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19TH ANNUAL EDITION

2017CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

2017 Economic Outlook& Market Fundamentals

19th Annual Edition | January 2017

Copyright © 2017 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 DISCLAIMERStatements contained herein that are not based on historical or current fact, including without limitation statementscontaining the words “anticipates,” “believes,” “may,” “continue,” “estimate,” “expects” and “will” and words of similarexpression, 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 LetterThe 2017 Canadian Economic Outlook and Market Fundamentals Research Report provides a comprehensive review and outlook for each real estate product class and major metropolitan area across the country. We trust that you will find the Report a useful resource as you plan your real estate investment and management strategies for the coming year. At Morguard, we look to our Research team to provide analysis and trends to effectively manage the complexity of real estate through sector and market cycles to realize its full potential.

In 2016, multiple factors shaped the year including the continued energy sector drag, evolving retail environment and uncertainty of interest rate movements. Despite weakness in resource-driven regions, sector returns were attractive across the major property asset classes. Core markets were most highly coveted, with Vancouver and Toronto generating the strongest investment interest. Pension funds, private capital groups, capital market groups and other institutional investors accessed low cost debt and equity capital at competitive rates. As a result, demand outdistanced the supply of available assets.

Despite this scenario, transactions were completed at a record pace. In fact, 2016 annual transactions were expected to surpass the most recent annual peak of $32.1 billion reported during 2007. The strength of the demand cycle in 2016 was boosted by off-shore groups looking for a relatively safe place to invest capital. The overall strength of the sector demand cycle ensured values were held at the peak for the cycle, with slight increases reported for core assets.

Looking ahead to 2017, the outlook for the Canadian investment property sector is generally healthy despite a backdrop of elevated risk. Stable and attractive investment performance will continue to draw debt and equity funds to the sector. Domestic and off-shore groups will actively pursue core property acquisitions in prime markets. The volume of capital in pursuit of relatively stable yield in the Canadian market will continue to surpass product availability. Consequently, investors will cast their nets further beyond the sectors top two or three markets. Others will look to development and redevelopment projects, as a core strategy. A moderate improvement in the national economic growth trend will support rental demand. Resource-driven markets like Calgary will be slow to recover.

While a prolonged downturn in the oil sector, global political uncertainty and the prospect of higher interest rates are among the leading threats to the 2017 economic and property market outlook, we believe 2017 will be another year of stable real estate investment performance. As your real estate advisor, we look forward to partnering with you to realize opportunities to create value for your portfolio.

Sincerely,

George SchottPresident and Chief Operating OfficerMorguard Investments Limited

Table of ContentsEconomic Outlook & Market Fundamentals

National Economic & Real Estate OutlookNational Economic Report 2Office Outlook 4Office Investment Report 5Industrial Outlook 6Industrial Investment Report 7Retail Outlook 8Retail Investment Report 9Multi-Suite Residential Outlook 10Multi-Suite Residential Investment Report 11Investment Outlook 12Economic Outlook 14

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

NATIONAL ECONOMIC & REAL ESTATE OUTLOOK

2 2017 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

ECONOMIC GROWTH FELL SHORT OF EXPECTATIONSA second consecutive year of slow growth was forecast for Canada’s economy in 2016, a performance that was adversely affected by the ongoing commodities slump. Initially, first-quarter growth was cause for optimism. However, in the subsequent quarter, the national economy contracted, due in large part to the Alberta wildfires. Oilsands production came to a grinding halt. The loss in revenue was estimated at more than $3.0 billion. By the third quarter, production restarted, which along with the start of the rebuild in Fort McMurray kick-started economic growth. In a broader sense, oil prices continued to range close to a low point for the cycle and export activity remained stunted. Other sectors of the economy also played a role in the modest growth performance of 2016. Business investment volume was below par as the sector took a position as one of the weakest of the nation’s economy. Export volumes were also subpar, having decelerated at various points. On the plus side, federally instituted programs helped boost economic output. Infrastructure projects, changes to personal income tax, and newly instituted child benefits were key drivers of expansion. However, this did little to counteract the largely weak 2016 economic growth trend.

