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mid-year 2017CANADA
PROPERTY MARKETS
Healthy fundamentals despite se-lect regional and sector challenges
CAPITAL MARKETS
Stable economic, political and property environments attract record capital flows
ECONOMY
Encouraging broad-based growth in Canada leaves the oil shock in the rearview mirror
ContentsGlobal Economy
U.S. Economy
Canadian Economy
Capital Markets
Office
Retail
Industrial
Multi-Residential
1
2
3
4
5
7
9
11
KeyPROPERTY TYPE METRICS
VACANCY / AVAILABILITY
ABSORPTION
NEW SUPPLY
RENT
BENTALL KENNEDY RESEARCH SENTIMENT
Positive < > Negative
CANADA PERSPECTIVE | MID-YEAR 2017 1
Global Economy
A POSITIVE OUTLOOK FOR THE U.S. AND CANADA
OIL PRICES FAILING TO SUSTAIN A RECOVERY
Sources: IMF | U.S. Energy Information Administration, Reuters (WTI Spot Price); June 2017 value = week of 6/16
♦ The U.S. and Canadian economies are poised for improved growth in 2017-18, and will lead many other industrialized nations.
♦ Europe provides upside as the French and, potentially, German elections favor status quo. “Free money” policies are finally having the desired effect on growth.
♦ German industrial production is strong and business and consumer confidence in the Euro-Area are near multi-year highs.
♦ Headwinds persist, however, as geopolitical un- certainty and recent terrorist attacks weigh on growth. Tourism in Europe has ebbed and flowed.
♦ China posted modestly better than expected GDP growth in 17Q1 of 6.9%, aided by government spending and export growth. Risks remain and Moody’s recently downgraded China’s credit rating due to rising debt levels.
♦ Oil prices have trended lower in 2017 as OPEC production cuts have been offset by Non-OPEC production and sluggish global oil consumption.
♦ Cheap oil remains a headwind for oil exporting countries, but benefits consumer driven econo-mies, namely the U.S.
2010
2011 - 15 Avg. 2016 2017 Fcst. 2018 Fcst.
2011 2012 2013 20152014 2016 2017
WT
I Sp
ot
Pri
ce ($
/bar
rel)
An
nu
al R
eal G
DP
Gro
wth
(%)
100
120
50
70
20
80
30
90
40
110
60
2.25
2.75Euro Area
Canada
United Kingdom
United States
1.00
1.50
0.25
0.00
1.75
0.50
2.00
0.75
2.50
1.25
Growth on more solid footing across regions
12.7% DECREASE IN OIL PRICES, FROM $51.91 TO $45.30 Week of 12/16/16 vs 6/16/17
U.S. EconomyCANADA PERSPECTIVE | MID-YEAR 2017 2
Major indicators showing the U.S. expansion has legs
♦ U.S. GDP growth was slow out of the gates in 17Q1, but should improve as the year progresses. Still our expectation for upper 2.0%-range growth in 2017 has moderated.
♦ The post election climate is more unsettled than anti- cipated. Increased government spending and tax and regulatory reform are likely to take some time. Policy uncertainty will be a persistent drag on growth.
♦ The U.S. dollar remains strong, but has come down from its post-election bounce. A cheaper dollar may support a resurgence in U.S. exports.
♦ Corporate earnings and profits are showing signs of strength aided by a healthy domestic consumer and improving conditions in Europe.
♦ Industrial production is at its highest level in more than two years. Car sales have taken a step back, however, presenting a potential headwind.
♦ Major indicators such as the ISM indices point to expansionary conditions for both manufacturing and non-manufacturing sectors.
♦ Job growth is encouraging despite recent modera-tion due to the maturing business cycle and a labour market that is near full employment.
♦ Unemployment is now below its pre-recession trough and strengthening wage growth is increas-ingly evident.
PROJECTED 2017 GDP GROWTHWSJ Economic Survey - May 2017
2.2%
ISM INDICES POINT TO CONTINUED ECONOMIC EXPANSION
U.S. GROWTH EXPECTED TO IMPROVE SLIGHTLY
Government
Net Exports
Inventories
Residential Investment
Nonres. Investment
Consumption
WSJ Survey
Total
5-Year Average
Sources: U.S. Bureau of Economic Analysis, Dow Jones (WSJ Economic Survey, May 2017) | Institute for Supply Management
2000 2003 2006 2009 20132001 2004 2007 2010 20142002
ISM Non Manufacturing Index
ISM Manufacturing Index
2005 2008 2011 20152012 2016 2017
ISM
Ind
ex (>
50
is e
xpan
sio
nar
y)U
.S. R
eal G
DP
Gro
wth
(%, S
AA
R)
55
3
65
5
30
-2
-4
40
0
45
1
50
2
60
4
35
-1
-3
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017 P
roj.
