Ft. Lauderdale mandate to increase and pending further tightening, from government Vecnaconstruction. Technologies, Inc. (office) 26,600projects sf became one of the world’s projectslargest already under Most of –these are midrise developments – 66,900 sf contractors as well, (office) as a result of sequestration’ s spending cuts. Similarly, space utilization rates TeraDiode, (industrial) – 24,500 sf totals to the broad scope of South launch pads for startups and techs. urban near thriving areas. Inc. Adding these condo Banyan Trail, Bocaas Raton (office) – 65,000 sf brought about by a younger are falling among604-622 private-sector tenants work culture changes Sotax Corporation (office) –boosts 21,900 sfthe local market to the workforce The area met every demand including Florida’s multi-residential development top of most 141 NW 20th Boca – 61,800 sf open-workspace floor plans. and technology areStreet, leading toRaton more(office) densely packed, MIT, one of the largest generators metros nationwide.Park Place International (office) – 17,800 sf Despite the R-B Corridor’ desirable qualities, it is expected that these market influences Recents many Properties Sold of startups in the nation. Today, withaccording Vantage Partners, LLC (office) – 16,200 sf Additionally, to Multi-Housing News, at year-end 2012, the South Florida market will lead to a prolonged underlying Stearns Bank (office) –vacancy, 14,200 sfespecially in class B buildings. The R-B Corridor is PayPal’s lease of 62,814 sf at 1 International East Cambridge rents leading Greater had vastly outsoldMaidPro its share of multi-residential development the Franchise Corporation (office) – 13,900 sf sites compared likelywith to experience intenseSale competition for viable tenants for the foreseeable future. Place has changed the way companies view the Boston, many startups will need Recent Properties Listed Spring/Summer 2013 rest of the country,Crunchtime! with more than $315 million in sales (compared with second-place Information Systems, Inc. (office) – 13,700 sf downtown market. 604-622 Banyan Trail, Boca Raton (office) – 65,000 sf alternative location options. Los Angeles at more than $108 million).(office/medical) – 12,200 sf Lexington Eye Associates 6501 & 6531 Park of Commerce Boulevard, The relocation patterns of these young, nimble and technology-driven Thecompanies South Florida sites seeing the most activity seem Flexion Therapeutics (office) – 11,800 sf to be infill locations in the primary Boca Raton (office) – 50,900 sf Y are explained by the decisions of their global corporate counterparts, such as GoogleOnceSmart submarkets. the new supply(office) hits the market, it does not take long to sell. As ISON OU Destinations – 10,900 sf 900 Broken Sound, Boca Raton (land) – 17 acres and Microsoft. In an effort to coexist, industry behemoths effect supplyanticipated, and demand class A inventory is still expected to be the product to beat. Reports show Recent Exclusive Lease Listings constraints upon smaller, younger firms. Hoping to capitalize on the human capital that brandthat new product sells very quickly, with the majority of the highly coveted projects 526 Main Street, Acton, MA (office) – 36,000 sf is so critical to their core business, these global companies occupy real estate locations all-cash stillinattracting buyers as the top bidders. Recent Sold should maintain a steady dense with startups. As corporations absorb spaces upwards of 200,000 sf, theofmarket 32 growthAvison Most the region’s expertsProperties believe the market rate as Young Commercial Real Estate Newsletter (Canada, U.S.) Baker Avenue, easier Concord,toMA (land) and – 6.3 acres tightens. The areas become less affordable for the very tenants who createdconstruction the desire toloans221 Generations and technology – transforming the workplace have become obtain capital from secondary markets theevident market not – early-stage and tech ventures. Recent SaleForeign Properties Listedespecially from Latin America, also is starting to become a factor. investment, oday’s workforce spans four generations: assigned workplaces – enter a trend only CANADA In buildings. 1995, office was renting in the mid $20s psf in East Cambridge. remains As rents as have Mature/World War II (born pre-1946); Baby in new, but also existing In space the iconic a strong component of private capital with VT more overseas interest growing 354 & 356 Mountain View Drive, Colchester, 2 Calgary Boomers (1946-1965), Generation X (1966-1980) 1960s-era TD Centre indoubled Toronto’s financial core, – and, in some cases, tripled – there has been a tremendous shift.by Startups and Simply the quarter. stated, the sustained level of activity across the multi-residential (office) – 110,400 sf 3 Edmonton and Gen Y/Millennials (1981-2000). According to TD Bank is retrofitting techs 20 storeys old offices beganoftaking space in the Seaport District in 2009. Dubbed the Innovation marketDistrict seems to indicate that the sector should 393 Fortune Boulevard, Milford, MA remain one of the hottest commercial 4 Guelph Statistics Canada and the U.S. Bureau of Labor with an array of flexible areas. Elsewhere, bywork Boston Mayor Thomas Menino, the Seaport, with its vibrant lifestyle and lower rents, markets in South Florida. (office/retail) – 107,600 sf 5 Lethbridge Statistics, Gen Y represents approximately 35% Deloitte introduced has the attracted “Deloittemany Journey”, small thriving companies. In recent years, however, $25 psf rents 6 Mississauga 60 Hartland Street, East Hartford, CT (office) – 40,800 sf The Trade Centre South building, located and 34% of the Canadian and U.S. labour forces, replacing assigned desks with shared work have become $38 psf rents. Availability has dropped with the addition of companies 7 Montreal in Fort Lauderdale, continues to attract respectively. Educated and tech-savvy, they spaces. In contrast, Yahoo! clearly values faceranging from Life Is Good to Vertex Pharmaceuticals. Tenants nearing lease expirations high-end office tenants. 8 Ottawa are transforming the workplace, physically and to-face interaction, recalling work-from-home face proposals that are as much as 30% higher than their current lease rates, so the cycle ISON YOU psychologically. employees back to the office in a bid to rebuild 9 Quebec City continues. the competitive advantage it once had. 10 Regina For decades, office designs changed little, with tight markets in Seaport and 11 Cambridge, Toronto startups and techs are seeking rent relief. traditional private offices, cubicles and meeting The rise in the urban With supply pipeline and the is expected companies will attracted to the South Station and North Station rooms. In the 1990s, personal computers, mobile technological advancesItbeing offered that are making 12 be Toronto North Avison Young Commercial Real Estate Newsletter (Canada, U.S.) 31 rents can still be found starting in the high $20s psf. Many should phones and the Internet brought dreams of a some lease renewals submarkets, problematicwhere as tenants 13 Vancouver considerTraditional the financial district. 14 Although previously too expensive, the high vacancy paperless office and hotelling. Still, over the past eschew in-place renovations. office Winnipeg 20 years, office space looked much the same. configurations simply stemming won’t work. fromGenerally, the Great Recession is providing opportunities for affordable class B U.S. tenants are taking lessspace. spaceCompanies on a per-person such as PayPal (an eBay subsidiary) have taken advantage of the glut Enter Gen Y: today, CEOs are in cubicles and there 15 Atlanta basis as they relocate. of A 2012 study vacancy found that is a new business glossary: “distributed workforce” lower-floor within the financial district’s class A highrises. As it turns out, early16 Boston corporations are lookingstage to reduce office space by – hiring regardless of geography; “BYOD” – and technology-driven companies are provided with more geographic options 17 Charleston 17% by 2020 – leaving than older,ever; obsolete buildings bring your own device to work; and “ROWE” – gone are the days when EastChicago Cambridge was the only choice. The real question 18 ready for renovation and adaptive re-use. results-only work environment. Smart phones is: what submarket will hold the19crownDallas as Boston’s innovation hub in five years’ time? have become virtual desks, offering “unified As office space per employee continues to decline, Boston’s Hubway bicycle rental network 20 Detroit communications” across platforms and media. what happens to all of the underutilized space, is a valuable amenity to employees and 21 Houston According to CTIA – The Wireless Association, and, indeed, to the traditional single-purpose residents alike. N YOU 22 Irvine American data usage from July 2011 to June office building? The future of office Ibuildings SO 2012 increased 104% from the previous year. may end up being the “Hackable Building” – a 23 Las Vegas Work is now mobile and, when it comes to office term coined in global architecture firm Gensler’s 24 Los Angeles premises, less is more. recent work on the evolution of the North 25 New Jersey American building. A Hackable Building is an Gen Y’s work characteristics (more flexibility, flat 26 Real NewEstate York Newsletter (Canada, U.S.) Avison Young Commercial existing structure16 that has been updated beyond hierarchy, mobile devices and social networking) 27 Pittsburgh recognition to incorporate a diverse mix of uses and businesses’ focus on cost reductions have 28 Raleigh-Durham such as residential, office, retail, educational and changed the office landscape toward open plans 29 Reno public spaces. and a collaborative work environment. Eroding 30 San Francisco work-life boundaries means work is no longer Advancing technology and generational 31 South Florida where you go, it’s what you do. Since Gen Y will shifts continue to shape the evolution of the 32 Washington, DC become the dominant group in the workforce, workplace. When these changes have played 33 About Avison Young businesses are adapting to attract top talent. out, what will the office of the future look like? 34 Avison Young Research Cisco’s “Connected Workplace” is a big draw Only time will tell. 35 Our Offices with new recruits, where many staff don’t have Q2 2009

Regina

Toronto

Vancouver

Ca na da

F

0%

Wi nn ipe g

Rosslyn-Ballston Corridor facing a new reality

6% 4% 2%

Re gin a

na

Ca

26% 24%

ar ke

ts

ar ke

.M

U.S

AY

3

Quoted asking rents continued to rise, reaching an estimated $24 psf across the metro – the highest level since 2008. Downtown, full-service rents averaged $50 psf for class A space while tighter highrise listings, as well as U.S. select listings in the Back Bay, exceeded $70 psf. Average suburban rents reached $22 psf, anClass increase of $1 psfAsking versus Gross one year ago, while select Suburban A Average Rents U.S. rents moved back to the low $30s. suburban submarket class A asking

Boston Office Vacancy Rates 28%

.M

Downtown Class A Average Additional Rent ($psf)

