MERIC - f.tlcollect.comf.tlcollect.com/fr2/716/84256/CBRE_Americas_Outlook_2016.pdf · E-commerce will continue to reshape the logistics market. ... Welcome to the 2016 CBRE Americas

americas

CBRE Research

C O n t e n t s

The Outlook for 2016 3

Introduction 5

Economy 6

Capital Markets 10

Multifamily 14

Hotel 20

Industrial & Logistics 24

Office 29

Retail 35

CBRE RESEARCHamericas real esTaTe markeT ouTlook 2016

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the OutlOOk fOr 2016

eCOnOMYExpect 2016 to be a year of volatile stock markets but steady global economic growth; with U.S. consumers spending the gains from rising incomes, low interest rates and low commodity prices. Continued financial turmoil will emanate from emerging economies in the region as currency depreciation and manufacturing weakness take their toll.

+2.4% glObal gDP grOwth in 2016

aCCOrDing tO the 2016 Cbre aMeriCas investOr intentiOns surveY, 39% Of investOrs exPeCt PurChasing aCtivitY tO rise in 2016 versus 19% whO exPeCt it tO DeCrease.

CaPital MarketsThe capital markets environment in the Americas remains extraordinarily active and favorable, particularly in the U.S., which claims more than 90% of Americas investment. U.S. investment volume is forecast to show a small gain over 2015—likely in the single digits—while foreign investment continues to show strong growth.

Investment activity elsewhere across the Americas will remain mixed. Canada’s investment volume is expected to slip, while activity in Latin America should improve after 2015’s precipitous drop of more than 50%; we anticipate moderate economic improvement, greater interest from cross-border investors, and rising levels of domestic institutional capital across the region.

2016 exPeCteD tO see the largest single-Year nuMber Of MultifaMilY COMPletiOns sinCe the bOOMs Of the 1970s anD 1980s

MultifaMilYExpect multifamily markets to begin loosening after several years of exceptional performance. Overall, demand will remain strong under favorable demographics, shifting lifestyle preferences and sustained economic expansion. However, the wave of supply will have wide-ranging effects, and in many cases, is expected to dampen fundamentals.


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the OutlOOk fOr 2016

hOtelFor the hotel market, favorable operating and investment conditions are forecast for 2016. In the U.S., healthy demand will continue to raise occupancy. Canada’s results will be mixed, however, with energy market and currency weakness only partially offset by increased tourism and growth in other sectors.

u.s. aDr exPeCteD tO grOw bY 5.2% in 2016 anD 5.3% in 2017—its strOngest inCreases sinCe 2007

+23% glObal e-COMMerCe sales grOwth in 2016

inDustrial & lOgistiCsE-commerce will continue to reshape the logistics market. Demand for big-box space will remain strong, but logistics users will ramp up efforts to secure smaller infill locations to meet the consumer’s growing expectation for same-day or next-day delivery. Economic health varies across the region, and strength in manufacturing and trade and commodities prices will bear upon fundamentals.

2016 rent grOwth PrOjeCteD tO reaCh 4.6%

OffiCeAcross the Americas, office market performance will vary widely, according to each market’s unique supply and demand drivers and progress in the office cycle. The U.S. will see consistent job growth and limited new supply push vacancy rates closer to pre-recession lows. With greater amounts of new supply and exposure to commodities markets, Canadian and Latin American markets will be seeking balance.

u.s. COnsuMers sPent MOre Dining Out than On grOCeries fOr first tiMe ever in 2015

retailRetail sales will grow strongly in 2016, particularly through e-commerce channels. Meanwhile, the best malls and brick-and-mortar retailers are using “place-making,” innovation, expanded food-and-beverage offerings, better customer service and high-profile placement of luxury brands to draw in more customers. These strategies have demonstrated appeal across the region.

© 2016 CBRE, Inc.

intrODuCtiOn

CBRE RESEARCHaMeriCas real estate Market OutlOOk 2016

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Welcome to the 2016 CBRE Americas Real Estate Market Outlook. This work, which covers the five major asset types, has three major themes: One World, Resilience and The Unusual Suspects.

One World. Global issues are increasingly impacting local commercial real estate. In mid-February 2016, the economic world was on edge, with heightened concerns about Chinese stock market gyrations, plunging oil prices, emerging market debt default risks and the potential for a global economic slowdown. However, commercial real estate fundamentals are very good. Unlike in prior cycles—which were marked by excessive construction and financial leverage—occupancy and rents are at or near record levels, leverage is much lower, and liquidity is ample. The market should be resilient in the event of any pause in activity. We are advising our clients not to succumb to the “short-termism” of current market sentiment.

Resilience. Consumer confidence and spending have remained strong. The consumer has already become used to the gyrations of the market and is now clearly spending the “oil dividend” provided by falling gasoline prices. Also, based on a recent investor sentiment survey (conducted in January and February that we will publish in March), institutional investors are bullish on the U.S. and expect to buy more commercial real estate here in 2016 than in 2015.

The Unusual Suspects. Most conventional research focuses on the tried-and-true basics of commercial real estate underwriting, such as rents, occupancy, new supply and job growth. At CBRE we look beyond these “usual suspects” to also encompass talent, infrastructure, technology disruption and other issues that will give clients perceptive insight and long-term competitive advantage.

Commercial real estate investing is a long-term endeavor, and long-term trends matter a lot more than today’s headlines. Don’t follow the money; lead it.

We wish you a successful 2016. Please reach out to any of our industry-leading research or transaction professionals anytime if we can assist you with your commercial real estate needs.

SpenceR G. LevyHead of Research, Americas

CBRE Research

eCOnOMY


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eCOnOMY

The U.S. and Chinese economies have been the strongest growth engines in the global economy the last two years; Japan and most European countries have barely moved out of first gear. As China’s economy transitions away from manufacturing and towards consumption, however, that engine is dropping to an idle, and most of the emerging markets are stuck in neutral (or reverse). In short, the world is counting on the U.S. to drive growth. Fortunately, the U.S. economy continues to grow—at a pace that’s solid and steady, if unspectacular.

Over the past year, the U.S. has averaged more than 210,000 new jobs added per month—slightly less than 2% of the workforce—while the past five years have seen GDP growth average more than 2% per annum. We expect growth of 2%-3% to hold through this year and next, before falling off in 2018. Meanwhile, Canada will see growth of 1%-2% this year, and Brazil’s growth will be negative. Mexico is one of the few countries in the hemisphere expected to experience growth at rates comparable to or even faster than the U.S.; its 2.5% in 2015 is expected to gain several percentage points in 2016 and 2017.

internatiOnal waters ChOPPY fOr glObal traDeLow commodity prices, faltering growth in emerging markets, and the strong dollar are major factors pushing and pulling on the global and U.S. economies right now. The implications of the U.S. dollar’s 20%

appreciation over the past two years have been far-reaching and mixed. U.S. manufacturers have become less competitive against foreign firms, whose prices have fallen with the exchange rate movement. Industrial production, surveys, and regional hiring patterns all agree: demand has taken a turn for the worse. The Fed’s recent interest rate increase will only make the situation worse.

In contrast, the Canadian dollar has fallen to an 11-year low and will likely fall further if the Bank of Canada keeps its monetary policy accommodative. The Mexican peso has also been falling in spite of strong economic news, as the currency has been caught up in emerging market weakness. The day after the Fed raised rates, Mexico’s Banxico followed suit to help keep the peso strong and the Mexican economy on a path of steady growth. The peso has been so severely devalued, however, that there has since been another rate increase of 50 basis points (bps) to stabilize it. Despite these moves, the fundamentals are still sound and we expect no further off-cycle moves from the Banxico. The growth forecast has dropped slightly from the low 3% range to 2.7%-2.9%, but Mexico’s economy remains on track and the Banxico will raise rates as the Federal Reserve raises them. The Brazilian real, meanwhile, remains in free fall, as slowing growth, rising inflation, falling commodity prices, corruption issues and slowing export numbers weigh heavily on the currency.

Figure 1: U.S. Dollar vs. Foreign Currencies

Change in the Value of Foreign Currency Relative to USD (%) YEN/U.S. U.S./EURO CAN/U.S. BR/U.S. UK/U.S.

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eCOnOMY

On the plus side, U.S. wholesalers are importing foreign goods more cheaply, which increases profits without raising prices for consumers. The Fed continues to be concerned about inflation below its 2% target, but not so concerned that it would hold off raising rates for all of 2016. Some of the most recent inflation data—especially for core goods and services—show inflation to be much closer to 2% than it has been in years. Industrial real estate markets that rely on imports stand to benefit from higher cargo volumes resulting from the lower cost of imports, while inland export-driven hubs will likely experience softer demand. The income effect of lower consumer prices indirectly benefits retailers, though this dynamic may take longer to play out.

The steep drop in commodity prices also has mixed implications. Thus far, the negatives have outweighed the positives. Energy-related investment has declined sharply alongside oil prices’ drop of more than 50% since summer 2014. The effects have been concentrated in North Dakota, Louisiana, Oklahoma and Texas, where nearly 75,000 jobs in energy exploration—and another 50,000 in manufacturing—have dissolved since last year. Lower energy costs should give consumers more money to spend elsewhere, but this hasn’t shown up in the retail sales data yet. Retail sales continue to grow modestly, but less than one would expect given the better cash flow that lower oil prices have afforded consumers.

Low commodity prices are hurting emerging markets that derive a significant portion of their export revenue from commodities, including Mexico and Brazil. Canada is also caught in the commodity downdraft; its economy experiencing a significant drag on job and GDP growth as a result. These factors are creating negative feedback for U.S. trade.