2018 P
roj.
♦ The Bank of Canada raised its overnight rate by 25bps for the first time in seven years, along with increasing its GDP growth forecast for 2017.
♦ Trade deficit is expected to narrow as export activity improves. Sustainable growth hinges on continued strength of export oriented sectors.
♦ Solid output in the manufacturing sector signaling that non-commodity export activity is emerging as another key driver of economic growth.
♦ Alberta’s economy is recovering from the oil-in-duced recession as conditions in the energy sector have stabilized.
♦ Prospect of oil prices reaching levels that could encourage new capital investments in Alberta’s oil patch is still tentative.
♦ Toronto housing market is beginning to cool owing in part to the Ontario Fair Housing Plan.
♦ Solid employment growth reflects improving businesses confidence but wage growth remains subdued.
♦ Downside risks include: NAFTA renegotiations damaging trade relations; a hard landing in the housing market weighing on domestic demand; and fragility in oil prices.
Canadian EconomyImpressive broad-based growth
Residential Investment ManufacturingConsumption Business InvestmentNon-Commodity Exports
Source: Statistics Canada, Haver Analytics
CANADA PERSPECTIVE | MID-YEAR 2017 3
EXPANSION OF ECONOMIC DRIVERS
CANADA REAL GDP GROWTH
Q22014
Q22015
Q22016
Q12015
Q12016
Q32014
Q32015
Q32016
Q42014
Q42015
Q42016
Q12017
Government
Inventories
Nonres. Investment
Total
Net Exports
Residential Investment
Consumption
5-Year Average
GD
P G
row
th (%
Ch
ang
e A
nn
ual
ized
) 6.0
10.0
(4.0)
(10.0)
(8.0)
–
2.0
4.0
8.0
(2.0)
(6.0)
(12.0)
♦ Canadian commercial real estate investment activity continues to soar in 17Q1 with the larg-est quarterly volume on record.
♦ Gateway markets of Toronto, Vancouver and Montreal continue to attract foreign capital, creating additional pricing pressures.
♦ Debt capital continues to be plentiful and cheap except for secondary markets and higher risk sub-sectors.
♦ Cap rates flattening out except for high quality assets in major markets with rent rolls that possess term and credit.
♦ Expect further isolated yield compression in industrial, multi-residential and office markets that offer more favourable NOI growth prospects.
♦ Cap rate spreads over risk-free remain above their long-term average, providing some cush-ion to absorb higher interest rates.
♦ Strong investor capital flows will be a primary driver to help preserve values.
♦ With further cap rate compression limited, returns will be largely income oriented with capital appreciation driven by NOI growth.
Capital MarketsRecord transaction volume continues
CANADIAN INVESTMENT VOLUME
$11.8BillionLARGEST TRANSACTION VOLUME FOR A SINGLE QTR IN THE PAST 5 YEARS
CANADIAN REAL ESTATE TOTAL RETURN DECOMPOSITION
* Q1 2017 represents the 12-month trailling return; decomposition of the valuation effect was not known at the time of print, therefore assumed to be same as 2016
Sources: CBRE | MSCI/IPD Realpac
CANADA PERSPECTIVE | MID-YEAR 2017 4
2012
$30.6
2012
2006
$24.0
NOI Growth (YoY)Income Return Total ReturnValuation Effect Long-Term Average
5.8%17Q1*
20062001
2013
$26.8
2013
2007
$32.1
20072002
2014
$26.1
2014
2008
$21.7
20082003
2015
$26.1
2015
2009
$13.0
20092004
2016
$34.5
2016
2010
$19.5
20102005
2017
$11.9
$31.9
2017Q1
2011
$23.6
2011
Tota
l Inv
estm
ent
Vo
lum
e ($
Bill
ion
s)
$40.0
$20.0
$30.0
$10.0
$0.0
2017 Projection
YTD - Q1 2017
Investment Volume
Per
cen
t (%
)
-10
-15
0
-5
5
15
10
20
25
Office
10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 6 MSF
♦ Office fundamentals are still weak in parts of the country but upward pressure on vacancy has eased in recent quarters.
♦ Bifurcation remains between Alberta and the rest of Canada as office va-cancy rates in Calgary and Edmonton are at or near historical highs.
♦ An active development cycle deliv-ered a steady flow of new supply over the past few years.