* Rental rates are shown in CAN $

U.S

he 10.3-billion-sf U.S. office market continued its bumpy recovery over the last 12 months and ended the second quarter of 2013 with an overall vacancy rate of 11.7%. Looking at Avison Young markets, vacancy rates remained in the double digits at mid-year 2013, with an overall average vacancy of 14.7%, down slightly from 14.8% at mid-year 2012.U.S. Nevertheless, 16 of the 20 Avison Young markets reportedClass lowerA vacancy ratesAsking when compared to 2012. Downtown Average Gross Rents Class A rents averaged $48 psf and $27 U.S. psf (USD) for central business Downtown Class A Average Asking Gross Rents district (CBD) and suburban markets, respectively. $70 San Francisco again saw a significant increase in CBD class A rent this year, $60ending the second quarter of 2013 at $52.50 psf, an 11.7% increase from the second quarter of 2012, following a remarkable 18% spike in $50 between the second quarter of 2011 and the second quarter of rents 2012. Vacancy fell 140 bps year-over-year to 8.9%. The highest CBD class $40 A rents currently are in New York, where the $64-psf rate was a 2.3% increase compared with 2012, and in Washington, DC, a 1.3% change $30 at $56 psf. There is currently more than 43 msf under construction, 72% $20 of which is in four markets – Houston (10.6 msf ), Metropolitan Washington, DC (7.8 msf ), New York (7.5 msf ) and Boston (5.3 msf ). $10 Pittsburgh’s metropolitan area recorded an 8.2% vacancy rate at midyear$02013 – the lowest of the Avison Young U.S. markets and one of only two U.S. markets with a total vacancy rate in the single digits. Although the Metropolitan Washington, DC office market remains relatively healthy (posting an average CBD vacancy of 9.3% at mid-year 2013), the region was one of four U.S. markets to see its overall vacancy increase (13.8%, +70 bps) the past year. currently hasAdditional the highest Downtown Class Aover Average Asking Rent ($psfNew net) Jersey Downtown Class A Average Rent ($psf) Downtown A Average Asking a Rent ($psf net) Downtown Class A Average Rent ($psf) vacancy, afterClass experiencing year-over-year increase in its Additional vacancy rate * Rental rates are shown in U.S. $ in a positive direction (20.9%, +30 bps), although the market is headed after posting 21.4% vacancy in the first quarter of 2013. Elsewhere, Chicago’s total office market vacancy rate improved to 13.8% at mid-year 2013, down from 14.1% at mid-year 2012. In New York, leasing activity rebounded, but with large blocks of space being returned to the market, vacancy rose to 12.1% at mid-year 2013. Los Angeles is experiencing a slow but stable recovery with strong leasing activity, although the 2013 vacancy rate climbed bps year over Report year to 6 Mid-Year Canada, U.S.330 Office Market 16.3% by mid-year 2013. Atlanta’s elevated vacancy rate persisted and ended the second quarter at 19.7%, albeit down from 21.7% at midyear 2012; and in South Florida, vacancy improved for the third straight quarter to 15.4%. Turning to Texas, Dallas recorded a vacancy decrease of 60 bps year-over-year, falling to 15.6%, while energy-driven Houston ended the second quarter of 2013 with an 11.1% total vacancy. After years of uneven recovery led by a handful of standout markets, many U.S. markets remain oversupplied. Expect vacancy to stay on its downward trajectory through year-end 2013 and some markets to demonstrate landlord-favorable conditions in the coming months.

AY

Downtown Class A Average Asking Rent ($psf net) U.S. Overview

anada’s office market, at 491 million square feet (msf ) and growing, closed the first half of 2013 with 7.9% vacancy – up from 7.1% at mid-year 2012, but remaining below the recent recessionary peak of 9.9% in mid-2010. Half of the 12 Canadian markets were below the national average and 10 posted single-digit vacancy. The gap in vacancy between Western and Eastern markets narrowed during the last 12 months. Representing two-thirds of the national inventory, the Eastern markets closed the first half of 2013 with a collective vacancy rate of 8.4%, or +70 basis points (bps), with Ottawa the lowest at 6%. The growing Western markets combined for a vacancy rate of 7.1% (+100 bps), with Regina reporting a national low vacancy of 5.2%. Corporations seeking to attract and retain the young and highly educated workforce increasingly living and working in urban areas have created competition in most downtowns. Corporate restructuring, downsizing and consolidations have raised sublease vacancy in some markets, elevating Canada’s downtown vacancy 40 bps over 2012 to 5.6% at mid-year 2013. The tightest markets are Calgary (4%, +80 bps), Ottawa (4.4%, -140 bps) and Vancouver (4.6%, +130 bps). Unsurprisingly, these markets have the highest average gross rents for class A space, led by Calgary ($57 per square foot (psf ), a $5.66-psf rise from 2012), Vancouver ($52 psf, -$2 psf ) and Ottawa ($47.95 psf, -$0.53 psf ). In contrast, new supply outpaced demand in some markets, pushing national suburban vacancy to 10.6% – up 130 bps since mid-2012 – with seven of the 12 markets below average. Except for Lethbridge and Vancouver, single-digit vacancy persists in the same markets as one year ago. Once again, Regina (3.1%, +170 bps) had the lowest suburban vacancy and Mississauga (Toronto West) (13.7%, +130 bps) the highest, while Lethbridge (11.6%) experienced the greatest yearover-year swing, spiking 350 bps. Calgary and Regina have the priciest suburban markets with average gross rent for class A premises of $37 psf, followed closely by Vancouver ($36 psf ). Office space under construction has increased by 4.5 msf since mid2012 to nearly 22 msf (53% preleased), with a 60/40 downtown/ suburban split. Toronto is the biggest development market in the country, with 7.1 msf (49% preleased) – one-third of the national total – and also leads with 5.3 msf (47% preleased/41% of national downtown total) underway downtown. However, Calgary is narrowly outpacing Toronto on the suburban front with almost 2 msf (78% preleased) under development – accounting for 23% of the national suburban total. For the second half of 2013, tight conditions will persist in most downtown office markets as tenants face eroding space options and likely higher rents. More options will present themselves later this year and into 2014 as new supply comes online. In contrast, more favourable space and rental-rate alternatives will be commonplace in select suburban markets across the country.

Mid-Year 2013 Canada, U.S. Office Market Report

da

da

na

Ca

Downtown Class A Average Additional Rent ($psf)

Canada Overview

T

oston’s office market continued to experience strong leasing velocity $0 in prime submarkets during the second quarter of 2013, resulting in vacancy declines across most of the class A and B inventory. Vacancies fell to 17.1%, down 190 bps from a year ago, with vacancy in the CBD’s 59-msf market declining to 12.5%. The CBD saw leasing velocity of 2.5 msf, slightly offSuburban last year’s annual pace of 5.6 Cambridge and the suburban office Class A Average Asking Rent ($psf net) msf. Suburban Class A Average Additional Rent ($psf) Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) markets dropped below 20% vacancy for the first time since 2008. With 5 rates are shown in CAN $ msf leased in 2013, the* Rental suburbs will struggle to keep pace with the 11 msf leased in 2012.

To ron to

B

Canada’s office markets, resilient during and since the recession, continue to sport relatively healthy market fundamentals; however, some major markets appear to be softening, turning in less-than-stellar performances in the first half of 2013. Many major U.S. markets remain oversupplied, with tenant-favoured conditions – even while tours and velocity have increased and several metro areas have moved into equilibrium. Downtown Class A Average Asking Rent ($psf net)

Boston Office Market

$10

$0

Va nc ou ve r

$20

$10

To ron to

$30

$20

Va nc ou ve r

$40

$30

Re gin a

$40

Ongoing improvement in US commercial real estate market, tight market conditions in major Canadian downtown office markets

Partnership. Performance.

16% 14% 12%

$60

Canada & U.S. Market Overview

MID-YEAR 2013

22% 20% 18%

$70

Canada Downtown Class A Average Asking Gross Rents

Avison Young Office Market Report Canada & U.S.

26% 24%

Atlanta’s CBD has also recorded an uptick in rent over the past year, with average asking rents climbing to $20.78 from $18.08. Overall suburban market Canada rents have remained flat during the same period; however, suburban class A rental rates did increase to $22.51 psf from $22.31 psf. CBD class A market Suburban ClassCurrently A Average Asking Gross Rents rents are also improving. standing at $19.81 psf, the rate is the highest since year-end 2011. Moderate job growth and limited development Canada are expected to continue throughout leading Suburban Class A Average2013, Asking Gross Rents to a tightening demand for quality space and, eventually, to rent growth across the Metro Atlanta $70 office market.

Canada Downtown Class A Average Asking Gross Rents

C

Atlanta Office Vacancy Rates 28%

Avison Young 2013 Forecast

9

Retail Washington continued to attract and retain retailers drawn to the market’s strong demographics in 2012. In the downtown DC market, retail performed well, with national retailers paying upwards of $80 psf in submarkets like Capitol Hill and even higher in destination areas such as Chinatown. Expanding food concepts are being supported by a myriad of multi-residential developments in these neighborhoods. In the suburbs, submarkets such as Clarendon and Reston Town Center are mature mixed-use environments. Plans for a new Tysons, to coincide with the extension of the Silver Metrorail line, will bring an enhanced live-work-play environment to this car-and-mallbased submarket.

Industrial The Washington region’s 187-msf market recorded positive absorption and a decrease in vacancy (to 10.1%) in 2012. Recent significant leases include Nash Finch taking 365,000 sf in Suburban Maryland and Cuisine Solutions committing to 163,000 sf in Northern Virginia. The region’s data center inventory, concentrated in Northern Virginia, is one of the largest in the country and boasts a sub 9% vacancy rate. Virginia’s governor recently signed a bill that expanded sales tax exemptions for data centers, and both the private and public sectors are expected to expand.

Investment By November 2012, year-to-date sales volume for office, industrial and retail properties was $6.4 billion metro-wide. While exceeding 2009 and 2010 totals, volume lagged by 24% of what was achieved during the same period in 2011. That gap was expected to tighten before year-end 2012 as major sales were completed (including Constitution Center, which closed for an estimated $734 million in the fourth quarter), and as sellers rushed to close before any scheduled capital gains take effect. In 2013, the best opportunities will be in high-quality, well-leased suburban office buildings with locations proximate to Metrorail.

Mid-Year 2013


Canada Commercial Real Estate Investment Volume By Property Type (CAD)

C $225

$30

$200 $25

$20

Billions

Billions

$175 $150 $125

$15 $100 $75

$10

$50 $5 $25 $0

$0

2007

2008

2009 Land Office

2010

Multi-Residential Retail Retail Industrial

2011 Industrial Office Multi-Residential

2012

Mid-Year 2013

Land

U.S. Commercial Real Estate Investment Volume By Property Type (USD) $225 $200

Billions

$175 $150 $125 $100 $75 $50 $25 $0

2007

2008

2009

Multi-Residential Office

2010

IndustrialRetail Retail

2011 Industrial Multi-Residential

2012

Land

Mid-Year 2013 Office


5

Canada & U.S. Market Highlights Canada Commercial Real Estate Investment Volume By Market (CAD)

Co

$7

$6

$6

$5

Billions

Billions

$5

$4

$4

$3 $3 $2 $2

$1

$1

$0

$0

Calgary

Edmonton

Montreal Mid-Year 2012

Ottawa

Toronto

Vancouver

Of

Mid-Year 2013

U.S. Commercial Real Estate Investment Volume By Market (USD)

Com $35

$16

$14

$30

$12

Billions

Billions

$25 $10

$20

$8 $15

$6

$10

$4

$2

$5

$0 $0

Mid-Year 2012

6

Mid-Year 2013


Canada & U.S. Market Highlights Canada Commercial Real Estate Investment Volume By Property Type (CAD) $6