Rising debt burdens face countries with large amounts of debt denominated in U.S. dollars. The low commodity prices are stunting growth for export-driven countries, putting additional financial pressures on sovereign and company debt in these regions. China’s transition toward a service-oriented economy looks more turbulent than previously thought; this is compounding issues for commodity producers like Brazil, which has myriad economic and political

troubles of its own without the Chinese slowdown. Financial market turbulence threatens to make matters worse for emerging market countries, making it even more imperative that central bankers adopt clear and effective policy.

hOusehOlDs tO the resCue?Average earnings in the U.S. have gained 2.3% over the past year. Wage growth increased slightly in the second half of the year, from approximately 2% to around 2.5%. There are some small indicators that wage growth will continue to grow faster in 2016. This is a good sign for the U.S. economy, since 70% of the economy is dependent on the consumer.

The U.S. labor market continues to tighten; unemployment has fallen below 5%. The labor force participation rate has stabilized around 62%, after falling during the Great Recession. With an aging population and younger workers staying in school longer, we do not expect a sharp rise in this metric, even as wage growth increases. Even if the results of the 2016 election bring the possibility of changes to immigration policy, it is unlikely that the parties would reach an agreement that alters the current structure dramatically enough to impact the labor markets.

Despite the lower energy costs and the slow rise in incomes, retail sales have been slow to climb, bouncing between 1% and 3%, year-over-year, for the past 12 months. However, we did see an increase over the holiday season, which may be a good sign of things to come. Vehicle sales are a particular strength, running at all-time highs, but that doesn’t help malls and shopping centers. The upside of lower energy costs is evident in surging truck sales—consumers are less concerned about prices at the pump.

Canada’s job machine is also showing signs of momentum after a challenging 2015. Job growth has increased to 1%, and wage growth has started to pick up after slowing through most of 2015. In Mexico, meanwhile, retail sales growth is at 5% (annual), and sufficient economic growth is anticipated—particularly in the industrial sector—to help maintain this pace. Brazil is moving in the opposite direction, however; consumption there has fallen 3.5% over the past 12 months.


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Central banks: DO nO harMThe current chief risk for the U.S. economy and commercial real estate markets is how the Fed manages interest rate increases. Specifically, the gap between market expectations and actual policy, bears watching. The Fed has had trouble with communication and timing during previous tightening cycles, and any missteps along these lines could have unintended consequences.

Interest rate spikes make it more costly for households and businesses to finance purchases, leading to lower aggregate demand. Higher interest rates ripple through to commercial real estate cap rates, and might give asset values a large shock if the Fed were to not manage the process properly. We expect the Fed to move slowly but steadily in 2016, with consensus bouncing between zero and two increases during the calendar year. This should have limited impact on interest rates, as detailed in the capital markets section. The Fed is watching the

commercial real estate market more closely, which will likely tighten lending standards and slow future construction in many markets.

Outside of the U.S. and Canada, central banks in the region are in a difficult spot. They don’t want to raise rates and harm their economies, but rising inflation and a strong dollar bring a different set of burdens. The Central Bank of Brazil is in the toughest spot, with rising inflation and a falling economy. They will likely hold rates steady, but they will be forced to act should inflation rise.

Mexico’s central bank raised rates twice since the Fed’s December action. Fundamentals that are stronger than in other emerging economies will allow the Banxico to match additional Fed rate increases, so the peso doesn’t collapse. As long as Mexico’s economy continues to gain steam—via manufacturing and the consumer—Banxico’s job will not be as challenging as Brazil’s.

eCOnOMY

CaPital Markets


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and sovereign wealth real estate investing to minority ownership positions. The cross-border flow of capital into the U.S. is likely to continue over the short- to medium-term if the Fed stays on track with monetary policy tightening. Tighter monetary policy will raise U.S. returns relative to the rest of the world, where loose monetary policy is expected to prevail for some time. Investment in properties located outside the U.S. also rose dramatically in 2015 and is positioned to rise again in 2016.

Throughout the rest of the Western Hemisphere, commercial real estate investment moderated in 2015. We calculate that acquisitions of Canadian commercial real estate slipped by 7%. We forecast acquisitions activity to again edge down in 2016, to $23.6 billion (-3%), but then to rise in 2017.

In 2015, Latin American investment dropped by more than 50% (based on data from Real Capital Analytics). Brazil’s recession was a major reason for the decline, as activity there dropped dramatically. In Mexico, the next largest market in Latin America, investment remained quite active, however, due in large measure to the FIBRAs (REITs). Chile also experienced an active 2015. For 2016, Latin America should experience a rise in acquisitions activity, based on expectations of moderate economic improvement, greater interest from cross-border investors and rising levels of domestic institutional capital available for commercial real estate.

u.s. interest rates tO eDge higher in 2016, but CaP rates tO barelY buDge One of the principal issues for 2016—one governing both the economy and the commercial real estate capital markets—is what will happen with U.S. interest rates. CBRE Econometric Advisors (CBRE EA) projects gradual increase in 10-year U.S. Treasury yields during 2016 and 2017, if economic growth stays on track. Rates are currently expected to rise by approximately 61 bps in 2016, to 2.80%, and then by as much as 65 bps in 2017, to 3.60%—though smaller increases are certainly possible.

The capital markets environment in the Americas remained extraordinarily active and favorable in 2015, particularly in the U.S. The U.S. is, by far, the dominant country of the region; this dominance is reflected in the region’s statistics and trends—more than 90% of Americas investment activity occurs in the U.S. Beyond the U.S., however, capital markets activity across the Americas was mixed.

Widely differing economic performance was the chief cause of variation across the region’s capital markets. In a surprising departure from much of recent history, Latin American countries experienced divergent economic trends—from moderate expansion in countries like Mexico and Chile, to deep recession in Brazil. Canada’s economy was dampened significantly in 2015 by contraction in its energy sector.

investMent sOars in u.s., but DrOPs in rest Of heMisPhereU.S. investment volume reached $456 billion in 2015, reflecting a 19% rise over 2014 (based on data from Real Capital Analytics and not including entity-level acquisitions or development sites). Moreover, the 2015 volume set a new record in the U.S. The industrial, retail, multifamily and hotel sectors are ahead of their mid-2000s levels; only office has yet to establish a new record investment volume.

CBRE Research’s outlook for U.S. investment volume is for 2016 to show a small gain over 2015, likely in the single digits. Favorable property fundamentals, sustained interest in real estate investment relative to other asset classes, increased cross-border capital seeking to acquire U.S. real estate assets, and other positive capital market factors outweigh the challenges in finding attractively priced assets in the U.S. market.

Cross-border investment will continue to play a major role in U.S. capital markets in 2016. Global investment’s market share rose from 10% in 2014, to 15% in 2015. For 2016, we predict another increase, especially given the late-2015 changes in the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)1 rules, which, in effect, lift the tax penalties that had kept most pension

CaPital Markets

1: Congress recently passed an omnibus spending bill that included changes to FIRPTA, which imposes income tax on foreign persons disposing of U.S. real property interests, including foreign pension and sovereign wealth funds that would otherwise be tax exempt. The previously required 10% withholding was a deterrent or limiting factor for many foreign investors. The change will certainly alter foreign capital flows into the U.S. Look for more detailed analysis in a separate publication from CBRE during winter 2016.


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Commercial real estate investors are interested in the potential impact of interest rate increases on asset pricing in 2016—particularly as expressed by capitalization rates. Based largely on the assumption that this year will see monetary tightening accompanied by continued economic growth, CBRE EA forecasts only very small increases in U.S. cap rates over the next two years. Expected increases over the next two years range from 94 bps on the high side (for office) to only 23 bps for multifamily. With these increases falling far short of the 126-bps rise forecasted for the 10-year U.S. Treasury, spreads between cap rates and Treasuries will compress.

Of course, cap rate movement will vary by market. Those that have seen the highest cap rate compression in recent years are at the highest risk for cap rate increases, while markets that have had little run-up in pricing (and decline in cap rates) recently are likely to experience little or no cap rate adjustment over the near term, making them attractive from a diversification standpoint.

COMMerCial real estate Debt Markets sCale the wall Of Maturities in 2016In 2015, U.S. commercial real estate debt markets continued to provide ample liquidity to borrowers

undertaking property refinancing and new acquisitions. The CBRE Lending Momentum Index, which tracks CBRE commercial mortgage closings, reached a new high in Q3 2015, surpassing its pre-recession peak, before easing slightly over the final three months of 2015. This strong lending growth has been fueled in large part by the Fed’s accommodative monetary policy, as well as market forces, which have kept lending rates near historically low levels for both fixed- and floating-rate mortgages.

Such positive lending momentum will need to continue in 2016 for the credit markets to successfully refinance the impending “wall of maturities” in the U.S. In 2016, commercial loan maturities will approach $435 billion across all major lenders, including banks, life companies, CMBS issuers and the agencies. This volume will be 43% higher than 2015’s estimated loan maturity level.

While banks will account for almost half of the maturities in 2016, CMBS issuers will see a disproportionate increase in financing demand as a large volume of 10-year loans that were originated in 2006 reach maturity. There has been much concern that the credit quality of CMBS loans maturing in 2016 and beyond—especially in 2017—could present

CaPital Markets

Figure 2: Interest Rates and Cap Rates - Outlook Through 2017

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Figure 3: CBRE Lending Momentum Index

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challenges. Many were underwritten very aggressively and many have witnessed stagnant or deteriorating net operating income, leading to thinner debt service coverage ratios.

CBRE Research calculates that about 16% of maturing 2016 CMBS loans—or about $15 billion—may face some form of refinance difficulty at current mortgage rates. Of this pool of loans with potential issues, about half would be prime candidates for maturity extensions, while the remainder may require some form of restructuring or workout for disposition. Given the volume of potential problem loans, we would not be surprised to see CMBS delinquency tick up from its current rate of 3.4%.

Challenges anD strengthsIn 2016, the Americas capital markets environment will face some challenges, but will continue to reflect many strengths. For the U.S., investment is expected to

remain very active and to register a new record volume. Investment activity should pick up pace in Latin America, and is expected to drop slightly in Canada as investors become even more selective in their search for safe and stable returns.