♦ A new development wave has kicked off in Toronto but new projects are not scheduled to come online until 2020. New projects in Vancouver are likely not far behind.
♦ Deteriorating fundamentals in Alberta continue to weigh heavily on national rent levels, outweigh- ing growth in the tighter markets of Toronto and Vancouver.
♦ Landlords in Alberta are likely to re-main focused on occupancy, sacrific-ing higher rental rates.
-7.4% YoY Growth
13.1%Vacancy
10Million SF
10-YEAR AVERAGE VACANCY 9.6%
as of 17Q2
Quarterly Vacancy Trend
10-YEAR AVERAGE ANNUAL RENT GROWTH 1.6%
10-YEAR AVERAGE ANNUAL DEMAND GROWTH 3 MSF
♦ The technology/creative tenant base has emerged as a key source of demand for office space. This trend should mitigate some downside risk in the traditional office using sectors.
♦ Absorption has been experiencing positive momentum over the past three quarters, in sync with impressive full-time job growth.
6Million SFfour quarters ending 17Q2
Quarterly Demand Trend
four quarters ending 17Q2
Quarterly Supply Trend
as of 17Q2
Quarterly YoY Rent Trend
RentVacancy
Office fundamentals improving, underpinned by a strengthening economy and robust job growth
New SupplyAbsorption
CANADA PERSPECTIVE | MID-YEAR 2017 5
Source: CBRE
♦ Leasing activity has been healthy in both the downtown and suburban markets outside of Alberta, with 70bps and 90bps growth in occu-pancy YTD, respectively.
♦ Professional/Tech employment has grown con-siderably since the recession, hedging softer growth within traditional users.
♦ Federal government focused on fostering inno-vation. Tech sectors in Toronto, Vancouver and Montreal poised to experience further growth.
♦ Shared office space has become another source of demand, with global and niche operators ca-tering to both freelance and enterprise users.
♦ Downtown Toronto remains one of tightest mar-kets in North America despite a steady flow of new supply. New development cycle kicked off this spring.
♦ Alberta demand remains tepid with vacancy rates expected to remain elevated at or near historic levels.
♦ Downside risks include: further office space ra-tionalization and automation of knowledge work resulting in employment dislocation.
Office
REGIONAL VACANCY — CLASS A OFFICE (CBD + SUBURBAN)
Vancouver TorontoCalgary Edmonton Ottawa Montreal National
Souces: Statistics Canada, Haver Analytics | CBRE
CANADA PERSPECTIVE | MID-YEAR 2017 6
Q2 2016
Q2 2017
10yr Avg
Per
cen
t (%
)
25
10
5
15
20
0
17Q2 VACANCY, DOWNTOWN TORONTOSource: CBRE
3.8% OFFICE USING EMPLOYMENT
2012 2013 20142008 20152009 20162010 20172011
Ind
ex: 0
8Q
1 =
100 115
125
90
100
105
110
120
95
FIRE
Professional/Tech
Public Admin
Averages misleading, masking “regional bifurcation”
Retail
10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 6 MSF
♦ Vacancy has been upward trending in recent years due to secular headwinds.
♦ Super-regional malls, needs-based shopping centres, and urban formats performing well whereas regional malls and community centres remain challenged.
♦ Majority of the space currently under construction is concentrated in the major urban markets of Toronto, Van-couver and Calgary.
♦ Capital investment continues to be focussed on urban mixed-use developments.
♦ Despite generally healthy fundamen-tals, expect rent growth to be con-strained as consumers and retailers face mounting headwinds.
♦ With former-Target vacancy still remaining, along with Sears closing stores and dissolution imminent, add-ed market vacancy is likely to exert downward pressure on rents.
1.9% YoY Growth
4.6%Vacancy
7Million SF
10-YEAR AVERAGE VACANCY 5.0%
as of 16Q4
Annual Vacancy Trend
10-YEAR AVERAGE ANNUAL RENT GROWTH 3.9%
10-YEAR AVERAGE ANNUAL DEMAND GROWTH 6 MSF
♦ Retail sales remain healthy however downside risks to consumer spending are increasing with elevated debt levels and the outlook for higher interest rates.
♦ Too much space, changing consumer preferences and the acceleration of ecommerce will continue to challenge retail demand.
7Million SFfour quarters ending 16Q4
Annual Demand Trend
four quarters ending 16Q4
Annual Supply Trend
as of 16Q4
Annual YoY Rent Trend
RentVacancy New SupplyAbsorption
Consumer backdrop supportive of retail spending but secular headwinds are clouding the outlook for retailers
CANADA PERSPECTIVE | MID-YEAR 2017 7
Source: CBRE
♦ Despite the dreary headlines, bricks and mortar retail continues to play a dominant role in the Canadian retail landscape.
