Megacity Blueprint

The long-awaited blueprint on the Greater Bay Area (GBA) is here. The ramifications are sizable. And the opportunities for business and individuals alike are unmistakable.

The Outline Development Plan (ODP) for the Guangdong-Hong Kong-Macao Greater Bay Area, the master plan’s official title, is governed by a straight-forward concept – collective growth. Its ambition to transform the GBA into a world-class bay area economy by 2035 through infrastructure development sits at its core. And it’s success will hinge on economically-critical sectors, including the real estate sector, with its issuance delivering on its promising prospects.

The blueprint, which sets forth the strategic directions for the 11 cities in Southern China, can serve as a guideline for investors, developers and corporate tenants who are looking to make a foray or planning to expand their businesses in the GBA.

So what does this mean for property? Hong Kong, Shenzhen, Guangzhou and Macau will remain the preferred locations for corporate headquarters and will therefore continue to attract talent. The plan to develop the GBA into a pioneering innovation, tech and modern services hub, is expected to drive robust demand for offices and business parks in established and emerging business districts. Included in the ODP were details of financial and insurance sector cooperation between Hong Kong and Guangdong, which we expect will drive cross-border office leasing activity.

The organic growth of domestic Chinese corporations and expansionary requirements from Hong Kong-based enterprises will fuel additional office demand, particularly in Shenzhen, with a relatively higher concentration of activity expected in the Futian CBD and Qianhai. Hong Kong’s status as the key funding platform for the region will attract sustained demand from financial, professional services and technology firms, ensuring high office occupancy. Despite short-term economic turbulence which may occasionally slow leasing market momentum, Chinese companies will continue to be a major source of office leasing demand in Hong Kong in the medium-to-long run. Guangzhou is expected to remain a domestically driven market.

With innovation, technology and communications set to form pillar industries for the GBA, the region will see a strong pick-up in demand for business parks, data centres and laboratories. Although the ODP did not identify any specific cities to lead, from where the major science and technology parks are built and planned, we  expect a high percentage of Research & Development activity – and therefore demand for space to host these functions – will occur in Shenzhen, Guangzhou and Hong Kong.

We predicted last year that the Greater Bay Area will rise as “the world’s largest bay area economy”. As we see it, the Greater Bay Area has many functional advantages already in place. It has two world-class financial hubs (Hong Kong and Shenzhen) as well as internationally-acclaimed airports and seaports. The launch of large-scale infrastructure projects that bring to life the ‘one-hour living circle’ that expedites the flow of talents, capital and goods will only add to its collective and existing strength.

This new development has clear and present implications for the property sector. After all, property are all about location, and location is all about connectivity. Given this reality, the Greater Bay Area initiative brings along an exciting chapter of growth to the real estate market.

For Hong Kong, the shortage of land and ongoing cycles of high prices for commercial and residential properties, has damaged affordability and posed a considerable bottleneck to the city’s future economic development. With the backdrop, the new GBA policy initiative comes at an opportune time for Hong Kong as it looks for incubators for it next phase of growth.

Think about the property market in Hong Kong – CBD office vacancy rates stand at 1%, industrial building vacancy at 2% and residential at 3-4%. These are incredibly low levels by any city’s standard. Then consider the fact that Hong Kong is ahead of many cities in its financial and legal systems, but will run into roadblocks if we do not act fast enough to enhance our competitiveness. This is one very plausible, long-term solution.

Last year the Hong Kong-Zhuhai-Macao Bridge unveiled the world’s longest sea crossing bridge. It is a centerpiece for China to develop the GBA to redress the long-standing development imbalance between the east and west coasts of the Pearl River Delta and boost economic development on the west side of the GBA.

More recently, increasing numbers of multinationals have started to establish business divisions in the Greater Bay Area to leverage on the commercial opportunities brought along by its connectivity. CBRE is one of the global companies that has established the Greater Bay Area as a new business geography before the blueprint was released.

These measures, backed by improved infrastructure, will create opportunities for Hong Kong and Macau residents constrained by limited land and social resources. Cross-border investment is likely to intensify upon the gradual implementation of these policies. Property sectors that rely on footfall, such as retail, will benefit from the increased flow of people. However, demand for hotels may not necessarily increase as day-trips will become more feasible.

We expect the GBA to remain a magnet for investment capital, with investment grade properties located in the core of the GBA likely to see strong demand growth. The emphasis on technology and advanced services will create considerable requirements for offices, business parks and high-end logistics facilities. Although the major focus of investment will be on Hong Kong, Shenzhen and Guangzhou, the likes of Foshan, Dongguan, Zhuhai and Zhongshan will benefit from spillover demand. Hong Kong will continue to top the league in terms of property prices but the gap with Shenzhen will narrow as the later moves further up the value chain.