Investment pricing may be affected slightly by higher interest rates in the U.S., but given the expected favorable economic expansion and steady flow of capital into the market—likely to be sustained in the future by the divergence in monetary policy between the U.S. and the rest of developed world—the overall impact will be quite modest. For the debt markets, the impressive gains in lending momentum that characterized 2015 will continue into 2016, though at a more moderate pace. The “wall of maturities” may cause the market some slight disruption—particularly the CMBS market—but no major problems for the commercial real estate industry as a whole.

CaPital Markets

MultifaMilY


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MultifaMilY

sOliD DeManD tO riDe the wave Of new suPPlYIn 2015, demand for multifamily units again outpaced the substantial and above-trend delivery of apartments by a wide margin. This imbalance offered continued support to already established trends in multifamily fundamentals—tighter markets and strong rent growth. Across the U.S., however, much of the supply expected in 2015 was delayed for a variety of reasons—and has been pushed into 2016. Not surprisingly, then, we are anticipating in 2016 the biggest single-year number of multifamily completions since the booms of the 1970s and 1980s.

Fortunately, we expect solid population growth, household formation and job creation to continue

throughout 2016. In fact, net absorption will likely remain well above the long-run average. Despite this strong demand, however, the wave of supply will put upward pressure on vacancy.

Looking beyond 2016, as the U.S. pushes closer to full employment, we expect employment growth to moderate. Additionally, the upward pressures on prices are expected to edge out those keeping inflation in check; putting it all together yields a mean-reverting vacancy rate and diminished real rent growth.

DeManD: DOes anYOne buY hOMes anYMOre?Favorable demographics, shifting lifestyle preferences and sustained economic expansion will underpin the strong demand we expect for 2016.

Figure 4: Real Rent Growth vs. VacancyReal Rent Growth (Y-o-Y, %) Vacancy (4-Qtr MA, %)Real Rent Growth (L) Vacancy (R)

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Forecast

Rank MarketNet In-Migration*

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Population 2014 PopulationTotal Population Growth

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Growth (2010-2014)

1 Houston, TX 369,355 6.2% 6,490,180 541,104 2.3%2 Dallas, TX 228,090 5.4% 6,954,330 501,605 1.9%3 Washington, D.C. 201,971 4.5% 6,033,737 367,806 1.6%4 Phoenix, AZ 173,605 4.1% 4,489,109 279,762 1.7%5 Austin, TX 172,880 10.0% 1,943,299 215,556 3.1%6 Atlanta, GA 165,246 3.1% 5,614,323 310,116 1.5%7 Orlando, FL 148,455 6.9% 2,321,418 181,732 2.1%8 Denver, CO 145,659 5.7% 2,754,258 199,923 2.0%9 San Antonio, TX 137,697 6.4% 2,328,652 175,397 2.0%10 Tampa, FL 137,300 4.9% 2,915,582 126,248 1.1%

Figure 5: Top In-Migration Markets (2010-2014)

Source: Moody’s Analytics, 2015. Note: Ranked in descending order.


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U.S. job growth will remain solid in the near term; however, its pace will diminish through 2018, due in part to limited labor availability. Throughout the current recovery, highly mobile young adult populations and other age cohorts have migrated to markets offering better job opportunities and lifestyle amenities.2 In the near term, Southern and Western markets are forecasted to remain leaders in population and job growth, securing the regional pipeline of multifamily demand.

Look for extended apartment demand from millennials over the next several years. Younger millennials are in their late teens and not yet living independently, and recent studies suggest older millennials will continue to delay both marriage and childbearing—extending the period during which they are more likely to rent than to own.3

It is a common misconception that recent multifamily demand is concentrated in urban centers and is driven by millennials. While urban fundamentals and millennial demand have been strong, suburban markets have also recovered and the contribution baby boomers are making to apartment demand is significant. This is particularly true of suburban markets that have developed an urban feel—markets that are reasonably walkable with a diverse retail presence.

MultifaMilY

In 2011, a shift began to develop in the growth trends of suburban and urban populations. Recent U.S. Census data reveal balanced growth, suggesting that apartment demand to come will be more evenly distributed. Multifamily demand in the U.S. has also broadly strengthened across age groups. Although the millennial cohort is a key driver, homeownership data revealed that rentership incidence (including single-family rentals) has deepened across all age groups over the past 15 years. Since Q3 2000, the U.S. homeownership rate’s sharpest declines have occurred among 35-44 year-olds and 45-54 year-olds—two groups that remember the housing crash well. On average, the preference for rentership will continue to be hearty in 2016, heavily influenced by millennials beginning to form households.

DOg run Or wine friDge? tailOring suPPlY tO Millennials anD bOOMersThe substantial new supply expected in 2016 will bear upon aggregate fundamentals. At the market level, however, this wave of supply will have varying effects, depending on the condition of a given market. Denver and Washington, D.C., for example, have similar near-term supply pipelines, but their outlooks for rent growth are significantly different. Denver is below its long-run average vacancy and is well-positioned to absorb this new product, while D.C. is well above and will find accommodating it relatively difficult.

2: Benetsky and Fields, “Millennial Migration: How has the Great Recession affected the migration of a cohort as it came of age?,” 2015. 3: Pew Research Center, 2014-2015.

Figure 6: U.S. Homeownership Rate Down BroadlyHomeownership Rate (%) Q4 2000 Q4 2010 Q4 2015

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U.S. Under 35 35 to 44 45 to 54 55 to 64 65+ Principal Cities in MSA Suburbs


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MultifaMilY

Going forward, how developers tailor product to their target markets will be something to watch. We would expect the distinct preferences of millennials and baby boomers to influence which types of properties, amenities, locations, etc., developers focus on over the next few years. Identifying key predilections within these groups could provide opportunities and help mitigate challenges through the various phases of development.

The growing footprint and user base of Airbnb represents an interesting alternative source of both apartment demand and supply. In October 2015, about 42% of all active Airbnb properties (73,000 listings4) were apartment units.5 Currently, most Airbnb hosts offer a single rental property, but whether the proportion of hosts renting multiple properties increases as the numbers grow will be something to watch closely. It is uncommon today, but increasingly,

developers pursuing well-located projects will consider the additional demand and revenue potential associated with dedicated Airbnb units. Even more telling about Airbnb’s impact on the apartment sector is that some of the largest apartment owners and operators in the U.S. are exploring how to revenue share with Airbnb.

CaPital Markets Can exPeCt anOther busY YearIn 2016, U.S. multifamily investment will remain very active; we forecast another robust year, with volume comparable to 2015. Negative influences on investment—slightly cooling fundamentals and high pricing—should be more than offset by positive ones, which include large amounts of capital waiting on the sidelines to be invested, as well as still-favorable demand trends. Multifamily investment, which has been extraordinarily active for several years, set a

4: This represents only 0.5% of all the apartment units tracked by CBRE EA in the 62 largest markets. 5: Airdna, Oct. 2015.

Figure 7: DenverReal Rent Growth (Y-o-Y, 4-qtr MA, %) Vacancy (4-qtr MA, %)Real Rent Growth (L) Vacancy (R) LR Avg Vacancy (R)15 10

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03

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Figure 8: Washington, D.C.Real Rent Growth (Y-o-Y, 4-qtr MA, %) Vacancy (4-qtr MA, %)Real Rent Growth (L) Vacancy (R) LR Avg Vacancy (R)10 8

246

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87

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MultifaMilY

new record again in 2015 with $137 billion in total investment, reflecting a 26% increase over 2014’s $108 billion. (Note that neither total includes the M&A activity that was particularly noteworthy in 2015, and that conditions are ripe for still more M&A in 2016.)

These high levels of multifamily investment have been enabled in large measure by the participation of industry giants Fannie Mae and Freddie Mac. Both agencies posted record production volumes in 2015, financing roughly 1.3 million apartment units in 2015 with a combined total of nearly $90 billion. For 2016, both are well positioned for another year of high volumes; lending caps for 2016 have been raised from $30 to $31 billion (loans in affordable and underserved market segments fall outside the caps). Other lending sources are also ready for a busy year—insurance companies and banks in particular. With respect to the latter, new requirements from Basel III may have some dampening effects on multifamily lending, but not enough to significantly handicap bank lending.

Multifamily rental markets throughout the rest of the Americas (excepting Canada) are far smaller and play a much diminished role in commercial real estate. CBRE Research estimates that total multifamily investment in Canada reached about $2.1 billion in 2015; investment

activity is expected to remain strong in 2016, reaching similar levels.

available affOrDable sPaCe is DeCliningAffordable housing represents a sizeable portion of the multifamily sector and is worth monitoring as stock continues to fall further behind demand. How bad is it? In the Colorado, New York, and California markets, low-income households’ access to affordable units has fallen by 20%-25% in just the last three years.

This is mostly about supply. A number of factors have helped bring about high costs of land and construction. Exceptionally strong fundamentals and lending liquidity have fueled both foreign capital flows into the U.S. and the appetite of domestic investors. As a result, the development market has fled to quality; with a marginal cost near zero, building luxury units simply makes economic sense for now—particularly as demand is sufficient to ensure their rapid absorption.

There is an additional strong development trend joining this luxury movement at the margin. Value-add projects that update older (affordable) stock with today’s luxury finishes and amenities are putting even further downward pressure on the availability of affordable housing.

Figure 9: The Decline in the Availability of Rental Units Affordable to Low-Income HouseholdsNumber of Affordable Units Available per 100 Low-Income Households Colorado New York California

70

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Source: National Low Income Housing Coalition, March 2015.

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risks• Higher interest rates notwithstanding, greater

liquidity in the single-family housing market might help raise the homeownership rate—shifting some demand away from multifamily.

• Evidence suggests current trends are propping up rent growth for now, but the continued delivery of high-end rental units could eventually distort the distribution of quality (and price), ultimately stalling rent growth.

