2016

CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

18TH ANNUAL EDITION

2016 Economic Outlook & Market Fundamentals 18th Annual Edition | January 2016

Copyright © 2016 by Morguard Investments Limited. All rights reserved. Any request for reproduction of this Research Report should be directed to Keith Reading, Director of Research at 905-281-5345. FORWARD-LOOKING STATEMENTS DISCLAIMER Statements contained herein that are not based on historical or current fact, including without limitation statements containing the words “anticipates,” “believes,” “may,” “continue,” “estimate,” “expects” and “will” and words of similar expression, constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and regionally; changes in business strategy; financing risk; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; liability and other claims asserted; and other factors. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Publisher does not assume the obligation to update or revise any forward-looking statements.

President’s Letter The Canadian commercial investment property sector registered largely positive performance trends through much of 2015, in extending the recovery phase of the cycle. Returns were attractive for the major property classes, despite trending lower, while values held at the peak. Once again, the country’s major urban centres were popular with investors in search of stable yield. A range of investors looked to capitalize on access to low-cost debt and equity funds. The widely positive investment performance of the past year was supported by rental market trends, although the office sector exhibited weakness due to an excess of new supply and a softer demand trend. Looking to 2016, the outlook for the Canadian investment property sector is fairly positive, against a backdrop of elevated risk. Annual overall sector returns will be similar or slightly weaker than those of the previous year for 2016. Access to lowcost equity and debt capital will remain a fixture in the coming year, even as the Fed continues to raise borrowing rates. The availability of capital will ensure demand for Canadian income-producing property surpasses the supply of available assets for acquisition, forcing investors to continue to look to joint ventures and new development to build their core portfolios. The generally positive 2016 sector outlook includes a measure of risk. Canada’s economic outlook is expected to slowly improve in 2016, following the recession that occurred in the first half of 2015. The oil crisis will continue to dampen activity levels in the early part of the year. Much of the risk related to the economic outlook is related to events outside of Canadian borders. Sluggish economic results in Europe and several emerging economies was a major source of concern. A number of recent socio-economic and political events added to the uncertainty. Canada’s position as the key trading partner of the U.S. will offset some of these risks, in supporting positive property sector performance. Morguard is pleased to provide you with the 2016 Canadian Economic Outlook and Market Fundamentals report. The report provides a comprehensive review and outlook for each real estate product class and each major metropolitan area across the country. We trust that you will find it is a useful resource as you plan your real estate investment and management strategies for the coming year. Our management team is available to support you in developing your organization’s long-term real estate vision and executing it to realize its full potential.

George Schott President, COO

Table of Contents ECONOMIC OUTLOOK & MARKET FUNDAMENTALS National Economic & Real Estate Outlook National Economic Report .................................................................................................... 2 Office Outlook ........................................................................................................................ 4 Office Investment Report ....................................................................................................... 5 Industrial Outlook ................................................................................................................... 6 Industrial Investment Report .................................................................................................. 7 Retail Outlook......................................................................................................................... 8 Retail Investment Report ....................................................................................................... 9 Multi-Suite Residential Outlook ............................................................................................ 10 Multi-Suite Residential Investment Report ........................................................................... 11 Investment Outlook .............................................................................................................. 12 Economic Outlook ................................................................................................................ 14

Metropolitan Economic & Real Estate Reports Halifax .................................................................................................................................. 16 Montreal ............................................................................................................................... 21 Ottawa .................................................................................................................................. 26 Toronto ................................................................................................................................. 31 Winnipeg .............................................................................................................................. 36 Regina .................................................................................................................................. 41 Saskatoon ............................................................................................................................ 43 Calgary ................................................................................................................................. 45 Edmonton ............................................................................................................................. 50 Vancouver ............................................................................................................................ 55 Victoria ................................................................................................................................. 60 Acknowledgements/Works Cited ......................................................................................... 65

National Economic & Real Estate Outlook

NATIONAL ECONOMIC REPORT HIGHLIGHTS

ECONOMIC GROWTH STALLED

■ Canada’s economy entered recession in the first half of 2015, due in large part to a sharp drop in oil prices and demand. By autumn, a return to positive results was observed, which bodes well for the second half.

■ Western Canada’s reign as one of the nation’s economic growth leaders came to an abrupt end recently, with Alberta falling into recession.

■ Canada’s labour market performance of the recent past was one of resilience. More than 140,000 jobs were created in the first seven months of 2015, as the national economic growth trend softened. The national unemployment rate continued to hover close to the 7.0% mark in 2015, with an increasing number of people entering the workforce.

The rate of Canadian economic growth slowed significantly over the past year, culminating in five consecutive monthly contractions beginning in January of 2015. As the year progressed, the lion’s share of forecasts called for an increase in economic output of a modest 1.5% for all of 2015. There were a number of factors, both domestic and international, that factored into the recent slowdown in activity. A sharp reduction in oil prices that unfolded in the summer of 2014, and lasted through all of 2015, had a significant impact on the nation’s Gross Domestic Product (GDP). Investment in oil sector-related projects, including engineering and exploration, fell sharply as prices plunged. According to the Conference Board of Canada (CBOC), investment engineering and mineral exploration fell by 15.0% in the first quarter. As prices fell below the $40 per barrel mark in 2015, Alberta’s economy slipped into recession. To varying degrees, the oil sector malaise had negative implications for the economies of just about every province in Canada. Moreover, the revenues of the various levels of government were eroded, which reduced public sector spending and economic output. Events outside of Canadian borders factored into the less-than-robust economic growth performance over the past year. Slowdowns in the economies of several developing countries impacted Canadian business confidence. The Greek debt crisis added to the uncertainty. At the same time, a number of geopolitical events, including the crisis in the Ukraine, were a factor. Stock market volatility at various points during the past year was another negative influence on Canada’s economic performance. In short, the slowdown in Canada’s economy over the past year was the result of a number of negative influences, both at home and abroad.

NATIONAL ECONOMIC PULSE FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Real GDP Growth*





Unemployment

-

-

Retail Sales Growth*



-

Housing Starts*



-

Trade Balance*





Total Inflation*

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. real GDP growth could be +/-, yet indicate a growing/shrinking trend).

HOUSING MARKET MODERATION WAS EVIDENCED Moderation, against a backdrop of regional variation, characterized Canada’s housing market performance of the past year. Nationally, re-sale property values moderated in the past year. If we removed British Columbia (B.C.), and Ontario from consideration, prices would have increased by a modest 2.5%, year-over-year as of October 2015. In Ontario and B.C., demand continued to outpace the supply of listings. This resulted in a steady rise in prices in each of the province’s largest population centres, Toronto and Vancouver. In contrast, re-sale markets in oil-dependent provinces have been generally quite weak. Not surprisingly, Calgary re-sale values fell the most among the country’s largest urban areas. In terms of re-sale activity, Calgary, Edmonton, Regina, and Saskatoon posted reductions in transaction closing volumes of 16.3%, 12.3%, 12.3%, and 21.8%, respectively as of October 2015. At the same time, national sales volume returned to the peak for the year, after two consecutive monthly declines. In short, while there were regional differences over the past year, Canada’s housing market performance was one of moderation.

OIL SLUMP CREATED HEADWINDS FOR ALBERTA The global oil crisis severely reduced economic activity in the province of Alberta over the past year, following several years of robust expansion. The slowdown began in late 2014 and persisted through to the close of 2015. In its autumn forecast, the CBOC indicated GDP would contract by 1.0% over the full year. Previously, the province generated average annual increases in output of more than 4.0% between 2012 and 2014. As the provincial economy slid into recession in the first half of 2015, labour market conditions began to weaken. In the second half of the year, oil companies started to reduce their workforces. At the same time, the provincial housing market slowed and prices fell. Additionally, the province attracted fewer people looking for work. The oil sector slump is expected to carry over into 2016, resulting in continued weakness in provincial economic performance in the near future.

2

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

NATIONAL ECONOMIC REPORT HOUSEHOLD EXPENDITURES MODERATED Canadian consumer spending patterns moderated over much of the past year, due in large part to a relatively soft labour market performance, the absence of material wage gains, and record consumer debt levels. Household spending increased by 0.6% in the second quarter of 2015, after a more modest 0.1% lift in the first quarter. Much of the recent progress was the result of a 2.9% rise in auto sales. In the autumn of 2015, the CBOC forecasted retail sales would rise by 2.1% for all of 2015. In 2013 and 2014, sales had increased respectively by 3.2% and 4.6%. In the first half of 2015, the Canadian economy slowed more than expected, which resulted in a softer labour market and lower levels of consumer confidence. In turn, retail sales volume lessened. Moreover, income growth was negligible, which impacted spending patterns as spending power was reduced. Household debt levels also took their toll on consumption patterns as Canadian household debt-service ratios increased to 14.1% in the second quarter of 2015. While the rate was fairly stable, when compared to the 13.1% ratio in the previous quarter, it remained high by historic standards. There were indications that consumers recognized how problematic high levels of debt could be. The prospect of an increase in U.S. interest rates was perhaps the root of this realization. Barring a significant improvement in the Canadian economic outlook, household spending is expected to remain modest when compared to recent performance.

SURPISING JOB MARKET RESILIENCE OBSERVED Canada’s labour market exhibited a surprising level of resilience over the past year, despite a markedly weaker economic growth performance. Total Canadian employment increased by 143,000, or 0.8% year-over-year, as of the end of October 2015. Moreover, an average of 14,600 jobs were created monthly during the first seven months of the year. While not an overly robust growth cycle, recent performance was better than much of 2014. Encouragingly, employment sector progress was primarily in the form of fulltime jobs, offsetting declines in part-time positions. As of October, B.C. posted the strongest increase in employment year-over-year, generating 67,000 new positions. Manitoba and New Brunswick posted healthy employment growth over the period, while a number of provinces saw employment levels stabilize. In Alberta, employment was unchanged, as oil companies had only just begun to lay off workers. During much of the last year, the national unemployment rate held steady as more people entered the workforce. This stability was indicative of the resilience of Canada’s labour market, despite a materially weaker economic performance.

BUSINESS INVESTMENT UNDERWHELMED Canada’s tepid economic growth performance of the past year was due in large part to lower-than-expected business investment. To a large extent, the shortfall in capital invested contributed to the recession that emerged in the first half of 2015. A major factor in reduced investment levels was the oil sector slump that began in the summer of 2014. Oil companies slashed investment for both engineering and extraction programs in the oil sands region of Alberta. In the first quarter of 2015 capital investment in the sector dipped by 15.0%. The trend was expected to continue with funds invested falling by a combined one third over 2015 and 2016. Business investment in non-energy sectors also fell in early 2015. For example, in the building construction sector investment declined over 2014, with more severe cuts expected in the first half of 2015. Non-residential investment was forecast to fall by 7.0% overall in 2015. In summary, business investment was a determining factor in what was a period of economic weakness in Canada over much of the past year. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

3

OFFICE OUTLOOK EROSION OF LEASING FUNDAMENTALS CONTINUED The erosion of leasing fundamentals in Canada’s office sector over the past year was the result of a tepid demand cycle and recent new supply completions. The national office sector occupancy profile was weakened during the past year. The average national occupancy rate for all classes of buildings in the country’s largest urban centres fell to its lowest level since 2005. The rate stood at 88.8% at the end of the third quarter of 2015, down 150 bps year-over-year. Average occupancy levels fell by similar amounts for both the suburbs and downtown by 140 bps and 160 bps, respectively. In each case occupancy also dipped to a record low dating back to 2005. Falling occupancy levels resulted in downward pressure on rents in most markets across the country. The pressure was more acute in markets like Calgary, where the energy sector downturn eroded demand. However, office space demand was low throughout the country, due in large part to a weak economic growth trend and public sector rightsizing. The erosion of leasing fundamentals was also a byproduct of the ongoing completion of new construction projects. At the three quarter mark of 2015, a total of 4.2 million SF of new supply was completed, compared to an average annual total of 4.9 million SF over the previous five-year period. While the majority of the new space completed was leased, there was some excess space available. This resulted in significant oversupply in some cities, which when combined with a weak demand trend, eroded leasing fundamentals overall.

STABILIZATION CHARACTERIZED INVESTMENT MARKET Canada’s office property sector investment performance of the recent past was characterized by stable and positive trends. On the whole, sector yields were at levels that met the requirements of most local and national investment groups. This was generally the case for both core and secondary markets. Attractive yields have been in place for much of the post-recession time period. Investor confidence was evident in recent transaction volume figures. In the first half of 2015, a total of $2.4 billion in combined sales volume was recorded for the nation’s major urban centres. While down from the peak, transaction volume was a function of the availability of income-producing assets for sale rather than any demand weakness. Indeed, investor appetite for Canadian office properties remained robust, which has been the norm for a prolonged period of time. Product offerings were recently met with multiple bids, as was the case over the past several years. Properties with strong tenant rosters in established nodes received the highest levels of interest from the investment community. Multiple bid scenarios were not unusual. Recent MSCI returns provided additional evidence of the strength of the office property sector investment performance. Properties tracked in the index registered an annual average return of 6.6%, for the period ending on June 30th, 2015. The attractive return was predominantly income-driven, as values leveled. This attractive outcome was one indicator of what was a generally healthy and stable office sector investment performance over the recent past.

EXTENDED PERIOD OF SOFTNESS FORECAST The Canadian office sector’s near-term investment performance will be hampered by the continued erosion of leasing fundamentals. In several markets, occupancy levels are expected to trend lower due to an excess of newly built vacant space. A significant increase in backfill space as a result of new supply will also pull occupancy levels lower. More than 17 million SF of new supply is scheduled for completion over the next four-to-five years. A weakened demand cycle over the near term will also support leasing market softness. The public sector’s program of cost cutting was seen as a demand limitation, as was the lack of a firm economic growth cycle in terms of private sector expansion activity. Persistent near-term leasing market softness will negatively impact investment performance over the close future.

4

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

OFFICE INVESTMENT REPORT INVESTMENT MARKET TRANSACTIONS

HIGHLIGHTS ■ Pension Funds, private capital, and other

Montreal Property 8000 Decarie Blvd Tour KPMG 79 Rene-Levesque Blvd E

Date Nov-15 Sep-15 Jan-15

Price $28.0 M $164.5 M $16.5 M

Property 4000, 5050 Innovation Dr 72 Laval Rd, Gatineau 100-136 Colonnade Rd Trebla Bldg. 473 Albert St

Date Oct-15 Sep-15 May-15 Apr-15

Price $70.1 M $18.5 M $29.0 M $13.1 M

Property

Date

Price

105 Gordon Baker Rd

Dec-15

$25.6 M

425 University Ave 1243 Islington Ave 2 Bloor St W HOOPP Beaver Creek 295 The West Mall 1470 Don Mills Rd RBC Meadowvale Campus 6835 Century Ave

Nov-15 Nov-15 Nov-15 Nov-15 Nov-15 Nov-15 Oct-15 Oct-15

SF 134,482 516,785 75,937

P.S.F. $208 $318 $217

Purchaser Holand Leasing Bentall Kennedy Private

P.S.F. $219 $271 $191 $94

Purchaser CMHC/Crestpoint Nobel REIT/rue Laval Regional Group Concentra Financial

SF

P.S.F.

Purchaser

153,380

$163

Canada JC Investment

$16.3 M $25.8 M $262.0 M $71.3 M $10.0 M $8.3 M $278.3 M $15.6 M

47,759 111,370 455,371 307,393 93,600 37,250 811,949 64,361

$341 $231 $575 $232 $107 $221 $343 $242

Private Canderel/KingSett KingSett/Greystone Dorsay Corporation Fiera Properties Kamfy Holdings Triovest/Northam Morguard Corporation

5150 Spectrum Way (50%) Oct-15

$21.5 M

246,247

$175

Greystone

2655 Bristol Circle TD Centre (30%)

Oct-15 Oct-15

$37.1 M $881.0 M

94,922 4,289,580

$391 $685

Fiera Properties Ontario Pension Board

160 Traders Blvd E

Oct-15

$15.5 M

92,467

$175

Hallmark Housekeeping

642 King St W

Oct-15

$14.5 M

29,600

$490

Abe Gitalis Real Estate

581 Davis Dr,

Oct-15

$86.4 M

164,855

$524

Constantine Enterprises

70 York St Liberty Centre 600 Cochrane Dr 33 Commerce Valley Dr E 100, 120, 160 Comm. Vall. King James Place Evton Portfolio 474 Wellington St W 7150 Mississauga Rd 230-240 Richmond (50%) 1133 Yonge St 18 Wynford Dr BCIMC Markham Portfolio

Sep-15 Sep-15 Sep-15 Aug-15 Aug-15 Jul-15 Jul-15 Jul-15 Jun-15 May-15 May-15 Apr 15 Apr-15

$110.0 M $111.6 M $30.0 M $10.0 M $10.5 M $59.5 M $93.5 M $12.5 M $22.0 M $17.5 M $21.5 M $12.3 M $126.7 M

194,083 552,447 100,161 125,000 71,150 79,133 238,900 20,237 79,406 119,442 63,237 97,615 465,306

$557 $202 $303 $80 $148 $752 $391 $619 $276 $293 $340 $126 $272

Anbang Insurance Fiera/Canderel Canadian Urban Metrus Properties Financial Debt Recov. Northam Realty Slate Properties Hullmark Peel Region Hullmark Clifton Blake Integrated Condom. Crown Realty Partners

5025-5045 Orbitor Dr

Feb-15

$10.5 M

106,271

$99

MP Developments

81-85 The East Mall

Jan-15

$10.5 M

82,300

$128

Northwest Partners

151 Yonge St

Jan-15

$153.8 M

296,992

$518

GWL Realty Advisors

Property 140 Columbia St W

Date Sep-15

Price $10.2 M

P.S.F. $187

Purchaser Tanem Columbia St Inc

Property Encana Place

Date Feb-15

Price $116.0 M

P.S.F. $260

Purchaser Aspen Properties

Property Guardian Building

Date Mar-15

Price $20.5 M

P.S.F. $246

Purchaser Trans America Group

Property 1128 Hornby St 2601-2609 Granville Richmond Place* Riley Professional Building London Building 3600 Lysander Lane* Centennial Building* CGA Buillding

Date Sep-15 Jul-15 Jul-15 Jun-15 Jun-15 Mar-15 Feb-15 Feb-15

Price $25.5 M $41.0 M $30.3 M $12.6 M $27.6 M $33.0 M $21.5 M $16.1 M

P.S.F. $611 $900 $320 $451 $498 $220 $308 $511

Purchaser Bene (Hornby) Devt. Peterson Investment Private Transworld Mgt. Private Lysander Holdings Peterson Investment Austeville Properties

institutions moved to the forefront of the office sector investment market over the past year. To a large extent, capital market dependent groups found it more challenging to raise funds.

Ottawa SF 322,000 68,365 151,614 139,885

Toronto

■ National office leasing market fundamentals softened over the past year, as supply outpaced demand. Public and private sector expansion activity remained tepid in the wake of continued development completions.

Kitchener/Waterloo SF 54,525

Calgary SF 446,297

Edmonton SF 83,341

Vancouver SF 41,706 45,540 94,675 27,963 55,494 150,000 69,738 31,527

*share sale

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

5

INDUSTRIAL OUTLOOK LEASING PERFORMANCE WAS LARGELY POSITIVE Generally positive trends were observed in Canada’s industrial leasing market over the recent past, although there was evidence of softening in energysector driven regions. Supply-side characteristics in most markets were healthy and stable. The average occupancy rate for the nation rested in the mid-to-high nineties through the first three quarters of 2015, following a twoyear run of similar performance. Additional indications of leasing strength were contained in the development cycles of the country’s largest inventories of industrial space. According to CBRE figures, a total of 12.8 million SF of new industrial construction was completed in the first nine months of 2015 alone, adding to the 14.9 million SF of space built in 2014. Much of the recently completed space was met with strong demand, as tenants and owners exhibited eagerness in securing state-of-the-art premises. In particular, logistics and warehouse users, as well as consumer goods distributors, absorbed many of the newly built properties. Further evidence of the health of Canada’s industrial leasing market was upward pressure in average rents. Much of the pressure was for newly built space and for the most functional of existing properties. Second and third generation space saw rates hold steady, although upwards pressure was observed in cases where options were in short supply. The only downward pressure was reported in oil sector driven markets. In Calgary, for example, industrial space demand softened, as a byproduct of a sharp downtown in regional economic activity. As a result, downward pressure on rents and occupancy began to build. Aside from weakness in the west, industrial conditions across the country were largely positive over the past year.

SOLID INVESTMENT PERFORMANCE REPORTED Canada’s industrial sector posted another period of solid investment market performance over the past year, extending the current phase of the cycle. Recent MSCI Index returns were indicative of investment strength. Properties tracked in the index registered an annual average return of 6.6% for the 12month period ending on June 30th. The positive outcome was rooted in income growth. Capital values were largely stable over the period, mirroring the wider commercial property sector. Despite the levelling trend, values remained at the peak for the cycle. The investment performance of the past year was also the result of healthy leasing market fundamentals. For the most part, owners were able to lease vacant space quickly, in supporting income levels. The resulting occupancy strength allowed many owners to command higher rents. The health of the investment performance of the past year was also a boon for investors who chose to sell assets. On the whole, bidding was competitive, as a range of groups looked to capitalize on recent conditions, which supported sector values. In short, Canada’s industrial property sector registered continued investment performance strength over the past year, thereby prolonging the medium-term trend.

GROWTH TREND TO MODERATE Canada’s industrial property sector growth cycle will ease somewhat over the near term, due in large part to a modest economic growth outlook. National economic output will expand by 1.5% in 2015 and 2.0% in 2016. Weakness in the oil sector will continue to hamper progress and limit expansion in the industrial sector overall. The broader commodities sector will do the same for a number of regional economies. The modest economic outlook will lessen demand for industrial space overall. At the same time occupancy levels will rise as the pipeline of development projects are completed. On average, upward pressure on rents will ease with some downward movement in certain regions. In turn, income performance will also trend lower. This downward pressure will weaken investment performance overall, as the sector growth cycle slows.

6

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

INDUSTRIAL INVESTMENT REPORT INVESTMENT MARKET TRANSACTIONS

HIGHLIGHTS ■ Canada’s

Montreal Property Saint-Jean-sur-Rich.Portf.

Date Sep-15

Price $58.1 M

SF 692,135

P.S.F. $84

Purchaser Skyline Comm. REIT

3550, 3600 1st St, 3330 2nd Jun-15

$10.7 M

116.157

$92

Nobel REIT

11281 Albert-Hudon Blvd

May-15

$29.2 M

466,442

$62

Quintcap/Divco

IGRI Industrial Fund GP Laval KingSett Portfolio

Apr-15 Jan-15

$34.5 M $31.8 M

698,169 391,376

$49 $81

Cominar REIT Triovest

Property

Date

Price

SF

P.S.F.

Purchaser

550-560 Parkside,50 Northl. Aug-15

$43.3 M

510,034

$85

Firm Capital

25 Reuter Dr

Jul-15

$18.8 M

248,820

$75

CanFirst Capital

549 Conestoga Blvd

Jul-15

$7.7 M

96,495

$79

Skyline Commercial

Property

Date

Price

SF

P.S.F.

Purchaser

8020 Fifth Line

Dec-15

$13.6 M

111,270

$122

Investors Group

1166-1168 Caledonia Rd

Nov-15

$12.3 M

100,250

$122

Private

1051 Tapscott Rd

Nov-15

$15.8 M

255,026

$62

Rodenbury Investments

26-36 Tidemore Ave

Nov-15

$11.9 M

206,786

$58

Davpart Inc.

2001 Drew Rd

Nov-15

$14.9 M

188,683

$79

Dhaliwal Investments

2189 Speers Rd

Oct-15

$28.2 M

250,541

$112

Rodenbury Investments

3230 Mainway Dr

Oct-15

$12.0 M

207,000

$58

Dream Industrial REIT

505 Industrial Dr

Sep-15

$22.5 M

258,960

$87

CanFirst Capital

330 Humberline Dr

Sep-15

$14.1 M

254,665

$55

Redstone Group

2155 Steeles E, 7956 Torbr Sep-15

$13.5 M

154,152

$88

Fieldgate Commercial

Caleast Logistics Portfolio

Aug-15

$25.1 M

107,682

$233

Rathcliffe Properties

Sun Life GTA Portfolio

Jun-15

$25.2 M

159,434

$158

Menkes Developments

1601 & 1635 Tricont Ave

Jun-15

$13.0 M

259,181

$50

KingSett Capital

2333 North Sheridan Way

Jun-15

$14.5 M

184,000

$79

Summit Industrial REIT

3447 Kennedy Rd

Apr-15

$13.0 M

86,706

$150

Private

2 Hallcrown,501 Consum Rd Apr-15

$20.5 M

417,000

$49

Consumers Rd Invest.

5591-95, 5621-31 Finch E Apr-15 2400 & 2430 Royal Windsor Mar-15 8020 Fifth Line Feb-15

$10.0 M $19.0 M $13.6 M

210,123 292,610 111,000

$48 $65 $123

Emery Investments Panattoni Developm. Hopewell

Art Heller Portfolio

Feb-15

$25.2 M

339,404

$74

Summit Industrial REIT

35 Bosworth Crt, Brantford

Jan-15

$37.5 M

476,207

$79

HOOPP

1400 Church St 440 Railside Dr

Jan-15 Jan-15

$70.2 M $19.2 M

921,000 250,000

$88 $77

Choice Prop. REIT Northam Realty

Property

Date

Price

SF

P.S.F.