Clarity provided by the blueprint underpins the development of all property sub-markets. The one-hour connectivity, enabled by the bridge or the high-speed rail, creates a great appeal for international and domestic corporations to set foot and expand their businesses in the Greater Bay Area. The industrial and logistics sectors are also set to receive direct advantage from the launch of other large-scale bridges and highway projects. We will see more developments coming to these sectors in the years to come.

Tom Gaffney, regional managing director, Greater Bay Area & Hong Kong, CBRE.

Does Investment in Workforce Housing Still Make Sense?

This is one of the most common questions asked by CBRE clients this past summer. The answer is a qualified “yes.”

Before elaborating on that qualified yes, some sort of definition is warranted since the term “workforce housing” means different things to different people.

The best way to think about workforce housing is to consider it as the housing where families in the 60% to 100% of AMI (area median income) live, families which do not qualify for government-sponsored affordable housing. These households are often “renters by necessity,” and the predominant housing stock which offers affordable rents is a combination of Class B and Class C multifamily, mostly older and mostly garden-style communities.

Demand clearly outweighs supply

From a market fundamentals perspective, the story is favorable and leads to an unqualified “yes, investment in workforce housing still makes sense.”

One way to measure performance is to compare Class B and Class C multifamily with Class A.  Class B and C multifamily are outperforming Class A in all basic performance measures.

The lower classes had fewer vacant units relative to the totals of each class. CBRE Econometric Advisors’ (CBRE EA) most recent statistics of vacancy by class (Q1), showed the tightest vacancy rates in Class C (4.5%). Class B vacancy was 5.0% while Class A was 5.6%.

Similarly, rental growth was higher in the lower-class categories. Class C’s year-over-year rent growth was averaging 3.0% and Class B 1.6% vs. Class A’s 0.7%.

In the same vein, older product has been outperforming newer product, and garden product has been outperforming high-rise. CBRE EA’s Q2 statistics revealed 4.8% vacancy rates for multifamily units built in the 1960s, 1970s, and 1980s vs. vacancy rates in the low 5’s for the more recent decades. As of Q2 year-over-year rent growth for garden properties averaged 3.3% vs. 1.2% for high-rise communities.

This cycle has produced minimal new workforce housing supply

From a supply standpoint, the story is well known that there has been very limited new supply in Class B and C space this cycle., Of course, throughout history, most development has been at the top of the quality spectrum. But the trend has been amplified this cycle by high land, steadily rising construction costs and preferences for building mid-rise and high-rise product in urban and urban-suburban areas. Development in this decade has created a new genre of multifamily housing, not simply newer suburban garden product. The organic creation of more moderately-priced multifamily units will be slower this cycle than in previous

Moreover, families of more moderate means continue to struggle to enter homeownership and move up in multifamily housing, thereby staying in Class B and C multifamily housing longer. The steady increases in multifamily rents (all classes) has put more distance between Class A rents (some Class B rents as well) and households needing moderate rent level.

From the recession through Q2 2018, multifamily rents have risen at 3.6% per year on average, yet wage levels have risen by only 2.2% on average over the same period. Single-family median home sales prices have risen by 6.5% per year since the recession, making it even harder for middle-income households to buy homes. (Other factors such as limited lower-priced inventory, strict mortgage credit standards and rising mortgage rates further hinder renters from entering homeownership.)

The result is that demand levels for Class B and C multifamily housing remains very high and workforce housing is very likely to hold up better during the next downturn compared to prior cycles. During past downturns, Class A product has outperformed Class B and C due to the greater financial vulnerability of renters in lower-priced communities. This situation is not going away, but the current market dynamics offers fewer choices for the residents of Class B and C multifamily housing, thereby mitigating some of the downside risk.

Nearly half of all renters pay more 30% or more of their income on rent

The “qualified” part of the market fundamentals picture comes from the perspective of multifamily residents’ ability to pay higher rents. Affordability is a real problem. In 2016 (latest data available), for 46% of all renter households in the U.S. (both multifamily and single-family renters), rent payment represented a high 30% or more of their incomes according to the U.S. Census Bureau’s American Community Survey. For renter households who made less than $50,000 per year, 73% paid 30% or more of their incomes on rent.

Rising rents for many of renter households creates financial stress. While there is no clear answer as to how far Class B and Class C rents can rise, the challenge which some households have in keeping up with these increases is apparent in some parts of the marketplace (such as slower releasing of renovated communities). Yet, from a multifamily supply/demand standpoint, the scale remains tipped in the owners’ favor.

