Before the Q1 2011 comes to an end, I should probably give my 2010 Year End update. It was an exciting year in most Latin American countries and a notable one in a few others, but for this latter group it wasn’t necessarily the kind of notoriety that most of us free market ideologues enjoy. The majority of the countries in Latin America are continuing the strong growth and development trend with the exception of those countries (Bolivia, Nicaragua and Ecuador) ruled by presidents who believe the economic model and goals espoused by Hugo Chavez, current president of Venezuela, offer the proper methodology. The Caribbean countries continue their uphill climb due to their dependency in large part on the yet-to-recover hospitality industry.

 Across the region the strong growth projections with the subsequent healthy GDP and real estate absorption figures that were highlighted during the first nine months of the year continued through to year end. A Latin American and Caribbean growth rate for 2010 projected at the outset to be 4.3% turned out to be higher at 5.2%. However, for Latin America it was higher than that; unfortunately the percentage was brought down a little by the Caribbean’s slower activity. In South America the growth was 6.6%, bolstered largely by countries such as Brazil, Argentina, Uruguay, Chile and Paraguay. Throughout the region Peru led the economic growth in 2010 with 9.8%, followed by Paraguay at 9.7%, Uruguay with 9%, Peru with 8.6% and Argentina with 8.4%. Brazil grew 7.7% and Chile registered an increase of 5.3%. All these countries, and Colombia, Panama and Mexico, surpassed the projections set for them throughout the year.

 For 2011, the projected economic growth in the region is 4.2% as a result of a less optimistic stage for the international economy. However, prior to 2010 the projections were targeted at a lower level due to the same global economic sluggishness, so it will be interesting to see the figures after 2011. In the Caribbean the overall growth at year-end was registered at about 2.4% (again, that pesky lack of tourists, yet slowly recovering, is holding that percentage down), with some island nations recording negative rates. For the CARICOM countries (Barbados, Jamaica, Guyana, Trinidad and Tobago, Antigua and Barbuda, Bahamas, Belize, Dominica, Grenada, Haiti, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Suriname) the growth rate hovers around zero. A bright spot in this sub-region is the Dominican Republic, which experienced, according to government projections, growth above 7% in 2010. Unfortunately for Puerto Rico, it stays mired in the recession that has plagued it for several years. Most economists and residents believe that one year after the USA economy is operating on all cylinders, only then will the Enchanted Isle start its recovery.

In Latin America demand is strong largely in all sectors, except for tourism; it is slowly recovering in many countries. Generally the business hotel market in primary and secondary markets is seeing great interest and land acquisition is on the upswing by the more, as well as the less, recognizable brands. Interest in resort development across the region is patchy. Countries like Brazil, Panama, Colombia and Uruguay are seeing renewed strong interest due to their vibrant economies and strong economic base. Other countries such as Costa Rica, El Salvador and the Caribbean countries have yet to adequately catch this investment wave. Both second home sales and development in these latter countries and Mexico is yet to recover.

Demand across the other major commercial asset classes–office, industrial and retail – continued healthy through year-end and especially so in the retail sector. The growing consumer market kept pushing this sector to new highs in sales and development in all product types whether they were shopping malls, regional centres or high street locations. The office sector experienced healthy growth and demand. Sale and lease rates are beginning to feel upward pressure in some markets, but they have not yet begun to rise noticeably. The only notable exception to this observation is the São Paulo and Rio de Janeiro markets, which have had climbing lease rates in local currency and US$ for the last three years. The driving demand, due to the concentrated economic growth in those markets, and conjointly caused by the coming Olympics and World Cup are the prime drivers. The only notable possible exception to the observation of generally increasing lease rates across the region is that of Panama; within the next 12 to 18 months we may see a softening of prices, as currently there are 357,300 m2 of Class A space under construction, an amount greater than the total current inventory of all Class A in Panama City.

Although construction continues healthy, inventory cannot keep pace with demand. As noted in previous reports, supply still tends to lag demand in most cities–Rio de Janeiro and São Paulo stand out as prime examples–even though office construction activity is reaching new highs in some markets. As might be expected, the two largest countries and most active economies in the region, Mexico and Brazil, experienced the highest levels of development. Mexico City and São Paulo have a combined 2.7 million m2 under construction, while Rio de Janeiro has 420,000 m2 under construction. It is still too early to tell if the high construction in the latter two cities will help to alleviate the pressure on the swiftly rising prices. The vacancy average in the region is 7% with Rio de Janeiro having the lowest vacancy at .5% in spite of its tremendous construction activity.

Although vacancy overall in the region has increased approximately 4%, this is a healthy sign as developers are now trying to catch up to demand and this should help to restrain lease rates from increasing too much and too quickly. São Paulo and Rio de Janeiro captured the top spots as the most expensive office markets with Full Service Gross calculated rents achieving US$85 per m2. The industrial sector across the region is also experiencing much the same genre of activity as the office market, except that the industrial market is receiving even greater demand and the vacancies tend to be lower. Some might mention that there is a good supply of industrial product that is vacant; however, that is not Class A product designed and constructed to meet 21st Century requirements.

Development of industrial product is indeed growing, but it is still not enough in quantity and certainly is not enough in quality. Other than Mexico, this characteristic is prevalent throughout Latin America. Brazil is, perhaps, the local market most in need of Class A quality industrial product due to its high economic growth and lack of qualified developers. In other areas of the region, it is simply a question of a lack of experienced developers that can respond to the need of multi-national companies. Subsequently, many firms are forced to obtain Build to-Suit projects with their own capital and energies. However, this has helped to stimulate somewhat the Sale/Leaseback market, mostly benefiting local investors.

Real estate investment continued to increase and not just from domestic sources as was the case over the last year. Several international capital sources have now started to research and invest in the region, but mostly in existing product with little interest in Greenfield projects. The local markets are now beginning to get their due attention as safe, stable and capable of providing higher returns. (As mentioned in the past, it is important to comment that historically in the region financing was not easily available and very expensive – this is still the case. Therefore, real estate projects were and are developed on a mostly cash basis. This means that a tremendous amount of capital is being generated in-country to feed these numerous projects; a testament to the growing industries and economies.) Cap rates have not experienced any pressure to decline, with the exception of Brazil. It is difficult in the current climate to determine a stable range of cap rates since there is still no broad range of activity. They are mostly determined by “urgent” sales that are few and tend to higher and the ROR that local landlords are willing to accept (these tend to lower) before they will sell. There is a slight disconnect between the international investors’ cap rate sweet spot and that of the local landlords. Once the world markets are again stabilized, we should see that spread decrease and cap rates for investment grade product quality will drop to the 8% to 8.5% range where landlords are willing to sell.