Purchaser

1802 Centre Ave NE

Sep-15

$10.7 M

226,000

$48

KingSett Capital

3000 15th St NE

Jun-15

$11.6 M

54,000

$215

CanFirst Capital

44 St SE & 68th Ave SE Feb-15 McCall Bus. Ctr. 32 Ave Ctr. Jan-15

$11.1 M $36.7 M

55,227 236,723

$172 $155

Renoir Management Advent Commercial

Property

Price

SF

P.S.F.

Purchaser

9729,9730,9750 51 Ave NW Sep-15

$14.0 M

109,538

$127

Guardian Capital

16408 121A Ave Lee Valley Tools Building 9330 45 Ave

Sep-15 Sep-15 Mar-15

$10.4 M $12.8 M $9.2 M

87,552 72,563 40,508

$119 $176 $227

Manulife Financial Bentall Kennedy Feigel Investments

Property

Date

Price

SF

P.S.F.

Purchaser

1055 Vernon, 1010 George Sep-15

$10.5 M

56,752

$185

Living Balance Group

Key West Business Ctr.

Aug-15

$34.5 M

271,388

$127

Crestpoint

12091 88th Ave

Jul-15

$17.6 M

195,960

$90

Pacific Press Properties

7900 Nelson Rd

Jun-15

$10.3 M

125,000

$83

Brookfield Properties

Knightsbridge Business Pk

Apr-15

$40.3 M

259,440

$155

Crestpoint

11480-11500 River Rd* Feb-15 Ocean Ridge Business Ctr. Jan-15

$17.5 M $11.0 M

222,755 77,101

$79 $143

PCI Group Bentall Kennedy

Kitchener/Waterloo

industrial sector registered broadly positive leasing fundamentals during the second half of 2014 and first half of 2015. Healthy demand patterns, particularly for warehouse and distribution space ensured owners continued to enjoy strong occupancy characteristics overall.

■ Exports were expected to improve in the

Toronto

second half of 2015, which should support industrial demand in eastern Canada. In the west, the oil crisis will have a negative impact on demand in Edmonton and Calgary.

Calgary

Edmonton Date

Vancouver

*share sale

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

7

RETAIL OUTLOOK LEASING MARKET SOLID DESPITE HEADWINDS Canada’s retail sector continued to register healthy leasing fundamentals over the past year, in the face of increased headwinds. Supply-side conditions provided evidence of the market’s overall resilience. The average national occupancy rate of 95.6%, posted at the midway mark of 2015, was unchanged year-over-year according to CBRE. The Regional mall segment of the market continued to thrive, with occupancy resting at 95.8%. The health of the retail sector’s occupancy profile was maintained despite the completion of more than 3.0 million SF of new supply over the 12-month period ending at the midway mark of 2015. Strong occupancy characteristics ensure average rents continued to hold at the cycle peak for the most highly sought after space. There was some softening of rents reported for smaller non-anchored strip centres. Overall leasing fundamentals remained healthy, even as a number of performance headwinds built. The abrupt exist of Target threatened to drive occupancy significantly higher. However, this was partially offset by the absorption of a significant portion of this space by Canadian Tire, Lowes and Walmart. In addition, a number of store closures presented headwinds for the retail leasing market in the recent past. A range of stores were forced to close their doors completely or reduce the number of outlets. Many struggled with the weak Canadian dollar, competition, the impact of e-commerce and the broader trend of weaker consumer spending patterns. Despite these headwinds, Canada’s retail sector posted another strong leasing market performance.

CONSISTENCY CHARACTERIZED INVESTMENT MARKET Canada’s retail sector extended its recent history of positive investment performance over the past year. Demand remained robust for an asset class with a recent record stable and positive investment performance. A range of local and national groups looked to acquire assets with strong national tenant rosters in established shopping nodes. Private capital, pension funds and other institutions were the most active buyer segments over the past year. The strength of the demand cycle supported peak property values. Yields remained relatively attractive, despite resting at record lows for the most part. Overall investor confidence in the retail sector resulted in a highly competitive bidding environment. Further evidence of consistently positive performance trends in the retail sector was contained in MSCI Index return metrics. Retail properties tracked in the index posted a sixth consecutive year of attractive results, for the period ending on June 30th 2015. At 7.1%, the total average sector return ranked second among the major assets classes, behind residential. The positive outcome was in keeping with retail sector results of the past year, a period which represented a continuation of the medium-term trend.

UNEVEN PERFORMANCE FORECAST Canada’s retail sector will experience slightly weaker performance patterns over the near term, following a fairly solid 2015. The continued closure of stores in specific segments of the market will push vacancy slightly higher and cause modest erosion of rents. E-commerce and changing consumer patterns and preferences will be key drivers of the softening of leasing market characteristics. At the same time, the economic malaise that will continue to grip Alberta over the near term will erode national spending and occupancy levels. The resulting impact on job creation will also hamper consumption. Regional and Super-regional centres will continue to post strong leasing fundamentals, however the power centre and smaller strip formats will be the focus of weakness over the near term. Increased vacancy will dampen income results for owners of centres most at risk. Overall sector investment performance will fall short of 2015 results. In summary, Canada’s run of stellar performance over the last several years will ease in 2016.

8

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

RETAIL INVESTMENT REPORT INVESTMENT MARKET TRANSACTIONS

HIGHLIGHTS ■ Investor

demand for retail asset acquisitions resulted in $2.2 billion in transaction volume in the first half of 2015. Activity was limited by product availability rather than any demand shortfall.

Montreal Property

Date

Price

SF

P.S.F.

Purchaser

Jacques-Cartier Centre Delson Plaza

Aug-15 Jan-15

$17.6 M $21.5 M

219,109 145,546

$80 $148

Strathallen Retail BTB REIT

Property

Date

Price

SF

P.S.F.

Purchaser

125 Rideau St, 90 George St Oct-15 1800 Bank St Oct-15

$24.5 M $10.0 M

51,000 53,229

$480 $188

Lasalle Investment Mgt. Econo-Malls

Property

Date

Price

SF

P.S.F.

Purchaser

651 Yonge St

Dec-15

$15.0 M

10,818

$1,587

KingSett Capital

Credit Ridge Commons

Oct-15

$93.9 M

370,244

$253

GWL Realty Advisors

601-605 Rogers Rd

Sep-15

$25.8 M

160,000

$161

Paradise Homes

Brant Power Centre

Sep-15

$40.5 M

115,077

$352

Desjardins Financial

530 Yonge St

Aug-15

$13.5 M

13,321

$1,013

KingSett Capital

131-137 John St Delaware Square Henley Gardens Plaza Portsmouth Mews 5995 14th, 7760 Markham Rd

Jul-15 Jul-15 Jul-15 Jun-15 Jun-15

$11.0 M $7.8 M $10.8 M $9.5 M $11.2 M

13,600 19,578 37,316 18,846 36,650

$809 $398 $289 $502 $306

Camwood Properties Al Walid Co Ltd Private Cachi Holdings Inc Astro Evermore

1855-1911 Dundas E

May-15

$21.0 M

154,890

$136

Zoran Properties

1030 King St W Bayview North Centre Milliken Wells Centre 339 Queen St E Bolton Country Plaza Whites Road Shopping Ctr.

Apr-15 Mar-15 Mar-15 Feb-15 Feb-15 Feb-15

$24.8 M $19.5 M $25.6 M $10.0 M $18.6 M $25.0 M

17,924 48,928 136,000 33,000 87,005 65,703

$1,381 $399 $189 $303 $207 $381

First Capital Realty Liberty Development Laurier/Paradise Homes Downing Street Group Stonebridge Bolton Valiant Rental Prop.

Avondale Shopping Centre

Feb-15

$6.2 M

32,939

$188

Goldmanco Inc

Agincourt Mall

Jan-15

$97.0 M

290,069

$334

I.G.,P.S.P. NA Group

Property

Date

Price

SF

P.S.F.

Purchaser

Brantford Commons Plaza

Jun-15

$26.2 M

53,766

$487

Econo-Malls

Property

Date

Price

SF

P.S.F.

Purchaser

Northgate Centre, Kitchener

Nov-15

$9.4 M

23,500

$400

Northgate Centre Inc.

496 Albert St, Waterloo

Aug-15

$14.7 M

52,893

$278

Private

Evergreen Mall, Kitchener

Mar-15

$19.3 M

78,144

$247

Shops on the Park, Guelph

Feb-15

$13.0 M

37,500

$346

Private Belmont Equity Partners

Property Fish Creek Village 802-818 16th Ave SW

Date Jun-15 Jan-15

Price $20.1 M $22.8 M

P.S.F. $376 $563

Purchaser Landsdowne Equity First Capital

Property

Date

Price

SF

P.S.F.

Purchaser

Duggan Shopping Centre Leduc Town Square

Mar-15 Feb-15

$8.8 M $12.7 M

28,000 51,393

$314 $246

Elite Investments Crombie REIT

Property

Date

Price

SF

P.S.F.

Purchaser

1090 Lougheed Highway

Nov-15

$31.0 M

67,527

$459

Dava Developments

7491 Vedder Rd

Nov-15

$10.0 M

45,082

$222

Taikoo Property

8010 Saba Rd

Sep-15

$24.3 M

33,546

$723

PLLR 368 Holdings

600-640 W Broadway

Sep-15

$38.9 M

34,708

$1,120

Private

Ackroyd Plaza*

Aug-15

$101.8 M

106,382

$957

Private

Haney Place Mall

Jul-15

$57.6 M

226,874

$254

SmartREIT

The Village at Sardis Park Walnut Grove Town Centre

Apr-15 Apr-15

$15.2 M $21.3 M

52,504 56,751

$289 $376

Spire Development Jim Pattison Group

Ottawa

■ In keeping with the broader market trends,

Toronto

investors looked to development as a method of expanding their core retail property portfolios. Many chose to invest capital for expansion programs in existing properties, including several of the nation’s highest profile centres.

Brantford

Kitchener/Waterloo/Guelph

Calgary SF 53,451 40,387

Edmonton

Vancouver

*share sale

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

9

MULTI-SUITE RESIDENTIAL OUTLOOK STABILIZATION MASKED REGIONAL DISPARITY Offsetting regional trends supported the continuation of largely stable and healthy purpose-built Multi-Suite Residential property rental market conditions. In a spring 2015 survey, the Canada Mortgage and Housing Corporation (CMHC) reported an average occupancy rate of 97.1% for the nation’s 35 major rental markets. The national occupied position fell by just 20 bps yearover-year. Census Metropolitan Areas (CMA) in Alberta and Saskatchewan fell over the same period, as the oil crisis eroded demand. In Quebec, occupancy levels also declined, due to the combination of new supply completions, weaker migration patterns and employment market weakness. Conversely, CMAs in Ontario and British Columbia posted increases in occupancy, given healthier economies and the relatively high cost of home ownership. On aggregate, there was evidence to suggest that rents were beginning to stabilize. Excluding newly constructed properties that tend to command higher rents, the average two-bedroom rent increased by 2.3%. This was down from 2.6% in each of the previous two years. Regionally, averages in Calgary increased by a robust 5.9%. Indications were that this was more of a result of the first half of 2014. Despite regional differences, the stabilization of rents keeps with the broader market theme of the past year.

INVESTMENT PERFORMANCE STRENGTH EVIDENCED The Canadian purpose-built Multi-Suite Residential property market exhibited healthy investment trends over the past year, keeping with the extended recovery phase of the cycle. The sector generated an attractive annual average return of 8.5% in the MSCI Index for the 12-month period ending in June 30th 2015. In doing so, the sector ranked first among the major commercial property asset classes. The sector return was 20 bps better than the previous period, in extending its lengthy run of fairly strong performance. Further evidence of healthy investment market trends was given when assets were offered to the market for acquisition. There were often multiple bidders at the table and bids were usually aggressive. The consummation of a number of high profile off-market transactions was further evidence of the health of the investment market. During the past year, a range of investors scoured the country for potential acquisitions. Investment demand was buoyant overall. Recently, capital market-dependent groups were active acquirers of assets, most notably with CAP Real Estate Investment Trust (REIT) and InterRent REIT. The strength of the sector’s demand profile resulted in material upward pressure on values. Most groups offered the asset class’ history of income performance and value retention during periods of economic weakness as motivation for investment. This sentiment helped drive transaction volume beyond last year’s pace. In the first half of 2015, a total of $2.2 billion in sales were completed in the nation’s largest rental markets, up 27.2% year-overyear. Recent activity was arguably the most tangible evidence of the sector’s healthy investment market.

PREFERRED SECTOR STATUS TO PREVAIL Canada’s purpose-built Multi-Suite Residential rental property will remain a preferred asset class for a range of investment groups in the near term, in support of mostly positive market trends. The overall outlook for the sector is one of continued health and stability, although a slight softening is expected. Occupancy will trend slightly lower, given the weakness forecast in the oil sector driven CMAs of Alberta. On average, rents will continue to stabilize, with some growth anticipated in Ontario and B.C. Income stability will be afforded to most owners of assets in the sector. Some owners will suffer modest setbacks, although recovery is forecast for the second half of 2016. Generally, investment performance will remain relatively healthy, with average yields holding at the cycle low. Continued investor preference in the sector will ensure that demand will continue to outpace supply.

10

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

MULTI-SUITE RESIDENTIAL INVESTMENT REPORT INVESTMENT MARKET TRANSACTIONS

HIGHLIGHTS ■ Multi-Suite

Montreal Property

Date

Price

Suites

P.S.

Purchaser

Central Montreal Portfolio

Sep-15

$490.0 M

3,661

$133,843

CAP REIT

3455 Aylmer Rd

Aug-15

$16.0 M

98

$163,265

Akelius Canada

St Lambert Portfolio

Jul-15

$25.7 M

260

$99,000

Akelius Canada

5501 Adalbert Ave

Apr-15

$32.4 M

280

$115,714

InterRent REIT

Property

Date

Price

Suites

P.S.

Purchaser

2750 Carousel Cr

Jul-15

$34.0 M

201

$169,054

Homestead

Sipolins Portfolio

Apr-15

$27.8 M

286

$97,028

InterRent REIT

Forest Ridge 950-986 Byron Ave

Apr-15 Mar-15

$58.5 M $12.1 M

393 77

$148,855 $157,662

InterRent REIT Byron Rental Prop.

Property

Date

Price

Suites

P.S.

Purchaser

3480 Havenwood, 1485 Williamsp Nov-15

$50.3 M

264

$190,341

Starlight Investments

141 Main St S

Oct-15

$10.0 M

66

$151,515

Starlight Investments

Landscape Court Apartments

Oct-15

$18.0 M

160

$112,500

Gowan Property Mgt

Seaview Apartments

Sep-15

$10.3 M

75

$137,067

Century Building Rest.

280 Morningside Ave

Sep-15

$18.9 M

165

$138,788

Conundrum Capital

730 St Clarens Ave

Aug-15

$24.0 M

275

$87,273

Akelius Canada

111 Lawton Blvd

Aug-15

$46.0 M

152

$302,632

Akelius Canada

2029-2055 Victoria Park Ave

Jul-15

$12.2 M

60

$202,500

Akelius Canada

380 Gibb St

Jun-15

$19.0 M

126

$150,397

Timbercreek

2770 Aquitaine Ave

Jun-15

$52.3 M

180

$290,556

Homestead

The Brock

Jun-15

$39.9 M

115

$346,522

Homestead

556-560 Eglinton W & 4 Latimer

Jun-15

$11.2 M

64

$175,000

Timbercreek

High Park Village 2,4, & 6 (60%)

Jun-15

$104.6 M

750

$232,388

CPPIB

74 Curlew Dr

Jun-15

$14.0 M

111

$126,126

Akelius Canada

106 Parkway Forest Dr

May-15

$25.8 M

97

$265,464

Homestead

25 Fisherville Rd

Apr-15

$42.8 M

214

$199,766

Starlight Apartments

103 Avenue Rd

Apr-15

$36.2 M

125

$289,600

Hollyburn Properties

KAF Burlington Portfolio 5693 Highway No. 7 2175-77, 2181 Ave Rd 166 Wilson 50 Spadina Rd, 35 Walmer Rd

Mar-15 Feb-15 Feb-15 Jan-15

$53.7 M $10.0 M $47.0 M $59.0 M

285 55 260 229

$188,547 $181,818 $180,769 $257,642

CAP REIT Markwood Apartments Starlight Apartments Starlight Apartments

Property

Date

Price

Suites

P.S.

Purchaser

The Laurier

Mar-15

$50.0 M

144

$347,222

Minto Group

King’s Heights Apartments Airdrie Place Apartments

Feb-15 Jan-15

$41.0 M $64.3 M

192 299

$213,542 $215,000

Skyline Apt. REIT Realstar

Property

Date

Price

Suites

P.S.

Purchaser

Southgate Court

Sep-15

$14.7 M

96

$153,000

Alliance Properties

Elizabeth Gardens Apartments

Feb-15

$25.6 M

125

$205,000

Realstar

Highstreet At Brintnell Landing

Feb-15

$33.1 M

160

$205,563

Skyline Apt. REIT

Blue Quill Pointe Grandin Tower Windermere Village Phase II

Feb-15 Feb-15 Jan-15

$23.3 M $31.0 M $28.5 M

156 125 126

$149,200 $248,000 $226,190

Realstar CAP REIT Centurion Apt. REIT

Property

Date

Price

Suites

P.S.

Purchaser

Lougheed Village Apartments*

Nov-15

$160.0 M

548

$291,971

Starlight Investments

6390 Willingdon Ave

Oct-15

$11.4 M

58

$196,000

Prospero Internat.

Western Income Portfolio*

Sep-15

$170.0 M

919

$184,984

CAP REIT

Monterey Apartments

Sep-15

$18.6 M

54

$345,000

Hollyburn Properties

8740, 8790 Cartier, 1373 73 Ave Sep-15

$24.2 M

106

$228,019

Hollyburn Properties

Cardinal Crt Apartments

Sep-15

$10.3 M

26

$394,231

Private

Yorkson Grove*

Aug-15

$17.0 M

58

$293,534

CAP REIT

Westside Apartments Riverside Gardens 2121 Alma St

Jul-15 Jun-15 May-15

$11.3 M $14.9 M $14.5 M

45 90 43

$251,111 $165,556 $337,093

Prospero International Kelson Group EMV Holdings

Mainstreet Estates Apartments

Jan-15

$33.7 M

331

$101,662

Mainstreet Equity

Langara Gardens (50% interest)

Jan-15

$101.9 M

621

$328,043

Concert Properties

Ottawa

Residential rental demand received a boost in markets like Toronto and Vancouver, due to the continued increase in property values. Many families were forced to rent in these markets, as the costs of home ownership was out of reach.

■ Toronto, Ottawa and Vancouver posted the

Toronto

highest transaction volumes for the 12month period ending at the midway mark of 2015. Availability was less of an issue in this sector overall, as national transaction volume increased by 27.2 % year-over-year.

Calgary

Edmonton

Vancouver

*share sale

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

11

INVESTMENT OUTLOOK HIGHLIGHTS ■ Investor confidence factored into the recent positive Canadian commercial investment property performance. Property yields continued to reside near historical lows in a low interest rate environment, especially for core stabilized holdings that remain in high demand.

■ Debt and equity capital flows into the Canadian commercial property market tracked the long-term average of roughly $20 billion in 2015, with pension funds and private capital as leading sources of funds.

MATURE PHASE OF RECOVERY CYLE WAS EXTENDED The continued emergence of the mature phase of the recovery cycle characterized Canada’s commercial property sector investment performance over the past year. An average sector return of 6.9% was posted for the 12month period ending on June 30th, 2015, for $130 billion in assets tracked in the MSCI Index. The retail and Multi-Suite Residential property sectors outperformed, while the office and industrial assets classes underperformed. Overall, the broader index return was indicative of the mature phase of the cycle, in falling far short of the five, 10, and 15-year term averages of 11.3%, 10.7%, and 10.6%, respectively. In general, returns have trended lower as the rates of cap rate compression and rental growth have subsided. Prior to 2014, property values steadily increased through much of the post financial crisis period. As a result, values reached a peak and began to level off in late 2014. In the past year, the MSCI Index posted capital growth of less than 2.0% for all asset classes combined. The maturing of the capital cycle had little impact on investment demand. Pension Funds, private capital and other institutional groups, looked to increase their Canadian property portfolios. For the most part, high quality assets offered for sale commanded peak pricing and garnered multiple bids.

PLENTY OF FUNDS AVAILABLE TO INVEST There was no shortage of debt and equity capital available for investment in Canada’s income-producing commercial property sector. Debt capital was generally inexpensive and readily available for proven property sector operators. At the same time, there were many requests for funds for new mortgages and re-financing scenarios. To a lesser extent, requirements for construction and other development projects were also fairly significant. As a result, lenders were usually able to meet their sponsorship goals. Borrowing rates remained low by historic standards, as competition among lenders resulted in downward pressure on interest rates and favourable terms for borrowers. In particular, groups with a history of success in the commercial property sector were able to achieve the most attractive terms. In addition to debt, there was also a significant supply of equity capital available to invest in Canada’s commercial property over the past year. Pension funds, institutional investors and private groups, were the most active cash buyers over the past year. Capital market dependent groups, with a few exceptions, remained on the sidelines as funds proved difficult to raise. Foreign investors also exhibited a willingness to place funds into the Canadian property market. Until recently, foreign investors showed little interest in the sector, preferring to place capital elsewhere. However in the past year, investors from various parts of the globe have begun to scour the market for opportunities. For some, the preferred entry point into the market was providing debt. In short, there was a high supply of debt and equity funds available for investment in Canada’s commercial property market from a variety of sources over the recent past, which supported activity levels.

POSITIVE CAPITAL FLOW TREND RECORDED Investor confidence in the long-term health and performance of Canada’s commercial property sector supported strong capital flows over the recent past. Transaction volumes of $10.8 billion reported for the first half of 2015 was the result of a fairly robust demand cycle. While down from the 2007 peak, the current transaction pace was in line with the long-term annual average of $21 billion, for transactions with a minimum sale price of $1 million in the country’s larger urban centres. During the current cycle, transaction volume had peaked at $30.6 billion in 2007, marking a fourth annual increase. Previously, sales volume fell to a cycle low of $13 billion in 2009 during the financial-crisis driven market correction. Subsequently, volume has trended lower. The trend which included 2015 was somewhat misleading.

12

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

INVESTMENT OUTLOOK The downward trend was not due to any downturn in demand. Rather, it was the result of reduced product availability. Put another way, investors were willing and able to invest funds into the sector. However, their appetites surpassed the volume of quality assets offered for sale on the open market. This imbalance supported recent trends in the property investment market. When assets were offered for sale, they generated several bids. This was especially true for core asset offerings. For some groups, frustration led to a decision to use development as a core investment strategy. That is, if you are unable to acquire existing income-producing assets, adopt a “build to core” strategy. Still others looked to invest outside Canada due to the perceived lack of opportunity. Despite the shortfall in availability in the Canadian property sector , capital flows remained relatively healthy.

INCREASED SECTOR RISK UNFOLDED Canadian commercial property investment sector performance risk increased over the past year, as a result of a number of domestic and international factors. Arguably the most direct of these was the marked slowdown Canadian economic activity through much of the first half of 2015. The plunge in oil prices that began in the summer of 2014 continued during the first half of the year. Capital investment in oil sector projects fell significantly, resulting in five consecutive monthly contractions in economic output at the beginning of 2015. As the oil crisis continued to unfold, many commercial property owners and investors chose to carry out performance risk reassessments for at least the near term. Canadian commercial investment property sector risk also increased over the recent past as a result of a number of external factors. The downshift in Chinese economic activity caused an increase in investor concerns related to the global economic outlook. Similarly, slowdowns in the economies of a number of emerging markets were cause for concern. Further, a slower-than-expected recovery in the European economy factored into increased risk for the commercial property sector. Various socio-political events indirectly eroded investor confidence as well. Closer to home, the U.S. recovery appears to have strengthened, which could trigger a shift in monetary policy. The question of the rate at which U.S. interest rates will rise will come into play with regard to the potential impacts on Canadian economic growth. Generally, the timing of reductions in economic stimulus was also viewed as a potential threat to U.S. growth. As Canada’s largest trading partner, any fall off in economic activity in the U.S. would impact commercial property performance. In short, there was an increased risk in Canadian commercial property investment performance, as a byproduct of both domestic and global influences.