Current investment returns favor garden product

NCREIF returns provide the best overall view of investment performance, albeit somewhat limited to the higher-end Class B assets (and Class A) due to the institutional nature of the NCREIF database. Despite, this limitation, the garden product return data provides some insight to older product performance.

The Q2 one-year return for garden assets averaged a healthy 9.57% vs. the below-average high-rise return of 4.92%. For garden assets, both the appreciation and the income returns were favorable at 4.38% and 5.02%, respectively.

Both value-add and stabilized asset investment are attractive

Workforce housing investment strategy generally falls into two categories—stabilized and value-add—with the latter, by far, the most popular in recent years.

Pricing for assets with value-add potential reflects the popularity of the strategy. CBRE’s recently released North American Cap Rate Survey H1 2018 revealed that expected returns on cost for value-add acquisitions fell in H1 2018. The declines were small, but still clearly reflected the competitive buying landscape, strong appetite for value-add opportunities and acceptance of moderate returns. Expected returns on cost for infill value-add acquisitions edged down 3 basis points (bps) to 5.95% and 6 bps to 6.27% for suburban assets.

Value-add buyers must carefully assess whether they will be able to obtain the rent increases ($100-200/month) needed to reach their desired investment returns. However, despite the stress on some renter households today, the odds of success still appear in favor of the investors. And the sustained enthusiasm of value-add buyers provides convincing evidence of continued success at pushing rents.

Investment of stabilized workforce housing assets is also supported by market fundamentals. It’s a different strategy; the focus is on current income and income durability. Owners do not obtain large NOI bumps from rent increases on renovated units, but obtain steady income (with moderate rent growth). Buying stabilized workforce housing is an attractive longer-term strategy. The investment marketplace today is generally less competitive for stabilized product than value-add, and therefore offers better pricing for stabilized asset buyers.

Yes, workforce housing investment still makes sense

Market fundamentals definitely support workforce housing–-housing which caters to America’s large middle market. The last decade has produced only minimal new supply, and demand remains very strong. Returns are moderate in today’s highly competitive marketplace, but workforce housing investment—both for value-add and stabilized assets—remains a very attractive strategy.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

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Keener to be Greener

In 2018, for the first time in the four-year history of CBRE’s Investor Intentions Survey, more investors said sustainability is an important criteria in asset selection than unimportant. This reflects a gradual trend of increasing investor interest in sustainability.

Investors based in CBRE’s EMEA (Europe, Middle East & Africa) region lead the way in factoring sustainability into investment decisions. Only 4% of investors in EMEA in 2018 do not consider it as important, compared with 23% in the Americas. APAC lies in between at 12%.

Other research points the same way. The Green Building Adoption Index produced by CBRE and Maastricht University has shown that since 2007, the quantity of ‘green’ certified space across Australia, Canada, and Europe has increased threefold. In addition, the number of real estate investment firms agreeing to have their businesses scrutinized for the Global Real Estate Sustainability Benchmark (GRESB) has increased from 198 in 2010 to 759, representing US$2.8 trillion of assets (gross value).

With real estate investors committing to more strenuous sustainability targets, what are the effects on performance? Recent research has shown sustainably certified buildings owned by REITs command rental premia. In addition, this research has found lower interest expenses associated

with investment in more sustainable properties. It would therefore appear that, rather than having to sacrifice returns to achieve sustainability targets, investors can benefit financially from achieving them.

Yet the growth of interest in the sustainability of commercial buildings is not confined to investors.  92% of occupiers surveyed in CBRE’s EMEA Occupier Survey said they prefer wellness-capable buildings. To respond to demand, occupiers have been turning to standards such as the WELL building certification scheme to improve and advertise the standard of their workplaces. WELL evaluates buildings according to their impact on human health and wellbeing. It is linked to many existing green certification schemes such as LEED. Since its launch in 2014, the scheme now has 57 million sq. ft. of commercial property either registered or certified. The simplified certification process under WELL should help occupiers and owners achieve WELL status more easily.

The introduction of WELL-certified schemes is not simply a marketing gimmick. A recent study by CBRE’s Netherlands office in partnership with the University of Twente has shown that workplace performance improves with the introduction of wellness-related schemes. This supports findings elsewhere that tenant turnover is lower in sustainable buildings.

With ‘green’ building certification becoming increasingly mainstream, I would expect wellness to be the next frontier. The design of corporate offices has always been a way for companies to project their brand. A top quality workplace experience, as demonstrated by WELL certification, is increasingly becoming a way to do this.

By Siena Carver, Senior Global Research Analyst, CBRE.

For more commentary on green issues that impact real estate, take a look at the Green Perspective, CBRE’s global sustainability blog.