♦ Mall productivity growth healthy in Toronto and Vancouver; Montreal is gaining momentum with improved employment outlook; Alberta malls remains challenged but retail sales show- ing recent improvement.
♦ New entrants to the Canadian market are taking a measured approach; meanwhile existing retail-ers expanding their store counts are concentrat-ed amongst a few players.
♦ Ecommerce accounts for only 3.9% of all core retail sales but it’s growing at an impressive +40% YoY.
♦ There are few retailers that are “getting digital right”—those that do are attracting a dispropor-tionate share of consumers’ wallets.
♦ Needs-based retail, urban formats and top-tier malls remain the best bets but Amazon’s acquisition of Whole Foods signals that it wants to win everywhere, including figuring out experiential retail.
Retail
MALL SALES PRODUCTIVITY BY PROVINCE
MOST VULNERABLE CATEGORIES
General Merchandise Clothing & Accessories Electronics & Appliances
Furniture & Home Furnishings Sporting Goods, Hobby, Book & Music Off ice Supplies, Stationary, Gifts
Source: ICSC Research
Canada
Mal
l Sal
e P
SF
An
nu
al C
han
ge
Vancouver Toronto Calgary Edmonton Ottawa Montreal
CANADA PERSPECTIVE | MID-YEAR 2017 8
$0 8%
$2006%
4%
$400 2%
0%
$6002%
$800 4%
$1,0006%
8%
$1,200
Mall Sales Annual % Change
10%
$761 $1,045 $926 $778 $758 $695 $631
Can retailers keep up with the pace of change to stay relevant?
ONLINE CORE RETAIL SALES PENETRATION
3.9%
Industrial
10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 16 MSF
♦ Availability continued to experience downward pressure over the past year and is now at the lowest level since 04Q3.
♦ Key manufacturing and trade hubs such as Vancouver and Toronto are among the tighest industrial markets in North America
♦ Owing to a steady flow of new supply, current volume of space under con-struction is well below the cycle peak of 23 million sf in 15Q3.
♦ Construction activity should pick up over the near term as developers look to take advantage of favourable demand conditions.
♦ Rental growth lost some momentum over the past year mainly due to weak conditions in Alberta.
♦ Meanwhile the balance of the country continues to experience upward pres-sure on rents.
4.5% YoY Growth
4.7%Availability
12Million SF
10-YEAR AVERAGE AVAILABILITY 6.1%
as of 17Q2
Quarterly Availability Trend
10-YEAR AVERAGE ANNUAL RENT GROWTH 1.9%
10-YEAR AVERAGE ANNUAL DEMAND GROWTH 15 MSF
♦ Macro fundamentals have been sup-portive of demand. This trend should persist as manufacturing remains strong and export activity picks up.
♦ Industrial demand should continue to get additional support from the ongoing growth of ecommerce across Canada.
22Million SFfour quarters ending 17Q2
Quarterly Demand Trend
four quarters ending 17Q2
Quarterly Supply Trend
as of 17Q2
Quarterly YoY Rent Trend
RentAvailability New SupplyAbsorption
Low oil prices, a competitive Canadian dollar, stronger growth Stateside, and the rise of ecommerce should continue to fuel robust tenant demand.
CANADA PERSPECTIVE | MID-YEAR 2017 9
Source: CBRE
♦ Solid manufacturing production and shipments have been supported by improving U.S. demand and a lower Canadian dollar. Vancouver, Toronto and Montreal should benefit most with strong ties to U.S. trade.
♦ Conditions in Vancouver remain tight as demand for newer generation distribution space out- weighs supply.
♦ Calgary’s role as a key distribution hub for West-ern Canada continues to support the recovery of its industrial market.
♦ Given its strong ties to the oil patch, a tentative capex outlook should weigh on Edmonton’s indus-trial market.
♦ As non-commodity export activity picks up, indus-trial demand should remain healthy in manufactur-ing hubs such as Toronto and Montreal.
♦ Ongoing penetration of ecommerce into tradition-al retail remains a key demand driver of newer generation space.
♦ Older generation space should garner increased attention as retailers look to integrate “the last mile” of their distribution networks.