Billions

$5

$4

$3

$2

$1

$0

Vancouver

Office

Industrial

Retail Mid-Year 2012

Multi-Residential

Land

Mid-Year 2013

U.S. Commercial Real Estate Investment Volume By Property Type (USD) $35

$30

Billions

$25

$20

$15

$10

$5

$0

Office

Industrial Mid-Year 2012

Retail

Multi-Residential

Mid-Year 2013


7


Canada Average Capitalization Rates By Market (All Property Types) Calgary

Multi-R

Edmonton

Tier I Reg

Montreal

Multi-Tenant

Ottawa

Single-Tenant

Toronto

Suburban Cla

Vancouver

Downtown Class

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mid-Year 2012

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

Mid-Year 2013

U.S. Average Capitalization Rates By Market (All Property Types) Atlanta Boston

Mult

Chicago Dallas Denver Houston Las Vegas Los Angeles New Jersey New York Orange County Pittsburgh Raleigh-Durham San Diego County San Francisco San Mateo South Florida Washington, DC 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Mid-Year 2012

8

4.0%

4.5%

5.0%

Mid-Year 2013


5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%


Canada Average Capitalization Rates By Property Type (All Markets) Multi-Residential

Tier I Regional Mall

Multi-Tenant Industrial

Single-Tenant Industrial

Suburban Class A Office

Downtown Class AA Office

8.0%

8.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Mid-Year 2012

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

6.5%

7.0%

7.5%

8.0%

Mid-Year 2013

U.S. Average Capitalization Rates By Property Type (All Markets)

Multi-Residential

Retail

Industrial

Office

8.0%

8.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Mid-Year 2012

4.0%

4.5%

5.0%

5.5%

6.0%

Mid-Year 2013


9

Calgary Jacobs Engineering building

C

algary’s commercial real estate investment market once again witnessed significant investment activity in the first half of 2013. Total dollar volume increased by 4% compared with firsthalf 2012 levels, amounting to almost $2.2 billion. The key driver was land sales, which totalled $902 million. This total represents an increase of 249% compared with first-half 2012 figures; however, a handful of major transactions are responsible for the increase, including Capital Power’s purchase of a 25% interest at the KBV Shepard Energy Centre for $261 million. The industrial, retail and multi-residential sectors experienced changes of 125%, -78% and -5%, respectively. The tremendous pace of office investment sales transactions in the first half of 2012 – which exceeded $1 billion in total dollar volume – was expectedly lower in the first half of 2013, down roughly 40% to $654 million. Early 2012 was a phenomenal break-through period, demonstrating the return of liquidity in the office investment market after a gradual recovery period from the global economic recession. Office investment activity is still strong and should not be viewed as a declining sector. Downward adjustments in the pricing of REITs occurred during the second quarter of 2013. The threat of declining federal economic stimulus and future interest rate increases have led several REITs to curtail the amount of equity raised through capital markets to fund their aggressive appetite for property acquisitions. However, this situation has created an opportunistic environment for institutional and other non-REIT buyers. It is anticipated that pent-up demand from these purchasers will cause investment activity in the second half of 2013 to outpace the first. Cap rates have shown further compression in the first half of 2013. The most notable transaction was the sale of the Jacobs Engineering building, located in Quarry Park, which was purchased by EPIC Realty Partners. This class A suburban office property represents the second-highest transaction in terms of dollar volume ($171 million) and also marks a historically low capitalization rate for suburban office product, at 5.2% (unstabilized.) Although cap rates are not likely to decrease further, there is also no evidence to predict they will increase any time soon for best-in-class assets.

Calgary Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

5 4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Calgary Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

42%

13%

Land

30%

53%

Office

17%

8%

Industrial

6%

7%

Multi-Residential

4%

19%

Retail

Select Average Capitalization Rates Mid-Year 2012

Mid-Year 2013


5.7%

5.4%


6.3%

6.1%


6.2%

5.9%


6.3%

6.0%


5.4%

5.0%

Multi-Residential

5.2%

4.7%

TOP 5 INVESTMENT SALES BY PRICE Address

Property Type Total Price (CAD)

Vendor

Purchaser

1

KBV Shepard Energy Centre

Land

$261,210,344

ENMAX Corporation

Capital Power Generation Services Inc.

2

Office

$171,000,000

KanAm Group

EPIC Realty Partners

Office

$154,840,000

Remington Properties Inc.

Artis REIT

4

Jacobs Engineering building Quarry Professional & Quarry Parkside A & B Stonegate Landing

Land

$135,722,000

Albari Holdings Ltd.

5

Vintage I & II

Office

$110,000,000

1248493 Alberta Ltd. Credit Suisse Real Estate Fund International

3

10


Allied Properties REIT

Edmonton Broadmoor Plaza

E

dmonton continues to ride the wave of economic revitalization taking place in Alberta as all major indicators point towards another year of healthy growth for both the city and the province. Investment volume in Edmonton and the surrounding area for the first half of 2013 was up almost $350 million compared with the first half of 2012, reaching $1.6 billion. These numbers are indicative of the cyclical trend that has gripped the market during the last three years, with larger investment totals occurring in the first and last quarters and dropping off during the second and third. Despite steady growth, particularly in contrast to the rest of the country, Edmonton has yet to see investment volumes top out above the peak rate of $4 billion – seen in 2007, the height of the most recent Alberta boom. Cap rates in Edmonton have been decreasing steadily, due in large part to increases in revenue associated with the buoyant economy. Vendors have been taking advantage of the larger revenue streams and are subsequently requiring much higher prices to be convinced to sell, even while factoring in rising valuations on multi-residential buildings. Cap rates have declined 25 basis points (bps) on average, most notably in first-tier regional malls where they have fallen 50 bps to 5%, currently. The most notable transaction in the Edmonton area was the sale of Sherwood Park Mall, which was sold into the T&T portfolio, containing three adjoining Sherwood Park properties as well as other holdings in Western Canada. This sale banked an impressive $180 million, comprising 85% of the retail investment total for the first quarter and 74% of the first-half total. In a distant second place was the sale of Broadmoor Plaza. Originally a mixed-use development comprising four structures, Broadmoor was intended to be split between office and warehouse use, but has since become a de facto suburban office complex based on how it has been used by tenants. This sale brought in $84 million for vendor LaSalle Investment Management.

Edmonton Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

5 4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Edmonton Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

42%

37%

Land

20%

10%

Industrial

15%

35%

Retail

13%

6%

10%

13%

Multi-Residential Office


Mid-Year 2013


6.1%

5.8%


6.5%

6.5%


6.3%

6.1%


6.3%

6.0%


5.5%

5.0%

Multi-Residential

5.3%

5.1%



Vendor

Purchaser Primaris Retail REIT

1

Sherwood Park Mall

Retail

$180,000,000

H&R REIT

2

Broadmoor Plaza

Office

$84,000,000

LaSalle Investment Management

Dundee REIT

3

1611 199 St.

Land

$54,893,798

David & Cathy Higgins, et al

Riverview Land Company Ltd.

4

RR 211/212 & TR 560 Strathcona County

Land

$39,000,000

Statoil Canada Ltd.

MEG Energy Corp.

5

City Square Tower

Multi-Residential

$38,500,000

Harvey Rosenbloom

Mainstreet Equity


11

Montreal 101 Roland-Therrien Boulevard

T

he Montreal commercial real estate market was particularly active during the first half of 2013. Sales volume totalled nearly $1.6 billion, representing an increase of nearly $497 million (46%) compared with the same period in 2012, while the number of transactions increased by 10%. This is the secondlargest first-half dollar volume experienced during the last five years. Transaction volume in all asset categories grew, with the exception of land sales, which declined by 38%. The multiresidential sector experienced the highest sales volume at $537 million, which represented a 124% upswing. The retail sector grew 11%, accounting for $233 million of the volume, while the office and industrial sectors enjoyed increases of 77%, to $205 million, and 73%, to $434 million, respectively. Among the five largest transactions, two were portfolios of industrial and office buildings and three were multi-residential. The top-priced transaction was a portfolio of 18 industrial buildings and one office building which were purchased by Cominar REIT. The portfolio comprised a total area of 1.8 msf, and was located, for the most part, on the South Shore of Montreal. The second-largest transaction was a retirement home in PointeClaire comprising 530 suites, which sold for $200,000 per unit. The third most valuable transaction was a portfolio of two industrial and three office buildings acquired by Manulife for almost $80 million. Rounding out the top five were two multi-residential properties sold at an average price of $34 million – or $125,000 per unit. With previously announced and ongoing transactions in the second half of the year, it is likely that 2013 total sales volume will surpass the 2012 mark and may exceed the record volume of 2008. For example, Ivanhoé Cambridge recently acquired 50% of the Place Ville-Marie, a transaction valued at more than $400 million; and the abandoned project of l’îlot Voyageur was sold for $40 million for redevelopment. Despite the rise in interest rates and slow growth of the economy, all asset classes in the Montreal commercial real estate market continue to offer investment opportunities.

Montreal Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Montreal Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

34%

22%

Multi-Residential

28%

23%

Industrial

15%

20%

Retail

13%

11%

Office

10%

24%

Land


Mid-Year 2013


6.1%

5.7%


7.0%

6.8%


6.9%

6.6%


7.1%

6.8%


5.7%

5.3%

Multi-Residential

5.7%

5.3%

TOP 5 INVESTMENT SALES BY PRICE Address 1


Vendor

Purchaser Cominar REIT

Tecton-Cominar REIT Portfolio

Industrial

$151,188,552

Tecton Industries Ltd.

2

300 Hymus Blvd.

Multi-Residential

$106,500,000

Cambridge Holdings Inc.

83117704 Canada Inc.

3

Redbourne-Manulife Portfolio

Office/Industrial

$79,500,000

Redbourne Properties

Manulife Financial Real Estate

4

7460 Kingsley Rd.

Multi-Residential

$34,900,000

Kingsley Holdings/Trent Holdings

Interrent International Properties Inc.

5

1255 Papineau Ave.

Multi-Residential

$33,200,000

WB Place Papineau Inc.

7037457 Canada Inc.

12


Ottawa 495 Richmond Road

T

he nation’s capital continues to be a safe haven for pension fund advisors, REITs, financial institutions and other institutional investors looking for stable long-term yields. Investors’ assets of choice continue to be office buildings – although the industrial market is ahead of 2012 levels as it remains popular with institutional and private local investors. Allied Properties REIT’s acquisition of 40-42 Elgin Street in February 2012 – for a near-record price per square foot for a core asset – continued the trend of recent years. That trend line has extended through the first half of 2013. The sale in March of 495 Richmond Road by Credit Suisse to Artis REIT of Winnipeg demonstrated that well-placed assets with longterm leases could command cap rates hovering in the range of 6%, and did not need to have Government of Canada leases in place, as non-governmental organizations (NGOs) with historical longevity and trusted brand-name companies became worthy of the investment community’s attention. Development sites, both redevelopment properties and raw land, have constituted one of the more volatile asset classes in the latter half of 2012 and the first half of 2013. Serviced industrial land inside the greenbelt now commands prices in excess of $600,000 per acre. Small infill multi-residential redevelopment sites have seen land value prices meet and exceed $40 per buildable foot in some instances, outstripping the price points typically paid by Ottawa’s more seasoned larger-scale condominium developers. Ottawa’s condominium market has certainly slowed in recent months. A number of projects have been cancelled outright as unsold inventories in large-scale projects currently under construction remain high. This is one market sector that started to run counter-current to all others in 2013 and bears watching. Finally, the sale of 57 acres inside the traffic circle at Palladium Drive for $29 million for a retail power centre development is a testament to the overall strength of Ottawa’s economy.