Spencer’s Summer Reading List

“Why would you want to read when you got the television set sitting right in front of you?”
–Harry Wormwood, “Matilda”

Summer is here! While you are at the beach, in the mountains or sitting on the porch, it’s also the best time of year to catch up on your reading. If you haven’t figured it out already, I’m a big reader. Reading is necessary for me to keep up with and comment on the trends that impact our business and our world.

In addition to my main sources of information—The Financial Times, The Wall Street Journal, The New York Times and The Economist—I read as many books as I can. Writing a review of them helps the concepts stick in my mind so that I can use them on stage and in my blog posts and articles.

Here is a list of some books I have recently read, along with my blog posts on each. If you pick any two, I’d go with “Nudge” and “Mother American Night.” “Nudge” is the most influential book on my thinking about public policy. It also recently won the co-author a Nobel Prize in economics. “Mother American Night” is a wild journey through the major events of the past 50 years on the wings of an unlikely angel—a songwriter for the Grateful Dead. If you are a techie, go with “Machine Platform Crowd” and “Mother American Night.” Enjoy and please comment with your book recommendations!

1. “Nudge” by Richard Thaler and Cass Sunstein. Explains “behavioral economics” and how a “nudge” (incentive) is better than a “shove” (blunt legal changes) to influence public policy outcomes.

2. “It’s Better Than It Looks” by Gregg Easterbrook and “Makers and Takers” by Rana Foroohar. Mr. Easterbrook makes a persuasive case that despite the world’s great prosperity, limited war and other factors, we still feel bad because our leaders have incentive to make us feel that way. Ms. Foroohar’s book stands in marked contrast to Mr. Easterbrook’s. The world is going to hell in a hand basket, according to Ms. Foroohar, led by the Cerberus of Wall Street, government regulators and the business schools that teach that “greed is good.”

3. “Machine, Platform, Crowd” by Andrew McAfee and Eric Brynjolfsson. Although technology is quickly evolving, the need for humans isn’t going away anytime soon. Blockchain is still in its infancy and a “trusted intermediary” like the government or a large corporation will remain essential for a very long time.

4. “Advice and Dissent” by Alan Blinder. The former Fed vice chair proposes creation of a second central bank to control tax policy similar to the way the Fed controls monetary policy. What’s more interesting is Dr. Blinder’s turnabout on economic dogma regarding the undisputed good of “creative destruction” and how “transitional costs” are much higher than economists have historically believed.

5. “Us vs. Them: The Failure of Globalism” by Ian Bremmer. Echoing Mr. Blinder’s concern about transitional costs, Mr. Bremmer goes a step further and suggests that global trade of goods will slow down as the cost of automation continues to drop. This will upend our traditional notions of the young demographic advantage of most emerging economies as traditional jobs in manufacturing will be re-shored to advanced economies.

6. “Demopolis” by Josiah Ober. The problem with our democracy is that there isn’t enough of it. Mr. Ober makes the case that a society with a more pure form of participatory democracy has benefits well beyond the ability to make decisions. It brings people into the process and by extension brings all of us closer together.

7. “Mother American Night” by John Perry Barlow and Robert Greenfield. You think you lead an interesting life? This guy makes Forrest Gump look like a homebody. Read this story about John Perry Barlow, friend of everyone from John F. Kennedy, Jr. to Dick Cheney, Steve Jobs to Bill Gates, Bob Weir to Timothy Leary, tech visionary and, by the way, songwriter for the Grateful Dead (Mexicali Blues, etc.). Keep an open mind when you read this one or Mr. Barlow will suggest some unconventional ways to open it for you!

8. “Batman: The Dark Knight Returns” by Frank Miller and “The Watchmen” by Alan Moore and Dave Gibbons. These last two are just for fun. I’ll never forget the first time I read the Dark Knight in my late teens at Cornell. I liked it so much that I recently bought it for my 12-year-old son. I ended up reading it again myself, along with “The Watchmen,” which I bought after watching what I consider to be the greatest superhero movie of all time.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor

What Time Is It?

Does anybody really know what time it is? Does anybody really care? – Robert William Lamm, singer, songwriter and founder of the band Chicago

During a 1992 presidential debate with Arkansas Governor Bill Clinton and businessman Ross Perot, President George H.W. Bush was caught on camera looking at his watch. The press and the Democrats jumped all over him. Did he have someplace better to be? Was he impatient? Was he bored? Did he not care about the real concerns of the average Americans in the audience?

I stopped wearing a watch about three years ago. I had worn a Breitling for about 15 years (an engagement gift from my in-laws) and had switched to an Apple Watch a few years ago. I stopped wearing the Breitling after it broke and I was too cheap to fix it (note: fixing a fancy watch is more expensive than some fancy watches). I stopped wearing the Apple Watch because it constantly needed charging and would not synch with my I-phone.