MODERATE PROGRESS FORECAST The near-term outlook for the Canadian commercial investment property sector is one of cautious optimism, against a backdrop of elevated risk. The national economy is forecast to strengthen slightly in the near term. Economic output, measured by GDP, will expand by 2.5% in both 2015 and 2016, according to the latest CBOC forecast. This will, in turn, support moderately positive demand in the industrial, residential and retail rental markets and will support largely stable fundamentals and income growth in these sectors. Office market conditions will continue to soften, as new supply continues to outpace demand resulting in imbalance. New buildings will perform well, with the majority of weakness centred in older and less desirable properties. In the investment market, performance will once again be largely income-driven. Property values will hold at the peak, with some erosion in certain segments and regions, especially if the oil crisis continues. There will be an abundance of low-cost capital available, which will support investment activity. Barring an unforeseen financial or economic misstep, the outlook for Canada’s commercial property sector is generally positive.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

13

ECONOMIC OUTLOOK SLOW GROWTH TREND WILL BE THE NORM The near-term outlook for Canada’s economy is one of slow growth, due in part to continued weakness in the nation’s commodities-driven regions. Economic output, measured by Real GDP, will continue to underwhelm with output increasing by roughly 1.5%. Economic output growth will strengthen in 2016, with GDP forecast to rise by 2.1% for the year. A similar rate of annual expansion is expected through to, and including, 2019. The relatively tepid economic forecast for the near term will be the result of the ongoing commodities sector slump, more specifically the oil sector. According to the CBOC forecast, capital investment in the oil sector will fall by roughly one-third during 2015 and 2016, as the Canadian oil sector was expected to cut capital spending by almost one third. Markedly lower levels of capital investment in oil-related projects will have a ripple effect on the broader economy. Business investment, a driver of economic growth over the past several years, will continue to fall short of expectations. The wider commodities sector slump will negatively impact economic activity rooted in public sector spending programs over the near term. The federal government, for example, will have to wait longer to balance its financial books, as forecast revenues from the commodities sector decline. This will reduce public sector spending and its related economic benefits. While the positive influence of Canada’s oil sector on economic growth wanes over the near term, non-energy exports will provide a boost to activity levels. Momentum in the U.S. economic recovery and a low Canadian dollar will support output levels. Overall exports will rise by 3.1% in 2015, followed by a 3.6% rise in 2016. However, this will do little to change what is a forecast of slow growth for the domestic economy over the near future.

SHIFT IN REGIONAL GROWTH PATTERN TO UNFOLD Canada’s regional economic growth pattern will change substantially over the near term, due in large part to the oil sector malaise that took hold in the second half of 2014. Regions with economic fortunes tied to commodities exports will no longer be the growth leaders. Vancouver and Toronto will finish near the top of the CMA rankings for economic growth in 2015, with output set to expand by 3.4% and 2.6%, respectively. For example, In 2014 Edmonton and Calgary led the nation with Real GDP expansion of 5.2% and 5.1%, respectively. Additionally, five western Canadian CMAs ranked highest in terms of economic growth for 2014. For 2015, the five highest rankings will be filled by eastern Canadian CMAs, in a reversal of this trend. In the following year, Calgary and Edmonton will return to the top of the ranking for growth with expansion of 2.5% and 2.3%, respectively. Despite this reversal, both cities rates of economic expansion will be roughly half of those of 2014. A modest rebound in oil prices will be key in this performance. In the meantime, Canada’s regional economic growth pattern will shift significantly in the coming year, with the fortunes of the oil sector playing an integral role.

HOUSEHOLD CONSUMPTION TO MODERATE Real consumer spending growth will remain moderate over the near term, in keeping with the economic backdrop. According to the CBOC, household spending will rise by a modest 2.1% in 2015, with a slightly firmer growth rate of 2.3% forecast for 2016. The more modest growth trend will be the result of a number of factors. Labour market conditions will not be overly conducive to stronger increases in spending patterns. Employment growth will remain fairly weak in the near future. At the same time, the absence of material wage growth will limit consumer spending growth. To some degree, consumers will be reluctant to boost spending habits in an environment of economic uncertainty, given record levels of debt. Costs associated with servicing debt are at historic highs. In short, a number of factors will ensure real consumer spending growth rates remain fairly conservative over the near term.

14

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

Metropolitan Economic & Real Estate Reports

HALIFAX ECONOMIC REPORT ECONOMIC SNAPSHOT Halifax’s economy was forecast to expand by roughly 2.3% through 2015, according to the CBOC’s August forecast. This was a moderately stronger rate of expansion than the 1.7% in 2014. The projection was predicated based on increases in non-residential construction and manufacturing output. In terms of employment, Halifax Shipyard activity was expected to result in improved labour market conditions this year. By the end of 2015, total CMA employment will have increased by a modest 0.4%, as more people look for work and push the unemployment rate up to 6.4%.

MUTED RECOVERY FOR LABOUR MARKET Halifax’s recent labour market performance was largely underwhelming. In the first half of 2015, total employment for the CMA decreased slightly. Prior to this, total employment had increased by a meagre 0.4% in both 2013 and 2014. As a result, a slow rise in the unemployment rate for the CMA was observed. For the most part, more people entered the workforce looking for work than found employment. By the midway mark of 2015, the unemployment rate reached 6.7%, up a full percentage point from a year earlier. This underscored what has been a weak labour market performance over the recent past.

RETAIL SALES GROWTH STALLED Halifax’s recent record of strong retail sales growth appeared to come to an end in 2015. In fact, by the end of the first half of the year, a slight contraction was reported for the CMA. This followed a five-year run of strong gains in retail sales. Annual retail sales growth had averaged 3.1% from 2010 through to and including 2014. Limited gains in the local labour market and a slowing of the economic growth trend were cited as leading causes of disappointing retail consumption results.

HOUSING MARKET RECOVERY BEGAN TO EMERGE Recovery in Halifax’s residential construction market looked to be underway recently, as the volume of new home starts surged. More than 3,000 new homes were under construction at the midway mark of 2015. Previously, the number of starts had declined by an average of 15.4% annually over the preceding three-year period. In 2014, starts fell sharply falling to 1,760 units. This was the first time the total had dipped below 2,000 units in five years. The recent rise was in single-detached homes, as Multi-Suite Residential property activity was expected to fall slightly.

OUTLOOK IS GENERALLY POSITIVE The outlook for the Halifax CMA is generally positive. The economy will expand by roughly 2.3% over 2015, with a more robust 3.0% growth forecast for 2016. These advances should fuel stronger retail sales activity. After a pause in 2015, retail sales will increase by 4.6% in 2016, according to the CBOC. Halifax’s labour market will continue to progress, with the unemployment rate declining to 5.8% by 2017. The region’s housing market will also progress in 2016, after fairly muted gains this year. Halifax’s economic output will receive a significant boost from shipbuilding activity, which has taken longer than expected to get underway. This will help drive strong income growth for Halifax’s workers. In short, Halifax is expected to register a moderately stronger economy, labour market, housing sector and retail activity over the near term, to the benefit of the region’s commercial real estate sector.

16

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

HALIFAX OFFICE REPORT LEASING MARKET CONDITIONS SOFTENED The erosion of Halifax’s office leasing fundamentals continued over the past year, a trend that was in place through much of the previous year. Stabilization was the overriding theme in Halifax’s office rental market performance. Demand characteristics were largely unchanged in late 2014 and much of 2015. While there were expansions reported, there was little to report in terms of real growth. These advances were offset by the completion of newly built space and in the existing built inventory. These offsetting forces of new vacancy and tepid demand minimized upward pressure on average rents overall. In fact, there was a modicum of downward pressure in both the class A and B inventories downtown and in the suburbs. Pressure was intensified by the promises of still more new supply to be completed over the next two years. The market’s demand supply interplay over the recent past also influenced occupancy patterns. More than one market survey pegged occupancy at just short of the 90.0% mark for the market as a whole, with little change fluctuation indicated between the start of 2014 and mid-year 2015. In general, advances were followed by reductions in occupancy levels over the period. Balanced conditions favoured tenants looking for space upon lease expiry. In short, this balance was the overriding theme in Halifax’s office sector over the recent past, which supported largely stable conditions.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates





New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT TRENDS WERE GENERALLY POSITIVE Halifax’s office sector registered largely positive investment trends over the past year, as the current phase of the cycle continued. Investors exhibited confidence in this market during the sale process of the Fortis Portfolio of 14 commercial properties in the second quarter of 2015. Slate Office REIT and an institutional partner acquired the portfolio for $430 million, which included Halifax’s Maritime Centre. The sale indicated investor comfort levels with current yields and interest in acquiring assets in Halifax and eastern Canada in general. Broadly speaking, both national and local demand for core office assets in this market has been consistently strong over the medium term. Office property yields remained superior to those of the country’s major markets, which added to the rationale for investment. For national groups the market offered opportunities for diversification. For local groups, Halifax’s office market continued to provide healthy returns in a familiar setting. Positive demand patterns ensured values held at the peak for the cycle over the recent past. Overall demand stability persisted recently despite the softening of rental market characteristics. In summary, Halifax’s office sector posted largely stable and healthy investment market characteristics over the recent past.

LEASING RISK TO RISE MATERIALLY Halifax’s office market will be subjected to increased levels of leasing risk over the near term. The cause will be a combination of excess vacancy combined with a fairly modest demand performance. In the past year, vacancy levels have increased significantly. This issue of rising vacancy will be exacerbated by the introduction of new supply over the near term. At the midway mark of 2015, approximately 422,000 SF of new office space was under construction and was set for completion by early 2016, much of this space is contained in three projects. A total of at least 150,000 SF of space was being construction at the Nova Centre in Halifax’s Central Business District and in the suburbs, the Bay West Centre and CRA building are to house 105,000 SF and 130,000 SF of state-of-the-art space. New supply will create excess vacancy, given a relatively modest demand outlook over the next few years. Public sector austerity will effectively minimize demand from this source. In the private sector, modest economic growth will limit expansion activity. In combination, the modest demand outlook coupled with increased vacancy levels will produce a material rise in leasing risk over the near term.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

17

HALIFAX INDUSTRIAL REPORT EROSION OF LEASING FUNDAMENTALS CONTINUED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Halifax’s industrial leasing market continued to soften over the past year, after a poor showing over the previous period. The softening registered in supply characteristics. Market availability was among the highest in the country at the midway mark of 2015, according to CBRE statistics. The second quarter rate of 9.4% represented an increase of 120 bps year-over-year. For the most part, demand has been generally positive. Small manufacturers and warehouse tenants were active in sourcing space for relocation and, in some cases, for expansion. However, this activity fell short of the increased supply of available space. In many cases, tenants and owner-occupiers relocated to new build-to-suit premises. At the midway mark of 2015, there was a total of 153,000 SF of space under development, much of which was buildto-suit. This followed the completion of 174,000 SF of space in 2014. Tenants welcomed the increased access to state-of-the-art space. However, the market was forced to deal with backfill space that resulted in high availability rates. The demand supply dynamic played out in the market’s rental rate trend over the past year. For the most part, there was downward pressure on rents, as some landlords were forced to be more aggressive in attracting tenants who were able to source more than one space alternative. This leverage tenants achieved in lease negotiations was a byproduct of the market erosion that had been a fixture in this market over the past year.

MATURITY CHARACTERIZED INVESTMENT MARKET The maturing of Halifax’s industrial property sector investment cycle was reflected in market conditions over the past year. Property values continued to range at the peak, having increased earlier in the recovery phase. Yields remained largely unchanged over the past year, offering a premium over the country’s major urban centres. Maturity was also evidenced in this market’s demand profile. While investors continued to look on this market favourably, they exhibited a little more scrutiny when looking at individual assets for acquisition. This was likely a reaction to the perception of increased risk related to the broader property sector. In keeping with the longer-term trend, demand outpaced the supply of assets available for acquisition in the past year. Transaction volume totaled $29.4 million in the first half of 2015, besting the previous year’s pace when a total of $38 million in sales was posted for all of 2014. In this market, transactions tend to be smaller in size due to the relatively small average building size. In addition to the relative shortfall in available product, investors were also forced to compete with owneroccupiers in the market for industrial buildings to purchase in a low interest rate environment. Despite the strength of the demand backdrop, sales volume fell far short of the 2013 peak of $63.9 million. The maturing of the sales volume cycle was in keeping with the broader market trend over the past year.

REPEAT PERFORMANCE FORECAST Halifax’s industrial sector near-term forecast calls for a repeat of most characteristics observed over the recent past. Economic growth will be modest over all of 2015, as economic output expands by 2.3%. This will be followed by annual average expansion of at most 1.7% between 2016 and 2019. As a result, demand for industrial space will be relatively stable and positive. The low Canadian dollar should benefit the region’s manufacturers as a source of industrial demand. The energy slump will be a negative, however Halifax Shipyard contracts will be a positive influence on the sector. New supply will prevent any material growth in occupancy and ensure a measure of balance. Therefore at best, rents will continue to stabilize. In turn, investors should enjoy income growth, as values continue to stabilize. All in all, this market will see a repeat performance of the past year over the near term.

18

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

HALIFAX RETAIL REPORT RENTAL MARKET WAS STABLE AND ACTIVE Broadly stable rental market fundamentals were reported in Halifax’s retail sector recently, against a backdrop of change. There was minimal variation in market occupancy, which held close to the 95.0% mark for much of the two years ending at the midway mark of 2015. The region’s dominant malls often enjoyed even higher occupancy levels over the same period. Coincidentally, rental rates have also exhibited a measure of consistency. Average asking rents have been on a steady upward path recently, particularly for prime locations. The strength of the occupancy profile of the past two years and the steady rise in rents occurred during a period of significant change. The most notable change was arguably the closure of Target in the region. This resulted in three large vacancies hitting the market. In addition, another notable change in this market was in the form of development activity. A veritable plethora of new supply either completed or was under construction recently. Higher profile developments included: new pads at Dartmouth Crossing, the completion of Highfield Centre and the renovation/expansion of the Halifax Shopping Centre. A number of retailer relocations and openings were another driver of change in this market recently. RONA opened a new store in February of 2015 in Bedford, Canadian Tire was set to open a store at Bayers Lake Power Centre in the former Target space and Aritzia confirmed it would open at the Halifax Shopping Centre. In short, despite the high levels of activity registered in Halifax’s retail market over the past 24 months, leasing fundamentals have, for the most part, been fairly stable and healthy.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption

-



Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

POSITIVE INVESTMENT FUNDAMENTALS RECORDED AS ACTIVITY LEVELS REMAINED SUBDUED Retail investment fundamentals were largely healthy and stable over the past 12 to 18 months, while sales activity continued to underwhelm. In keeping with the national trend, property values stabilized, holding close to the peak for the cycle. At the same time, cap rates held near cycle lows for prime assets with strong tenant rosters. The lack of transaction evidence was a factor in the stabilization of property values. In the period between 2010 and 2012, values had consistently increased, largely due to cap rate compression. During this period, demand was very strong, as a broad range of capital sources looked to acquire retail assets in most of the nation’s larger urban centres, including Halifax. While less robust, demand in this market remained healthy in 2014 and much of 2015. Demand outpaced the supply of assets, in tracking the national trend. Generally positive market fundamentals were reported in the past year, as activity levels remained subdued. Transaction closing volume of just $10.8 million was tallied in the first half of 2015. The pace was well below that of 2014, when $54.9 million in sales was reported. The 2014 result was well below the 2012 peak of $276.5 million. Low levels of activity was the only blemish on what was a period of stability and health over the recent past.

PERFORMANCE-DRIVER FORECAST BODES WELL Performance-driver forecasts bode well for the continued health of Halifax’s retail sector. Halifax’s economy will see consistent progress over the near future, with expansion of 2.3% in 2015 and average annual growth of 1.7% through to 2019. An unprecedented number of capital projects will support employment stability and retail spending. The Irving Shipbuilding contract, Maritime Link, the MacDonald Bridge project and the $500 million Nova Centre, will generate spending and employment additions. This is expected to support the ongoing health of the region’s leasing market and income performance for investors. As a result, investment performance will remain positive. Once again, high quality assets will fall short of demand, ensuring pricing holds at the peak for the cycle. In short, performance-driver forecasts will provide a solid foundation for continued stability and positive performance in Halifax’s retail sector. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

19

HALIFAX MULTI-SUITE RESIDENTIAL REPORT STABILITY RULED THE DAY

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption



-

Lease Rates





New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Stability characterized Halifax’s purpose-built Multi-Suite Residential property rental market performance over the past year, which represented a prolonging of a trend that has been in place for the past few years. This near-term consistency was evident in the market’s supply metrics. In the spring of 2015, the CMHC reported aggregate occupancy of a solid 95.8% for the CMA, down just 10 bps from the same time a year earlier. Across the various unit sizes, the bachelor segment was the only category to register a material decline in occupancy over the same 12-month period. Moderate downward pressure on occupancy in the past year was, at least partially, the result of new construction. A total of 2,750 purpose-built rental units were completed between 2013 and 2014. A slowing trend unfolded in 2015, which alleviated some of the pressure. Construction levels remained below the long-term average, in supporting stable supply characteristics. Rental demand was consistently healthy over the past few years, due to population growth in the form of international migration. In 2014, 3,332 international migrants took up residency within the boundaries of the CMA. Historically, the majority of new arrivals have chosen to rent in their first year of residence. A similar total was forecast for 2015. Rental demand was also supported by trends in the region’s re-sale home market. For many, vendor expectations on pricing put home purchases out of reach. A byproduct of the demand supply stability of the recent past was the consistency of average rents, which supported the overriding market theme.

INVESTMENT CONDITIONS REFLECTED CYCLE MATURITY Conditions reported in the past year for Halifax’s purpose-built Multi-Suite Residential property rental investment market were indicative of the continued maturity phase of the cycle. The most active segment of the market was newer buildings between 50 to 100 units. Local investors tended to focus more on smaller and generally older assets, with which they were most familiar. Institutions looked to larger-scale investments, which were more often concrete structures and fewer in terms of availability. On balance, demand surpassed the volume of available product, in keeping with the long-term trend. The relative shortfall in available product was evident in recent transaction closing volume totals. In the first six months of 2015, a total of $19.5 million in sales was completed, down from $62.6 million for the same period a year earlier. This demand supply imbalance supported property values ranging at or near the peak for the cycle. This stabilization of values was reflected in overall investment performance. Properties contained in the IPD Index generated an annual average total return of 4.6% for the year ending on June 30th, 2015. This solid performance was income based, as capital growth eased. The leveling of the values was in keeping with the broader investment market performance of the past year.

LARGELY POSITIVE OUTLOOK FORECAST On the whole, Halifax’s Multi-Suite Residential rental market was expected to post mostly positive trends over the near term. In the rental market, rents were forecast to rise by 2.0% in each of 2015 and 2016 year-over-year, as of October. A marginal decline in aggregate market occupancy was anticipated, from the 95.8% market posted in the spring of 2015. Demand for rental accommodation was on course to strengthen in the coming months, as the region’s job market exhibited modest improvement. Over the near term, prices on re-sale homes were expected to range at the cycle peak, effectively preventing many renters from shifting to home ownership. Rental market buoyancy factored into the forecast of positive investment market conditions over the near term. Low-to-mid single digit returns was a likely near-term scenario, made up largely of income growth. In short, this market should generate continued stability over the near term.

20

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

MONTREAL ECONOMIC REPORT ECONOMIC SNAPSHOT Montreal’s economy was on pace to expand by 2.1% in 2015 according to the CBOC August forecast, after several years of below-average performance. Labour market conditions began to stabilize in 2015, after a weak 2014. Employment was expected to increase slightly, along with the CMA’s participation rate. As a result, Montreal’s unemployment rate would rise slightly, reaching 8.4% by the end of the year. On the whole, a moderately stronger economic performance was anticipated for 2015, with slightly better results anticipated over the medium term.

LABOUR MARKET SHOWED SIGNS OF STRENGTHENING Montreal CMA labour market conditions strengthened as 2015 progressed, a period when a modest number of jobs were created and the unemployment rate started to fall. In the first half of 2015, the region’s total number of employed increased by slightly more than 7,000. In the first quarter of the year, the unemployment rate fell by 60 bps to 7.5%. Subsequently, the rate increased as more people looked for work than found jobs in the second quarter. However, after a period of adjustment the rate was expected to decline once again. In the second half of the year, the manufacturing sector was expected to boost employment levels by regaining some of the positions lost over the past several years. Large-scale construction projects, like the Champlain Bridge replacement and the Turco Exchange underway, were also seen as a source of newly created jobs. By the close of 2015, Montreal’s labour market outlook had brightened.

HOUSING STARTS PULL BACK REPORTED A slowdown in residential construction was reported in the Montreal CMA recently, after a fairly strong growth in 2014. Housings starts in the Greater Montreal Area (GMA) declined by roughly 20.0% in the first half of the year. Much of the reduced activity was concentrated in the condominium sector, where a larger number of unabsorbed units remained available. In 2014, there was a total of 18,672 units in the Multi-Suite Residential starts. After the 2015 pull back, housing construction activity was expected to rebound slowly.

SOLID RETAIL SALES OUTPUT OBSERVED The Montreal CMA was poised for another period of strong retail consumption in 2015, following solid results in each of the past two years. In the first six months of the year, sales increased by 3.4%. Prior to this, average annual sales growth of 3.6% was generated over the previous 24-month period. A sixth consecutive year of healthy levels of retail sales growth was forecast for 2015. Aside from the recession of 2009, the Montreal CMA has produced retail sales growth in six consecutive years, including 2015. The positive economic forecast will result in continued strength of retail sales.

CONSISTENT ECONOMIC PERFORMANCE FORECAST The Montreal CMA will generate largely stable and healthy economic performance over the next few years, according to the most recent CBOC forecast. Economic output will expand by an annual average of 2.2% from 2016 through to the close of 2019. This will eventually pull the unemployment rate below 8.0%. Economic and labour market recovery will help boost retail sales, which will rise by an annual average of 3.5% over the forecast period. In short, the region’s largely positive economic outlook will support job growth, retail sales, and housing construction activity over the next few years.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

21

MONTREAL OFFICE REPORT RENTAL MARKET REFLECTED NATIONAL TREND

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates





New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Montreal’s office space market posted a performance that mirrored the national average over the past year. The market’s demand profile was somewhat underwhelming, with more weaknesses than strengths. On the one hand, loft space was highly sought after, while suburban and midtown buildings generated marginal interest. In the downtown business district, muted demand patterns were reported, with renewals and relocations accounting for much of the activity observed in 2015 as opposed to real growth. The relatively soft demand backdrop negatively impacted occupancy, a trend that was also observed at the national level. The market’s occupied position for all combined sub-markets dipped to a ten-year low of 86.7% by the midway mark of 2015. Occupancy erosion was punctuated by the delivery of new supply. In the second quarter of 2015 alone almost 500,000 SF of new construction was completed in the city’s Central Business District, in addition to the almost 273,000 SF delivered in the suburbs. While a portion of these buildings had been pre-leased, the excess vacancy drove occupancy lower as was the case in most markets across the country. Consequently, there was downward pressure on rents, as Montreal’s office market transitioned to a more balanced state. This mirrored the national trend, a relationship that was duplicated for most market fundamentals over the recent past.

DEMAND SOLID DESPITE PERFORMANCE SOFTENING Montreal’s office property sector continued to garner healthy investor interest over the past year, despite a weaker performance trend. Demand for wellleased properties in established nodes remained fairly healthy, as both local and national groups were active pursuers of opportunities. The availability of low-cost debt and equity capital and the long-term benefits of investing in the sector and region underscored investor confidence in this sector and market. As a result, investors were generally satisfied with market yields. There was evidence of slight upward movement in yields for riskier assets, in light of higher levels of broader property sector risk. However, when investors brought assets to market, competition among buyers was healthy. As a result, values held firm for the highest quality assets. An ongoing issue for this market has been a shortage of high quality assets, which persisted through 2014 and 2015. However, despite the healthy demand backdrop, there was some of performance softening in this market recently. Properties tracked in the MSCI Index generated an annual average total return of 3.2% for the year ending on June 30th 2015. In the previous year, a strong 8.0% total return was tallied. The most recent performance, while fairly attractive, was the product of a slight correction in capital value and a lower rate of income growth than the previous year. This evidence of performance erosion occurred against a backdrop of broadly healthy investment demand.

SECTOR RISK TO RISE Risks related to Montreal’s office sector leasing performance will increase over the near term, in keeping with the national outlook. Demand for office space will remain fairly weak. The private sector will continue to try to come to terms with an uncertain global economic, geo-political and financial backdrop. As such, expansion activity will remain below average. Ongoing public sector austerity will also erode the space demand trend. The modest demand cycle will coincide with a fairly healthy construction cycle. While tenants enjoy an increase in space alternatives, landlords will be forced to contend with lower occupancy, downward pressure on rents, and an increasingly competitive environment. Therefore, more investors and owners will face compromised income and overall investment performance. In particular, owners of older class A and B properties will be exposed to higher levels of risk over the near term, in keeping with the broader regional and national market trend.