• Many markets with strong demand outlooks also rank relatively low in the University of Minnesota’s transit study, “Access Across America.”6 Developers, city planners and industry executives in these cities should cooperate to estimate future local infrastructure needs and to inform the location decisions of employers and multifamily developers.

• Low oil prices pose a risk in energy markets—particularly those with notable pipelines of new supply. The more energy-dependent markets will see softer multifamily demand in 2016, raising vacancy levels, slowing rent appreciation and cooling investment activity. Markets with greater economic diversity, like Dallas and Denver, will be more resistant to negative oil-related impacts.

• Interest rates could rise more quickly than is forecasted, raising cap rates faster than rent growth and lowering values.

OPPOrtunities• A moderate economic slowdown could limit

renters’ perceived mobility and undergird existing multifamily demand. Depending on timing and other economic factors, this could also put further downward pressure on the homeownership rate.

• Suburban markets in the early stages of developing an urban feel could offer developers opportunities for higher returns. Lower land costs and the ability to tailor new product to the specific needs of target demographics could prove critical in the tightening supply side of the multifamily landscape.

• In certain markets, value-add projects may offer developers unique opportunities to bridge the rent gap that the luxury development trend has created between existing and new stocks of apartments. In many major markets pricing already shows evidence of this, but others have only recently adopted the luxury trend.

• The biggest question for multifamily may be the value of the U.S. dollar: will it affect the flow of foreign capital to U.S. commercial real estate markets—and if so, when? Slowing flows to the multifamily sector could relieve some pressure on yields—particularly in gateway markets—and offer a reprieve to the supply pipeline after a very big 2016.

MultifaMilY

6: Owen, Andrew, and David Levinson. “Access Across America: Transit 2014.” University of Minnesota (2014).

hOtel


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hOtel

favOrable COnDitiOnsFavorable economic conditions are forecast for the hotel market in 2016. The two components of U.S. GDP most important to hotel demand—combined personal consumption and gross investment expenditures—are expected to double their pace of growth in 2016 to around 4%, according to Moody’s. Throughout 2015, the Conference Board’s index of leading economic indicators increased at 1.0-2.5%—suggesting favorable changes for hotel demand in H1 2016, given the significant six- to eight-month lagged relationship between the two.

Investment fundamentals remain very favorable in the vast majority of U.S. hotel markets. As we move through this year and next, secondary and tertiary markets will be able to support new construction in greater amounts. Resort locations will remain attractive, and lifestyle hotels will continue to gain in popularity. While luxury hotel development will continue to be a challenge in the near-to-mid term, the market will justify the continued expansion in the upscale and upper-upscale segments.

healthY DeManD Pushes OCCuPanCY tO PeakDemand growth in the U.S. lodging market will continue to moderate, gaining 2% in 2016. Supply growth will overtake demand growth in Q4 2016,

decreasing occupancy rates from the record levels set in 2015 in urban, suburban, airport, and resort locations. Resort hotels achieved record occupancy in Q4 2015 and are poised to achieve peak occupancy in Q3 2016. Small-town and interstate hotels will experience low gains or flat occupancy, along with occupancy levels below their previous peaks. Nationally, occupancy is expected to average 66%.

California markets will continue to see robust occupancy growth, contributing to the overall national demand trend. Sacramento and Oakland will record the highest (2.6%) and second-highest (2.4%) occupancy increases. Meanwhile, some Texas markets will be a drain on national occupancy rates. Notable occupancy losses will be in Houston (5.4%) and Austin (2.7%), due in part to economic effects of low oil prices and new supply.

In 2016, oil prices are expected to increase from current cyclical lows, causing gasoline prices to rise by as much as 15%—raising effective travel costs and lessening the boost that today’s prices give to consumers’ purchasing power. To the extent that gas prices stay low, areas with high gas expenditure—notably the U.S. non-oil-producing Southern and Mountain regions—will continue to see demand benefits. Meanwhile, areas that have historical ties with oil production—particularly Houston and certain Canadian markets—will continue to suffer from the negative demand effects of reduced employment.

In 2015, when the U.S. dollar rapidly gained strength against a broad index of foreign currencies, travel spending dropped by 1.6%, year-over-year, according to the International Trade Administration. As we expect the dollar to continue to gain strength through 2017, the industry should anticipate further decline in international travel continuing to put downward pressure on demand. This effect will be most pronounced in the luxury, upper-upscale, and upscale segments in gateway cities (i.e., Boston, Chicago, Los Angeles, Miami, New York, San Francisco and Washington, D.C.).

In Canada, low oil prices and a weak Canadian dollar have been identified as causes for sluggish demand, though their effects have been offset somewhat by

Figure 10: Exchange Rate Index and International Travel Spending

International Travel Spending ($ Millions) Index (1997 = 100)

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hOtel

increased tourism and commercial growth in other Canadian sectors. In 2015, Canada’s demand growth of 1.0% fell short of its 1.5% supply growth, and occupancy remained at 64%. Demand growth will pick up to 2.4% in 2016, helping raise the occupancy rate to 65%. The Canadian dollar should see its declines against the U.S. dollar slow, so the exchange rate’s effects on demand at Canadian hotels are thus likely to be negative in tourist destinations and positive elsewhere.

suPPlY PiCks uPU.S. lodging supply growth is expected to accelerate in 2016, but to remain below the annualized long-run average of 1.9% for most of the year—at 1.6%, 1.7% and 1.88% in the first three quarters, respectively. Supply growth of 2.0% is expected by Q4. Although financing new construction remained a challenge through much of 2015, record occupancy levels and rising ADRs convinced many investors to move forward with construction projects. Approximately 118,000 rooms are scheduled to open in 2016—up from 2015’s estimated 96,000 rooms. Seventy-one percent of these rooms will be in upscale or upper midscale—a slight increase from 2015. Roughly two-thirds of new rooms in 2016 will have either Hilton Worldwide, Intercontinental Hotels Group or Marriott International as their parent company.

Demand is expected to outpace supply until Q4 2016. Figure 11 shows the nation’s ten largest hotel markets and their 2016 supply growth rates. Much of the recent new development has been concentrated in larger metropolitan areas. With 8.4% growth, Austin will see the highest supply growth rate in 2016, followed by Cleveland (7.5%) and Pittsburgh (7.5%). All three will see supply exceed demand by Q2 2016.

In the U.S., Airbnb represents an emerging threat to hotel demand and pricing power. As of the end of 2015, our estimates put Airbnb supply at around 170,000 units—or 3.5% of the U.S. supply of hotel rooms. Supply of Airbnb units is growing at a significant pace (approximately 80%, year-over-year) and is expected to continue to expand rapidly throughout 2016. While a large percentage of Airbnb hosts (78%) rent out only one unit, the 8% of hosts that manage three or more units generate 34% of all Airbnb revenue. These multi-unit hosts may represent more sophisticated competition to traditional hotels than the conventional single-unit Airbnb host.

In Canada, 2015 saw mixed supply changes, with new openings in Saskatoon, Regina and St. John’s and closures in Montréal, Ottawa and Toronto. Canadian supply expanded by 1.5% in 2015 and is expected to grow by another 1.3% in 2016.

west COast still leaDs iMPressive aDr grOwthIn the U.S., ADR is predicted to increase by 5.2% in 2016 and 5.3% in 2017—its strongest increases since 2007. RevPAR growth will slow to 5.5% in 2016 and to 4.7% in 2017 as occupancy levels off. Airport hotels will see the strongest growth in 2016, with ADR increasing by 6.4% and RevPAR by 6.1%. By these two measures, resort hotels will take second place, with an expected ADR increase of 4.7% and a RevPAR increase of 5.4%.

The West will continue to lead U.S. ADR gains in 2016, with Oakland and San Jose-Santa Cruz recording increases of 9.2% and 8.6%, respectively. Of the top ten U.S markets for ADR growth, six are on the West Coast. West Coast markets Oakland and Sacramento will lead RevPAR growth with rates of 11.9% and 10.9%, respectively. In 2016, all U.S. markets will see

Figure 11: Top Ten Markets’ Supply Growth in 2016

Growth Rate (%)

0 42 6 81 53 7 9

Austin

Cleveland

Pittsburgh

New York

Houston

Miami

Albany

Omaha

West Palm Beach

Raleigh-Durham

Source: STR and CBRE Hotels’ Americas Research, Q4 2015.


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hOtel

ADR growth—with the exception of Houston, which is experiencing demand woes from low oil prices along with a large supply increase. All but Houston, Pittsburgh, and Omaha will see RevPAR increase in 2016.

In Canada, ADR and RevPAR are expected to increase by 3.5% and 4.7% in 2016—led by Central Canada with robust ADR growth of 4.0% and RevPAR growth of 5.3%. For Western Canada and Atlantic Canada, we expect ADR increases of 3.0% and RevPAR increases of 4.1% and 4.4%, respectively.

risks• Demand will suffer for as long as the strong dollar

discourages travel from abroad.

• Growth in Airbnb represents an emerging threat to hotel demand and pricing power.

• Oil and gas sector exposure and continued supply growth may lead to lower RevPAR in certain U.S. and Canadian markets (e.g., Houston, Calgary and Edmonton).

• Sustained double-digit ADR growth in many gateway cities has led to rates that, adjusted for inflation, are historically high—which may negatively impact demand.

OPPOrtunities• Secondary and tertiary markets will be able to

support new construction in greater amounts as we move through this year and next.

• Continued low oil and gas prices may increase demand by lowering effective travel costs and increasing consumers’ overall purchasing power.

• Resort locations will remain attractive.

• The market will justify continued expansion in the upscale and upper-upscale segments (though development in the luxury segment will continue to be a challenge).

• Lifestyle hotels will continue to gain in popularity.

• The strong U.S. dollar should lead to growth in Canadian hotel demand from corporate and leisure travelers.

• Record occupancy levels across the U.S. are giving hotels an opportunity to raise prices, which has a strong flow through to profits.

• New hotel brands offer new prospects for hotel development in brand-saturated markets.