But there is another reason why I stopped wearing a watch. As a professional speaker, I never want to be caught in a “George Bush debate” moment by glancing at my watch during a presentation. My goal is to be hyper-focused, which means getting into an almost trance-like state of clear thinking, and I want nothing to distract me. More importantly, my goal is to get the same focus from the audience.

Getting your own focus right is hard, and getting the audience engaged is even harder in the era of personal electronic devices. Given that we perform in short-attention-span theater, anything—including one glance at your watch—can distract the audience.

Have I gotten some comments that my lack of wearing a watch is “unfashionable?” Yes, which I always answer with the famous Billy Crystal “Fernando” line that I suppose you think “it is better to look good than to feel good.”

My point: If you want to engage an audience—on stage, at a meeting or in a political debate—you must think about the details. Having the best presentation content, the slickest slides or best videos will help, but “casting the engagement spell” requires thinking about signals you are sending through body language. When you are in front of an audience, you need to make them feel that they are the most important people in the world, and that all your attention is on them so you have a fighting chance they will return the favor.

Focus on your audience and lose the watch. You will look marvelous! Thank you, Fernando.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor



China’s Consumers are a Major Global Opportunity

Since China’s economic take-off in 2000, investment has driven GDP while the contribution of consumers’ spending diminished. This is common in export-oriented economies, but China’s low private consumption has continued for over a decade, setting it apart.

There are many factors behind this: the uncertainty created by the transition from full-blown communism caused households to save, not spend; to generate rapid growth on its own terms, the Chinese authorities prioritized exports, including urban infrastructure improvements to support hyper-efficient manufacturing; the post-GFC stimulus was, in retrospect much too strong, leading to a wave of over investment.

China is shifting gears for future growth and will become a consumer-led economy in little more than seven years (Figure 1). Inflation-adjusted retail sales increased by 10.5% in 2017, up 50 basis points from the previous year. Consumer confidence is near the all-time high.[1] New light-vehicle sales were up 11% in the year to April. We hear a lot about China’s “debt mountain,” less about the growing power of the consumer economy. A number of forces are at work creating this change:

  • Policy has changed. The government has long recognized that its initial growth strategy has run its course. Excess investment in production capacity has driven return on capital to low levels. The continued flow of low cost goods from China has irritated its trading partners, particularly the United states. More strategically, China wants the yuan to become a global reserve currency and for that, its capital account needs to be opened and the yuan freely traded. Were the capital account to be opened right now, money would flow out of China because of the high risk and low returns currently on offer in the Chinese economy. The economic model had to change, and it is.
  • The Chinese are becoming middle class. This rising middle class is anticipated to comprise 65% of total Chinese households by 2027.[2] With higher education, income and different consumer preferences from previous generations, this population will largely define the new consumer economy, as already reflected in China’s surging food, fashion and auto industries.

  • The internet has unlocked the spending power of rural consumers. Now that urban migration is easing back,[3] the growth of urban real consumer spending started to flatten (Figure 2). However, China’s robust digital economy, which accounts for 30% of current GDP and is expected to make up 35% by 2020,[4] is helping rural consumers to spend more freely. Internet-enabled mobile devices, convenient digital payments and parcel-based distribution (e-commerce). Since 2012, the real household consumer spending in rural areas rose by 55%, adding up to 9% of GDP. This will only continue as the government’s infrastructure improvements and e-commerce companies’ strategic expansion combine to tap into a larger consumer base.

It won’t be long before China transforms from the world’s factory to the world’s consumer, which is a good thing on many levels. The continual rise of the Chinese consumers points to substantial ongoing demand for logistics facilities in the APAC region. The massive consumer economy in the making is projected to reach $6 trillion by 2020. Its incremental growth over the next three years alone can add another Canada-sized consumer market.[5] Against the backdrop of the U.S.-China trade negotiations, the pace of China’s opening up seems to be accelerating, giving international businesses wider access to Chinese markets and thus phenomenal growth opportunities in many arenas, including real estate and logistics.

By Professor Richard Barkham, Global Chief Economist, CBRE.


According to China National Bureau of Statistics’ Consumer Surveys, Consumer Confidence Index reached 124 in February 2018, near the all-time high (124.6) of August 1993. Since the series started in 1991, the average CCI has been 109.7.

[2] See “Future of Consumption in Fast-Growth Consumer Markets: China”, World Economic Forum, 2018.

[3] Enodo Economics’ analysis show that China’s migrant labor force shrunk between 2010 and 2015.

[4] China Academy of Information and Communications Technology (CAICT) and the Ministry of Industry and Information Technology (MIIT), 2017.

[5] Based on Euromonitor’s data and forecast.

Warehouse Oversupply?