22

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

MONTREAL INDUSTRIAL REPORT LEASING MARKET GROWTH TREND EASED Montreal’s industrial leasing market registered a measure of stabilization recently, as the more than four-year growth cycle eased. The forecast uptick in export activity failed to materialize, which translated into weaker demand for industrial space in the first half of 2015. A low Canadian dollar was also thought to have been a catalyst for economic activity and industrial demand in 2015. However, by the late summer industrial space demand was weaker than what was observed over the past few years, which caused a reduction in the amount of industrial space absorbed over the recent past. In the first half of 2015, a total of 522,000 SF of space was absorbed. This represented a slower pace than the 3.9 million SF of space was that was absorbed through all of the previous year. The weakened demand trend was also a factor in the rental rate cycle. In late 2014 and much of 2015, there was little upward pressure on average rents negotiated. Prior to this, rents had increased modestly during much of the post financial crisis period. In the past year, rents stabilized overall, although there was a modicum of upward pressure for the market’s newest buildings. Landlord’s with older properties experienced little growth in rents. The easing of this market’s growth trend was also evidenced in its development cycle. There was 687,000 SF of industrial space under construction at the midway mark of 2015 according to CBRE data, the lowest figure reported since the end of 2013. Reduced construction activity was emblematic of the broader market trend over the past year.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT MARKET RECOVERY MATURED The predominant theme for Montreal’s industrial property investment market performance of the past year was the maturing of its recovery cycle. Property values stabilized, a trend that first emerged in 2014. MSCI results provided evidence of this trend recently. Through all of 2014 and the first half of 2015, values were essentially flat after a steady run of capital appreciation between 2011 and 2013. Value stabilization was reflected in the sector’s annual average return of 7.3% for the year ending on June 30th, 2015. During this period there was an increase in capital value of just 0.4%. This most recent outcome was driven largely on income growth, a common long-term theme for this market. The maturing of the market’s capital growth cycle was at least partially corroborated by recent market activity. Cap rates in the open market were thought to have been unchanged through the second half of 2014 and much of 2015. Despite the maturing of Montreal’s industrial investment cycle, demand for high quality industrial assets remained robust. Assets offered for sale attracted multiple bidders, especially those in established nodes with longer-term income. Demand generally outdistanced supply, a trend that has been in place for the past few years. In summary, Montreal’s industrial investment sector saw the maturing of its recovery recently, in keeping with the national sector performance.

STABILITY TO CHARACTERIZE NEAR TERM Conditions in Montreal’s industrial sector will gradually stabilize over the near term. Moderately healthy economic growth will register in terms of equally moderate demand for industrial space. The CMA’s manufacturing, export, and warehouse sectors will be the focus of this demand. In turn, occupancy will slowly stabilize, a trend that will be supported by an extended reduction in new construction volume. Rents will begin to stabilize for older generation space as the market settles. For owners and investors, leasing market stabilization will eventually result in income stability ensuring positive investment performance overall. Property values will hold at current levels, barring an abrupt change in the financial or economic backdrop. High quality assets will remain in short supply, resulting in competitive bidding scenarios. The lack of variation in the bidding backdrop will be in line with the broader market theme of stabilization over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

23

MONTREAL RETAIL REPORT EVIDENCE OF LEASING MARKET HEALTH OBSERVED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-

-

Net Absorption

-

-

Lease Rates

-

-

New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

The health of Montreal’s retail leasing market was evident in its recent performance. On the supply-side of the ledger, recent market surveys indicated the market’s occupancy levels remained strong over the recent past. According to CBRE occupancy data, average occupancy ranged between 95.3% and 96.0% for three different sub-classes of Montreal’s built retail inventory at the midway mark of 2015. As was the case over the past couple of years, regional centres continued to post above-average occupancy for the market. The Power Centre subset of properties also posted above-average occupancy at 95.8%, reversing the recent trend. Overall, Montreal’s retail occupied position matched the national average at 95.6%. The health of Montreal’s retail occupancy level was supported by a conservative development cycle. A modest 300,000 SF of new supply was forecast for completion in 2015, following conservative totals of 720,000 SF and 783,000 SF in 2013 and 2014 respectively. These relatively small totals represented less than 0.3% of the market’s total existing inventory. This helped buoy market stability. Additionally, the health of Montreal’s retail leasing market was reflected in rental rate trends. On average, net rents increased marginally over the past year to 18 months for prime locations with little competitive vacancy. In most locales, tenants were still able to source vacant options and avoid sharper rental rate inflation. However, modest rental rate growth observed recently was yet another indicator of the market’s broader leasing market health.

INVESTMENT PERFORMANCE WAS MIXED Montreal’s recent retail property investment performance was somewhat mixed. From an overall performance standpoint, a positive total return of 3.5% was generated for properties tracked in the MSCI Index for the year ending on June 30th, 2015. On the one hand, the income component of the performance was positive and healthy. Whereas the capital component was eroded by 130 bps. Moreover, the overall return at 3.5% represented a second consecutive period of weakened performance, after a peak of 18.8% in 2013. Regardless, this year’s performance rested in positive territory. Despite the downward trend for investment returns, demand for high quality asset acquisitions remained robust. National and local groups were attracted to the long-term strength of this market, supported by access to low cost debt and equity funds. Ongoing demand strength resulted in record high annual sales volume of $1.9 billion for 2014, for assets with a sale price minimum of $1 million. Though this pace proved difficult to match in 2015, it was more a factor of limited supply than weaker demand. In summary, this market posted a mixed investment performance over the recent past, one which included positive demand characteristics, modest returns, and high levels of activity.

REPEAT OF RECENT TRENDS FORECAST Montreal’s retail sector near-term performance will feature many of the same characteristics recorded over the past year. The maturing of its investment cycle recovery will continue. Demand for core assets will remain healthy, holding property values at similar levels over the past year. This consistency will also hold true for cap rates. There will be some softening of leasing fundamentals, due in part to national trends. The supply of available assets will once again fall short of low interest rate-supported demand. Some owners will feel pressure from the ever-changing retailer sector, with some stores struggling to remain relevant. On the whole occupancy levels will hold close to those rates reported in the past year, resulting in modest upward pressure on rents for the most sought after locations. A conservative development cycle should continue to support leasing market stability. In short, Montreal’s retail sector will repeat most performance patterns observed in the recent past over the near term.

24

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

MONTREAL MULTI-SUITE RESIDENTIAL REPORT SLIGHT EROSION OF FUNDAMENTALS TALLIED GMA Multi-Suite Residential property rental market fundamentals suffered through a period of minor erosion over the past year. A disappointing level of demand was the cause of the erosion, while the overall health of the market remained largely intact. Demand eased as a result of a marked reduction in international migration to the region in 2014. In total, 22,050 individuals arrived, down from 29,143 in the previous year. While still a solid result, there was a modest softening of rental demand. Demand for purpose-built units was reduced due to competition from the secondary market. Specifically, more unabsorbed and generally newly built rental condominiums became available in 2014 and 2015. Finally, a fairly soft labour market was also a factor in weakened demand for rental accommodation in this market. The easing of the demand cycle was a factor in the erosion of supply fundamentals for the period ending at the midway mark of 2015. The CMA posted an occupancy rate of 96.7% in the spring of 2015, down 60 bps from 97.3% from a year earlier. This was in line with the provincial performance. The one-bedroom market segment witnessed the sharpest drop in occupancy over the period, falling from 97.3% to 95.8%. Even with the recent occupancy erosion, the GMA possessed one of the nation’s strongest occupancy profiles. However, the market's downward occupancy trend of the past two years prevented most landlords from raising rents. The minor erosion of occupancy recorded recently mirrored the market’s overall performance.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption

-

-

Lease Rates

-



New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

RELATIVELY HEALTHY INVESTMENT TRENDS OBSERVED Montreal’s Multi-Suite Residential purpose-built rental property sector registered mostly healthy investment market fundamentals over the past year. In extending the current phase of the cycle, a fairly attractive total return of 3.9% was posted for the year ending on June 30th for MSCI-indexed assets. This performance was wholly income-driven, as the capital component suffered a setback of 0.6% over the period. This was in line with the national trend across the major asset classes, which witnessed a slight decline or stabilization of value. Despite the weaker performance overall, this market continued to generate strong investor interest. The continued low interest rate backdrop and competitive lending environment ensured demand surpassed the supply of high quality assets for sale. The limited number of institutionalgrade assets brought to market were highly sought after. Consequently, values ranged close to the cycle peak through to the second half of 2015. Despite the fact that demand surpassed supply, transaction closing activity was fairly robust. In the first half of 2015, a total of $341.2 million in sales volume was recorded. Though down from the 2012 peak, volume has been strong over the past two and a half years. This market’s recent solid liquidity trend was a component of what has been a period of healthy investment performance.

SOLID RUN OF HEALTHY PERFORMANCE TO PERSIST The forecast for the GMA’s Multi-Suite Residential purpose-built rental market performance drivers is indicative of continued sector buoyancy over the near term. The CMA will generate economic growth of roughly 2.2% annually between 2016 and 2019. This CBOC forecast will, in turn, support job growth and rental demand. International migration to the region is expected to continue to slowly rise, after a sharp drop in 2015, which will increase demand. The gradual demand recovery will positively impact supply conditions, which should prolong the market’s record of strong occupancy. Rents will hold at least at current levels, which will support income performance for owners and investors. Rental market strength will continue to attract investors to the country’s largest and arguably deepest and most stable rental markets. Consequently, another period of investment market health is likely. In conclusion, the market will remain strong in the near future. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

25

OTTAWA ECONOMIC REPORT ECONOMIC SNAPSHOT Slow growth characterized the Ottawa-Gatineau CMA economic performance of the recent past. Sub-par results in early 2015 punctuated the CBOC’s growth forecast of a less than 1.0% advance for all of 2015. Federal government austerity measures factored into what will likely be a fourth consecutive year of weak results. Employment growth was expected to follow the economic trend in rising less than 1.0% in 2015. On a more positive note, retail sales were on pace to expand by 2.6%.

ECONOMIC EXPANSION RATE REMAINED MUTED The Ottawa CMA continued to register sluggish economic results in 2015, following average annual growth of just 0.4% from 2012 through to 2014. While some sectors of the economy continued to suffer, others exhibited resilience. The region’s tech sector, for example, reported relatively positive news throughout 2015, in terms of hiring and activity. In addition, output was expected to rise in the non-residential construction and retail business sectors. However, on the whole, Ottawa’s economic growth performance remained generally weak.

WORST MAY HAVE PASSED FOR LABOUR MARKET There was some evidence that suggested the worst may be over for OttawaGatineau’s labour market. When the results were compiled, a modest increase in total employment of 0.7% was forecast year-over-year as of the midway mark of 2015. Public sector cutbacks appeared to have slowed, with most announced reductions in employment having already been accounted for. For all of 2015, total employment was projected to rise by only 0.3%, after a modest increase of 1.8% in 2014. This came after a 2.0% dip in total CMA employment levels in the previous year. The region’s unemployment rate was believed to have stabilized in 2015, after reaching a cycle high of 6.7% last year. This would have marked the highest unemployment rate dating back to 2005. Hopefully this was also a sign that the worst was over for the OttawaGatineau labour market.

RESIDENTIAL CONSTRUCTION CORRECTION PERSISTED Ottawa’s residential construction market continued to flounder in early 2015, as housing starts continued to decline. In 2015, starts were forecast to dip once again, after slides of 3.4% and 9.7% in 2013 and 2014, according to the CBOC. The slowdown in construction activity was concentrated in the condominium sector, given evidence of oversupply.

GRADUAL RECOVERY FORECAST FOR CAPITAL REGION Gradual recovery is forecast for the Ottawa-Gatineau region’s economy and labour market over the near term. In 2016 and 2017, regional economic output is forecast to increase by an average of 1.8% annually. Subsequently, the CBOC is projecting similar growth patterns through to the end of 2019. A stronger economy will support recovery in labour market conditions. The unemployment rate will steadily fall over the forecast period, from the yearend 2015 rate of 6.8%. By the end of 2019, a rate of 5.6% is projected. Between 2016 and 2019, employment will increase by a modest annual average of 1.4%, according to the CBOC. Finally, housing starts will also rise markedly in each of 2016 and 2017, with annual average growth in units started of 5.7%, before a stabilizing trend unfolds. In short, the outlook for the CMA’s economy and labour market is moderately healthier than the previous period.

26

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

OTTAWA OFFICE REPORT LEASING MARKET CHALLENGES PERSISTED Ottawa’s office leasing market continued to exhibit weakness over the recent past, in keeping with the current phase of the cycle. The Federal government’s program of space rationalization and overall austerity continued to have a negative impact on the demand cycle. However, there was evidence to suggest that the trend toward reduced public sector space usage has eased. In the private sector, technology tenants showed a propensity to expand in several cases, partially offsetting low levels of public sector expansion. On balance however, demand fell short of supply in 2014 and much of 2015. As a result, aggregate occupancy continued to fall, although the decline rate was less than in the previous year. The market’s occupied position of 89.9% at the midway mark of 2015 was down 50 bps from year end 2014 and 120 bps year-over-year, according to CBRE statistics. The midyear rate was a low point dating back to 2008. The downward trend was buoyed by the introduction of newly built space. In 2014, a total of 713,350 SF of new construction was delivered to the market, with a further 28,000 SF in the first six months of 2015. Of the total, just short of 60.0% was in the Central submarket. Reduced occupancy impacted lease negotiations. On average, landlords were forced to be more aggressive in offering incentives and lower rents. This challenged owners to maintain income performance, against a backdrop of the continued erosion of leasing fundamentals.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption



-

Lease Rates



-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

CONSISTENCY CHARACTERIZED INVESTMENT TRENDS Trends reported in Ottawa’s office investment market over the past year were consistent with patterns recorded over the previous period. From a performance standpoint, a total annual return of 4.9% was reported for properties tracked in the MSCI Index for the period ending at the midway mark of 2015. This outcome was identical to the previous 12-month period. Once again there was capital depreciation of 1% posted, while the income component remained stable and positive. This two-year run of capital loss contrasted the balance of the post-recession period when values steadily increased. Ottawa’s institutional-grade assets were consistent in their ability to generate healthy income growth, even with the erosion of leasing fundamentals overall. This dynamic ensured investors continued to scour the market for investment opportunities. The long-term presence of the Federal government as the market’s largest occupier of space was also a draw. In a broader sense, property values stabilized at the peak for the cycle, with cap rates holding at the cycle low. In keeping with the national trend, a limited number of assets were brought to market for sale. As a result, transaction volume was relatively modest. In the first half of 2015, a total of $134 million in sales was completed. Limited closing volume was posted in each of the past two years. This consistency was observed for most market trends over the same two-year period.

DON’T EXPECT BIG CHANGES Performance patterns observed in Ottawa’s office sector over the recent past will be repeated in the upcoming term. In the rental market, demand will remain moderately positive. The Federal election will delay decision-making in terms of expanding or contracting programs and space requirements. At the same time, global economic uncertainty will reduce private sector growth. The modest economic growth outlook will also act as a buffer against significant space demand shifts. Therefore, conditions will remain fairly balanced, resulting in modest pressure on new lease rents. For the most part, investors will continue to enjoy contracted rental growth in existing assets. The continued maturing of the investment cycle will ensure values hold at current levels, unless an exceptional asset is offered for sale. In short, material variation on current sector themes over the near term is unlikely.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

27

OTTAWA INDUSTRIAL REPORT EVIDENCE SUGGESTED RENTAL MARKET STABILITY

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates

-

-

New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

A number of factors indicated stability was the overriding performance theme in Ottawa’s industrial leasing market over the past year. Smaller tenants continued to drive market activity, especially those with a footprint of less than 10,000 SF. This segment of the region’s tenant base has been the key driver of leasing activity over the long term. While demand characteristics were consistent, so was the market’s construction cycle. In the first half of 2015, 196,000 SF of new construction was completed and readied for occupancy, all of which was build-to-suit in format. Previously, 260,000 SF of new supply was completed in all of 2014, most of which was also built to specifications. Tenants in this market have struggled to source appropriate space in the existing building stock for several years. The overall theme of consistency was also a factor in supply-side patterns in the existing inventory of industrial buildings. Occupancy levels ranged within a fairly narrow bandwidth over the past few years. At the midway mark of 2015, CBRE reported aggregate market occupancy of 93.0% for the almost 30 million SF of inventory tracked. While the lowest of the past few years, the market’s occupancy rate has ranged between 93.0% and 95.0% dating back to 2010. Supply-side stability factored into rental rate patterns in the past year. On average, asking rents continued to hover around the peak for the cycle. In some cases, landlords offered incentives to entice tenants. At the same time, smaller tenants looked for finished space to cut costs. However balance on rents were largely unchanged against a backdrop of recent rental market stability.

LITTLE VARIATION ON RECENT INVESTMENT THEMES There was minimal variation in Ottawa’s industrial sector investment themes reported over the past year, mirroring the national trend. From a performance point of view, returns remained attractive. Properties tracked in the MSCI Index posted an annual average total return of 7.6% for the year ending on June 30th, 2015. This was down slightly from the 8.1% result of a year earlier. During both periods, slightly weaker results were tallied for the income and capital components. While down from the 2013 peak, the recent result marked a fifth consecutive period of healthy performance. Not surprisingly, this record of investment performance resulted in healthy investment demand characteristics. Local and national groups looked to invest in this market. There was more debt and equity capital available to invest than properties available to acquire. This dynamic was reflected in transaction volume, as a modest $80.6 million in sales was recorded. While up from the pace of the previous period, it was markedly lower than the 2012 peak. Demand pressure produced a modest upward path for property values, although cap rates were largely unchanged. This slight shift was emblematic of the broader market theme of stability observed over the past year.

SECTOR RISK WILL REMAIN LOW Performance-driver forecasts are indicative of the continued health of Ottawa’s industrial property sector over the near term. The local economic outlook is one of steady and slow economic growth. This will support demand for industrial space within the market’s dominant small tenant segment. In combination with a conservative development cycle, supply characteristics will remain tight. Occupancy will once again range close to the 95.0% mark. The demand supply dynamic will support current rental averages, which are close to the peak for the cycle. For investors this will mean solid income performance and stable values. The long-term health of the sector will result in strong demand for new acquisitions. However, the volume of offerings will once again fall short of demand. On the whole, the demand supply backdrop, both from a leasing and investment point of view, will support the ongoing health of Ottawa’s industrial sector.

28

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

OTTAWA RETAIL REPORT LEASING MARKET RESILIENCE WAS EVIDENT Ottawa’s retail rental market sector displayed a measure of resilience over the past year, despite the fact that a number of retail outlets closed their doors. Evidence of the market’s resilience was contained in recent occupancy patterns. Aggregate occupancy rested at 95.6% at the end of the first half of 2015. In matching the yearend 2014 rate, occupancy remained at the highest point dating back to mid-year 2008. This market’s occupancy trend was even more impressive when the addition of newly built space was considered. In 2014, close to 700,000 SF of new supply was completed, with a further 360,000 SF scheduled for completion by the summer of 2015. Leasing market resilience was exhibited during a period when several significant store closures took place. The most impactful of these was the closure of five Target locations, including at St. Laurent and at Bayshore. In addition: Holt Renfrew, Sony, Mexx, and Future Shop locations closed. Despite these closures, average rents held at the peak for the region’s better malls. In short, Ottawa’s retail rental market exhibited a material level of resilience over the past year, which supported landlord income growth and stability.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT TRENDS TRACKED NATIONAL PATTERN Trends observed in Ottawa’s retail property investment market over the past year were consistent with the national asset class average. For the second consecutive year Ottawa’s retail sector investment performance trended lower, in line with the national return trend. Ottawa’s retail sector generated an annual average total return of 3.9% for the 12-month period ending on June 30th, 2015, down 360 bps from the previous year. A similar downward return pattern was posted at the national asset class level, with a dip of 440 bps. The downward path for returns signaled the maturing of the capital growth cycle that persisted in the post financial crisis period. The most recent return result was largely fueled by income growth, both for Ottawa and at the national asset class scale. Despite the maturing of the capital cycle, core property values held close to the peak for the cycle in Ottawa and for the asset class in most markets across the country. This was the result of fairly robust investor demand from local and national groups. A similar dynamic played out for the broader asset class in the past year. To some degree, strong demand for core retail assets was evident in transaction closing volume. A total of $38.9 million in sales was tallied in Ottawa and $2.2 billion nationally in the first half of 2015. While these figures were low, it was not because of any shortfall in demand. Rather, sales were limited by product availability. Once again, the local trend was consistent with the national performance.

SOLID FUNDAMENTALS FORECAST The near-term outlook for Ottawa’s retail sector will see most trends reported over the past year repeated. Supply conditions will be generally unchanged, with occupancy holding close to the 95.0% threshold. While the market will see the continued closure of stores, much of the resulting vacancy will be offset by new store openings announced recently. The health of this market’s occupancy profile will be buoyed by what will be a fairly modest phase of the current development cycle. There was 586,000 SF of new supply scheduled for completion, over the 12-month period ending at mid-year 2016, according to CBRE data. The largest of these will be the 309,000 SF Kanata West Centre developed by Taggart, which will be anchored by a roughly 70,000 SF Cabela’s. Strong occupancy fundamentals will ensure rents hold at the peak for the cycle, with the potential for upward pressure for the market’s space. Forecast performance consistency in Ottawa’s retail leasing market will also be the overriding investment theme. Demand will continue to outdistance supply, as values hold close to the peak. Income growth will drive performance, which will attract investment capital. In short, Ottawa’s retail leasing and investment performance will stabilize over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

29

OTTAWA MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET HEALTH HELD FIRM

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates





New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Ottawa’s purpose-built Multi-Suite Residential property rental sector registered a generally positive performance over the past year. Overall, strong demand patterns were observed during the second half of 2014 and much of 2015. The local labour market showed little in the way of improvement, which acted as a barrier for renters looking to acquire their first homes. According to the CMHC, healthier employment prospects for young people in the 15-24 age range boosted rental demand. In addition, international migration volume also supported rental demand, although recent activity was below the 2012 peak. To a large extent, international migration offset losses due to inter-provincial migration. For the most part, there was a sufficient supply of vacant units to meet demand over the past year. The combination of new supply and a slight increase in existing vacancy produced a fairly balanced market. In its spring 2015 survey, the CMHC reported an occupancy rate of 97.2% for the Ottawa CMA, which represented a 40 bps rise year-over-year. An increase in rental condominiums also helped satisfy demand. The demand supply dynamic in the purpose-built Multi-Suite Residential property market resulted in higher average rents. According to the spring 2015 CMHC survey, all unit size categories posted year-over-year increases in average same-sample rents. This growth was emblematic of the overall health of Ottawa’s Multi-Suite purpose-built residential rental market over the past year.

INVESTMENT MARKET WAS STABLE AND ACTIVE Ottawa’s purpose-built Multi-Suite Residential property investment market continued to exhibit stable fundamentals over the past year, in line with the broader sector. Demand for institutional-grade assets was fairly robust, with REITs, pension funds, institutions and private capital, eager to take or increase their positions in this market. This confidence was partially fueled by market yields that satisfied their performance objectives. For many, the shortfall in product availability was a challenge. Despite this predicament, there was a fairly robust level of transaction closing activity reported. In the first half of 2015, a total of $183.3 million in sales was recorded, which represented a similar pace to the past two years. On the whole, the demand supply imbalance resulted in fairly intense competition and aggressive bidding on the part of purchasers when assets were brought to market. This, in turn, supported modest upward pressure on value in some cases. This was arguably the only change in market activity in what was otherwise a stable and active market performance over the past year.

GRADUAL IMPROVEMENT FORECAST The outlook for Ottawa’s purpose-built Multi-Suite Residential property rental market is one of gradual improvement over the near term. The expectation of a slightly more robust economic growth performance will result in slightly stronger demand for rental accommodation. The Ottawa CMA’s economy will see output edge higher, with expansion of 1.3% in 2015, after a sluggish 0.6% in 2014, according to the CBOC. In 2016, the growth rate will close in on the 2.0% threshold. This will attract migrants looking for work, many of whom tend to rent in their initial year of residence. Increasingly, young workers will venture out of their family homes looking for an apartment, due to the forecast in youth employment. The healthier rental demand outlook will be reflected in rental market fundamentals. Market occupancy will rise in 2015 and 2016, resting at roughly 97.5% by the end of the forecast term, having hit a four-year low of 97.2% in October of 2015. The rise in occupancy will translate into upward pressure on monthly rents and continue to justify new supply. Rental market conditions will continue to attract investment, as income stability and growth draw a range of investors. This will, in turn, ensure property values hold at the peak. In summary, Ottawa’s rental fundamentals will gradually strengthen over the near term, keeping pace with the local economy.

30

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

TORONTO ECONOMIC REPORT ECONOMIC SNAPSHOT Toronto’s economy was expected to register continued expansion in 2015, after a fairly stellar 2014. Output was forecast to improve by 2.6% over the year. Domestic and U.S. demand for goods assembled and produced in the Greater Toronto Area (GTA) was billed as a key to the healthy economic growth forecast for this year. In addition, it was expected to drive increased employment, retail sales, disposable income and housing starts. In short, the outlook was broadly healthy.

ECONOMIC OUTPERFORMANCE PROJECTED Relatively speaking, the Toronto CMA continued to generate fairly healthy economic growth over the near term. Output, measured by GDP, was expected to rise by 2.6% over 2015, according to a recent CBOC forecast. Over the preceding three-year period, annual economic expansion averaged 2.4%. Expansion peaked at 3.1% in 2014. The CMA was generally expected to be one of the growth leaders over the near term, in light of the energy sector slowdown in Alberta. U.S. demand for products assembled and/or produced in this market was key to the strong economic performance of the recent past.

GRADUAL IMPROVEMENT IN LABOUR MARKET NOTED The Toronto CMA labour market showed modest signs of improvement recently, after a period of weakness in the second half of 2014. In the first quarter of 2015, total CMA employment increased by roughly 23,000. This drove the unemployment rate down to 7.3%, from 8.0% recorded just three months earlier. By the midway mark of 2015, total employment was expected to rise by a further 72,000 quarter-over-quarter. In doing so, the unemployment rate would be yanked down below the 7.0% mark, according to the August 2015 CBOC forecast. Labour market trends were expected to strengthen through to the end of 2015.