Ottawa Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

3

2.5 2 1.5 1 0.5 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Ottawa Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

32%

37%

Office

24%

42%

Multi-Residential

19%

3%

14%

12%

Land

12%

6%

Retail

Industrial


Mid-Year 2013


5.9%

5.6%


6.7%

6.6%


6.4%

6.2%


6.6%

6.4%


5.5%

5.1%

Multi-Residential

5.0%

4.9%



Vendor

Purchaser

1

Conundrum Capital-Skyline Commercial Portfolio

Industrial/Office

$117,000,000

Conundrum Capital Corp.

Skyline Commercial Real Estate Holdings Inc.

2

340 Laurier Ave.

Office

$75,000,000

Elad Canada Inc.

True North Commercial REIT

3

495 Richmond Rd.

Office

$39,000,000

Credit Suisse Real Estate Fund

Artis REIT

4

201-219 Bell St. N.

Multi-Residential

$38,625,000

Devcore Group

InterRent International Properties Inc.

5

Palladium Dr.

Land

$29,428,500

Taggart Construction Ltd.

RioCan REIT


13

Toronto 1 Queen St. E. & 20 Richmond St. E.

H

ealthy commercial real estate market fundamentals continue to drive investment activity in the Greater Toronto Area (GTA). Sales of office, industrial, retail, multi-residential and land properties in the first half of 2013 reached $6.5 billion, up 15% over the same period in 2012 – capturing 45% of the Canadian tally. Portfolio transactions boosted sales, and though cap rates remain low, compression appears to have moderated for some property types. Industrial sales outpaced the office sector at $1.9 billion (29% share), recording the greatest year-over-year increase of 112%. GE Capital Real Estate (GE) and CanFirst Capital were active sellers, collectively disposing portfolios worth $492 million to PIRET and Dundee Industrial REIT, respectively. First-half office sales totalled $1.8 billion (27% share), down 34% from an impressive $2.7 billion in the first half of 2012. Again, GE was active, selling 22 office buildings worth $686 million in two separate transactions to Greystone Managed Investments and Slate Properties. Retail transactions totalled $1.3 billion (20% share) in the first half of 2013 – twice that of one year ago and equal to the sales volume for all of 2012. Pension funds and REITs swapped prize assets with three deals greater than $200 million, the largest being Primaris Retail REIT’s $259-million sale of Oakville Place to RioCan REIT. Favourable mortgage rates, steady income and low vacancy continue to make multi-residential property a desirable investment with the lowest cap rates. However, this sector failed to crack the billion-dollar mark, finishing the first half of 2013 with $986 million (15% share) in sales. This was due more to lack of product than lack of demand. Nevertheless, the mid-year figure was 25% higher than in 2012. Maple Leaf Quay was the largest transaction at almost $151 million. Land was the least-traded asset class with a first-half tally of $617 million (9% share) – a modest 6% decline compared with the same period in 2012. Land remains highly contested, particularly downtown, where interest is growing in mixed-use projects that facilitate urban lifestyles. Toronto could top $13 billion in sales in 2013. However, the recent uptick in interest rates could curtail investment volume and leave some of the most active buyers, the interest-sensitive REITs, on the sidelines.

Toronto Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Toronto Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

29%

15%

Industrial

27%

47%

Office

20%

12%

Retail

15%

14%

Multi-Residential

9%

12%

Land


Mid-Year 2013


5.5%

5.1%


6.4%

6.3%


6.2%

6.0%


6.4%

6.1%


5.2%

4.8%

Multi-Residential

5.1%

4.7%

TOP 5 INVESTMENT SALES BY PRICE Address 1 2 3

GE Canada Real Estate Greystone/Slate Office Portfolio GE Canada Real Estate - PIRET GTA Industrial Portfolio Oakville Place


Vendor

Purchaser

Office

$541,813,777

GE Canada Real Estate

Greystone Managed Investments / Slate Properties

Industrial

$340,950,000

GE Canada Real Estate

PIRET

Retail

$258,562,000

Primaris Retail REIT

RioCan REIT

4

Upper Canada Mall

Retail

$251,500,000

Oxford Properties Group

Canada Pension Plan Investment Board

5

1 Queen St. E. & 20 Richmond St. E.

Office

$220,000,000

Ontario Pension Board

Canada Pension Plan Investment Board

14


Vancouver Discovery Parks Vancouver

D

emand for BC commercial real estate attained near-record levels in the first half of 2013 with almost $2 billion invested. While dollar volume tapered off compared with the same period in 2012 (a record-setting $2.4 billion), deal velocity was one of the strongest recorded in the past decade. By asset class, office investment declined 70% to $211 million by the midway point of 2013 compared with $707 million during the same period in 2012. Retail investment slipped 17% to $421 million from $507 million in the first half of 2012. These declines are attributed more to a lack of product than flagging demand. Industrial investment rose 8% to $421 million compared with $391 million the year previous. The greatest increase came in land acquisitions, where investments rose 48% to almost $675 million from $456 million in the first half of 2012. The $66-million sale of Discovery Parks Vancouver was both the largest office and overall transaction recorded in the first half of 2013. Four industrial transactions, which all closed in February 2013, also contributed significantly to dollar volume, including the $21-million acquisition of Buckeye Canada’s manufacturing plant by Triovest (on behalf of an undisclosed client) and the $27-million purchase of 4606 Canada Way/3033 Beta Avenue. PIRET acquired two significant industrial assets, including the recently constructed Hopewell Distribution Centre III for $32 million and 18111 Blundell Road for $44 million. Cap rates have generally stabilized and flattened out. Rising bond yields have tempered some of the more aggressive purchasers. Depressed unit prices removed REITs as competitive buyers of most significant assets. The absence of investment trusts has so far not triggered downward pressure on marquee asset pricing, as remaining purchasers continue to be aggressive in pricing. The first half of 2013 likely marked the start of a transition to a post-recovery financial environment as various economic levers – such as quantitative easing and the monthly purchase of U.S. bonds by the Federal Reserve, which has helped keep longterm borrowing rates near record lows – are slowly withdrawn.

Vancouver Investment Volume Office

Industrial

Retail

Multi-Residential

Land

$ in billions (CAD)

5 4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Vancouver Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

34%

19%

Land

21%

21%

Retail

21%

16%

Industrial

12%

16%

Multi-Residential

11%

29%

Office


Mid-Year 2013


5.3%

5.0%


5.9%

5.9%


5.9%

5.7%


6.1%

5.8%


5.2%

4.8%

Multi-Residential

4.4%

4.5%



Vendor

Purchaser

Discovery Parks

Dundee REIT

Discovery Parks Vancouver

Office

$66,135,000

2

18111 Blundell Rd.

Industrial

$44,100,000

Kingswood Capital

PIRET

3

Hopewell Distribution Centre III

Industrial

$32,320,000

Hopewell Development Corp.

PIRET

4

Lougheed Super Centre

Retail

$29,853,333

Madison Pacific Properties

Nicola Crosby

5

Aldergrove Village Shopping Centre

Retail

$29,250,000

MDC Properties

Manulife Financial Real Estate


15

Atlanta Terminus 100

A

tlanta’s commercial real estate investment market experienced a significant 63% increase in investment sales volume during the first half of 2013 compared with the same time period in 2012. Investment sales in the office, industrial, retail and multi-residential sectors topped $4.3 billion in the first half of 2013, the largest mid-year total since 2007. Bolstered by the $373-million sale of a partial interest in Terminus 100 and 200, Atlanta’s office sales volume totaled $1.8 billion during the first half of 2013, representing 42% of all sales in the first two quarters. Atlanta office sales for the first half of 2013 outperformed first-half 2012 sales by 515%, thus already surpassing the 2012 total by $146 million. Improved job growth arising from local business expansion and increased relocations are driving the strong rebound in the Atlanta office market. The multi-residential market was a close second with transactions totaling $1.7 billion during the first half of 2013 – an $81-million (5%) increase compared with the same period in 2012. The sale of lower-quality properties has generated a 190-bps increase in the capitalization rate to 7.4%, up from 5.5% at mid-year 2012. Atlanta’s industrial investment saw the only decline in sales at the mid-year point of 2013. Industrial sales at the end of June 2013 totaled $323 million, a 35% decrease over the same period in 2012. Build-to-suit activity has increased as a result, and vacancy remains high amid slow rent growth. Retail investment in Atlanta has increased 92% year over year. During the first half of 2013, the retail sector saw $526 million in transactions, compared with $274 million in the first half of 2012. As the job and housing markets slowly move in the right direction, the retail market will continue to see modest gains. A few large projects, mainly in Midtown and the northern suburban markets, are currently under construction. Atlanta’s recovery since the Great Recession has been slow, but is gaining steam thanks to an improving economic climate, Atlanta’s growing strength in the technology sector and an improved housing market.

Atlanta Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

16 14 12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Atlanta Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

42%

11%

Office

39%

60%

Multi-Residential

12%

10%

Retail

8%

19%

Industrial


Mid-Year 2013

Office

7.9%

8.2%

Industrial

6.5%

7.7%

Retail

7.5%

8.1%

Multi-Residential

5.5%

7.4%


Property Type Total Price (USD)

Vendor

Purchaser

1

Terminus 100

Office

$209,200,000

Cousins Properties

JP Morgan Asset Management

2

Midtown I & II

Office

$205,000,000

KanAm Grund

Cole RE Investments & MacFarlan Capital Partners

3

Terminus 200

Office

$164,000,000

4

999 Peachtree

Office

$157,900,000

5

Ravinia Center

Office

$144,300,000

Cousins Properties Shailendra Group & Jamestown Properties Colonial Properties Trust

16


JP Morgan Asset Management Franklin Street Properties Strategic Partners U.S. Value 6 Fund

Boston The Arsenal on the Charles

I

nvestment sales volume decreased 13% to $2.7 billion as most major transactions during the first half of 2013 occurred in Boston’s suburbs, with the top two transactions occurring in the tech-heavy 128 West and 128 North submarkets. The Blackstone Group was the big seller, parting ways with the New England Executive Park in Burlington for $216 million, or $209 psf, and Riverside Center in Newton, MA for $197.25 million, or a hefty $387 psf. The Inner Suburbs saw user athenahealth buy Harvard’s Arsenal on the Charles in Watertown for $168.5 million. The largest deal in Boston proper in 2013 involved Pearlmark selling 40 Broad Street to TIAA-CREF for $110 million, reportedly at a cap rate in the 4.5% range. As mid-year 2013 office sales were dominated by suburban transactions, the overall office cap rate increased to 6.5% from 6.1% at mid-year 2012. The industrial sector saw several deals in excess of $25 million. TriTower Financial made its first move, buying 300 Riverpark Drive in North Reading for $32.3 million. While it appears fairly steep at $154 psf, the 209,000-sf, high-bay building enjoys a long-term lease with Amazon’s recently acquired Kiva Systems. Comparatively, to Boston’s south, Sycamore Partners sold 175 Kenneth Welch Drive in Lakeville to AR Capital for $66 psf, having acquired it in 2012 from long-term tenant Talbots for roughly $37 psf. The retail sector saw several challenged mall properties trade, including The Mall at Whitney Field in Leominster, which sold for $36.1 million, and Silver City Galleria in Taunton, which sold for $22.1 million. Retail deals captured 20% of the deals but only 9% of the dollar volume. Lastly, multi-residential sales declined 22% year-over-year, garnering just 19% of the invested dollars during the first half of 2013. Excluding bulk portfolio sales, pricing averaged $223,963 per unit, while average cap rates fell to 5.5% from 5.7%. Continued downward pressure on cap rates kept the investor pool in the urban core limited to long-term buy/hold players. Rising interest rates bear watching and may push returns below acceptable levels for some buyers, likely resulting in continued activity in suburban product.