New warehouse supply has reacted robustly to the current strength of demand in Europe. As a result, completions have recently reached nearly double the levels at the height of the last cycle. We address here whether there is a risk that future supply could produce a surplus, or whether take-up will continue to be sufficient to absorb the space delivered, especially as the vast majority is built to suit, not speculative.

Completions are at record levels

Completions have been steadily recovering since 2011, exceeding the previous cyclical peak in 2015. In 2017 delivery of new space outstripped the record level of 2016 in the first nine months alone. In the ten core markets (UK, France, Germany, Netherlands, Spain, Italy, Poland, Hungary, Belgium, Czech Republic) there was c. 14m sqm of new space delivered last year, nearly double the annual total in 2008.

To put this in context, completions as a percentage of existing stock have also surpassed the previous peak of 5.4% in 2008. They exceeded 5% in the first nine months of 2017 alone, continuing the upward trajectory since 2012, to reach 6.5% for last year. It seems likely the previous peak will be exceeded again in 2018, given the current pipeline.

Demand still exceeds supply, even where deliveries are highest

However, the situation varies hugely depending on the country. As the chart below shows, completions in Poland reached 18% of existing stock in 2017. This is well ahead of the trend in the past two years, which has averaged c.10.5%. Nevertheless, in 2017 take-up in Poland increased 32% YoY. Even after a 138% surge in deliveries, take-up exceeded completions by 38% in 2017, such that vacancy fell further to 4.7%. Other than Belgium the same was true of all markets in 2017. In aggregate take-up exceeded completions by 64%. Only in the Netherlands did the vacancy rate increase slightly in 2017.

What is the wider market vacancy backdrop?

Average vacancy for the ten core countries fell below 4.5% at the end of 2017, from 5.5% in 4Q16, with take-up running well ahead of new supply during the year. This is in line with the normal trend as the chart below shows. Although this does show that completions have been rising steadily for the past few years, it also highlights there has been sufficient growth in take-up to significantly exceed completions. This suggests that the supply side has been responding to the recent strength of demand, rather than in isolation. With vacancy across the region below 5% there is clearly still a need for additional market supply.

What is the future outlook for supply?

The core European markets generally have low vacancy rates and a limited pipeline. The exceptions are Poland, which is reacting to particularly strong demand, and other markets in CEE, where take-up is also running well ahead of supply. The chart below shows the total pipeline under construction in each country, which is due for completion in the next year, as a proportion of existing modern stock. This is generally clustered in a range of 4-8% for the core markets. Similarly, vacancy rates are largely between 3% and 6%, so should be readily able to sustain this level of new development, even in the markets with larger pipelines.

The vast majority of the pipeline is built to suit

Analysing these figures more deeply for six of the markets below, shows that the vast majority of the current development pipeline is built to suit. Indeed, the speculative element in the six markets below is only 18%, or 1.4m sqm of the total of 7.5m sqm. In France and Italy speculative projects are less than 10% of the total. In the UK, which has the largest proportion, the speculative component currently accounts for 36% of the total, as the ecommerce BTS developments are significantly lower this year.

This analysis also gives further context to the previous chart. Not only do Poland and the Netherlands have low vacancy rates to help them absorb the level of development, they also have a high proportion of built to suit within the total (66% and 86% respectively), further reducing the risk of that development pipeline.

Per capita rates remain low in Europe

Another potential area of support for the European logistics market is the disparity between the amount of existing modern warehouse space in Europe and the US. The comparison between per capita levels of space in the two regions suggests Europe should be able to sustain years of further supply growth without too much risk of oversupply. The EU currently has less than 60% of the US level, with just 0.7 sqm per capita, compared with 1.2 sqm in the US, although there are geographic reasons for the higher levels in the US.

The US supply example is also instructive for completions and rents. Although completions have run at c.90% of net absorption during 2017, industrial rental growth was still running at c.6%.

What does this mean for the 2018 outlook?

The average level of total pipeline relative to existing stock across the region is currently below 7%. This is only marginally higher than the average rate of completions in 2017, when vacancy continued to fall. With vacancy below 4.5% and take-up continuing to increase, there is clearly a need for additional supply. Therefore, at this level of vacancy, increased completions should not prevent rental rates increasing in many markets in 2018, as we currently forecast.

Also, as the vast majority of this new development is built to suit, it will not hit the market, so should have a limited impact on the outlook for rental rates. Finally, with construction costs rising and land becoming more scarce, development seems unlikely to remain at current levels, or may shift further to brownfield sites, suggesting higher levels of redevelopment.

Mark Cartlich, senior director, Industrial & Logistics, Capital Markets, EMEA.