RETAIL SALES PACE BEGAN TO EASE Signs of a slowdown in retail sales growth were reported in the late stages of 2014 and early 2015. There was a meagre 0.5% growth reported in the final three months of 2014 and a contraction of 1.1% in the first three months of 2015, according to CBOC records. This marked a substantial reduction in the annualized sales growth with 6.2% reported for all of 2014. The slowdown was linked to lower levels of consumer confidence related to the global economic outlook. As well, Canadian consumers were increasingly focused on saving rather than spending during much of 2014. These two trends more than offset any potential gains in consumer purchasing power due to lower energy costs.

OUTLOOK IS BROADLY POSITIVE The outlook for the Toronto CMA economy is largely positive, rooted in a relatively robust growth trend. Ongoing U.S. demand for goods produced in the region should drive an economic growth of 2.6% in 2015, followed by an annual average of 2.7% over the subsequent four-year period. This will support steady improvement in labour market trends, pulling the unemployment rate close to 6.1% by the end of the forecast period. Employment will increase annually by between 1.5% and 2.0%. At the same time, retail sales will increase by 3.5% annually, according to the CBOC forecast. In short, the Toronto CMA will register material improvement in its economy, labour market, and retail sales patterns over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

31

TORONTO OFFICE REPORT RESILIENCE CHARACTERIZED LEASING PERFORMANCE

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption



-

Lease Rates





New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

The Greater Toronto Area (GTA) office space market was characterized by its display of resilience over the past year. Occupancy characteristics remained fairly healthy over the past year, despite the potential for significant fallout as a result of a robust development cycle. For the most part, occupancy levels fell modestly, ending the second quarter of 2015 below the 10.0% mark. Depending on the survey, average occupancy for the entire GTA market was pegged between 89.0% and 92.0%. The health of the market’s occupancy profile was a reflection of its resilience, given the addition of roughly 2.5 million SF of new supply for the year ending at the midway mark of 2015. The reason for the resilience was a surprisingly strong demand trend. There was a clear preference on the part of tenants to move to the newly built towers, resulting in significant backfill concerns for landlords of older buildings. This was particularly true for the downtown area, as tenants relocated to the new South Core buildings. On balance, the downtown sub-market remained relatively tight overall, while the suburbs saw more acute decreases in occupancy over the past year. The resilience of the demand backdrop resulted in fairly healthy rental rate trends. The market’s newest and highest quality buildings continued to command premium rents. However, there was some erosion of rents reported for nodes with elevated vacancy and in circumstances where large blocks of space were available downtown. On the whole, the GTA office market exhibited a surprising level of resilience over the past year, a trend that should hold true through to the end of 2015.

MATURE PHASE OF CYCLE IMPACTED RESULTS The GTA office sector posted generally positive investment trends over the past year, as the mature phase of the recovery cycle continued. MSCI Index returns over the period provided evidence of positive investment performance. A total average return of 7.5% was recorded for properties tracked in this market, for the 12-month period ending on June 30th, 2015. While attractive, the performance marked a third consecutive decrease since the 15.5% peak of 2012. Relatively speaking, the result was second only to Winnipeg amongst the nation’s major office markets. The maturing of the current phase of the cycle was evident when the recent annual return was broken down into its income and capital components. Capital growth was modest, which was a reflection of the maturing of the property value cycle, a trend observed across the major asset classes nationwide. There was a modicum of income stability, which continued to form part of the rationale for investing in this market and sector. Stable and healthy income performance was, in part, a driver of healthy demand for GTA office property over the past year. There was no shortage of willing investors looking to increase their exposure to this market, when core assets were offered for sale. The strength of the demand cycle was evident in aggressive bidding observed when core assets were offered for sale. However, more caution was exercised for higher risk assets. This was in line with the maturing of the current phase of the cycle.

THIS MARKET WILL BE TESTED The GTA office sector will exhibit further resilience over the near term. A relatively healthy economy will support office space demand and prevent a sharp fall in occupancy levels. The decline will be modest, which will erode rents in older buildings with elevated vacancy. A re-pricing of these buildings will be unavoidable. The delivery of close to 7 million SF of new supply will be a significant obstacle to overcome. However, the negative impacts will be at least partially offset by the eventual conversion of older buildings to alternate uses. To be sure, leasing fundamentals will weaken. But, the long-term outlook remains positive. Therefore, investors will continued to increase exposure to this market. In short, this market will exhibit resilience over the near term, until it stabilizes over the medium-to-long term.

32

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

TORONTO INDUSTRIAL REPORT GROWTH WAS OVERRIDING THEME Growth has been the overriding theme in the GTA industrial leasing market over the past year, in support of strong leasing fundamentals. The growth theme was evident in the market’s development cycle. Eight million SF of new supply, or 1.1% of inventory, was completed in the 18-month period ending at the midway mark of 2015. This expansion was the result of growth within the market’s occupier and tenant base. In particular, larger warehouse and distribution companies increased their footprints. Many were forced to pay higher rents in newly constructed projects, which were built to modern standards in terms of clear height, shipping configurations, access to transport networks and customers. As was the case over the past few years, consumer goods and fulfillment centre users made up a significant portion of this growth, in line with the medium-term trend. Demand was also strong within sectors that were tied to the U.S. recovery and those that were able to benefit from the low Canadian dollar. The overriding theme of expansion in this market positively impacted leasing fundamentals. The market’s occupied position at the midway mark of 2015 rested slightly below than 96.0%. This occupancy level was the highest on record dating back to the mid 2000’s. The strength of the market’s occupancy profile resulted in upward pressure on rents, particularly for new developments in the western portion of the market. Pressure was also evident in GTA East, GTA North, and GTA Central. Rental pressure was in keeping with the broader market theme of positive rental fundamentals

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption





Lease Rates





New Supply

-



*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

SOLID RESULTS RECORDED IN INVESTMENT MARKET The GTA industrial sector registered generally positive investment market performance over the past year. An attractive return was posted for properties tracked in the MSCI Index. The total annual return of 7.3% registered for the 12-month investment horizon ending on June 30th, 2015, represented a repeat of the previous year’s result. Once again, material growth was posted for the income component, along with marginal capital growth. Demand for investment product outpaced supply. Investors were generally of the opinion that the sector had more performance upside than the other major assets classes. Therefore, both national and local groups tried hard to increase their exposure to the country’s largest and most diverse market. Not surprisingly, high quality asset values remained at the peak. On average, there was evidence of modest upward pressure on values for both core and higher risk assets. The demand pressure resulted in healthy sales activity, with $986.5 million in transaction volume reported for the first six months of 2015. This pace was similar to the previous year. The strength of the demand backdrop was in support of largely solid investment trends in this market over the recent past.

GROWTH CYCLE TO CONTINUE The growth cycle underway in the GTA industrial sector will continue over the near term, given a positive performance-driver forecast. Toronto’s economy is projected to expand by 2.6%, according to the latest CBOC forecast. This should support demand for industrial space, along with low interest rates, the U.S. recovery and a low Canadian dollar over the near term. Retail activity will also drive the movement of goods and interest in vacant space, resulting in tight supply conditions. Modest upward pressure on rents and values will also be a byproduct of the continued growth cycle. Leasing market strength will be a significant driver of investment demand. Investors will once again look to capitalize on perceived, and what may be actual, performance upside. Low interest rates will be a supporting element in demand. The volume of available product will once again fall short of the supply of investment capital. Therefore, upward pressure on value is not out of the question. In short, current phases of the investment and leasing cycles will be prolonged for at least the next six to 12 months. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

33

TORONTO RETAIL REPORT PERFORMANCE DEFIED SECTOR RHETORIC

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates



-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Generally strong leasing market fundamentals were reported in the GTA retail sector over the past year, despite the documented struggles of some retailers. Supply-side fundamentals were generally strong, according to CBRE statistics. At the end of the second quarter of 2015, the GTA occupied position stood at 94.9%. This was up 80 bps from the same time a year earlier and was the highest rate reported since the end of 2006. The tightness that has been in place in this market for some time has given rise to a fairly conservative development cycle. In total there is 1.5 million SF of new space scheduled for completion in 2016, which equated to just 1.4% of the total market inventory. This low total however, masks the development industry’s confidence in this market that was evident in the past year. There was a plethora of long-term projects and expansions to existing high-profile malls underway. Most the city’s largest malls were undergoing major expansions, for delivery after 2016. This market’s demand supply dynamic held average rents for highly sought after locations at the peak for the cycle. There was some downward pressure on smaller strip centres and new format centres where there was a slight softening reported. The recent leasing market strength in the GTA was surprising given the steady stream of bad news for the sector. Numerous closings and downsizings took place over the past year, including Target. Still others struggled with the low Canadian dollar and its impact on their expenses. Online shopping has also impacted bricks and mortar sales. Despite these challenges, the GTA near-term rental market performance remained buoyant.

HEALTHY RUN OF SOLID RESULTS CONTINUED The GTA’s run of healthy investment fundamentals continued over the recent past, as the recovery cycle matured. The sector posted another attractive return for properties contained in the MSCI Index. A total average annual return of 7.9% was registered, which represented a sixth consecutive year of healthy performance. The capital growth cycle eased, while the income component posted material growth of 4.4% over the period. It is no secret that demand for the core assets in the country’s largest market remained strong and stable. This helped support property values that were generally at the cycle high. Investors were often challenged to source available assets, given many are in the hands of institutions who typically hold real estate for the long term. Despite limited access to the GTA’s best malls, transaction closing volume was fairly robust. In the first half of 2015, a total of $1.1 billion in sales was closed, according to CBRE figures. It should be noted however, that activity levels were below those recorded during the most recent market peak. While there was plenty of evidence to suggest that the current investment cycle had entered maturity, the market continued to generate healthy fundamentals including strong activity levels.

MARKET WILL CONTINUE TO ADVANCE The GTA retail sector will continue to progress over the near term, against a backdrop of change. As the country’s deepest retail market, the GTA will attract retailers looking to capitalize on a sound economy and positive demographic trends. Therefore, leasing market fundamentals will remain strong, with the potential for a minor softening. Retail sales are projected to expand by an annual average of 3.5% from 2015 to 2019, resulting in solid sales performance for many stores. The sector will navigate significant change over the forecast period, as a result of trends like e-commerce and changing demographics characteristics. However, the GTA will remain a preferred location for new retailers to the country and expansions of existing retail chains. As a result, leasing fundamentals will continue to impress investors looking to place capital in the GTA retail sector for the foreseeable future.

34

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

TORONTO MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET RISK BARELY REGISTERED There was little evidence of material risk in the GTA purpose-built Multi-Suite Residential property rental market over the past year. Demand remained generally healthy. Migration patterns were supportive of rental demand. The total number of new arrivals in 2014 remained higher than the long-term average, despite a sharp dip from the previous year. The total was expected to rise in 2015, as employment prospects improved, as previously, migrants headed west to gain employment in the energy sector. Rental demand was also supported by housing market trends in the GTA. Prices continued to rise in 2014 and 2015, which reduced affordability for many renters who were forced to continue to rent. The health of the GTA rental demand backdrop resulted in significant supply imbalance over the past year. Occupancy of 98.2% was reported in the CMHC’s spring 2015 survey, representing a 10 bps increase year-over-year. The rate was 30 bps higher than the national average. The purpose-built rate was achieved in spite of an increase in the number of designated rental condominiums. The lack of a purpose-built rental development cycle was also a factor in the supply imbalance of the past several years. The tightness that characterized the market over the past year resulted in continued growth in average rents achieved. As a result, landlords were able to command higher rents on average, which was another indication of the absence of material risk in the GTA purpose-built Multi-Suite Residential property rental market over the past year.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-

-

Net Absorption

-

-

Lease Rates





New Supply

-



*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

LITTLE VARIATION ON EXISTING INVESTMENT THEMES The GTA Multi-Suite purpose-built residential rental property investment market exhibited the maturing of the current phase of the cycle year-overyear. Property values showed signs of stabilization in 2014 and 2015. Prior to this, values steadily increased in the post-financial crisis era. Cumulative capital growth of 23.5% was tallied over a 24-month period ending June 30th 2015 in the MSCI Index. For the 12-month period ending June 30th 2015 this market registered an average total return of 10.8%, according to MSCI Index data. This was supported by a 6.2% increase in capital value. Strong performance continued to drive healthy investment demand, which has been a fixture in the market for several years. There was an abundance of low-cost debt and equity capital destined for this market from a variety of sources. Investors continued to exhibit high degrees of confidence in the sector and market, resulting in aggressive bidding, cycle low cap rates and cycle high values. The volume of funds available outdistanced the supply of available product. Regardless of this fact, there was a strong level of transaction closing activity, culminating in $847.2 million in sales volume in the first half of 2015. This activity indicated investors believed they could still achieve their performance objectives, during the mature phase of the investment cycle.

DOWNSIDE RISK LOW FOR THE NEAR TERM There is little evidence to suggest material downside risk for the GTA’s MultiSuite Residential property purpose-built rental market over the next 12 months. For one, the region is expected to outperform in terms of economic growth. The resulting bolstering of labour market conditions bodes well for rental demand. Migrants will be drawn to the GTA by relatively superior job prospects, with many renting upon arrival. The GTA’s demand profile will push occupancy and rents higher. In turn, owners of assets in this market will be treated to solid income performance, which will support positive returns and upward pressure on values. Investors looking to capitalize on favourable market performance will once again find they are challenged with a shortage of product. Competition for available good quality assets will remain fairly intense as a result. In short, barring a significant change in either the global economic or financial outlook, this market will experience little downside risk over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

35

WINNIPEG ECONOMIC REPORT ECONOMIC SNAPSHOT By the fall of 2015, the Winnipeg CMA economy was on track for a fourth consecutive year of growth in excess of 2.0%. The CBOC forecast expansion of 2.6% for 2015 will mark a seventh consecutive period of progress. At the same time, the rate of expansion was expected to outpace the national average for a fourth year in a row. To date, the medium-term advances had failed to have a materially positive impact on the region’s labour market.

LABOUR MARKET PROGRESS WAS TEPID Labour market advancement has been largely modest over the past few years, despite what was a period of healthy economic growth. In 2013 and 2014, total CMA employment expanded by an annual average just shy of 0.2%. This followed a solid 3.1% step forward in 2012. Between 2012 and 2014 the region’s unemployment rate initially edged 30 bps higher to 5.8% and then stabilized. In 2015, total employment was expected to rise by 3.4%, a four-year high. However, the unemployment rate was forecast to rise again to 6.1% by the end of 2015, with the labour force also expected to rise.

HOUSING STARTS TRACKED NATIONAL TREND Trends reported in Winnipeg’s housing construction sector over the recent past were in keeping with the national average. Having peaked in 2013, starts declined in 2014, with a similar result anticipated for 2015. Evidence suggested overbuilding occurred in 2013, as the ratio starts to population growth was well above the 20-year average. High inventories of unsold or unoccupied condominiums led to a slowdown in this market segment in 2015. At the same time, rental apartment construction began to surge.

RETAIL SALES GROWTH CONTINUED Retail consumption continued on an upward path recently, in keeping with the medium-term trend. Generally positive economic performance helped boost sales by a robust 4.9% in 2014. This was not overly surprising given the CMA boasts an unemployment rate that was well below the national average. Gains in Personal Income per Capita over the past few years supported purchasing power among the city’s consumer sector. A healthier economy and labour market was indicative of continued increases in retail consumption levels.

RECORD OF HEALTH WILL BE EXTENDED Winnipeg’s recent record of solid economic performance will be extended over the near term in support of its commercial real estate market. The CBOC is forecasting economic expansion of 2.6% for all of 2015, with similar results in 2016 and 2017. Just about every major sector in Winnipeg’s economy will see increased output in 2015 and through to 2019 annually. Increased output overall will, in turn, generate an increase of 3.4% in total employment. This will represent a four-year growth rate high. By 2016, the CMA’s unemployment rate will fall to 5.5%, a four-year low. The most significant gains in total employment are anticipated in the Transportation and Warehouse, Personal Services and Office sectors, ranging between 5.5% and 7.0%. A more robust economic growth performance and improvement in labour market conditions will combine to generate retail sales growth of 2.0% and 4.0% in 2015 and 2016, respectively. A marked rise in personal income levels will also help drive increased consumer spending. In sum, the Winnipeg CMA’s economic fortunes are set to brighten over the medium term.

36

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

WINNIPEG OFFICE REPORT RENTAL MARKET WAS LARGELY STABLE AND HEALTHY Winnipeg’s office rental market exhibited continued stability and health over the past year, in keeping with the sector’s medium-term performance pattern. Recent market surveys indicated the market’s occupied position was either slightly below or slightly above the 90.0% mark overall. Since the beginning of 2014, through to the midway mark of 2015, occupancy slowly fell. The downtown sub-market tracked the overall trend in the past year, with modest upward movement recorded in the suburbs. However, with more than 80.0% of the market’s inventory in the downtown area, the overall trend was moderately negative. The fact that there was only one significant office development completed over the past several years, factored into what has been a fairly healthy run of supply-side fundamental stability. Since 2014 began, the only significant addition to inventory was downtown at the Centrepoint building at 311 Portage. The building’s completion in the second quarter of 2015, marked the first office development delivered to market since 2010. Office space demand has been relatively healthy over the recent past, in addition to generally positive supply-side fundamentals. Most recently, the strength of the demand backdrop was centred in the suburbs of Winnipeg. This resulted in upward pressure on average rents in the suburbs, with the steady increase in occupancy. In summary, Winnipeg’s office sector maintained its position of stability and relative health over the past year, in keeping with the medium-term trend.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption





Lease Rates

-



New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT MARKET STRENGTH WAS EVIDENT Winnipeg’s office property sector registered another period of investment market strength over the past year, in extending the current phase of the cycle. From a performance standpoint, properties tracked in the MSCI Index posted an annual average return of 15.1% for the year ending on June 30th, 2015. This marked the highest total return of the country’s major asset classes and its largest urban centres. Moreover, it was 330 bps better than the second highest total return over the period. Additionally, the most recent return represented a fifth consecutive year of attractive outcomes. Strong demand for assets in this market supported the stabilization of property values at the peak for the cycle over the past year. Although a relatively small number of assets were brought to market, they were met with strong demand from a variety of public and private investment groups. This applied to both local and national investors, who were active bidders on assets with strong tenant profiles. A consequence of these demand patterns was that vendors were generally able to achieve their pricing objectives. The volume of capital earmarked for investment outdistanced the supply of available assets. Against this backdrop, a modest $16.2 million in sales volume was reported in the first half of 2015, after a record high of $287.3 million in 2014. Aside from a fairly low volume of recent transaction closings in 2015, Winnipeg’s office property market posted generally healthy investment fundamentals over the past year.

SECTOR RISK WILL REMAIN LOW Winnipeg’s office property market will be exposed to relatively low levels of risk over the near term. The positive regional economic outlook will continue to support moderately positive demand for office space. The sector’s development cycle will remain relatively muted, resulting in low levels of related risk contrasting several other markets. Therefore, at a minimum rents will hold at current level, with minor upward pressure in sub-markets with low vacancy. The rental market outlook should produce solid income performance for owners and/or investors. The capital available for investment will continue to outdistance the supply of assets for sale. Therefore, capital values will at worst hold close to the peak. Low interest rates will also support healthy demand for quality assets. In short, another period of prosperity is forecast for this market over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

37

WINNIPEG INDUSTRIAL REPORT RENTAL MARKET RISK WAS NEGLIGIBLE

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Winnipeg’s industrial sector was exposed to relatively low levels of leasing risk over the past year, in keeping with the medium-term trend. Supply-side metrics supported a thesis of low risk. On an aggregate basis, the market’s occupied position rested at 94.9% at the midway mark of 2015, according to CBRE statistics. The rate was the third highest of the country’s largest markets, after Edmonton and Toronto. While the rate had increased by 70 bps over the first half of 2015, conditions remained tight across the market. This resulted in upward pressure on rents over the past year. After a brief pause in the early going of 2015, rents continued to rise as the midway mark for the year passed. The steady upward rental pressure offered additional evidence of the existance of low levels of risk over the past year. Demand for space had been sufficiently robust to offset a fairly brisk development market. Just over 618,000 SF of newly developed industrial space was added to inventory since the beginning of 2013. Despite this fact, occupancy patterns remained healthy and reflective of the lack of material risk in Winnipeg’s industrial rental market over the recent past.

RECOVERY PHASE OF INVESTMENT CYCLE CHARACTERIZED PERFORMANCE Winnipeg’s industrial property sector investment performance of the past year was in keeping with the mature phase of the current cycle. Investment returns were consistently attractive over the period, with the MSCI Index reporting a total average of 8.7% for the year ending in June 30th, 2015. In line with the broader property sector, the outcome was largely income-driven, with a modest 1.2% of capital appreciation recorded. The return was slightly better than the three-year average for this market, but was down 360 bps year-overyear. The driver of the downward shift was the maturing of the capital cycle. Despite this fact, investment demand remained fairly robust, as investors looked to acquire assets in a market that provided stable and healthy income performance over the long term. Consequently, there was aggressive and competitive bidding patterns when assets with strong tenancies were offered for sale. In the first half of 2015, a total of $40.3 million in sales volume was completed, following $146.2 million in all of 2014. In line with the national trend, demand outpaced the supply of assets for sale. Local and national groups competed for the highest quality assets. At the end of the day, vendors were able to achieve their pricing requirements on sales. However, purchasers began to display reluctance to push value much higher. This was reflective of the overall maturity of the current phase of the investment cycle witnessed over the past year.

THE FORECAST CALLS FOR FURTHER PROGRESSION Winnipeg’s industrial sector performance will be one of progression over the near term, driven by positive economic conditions. Economic output expansion forecast for the near term will support healthy demand for industrial space and stable rental market fundamentals. Various business sectors, including manufacturing, will be in expansion mode. This year, through to and including 2017, will see the local economy expand by roughly 2.6% annually. Therefore, demand should produce additional upward pressure on rents for the market’s owners. In turn, Winnipeg’s investment profile will feature solid income performance, while values continue to stabilize. On the whole, this will attract investment, as demand outpaces supply once again over the near term. Barring a significant shift in financial and/or economic trends, industrial sector risk will remain modest at best. As a result, competition among both tenants looking for space and investors for acquisitions, will be intense. This will ensure rental market conditions remain tight, as the broader sector progresses.

38

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

WINNIPEG RETAIL REPORT SLIGHT SOFTENING OF LEASING TRENDS RECORDED Winnipeg’s retail sector registered a slight softening of its leasing fundamentals over the recent past, but maintained broadly healthy characteristics overall. On balance, supply conditions were tight, with an occupied position of 96.2%, according to CBRE statistics at the midway mark of 2015. Tightness over the past year resulted in significant imbalance, with retailers often challenged to source space in prime locations. As 2015 wore on, several core closures provided a modicum of relief from the shortfall in alternatives for retailers looking expand. The strength of this market's occupancy profile was aided by a slowdown in the volume of construction completions. There was a modest 184,000 SF of new supply delivered to the market in the second half of 2014, with no additions in the first half of 2015. This reduced the chances of a material dip in occupancy levels. The strength of the market’s occupancy profile helped support what were largely peak rents. For the most part, there was little or no change in average asking rents for Power Centres and Regional Centres. Established properties in the city’s most prominent retail nodes were able to achieve rental stability. Some strip centres with vacancy were forced to lower rental expectations slightly. In short, while occupancy levels fell slightly and rents were eroded in some instances, Winnipeg’s retail rental market continued to post healthy fundamentals over the recent past.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates



-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT TRENDS WERE GENERALLY POSITIVE Generally positive and healthy trends were reported in Winnipeg’s retail property investment market recently, in keeping with the broader sector performance. Winnipeg retail assets tracked in the MSCI Index posted one of the strongest annual average returns over a recent 12-month investment horizon. More specifically, a return of 10.7% was tallied for the year ending at the midway mark of 2015. This marked the fifth consecutive double-digit result. Though down from the previous year’s peak for the cycle of 19.0%, it was an attractive outcome nonetheless. During this period, material capital growth was recorded. At the same time, most other sectors of Canada’s property investment market saw an end to the capital growth phase of the cycle of the past few years. The strength of the return cycle was an attraction for investors. Consequently, bidding on high quality assets with strong tenant rosters was aggressive. Multiple bids ensure values held at the peak for the cycle, with minor increases in some circumstances. Demand outpaced the supply of assets available for purchase, in keeping with the broader market trend. The relative health of Winnipeg’s economic performance over the past year and positive forecast were also factors in investor rationale for additional exposure to this market. In short, Winnipeg’s retail sector saw a continuation of the investment recovery cycle over the past year, in duplicating many of the trends reported at the national level.

