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Latin America’s 2010 Outlook Remains Sunny

By: Paul Bubny

Compared to their counterparts in markets such as Brazil and Venezuela, US commercial property professionals remain a relatively downbeat crowd when assessing the near-term outlook, RICS Americas says in a report released Wednesday. In key indicators such as capital value expectations and tenant demand, Latin American industry members share a bullish outlook, while US professionals believe these indicators still have farther to fall.

Globally, Brazil tops the rankings in expectations about rents and values. By contrast, the US ranks near the bottom, with only the United Arab Emirates and Japan taking comparably dour assessments. Regionally as well, industry members in the US maintain a negative outlook, coming in with the lowest expectations for about values and rents and coming in second only to Central American professionals when it comes to a downbeat view of tenant demand and investment activity. Brazil is at or near the top of the charts in all four indicators; other Latin American nations that score high include Argentina, Peru and Venezuela. “Our membership anticipates hot spots, and Brazil and its neighbors are inspiring attention,” Matt Bruck, the New York-based managing director of RICS Americas, says in a release.

Naturally, Brazil’s sunny outlook is grounded in recent experience. According to the quarterly RICS Global Property Survey released earlier this month, Brazil led the way for investment sales rebounding. Sixty-one percent of survey respondents said they’d said an uptick in property sales during the fourth quarter of 2009, compared to 29% in Q3. In second place globally was China, with 58% of respondents saying the same thing. “With low interest rates and relatively high yields, investors have returned” to Brazil, according to RICS.

Tenant demand in Brazil remains high, even though the vacancy rate crept up in ’09—to a level many US markets wish they had. "Vacancy has increased to 6.6% after reaching 5.5% in 2008,” Equity Capital’s Rodrigo Abbud says in a release. Those strong fundamentals have had a positive effect on investment sales. “For 2010, the market has started hot,” says Abbud. “Tenants and investors are looking at projects under construction.”

That assessment squares with a recent Cushman & Wakefield report on the Americas. “From a general business perspective, Brazil is seen as a top destination for foreign investment and appears to be poised for an outstanding year,” according to C&W. “Commercial real estate remains a major area of opportunity in the main CBDs, but given the extremely high foreign interest to invest, as well as strong interest from local players, cap rates are starting to compress,” a process which may accelerate this year. Higher office vacancies could occur in Sao Paolo, where a sizeable amount of new product will enter the market in the next few years.

C&W says industrial real estate is “still relatively untapped” in Brazil, with pent-up demand for space that is likely to rise in the next few years. Retail, by contrast, “seems to be crowded by new players” in the shopping-mall arena, but smaller formats are still relatively untapped.

According to RICS, “there may be glimmers of recovery” farther north. "Mexico will see rents stabilized by the end of Q2 as demand for industrial and retail space increases triggered by the recovery," Oscar Franck, managing director of IRR de Mexico, says in a release. "Mexico's economy is tied to the economic behavior of its northern neighbor. It would not be a surprise to find rents and yearly increases going back to previous levels by early 2011."

Similarly, C&W notes that the Mexican economy is projected to grow much faster this year than it did in ’09, with current estimates for growth at about 4.0% to 5.0%. “Overall, there is likely to be more investment activity in 2010 than in 2009,” C&W says. “The combination of a recovering US economy and the cheaper peso is expected to boost the Mexican real estate market in 2010.”

In its Americas report, C&W predicts continued weak demand for Canadian office markets in the near term, with vacancy rates continuing to rise. “Still, some markets are experiencing unexpected demand resilience, with a slowing of sublet space being returned to market,” C&W says. “Central Calgary and Toronto will continue to see available space rise faster than other major markets, which is attributable to the completion of new office towers, not weak demand fundamentals.”

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