Boston Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

20 16 12 8 4 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Boston Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

62%

49%

Office

19%

22%

Multi-Residential

9%

14%

Retail

9%

15%

Industrial


Mid-Year 2013

Office

6.1%

6.5%

Industrial

9.0%

8.0%

Retail

9.3%

8.4%

Multi-Residential

5.7%

5.5%



Vendor

Purchaser

The Blackstone Group

National Development/Charles River

New England Executive Park

Office

$216,000,000

2

Riverside Center

Office

$197,250,000

The Blackstone Group

Hines Global REIT

3

The Arsenal on the Charles

Office

$168,500,000

Harvard Alumni Association

athenahealth

4

Alterra

Multi-Residential

$149,250,000

Prudential Real Estate Investors

Mack-Cali Realty Corporation

5

40 Broad St.

Office

$110,000,000

Pearlmark Real Estate Partners

TIAA-CREF


17

Chicago 225 West Wacker Drive

C

hicago investment activity dipped slightly during the first half of 2013, totaling $4.7 billion – a 5% decrease compared with the same period in 2012. The office market continued to lead in transaction volume, totaling more than $1.7 billion at mid-2013 – a 23% jump compared with 2012. The average capitalization rate for office properties in Chicago fell 60 bps to 6.9%. Foreign investors continue to see the CBD office market as a smart choice as other key office markets across the country witness an uptick in pricing. South Korean investor Mirae Asset Global Investments Co. acquired 225 W. Wacker Drive for $218 million, or $335 psf. Canadian REITs, such as the Onni Group and Agellan Commercial, have purchased office properties during the last 12 months. Montreal-based Ivanhoé Cambridge is also financing the first speculative building to be built in the CBD since 2009, which broke ground earlier this year. The industrial investment market saw a 7% increase in activity. Sales volume was recorded at $891 million as of June 2013. Cap rates continue to drop, averaging 7.6%. Demand remains strong as the manufacturing and e-commerce industries continue to be major market drivers; as a result, vacancy decreased to prerecession levels, ending the second quarter at 8.4%. Owners have begun selling class B and/or vacant product in a bid to capitalize on improving market conditions. Institutional investors needing to place capital are purchasing these assets for premiums. This trend will likely continue throughout the remainder of 2013. In other sectors, the multi-residential market witnessed a 19% increase in total sales volume during the first half of 2013 when compared with the same period in 2012. The retail market saw a substantial decrease in investment activity since 2012, due largely to a stagnant vacancy rate and sluggish consumer confidence during the first half of 2013. Both the office and industrial asset classes will likely continue to attract investors. There is a substantial pipeline of CBD office properties that are expected to trade in late 2013 or early 2014. As both the Chicago economy and real estate market continue to improve, so will the investment market.

Chicago Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

20 16 12 8 4 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Chicago Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

37%

29%

Office

23%

38%

Retail

21%

17%

Multi-Residential

19%

17%

Industrial


Mid-Year 2013

Office

7.5%

6.9%

Industrial

8.3%

7.6%

Retail

7.0%

7.1%

Multi-Residential

7.8%

6.7%


130 E. Randolph St.

Property Type Total Price (USD) Office

$410,000,000

Vendor

Purchaser

Bentley Forbes

Berkley Properties

2

225 West Wacker Dr.

Office

$218,000,000

JP Morgan Chase

Mirae Asset Global Investments Co.

3

Onterie Center Apartments and Offices

Multi-Residential/ Office

$188,000,000

Metropolitan Properties of America, Inc.


4

1225 Old Town

Multi-Residential

$156,906,500

Hines

Heitman LLC

5

550 West Washington

Office

$111,000,000

Beacon Capital Partners

MetLife Inc.

18


Dallas The Colonnade

D

allas is considered to be one of the nation’s most dynamic markets and a top metro region for employment and population growth. The city is an acquisition target for real estate investors who want to capitalize on the metro’s favorable business climate. Investment activity during the first half of 2013 was up 21% compared with the first half of 2012. Tech and energy markets continue to lead the nation in terms of growth. Dallas has a strong energy base, but has also made leaps and bounds in the technology sector, particularly in software development that benefits the energy industry. Strong ties to both of these growing industries have led to an attractive market for investors. Multi-residential properties remain the most desired investment property type, leading the way with nearly $1.8 billion in transaction volume in the first half of 2013, a 60% increase compared with the first half of 2012. Fiori, a 391-unit complex developed by UDR, sold for $137 million to MetLife, representing the second-highest-grossing transaction thus far in 2013. Investment activity in industrial and retail assets slowed in the first half of 2013, by 2% and 27%, respectively. The retail sector has been slow to recover from the recession. The sharp decline in retail investment is mainly due to a lack of new product that is available to purchase. An incredibly tight market for retail assets has resulted in significant cap-rate compression. Office investment sales volume increased 43% in the first half of 2013, to $1.5 billion from $1.1 billion in the first half of 2012. Core assets in prime locations, particularly in the desirable Las Colinas area, continue to be a favorite among investors. However, value-add properties are gaining traction, particularly among market-entry buyers who want to place capital in a growing market. Woods Capital Management recently purchased Thanksgiving Tower in downtown Dallas and is planning to invest significant capital in upgrades for the building, which was 55% leased at the time of sale. An uptick in value-add investments displays the confidence that investors have in the secure and growing Dallas market.

Dallas Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

14 12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Dallas Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

37%

28%

Multi-Residential

31%

27%

Office

18%

22%

Industrial

14%

23%

Retail


Mid-Year 2013

Office

8.2%

6.6%

Industrial

7.6%

6.8%

Retail

7.8%

7.4%

Multi-Residential

6.6%

7.8%



Vendor

Purchaser

Strategic Partners U.S. Value 5 Fund

Fortis Property Group

The Colonnade

Office

$203,000,000

2

Fiori

Multi-Residential

$136,607,764

UDR, Inc.

MetLife Inc.

3

Preston Commons

Office

$109,542,500


KBS REIT III

4

University Parke Village

Retail

$105,000,000

Heitman

Glimcher Realty Trust

5

Hallmark I & II

Office

$105,000,000

Bank of America

Select Income REIT


19

Denver 1999 Broadway

I

nvestment activity in Metropolitan Denver was down 3% in the first half of 2013 from a year earlier as investment sales totaled approximately $2.4 billion. Year-over-year figures have been on the rise since a low of $1.3 billion in 2009, but the 2012 total of $6 billion may prove hard to beat at the current pace of the market. Multi-residential investments continue to lead the Denver market, with almost $1.1 billion in sales during the first half of 2013. Cap rates were up slightly from the same period of 2012, with an average of 6.8%. Several significant multi-residential investment sales occurred during the first half of 2013. Commons Park West sold for $98 million, the Crestwood Resort apartments traded for $80 million, and Acadia at Cornerstar went for $69 million. The average price per unit - $101,000 at the end of June 2013 - is steadily climbing. Retail and industrial investments remained behind the curve during the first two quarters of the year. Retail investments came in with approximately $181 million in sales – a 57% decline from the same period in 2012. As seen in the rest of the country, investors are focusing more on multi-residential investments rather than retail investments, but this trend is expected to shift after apartment growth slows. The industrial market is also down, closing June 2013 with a total of $136 million in investment transactions – a 34% decrease from the first half of 2012. Additionally, industrial cap rates increased to 8.8% from a 7.8% average. The office investment market remained active with roughly $1 billion in sales during the first half of the year. The average cap rate was flat at 7.3%. A number of notable office buildings changed ownership, including sales of a portfolio at 1999 Broadway and 2099 Welton Street for $183 million, 1625 and 1675 Broadway for $176 million, 1700 Broadway for $98 million and Westmoor Center, a six-building office park, for $86 million. Despite some regression in the investment market, Denver remains attractive for investors due to strong employment figures and a successful business environment.

Denver Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Denver Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

44%

30%

Multi-Residential

43%

45%

Office

8%

17%

Retail

6%

8%

Industrial


Mid-Year 2013

Office

7.2%

7.3%

Industrial

7.8%

8.8%

Retail

6.6%

7.4%

Multi-Residential

6.5%

6.8%



Vendor

Purchaser

1

1999 Broadway & 2099 Welton St.

Office

$183,000,000

Transwestern Broadreach 1999

Franklin Street Properties Corporation

2

1625 & 1675 Broadway

Office

$176,000,000


Rosemont Realty

3

1550 Platte St.

Multi-Residential

$98,100,000

JP Morgan Chase

Heitman LLC

4

1700 Broadway

Office

$98,000,000

The BROE Group

Artis REIT

5

10055 - 10385 Westmoor Dr.

Office

$86,000,000


KBS Strategic Opportunity REIT Inc.

20


Houston BG Group Place

H

ouston has made headlines in recent years for its employment generation. In the 12 months ending in July, the Houston metro area added 97,700 jobs, a 3.6% increase in employment. Houston is among the country’s most important emerging cities, with the largest amount of job growth of any major metro area – driven in large part by the energy industry. Houston’s active investment market indicates that commercial real estate investment continues to follow jobs. Houston has historically been considered a secondary investment market, but in a 2012 year-end survey by the Association of Foreign Investment Real Estate (AFIRE), Houston was named the fifth most attractive investment market in the world. Houston is now well-positioned as a gateway city. Investment volume in the first half of 2013 increased by 33% compared with the first half of 2012. The industrial and retail sectors totaled $379 million and $425 million in this period, respectively. Office properties traded for a total of $1.8 billion as a series of high-profile assets changed hands during the first half of the year. These transactions represent a 62% increase in activity compared with the first half of 2012. Invesco, on behalf of the National Pension Service of Korea, purchased BG Group Place for a record $480 million. This deal exceeded the $455-million record for a single office building held by the Hess Tower (sold in 2011) and demonstrated the increasing interest from overseas buyers. After purchasing the iconic Williams Tower in 2008 for $271.5 million, Hines sold the building in March 2013 to Invesco for $412 million. The building was on the market for just eight months. Invesco has stated that it will continue to invest in high-profile assets in Houston’s major submarkets. Demand in the Houston market continues to outpace supply, translating into rising rental rates. Investors are drawn to Houston due to its relatively low-cost properties that yield high returns. Houston’s construction boom will deliver more than 10 msf of new product, which could lead to a wave of investment activity in the coming years. While the Houston economy continues to perform better than other major U.S. metros, investment activity is projected to remain active.