PERFORMANCE-DRIVER FORECAST LOOKS POSITIVE The sector performance-driver outlook bodes well for Winnipeg’s retail property performance over the near term. The CMA will see economic expansion of roughly 2.6% in 2015 and 2016. This will result in a gradual improvement in labour market conditions and positive retail sales gains. Consumption is expected to increase by 2.0% this year and a more robust 4.9% in 2016. Consumer purchasing power will improve with steady income growth. The strong performance-driver forecast will translate positively into rental market conditions. Retailers looking to capitalize on the positive outlook will look for opportunities to expand in the coming months. Therefore, landlords will continue to achieve income growth and stability. In turn, this will support investment performance. In short, if performance-driver forecasts are proven accurate over the near term, Winnipeg’s retail sector should generate generally positive results. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

39

WINNIPEG MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET PROGRESSED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption

-

-

Lease Rates



-

New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Winnipeg’s purpose-built Multi-Suite Residential property rental market fundamentals stabilized over the past year, punctuated by a healthy demand supply dynamic. Evidence of the broad-based rental market health and stability was captured in supply-side metrics. The CMHC recorded an average occupancy rate of 97.7% for the more than 54,000 rental units tracked in the Winnipeg CMA, as of the spring of 2015. The rate had edged slightly lower year-over-year from 98.0%. This was a testament to the sector’s resilience in the face of new Multi-Suite Residential construction volume that surpassed the historic average. Existing Multi-Suite Residential rental property owners were forced to compete with an increased number of condominiums designated for rent. The supply-side strength observed in this market over the recent past was the result of mostly positive demand characteristics. The CMA’s employment gains of late were largely centred in the 25 to 44 age cohort, which accounts for the largest portion of people renting accommodation in this region. At the same time, migration to the Winnipeg CMA recently eclipsed the historic average. Historically, the majority of migrants have tended to rent upon arrival. On the whole, rental demand more than offset moves by some renters to purchase homes in what have been favourable conditions. Over the past year the market’s demand supply dynamic has driven average rents higher. Average monthly rents increased by between 4.5% and 6.6% across the various unit-size categories, year-over-year as of April 2015 according to CMHC same-sample data. Nationally, rents increased by between 2.0% and 3.4% for the same period. This outperformance was a result of the continued progression of this market over the recent past.

INVESTMENT TRENDS MIRRORED BROADER MARKET On balance, Winnipeg’s purpose-built Multi-Suite Residential property market exhibited similar investment trends to those on a national scale over the recent past. The CMA’s relatively healthy economic outlook and past stability were an attraction for investment capital. Pension funds, REITs, private capital and other institutional buyers continued to try to source assets in this market in order to gain entry or expand their existing portfolios over the past few years. National groups were active bidders in this market, along with a strong local contingent. The result of this demand pressure was a measure of imbalance, as investor interest outweighed the supply of available product. The shortfall played out in transaction volume in the first half of 2015, when just $14 million in sales were recorded. The supply demand dynamic ensured property values rested largely at the cycle peak. There was some evidence that riskier asset values were reduced marginally. Similar to the national experience, owners of property in this market were treated to stable and healthy income performance over the past year. As a result, owners were often unwilling to sell assets that had performed well historically. This reluctance was also a common rationale for owners in the sector across the country. This consistency was typical of recent market performance in this sector for Winnipeg.

CLEAR SKIES AHEAD The outlook for Winnipeg’s purpose-built Multi-Suite Residential rental market is mostly positive, resulting in minimal sector risk. Rental market fundamentals will be buoyed by forecast GDP expansion of 2.6% in 2015 and 2.3% in 2016. This performance will support rental demand, as employment levels increase. The positive rental market outlet will translate favourably into rent growth and bolster income levels for owners. In turn, property values will hold at close to record highs. Investors, both local and national, will look to gain access to institutional-grade assets in this market. Therefore the bidding environment will be brisk, with vendors generally achieving their pricing objectives. In short, conditions in this market will remain largely positive over the near term.

40

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

REGINA ECONOMIC REPORT ECONOMIC SNAPSHOT Regina’s 2015 economic performance was negatively impacted by the global downshift in resource prices, led by the oil sector. When the final results are tabulated, the CMA’s GDP is expected to have increased by a modest 1.6%. This marked a sharp decline from the 3.8% in 2014. Regina’s weakened economic backdrop was expected to temper employment growth to roughly 1.0% for all of 2015 and push the unemployment rate higher by 80 bps to 4.4%.

MANUFACTURING SECTOR STAR HAS DIMMED For a second consecutive year, Regina’s manufacturing sector growth was forecast to moderate. Through all of 2015, the sector was expected to generate a modest 1.9% increase in output. This followed a slightly better result in 2014, with growth of 2.4%. The 2014 and 2015 advances paled in comparison to the annual average increase of 8.0% from 2011 to 2013. During the sector slowdown of 2013 and 2014 sector employment also decreased. The hardest hit were companies involved in manufacturing related to the resources sector. However, most of Regina’s manufacturing sectors suffered through a moderation in output growth over the near term.

CONSTRUCTION OUTPUT CONTRACTION EXPECTED A material decline in construction output was forecast for the Regina CMA in 2015, following two years of stabilization. The CBOC cited reduced activity in the residential sector and a leveling trend for major project work in the local area as key causes of the decline. Major projects already underway continued to progress including: a new $278 million football stadium, a $181 million sewage plant upgrade and a new trade centre to replace Evraz Place. While projects continued to move forward in 2015, residential construction volume was expected to decline for a second consecutive year. Declines in Multi-Suite Residential and single family activity were forecast, as starts will be reduced by roughly half of the total of two years ago. The economic slowdown left builders with higher numbers of unsold properties. Therefore, construction plans were often placed on the backburner.

SERVICES SECTOR GROWTH DECELERATED Restrained activity in Regina’s services sector was the direct result of a softer economic performance over the past year. Over all of 2015, output was forecast to rise by a modest 2.3%, after output growth fell below the 4.0% mark in 2014 for the first time since 2010. All eight sub-groupings of the services sector were expected to generate gains in 2015, albeit at a significantly lower rate than over the past several years. The slowing of the services sector growth trend over the past year was in keeping with the broader economic performance.

GRADUAL REBOUND FORECAST Regina’s economic growth pace will pick up in 2016, with more modest results forecast through to and including 2019. The CBOC has predicted increased economic output in 2016 with expansion of 2.4%, up 80 bps year-over-year. Subsequently, the CMA will generate annual increases in output of slightly less than 2.0% from 2017 through to 2019. The positive medium-term economic outlook will drive equally modest employment growth. However, increases in the CMA’s labour force will push unemployment rates slightly higher over the forecast period. On balance, the outlook for Regina’s economic and labour market is largely positive for the short-to-medium term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

41

REGINA INDUSTRIAL REPORT LEASING MARKET CONDITIONS WERE TIGHT AND STABLE

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates

-

-

New Supply

-



*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Regina’s industrial property sector posted broadly stable and positive rental market characteristics over the past year, which represented an extension of the medium-term performance. Supply-side tightness was an ongoing fixture of the market over the past year. The market’s occupied position was close to the 98.0% mark over the period, according to Colliers International statistics. As was the case over the past several years, tenants were challenged in some locales to source appropriate space to lease. For this reason, the market maintained a fairly robust build-to-suit component over the past year. Most developers have been reluctant to build speculative projects, given uncertainty surrounding the impact of the oil sector correction on the local economic outlook. The tightest segment of the market was for larger users with a footprint in excess of 10,000 SF. Smaller tenants were treated to moderately higher numbers of vacant alternatives when looking for space. However, the lack of a material speculative development cycle placed a limit on choice. Indeed, Regina maintained one of the highest occupancy rates in the country over the past year. Limited vacancy in conjunction with stable and positive demand characteristics, ensured rents remained among the highest in the country. Although, there was little in the way of upward pressure on rents, as some tenants chose to wait and see what the impacts of the oil price correction would ultimately be. In the meantime, rental market fundamentals in Regina’s industrial sector remained largely stable and healthy.

INVESTMENT MARKET WAS QUIET BUT STABLE There was fairly limited activity in Regina’s industrial property investment market over the past year, against a backdrop of largely healthy fundamentals. The explanation for the relatively quiet period was two-fold. First, in most cases owners chose to hold on to properties that had performed well historically, in generating stable and positive income performance. Second, the market has a significant owner-occupancy segment. Many business owners continued to hold onto their properties during what continued to be a low-interest rate environment. The combination of these two influences limited the volume of transactions reported over the recent past. Despite limited sale activity, stable and healthy fundamentals continued to characterize Regina’s industrial property market. Strong demand for properties with attractive tenant rosters outpaced the supply of available assets. Local and national groups alike were drawn to a market with a long history of stellar leasing fundamentals and prospects for further capital appreciation. Property values rested at the peak for the cycle in a market that could provide yields in excess of the nation’s largest markets. The strength of this market’s fundamentals over the past year coincided with what was a fairly low level activity.

MARKET OUTLOOK IS MODERATELY POSITIVE The outlook for Regina’s industrial property sector is predominantly positive over the near term. The local economy will advance, though at a markedly slower pace than in the recent past. The commodities market correction will limit growth to roughly 2.0% over the medium term, following a slightly stronger 2.6% in 2016 according to the CBOC forecast. This will support moderately healthy demand for industrial space. At the same time, developers will take a more conservative position in focusing on purpose-built projects. This focus, coupled with moderately positive demand, will support ongoing leasing strength. Property values should hold at the peak. Investment demand will continue to outpace supply, resulting in aggressive bidding. In short, the outlook for Regina’s industrial sector, while less robust than earlier in the decade, is one of modest progression.

42

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

SASKATOON ECONOMIC REPORT ECONOMIC SNAPSHOT A sharp slowdown was forecast for Saskatoon’s economy in 2015, after a torrid growth pace in the preceding half-decade. The CBOC was projecting growth of a modest 1.7%, following an annual average of 6.0% over the previous five-year period. The slowdown has impacted the CMA’s job market. In 2014 employment increased by 3.0%, less than half of the average growth rate of the previous two years. The unemployment rate was set to rise, but remain below the national average in 2015.

MANUFACTURING TREND TRACKED ECONOMIC RESULT Saskatoon’s manufacturing sector exhibited similar performance patterns to the region’s broader economy. Output growth has steadily declined, with a 2.0% advance expected for all of 2015. In 2014, manufacturing output increased by 2.9%, which marked the weakest advance since the contraction of 2010. Between 2010 and 2014, the sector outperformed with annual growth average 6.0%. Manufacturing employment patterns were mixed in 2014 and 2015. In 2014 the number of positions fell by 8.0%, but remained 6.0% higher than 2010, according to the CBOC. Manufacturing sales dipped by 10.0%, year-over-year, as of May 2015. In short, the combined effect of weak agricultural and commodities activity were determining factors in the slowdown in manufacturing output and the broader regional economy over the past couple of years.

CONSTRUCTION SECTOR OUTPUT HAS STALLED Construction output was expected to decline by 5.9% in 2015, having stalled over the preceding 24-month period. In keeping with the broader economic trend, the sector witnessed robust growth prior to the recent slowdown. The pause coincided with a gearing-down in the region’s residential construction sector. Absorption of new homes was slower than anticipated, as inventories of unsold homes increased. As a result of the excess supply, the CBOC forecasted starts would dip by 25.0% to a five-year low of 2,500 units. In short, Saskatoon’s construction sector saw a marked slowdown in output recently, including an expected contraction forecast for 2015.

WEAK LABOUR MARKET PERFORMANCE POSTED Labour market conditions looked to have softened over the recent past, as a result of the slowdown in the regional economy. Employment was set to rise by a minimal 0.2% through all of 2015. During the same period, the regional unemployment rate began to rise, resulting in a yearend 2015 forecast of 5.4%. This would represent a 120 bps rise year-over-year.

BETTER DAYS AHEAD A slightly more robust economy over the near term will result in moderately healthier employment trends. The region’s economy will expand by 2.6% in 2016, after a modest increase in economic output of 1.7% in 2015. This will, in turn, pull the unemployment rate down by 10 bps in 2016 and boost employment by 2.2%. At the same time, the region’s consumers will enjoy greater purchasing power, by way of a 2.1% increase in personal income per capita. This should drive retails sales growth of 3.3% for 2016, after a meagre 0.1% this year. In summary, Saskatoon’s near-term economic outlook is moderately healthier than what was expected for 2015. While encouraging, the recovery pace will be much slower than earlier in the decade when this region outperformed.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

43

SASKATOON RETAIL REPORT LEASING STRENGTH PERSISTED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-

-

Net Absorption



-

Lease Rates

-

-

New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Saskatoon’s retail leasing market continued to exhibit strong fundamentals, in extending the current phase of the cycle. Through 2014 and 2015, the market remained tight, in keeping with characteristics observed over the past few years. Aggregate occupancy ranged above the 5.0% threshold across much of the Greater Saskatoon Area (GSA). The strength of the occupancy profile over the past few years was the direct result of economic robustness and strong employment patterns. This period of economic prosperity helped support strong sales for retailers and tenant expansions. By extension, the economic backdrop resulted in above-average population growth and housing development. Much of this growth took place in the GSA’s suburbs, which acted as a magnet for retail development. In 2014, 270,000 SF of new supply was constructed and readied for occupancy. A similar figure was forecast for 2015, including planned projects and expansions to existing centres. Blairmore, Riversdale, Preston Crossing, Stonebridge, and Warman have all added new retail space in 2014 and 2015. On the whole, demand for newly constructed space has been brisk, with much of the space spoken for well before scheduled completion. National retailers like Lowe’s and Old Navy, as well as a plethora of restaurants, have committed to the GSA recently. On balance, leasing demand has more than kept pace with supply, resulting in upward pressure on rents. As a result, landlords have shown little hesitance in investing funds to improve existing assets. This confidence symbolized the health of the GSA’s leasing market of the last several years.

STABILITY CHARACTERIZED INVESTMENT MARKET Conditions in the GSA retail property investment market over the recent past reflected the sectors stability and health. The region’s recent history of economic outperformance and demographic attributes cast the asset class in a favourable light with investors. This attraction was enhanced by its history of strong leasing market fundamentals. Consequently, demand for high-quality assets, both nationally and locally, remained brisk over the past few years. The challenge for investors continued to be their inability to source properties for acquisition. For some, development has been an alternative core investment strategy. However, the strategy was not without added risk. Some parties invested in their own portfolios, which had performed well historically. This overall demand pressure supported property values that continued to hold at the peak, with cap rates holding at close to historic lows. In summary, the GSA retail property sector investment performance of 2014 and much of 2015 included a large measure of stability and broad based health.

OUTLOOK IS ONE OF CAUTIOUS OPTIMISM The positive outlook for the GSA retail sector comes with an element of caution. The local economy will expand by roughly 2.6% in 2016, followed by similar results through to 2020. This will positively impact retail sales and consumer demand. In turn, retailers will look to position themselves to take advantage of the positive economic backdrop. However, if the commodities’ slump worsens, then the outlook could be compromised. Assuming the forecast holds true for the GSA, then the near term will see continued successes for the asset classes. Leasing fundamentals will remain strong. Occupancy will continue to surpass the 95.0% mark, even with the delivery of new supply in suburban locations. Areas with growing populations will drive the development plans of most groups. As in the recent past, retailers will commit to newly constructed space, resulting in rental rate stability and perhaps some upward pressure. This will be a welcome sight for owners and investors alike, who will continue to struggle to source assets for acquisition in this market over the next few years.

44

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

CALGARY ECONOMIC REPORT ECONOMIC SNAPSHOT Calgary’s economic performance was markedly weaker in 2015, due to the sharp decline in oil prices that began in the summer of 2014. GDP was on pace for a contraction of 0.5% for the year, the first decline dating back to 2009. Output for most sectors of the economy was expected to either slow sharply or decline. Employment levels were forecast to rise more modestly in 2015, while the unemployment rate increased to almost 6.0%. Retail sales and housing starts were projected to decline as well.

WEAKENED ECONOMIC PERFORMANCE RECORDED A weakened economic performance was observed in the Calgary CMA during 2015, which had a broader impact on the region overall. Economic output was forecast to contract by 50 bps over the year, in sharp contrast to annual average growth of slightly more than 4.5% over the preceding three-year period. The impacts of Calgary’s recent economic slowdown were farreaching. The absence of growth in the region’s business sector reduced the number of migrants coming to the area to find employment. Additionally, housing starts began to slow, as consumer confidence was eroded. Various sub-sectors of the economy were also impacted. The Transportation and Warehousing sector, for example, posted lower shipping volume early in the year, which marked the beginning of a year-long slowdown. In short, the Calgary CMA witnessed a marked slowdown in economic growth in 2015, a performance that had various impacts on its consumers and businesses.

CONSTRUCTION SECTOR SUFFERED Calgary’s construction sector downturn appeared to have commenced at the midway mark of 2015, a trend that was expected to persist through to at least the end of the year. The CBOC’s autumn forecast called for a sharp reduction in housing starts for the year of almost 25.0%. The commencement of the construction of just short of 13,000 residential units was forecast for 2015, down from the more than 17,000 units in the previous year. Weak economic results and job cuts in the energy sector were cited as the leading cause of the slowdown. Non-residential construction volume was also in line for a setback. Much of the reduced output was centred in the energy sector. However, other non-residential construction projects were considered a plus. Examples included: the $3 billion StoneGate Landing development and the $1 billion Brookfield Place. On balance however, this segment of the market was not expected to make up for the residential and energy sector construction erosion. In short, Calgary’s construction sector downturn began in the first half of 2015, a trend that was expected to continue through to the end of 2016.

RECOVERY FORECAST FOR NEXT YEAR A level of recovery is forecast for Calgary’s economy in 2016, following a significant oil sector-driven correction in the previous year. Oil prices will rebound to some extent in 2016, which will buoy the region’s economy. Output is forecast to increase by a modest 1.8% over the year, with a stronger pace of activity over the subsequent three-year horizon. This will translate into employment growth beginning in 2017. Consumer confidence should also improve, resulting in a return to retail sales growth over the forecast period. Housing starts will also slow after a five-year low will be set in 2016. Generally, the prospect of recovery by next year bodes well for the commercial real estate sector. By 2017, demand for office space should rebound, which will begin to have a positive impact on elevated vacancy levels.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

45

CALGARY OFFICE REPORT OIL PRICE PLUNGE ERODED LEASING FUNDAMENTALS

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates





New Supply

-



*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

The continued slump in global oil prices has had a profoundly negative impact on Calgary’s office leasing fundamentals over the recent past. Oil companies located in this market reduced their office space footprints significantly, as a direct result of the erosion of income brought about by the sharp dip in oil prices. Many placed significant blocks of space back onto the market for sublease at substantially discounted asking rents. The oil sector slump also had a ripple effect on the broader economy, further reducing demand for office space. The sharp reduction in demand came in the midst of one of the market’s more robust development cycles, which placed additional pressure on supply-side fundamentals. Initially, 11.3 million SF of new supply was added to Calgary’s inventory of office buildings between 2007 and 2011. Subsequently, a further 5.4 million SF was completed between 2012 and 2014, with a further 554,000 SF of new space over 2015. The net result of the recent supply additions and weakened demand was a sharp decline in occupancy. Downtown occupancy fell from 90.9% to 86.0% at the end of the third quarter of 2015, year-over-year. The suburbs posted occupancy of 82.0% at the end of the third quarter, down over four full percentage points. Increased vacancy forced landlords to reduce their expectations on income, given declining rents. This was particularly true for older and less desirable properties. Additionally, more incentives were offered to entice the reduced number of tenants looking to expand or relocate. Institutional owners with plenty of cash reserves were able to maintain a firmer stance in negotiating rents. However, for the most part rents were below the peak for new and renewal leases negotiated. The relative abundance of sublease space on the market keyed at least part of the downward path for rents. By the end of the summer of 2015, it was clear that the slump in oil prices had caused a marked softening of office leasing fundamentals in this market.

INVESTMENT CONDITIONS SOFTENED The modestly weaker investment performance in Calgary’s office property sector over the recent past was the result of both regional and national trends. At the local level, markedly softer leasing fundamentals reduced income growth for the market’s owners. Coincidentally, weaker income performance affected investment performance overall. For the 12-months ending on June 30th, 2015, Calgary’s office sector posted a fairly attractive total average return of 5.5% in the MSCI Index. However, on closer inspection, these results were less positive in the second half of the 12-month horizon. On average, MSCI indexed property values for Calgary declined in the first two quarters of 2015. The cause of the decline was likely two-fold. First, it was a reflection of declining rents in this market overall. Second, the maturing of capital values across the country was also a factor. Despite weakened performance metrics in Calgary’s office sector over the past year, demand for property offered for sale remained healthy. Investors continued to believe in the long-term merits of investing in Calgary’s office market. Therefore, many continued to look for opportunities, both core and riskier in nature. For those with a longer-term view, the performance decline of the past year was less crucial.

TOUGH TIMES TO CONTINUE Calgary’s office sector will continue to exhibit the effects of the corrective phase of the cycle over the next couple of years. Oil prices will remain low through to at least 2016, which will support modest economic growth rates. As a result, office space demand will remain low. Rents will also continue to rest well below the most recent peak. The delivery of over 5 million SF of new supply over the next three years will also result in the continued leasing market slump. Therefore, owners will see the continued erosion of income and overall performance. For some however, the tough times will likely unearth opportunities to meet long-term investment objectives.

46

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

CALGARY INDUSTRIAL REPORT LEASING MARKET RESILIENCE WAS DISPLAYED A considerable degree of resilience was evident in Calgary’s industrial leasing market performance of the recent past, against a markedly weaker economic backdrop. For much of 2015, the Calgary CMA’s economy felt the effects of the global oil price plunge. Despite this backdrop, supply-side strength continued to characterize the market. At the midway mark of 2015, occupancy rested at a healthy 93.8%, for the 127 million SF of industrial properties tracked by CBRE. Occupancy had edged down a modest 150 bps year-overyear. This was in keeping with previous oil sector corrections. The relatively modest occupancy reduction accompanied a similar trend in average rents over the past year. Asking rents declined by less than 10.0% from the 2014 peak over the period, which was further evidence of the market’s resilience. Demand-side indicators also provided evidence of this market’s relative strength over the past year. In the second half of 2014, close to 2.3 million SF of space was absorbed. An additional step forward was posted in the second quarter of 2015, after a fairly sharp negative result in the first three months of the year. While there was some evidence that demand had softened in the first half of the year, it had only a modest impact on results year-to-date. Indeed in the past year Calgary’s industrial leasing sector performance has been surprisingly buoyant, given generally weaker economic conditions overall.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates





New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

PERFORMANCE EASED ALONG WITH BROADER MARKET Calgary’s industrial property sector posted another healthy overall investment performance recently, though not as strong as earlier in the cycle. A healthy overall performance was tallied, with a total average annual return of 8.8% for the year ending on June 30th, 2015 in the MSCI Index. However, the return was 620 bps lower than the 2012 cycle peak of 15.0% and 300 bps down from the previous year. The downward return trend was also an element of performance across much of the Canadian market tracked in the MSCI Index. In breaking the performance down by component, income growth was largely stable and positive, while there was a slight decline in capital value over the 12-month horizon, which was also in keeping with the national trend. While performance trended downward, demand for core assets remained robust. Despite the anticipation of weaker performance over the near term, investors continued to view the market favourably. While underwriting processes were likely more stringent, demand outpaced the supply of assets for sale. To some extent this supported property values in this market. The health of the demand backdrop was fueled by the availability of low-cost capital. As well, investors were of the belief that the recent oil sector correction and economic slowdown would eventually stabilize. In turn, the sector would once again generate strong performance as the cycle transitioned to growth. It is this premise that supported demand, as the down cycle appeared to be emerging.

EROSION OF FUNDAMENTALS A SAFE BET Market fundamentals are likely to be eroded over the near term, with the expectation of disappointing economic results and depressed oil prices. The combination of these two factors will cause a shortfall in leasing demand, and downward pressure on occupancy and rents. It is difficult to envision a sharp rise in demand over the near term. At the same time, there is more than 4.4 million SF of industrial space under construction that will coincide with a softer demand trend. The good news is that construction projects can be delayed with relative ease. This will buffer the market from some of the ill-effects of the economic malaise. However on aggregate, leasing fundamentals will be eroded for at least the next 6-12 months. For owners this will mean a downward path for income performance, and the potential for modest decreases in value.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

47

CALGARY RETAIL REPORT RESILIENCE EVIDENT DESPITE ECONOMIC SOFTENING

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Calgary’s retail sector registered largely healthy leasing fundamentals of late, despite the closure of more than one national retailer store. The Greater Calgary retail market posted the second highest occupancy level of the eight largest retail markets in the country, at the midway mark of 2015. At 96.3%, market occupancy was lower than only Vancouver and 70 bps lower than the average for the eight markets tracked. The maintenance of a strong occupancy profile was symbolic of Calgary’s retail sector strength of the past year to 18 months. Recently, Target and Future Shop closed six and four locations respectively. Four of the six Target locations were spoken for shortly after they were vacated, while the remaining two, as well as the Future shop locations, garnered significant interest. The closure of these stores was fairly unusual for this market over the past year, as demand was generally quite healthy. While there was evidence of increased vacancy in older strip plazas, in keeping with the national trend, established malls and nodes experienced fairly healthy demand from both Canadian and international retailers. A significant portion of retailer demand over the past year was focused on newly built projects. For the most part, they were fully leased upon opening. Over the past few years the development cycle was concentrated in Power Centres, which was a testament to the sector’s overall health. In the past 12-18 months, this strength was evident, even with the closure of several stores by national retailers.

SOLID INVESTMENT OUTCOMES RECORDED Calgary’s retail sector generated another period of healthy performance recently, with evidence of the broader sector’s cycle maturity observed. An attractive investment performance was reported for assets tracked in the MSCI Index. A total average return of 9.8% was generated for the 12-month investment horizon ending on June 30th, 2015. Much of this advance was income-driven, as capital values edged only slightly higher for the period. Income growth was the result of generally healthy leasing fundamentals. Once again, values were supported by positive demand characteristics. Both local and national groups looked to increase or establish portfolios in a market that has performed well historically. Investors looked to the region as an incomeproducer over the long term and were willing to accept the short-term uncertainty. Bidding was generally aggressive when core assets were offered for sale. In the first six months of 2015, a modest $151.6 million in sales were completed. While well below the peak of 2012 when $733 million in sales were recorded for the year, the main limitation on activity was supply rather than the availability of capital and debt funds. Against a backdrop of low levels of availability, most other outcomes in this market were positive over the recent past.