Investors & Occupiers Test Agile Space Strategies

From coworking initiatives to shorter lease terms and the provision of space through service agreements, investors and occupiers are intent on finding the best ways to respond to changing economic and business conditions in an agile manner.

Following are the key findings of CBRE’s upcoming Global Investor Intentions and Global Occupier surveys for 2018:

  • 45% of surveyed investors think that an “agile” space strategy—space that can be procured quickly with little capital investment and very flexible terms—is an occupier trend that will have the most impact on real estate value this year.
  • Only 4% of investors intend to develop their own agile space offering, while 9% intend to partner with a third-party operator. This finding indicates that most investors likely are still evaluating agile space strategies.
  • 25% of investors believe that an agile-space offering is a value-add for long-term tenants.
  • Investor survey results suggest there is a threshold to the amount of space that can be dedicated to an agile-space offering before value is negatively impacted.
  • When third-party agile space operators have up to 20% of a building’s leasable area, 42% of investors think this will increase building value and 52% think it will not impact value at all.
  • When third-party agile space operators have more than 80% of a building’s leasable area, 64% of investors think this will decrease building value versus 36% who think it will have no impact.
  • 41% of occupier survey respondents in the U.S. anticipate having 50 or more employees working out of at least one coworking location in the next three years.
  • Nearly half of occupier respondents still anticipate using a traditional serviced-office model three years from now. This signals the desire of some occupiers to take advantage of flexibility and a tech-enabled work environment without the fashionable community environment that coworking offers.
  • Almost one-quarter of occupier respondents intend to use agile-space offerings as a test drive for new approaches to workspace and occupancy. The lasting impressions these public and private spaces make on their users will play a role in creating the stickiness that is required to maintain longevity in these flexible relationships.

By Julie Whelan, Head of Occupier Research, Americas, CBRE.

Check out the full results of the CBRE’s 2018 Investor Intentions Survey and Global Occupier Survey to be released later this month.

The Democracy Solution

A few years ago, I played golf with a fellow who ran a home for troubled young men in Baltimore. His story inspired me, and I told him that if there is such a thing as “God’s work,” then he was doing it. When I asked him what he was doing to get these kids into college, he looked at me like I was from Mars. “I’m just trying to keep these kids alive,” he replied, and he wasn’t kidding.

I think about this story every time a new solution is proposed on how to fix the social ills of Baltimore—everything from more cops and more security cameras to more money for higher education and public works projects. While every little bit helps, there isn’t a serious person alive who believes that these are any more than short-term Band-Aids that do nothing to solve the underlying social problems.

While the manifestations of these social issues are well-publicized, the underlying reasons for them are not. From my perspective, they all spring from a lack of hope, economic opportunity and a meaningful stake in the future. To truly solve these problems, we need to think outside the box and enact institutional improvements that will put the people on the right path. Democracy may be one of those solutions.

I came to this idea after reading Jonathan Ober’s new book Demopolis, in which he argues that more democracy rather than less may be part of the solution to our social ills. Ober’s basic premise is that a good democracy serves three collective purposes: security, prosperity (as in the ample opportunity to pursue) and “non-tyranny” (having a stake in the game by having the ability to vote). In short, those who are intentionally disenfranchised see the system from which they are excluded as tyranny, which entrenches many of the problems we are trying to root out. “Every time a civic majority disenfranchises citizens, it becomes, in that moment, a collective tyrant,” Ober writes.

So here is my solution: Let the people vote. People need to have a stake in the future and democracy provides it. Here are my “radical” ideas in this regard:

  1. Lower the voting age to 16. Scotland lowered its voting age to 16 a few years ago in the runup to its referendum on secession from the U.K. The Scottish government wanted young people to tangibly know that they had a stake in the country’s future. Give as many people as possible a stake in the game to let them know their voices matter.
  2. Remove all restrictions on convicted felons to vote, except for those currently incarcerated. Crime isn’t a moral issue; it is a social one that disproportionately impacts the poor and minorities. If you do your time, you should be welcomed back as a fully enfranchised member of our society.
  3. Open primaries for all voters, regardless of political affiliation. Preventing Independents or members of an opposing political party from voting in primary elections is a ploy to perpetuate the power of the parties, not the people.
  4. Stop gerrymandering. Redrawing voting districts to favor one political party over another is the surest way to disenfranchise voters.
  5. Schedule elections on Saturdays. Having an election on a weekday limits voter turnout, particularly by hourly workers and workers with young children.
  6. Make voting mandatory and fine those who don’t vote. This is the law in Australia and forces people to get involved. If you don’t like any of the candidates and want to protest by not voting, you can write in Mickey Mouse on your election ballot.