Houston Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Houston Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

42%

34%

Office

39%

38%

Multi-Residential

10%

17%

Retail

9%

11%

Industrial


Mid-Year 2013

Office

7.1%

7.0%

Industrial

8.1%

8.1%

Retail

7.2%

7.4%

Multi-Residential

6.2%

7.1%



Vendor

Purchaser

Hines

Invesco (Nat'l Pension Service of Korea)

BG Group Place

Office

$480,000,000

2

Williams Tower

Office

$412,000,000

Hines

Invesco

3

Post Oak Central

Office

$232,600,000

JP Morgan Asset Management

Cousins Properties

4

919 Milam

Office

$113,700,000

M-M Properties

Credit Suisse

5

Camden Post Oak

Multi-Residential

$108,500,000

Sentinel Real Estate

Camden Property Trust


21

Las Vegas The LINQ

D

uring the Great Recession, it was difficult to gauge the true value of real estate. Instead of unloading their inventory to the most eager buyer, many banks would hold on to select assets to compete with non-distressed properties. This tactic had an adverse effect of driving prices down as many frustrated investors sat on the sidelines, uncertain of how to “time” the market. Increasing sales in recent years are a sign of recovery for the local market. Investors will have to shift their focus from distressed acquisitions to include all sale opportunities and lower their return expectations if they want to participate in the local economic improvements and capitalize on less expensive debt. The biggest news to hit the market in the first half of 2013 was Blackstone’s $350-million acquisition of the 1.5-msf Hughes Center, the premier class A office space location in Las Vegas. The approximate cap rate for the transaction was 7.7%. This transaction, which closed in September and is not included in the first-half figures, marked the largest commercial real estate sale in the past five years. The SLS Hotel is scheduled to open in 2014. This significant opening, along with 200,000 sf of unique retail space at the LINQ, the world’s tallest observation wheel, will create a much-needed influx of jobs and visitor volume for the local market. While the Las Vegas unemployment rate has been slowly ticking down during the past few years, this increased demand for jobs will undoubtedly help the local economy. In recent years, many California-based investors have sought to avoid the steep tax rates in their home state. Nevada’s business tax climate has always been more attractive. The recently passed California Assembly Bill 92 states that taxpayers in a 1031 Exchange who sell in California and purchase property out of state will be required to file an annual information return and may have to pay additional taxes and penalties. This will likely push more California investors to consider Las Vegas as a viable alternative.

Las Vegas Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

5 4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Las Vegas Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

56%

32%

Multi-Residential

26%

22%

Retail

11%

18%

Office

7%

27%

Industrial


Mid-Year 2013

Office

9.5%

9.0%

Industrial

8.5%

8.5%

Retail

7.8%

8.0%

Multi-Residential

8.0%

8.0%



Vendor

Purchaser

Regency Centers

Stoltz Real Estate Partners

1

7090 North 5th St.

Retail

$50,500,000

2

7600 South Jones Blvd.

Multi-Residential

$43,980,000

Watt Cos.

John Lai

3

210 Quest Park St.

Multi-Residential

$41,075,000

Fore Property Company

Griffis Group

4

4150 East Cheyenne Ave.

Industrial

$23,250,000

Bentall Kennedy

ProLogis

5

8530 West Sunset Rd.

Office

$21,737,000

AR Capital Trust

Realty Income Corp.

22


Los Angeles U.S. Bank Tower

L

os Angeles County remains a leader in U.S. investment activity with $11.3 billion in sales volume for the first half of 2013. The multi-residential sector led the way with $4.7 billion in transaction volume, followed by $3.4 billion of office activity, $2 billion of retail and $1.2 billion of industrial properties. The distinct lack of available, favorably priced investment properties in all asset classes has enabled properties with perceived appropriate prices to sell quickly. Investment-grade offerings have received multiple offers from qualified buyers, as there has been more capital looking for a home than available real estate for sale. During the past year, the market has experienced cap-rate compression for all property types, with the overall rate tightening to 6.3% at mid-year 2013 from 6.5% at mid-year 2012. This trend was especially acute with investment-grade properties. Based on cap rates, the strongest investment class was multi-residential, followed by industrial, retail and office. This point is noteworthy because cap-rate compression has occurred despite the lack of rent growth and persistent vacancy levels. Foreign dollars and bulk acquisitions have played an important role in the Los Angeles County investment market landscape. Most notably, the iconic U.S. Bank Tower sold to Singaporebased Overseas Union Enterprise (OUE) for $367.5 million. In a blockbuster deal that closed after the first half of 2013, Brookfield Office Properties acquired a Downtown Los Angeles portfolio that included the Gas Company Tower and Wells Fargo Tower for $430 million. These strong investments reflect a market that is highly desirable and profitable. The entertainment, tech and new media markets have driven demand for creative office space, especially in the thriving Silicon Beach submarket. Developers are back in the market, searching for all types of land. Demand for land is especially healthy in West Los Angeles, Downtown Los Angeles and Hollywood. As the U.S. economy begins to create jobs, the prospects are bright for the Los Angeles investment market, which has benefited from strong cross-border investment, low interest rates, decreasing unemployment and a diverse economic base.

Los Angeles Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

30 25 20 15 10 5 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Los Angeles Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

42%

19%

Multi-Residential

30%

24%

Office

17%

38%

Retail

11%

18%

Industrial


Mid-Year 2013

Office

7.2%

7.2%

Industrial

7.0%

6.3%

Retail

6.2%

6.4%

Multi-Residential

5.4%

5.2%



Vendor

Purchaser Overseas Union Enterprise (OUE)

U.S. Bank Tower

Office

$367,500,000

MPG Office Trust

2

Antelope Valley Mall

Retail

$327,973,687

Forest City Enterprises

QIC

3

Hollywood & Highland Center

Retail

$310,655,000

CIM Group

H&H Retail Owner LLC

4

1888 Century Park E.

Office

$305,000,000

Blackstone

CommonWealth Partners

5

Esprit Marine Apartment Complex

Multi-Residential

$225,000,000

Ring Group

Kennedy Wilson


23

New Jersey 900 Sylvan Avenue

D

uring the first six months of 2013, New Jersey experienced consistent job growth throughout most employment sectors. Moreover, payrolls have also increased steadily as the average weekly wage for the private sector is one of the fastestgrowing in the country, increasing by 2.2% from March 2012 to March 2013. These improving economic conditions have attracted buyers to the region. As a result, when comparing the first half of 2013 with the first six months of 2012, overall sales volume is higher by 46%, improving in three of the four major property sectors (office, industrial and multi-residential). Powered by strengthening market fundamentals, the industrial property sector has the highest level of investor demand. Positive absorption has been recorded in eight of the past 11 quarters, while asking rents increased by 4.7% in the past 12 months. Bulk warehousing has been of particular interest, as was the case for the sale of the 1.1-msf Barnes and Noble distribution center in Monroe Township to CenterPoint Properties. The property is located in the red-hot Exit 8A submarket, where four of the five largest leases were completed during the second quarter of 2013. Office investment activity represented 28% of overall property sales volume. Velocity for the first half of 2013 was lower than the previous six months, but 94% higher when compared with mid-year 2012. Portfolio sales largely accounted for the increase. As part of a $650-million purchase, The Herrick Company of Florida acquired four AT&T office/research facilities totaling more than 1 msf in Middletown. The telecommunications giant had occupied the space since the 1960s. In Lawrenceville, a joint-venture between Prism Capital Partners LLC and Angelo, Gordon & Co. acquired Princeton Pike Corporate Center, an eight-building, 800,000-sf office park, for $151 psf. The Princeton area is one of New Jersey’s most active regions. Multi-residential sales volume also improved year over year, by 35%, and is expected to outperform its 2012 total, which was 15% lower than 2011. A joint-venture between Greystar Real Estate Partners and Goldman Sachs & Co. made the largest acquisition, purchasing Prospect Towers in Hackensack as part of a 27-property portfolio encompassing seven markets.

New Jersey Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

New Jersey Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

37%

23%

Industrial

28%

21%

Office

24%

27%

Multi-Residential

11%

30%

Retail


Mid-Year 2013

Office

7.7%

6.3%

Industrial

7.7%

7.5%

Retail

7.3%

6.5%

Multi-Residential

5.5%

6.8%



Vendor

Purchaser The Herrick Company, Inc.

1

200 Laurel Ave.

Office

$122,770,000

SunTrust Banks, Inc.

2

Princeton Pike Corporate Center

Office

$121,000,000

Brandywine Realty Trust

3

Prospect Towers

Multi-Residential

$99,182,000

Equity Residential

4

900-904 Sylvan Ave.

Office

$92,044,000

General Electric Company

Prism Capital Partners LLC & Angelo, Gordon & Co. Greystar Real Estate Partners & Goldman, Sachs & Co. Comcast Corporation

5

Barnes & Noble

Industrial

$83,000,000

Utah State Retirement Fund

CenterPoint Properties

24


New York 30 Rockefeller Plaza

T

wo themes appear to be materializing in the Manhattan real estate investment sales market. First, pricing for class A office buildings and quality development sites has accelerated due to limited supply and robust investor demand. These two situations are being driven by the long-term perspective of private investors about the growth of Manhattan office rents and escalating prices being paid by homeowners for residential condominiums – especially new product in luxury buildings – where expectations of developers are consistently being exceeded. For class A office buildings, there is a perception among institutional owners that the fundamentals of the office rental market may not carry forward indefinitely, which has led to a paring of class A office assets. Meanwhile, private investors sensing a forthcoming pricing spike are pushing to acquire the few high-caliber office assets that are offered for sale. The second theme is the rise of Manhattan sales volume. The fervor of buyers and sellers has resulted in a substantial overall transaction volume improvement when compared with the first six months of 2012. Through mid-year 2013, total dollar volume of Manhattan real estate sales was up 59% year-over-year, and was reportedly the highest of any market in the United States, at almost $15 billion. While institutional investors began to dispose of major assets, private equity capital has been quick to accelerate purchases. Thirty-six per cent of capital directed into the office market year-to-date is from private equity, up from 29% in 2012 and 8% in 2011. The concurrence of low interest rates and a robust investment sales market has opened the door for private equity to take a stronger ownership role in the Manhattan office segment. The second half of 2013 should remain strong for investment sales activity as the economy continues to grow. While interest rates remain low, residential condominium sales and office cap rates will maintain their strength, thereby driving investors and developers into the market. These low interest rates should remain central to skyrocketing prices – as eventual rate increases seem not to be on the radar screen or are reasonably distant for most real estate investors.

New York Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

60 50 40 30 20 10 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

New York Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

62%

55%

Office

32%

35%

Multi-Residential

6%

9%

Retail

N/A

N/A

Industrial


Mid-Year 2013

Office

5.3%

4.6%

Industrial

N/A

N/A

Retail

5.8%

5.1%

Multi-Residential

5.3%

4.7%



Vendor

Purchaser

Meraas Capital/Goldman, Sachs & Co./ Kuwait & Qatar Investment Authorities General Electric

Zhang Xin & M. Safra & Co.

1

767 5th Ave. (40% interest)

Office

$1,360,000,000

2

30 Rockefeller Plaza

Office

$1,310,000,000

3

550 Madison Ave.

Office

$1,100,000,000

Sony

Chetrit Group & Clipper Equity

4

425 Lexington Ave.

Office

$630,000,000

JP Morgan

5

30th St. & 10th Ave.