DISTRIBUTION ACTIVITY
REGIONAL AVAILABILITY
Industrial
Vancouver Edmonton Calgary Toronto Ottawa Montreal National
Sources: Statistics Canada, Haver Analytics | CBRE
CANADA PERSPECTIVE | MID-YEAR 2017 10
2012 2013 20142008 20152009 20162010 20172011
Per
cen
t (%
)
Q2 2016
Q2 2017
10yr Avg8
10
4
6
2
7
9
3
5
1
0
ind
ex: 2
00
8 Q
1 =
100
130
150
Wholesale Trade
Export
Manufacturing Shipments
90
110
70
120
140
80
100
“Industretail” drives performance
260 bpsINCREASE IN NATIONAL OCCUPANCY YOYSource: CBRE
Multi-ResidentialProperty fundamentals remain healthy and supportive of stable rent growth
10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 16K UNITS
♦ National vacancy above long-term average is largely a function of elevat-ed rates in Alberta.
♦ Vacancy remains exceptionally tight in the markets of Toronto and Vancou-ver as renter formation outpaces new supply.
♦ New supply continues to be delivered at or near record levels across most major markets.
♦ 2016 marked a record year for new purpose-built rental completions and another strong year for the secondary rental market (condos).
♦ Rent growth continues to trend well above inflation even within rent con-trolled provinces.
♦ Alberta is the only exception where rents continue to fall (albeit at a decelerating pace) and inducements are still required to attract tenants.
2.4% YoY Growth
3.3%Vacancy
24kUnits
10-YEAR AVERAGE VACANCY 2.6%
as of 16Q4
Quarterly Vacancy Trend
10-YEAR AVERAGE ANNUAL RENT GROWTH 2.8%
10-YEAR AVERAGE ANNUAL DEMAND GROWTH 9K UNITS
♦ Demand continues to be driven by robust immigration, urbanization and increased renter formation due to deteriorating affordability of home ownership.
♦ These demand drivers are anticipated to persist, providing a positive outlook for the sector.
16kUnitsfour quarters ending 16Q4
Annual Demand Trend
four quarters ending 16Q4
Annual Supply Trend
as of 16Q4
Annual YoY Rent Trend
RentVacancy New SupplyAbsorption
CANADA PERSPECTIVE | MID-YEAR 2017 11
Source: CBRE, CMHC
Multi-Residential
APARTMENT VACANCY RATE
Canada CMA
8
4
6
2
7
3
5
1
0
Per
cen
t (%
)
Vancouver Edmonton Calgary Toronto Ottawa Montreal
Sources: Statistics Canada l CMHC
♦ Population growth fueled by immigration is continuing to drive strong demand, particularly in Toronto, Montreal and Vancouver.
♦ Tenant demand for new multi-res product is strong across most markets as renters are willing to pay a premium for high quality finishes and life-style amenities.
♦ Opportunities for purpose-built rental are devel-oping in markets that previously would not have supported the economics to justify new projects.
♦ The jury is still out on how the newly implemented rent controls in Ontario will impact market fundamentals.
♦ Developers are building larger suites to attract a more diversified, “want-to-rent” tenant base.
♦ Although, a push towards smaller units could potentially be a by-product of new rent control policies in Ontario, enabling developers to move rents to market more frequently.
40,976
94,503
16,181
69,353
37,31135,139
Average Annual Population Growth
International Net Migration (%)
Montréal, Quebec
Ottawa, Ontario
Toronto, Ontario
Calgary, Alberta
Vancouver, BCEdmonton, Alberta
61.5%
39.8%
68.5%
26.4%
86.7%
34%
POPULATION GROWTH 5 YEAR CHANGE
CANADA PERSPECTIVE | MID-YEAR 2017 12
2016 Long-Term Average2015
Institutional investors increasingly active in developingpurpose-built rental
For institutional use only.
ABOUT BENTALL KENNEDY
Bentall Kennedy, a Sun Life Investment Management company, is one of the largest global real estate investment advisors and one of North Amer-ica’s foremost providers of real estate services. Bentall Kennedy serves the interests of more than 550 institutional clients with expertise in office, retail, industrial and multi-residential assets throughout Canada and the U.S. Bentall Kennedy is a member of UN PRI and a recognized Respon-sible Property Investing leader ranked among the top firms around the globe in the Global Real Estate Sustainability Benchmark (GRESB) for the sixth consecutive year since GRESB was launched.
For more information, visit www.bentallkennedy.com.
For more information about Perspective, please contact:
Phil Stone, VP, Head of Research, Bentall Kennedy (Canada) Limited Partnership [email protected], 416 681 7955
This document is intended for institutional investors only. It is not for retail use or distribution to individual investors. The information in this document is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this document.