Figure 12: Top Ten Markets’ ADR and RevPAR Growth in 2016

Growth Rate (%) ADR Growth RevPAR Growth

-8 0-4 4 8-6 2-2 6 10

Orlando

New York

Chicago

Washington, D.C.

Los Angeles

Atlanta

Dallas

Houston

Phoenix

San Diego

Source: STR and CBRE Hotels’ Americas Research, Q4 2015.

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a seCtOr in fluxThe Americas’ industrial and logistics sector has had a great run for the past few years. Though markets throughout the entire region have seen significant expansion since the end of the Great Recession, the U.S. has been the primary engine of growth. The U.S. market has achieved some impressive milestones: A recovery spanning 23 consecutive quarters of positive net absorption—the longest such stretch in history. Availability has fallen to 15-year lows, and the overall net rent figure is on track to regain its prior highs in the middle of 2016. The sector is highly favorable from a capital markets perspective, with near record-level acquisition pricing and widespread low cap rates. Many of these metrics are even more impressive at the individual market level, with more than a dozen markets well into expansionary territory, above and beyond prior peak levels.

With the sector meeting and surpassing many of these high water marks, some observers are understandably skeptical about how much runway is left in this cycle. Our view is resolute: conditions in the U.S. industrial market will continue to be favorable throughout 2016. This outlook is rooted in how, among the various property types, the industrial sector is uniquely positioned to benefit from both cyclical and structural changes throughout the coming year.

On the structural side, emergent technologies are reshaping the logistics landscape. In particular, the rise of e-commerce has far-reaching implications for supply chains across the world. Manufacturers, suppliers and distributors are all reshaping their supply chains to meet the new service demands that e-commerce has prompted. According to e-Marketer, these changes are set to continue, with global Internet sales growing to $3.5 trillion, or 12.4% of total retail sales, by 2019. Online retailing is inherently more complex than traditional retailing, demanding a higher variety of goods, smaller package sizes and a greater frequency of shipments from warehouses; as this sales channel has grown, demand for a variety of modern logistics property types and locations has increased, changing the profile of occupier demand.

On the cyclical side: U.S. consumers are in a good spot, with unemployment at multi-year lows, wage increases appearing broadly imminent and the lowest oil prices in a decade giving households a significant savings boost. Meanwhile, the dollar’s strength against a basket of world currencies is driving down the cost of importing goods. Greater import volume will weigh on top-line GDP growth, but for industrial demand it is a strong positive, as imported goods tend to make more stops along the domestic supply chain than exports or domestic goods do.

Figure 13: Global E-Commerce SalesTotal Sales ($ Trillions) Growth (%)Total Sales (L) % Growth (R)4.0 100

9080

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Source: e-Marketer, July 2015.

2013 2014 2016 20182015 2017 2019


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Outside of the U.S., industrial fundamentals and their economic backdrops will vary from country to country. Weakness in Canada’s currency has seen consumer activity fall, and the manufacturing sector has not picked up as much as some had hoped it would; however, demand for warehouse and distribution space has remained relatively stable. Persistent low oil prices are likely to weigh on the Canadian economy, but Canada’s economy is diversified enough that areas like Vancouver and Toronto will remain relatively healthy. Furthermore, Calgary’s industrial market is somewhat diversified away from the oil sector, as Calgary is one of the major distribution centers for Western Canada.

Mexico’s logistics sector is expected to maintain its strong performance in 2016 while Mexican manufacturing continues to grow—remaining competitive on the global stage and especially against emerging Asian countries, thanks to relatively low wage and energy costs (with continued declines in the latter expected). Proximity, and a trade agreement waiving import taxes to North American markets, will allow Mexican manufacturers to benefit from ongoing improvement in the U.S. economy.

In 2015, ongoing brisk growth in Brazil’s logistics market was met with an economic downturn that slowed industrial production, cooled speculative development and prompted local market diversification. Although the recent weakness in the domestic economy is likely to continue, exports are expected to recover from recent lows later in 2016, and the country’s primary markets will show continued growth for the year.

DeManD COntinues, anD COntinues tO DiversifYFor the past two decades or so, the bulk of industrial demand has been focused on large distribution space in the main gateway markets, as manufacturers and distributors have established anchor and hub facilities along key transportation networks near major population centers. While the need for such space will be ongoing, demand has begun to diversify—users are looking to smaller markets and smaller spaces in order to meet more stringent consumer demand and gain a speed-to-market advantage. As Internet shopping expands, more parcels are moving through the system,

and consumers are demanding that they do so more quickly. Compressed delivery requirements—next day or same day—are becoming the norm, placing extreme pressure on supply chains. The result is that shipping’s “last mile” will continue to be logistics users’ key focus in 2016. Several operators are creating networks whereby strings of smaller, city-fringe delivery sites can be coordinated through one or more hub warehouses in strategic locations. In the near term, the demand for these last-mile facilities will be strongest in mature, high-value cities like Toronto, Los Angeles and New York, where demand for quicker delivery times will keep the focus on operational efficiency.

latin aMeriCaAcross Central and South America, the story is a little different. Occupiers are generally still expanding their service networks in order to widen their customer base by introducing consumers to e-commerce, geographically broadening demand for warehouse space. User demand is growing, but in emerging markets the industry remains more focused on building a strong foundation for reasonably quick shipping than on fine-tuning the supply chain for maximum speed-to-market.

In Brazil, continued growth in retail and e-commerce has seen these segments pursuing local market investment and expansion opportunities. Coupled with growing demand for time-sensitive delivery, this has reshaped Brazil’s logistics market to a degree. Retailers and e-commerce companies have begun to implement regional distribution hubs in the country’s southern and northeastern regions while consolidating some operations in large warehouses near São Paulo and Rio de Janeiro.

Brazil’s industrial market has also diversified in response to lower demand caused by the economic downturn. With industrial parks having averaged 14% annual growth over the past 10 years (17% expected in 2016), new market segments, such as data centers and self-storage, are being explored. Meanwhile, more attractive pricing and the possibility of improving efficiency are prompting users to relocate to better-quality warehouses; such opportunities are anticipated to continue in 2016.


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Also adjusting to sluggish demand and investment is Argentina, where the new government is expected to take steps to improve the economy, including recovering market predictability and the trust of foreign investors. The administration has announced support to tech and audiovisual districts as a way of reinvigorating the real estate sector in deteriorating neighborhoods, granting tax benefits and improving infrastructure with the goal of concentrating specific activities into clusters. Meanwhile, warehouse completions will be significant in 2016, and although absorption may improve, rising vacancy and declining average asking rents are anticipated.

In Mexico, demand and supply are currently well balanced. Manufacturing activity has prompted ongoing growth in the largest central and northern industrial hubs, while sustained growth in Class A/A+ space in Ciudad Juarez and Tijuana, Mexico’s manufacturing markets nearest to the U.S. border, has been met with record absorption and stable rents.

Stable performance is also anticipated in Colombia’s primary industrial markets (Bogotá, Medellín, Cali and Barranquilla), and in Lima, Peru. In Panama, the expanded canal will start operations in 2016, and Panama City’s Class A/A+ warehouses—most of them logistics-related—will continue to be very active, with declining vacancies. Panama’s Colón Free Trade Zone (the largest logistics complex in the hemisphere, exceeding 6.0 million sq. m.) has been facing increased

vacancy and falling rents since 2014, but new incentives anticipated in 2016, along with a slow rebound among South American markets, may contain the downturn and lead to a growth trend.

DevelOPers keeP suPPlY in triMOne of the most notable features of the current cycle has been the relatively tepid development market and the slow addition of new logistics product. As has been the case throughout this cycle, construction remains concentrated in the large North American gateway markets and the key Latin American manufacturing and distribution hubs, such as Mexico City and São Paulo.

U.S. completions since 2010 are less than half of their long-term average, despite net absorption averaging 20% more than its long-term average. On the whole, developers have shown healthy discipline that has allowed for steady rental growth, and many markets have achieved or are near full recovery as a result. This rent growth—coupled with tight availability, particularly in the key hub markets—has fueled a steady global development market that has seen (and will continue to see, through 2016) little risk of oversupply. Throughout the Americas—the global region where the development market has been strongest—supply and demand are forecasted to reach a balance for the first time in nearly a decade.

As user demand has evolved, so has the development market. In the U.S. in particular, demand for smaller

Figure 14: Americas Region Industrial DevelopmentMSF 2016 Forecast 2010-2015 Average2018

8642

16141210

0

Source: CBRE Research, Q4 2015.

Inland Empire Dallas Atlanta TorontoLos Angeles/OC Chicago Northern N.J. Mexico City Bajío São Paulo Santiago



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warehouse spaces needed to solve the last-mile problem has developers filling that niche with new Class A facilities that are smaller (or easier to divide into smaller spaces) and located closer to the urban core. These “light industrial” properties represent a growing portion of all buildings under construction—currently up to a third—which shows significant growth from previous years, when virtually all development was concentrated in the big-box bulk warehouse segment.

To that end, for both occupiers and investors, many considerations factor into making optimal choices. Modern logistics strategy has progressed beyond simply picking a building with the right attributes. Site selection—in a macro sense, beyond individual parcel selection—has become increasingly important, as everyone in the industry must fine tune their operations to stay competitive in an evolving landscape. Such challenges and pressures will be heightened as we move into the maturing years of the cycle, as the best opportunities will have already been occupied or acquired.

risks• Slowdown in consumer consumption could reduce

inventories, lowering user demand for warehouse and distribution space.

• New supply of speculative, extra-large big-box space could exceed historical demand metrics.

• Macro conditions outside the U.S. might dry up flows of foreign capital, affecting pricing on asset sales.

• Cap rates, which are at historic lows with little room to compress, are exposed to some volatility, with interest rates rising.

• The weak Canadian dollar is having an impact on consumer activity, driving down demand for distribution space.