Office

$530,000,000

Hines US Core OFF Fund & Sumitomo Life Related Companies & Oxford Properties Group

Comcast Corp.

Coach Inc.


25

Orange County Oakwood Long Beach Marina

U

nquenchable demand has sparked a transformation in the Orange County commercial real estate landscape, from lowdensity suburbia to pockets of high-density urbanization. The investment market has been a driving force in Orange County based on the global outpouring of capital from traditional equity markets into real estate. These factors will ultimately affect not only the commercial real estate industry but, on a broader scale, how and where people live, work and find recreation. Orange County is ripe with commercial real estate investment opportunities. Beyond the dot-com crash, low interest rates have driven capital traditionally earmarked for the stock market into the realm of commercial real estate. Private and institutional investors such as individual entrepreneurs, pension funds and REITs continue to blanket Orange County’s five commercial real estate submarkets in search of all product types, whether industrial, retail, office or multi-residential. The challenge in today’s market is finding available product. The shortage of inventory is creating an extreme imbalance in supply and demand, driving property values to unprecedented highs. Cap rates are lower than normal considering today’s soft lease rates and economic uncertainty. These unusual market dynamics have led to multiple offers behind almost every building for sale. Additionally, more investors are liquidating their assets now while the market remains primed for sellers. Of the $4.8 billion in investments in the first half of 2013, multiresidential was the bright spot with $2.3 billion in investments, up from $779 million one year earlier. Orange County was one of the first metros in Southern California where the construction of multi-residential units gained notable traction after a virtual five-year halt. Steady job gains in the office and industrial sectors have led to strong investments at $1.6 billion and $627 million, respectively. Multi-residential development and construction will continue to lead in investments, as the market continues to improve and job growth remains stable. Additionally, the market has experienced cap-rate compression for all property types, with the overall rate tightening to 5.9% at mid-year 2013 from 6.6% at mid-year 2012.

Orange County Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Orange County Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

48%

27%

Multi-Residential

32%

17%

Office

13%

20%

Industrial

7%

35%

Retail


Mid-Year 2013

Office

7.4%

6.0%

Industrial

6.9%

5.9%

Retail

6.8%

5.6%

Multi-Residential

5.3%

5.9%


Oakwood Long Beach Marina

2 3


Vendor

Purchaser

Lehman Bros. Holdings

AvalonBay Communities

Multi-Residential

$136,373,560

Laguna Hills Mall

Retail

$110,000,000

Simon Property Group

Merlone Geier Partners

Bixby Office Park

Office

$84,250,000

American International Group

Parallel Cap Partners

4

3300 S Fairview St.

Industrial

$63,336,000

PacTrust

Alere Property Group

5

2601 Campus Dr.

Industrial

$56,194,000

Guggenheim Partners

Campos Verdes LLC

26


Pittsburgh Federated Office Tower

T

he Pittsburgh investment market continued to hum along in the first half of 2013. While rental rates increased, vacancy decreased, and with interest and cap rates as they were, owners became sellers with the market very one-sided in their favor. Pittsburgh continued to see outside investors looking to make a splash in the market, with substantial moves in all sectors resulting in first-half investment volumes in 2013 exceeding first-half 2012. While first-half 2013 office investment volume was only approximately half of what it was in the first half of 2012, the CBD/Fringe still saw major complexes trade, including Forest City selling Federated Office Tower and the adjoining Westin Convention Center Hotel to Starwood Capital in August. KKR also came storming into town with its purchase of the 270,000sf Del Monte Center on the North Shore. In addition, the Federal Reserve Building of Pittsburgh changed hands and is being repositioned for multi-tenant office space. The Pittsburgh retail market continues to perform well as vacancy rates are at single-digit lows and demand for prime retail acquisitions remains high. Two dozen retail deals have traded during the last 12 months totaling in excess of $300 million, plus an exchange of interests between locally owned Zamagias Properties and national player Forest City Enterprises in an equity swap that included the Mall at Robinson and Robinson Town Centre. Other retail sales of note include the 150,000-sf Plaza at the Pointe for $16.8 million and the 144,000sf Holiday Center for $20 million. Cap rates averaged 7.5% to 8% throughout the first half, which is in line with reported rates by Integra Realty Resources (IRR) in its 2013 viewpoint report. In a market with a thriving multi-residential sector and a resilient office segment, retail remained king and is expected to be highly coveted for the foreseeable future. Given the overall well-being of the metropolitan statistical area, coupled with investors looking for better returns on investment, interest rates at historical lows, and a strong retail market with high occupancy, Pittsburgh appears to be on pace to have a strong finish to 2013.

Pittsburgh Investment Volume Office

Industrial

Retail

Multi-Residential

$ in millions (USD)

1,200 1,000

800 600 400 200 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Pittsburgh Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

55%

35%

Retail

25%

55%

Office

13%

8%

Industrial

6%

2%

Multi-Residential


Mid-Year 2013

Office

8.0%

7.6%

Industrial

8.2%

7.8%

Retail

9.1%

7.1%

Multi-Residential

6.3%

7.3%


Federated Office Tower


Vendor

Purchaser Starwood Capital Group

Office

$60,600,000

Forest City Enterprises

2

Del Monte Center

Office

$52,500,000

Continental Real Estate Co.

KKR

3

Turnpike Distribution Center

Industrial

$20,000,000

Al Neyer Inc.

Centurion Investments LLC

4

Holiday Center

Retail

$20,000,000

UBS

Blackstone

5

Plaza at the Pointe

Retail

$16,800,000

JER Partners

WP Realty Inc.


27

Raleigh-Durham CAPTRUST Tower at North Hills

R

aleigh-Durham commercial real estate sales totaled $1.1 billion during the first half of 2013, up 20% compared with the first half of 2012. Multi-residential transactions continued to lead the way with $610 million in volume during the first and second quarters, matching the volume witnessed during the same period in 2012. While demand from renters remains strong, a wave of construction completions during the next 12 to 18 months will likely push vacancy higher and dampen rent growth. As a result, investor demand for multi-residential properties is likely at or near its peak for the current cycle. While Raleigh-Durham’s overall office vacancy rate remains elevated, a lack of construction in recent years has driven class A vacancy to approximately 12%, leaving tenants in need of large blocks of space with few quality options. This trend is helping to fuel an increase in investor demand for prime class A buildings, as well as some older buildings that may need improvements but are in premium locations. Office sales totaled $287 million, up slightly compared with the same period in 2012, but still well below historical norms in terms of market share. Volume was driven primarily by a handful of large transactions. The sale of the 300,389-sf CAPTRUST Tower at North Hills during the first quarter set a new pricing record for the region at $98.3 million or $327 psf. Retail and industrial sales were relatively modest in the first half of 2013, with volume totaling $157 million and $95 million, respectively. A single transaction represented more than one-third of the industrial volume: NTRG purchased two buildings totaling 458,815 sf at 2525 and 2532 Whilden Avenue in Durham for $33.4 million. Moving forward, institutional, core assets will continue to be the most coveted product type. With interest rates rising sharply during the past several months, many owners are looking to sell properties before rates climb further and spreads are no longer as favorable.

Raleigh-Durham Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Raleigh-Durham Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

53%

64%

Multi-Residential

25%

25%

Office

14%

6%

Retail

8%

6%

Industrial


Mid-Year 2013

Office

8.5%

8.3%

Industrial

9.1%

8.8%

Retail

9.1%

8.7%

Multi-Residential

5.9%

5.9%



Vendor

Purchaser

1

CAPTRUST Tower at North Hills

Office

$98,275,000

Duke Realty/Kane Realty

KBS Realty Advisors

2

Lodge at Crossroads

Multi-Residential

$57,119,000


Morguard North American Residential REIT

3

Perry Point

Multi-Residential

$55,606,000


Morguard North American Residential REIT

4

Alexan Garrett Farms

Multi-Residential

$49,300,000

Trammell Crowe Residential/ Prudential Real Estate Investors

Global Securitization Services/Bentall Kennedy

5

Artisan at Brightleaf

Multi-Residential

$43,800,000

Greystar RE Partners/Prudential Insurance

AEW Capital Management

28


San Diego County First Allied Plaza

L

ong-term prospects for the San Diego commercial real estate investment market are a mixed bag. The region’s multiresidential investment market, and to a lesser extent its office market, are considered to be in expansion mode for 2013 through 2016 with $1 billion and $482 million in investments, respectively, midway through 2013. Meanwhile, the retail market, in part because of an uneven recovery in consumer spending and a dearth of desirable new product being built or sold, is expected to remain in recovery mode through 2016. The industrial market, which also has limited supply and construction compared with other regions, is expected by investors to stay in a relative recessionary mode for 2013-14, heading into recovery for 2015-16. At the halfway point of 2013, the overall cap rate for all San Diego investment classes compressed to 6.2%, down from 6.7% in 2012. San Diego’s office market has lately been bucking national trends of flattening vacancy rates and rents, registering rising absorption and rents amid dropping vacancy rates in several submarkets for the past year. While San Diego County’s office market has seen modest improvement in supply-demand trends this year, growth in the small-tenant segment of leasing has not fully rebounded, as companies decide to do more with less space. Full recovery in the county’s market will likely come in the next two to four years. The most sought-after properties are stabilized, class A trophy assets located in the major metro markets with long-term leases in place and potential for increased cash flow. These markets are perceived to be the most resilient and successful investment options and will continue to be investors’ favorite markets for the foreseeable future. Investment activity in major markets has been losing momentum due to the limited number of class A trophy properties available for acquisition. Furthermore, investors have pushed the prices for the best properties to premium levels – activity fueled by increased debt availability to those who qualify – resulting in a very competitive market dominated by large institutional and ultra-wealthy investors.

San Diego County Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

12 10 8 6 4 2 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

San Diego County Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

48%

28%

Multi-Residential

23%

15%

Office

17%

41%

Retail

12%

16%

Industrial


Mid-Year 2013

Office

7.1%

6.0%

Industrial

7.3%

7.1%

Retail

6.6%

6.5%

Multi-Residential

5.6%

5.3%


First Allied Plaza

2 3


Vendor

Purchaser Lone Star Funds

Office

$140,440,000

Wereldhave

Santee Trolley Square

Retail

$98,000,000

Vestar Development

Kimco

Missions at Sunbow

Multi-Residential

$90,000,000

Equity Residential

R&V Management Corp.

4

1551 Union St.

Multi-Residential

$63,400,000

MetLife

UDR, Inc.