MODERATION FORECAST FOR NEAR TERM Calgary’s retail sector near-term performance looks to be one of continued moderation. The CMA’s economic output is forecast to increase by 1.8% in 2016, which is markedly weaker than the three years prior to 2015. Retail sales will, as a result, increase modestly, while employment levels fall just shy of 1.0%. The uneven near term employment and economic performance will cause continued moderation in property market conditions. Slightly weaker leasing fundamentals will unfold. Leasing fundamentals will soften slightly over the near term, focused largely in the older and less desirable segment of the market. The region’s strongest performing malls will continue to thrive. However, the net result of these two trends will drive occupancy slightly lower and result in downward pressure on rents overall. In turn, this will negatively impact income growth for owners. The continued maturing of the capital cycle will also limit performance. In short, Calgary’s retail sector will continue to moderate over the near term, partially offsetting medium-term successes.

48

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

CALGARY MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET TOOK A STEP BACK The sharp drop in oil prices and slowdown in economic activity in the Calgary CMA eroded Multi-Suite Residential rental market fundamentals over the past year. The resulting job losses had an adverse effect on demand for rental accommodation, in addition to the broader residential market in late 2014 and much of 2015. Over this period, fewer migrants came to the region in search of employment. Typically, this has been a key source of rental demand. Previously, a record number of migrants had relocated to the area in 2013, thereby supporting strong demand. The overall weakening of this market’s demand profile over the past year had a negative impact on supply-side fundamentals. In its spring 2015 survey, the CMHC reported a year-over-year decline in aggregate market occupancy of 180 bps to 96.8%, from 98.6%. The decline was relatively modest, given Calgary has one of the smaller inventories of the major Canadian urban centres. Despite the dip, market occupancy continued to track the national average. The addition of newly constructed rental units was also a factor in the recent decline in overall occupancy levels. However, as development activity slowed, occupancy started to rise. New supply impacted the trend for average rents over the past year. Rents continued to rise on average. This was somewhat misleading, as the increase was driven by an increase in newly-built, higher-priced units in this market, rather than a broader trend. In some instances, landlords were forced to offer incentives to prospective tenants as vacancy levels increased, which affected their bottom lines. Until oil prices stabilize and the economy begins to recovery, market fundamentals will erode further.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates





New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

HEALTHY INVESTMENT MARKET TRENDS OBSERVED Calgary’s Multi-Suite Residential purpose-built rental market registered generally positive investment market trends over the recent past, despite a marked downshift in the region’s economic growth performance. Demand for institutional-grade assets remained buoyant. Investors continued to view the asset class favourably for its performance during periods of economic weakness. Additionally, national and local groups continued to look to this market as a source of income stability and growth over the long term. This confidence ensured property values held at the cycle–peak, with evidence of slight increases reported in specific cases. Strong demand had a positive impact on overall performance over the past year. Properties tracked in the MSCI Index in this market generated an average total return of 11.2% for the 12-month investment horizon ending at mid-year 2015. This was up 30 bps year-over-year, and finished the period second only to Vancouver retail. The performance was made up of steady capital and income growth. Solid performance metrics and current yields supported activity levels. The $137.5 million sales recorded in the first half of 2015 was slightly ahead of the previous year’s pace. As was the case across the asset class, availability of product fell short of demand. This dynamic was arguably the only blemish on an otherwise healthy investment performance over the past year.

POSITIVE OUTLOOK COMES WITH ELEVATED RISK The outlook for this market is generally positive, although a worsening of the oil crisis and by extension the local economy would have an adverse impact on performance. A modest erosion of leasing fundamentals is forecast for the near term. Occupancy levels will decline slightly. Landlords will see weaker income performance, as they continue to offer incentives to lure tenants. Demand will be eroded, to some extent, due to reduced migration volumes. More muted demand and new supply will drive occupancy close to the 97.0% mark. In the investment market, performance will soften. However, as in past economic downturns, results will be superior to those of the other major asset classes. In short, the outlook for this market is positive, although risks to the outlook will likely increase. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

49

EDMONTON ECONOMIC REPORT ECONOMIC SNAPSHOT A slight economic contraction was expected for the Edmonton CMA in 2015, as lower energy prices took their toll. Real GDP was forecast to contract by 0.5%, having surged by an annual average rate of 4.2% over the previous three-year period. Output in certain key industries was set to rise in 2015, while a marked output reduction was anticipated in the energy sector. Overall employment was expected to increase by 0.9%, despite decreases in the primary and utilities and manufacturing sectors.

SURPRISING RESILIENCE DISPLAYED The primary and utilities and manufacturing sectors of Edmonton’s economy displayed a surprising level of resilience over much of 2015. By the end of the year, primary and utilities output was forecast to have expanded by 0.5%. Manufacturing output will have risen by a more robust 3.3%. In both cases, the increases were somewhat surprising, given their direct linkages to the energy sector. Much of the recent strength was tied to the more than 600,000 barrels of oil sands capacity under development for completion over the next few years, according to the CBOC. The lion’s share of this construction activity was already paid for. Therefore, lower oil prices had little impact on output in the primary and utilities sector. Similarly, the fact that costs for much of the 600,000 barrel daily output was already incurred was a key to the increase in manufacturing output. As a result, both sectors were expected to generate solid expansion activity in 2015.

CONSTRUCTION ACTIVITY SLOWED Edmonton’s construction sector was set to slow over 2015, resulting in a 5.4% decline in output for the year. The main driver of this trend was reduced capital expenditures on the part of oil producers in this market. All told, output was forecast to fall by 5.4%. While energy-related investment was expected to dip over the year, non-energy, non-residential and residential investment was expected to remain fairly healthy. Numerous Multi-Suite Residential projects got underway in the first few months of 2015. This was expected to support the highest construction total of 16,151 dating back to 1972, according to CBOC records. In the non-residential sector, highway and transportation projects were the main drivers of growth. However, total construction activity levels started to slow by the first quarter of 2015, a trend that was likely to last through to at least the end of the year.

GRADUAL STABILIZATION FORECAST The Edmonton CMA’s economy and labour markets are expected to stabilize and gradually improve over the near term, in keeping with the provincial outlook. After a slight contraction in 2015, Real GDP will increase by a modest 1.8% in 2016 and an annual average of 2.5% over the subsequent three-year period. Total employment will increase by 1.4% in 2016, after a period of stabilization. Beginning in 2016, the region’s unemployment rate will begin to fall at a fairly modest rate. During the same period, personal income per capita will also slowly recover, in adding to consumer purchasing power. As a result, retail sales will once again begin to rise, after a contraction this year. The premise for the gradual stabilization and modest growth outlook for Edmonton’s economy and labour market, is recovery in the region’s energy sector. By the second half of 2016, oil prices are expected to stabilize, with the potential for a modest rise toward the end of the year. If this forecast proves accurate, then the projection for a gradual improvement in the local economy and labour market should follow suit.

50

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

EDMONTON OFFICE REPORT LEASING MARKET SOFTENING OBSERVED Edmonton’s office sector witnessed the erosion of its leasing fundamentals over the past year. Office space demand was relatively weak, when compared to the past several years. The drop in oil prices that began in the summer of 2014 pushed business confidence levels lower. This took much of the steam out of the demand trend over the past year. Whilst demand proved to be less than robust over the recent past, an excess of supply unfolded. This was largely the result of the delivery of newly constructed buildings in the suburban sub-markets. In the first nine months of 2015, a total of 253,029 SF of newly built space was readied for occupancy. This added to the 723,732 SF of new supply completed in 2013 and 2014. Subsequent to 2012, demand has consistently fallen short of supply. Through much of this period, including the past year, tenants have vacated older buildings to relocate into these new towers. Therefore, occupancy levels fell more sharply in the market’s older class A and B properties. A number of landlords took this as an opportunity to invest in building upgrades to re-position properties for the longer term. By the end of the third quarter of 2015, market occupancy rested at 87.9%, down 160 bps year-over-year. The combination of increased vacancy and muted demand resulted in downward pressure on rents. This pressure was further evidence that the contraction phase of the leasing cycle was underway.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption



-

Lease Rates

-



New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT RECOVERY CYCLE EASED Investment characteristics reported over the past year provided further evidence of the easing of the recovery cycle of the post-recession era. Recent MSCI Index performance metrics were in support of this premise. Properties tracked in this market generated an annual average return of –2% for the 12month period ending at the midway mark of 2015. Material capital depreciation over the period more than offset what was a stable and healthy income performance. Indexed total returns went from the peak of 16.1% in 2013 to the most recent negative result. Further evidence that the recovery had slowed was contained in the prevailing sentiment with regard to cap rates. In its third quarter cap rate survey, for example, CBRE indicated that cap rates for office properties in this market had levelled, a trend that was to continue over the near term. This was an indication that the run-up in values had indeed come to a close sometime in 2014. The downward income growth trend was also a sign that the region’s investment recovery had entered a mature phase of the cycle. Despite the continued easing of the investment recovery cycle over the past year, demand for office assets remained healthy. Investors exhibited confidence in this market, particularly those with a longer-term view. This was one of the few aspects of the market that did not point to an easing of the market’s investment recovery phase of the cycle.

MIXED RESULTS FORECAST On the whole, Edmonton’s office sector near-term forecast is one of uneven performance. The local economy is expected to stabilize, with a modest growth outlook for the next few years. However, if the energy sector correction continues or worsens, more negative performance could transpire. The final results are likely to be somewhere in between. Leasing fundamentals will be eroded further, as excess supply remains an issue. Development activity will continue to boost vacancy levels. The resulting downward pressure on rents will erode the bottom lines of the market’s landlords. Therefore, income growth rates will trend lower. Property values will continue to fall over the near term, which will impact overall performance. Despite this, demand for assets in established nodes with solid tenant rosters will attract a range of buyers. While this runs counter to the uneven near-term outlook, there is an abundance of capital looking for a home in a sector that has provided attractive results historically.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

51

EDMONTON INDUSTRIAL REPORT LEASING DEMAND WAS ERODED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-



New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

A weaker demand profile characterized Edmonton’s industrial leasing market in the latter half of 2014 and much of this year, after a decade-long trend of growth. The cause of this shift was the region’s economic slowdown brought on by the plunge in energy demand, and more specifically oil prices, that began in the summer of 2014. As 2014 wound down, it became clear that demand for industrial expansion space had dwindled. The recent election of the New Democratic Party, and uncertainty related to its economic policies, has prompted many business to hold off on changes in its operations, including the utilization of real estate. The net effect of the economic downturn and provincial politics resulted in a fairly material downshift in demand for industrial space. Despite the demand shortfall, supply-side metrics were generally positive in Edmonton’s industrial leasing market in the latter half of 2014 and much of 2015. Conditions were consistently tight, with a range of surveys reporting occupancy between 95.0% and 98.0% overall. Year-overyear, occupancy has increased marginally, as an indication of the market’s resilience in the face of reduced demand. Average asking rents were also relatively stable over the past year, in keeping with the occupancy trend. While upward pressure on rents subsided, there was little indication of any material erosion. In summary, there was a marked reduction in tenant expansion activity in Edmonton’s industrial sector over the recent past, a performance that had yet to measure in supply-side conditions through much of 2015.

INVESTMENT DEMAND OUTDISTANCED SUPPLY Demand for high-quality, recently built industrial investment properties surpassed availability by a significant margin over the past year. Investors showed confidence in investing funds in this market at prevailing yield rates. For most, the ability of assets in this market to generate stable and healthy income growth was also an attraction. Local and national groups scoured the market for properties that were built recently and had attractive long-term tenants in place. Riskier and generally older properties were not as highly sought after, but still garnered interest. Investors were also attracted to a market that had generated positive investment performance metrics over the past few years. MSCI Indexed properties posted an annual average total return of 8.7% for the period ending on June 30th, 2015. This attractive result outpaced the national average for the asset class by 210 bps and the broader index by 180 bps. Moreover, it marked a sixth consecutive year of performance strength. Therefore, it was not difficult to rationalize investing in this market, even as values stabilized. For the past several years, investors were drawn to a market that witnessed consistently positive capital growth. During the past year however, investors were largely thwarted in their efforts to acquire property in this market, given significant supply imbalance.

UNCERTAINTY WILL FACTOR INTO PERFORMANCE There is a level of uncertainty within Edmonton’s business community that will, at least partially, dictate industrial sector performance over the near term. Specifically, the extent and duration of the energy sector downturn will have an impact on business confidence. Assuming the sector stabilizes, then a modest economic recovery should unfold. This will support industrial space demand. However, if the downturn continues, or worsens, then the local economy will suffer. If the economy stabilizes, leasing market conditions will improve to some extent. If not, occupancy will fall, with rents following suit. Regardless of the economic outcome, investors will continue to try to acquire one of the few high quality assets brought to market with the promise of attractive long-term performance. A byproduct of this demand will be property values that range close to the cycle peak. In short, business confidence related to the energy sector and by extension the overall economy will influence industrial performance over the near term.

52

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

EDMONTON RETAIL REPORT SOLID LEASING MARKET PERFORMANCE POSTED There was little evidence of material leasing risk in Edmonton’s retail sector over the past year, despite recent economic uncertainty. A prolonged period of economic outperformance in the post-recession period resulted in tight conditions over the past several years. During this period, a range of local and national retailers, both existing and new to the market, expanded operations in this market. To a large extent, the recent slowdown has had little impact on demand. In the past year, expansion activity remained fairly strong, albeit not quite as robust as previously observed. Recent expansion news in this market: Canadian Tire, Nordstrom Rack, Cineplex’s Rec Room at South Edmonton Common, LA Fitness at NewCastle Centre and GoodLife Fitness in Tamarack. Further evidence of recent expansion activity was fairly plentiful. Over the past year, the market’s demand profile has been sufficiently strong in support of positive supply-side fundamentals. According to mid-2015 CBRE survey results, the market’s aggregate occupied position rested at a healthy 95.4%. Occupancy fell by 240 bps since the end of 2014. However, the downward shift was mostly due to the closure of stores by Target and Future Shop. If these sublets were subtracted from total vacancy, occupancy would be a stellar 98.1% and signal the broader health of supply-side fundamentals. The market’s healthy occupancy profile was maintained in spite of the addition of 605,000 SF of new supply in the first six months of 2015. Much of the space was pre-leased, or committed to shortly thereafter. This bodes well for the 624,000 SF that was under construction in the summer of 2015. The lease-up of newly built space represented additional evidence of this market’s overall health over the recent past.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT RECOVERY STABILIZED Recovery continued to characterize Edmonton’s retail property investment performance over the past year, while investor confidence levels were eroded. The sector registered another year of attractive results. Properties tracked in the MSCI Index posted a sixth consecutive year of attractive return performance. The total annual return of 8.0% for the year ending at the midway mark of 2015 was 90 bps better than the average for the asset class. Additionally, it was 120 bps higher than the average for the entire index. The strength of the market’s medium-term performance was an attraction for investors. This, along with consistently strong economic and retail performance drivers in the post-recession period, translated into healthy investment demand patterns. Investors, both local and national, looked to Edmonton’s retail sector to increase their property holdings. In keeping with the commercial property sector overall, many were challenged to source available product. Assets were infrequently put on the open market for sale. When they were, bidding was generally aggressive, which supported the stabilization of property values close to the peak for the cycle. Some groups chose the development avenue to effectively build their core portfolios. Outside of the product shortage, conditions in Edmonton’s retail investment market were mostly stable and healthy.

INVESTMENT RISK WILL REMAIN ELEVATED Investment risk will be a factor in what is otherwise a positive outlook for Edmonton’s retail sector. Investors will monitor global economic conditions closely, which will impact decisions over the near term. For the most part however, Canada’s economy is forecast to strengthen over the second half of 2015 and into 2016. This includes the stabilization of the domestic energy sector. In turn, this would register positively in Edmonton’s retail leasing and investment markets. If this forecast holds true, then leasing fundamentals will strengthen an already solid position. This will include income growth for the market’s owners. Values should at least hold at current levels, with the potential for modest growth. For the near term however, risk will be elevated. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

53

EDMONTON MULTI-SUITE RESIDENTIAL REPORT MODEST RENTAL MARKET SOFTENING RECORDED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Edmonton’s Multi-Suite Residential rental market fundamentals softened slightly over the past year, as demand fell short of expanded supply. The softening was most evident in recent occupancy patterns. The Edmonton CMA posted an average occupancy rate of 97.6% in the CMHC’s spring survey. The rate was down 100 bps year-over-year, with declines reported for all unit size categories. The cause of the dip was that the supply of rental apartments grew more quickly than rental demand. Between April 2014 and 2015, Edmonton’s inventory of purpose-built rental units increased by 1,800. Coincidentally, the region’s economic slowdown resulted in a weaker employment growth trend and fewer migrants settling in the area. As a result, there was a marked demand shortfall relative to the increased number of units. Even as demand fell short of supply, year-over-year average monthly rents continued to climb. This was somewhat deceiving, in that much of this growth occurred in the latter half of 2014. As 2015 progressed, it became clear that the upward pressure on rents was about to come to an end. In some cases, owners had already begun to consider reducing their expectations on rents, given an expectation of increased competition for the relatively few tenants in the market for rental accommodation. The timing of these related decisions would like be dictated by further erosion of market fundamentals.

PERFORMANCE TRACKED SECTOR AVERAGE Edmonton’s purpose-built Multi-Suite Residential rental property investment performance of the past year was in keeping with the national average for the asset class. Investment demand was robust, as most groups continued to realize the relative benefits of owning assets in this sector. In the past, stable and healthy income performance was achieved during economic downturns. Investors were attracted to the sector’s defensive characteristics overall. The demand-strength observed over the past year supported peak property values and competitive bidding scenarios. Investors who already owned assets in this market were treated to a sixth year of attractive performance. Private ownership groups with property in this market that were tracked in the MSCI Index generated attractive results on average. Evidence of this fact was the average annual return of 7.3% for this market, in the index for the year ending June 30th, 2015. This was competitive with the asset class average of 8.5% for the period. Healthy income and capital component performance was recorded over the same period in Edmonton, which tracked the national trends. Indeed, most of the investment trends reported in Edmonton’s MultiSuite Residential rental sector over the past year were similar to those observed at the national scale for the asset class.

SLIGHT SOFTENING TREND FORECAST On balance, Edmonton’s Multi-Suite Residential purpose-built rental apartment sector will register a slightly weaker performance over the near term. The energy sector correction will continue to erode demand for rental accommodation overall. The resulting labour market softness will reduce demand for rental apartments. As a result, occupancy will continue to rise, although levels will remain fairly strong. The weaker demand backdrop will produce more stable average rents, with modest erosion possible. The mild erosion of rental fundamentals will also impact investment performance. A lower rate of income growth will impact total returns, although modest increases in value may offset the lost ground. Despite slightly weaker leasing fundamentals, investment yields will be sufficiently high to attract investors to this market. The sector will likely outperform during an extended period of tepid economic growth, which will draw funds to this market. The sector’s longer-term history of income stability and security will also drive healthy demand patterns. In short, conditions in this market will weaken moderately over the near term, with limited impact on investment demand trends.

54

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

VANCOUVER ECONOMIC REPORT ECONOMIC SNAPSHOT Vancouver’s economy was expected to outperform in 2015, resulting in annualized growth of 3.4% for the year. Real GDP will have expanded by more than 3.0% annually in five of the past six years, should this forecast prove accurate. According to the CBOC, Vancouver was expected to register the fastest rate of economic growth of the 13 cities it tracked. The CMA’s manufacturing sector was forecast to lead the growth trend. The 2015 expansion level projected to continue over the next couple of years.

ROBUST MANUFACTURING OUTPUT GROWTH REPORTED Vancouver’s manufacturing sector output picked up in the first half of 2015, due to increased U.S. and domestic demand. Sector output was forecast to increase by 8.6% over 2015, after a more modest 2.6% expansion was tallied in the previous year. Much of the recent advancement was a byproduct of a low Canadian dollar, which has boosted exports. Continued strength in the U.S. economy helped to drive demand for Canadian products over much of the past year. Coincidentally, ship-building activity at Seaspan’s North Vancouver site also contributed to increased production output. In June of 2015, work began on an $8 billion contract to build ships for the Federal government. The 2015 rise in manufacturing output was expected to continue into 2016, in helping to fuel growth in the Vancouver CMA.

CONSTRUCTION OUTPUT LEVELED Stabilization in construction output forecast for 2015, after several years of strong growth. While a number of large scale developments continued to advance in 2015, a marked increase in output was forecast for 2016. Ongoing projects underway in the Vancouver CMA during 2015 included: Telus Garden Marine Gateway, Trump International Hotel, the MNP Tower and the Vancouver International Airport expansion. Output was expected to increase by 7.4% in 2016, with projects like Rogers Arena towers and 20,800 residential units scheduled to commence construction.

SERVICES SECTOR WAS NO SLOUCH Gains in services sector output were fairly healthy across all sectors in 2015, except for a small dip in the information and culture segment. By the end of the year, output was expected to have increased by 3.6%. Output in more than one sector was forecast to expand by at least 4.0%, including: wholesale and retail trade, the finance insurance and real estate sector and business services. Services output was also expected to rise by similar rates into 2016, as Vancouver’s economy continued to thrive.

ECONOMIC OUTLOOK RANKS HIGH Vancouver’s economic outlook is arguably the strongest of the major Canadian cities over the near term. As mentioned previously, economic expansion will be stronger than most other large cities in Canada. Growth of 3.4% in 2015 will be followed up by similar economic advances in 2016 and 2017. In turn, the region’s unemployment rate will be pulled down below the 5.0% mark by 2018. Robust retail sales growth of 8.7% in 2015 will be fueled by steady increases in personal income and employment levels. Between 2016 and 2018 sales growth will eclipse the 4.0% mark annually. Housing starts in excess of 20,000 units are forecast annually through 2019, according to the CBOC. This will drive spending activity and economic activity.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

55

VANCOUVER OFFICE REPORT NEW SUPPLY FUELED ACTIVITY AND HIGHER VACANCY

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption



-

Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

The over 2.2 million SF of new construction delivered to the Greater Vancouver Area (GVA) office market since the beginning of 2014 has been the focus of market activity and increased vacancy. In the first half of 2015 alone, four new projects were readied for occupancy totaling almost 1.3 million SF. This supported record high quarterly absorption of 822,069 SF in the second quarter alone. Several large tenants took occupancy of space in these new buildings, having secured the most efficient available space. In doing so, the average SF occupied per employee decreased for these companies. At the same time, many were able to secure more flexible configurations in which to carry out their business operations. A byproduct of many of the recent relocations to new buildings has been a sharp rise in backfill space in older buildings. This was not a unique condition to Vancouver, as a number of other markets in Canada have witnessed similar increases in vacancy in older buildings. Owners of these properties have been forced to allocate significant time and resources to planning the re-lease and, in some cases, the repositioning of buildings in the market. New office construction in the GVA has also driven vacancy levels higher since the beginning of last year. Coincidentally, occupancy levels trended lower. At the midway mark of 2015, downtown occupancy rested at 90.3%, down 350 bps from the start of 2014. In the suburbs, occupancy plunged by 610 bps to 82.8% over the same period. As 2015 advanced, tenants were able to achieve inducements more readily, as net effective rates declined. For some owners, this represented a significant erosion of income. The more than 2 million SF of new supply under construction in this market was expected to continue to be the focus of activity over the next couple of years, in support a steady rise in vacancy level.

RECOVERY CYCLE STABILIZATION PERSISTED Vancouver’s office sector investment recovery cycle was extended over the past year, a performance that included a measure of stabilization. The recovery phase of the cycle was observed in MSCI Index returns. A total return of 7.0% was tallied for the year ending on June 30th, 2015. While down from the 2011 peak of 16.6%, the result was attractive nonetheless. This marked a fourth consecutive decrease in overall performance, driven by a maturing of the capital growth cycle in the broader sector. In the past year, further evidence of the continuation of this market’s recovery cycle was observed in its investment demand patterns. A range of investment groups attempted to gain a foothold or increase their portfolios in the GVA office sector. Local, national, and international groups were all active in the past year, a market characteristic that has been in place since the most recent recession. In keeping with the broader market, the supply of investment property on the market for sale fell far short of demand. As a result, the $212.5 million in transaction volume recorded in first half of 2015 was well below the peak of just over $1 billion in 2012. The strength of the market’s demand profile helped stabilize property values at the peak for the cycle. This leveling of property values was indicative of this market’s performance of the past year.

MIXED PERFORMANCE TO CHARACTERIZE NEAR TERM The GVA office sector will generate mixed results over the near term. In the investment sector, the performance of the past 12-18 months will likely be repeated. That is, the mature phase of the current cycle will prevail. In the leasing market, new supply will drive occupancy rates lower. Therefore, outside of contracted increases, rental growth will be negligible at best with the potential for erosion for owners with older buildings or significant vacancy. As a result, returns will continue to trend lower. In the worst case scenario, values could fall along with rents. All in all, near-term sector performance will be uneven.