OPPOrtunities• Increases in development activity could fuel

additional growth in severely supply-constrained markets, such as Los Angeles.

• Development could expand beyond major distribution hubs to benefit secondary markets experiencing record-low availability rates, such as Cincinnati.

• Quicker-than-expected growth in e-commerce/omni-channel sales could shift market dynamics. “Last-mile” markets with favorable demographic trends hold the greatest opportunity.

• New forms of delivery service could shift the optimal locations for storage/distribution of goods. Depending on the scale, this could affect all markets or second-tier markets, specifically.

• The soft Canadian dollar may spur exports and domestic manufacturing, which may contribute to the increase in heavy industrial and manufacturing space demand.

• Growth in Mexican manufacturing could prompt further supply chain development, benefiting markets throughout Mexico, as well as markets in the southeastern U.S.


OffiCe


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OffiCe

u.s. Market tightens, the rest Of the regiOn lOOks fOr balanCe In 2016, office markets across the Americas are likely to vary widely in their performance, according to each market’s progress in the office cycle and its unique supply and demand drivers. Despite recent financial market volatility and fears regarding the impact of a global economic slowdown, the strongest performance is expected in the U.S., where consistent job growth and limited new supply are pushing vacancy rates to near-pre-recession lows. The Canadian and Latin American markets have seen new supply delivered in greater amounts and are more exposed to the commodities markets—though these trends are not uniform across the regions. Developers have started to pull back on construction in many of these markets, which should bring supply and demand into better balance over the next several years.

With strong job growth and limited new supply, the U.S. office market is projected to tighten further in 2016. CBRE Econometric Advisors forecasts a 50-bps drop in the U.S. vacancy rate—to 12.6%, 10 bps higher than the pre-recession low rate reached in 2006 and 2007. Fueled by the addition of approximately 575,000 office-using jobs (the highest annual total since 2000), net absorption is forecast to exceed 50 million sq. ft. for the third consecutive year.

DeManD: MOst Markets favOr OwnersIndicative of the broadening recovery, most U.S. markets registered positive absorption in 2015. The aggregate downtown and suburban markets are both expected to tighten further in 2016, with greater strength found in technology-driven markets and suburban markets offering a dynamic live-work-play environment and low cost of doing business. Suburban markets featuring high concentrations of talent and leading industries, strong lifestyle amenities and favorable business climates—including Dallas/Ft. Worth, San Francisco, San Jose and certain submarkets in Phoenix—accounted for an outsized share of suburban absorption in 2015—a trend we expect to continue in 2016.

With strong demand and falling vacancy rates maintaining upward pressure on asking rents, market conditions in the U.S. are owner-favorable or moving in that direction in most downtown and suburban areas. We expect tightening vacancy to allow landlords to continue to increase rents by 4% to 5% in 2016, which is above near-term inflation expectations. This would result in a longer and more moderate stretch of rent increases than was recorded during the last cycle (2005-2008), reflecting the current cycle’s slower but thus far more sustainable pace of expansion.

Figure 15: U.S. Office Construction and Vacancy RatesCompletions (MSF) Vacancy Rate (%) Suburban Completions (L) Downtown Completions (L) Suburban Vacancy Rate (R) Downtown Vacancy Rate (R)110 25

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OffiCe

Desirable inDustries anD lOCatiOns fOCus grOwthSupply trends vary significantly by market. Nearly 70% of the square footage under construction in CBRE Research-tracked U.S. markets is claimed by just 10 metro areas—primarily markets with high concentrations of leading industries and desirable live-work-play environments, such as San Francisco, Manhattan, Seattle, Boston and Dallas/Ft. Worth. As of Q4 2015, nearly half of the markets tracked by CBRE Research had 500,000 sq. ft. or less under construction. New supply is projected to be flat in 2016, at 35.7 million sq. ft., as lower completions in Houston offset moderate increases in other markets. New supply will remain well below the 2008 pre-recession peak of 75.9 million sq. ft.

In some U.S. markets, the number of available large blocks of space is expected to decrease, limiting options for tenants. In many of the leading technology markets, supply has been unable to keep up with robust tenant demand, due to long development timelines. In other, slower-to-recover markets—and especially in the suburbs—rents have not reached levels that justify

development, particularly given rising construction costs. As a result, the number of available blocks has diminished as tenant demand has picked up—a trend that is expected to continue in 2016.

CanaDaCanada is at a different point in the office market cycle than the U.S., with its vacancy rate having registered a 10-year high of 12.2% in 2015. This high, however, was still lower than the U.S.’s 13.1% rate for 2015, due to Canada’s milder recession and faster subsequent recovery. Although supply continues to come on line in large amounts in markets across Canada, completions are expected to decrease for a second consecutive year in 2016. New supply is projected to decrease in the primary energy city of Calgary, as well as in more economically diverse cities that have been very active development markets over the past few years, such as Toronto and Vancouver. After having declined in 2015, net absorption is expected to reach 2.77 million sq. ft. in 2016 as the economy emerges from a brief, technical recession. The vacancy rate is expected to increase to 13.0% in 2016 as completions decrease slightly, to 6.78 million sq. ft.

Figure 16: U.S. Vacancy RatesVacancy Rate (%) 2014 2015 2016F

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Figure 17: Canada Vacancy RatesVacancy Rate (%) 2014 2015 2016F

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latin aMeriCaFollowing uneven performance in 2015, Latin America’s Class A/A+ office market is expected to be relatively stable in 2016. Mexico’s major office markets (Mexico City, Monterrey and Guadalajara) are expected to lead the region, driven by strong growth in the financial and business services sectors, even as they continue to receive new supply. Buenos Aires’ office market, which has demonstrated resilience amid economic challenges, may improve as well, attracting greater foreign investment. Most other Latin American markets are expected to face challenging economic environments, although we anticipate a reduction in deliveries in some markets, which may prove attractive to investors and users eager to secure acquisition and lease opportunities. Weak commodities pricing will continue to affect Santiago and Bogotá, but a slowdown in completions may balance supply and demand. Despite decreased rent values amid economic deterioration and the weakening Brazilian real, São Paulo’s office market has continued to register near-record volumes of gross absorption. Less new supply is expected in 2016, and the rent gap relative to other Latin American markets has narrowed, which may be inviting to foreign companies.

Across the major Latin American markets tracked by CBRE Research, total inventory registered a year-over-year increase of 8% in Q4 2015, with the largest percentage gains in Bogotá and Lima. Mexico City had the region’s largest absolute supply growth, which was also high in relative terms, at approximately 10% of the market’s total supply. However, the market’s vacancy

rate only grew from 8.2% to 11.0% year-over-year, while rents increased by 6.5%, reflecting strong demand. In 2016, Bogotá, Lima and Panama could see vacancy rise as new supply continues to come on line, while a pullback in development activity in Santiago and São Paulo over the past year should yield greater stability in those markets.

teChnOlOgY anD energY: inDustrY OutlOOk anD risksThe technology industry will likely remain one of the strongest drivers of office space demand in the U.S. and Canada—in major technology markets like Seattle, Boston, Vancouver, Toronto and the San Francisco Bay Area, as well as in emerging, secondary cities that offer skilled workforces and lower operating costs, such as Atlanta, Phoenix and Dallas/ Ft. Worth. Technology is the fastest-growing segment of the Canadian office market, responsible for 20% of significant office leasing activity since Q4 2012. It has gained ground on the finance, insurance and real estate sector, which still accounts for the largest share of major leasing activity (26% since Q4 2012).

In the U.S., technology tenants accounted for 18.1% of the major leasing activity in 2015—up from less than 14% in 2013. Over the past two years, growth in U.S. technology sector leasing has far outpaced more traditional drivers of demand such as financial services and legal services, reflecting strong technology industry expansion, rightsizing of footprints and a drive towards greater efficiency in the latter

OffiCe

Figure 18: Latin America Office Vacancy RatesVacancy Rate (%) Q4 2014 Q4 201525

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Monterrey Panamá City LATAM Total Mexico CityRio de Janiero São Paulo Lima Buenos Aires Santiago CaracasBogotá Guadalajara

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two industries. Growth in the technology sector is expected to drive demand for the type of urban creative space that many of the industry’s employees prefer, prompting conversions of outmoded office and warehouse space to open, collaborative layouts. Fueled by an aging population, the healthcare/life sciences sector is also likely to account for a large share of leasing activity in 2016.

The technology sector is not without risks, however. A historically volatile industry that relies heavily on outside investment, technology has attracted a large amount of funding from investors seeking higher returns in the current low interest rate environment. This flood of funding has resulted in a soaring number of “unicorns” (private companies valued at $1 billion or more): 148 worldwide as of year-end 2015—up from just eight in 2010, according to CB Insights. As global markets adjust to rising interest rates over the next year, the technology industry may feel adverse effects of the increasing cost of money. Caution surrounding the sustainability of inflated private valuations has the potential to lead to disappointing public exits and to cause ripple effects as other tech firms plan their exit strategies.

Low oil and commodity prices are expected to affect office markets with high concentrations of tenants in these industries, including Houston, Calgary and Santiago. In many of these markets, large amounts of new supply continue to come on line, expanding the

sublease market and shifting the balance in favor of tenants. CBRE Econometric Advisors expects office vacancy rates in most U.S. energy markets to lose momentum or worsen. With softer demand and a large amount of new supply and sublease space coming to market, we expect vacancy rate increases in Calgary and Edmonton.

The recently diverging paths of the energy and technology industries—the two initial driving forces of the current U.S. recovery—illustrate the impact on office markets of industries that drive local office-using job growth: falling oil prices have seen Houston’s office market soften significantly, while tech markets and submarkets across the U.S. continue to account for outsized shares of absorption and development activity. The effect of weaker commodities prices on highly exposed markets in Canada and Latin America demonstrate this point as well. Going forward, any shifts in the primary industries driving individual metro areas and submarkets throughout the Americas will bear watching and could result in disparate performances of office markets across the region.