Will we need more Civics education in our schools if we make these changes?  Probably, and that’s a good thing. Is there risk in these proposals? You bet, but it is a risk I believe is worth taking. Believe me, while more police, security cameras, federal and state money aren’t going to hurt, they are not solutions. They are Band-Aids. Baltimore needs vision and guts and collective purpose. Our goal can’t simply be to keep Baltimore alive; our goal must be to have Baltimore thrive. Democracy can help lead us there.

As this is my last blog post for 2017, I want to thank my loyal readers. I am very fortunate to have you, and I hope all of you have a Happy, Healthy New Year.

By Spencer Levy, Americas Head of @CBREResearch | Senior Economic Advisor

Are Global Investors Running Out of Real Estate?

Global real estate investment transactions rose by 2.2% in Q3 2017 over the same quarter in 2016.1 The year-to-date (Q1-Q3) volume, at US$660 billion, is also up on 2016, by 2.8%.

The market is transacting at a high level of activity, but the growth in volumes is not what it was. Between 2009 and 2015, the average annual growth in real estate capital flows was 31%. Many factors are involved, but, at the start of the year, 25% of investors responding to a global survey stated that access to available properties was the main obstacle to investment.2 Is this a bigger issue than the survey evidence suggests?

Follow the Financing

Capital held by pension funds, insurance companies and sovereign wealth funds, for investment in all assets, has grown strongly over the last decade and now stands at US$94 trillion.3 Based on global surveys of asset allocations4 and our own calculations, we estimate that US$8.5 trillion is targeting real estate. There is a substantive under-allocation of real estate equity and, as of 2017, only US$6.5 trillion has been deployed.5

The market capitalization of the global REIT sector, which broadly equates to the amount of equity capital invested, is US$1.6 trillion.6 And, global private wealth is US$67 trillion, and we estimate that US$4 trillion of this is deployed in commercial real estate, although this could easily be higher.

On the debt side, data is very difficult to come by except in the U.S., where we know that there was US$3.9 trillion of public and private debt in Q3 2017. We estimate that there is US$1.2 trillion of debt in Europe and US$2.1 trillion in Asia Pacific. Summing these and estimating for Latin America suggests a global total of US$8.2 trillion.

How Does This Compare to the Global Real estate Universe?

In 2016, the total value of investable real estate in the world was US$27 trillion.7 Figure 1 shows how this is financed. Note that the 7% of institutional under-allocation has not yet been deployed in global real estate, so that chunk is currently held by owner-occupiers and private wealth.



How Easy Will it be for Institutions to Acquire the Properties They Require?

Not too difficult in the near future, although it will require creativity and ingenuity. An ample supply of investment property is available in the corporate sector, particularly in Asia and Europe where owner occupation rates are higher. My colleague Guy Ponticiello, Managing Director of CBRE Capital Markets, has seen a large uptick in sale-leaseback activity over the last 18 months. “Corporates are keen to access capital in this very efficient way,” he said recently. “The marketplace there for long-term income streams is competitive and global.” Investors may also need to be more active in funding new developments and push further into the residential sector.

Going forward, the sources of capital seeking to deploy in real estate will increase more rapidly than the supply of properties available in which to invest. Institutional equity is growing very strongly, fueled by 160 million new members of the middle class each year—88% of whom will be in Asia.8 Moreover, the global average allocation to real estate will grow from 9% in 2017 to 10.1% in 2020, driven by an increasing preference for real estate by Asian institutions. Institutional equity targeting real estate will grow from US$8.5 trillion now to US$11.4 trillion in 2020. Debt growth is also strong as banks are cast off the legacy of the Great Financial Crisis.

The message of Figure 1 is that there remains a reasonable supply of real estate. The supply will expand at about 3% the rate of GDP growth—and the amount of equity at about 9%—so finding properties in which to invest will be a growing issue over time. Investors should move quickly to execute their long-term plans.​

By Richard Barkham, Global Chief Economist, CBRE.

For more Ahead of the Curve content, click here.

1 CBRE Research, Capital Markets MarketFlash, November 2017.
2 CBRE Research, Global Investor Intentions Survey, February 2017.
3 TheCityUK – UK Fund Management 2014, PwC – Asset Management 2020 A Brave New World, PwC – Alternative Asset Management 2020, SWF Institute, CBRE Research.
4 Cornell University, Hodes Weill & Associates – Institutional Real Estate Allocations Monitor, CBRE Research.
5 McKinsey & Company – A routinely exceptional year, CBRE Research.
6 FTSE Russell – FTSE ESPRA/NAREIT Global REITs factsheet
7 CBRE Research, ViewPoint: How much real estate stock is there? November 2016.
8 Homi Kharas, The Unprecedented Growth of the Global Middle Class, Brookings Institute, February 2017.