56

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

VANCOUVER INDUSTRIAL REPORT GROWTH TREND SUPPORTED LEASING PERFORMANCE A healthy growth trend boosted the GVA’s industrial leasing performance over the past year, in extending the market’s medium-term strength. Relatively robust demand was the result of expansion activity within the region’s warehouse and logistics sectors. Procurement facilities related to e-commerce accounted for a significant portion of this demand. In addition, many companies looked to occupy more functional and often newer premises in which to carry out their operations. This resulted in positive demand patterns related to newly built premises. For some time, tenants in this market were only able to locate to older or less functional space. Demand for higher quality space keyed much of the new development in this market over the recent past. Since the beginning of 2014, close to 4.2 million SF of new supply was completed. For the most part, demand kept pace with new supply over this 18month period. This dynamic translated into stable occupancy on aggregate. According to CBRE statistics, the market’s occupied position closed the first half of 2015 at 93.8%. In the preceding 18-month period occupancy edged up to the 93.0% mark, before falling again. The strength of the market’s occupancy trend over the period supported upward rental rate pressure. The relative shortage of newly built space was the most obvious cause of the pressure. For owners, this justified their investments in new construction, a growth trend that bolstered largely positive leasing performance over the past year.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates



-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

RECOVERY PHASE OF THE CYCLE WAS EXTENDED Vancouver’s industrial property sector performance of the recent past was reflective of the ongoing recovery phase of the current investment cycle. This was punctuated by recent MSCI Index results for the year ending at the midpoint of 2015. GVA properties posted an annual average return of 9.8% for the period, up 40 bps year-over-year. The performance was punctuated by capital growth, unlike most other markets across the country captured in the index. However, the rate of capital growth was more modest than in the past few years. The continued GVA industrial investment recovery of the past year was supported by healthy demand characteristics. A fairly broad range of local, national, and foreign groups continued to try to source industrial investment properties in this market. In many cases, groups were unable to increase their exposure to this market. Despite the shortfall, transaction closing volume was largely strong over the recent past. In the first half of 2015, a total of $448.2 million in industrial property was sold. This outcome built on a relatively strong $814.3 million in sales over all of 2014. Activity levels were indicative of the overall strength of Vancouver’s industrial real estate sector of the past few years. The health of this market’s liquidity trend was further testament to the fact that the recovery phase of the current investment cycle remained in place over the past year.

CONTINUED STABILITY AND HEALTH FORECAST Vancouver’s industrial sector performance indicators point to persistent health and stability over the near term. The Vancouver CMA regional economic growth outlook is one of outperformance, with GDP to expand by more than 3.0% in 2015, and the subsequent few years. This should translate into positive space demand patterns, occupancy levels and average rents over the period. A byproduct will be development projects in support of demand. For owners, a positive leasing outlook will support income growth and stability and performance. Capital values will stabilize, with the possibility of minor upward pressure. On balance, investment fundamentals will continue to reflect investment market recovery. Various groups will try to source investments in this market, which will produce ongoing competitive scenarios when product is brought to market. In short, this market will register continued progress over the near term. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

57

VANCOUVER RETAIL REPORT HEALTHY LEASING FUNDAMENTALS REPORTED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate

-



Net Absorption





Lease Rates

-

-

New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Vancouver’s retail property sector posted generally strong and stable leasing fundamentals over the past year, in keeping with the medium-term trend. A flurry of activity reflected solid demand patterns, as a range of new stores opened. The most notable of these took place in the recently completed McArthurGlen Designer Outlet. The joint venture attracted names like: Hugo Boss, Armani, Polo Ralph Lauren, Coach and Brooks Brothers amongst others. Additional openings in the GVA included: a new Walmart at Central City, Equinox Fitness at 1111 West Georgia, a Christian Dior flagship store and several new stores in the Pacific Centre lower-level expansion. Retailers, both local and international, looked to capitalize on one of the countries healthier regional economies over the past year. The strength of the market’s demand picture was a catalyst for development projects either in progress or recently completed. Notable projects underway were expansions to existing centres like Amazing Brentwood and the Pacific Centre. Despite a fairly robust development cycle, GVA supply conditions remained strong over the recent past. Aggregate occupancy of 96.6% was recorded for the 36.7 million SF of retail shopping centre space tracked by CBRE at the end of the first half of 2015. This was a full percentage point higher than the national average. The spread was lower for regional centres and the same for the Power Centre subcategory of malls. The strength of the GVA’s occupancy profile of the past year ensured average rents held generally firm at the peak for the cycle. In summary, conditions in the GVA retail rental market were broadly positive over the recent past, in keeping with the trend of the past few years.

INVESTMENT MARKET OUTPERFORMED Vancouver’s retail sector posted a sixth consecutive year of positive investment performance recently. Returns were among the highest of the major retail markets tracked in the MSCI Index. A total average return of 11.8% was posted for the year ending on June 30th, 2015. This was 470 bps higher than the sector average and 490 bps better than the broader index performance. This market has posted double-digit returns for six years in a row, as of the midway mark of 2015. The strength of the medium-term performance was a factor in the market’s investment demand characteristics over the past year. On the whole, local, national, and international groups were eager to invest, which resulted in strong demand for assets in this market. Bidding was largely aggressive, which held property values at the peak for the cycle. In a few cases, values increased slightly, although the capital growth cycle appeared to have eased. This market remained a source of stable and healthy income for investors. Indeed, the ability of GVA’s retail sector to generate income factored into what was another year of healthy performance over the past year.

MEDIUM-TERM TRENDS WILL BE REPEATED There is evidence to suggest that the medium-term health of the GVA retail property performance will be extended over the near term. The region’s economic performance of late, and forecast over the next few years will support purchasing power for its residents. As such, retailer sales results should be strong enough to support ongoing retail leasing market stability. By extension, owners will enjoy income growth and stability. Rents will hold close to the peak, given above-average occupancy patterns. Investment trends will also remain positive. Therefore, demand for investment-grade assets with stable tenant rosters will be highly sought after. Once again, there will be more capital allocated for this market than availability. As a result, vendors will have little trouble achieving pricing objectives on sales. In short, Vancouver’s retail sector performance over the near term will be similar that of the past few years.

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2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

VANCOUVER MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET FUNDAMENTALS REFLECTED PEAK Conditions in the GVA Multi-Suite Residential purpose-built rental market of the past year were reflective of the peak phase of the current cycle. Demand outdistanced supply by a significant margin. Many families and individuals were forced to continue to rent accommodation, as the price of home ownership remained out of reach. At the same time, a healthy local economy and job market conditions added to the demand pressure in this market. Demand strength, coupled with issues of housing affordability and availability, have translated into supply imbalance in the GVA rental market. In its spring 2015 survey, the CMHC reported an occupancy rate of 98.6% for the Vancouver CMA. The supply imbalance became even more acute year-overyear, with occupancy increasing by 40 bps. The situation was made worse by the lack of a material development cycle. A myriad of social and political causes have presented significant road blocks to alleviating the shortage of housing in general in the GVA. Therefore, relief for families looking for accommodation was unlikely over the near term. The rental market supply shortfall benefited existing property owners. Rents continued to rise beyond the provincial guideline of 2.5% year-over-year, with the two-bedroom average monthly rent increasing by 5.6%. This rate of increase indicated rents for units vacated over the period were inflated even more. Peak rental averages were in keeping with the broader rental market phase of the current cycle over the recent past.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption

-

-

Lease Rates





New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

MORE OF THE SAME FOR INVESTMENT MARKET There was little variation in conditions in the GVA Multi-Suite Residential purpose-built investment property market over the past year. Performance and pricing were essentially unchanged over the period. Cap rates continued to range between 2.8% and 4.3%, according to one source, remaining among the lowest of the country’s major urban centres. They were however, at levels that produced positive cash flow for investors. On average, property values rested at the peak for the cycle. Investment demand outpaced the supply of available assets, which resulted in aggressive bidding and fairly intense competition when assets were offered for sale. Local and national groups were active in this market over the past year, with public market groups also present. In fact, CAP REIT added a 919-unit portfolio in September of 2015 for $170 million. The sale was expected to boost transaction volume figures for the year, in adding to the $361 million in total sales reported in the first half. Liquidity in this market was a product largely of asset availability, which was somewhat limited, rather than any demand shortfall. The strength of the demand backdrop over the recent past was not surprising when investment performance was considered. Properties tracked in the MSCI Index generated a fairly attractive annual average return of 6.6% for the 12-month period ending on June 30th, 2015. This represented a sixth consecutive year of positive performance. In summary, there was little change reported in GVA investment property market trends over the past year.

RINSE AND REPEAT The GVA Multi-Suite Residential purpose-built rental property sector will continue to perform much as it has over the past few years over the near term. Supply demand imbalance will persist in the rental market, which will drive rents higher still. Rental demand will outpace the supply of vacant units, given little in the way of development and housing market conditions. Therefore, owners will continue to enjoy stable and healthy income results. Property values will hold at the peak, while returns remain positive. Investors will continue to face stiff competition from various sources for the limited number of available properties. Barring a significant change in the global economic backdrop, this market will continue to exhibit conditions reported over the past few years. 2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

59

VICTORIA ECONOMIC REPORT ECONOMIC SNAPSHOT The Victoria CMA economic growth outlook was expected to strengthen in 2015, with GDP expansion of 1.4% for the year. During the preceding three-year period, fiscal belt-tightening on the part of the public sector eroded economic growth. This resulted in economic expansion of less than 1.0% annually. Healthier labour market conditions were anticipated for 2015, after a two-year period of contraction. In 2015, retail consumption was forecast to improve by a solid 5.3%.

PUBLIC SECTOR RESTRAINT IMPACTED PERFORMANCE The program of fiscal restraint enacted by the B.C. government over the past few years eroded Victoria’s economic performance. In 2015, public sector output was forecast to contract by 1.2%, after annual average declines of 2.0% over the preceding five-year period. Weak growth levels in the public sector was a key to the less-than-stellar economic and employment growth trends recorded in the Victoria CMA over the past several years. However, there was a silver lining to this generally negative performance. Fiscal restraint has enabled the B.C. government to balance its books starting in 2013-2014. This was expected to positively impact the region’s economic growth trend beginning in 2016.

RESIDENTIAL CONSTRUCTION ACTIVITY IMPROVED Construction volume in Victoria’s housing market increased markedly in the first half of 2015, after an extended period of weakness. The recent increase in volume occurred in both the single-detached and Multi-Suite Residential sectors, according to the CBOC. The rise in activity was forecast to persist through much of 2015, resulting in a 50.0% annual increase in total starts. Overall starts were expected to eclipse the 2,000 threshold over 2015 for the first time in five years. Previously, starts had slowed due to reduced condominium activity as inventories climbed. The recent increase in housing construction starts was expected to boost the local economy and job market.

MANUFACTURING SECTOR OUTPERFORMED Victoria’s manufacturing sector continued to post positive results in 2015, while much of the rest of the region’s economy registered weakened expansion activity. Sector output was forecast to expand by a healthy 7.0% over the year, according to the CBOC, having generated annual average growth of 4.4% from 2010 to 2014. Recently, sector output was supported by a low Canadian dollar and a stronger U.S. economy. Victoria Shipyard work also provided a boost to manufacturing output, with upgrades to warships and submarines. The 2015 surge in activity represented a continuation of the strong medium-term growth trend for the sector, which was expected to continue for at least the near term.

MOMENTUM TO BUILD Regional economic momentum will build over the near term, resulting in a firmer growth trend for the broader economy overall. Non-commercial services output will improve substantially, which will drive GDP growth of 1.4% in 2015 and an annual average of 2.5% from 2016 through to 2018. The healthier economic outlook will result in average annual employment growth of 1.5% over the medium-term. Housing starts will hold at the long-term average, which will also help support momentum in the CMA’s economy.

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2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

VICTORIA OFFICE REPORT EXCESS SUPPLY FIGURED PROMINENTLY Victoria’s recent office leasing market performance was dictated, to a large extent, by oversupply. The delivery of more than 500,000 SF of new supply to this market since 2010, coupled with a weak economic performance, has resulted in significant imbalance. Overall market occupancy reached a decade-low in 2014 of 91.8%, with only a slight lift reported in the first half of 2015, according to Colliers International figures. Occupancy had been on a downward path since the 2010 peak, as demand remains relatively weak. Suburban occupancy levels fell steadily over the same period, resting at 88.4% at the end of the first quarter of 2015. Once again, new supply played a significant role in this trend. To make matters worse, tenants were hesitant in terms of moving to class A premises, preferring less expensive space for their business needs. Market imbalance was also a product of a relatively weak demand cycle. The public sector’s twin objectives of more efficient use of office space and balancing their books effectively resulted in a reduced footprint. Coincidentally, private sector demand was also weak, given concerns related to the global economic outlook in 2015. Tenants looking to relocate or expand were able to capitalize on the weak demand backdrop in negotiating lease terms. At the same time, landlords were forced to adjust their expectations, which resulted in lower rents on average. Over the near term, the delivery of new supply, especially in 2017, was expected to support the current position of oversupply in this market.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption



-

Lease Rates





New Supply





*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

INVESTMENT DEMAND TOPPED SUPPLY Demand for investment product in Victoria’s office sector recently surpassed supply, in keeping with the national trend. There was plenty of low-cost capital available for investment, as a range of investment groups looked to acquire assets in this market. Pension funds, other institutional groups, private capital and fund managers all looked to increase their exposure. Foreign investors were also present. The issue over the past several years has not been demand, but rather a relative shortfall in the volume of assets brought to market for purchase. To some extent, this has been a function of relative size of the market. However, in many cases vendors chose to hold assets that had generated strong performance over the long term. Limited access to product was reflected in the fairly modest transaction closing volume of $37.3 million in the first half of 2015. Indeed, if product availability was higher, so too would the sales volume total. However the demand pressure in recent years has supported close-to-record-low cap rates and record-high property values. Unless there is a material change in market conditions, the demand supply imbalance was expected to remain a factor in Victoria’s office sector investment market performance.

SUPPLY RISK STILL A CONCERN Supply risk will continue to occupy the minds of market participants over the near term, with over 600,000 SF of new developments scheduled for completion through to 2017. This will most assuredly pull occupancy below the decade-low of 91.8% recorded in 2014. Additionally, downward pressure on rents will also be a mainstay of the market for the foreseeable future. Unless demand were to prove far more vibrant than forecast currently, conditions in this market will continue to soften. For investors and owners, this will mean becoming more creative and nimble in order to attract new tenants and maintain existing income. For those with a long-term view, it could mean opportunities for acquisition, the re-positioning of older assets, or the ability to adjust tenant mixes. For tenants, greater flexibility will be afforded, given increased vacancy. Despite the erosion of leasing fundamentals, the market’s best buildings will continue to perform. Those with deep pockets will be able to wait out the next few years of excess supply and achieve long-term success.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

61

VICTORIA INDUSTRIAL REPORT LEASING MARKET EXPERIENCED MODEST SOFTENING

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption



-

Lease Rates



-

New Supply

-



*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Conditions in Victoria’s industrial leasing market softened over the past year, although its position of broader stability remained intact. Supply-side metrics weakened, as overall market occupancy slipped by more than a full percentage point, according to Colliers International statistics. Occupancy rested at 94.3% as of the midway mark of 2015, down from 95.4% a year earlier. To some extent, the decline was misleading. The reason for the downward movement was softness in the larger box segment of the market. A small number of large spaces became and remained vacant during the first half of 2015; however, the mid-to-small tenant market remained generally healthy and stable over the same period. Demand was generally healthy and occupancy levels ranged close to the medium-term average. Across the market, demand for the most functional space remained healthy. Coincidentally, second and third generation space was not highly sought after, which resulted in downward pressure on rents in this sub-category of the market. A number of tenants looked to upgrade the quality of their space, which resulted in modest upward pressure on rents for newer space. The net result of the various pressures on rents in the different segments of the market contributed a flattening trend for the overall market average. In short, Victoria’s industrial leasing market underwent a softening of overall fundamentals over the past year, while its record of stability and strength went largely unblemished.

CONSISTENCY CHARACTERIZED INVESTMENT MARKET PERFORMANCE Investment market characteristics observed in Victoria’s industrial property sector over the past year were consistent with those of the past few years. Once again, demand outpaced supply. Local and national groups continued to show interest in this market, given a record of stable and healthy income performance over the long term. In addition to competition in this market from other investors, owner-users also looked to take advantage of a favourable debt market. The net result was a high level of competition for the relatively few assets offered on the market for purchase. Low levels of product availability were reflected in transaction volume totals. In the first half of 2015, just $16 million in sales were completed. While in line with the pace of the previous year, the total fell short of demand in keeping with the long-term trend. Overall, the demand supply imbalance of the past year was the norm for this market. As such, there was little change in property values, which held at the peak for the cycle. Investors exercised care in acquiring riskier assets, but for the most part this was unchanged from the past few years. In summary, investment market trends reported over the past year were consistent with many of those observed in the post-recession period.

LITTLE PERFORMANCE VARIATION FORECAST Victoria’s near-term industrial sector performance will be largely unchanged from that of the past year. Large bay vacancies will continue to cast a shadow over the leasing market. The balance of the market will see stable conditions, with positive demand driven by a slightly more robust economic growth performance in 2016 and beyond. The best spaces will attract tenants; however demand will remain moderately healthy overall. Occupancy will continue to decline, albeit at a modest pace. Small and medium tenant building owners will continue to enjoy generally stable income generation, given relatively healthy demand and occupancy levels. For investors, properties will be hard to come by. Values will hold at current levels, but material capital appreciation appears to have eased. Investors will be challenged to enter this market, given the barrier to entry of the overall size of the market. In short, near-term market performance will be consistent with recent outcomes.

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2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

VICTORIA RETAIL REPORT TRENDS GENERALLY FAVOURED THE TENANT Trends reported in Victoria’s retail space market were more attractive for tenants over the past year, as its fundamentals were eroded. Overall, vacancy levels were on the rise across various sub-sectors of the market. Available space in street front locations had become fairly abundant, according to an early 2015 Cushman and Wakefield report. This was in keeping with conditions reported a year earlier. Overall, vacancy levels continued to range in the low-teens. At the same time, the closure of a 147,000 SF Target store at Hillsdale Shopping Centre and the Target Tillicum store will add to vacancy pressure. For tenants, the rise in vacancy in this market has produced downward pressure on rents. This has helped their respective bottom lines, by lowering premises costs. This has helped offset issues related to the low value of the Canadian dollar when purchasing inventory and services. For owners, lower occupancy levels have eroded income performance and property values in some cases. However, the news is not all bad for landlords. There have been several store openings reported over the past year. Downtown, a number of mixed-use developments have attracted tenants to their ground floor space. In early 2015, Whole Foods announced the opening of a 40,000 SF location at Uptown Shopping Centre in Saanich next year. Despite the positive news reported for Victoria’s retail market over the past year, trends favoured the sector’s tenants on balance.

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate





Net Absorption





Lease Rates



-

New Supply

-

-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

FUNDAMENTALS ATTRACTED INVESTORS There was evidence to suggest that Victoria’s retail sector fundamentals remained attractive to investors over the recent past, which was consistent with much of the post-recession period. Demand for established centres in this market was brisk, as national investors looked to the region for diversification and income stability. Local groups also actively looked to gain a foothold in a market that had outperformed over the past few years. The region’s newest and best malls continued to generate strong interest on the part of tenants, which supported occupancy strength and income stability. Many groups were frustrated in their attempts to source existing income-producing product. In the past, some groups have looked to development as their core investment strategy given the existing product shortfall. The demand supply imbalance acted as a stabilizing force on values, which were essentially unchanged yearover-year. Even with limited existing property availability, transaction volume has been surprisingly strong. In the first half of 2015, $166 million in retail assets traded hands. This fell just short of the pace of 2013, which represented a 13-year annual peak. This was perhaps the most obvious evidence of the attractiveness of this market within the real estate investment community.

PERFORMANCE-DRIVER FORECAST HOLDS PROMISE FOR NEAR-TERM PERFORMANCE Economic conditions are expected to strengthen over the near term, which bodes well for Victoria’s retail sector. The regional economic growth trend will improve over the next few years, after expansion of less than 1.0% from 2012 to 2014. This will drive employment growth and healthier retail spending gains; therefore, retailers should anticipate healthy sales results. In turn, this will support demand for retail space and income stability for most landlords. Investors will continue to look to gain a share of this income stability, in order to meet their income-based investment objectives. This, along with the market’s long-term reputation for performance, should produce healthy investment demand patterns. Relatively aggressive bidding should remain the norm, which will provide a foundation for stable property values, with access to available product remaining a challenge. On balance, sector results over the near term will be dictated by performance-driver results.

2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

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VICTORIA MULTI-SUITE RESIDENTIAL REPORT RENTAL MARKET IMBALANCE CONTINUED

TRENDING STATISTICS FUNDAMENTALS

∆ YTD

1-YEAR OUTLOOK

Vacancy Rate



-

Net Absorption



-

Lease Rates





New Supply



-

*The trend indicators do not necessarily represent a positive or negative value (i.e. absorption or new supply could be negative/ positive, yet indicate a growing/shrinking trend over a specified time horizon).

Conditions in Victoria’s Multi-Suite Residential rental market reflected significant levels of imbalance over the past year, in line with the national trend. On the whole, demand outpaced the supply of vacant units for rent. The combination of population growth, higher youth employment, the high cost of home ownership and an aging population, supported broadly positive demand patterns. Unfortunately, the supply of available rental units became increasingly constrained over the past year, as occupancy levels continued to rise. The CMHC reported average occupancy of 98.8% for the Victoria CMA in its spring 2015 survey, up 150 bps year-over-year. The sharpest rise in occupancy over the period was tallied in the market’s one and two-bedroom unit categories. The shortfall in availability presented several challenges for families in the market to rent. Choices were few and far between. The absence of a significant development cycle was also a determining factor in the lack of choice for renters. At the same time, prospective renters were forced to deal with rising rents. While not as expensive as the cost of home ownership, rents increased as market conditions tightened. According to CMHC statistics, rents increased across all unit size categories in its same sample survey year-over-year. On average, rents continued to range at the peak for the cycle, which was welcome news for owners. In short, owners of assets in this market benefitted from the imbalance that continued to characterize the market over the past year.

STABLE INVESTMENT MARKET PERFORMANCE REPORTED Stabilization characterized Victoria’s Multi-Suite Residential rental sector investment market performance over the past year. Demand was generally positive, although, in keeping with long-term trend, local and regional groups were most active. National and, to a lesser extent, international groups also looked to gain a foothold in this market. Despite high levels of interest, transaction volume trended downward. According to Colliers International data, there was a total of $30 million in transactions recorded in the first six months of 2015. This was down sharply from the $63 million in trades reported over the same period a year earlier. The shortfall in availability accounted for the reduced closing activity over the past year, as demand remained strong and healthy. The demand peak has sustained cap rates close to the cycle low and property values at the peak. Local property yield rates continued to furnish investors with confidence in this market, despite being among the lowest in the country. In the past year, assets brought to market were generally well-received, resulting in more than one multi-bid scenario. Most groups were able to source low-cost debt and equity capital, which helped drive the sustained demand pattern in this market. In summary, many of the trends reported in this market over the recent past continued to factor into performance metrics over the past year.

PROLONGED STABILIZATION FORECAST Victoria’s Multi-Suite Residential rental property sector will generate continued stabilization over the near term. Rental market imbalance will be a common theme over the next 12 to 24 months, with demand surpassing supply. As a result, rents will edge higher and occupancy will range close to the 98.0% mark. In turn, owners will reap the benefits in the form of stable and healthy income performance. This will once again attract capital to this market. Investment demand will be robust, despite the continued shortfall in availability. Local and national groups will once again be at the fore of the bidding. Property values will hold firm at current levels, along with yields. Transaction volume will be dictated by availability, as was the case over the past year. Barring a significant change in market conditions, this market will post another period of largely stable conditions over the near term.

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2016 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

Acknowledgements Cited Research Resources In the course of compiling the statistical information and commenting on real estate markets, national, regionally and across Canadian metropolitan areas, we acknowledge the assistance and feedback from the following parties in completing this report: The Altus Group, Avison Young, Bank of Canada, Bank of Japan, BMO Economics, BMO Nesbitt Burns, British Bankers’ Association, Brunsdon Martin & Associates, CBRE Econometric Advisors, CBRE Limited, CIBC World Markets, Canada Newswire, Canadian Mortgage and Housing Corporation (CMHC), Canadian Mortgage Loans Services Limited, The Canadian Real Estate Association (CREA), Colliers International, Commercial Edge, Conference Board of Canada, Cushman & Wakefield, Developers and Chains e-news, Economy.com, European Central Bank, The Federal Reserve Board, Frank Russell Canada (RCPI), The Globe and Mail, ICR Commercial Real Estate, International Council of Shopping Centres (ICSC), Insite-Altus Research, International Monetary Fund, jlr Land Title Solutions, The Johnson Report (Winnipeg), Jones Lang LaSalle, Monday Report on Retailers, MSCI, Ottawa Business Journal, PC Bond Analytics, PricewaterhouseCoopers, RBC Capital Markets, RBC Economics, RealNet Canada Inc., RealTrack Inc., Rogers Media, Statistics Canada, Scotia Capital, TD Economics, Toronto Star, Torto Wheaton Research, Urban Land Institute, United States Department of the Treasury, York Communications

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