Owner risks• Rising interest rates and concern over company

valuations and exit strategy prospects could slow the tech sector, this cycle’s leading driver of office demand. Slower growth might hurt the leading technology-driven office markets, where construction activity is currently concentrated.

OffiCe

Figure 19: U.S. Major Leasing Activity by IndustryShare of Leasing Activity (%)

0 106 14 1842 128 16 20

High-Tech

Healthcare/Life Sciences

Business Services

Financial Services

Creative Industries

Legal

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Note: Includes the 25 largest transactions by sq. ft. each quarter for the 54 markets tracked by CBRE Research. Source: CBRE Research, Q4 2015.

2015 2014 2013


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• Persistent low commodities pricing could keep tenant demand soft in energy-driven markets like Houston, Calgary and Santiago.

• There is some oversupply risk in certain Canadian and Latin American markets where development has been active and demand has slowed. Mitigating strategies include:◊ Proceeding cautiously in expansions; undertaking

projects in phases◊ Focusing on niche markets and sectors where

demand is strong◊ Building the case for workforce location in

suburban markets◊ Being flexible and timely in renegotiating with

current tenants ◊ Upgrading aged or underperforming buildings

to extend their competitive economic life, repositioning them for the next expansion

Owner OPPOrtunities• Investors should consider conversions of

nontraditional space (e.g., warehouses) to “creative” spaces that appeal to technology tenants and, increasingly, others.

• With older millennials in their early 30s, we expect more of this demographic to move to the suburbs in the coming years. “Urban-suburban” submarkets that offer “live-work-play” features like mass transit access, walkability and retail and entertainment options appeal to this group, likely presenting compelling opportunities for owners and investors.

• With the number of available high-quality large blocks of space shrinking in many U.S. markets, owners should consider upgrading older, underperforming properties to capitalize on growing tenant demand.

• Soft market conditions in many Latin American markets may mean good opportunities to acquire properties for long-term investment.

OCCuPier risks• Major U.S. markets trending in favor of owners

promise continuing rent increases of 4% to 5%, with tightening expected in both downtown and suburban markets. This will challenge occupiers looking to stay in place and renegotiate leases, which was previously the preferred way to achieve cost efficiency.

• Occupiers identify labor and skills shortages and rising costs to be their greatest challenges presently.7

Innovative workplace redesign will be an important factor in meeting competing cost and workforce expectations; we expect occupiers to continue to opt for quality of space over quantity.

• In Latin American markets, low prime rents may tempt occupiers to over-expand the front office. Occupiers should also be wary about agreeing to the initial lowest bidders without first performing a lifecycle cost analysis.

• The fact that securing talent and reducing costs conflict with one another directly carries inherent risk. The tightening labor market will presumably pressure wages upward, and the tightening real estate market is already doing the same with asking rents. With economic uncertainty raising occupiers’ cost concern, these conflicting factors must be balanced carefully.

OCCuPier OPPOrtunities• Talent attraction and retention is a priority for

most occupiers, and today’s workers are choosing workplaces that offer freedom in where and how to work, and connection to the communities they need to accomplish their work. Large occupiers seeking flexible, lower-cost and attractive solutions are beginning to show interest in innovative solutions.8

• Uncertain economic sentiment will keep occupiers’ focus on expense management as they create workplace strategies. With many U.S. markets trending in favor of owners, emerging “urban-suburban” submarkets could present compelling opportunities for occupiers to relocate to a strong base of talent while containing costs. For those staying in place, a workspace redesign that reduces space while boosting employee engagement could be the way to meet expense management and talent retention needs.

OffiCe

7: See CBRE’s 2015/2016 Americas Occupier Survey. 8: CBRE Research is conducting research on the shared workplace—including its relevance for large corporate occupiers seeking ways to attract and retain talent and manage costs. Our first report on this was published in January; several more are planned for 2016.

http://www.cbre.us/research/2016-U-S-Reports/Pages/US-Shared-Workplaces-Prt-1.aspx

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retail

a brighter 2016 A bright outlook for consumer spending in North America should help the Americas as a whole post a solid performance in 2016. U.S. consumers are a relative bright spot in the global economy, thanks largely to the rapidly improving U.S. labor market. With the significant tailwinds of lower gas prices, easier access to credit,9 and asset price gains, confidence is brimming. Although the energy sectors in Canada and Mexico have been hurt more by the low oil prices, consumer spending in those countries should remain supportive of retail in the same way U.S. spending will. Latin America’s youthful population and growing middle class have good prospects for income growth and social mobility, which is likely to raise demand growth; and Central America will benefit from its strong trade ties with its neighbors to the north. All countries in the Americas can expect retail sales to increase in 2016.

Canada’s retail market experienced some surprises in 2015, including Target’s announcement that it would abandon its foray into Canada. Vacancy rates have increased as a result; however, vacancy rates in most markets remain very healthy—under 5.0%. In 2016,

although Canadian markets will continue to recalibrate after Target’s withdrawal and a challenging year for midmarket retailers, the country remains a worthy destination in the eyes of foreign retailers—though they will be more selective about locations and will roll out new stores more gradually than over the past few years.

Adverse macroeconomic factors explain South America’s generally less favorable retail outlook, though there is great dispersion across the region. Brazil in particular is in deep trouble—not just economically but politically as well, following the impeachment of President Dilma Rousseff. High borrowing costs, double-digit inflation and poor job prospects comprise a perfect storm for consumers, and businesses will remain hemmed in by fiscal policy uncertainty and the commodity price fallout. Fiscal deficits, weak currencies and high inflation are common themes that will hurt consumption throughout the continent in 2016. Nevertheless, many countries are making positive reforms that may boost confidence, which should lead to modest improvement over 2015.

a strOnger COnsuMer anD DiversifYing DeManDIn the U.S., the upbeat outlook for consumers overall bodes well for an acceleration in retail space demand, which has been inching higher at a measured pace throughout the recovery. Availability is at its lowest rate since 2008, and quarterly net absorption has averaged about 27 million sq. ft. over the past three years, matching the pace of 2005-2007. A divergence between consumer spending and demand for retail space is partially explained by the rapid rise of e-commerce, but its impacts on the various types of retail differ. High-end malls and shopping centers and urban retail enjoy much stronger activity than their peers in less-favorable locations, which are frequently more exposed to e-commerce encroachment.

Segments experiencing continued growth include restaurants, smaller-format grocers, supercenters and healthcare and discount stores. Many of these segments driving space demand are also diversifying the tenant base in malls and shopping centers—and with the addition of more amenities, enhancing

9: OCC 2015 Survey of Credit Underwriting Practices.

Figure 20: Households Carry Their Weight in SpendingAnnual % Change in Private Consumption 2015 2016

4

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Source: Oxford Economics, CBRE Econometric Advisors, 2015.

Argentina CanadaU.S. Argentina Brazil

http://www.occ.gov/publications/publications-by-type/survey-credit-underwriting-practices-report/pub-survey-cred-under-2015.pdf


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the attraction of retail destinations. Meanwhile, most department stores and mid-market general merchandisers continue to experience challenging market conditions. In 2016, retailer expansions should mirror recent retail sales performance.

In Latin America, large cities continue to grow and the more urban lifestyle favors the third-generation mall format—consumers are looking for shopping and entertainment together in a secure and stimulating place. The standout trends for 2016 are fast growth in the food and beverage, apparel and home-related categories (such as furniture and electronics); the continuing expansion of e-commerce; and the potential for luxury brands (mostly imported) to entice local buyers and visitors alike.

Mexico’s 2.5% annual growth in consumer spending since 2008 is largely due to strong growth in the country’s overall, working-age and middle-income populations—a pattern that is expected to persist through the next two decades and apply to much of the region. Even if economic growth remains modest in Mexico, rising incomes will alter consumption patterns across all product categories.

Although their size makes Brazil and Mexico (70 million and 25.4 million people, respectively) the most attractive markets in the region, medium-sized economies like Chile and Argentina have higher-than-average per capita incomes and low inflation forecasts that are supporting domestic demand. Nevertheless, consumer spending in Chile was challenged in 2015 by an unfavorable exchange rate and underwhelming income growth.

In Chile, shopping malls attract the most interest from consumers and stores alike, and high street is limited to traditional avenues with affluent pedestrians. Although high street should maintain a low vacancy rate in 2016, luxury brands may continue to shift toward malls’ greater security and convenience, as some peripheral malls work to establish themselves as sub-centers with increased services and improved transport links.

tight suPPlY QuiCkens rent grOwthA dearth of supply across the Americas has seen availability and rent growth begin to improve more vigorously. In the U.S., retail space has averaged annual completions of slightly more than 15 million sq. ft. since 2009—less than one fourth of the consistently strong 62 million sq. ft. averaged yearly over 2000-2008. Developers have remained extremely cautious, in part because they want to fully understand the dynamic changes in shopper behavior before committing to costly projects. More rapid decline in availability, along with growth in effective rents, will help end the construction lull within a couple years.

The capital markets reflect the broadly positive outlook for retail, as well as the developing trends within the asset class. Retail is attracting more capital as a substitute for other property types that may be overvalued at this point in the cycle. An example is the increase in cross-border capital flows to retail, where such investment historically has remained limited. Malls are commanding stronger pricing than open-air centers, although both are seeing a net appreciation in pricing. On the lending side, in Q3 2015, U.S. mortgage originations were up 39% versus a year earlier—the largest increase for any property type.

Figure 21: Retail Investment Slowing But Not Done

Retail Volume ($ Billions) Retail Cap Rate (%)

80 8.5

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the evOlutiOn Of the shOPPing exPerienCeTechnology is changing everything, and malls and shopping centers across the Americas are being forced to adapt. The competitive advantage these retail venues once held—selling merchandise in clean and convenient settings—has been challenged by an ascendant e-commerce sector and changing shopping preferences.

