This report examines the diverse factors driving the investment climate in the US, Brazil, Mexico and Canada real estate markets.
There is cautious optimism for a relatively strong real estate market in 2016. Many feel the US recovery will continue for another couple of years as the economy maintains slow-but-steady overall job growth. The outlook is for gross domestic product (GDP) growth to likely meet or exceed a six-year average that, while not robust, reflects the US economy’s continued movement in the right direction.
Job growth, good real estate fundamentals and the low interest-rate environment are making the US attractive, generating a flood of global capital that is currently at historic highs and poised to continue. Given volatile global economic conditions, the US market is being viewed as a safe haven by many nations – or what KPMG’s Chief Economist calls “the nicest house in a bad neighborhood.” The retail real estate segment of the US real estate market has been relatively flat. In the office marketplace, we anticipate positive-but-declining absorption, which may be another sign the US is reaching the end of the cycle. A noteworthy bright spot is unmet demand in the storage space segment, which is creating significant investment opportunity. The residential housing marketplace also looks positive and demographic trends among millennials and aging boomers are helping to drive development and investment opportunities. There is a changing, more positive attitude about homeownership, especially for millennials, though it is still not clear if this is a permanent phenomenon.
In Brazil, there are significant challenges including political unrest, inflation, regulatory issues and currency fluctuations. The unstable environment has been discouraging to investors. GDP outlook is down, inflation as of June 2016 was 8.841 percent, unemployment is rising, residential housing sales are low and office vacancies are high, while shopping-center construction is weaker than expected. While no one seems to believe that Brazil represents anything but a promising long-term investment environment, the current instability makes it particularly difficult to underwrite risk. There is some sentiment that with anticipated changes in political leadership, Brazil’s economic prospects will improve.
Mexico’s GDP growth was weak overall in 2015. There was a slight quarter over quarter increase from 2.4 percent to 2.6 percent at the end of March 2016 and the trend is expected to continue as the size and income levels of the country’s middle class continue to expand. Inflation is low and foreign real estate investment has been high2. Security challenges in some parts of Mexico are constraining development opportunities. The situation has made progress but there is more to do to generate broader development. The majority of development is in coastal parts of the country such as tourist areas. That said, Mexico is much further along compared to Brazil in attracting capital and generating new development.
The economy performed weakly in 2015, largely due to the global decline in oil prices and a weak Canadian dollar. For 2016, while uneven performance across the country’s provinces is anticipated, real estate demand is expected to remain at its current buoyant level and supported by US and Asian demand. Last year was one of Canada’s biggest years ever for foreign capital investment. Canada’s larger real estate investment trusts (REITs) have continued to raise capital and invest in real estate assets and that is a positive trend that reflects a healthy appetite in the market.
With the US economy poised to continue its slow, steady improvement amid solid job growth and low interest rates, the outlook is positive across the country’s entire real estate marketplace. Global investors certainly seem to agree as evidenced by the significant foreign real estate investment. Brazil meanwhile faces significant political and economic challenges that it will need to solve if it hopes to increase investment and generate development. Mexico, while further along in attracting capital and generating new development, also faces challenges of its own to enhance security and manage risk. The situation is improving but the journey toward greater stability and broader investment opportunity continues. Despite Canada’s uneven performance among its provinces amid the impact of low oil prices and a weak dollar, real estate demand is expected to remain relatively strong.
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