5

Archstone Del Mar Heights

Multi-Residential

$61,743,449

Lehman Bros Holdings a.k.a. Archstone

Equity Residential


29

San Francisco Future Transbay Terminal Building

S

an Francisco witnessed a slowing of investment deals in the first half of 2013 as it came off one of the strongest investment market years since 2007. With the increase in capital gains tax starting in January 2013, many investors were eager to sell before the end of 2012. Additionally, the city saw the largest single-building office investment transaction in recent history with the sale of 101 California, a 1.2-msf trophy asset, for $910 million in December 2012. It will be tough to match 2012’s performance, but even though investment deals have slowed, the first half of 2013 still demonstrated strong investor interest. With foreign investors still looking to stake their claims in one of the hottest markets in the country, San Francisco remains a strong competitor globally. Limited capacity for new development, rising rents and a thriving technology sector continue to enhance favorable investment opportunities in San Francisco real estate. Multi-residential activity dominated the first quarter of 2013, accounting for $458 million in trades during the first half of 2013. Office sales continue to be a driving force in the market, but as availabilities for top-tier office investment are decreasing, interest in multi-residential buildings is increasing. Three of the top five investment deals in the last six months have been multiresidential. Investment activity continued to thrive in both the South Financial District and the South of Market (SOMA) neighborhoods (home to future multi-residential developments) - dominating technology industry demand and all five of the top investment transactions in the first half of 2013. Among the top investments was the 1-msf Transbay Terminal Tower site which sold for $191 million in the first quarter of 2013, making it the top investment in the first half of 2013. Investment activity is likely to remain strong in these areas. Although the North Financial District witnessed a slowing in activity in the first six months of 2013, the area can expect to see a second round of investors by the end of the year.

San Francisco Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

18 15 12 9 6 3 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

San Francisco Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

59%

64%

Office

32%

15%

Multi-Residential

6%

16%

Retail

3%

5%

Industrial


Mid-Year 2013

Office

5.5%

5.1%

Industrial

5.3%

6.2%

Retail

6.0%

6.0%

Multi-Residential

5.3%

4.5%



Vendor

Purchaser

Transbay Joint Powers Authority

Hines/Boston Properties

101 First St.

Land

$191,816,196

2

Archstone South Market

Multi-Residential

$149,259,814

Lehman Brothers

Equity Residential

3

1390 Market St. (Portfolio Sale)

Mixed

$135,050,000

Asn Fox Plaza LLC

Essex Fox Plaza, LP

4

SOMA at 788

Multi-Residential

$130,000,000

Avalon Bay Communities, Inc.

LPF Yerba Buena, Inc.

5

2-50 First St. (Portfolio Sale)

Office

$122,000,000

Lincoln Property Company

Prudential Insurance

30


San Mateo Archstone San Mateo

T

here was more than $930 million worth of commercial investment sales throughout San Mateo County in the first half of 2013. This was a 56% increase from the first half of 2012 – when only $597 million in property changed hands – and nearly equal to the $1.1 billion of total deal volume in 2012. While office sales were the driving force in San Mateo County during the first half of 2012, multi-residential sales dominated the first half of 2013. During the first six months of 2013, multiresidential sales accounted for more than $610 million. The average cap rate fell 40 bps compared with the same period in 2012, ending the first half of 2013 at 4.7%. All but one of the top five transactions in San Mateo County was a multiresidential property. Office product accounted for slightly more than $226 million in trades during the first half of 2013. This total was a 43% decrease from the first half of 2012. In the past 24 months, investors have focused their efforts primarily in San Francisco where low vacancy, high demand, and rising rents are the fundamentals, unlike San Mateo County where vacancy has risen during the last few quarters and demand seemed stagnant. Industrial and retail product sales in San Mateo County were minimal during the first six months of 2013. Industrial product trades totaled $24 million while retail assets were involved in $69 million worth of transactions. If industrial vacancy decreases as expected, investors should become more active in this sector during the next year. Quality retail product in San Mateo County is scarce, resulting in very little interest from investors. There is approximately 400,000 sf of office product and more than 500,000 sf of industrial product on the market. This is currently the most active sale market that San Mateo County’s office and industrial sectors have witnessed since the start of the recession. One of the big factors moving forward into the latter half of 2013 for all property types will be rising interest rates. As a result, investors are likely to be cautious during the next six months.

San Mateo Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

5 4 3 2 1 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

San Mateo Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

66%

9%

24%

67%

Office

7%

7%

Retail

3%

17%

Multi-Residential

Industrial


Mid-Year 2013

Office

5.7%

5.7%

Industrial

6.0%

6.4%

Retail

7.5%

5.9%

Multi-Residential

5.1%

4.7%



Vendor

Purchaser

1

Archstone San Mateo

Multi-Residential

$169,629,145

Lehman Brothers

Equity Residential

2

Archstone San Bruno I

Multi-Residential

$117,047,145

Lehman Brothers


3

850 Davit Ln.

Multi-Residential

$89,682,191

Lehman Brothers

Equity Residential

4

Woodside Technology Center

Office

$87,000,000

BMR

RREEF

5

Archstone San Bruno III

Multi-Residential

$72,959,387

Lehman Brothers



31

South Florida Sabadell Financial Center

South Florida, comprising Miami-Dade, Broward and Palm Beach counties, is the seventh-largest MSA in the nation with roughly one-third of Florida’s total population. Though hit hard by the recent recession, the Florida commercial real estate market and, in particular, the South Florida region have begun to bounce back and are on the road to recovery. Leading the charge out of the Great Recession in South Florida was the multi-residential segment. Total multi-residential sales volume through mid-year 2013 was slightly more than $1.1 billion, an almost 40% year-over-year increase from midyear 2012, which saw total sales reach approximately $796 million. Due to the increased demand for these perceived safer assets, multi-residential cap rates have continued their steady decline. As of mid-year 2013, cap rates have dropped to an average of 5.8%, a 130-bps decrease from their peak of 7.1% back in 2009. Class A core properties have also seen continued cap-rate compression with assets trading at less than 5% at mid-year 2013. Not to be outdone, both the industrial and retail segments of the South Florida market have also been on a continued upswing. Most recently, industrial properties have begun to hit their stride as sales volume for mid-year 2013 totaled more than $706 million, almost 5% higher than all of 2011, which had a total annual figure of slightly less than $675 million. If industrial volume remains on its current mid-year trend, then projected sales for 2013 will outpace 2012 totals by almost 30%. Industrial cap rates remain steady, increasing only 10 bps year-over-year, with very little compression while averaging 6.6% at mid-year 2013. Retail properties have also returned to pre-Recession levels with 2012 recording sales of more than $2.4 billion, the second-highest volume in the last 10 years. As of mid-year 2013, the retail sector remains strong with a total sales volume of more than $1.1 billion and an estimated annual total of slightly less than $2.3 billion. Average retail cap rates continue to hold firm in the high 6% to low 7% range.

South Florida Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

15 12 9 6 3 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

South Florida Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

32%

41%

Retail

31%

22%

Multi-Residential

20%

18%

Industrial

17%

19%

Office


Mid-Year 2013

Office

6.6%

6.7%

Industrial

6.5%

6.6%

Retail

7.0%

7.2%

Multi-Residential

5.9%

5.8%



Vendor

Purchaser

1

The Resort at Pembroke Pines

Multi-Residential

$225,000,000

Strategic Partners US Value Fund 5 Pembroke Pines, LLC

Carroll Organization

2

Shops at Pembroke Gardens

Retail

$188,000,000

Duke Realty Corporation

Jeffrey R. Anderson Real Estate, Inc.

3

Sabadell Financial Center

Office

$185,000,000

Testa Inmuebles en Renta

Prudential Real Estate Advisors

4

Miracle Marketplace

Retail

$92,000,000

AWE Talisman

Heitman, LLC

5

BAC Colonnade Tower

Office

$81,000,000

Deka Immobilien Global Fund

TA Associates Realty

32


Washington, DC 1200 19th Street NW

I

nstitutional investment activity for Metropolitan Washington in the first half of 2013 was headlined by a series of large portfolio transactions: First Potomac’s industrial portfolio sale to Blackstone; Wereldhave’s office and industrial portfolio sale to Lone Star Funds; Archstone’s multi-residential portfolio sale to AvalonBay Communities and Equity Residential; Alony Hetz’s $330-million investment in Carr Properties; and the pending sale of WRIT’s medical portfolio. Aside from the portfolio deals, there were several one-off core deals that were marketed or traded in the first half of 2013 at record-low cap rates because of the sustained strong interest in downtown DC from foreign investors. Demand for core product remains high and, therefore, pricing for those deals will remain aggressive for the foreseeable future. First-half 2013 multi-residential sales exceeded 2012’s total volume for this property type and reached the highest level since 2007 – the peak in the most recent cycle. Thanks to this strong multi-residential demand, total investment sales volume is up 107% compared with first-half 2012. The Archstone portfolio sale alone accounted for approximately $5 billion of sales in the region during the first six months of the year. Volume for office and industrial is down slightly year over year, and that trend should hold through 2013, though institutional buyers demonstrate significant interest for industrial properties. There has been a shortage of middle-market deals for several reasons. At the beginning of 2013, long-term debt was at historic lows, allowing owners to refinance their way out of problems or vastly improving a property’s cash flow. Additionally, leasing activity was lower than historical averages region-wide during the first half of the year because of sequestration and tenants systematically rightsizing. This slow leasing velocity has created a fundamental disconnect between buyers and sellers in underwriting vacancy and re-leasing. In June 2013, long-term interest rates increased by approximately 100 bps, and now the leasing market in certain areas of Virginia appears to be showing signs of increased activity despite sequestration’s impact on market conditions. Middle-market investment activity should increase in the fourth quarter as owners’ refinancing options remain less attractive and buyers revert to underwriting vacancy.

Washington, DC Investment Volume Office

Industrial

Retail

Multi-Residential

$ in billions (USD)

30 25 20 15 10 5 0

2007

2008

2009

2010

2011

2012 Mid-Year 2013

Washington, DC Investment Activity (By Property Type) Mid-Year Mid-Year 2013 2012

Mid-Year 2013

70%

32%

Multi-Residential

21%

46%

Office

6%

15%

Retail

3%

7%

Industrial


Mid-Year 2013

Office

6.4%

6.6%

Industrial

8.2%

7.5%

Retail

6.6%

6.6%

Multi-Residential

5.8%

5.4%



1

1600 S. Eads St. (Archstone Crystal Towers)

Multi-Residential

$322,250,000

2

1200 19th Street NW

Office

$296,000,000

Vendor

Purchaser

Equity Residential

Dweck Properties Ltd.

3 2000 S. Eads St. (Crystal House I & II) Multi-Residential

$262,500,000

Hines U.S. Core Office Fund/ Sumitomo Life AvalonBay Communities

4

Office

$205,000,000

TIAA-CREF

Rockpoint Group/MRP Realty

Office

$175,600,000

Ralph Dweck

Piedmont REIT

Air Rights Center

5 901 N. Glebe Rd. (Arlington Gateway)

Fosterlane Management Mack-Cali/UBS


33

About Avison Young

Avison Young at a Glance

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34

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35

avisonyoung.com © 2013, Avison Young (Canada) Inc. The statistics contained in this report were obtained from sources deemed reliable, including Altus InSite, Avison Young, Collette, Plante & Associés, CoStar Group Inc., Desjarlais Prévost Inc., Gettel Network, Real Capital Analytics, Inc., RealNet Canada, RealTrack, Reis Services, LLC. However, Avison Young (Canada) Inc. does not guarantee the accuracy or completeness of the information presented, nor does it assume any responsibility or liability for any errors or omissions. All opinions expressed and data provided herein are subject to change without notice. This report cannot be reproduced in part or in full in any format without the prior written consent of Avison Young (Canada) Inc.

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