Retail is reinventing itself, though. Malls and shopping centers are focusing on their key advantage: the opportunity to provide an unparalleled consumer experience. Retail venues are being transformed—from simple places to sell merchandise into dynamic and diverse settings to which consumers will gravitate. In effect, malls and shopping centers are striving to become the active town centers they once replaced. This effort is often referred to as “place-making.”

Part of the transformation is physical. To compete with revived, 24-hour, live/work/play downtown areas, malls and shopping centers are aspiring to create similarly stimulating environments. Consequently, new, predominantly open-air shopping centers offer town squares, sidewalks, streetlamps and tree-lined streets. Places to gather are emphasized, providing shoppers with the opportunity to socialize, linger and be entertained.

Super-regional malls are revamping their exteriors to be more inviting than the typical fortresses with small pockets for entrances. They, too, are enhancing their properties with an emphasis on creating appealing gathering areas where shoppers can socialize, recharge phones, etc.

More ambitiously, developers are incorporating other land uses into retail projects. As they aspire to be 24-hour centers of activity, apartments, condos, offices and hotels are being integrated. In order to truly become a “place,” mixed uses are ideal. Virginia’s Tysons Corner Center is being transformed into a mixed-use development. The Village at Westfield Topanga in Woodland Hills, California, is emblematic of a mixed-use retail venue that has effectively become a new town center for the San Fernando Valley.

Part of retail’s new unparalleled experience is derived from the increasing diversity of its tenants. Surging demand from food services and beverage tenants in particular has enhanced the town center atmosphere in today’s malls and shopping centers. The additional draw of upscale eating options and activity from sidewalk cafes in some venues provides another reason to visit.

Many of the traditional department store anchors are being replaced with new, dynamic, smaller-format retailers. Among these new stores are fast-fashion retailers, which change their inventory on a daily basis. They also provide merchandise at attractive price points—part of a trend toward lower prices that has supported strong demand for space from luxury brands in secondary or outlet stores. At the other end of the spectrum, luxury retailers, which specialize in face-to-face customer service, also provide a unique reason to visit the mall.

Other tenants offer a much more aggressive draw, underpinning the mall as a place to be, rather than just to shop for merchandise. The Mall of America has a roller-coaster, for example; and the American Dream Meadowlands will soon offer an indoor, 800-foot hill for skiing and snowboarding. Less extreme are such successes as The Grove in Los Angeles and The Mall at Millenia in Orlando, which have clearly benefitted from offering visitors unique physical attractions and entertainment as an experience.

Lastly, owners and retailers are both catering to their customers in more aggressive ways—particularly through technology—in order to provide an unparalleled shopping experience. The Mall of America has an “Enhanced Service Portal” that provides a point of contact for security, telephone, guest services and social media for customers. The King of Prussia Mall, outside of Philadelphia, is expanding its concierge services for shoppers—like many other malls in the nation. Such efforts are new ways that owners and retailers are reaching out to their customers to provide personalized shopping experiences.

Online shopping is playing a large part in the current evolution of Latin America’s shopping experience; it is


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growing at 10.8% and will continue to increase as long as weak currencies discourage travel to the U.S.—Latin Americans’ favorite shopping destination. The region’s online population comprises 328 million people and is growing at a 3.6% rate. Although local retailers still face many challenges in implementing online transactions—particularly in Argentina and Colombia, where payment providers such as PayPal have very conservative policies—overall, e-commerce will bloom throughout the region in 2016.

luxurY retail in the glObalizeD eCOnOMYOver the past 10 years, the S&P Global Luxury Index, comprising 80 publicly traded luxury goods makers and service providers, has increased by 78%, while the S&P 500 has increased just 51%. China has been one of the primary contributors to global growth in the sale of luxury products and services. However, the past year’s slowdown in the Chinese economy could partially shift the bulk of luxury goods consumption to Europe and the Americas, despite efforts to increase domestic consumption through the reduction of import duties on certain luxury categories in China. In addition, the strong U.S. dollar affects traditional U.S. gateway markets, lowering the potential of retail sales to international tourists.

Increase in the income of top earners disproportionally benefits luxury retailers. For the top 5% of U.S. earners, real household income averaged increase of 0.23% per year over 2004-2014, while the median household’s real income averaged decrease of 0.33%. With demographics shifting and e-commerce rising, however, consumer dynamics are changing. High densities of luxury stores combined with luxury anchor tenants make malls attractive to shoppers looking for luxury shopping experiences, and strong local economies and large volumes of tourists have contributed to recent success in high-end malls. The Brookfield Place shopping mall in New York, which has been re-developed in a modern luxury style with high-end brands, is an example.

High-end shopping malls and luxury stores will continue to contribute to the recovery of U.S. retail, but not at the recent pace. Luxury expansion has slowed dramatically and sales growth in this area has dropped closer to the growth level in the general retail numbers. Many global luxury brands’ most recent income statements have shown weak revenue growth.

U.S. developers are also looking into redeveloped inner city areas revitalized by the influx of new Class A office and multifamily buildings, trying to benefit from the synergies of mixed-use development. Adapting to meet the tastes of consumers who have seen their fortunes rise during the current period of economic growth will lead to more redevelopment and the refinement of high-end shopping experiences and offers.

In Canada, the increasing luxury offered by super-regional shopping centers like Toronto’s Yorkdale Mall and Vancouver’s CF Pacific Centre will continue to draw high-end retailers, which traditionally have placed themselves on Canada’s high streets. Shopping malls have long stood at the center of the Canadian retail market.

Latin America will also continue to experience rising demand for luxury retail as long-term demographic and economic trends grow the middle class while creating a population with relatively fewer children and seniors. In Mexico, for example, these trends are pronounced, and growth in the country’s upper-income population is also significant. Mexico’s luxury market

Figure 22: S&P Global Luxury Index vs. S&P 500 Index

Index, January 3, 2006 = 100

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has grown 36% in value since 2011, and the pace is not expected to slow in 2016.

Panama, one of Latin America’s healthiest economies, is a well-known retail hot spot, centrally located on the continent. Domestic consumption is on the rise there, prompting upscale and luxury brands to open dedicated stores in shopping malls—to the degree that some larger centers have sections known as “luxury avenues.” Leisure and business tourism have been growing at a steady pace, and huge growth is anticipated once the airport expansion completes in 2016.

With growth in travel and tourism above global economic growth, Latin America is conscious of its potential to attract leisure travelers—and of their potential to spur retail sales, particularly luxury.

risks• Interest rates have the potential to affect aggressive

pricing in gateway markets, in addition to general investment.

• Luxury high streets may see pullback. Rents have started to moderate after years of astonishing growth.

• The strong U.S. dollar and Chinese slowdown may subdue luxury demand from tourists.

• Wage growth could fail to materialize as expected.

• Retailer bankruptcies are continually in flux.

• Grocery competition is heating up.

• B and C malls and shopping centers remain under pressure.

• Throughout Latin America, fiscal deficits, weak currencies and high inflation will hurt consumption.

• Capital flow restrictions and import/export tax disagreements have slowed business at Panama’s Colón Free Trade Zone—the hemisphere’s largest duty-free zone.

• It is uncertain whether new incentives and political changes in Latin America will help boost sales in 2016.

OPPOrtunities• Market fundamentals are supportive: a dearth of

new product persists, increasing aggregate demand for space and pressuring rents upward.

• Many secondary markets have relatively favorable cap rates and better growth, inviting investment.

• Clicks to bricks: more internet retailers are seeking brick-and-mortar space.

• Urban retail: following the rooftops into the urban core.

• Mixed-use developments should take advantage of live/work/play demand.

• The U.S. is an increasingly diverse nation, with adjusting tastes, and international stores and groceries represent significant opportunity.

• Newly redeveloped inner city areas with Class A office and multifamily buildings benefit from synergies of a live/work/play environment.

• Worth the effort: create “experience locations” with a modern luxury shopping style.

• Latin America has youthful demographics and the Americas’ largest growing middle class. (Other regions have slowing labor force growth and increasingly retired populations).

• Boosting Latin America’s natural appeal to tourism in 2016 will be:

◊ Local currency weakness versus the U.S. dollar and the Euro will make Latin American destinations even more attractive.

◊ Rio de Janeiro will host the 2016 Summer Olympic Games.

◊ A number of countries have prioritized airport expansions and other projects to heighten access and appeal.

© 2016 CBRE, Inc.

The 2016 CBRE Americas Real Estate Market Outlook report is a collaborative effort by the following CBRE Americas Research professionals:

Spencer G. Levy Americas Head of Research+1 617 912 5236 [email protected] Spencer on Twitter: @SpencerGLevy

Ian AndersonDirector of Research and [email protected]

James BohnakerEconomist, CBRE Econometric [email protected]

Serguei chervachidze, ph.D.Senior Economist, CBRE Econometric [email protected]

Melina corderoAmericas Head of Retail [email protected]

Andrea crossAmericas Head of Office [email protected]

David eganAmericas Head of Industrial & Logistics [email protected]

Bram GallagherEconomist, CBRE Hotels’ Americas [email protected]

Jeffrey HavsyAmericas Chief Economist+1 617 912 [email protected]

Mark GallagherSenior Strategist, Investment [email protected]

Alex KrasikovEconomist, CBRE Econometric [email protected]

Jamie LaneSenior Economist, CBRE Hotels’ Americas [email protected]

carla LopezDirector of Research, Latin [email protected]

Jessica OstermickDirector of Research and [email protected]

Jing Ren, ph.D.Economist, CBRE Econometric [email protected]

Jeanette I. Rice, cReAmericas Head of Investment [email protected]

Lexi RussellSenior Research [email protected]

Matt vanceEconomist, CBRE Econometric [email protected]

Roelof van DijkResearch Manager, [email protected]

Julie WhelanAmericas Head of Occupier [email protected]

Mark WoodworthSenior Managing Director, CBRE Hotels’ Americas [email protected]

To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.

Additional U.S. Research from CBRE can be found here.

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

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