LABOUR MARKET PROGRESS WAS LIMITEDFairly modest progress was recorded in Canada’s labour market in 2016, due in large part to a tepid economic growth trend. Employment gains were expected to increase by an unspectacular 108,000 during 2016, according to the Conference Board of Canada’s (CBOC) forecast of autumn 2016. If proven accurate, the 2016 result will have marked a third consecutive year of fewer than 200,000 jobs created. The weak forecast was predicated on monthly employment increases of just 8,000 jobs generated to the end of August. Broken down by sector, recent gains varied widely. In the country’s resource sector, a total of 35,000 jobs were lost in the first six months of 2016 alone. In contrast, tourism employment went through a period of strong growth over the same period, with Canada’s low dollar drawing an increased number of tourist dollars. The recent strength reported in Canada’s housing market was seen as a driver of increased employment levels in the finance, real estate and insurance sectors, resulting in over 13,000 new jobs. The national unemployment rate declined in the first half of the year to 6.8%, driven in part by declining rates of participation. By year-end the rate was expected to climb back up to the 7.0% mark, 10 bps higher year over year. While the creation of new jobs disappointed, wage growth followed a similar track in falling short of the long-term average of 2.4%. This was another aspect of what turned out to be fairly limited labour market progress.

RESPECTABLE RETAIL SPENDING GROWTH RECORDED A surprisingly robust rate of retail spending growth was forecast this year, despite periods of weakness in the early going. The CBOC was predicting annual consumption growth of 3.8% in 2016, following a modest 1.7% forward step in the previous year. The forecast was a testament to the willingness on the part of the Canadian consumer to accept record levels of debt. Despite the rosy forecast, there were signs of weakness in spending patterns. August of this year marked a fourth consecutive month of flat sales. The following month a marginal increase of 0.6% was recorded, due in large part to one sector, automotive. The slowdown in retail sales growth was related to ongoing economic and labour market sluggishness. At the same time, consumer confidence remained low during 2016, in part due to the persistent commodities sector malaise. The effect of reduced sector output was a reduction in retail sales in Alberta. By the end of September, sales had decreased by 2.4%, year over year. In contrast, Canada’s economic growth performance resulted in steady retail sales growth with British Columbia leading the way at 5.7% year over year. To the east, Quebec and Ontario registered

NATIONAL ECONOMIC REPORT

HIGHLIGHTS

• Slow growth characterized Canada’s economy for a second consecutive year in 2016, with Gross Domestic Product (GDP) projected to expand by roughly 1.3% over the full year.

• Canada’s 2016 labour market performance has been largely underwhelming, with a modest 108,000 new jobs forecast for the year.

• The forecast resale housing market’s “soft landing” was the expected outcome of new measures introduced by the public sector to cool overheated regions such as Vancouver and Toronto.

• Canada’s commodities sector slump hampered economic advancement in 2016, although moderately higher oil prices led some to believe the worst might be over.

NATIONAL ECONOMIC PULSE

FUNDAMENTALS Δ 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).

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Real GDP Growth% Change

Quarterly Growth Annualized Year-Over-Year GrowthSource: Conference Board Of Canada

2017 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS 3

upticks of 3.7% and 2.9%, respectively. In addition to regional strength, specific spending categories exhibited healthy progress. More specifically, automotive, drug, and clothing and shoes were leaders in spending volume growth. Looking ahead, a material strengthening in retail sales was forecast over the final few months of 2016 following an uneven growth trend year to date.

POLICY DECISIONS WERE INSTITUTED TO COOL OVERHEATED HOUSING MARKETPolicies instituted by federal and provincial government officials began to have an impact on Canada’s resale housing market over the past year. These were set in place to curtail price inflation in markets that were already perceived to be overpriced. The threat of a housing correction and its impact on consumer balance sheets was the impetus for the decision on the part of public decision-makers to act. In Vancouver for example, a 15.0% tax on purchases made by foreign nationals was put in place to reduce speculative buying and the associated price inflation. Subsequently, resale activity dipped by 1.7% in September, for a seventh consecutive month. As a result, resale home sales fell sharply in July and August by 9.3% and 18.8%, respectively. In September, a more modest decrease of 1.7% was reported marking a seventh consecutive monthly decline. During the same time period resale prices leveled following a two-year period of steady growth. Coincidentally, the nation’s other hot market, Toronto, continued to see sales and prices rise. Resales reached a record high of 118,600 units in September, with prices increasing by 18.0% year over year according to the RBC MLS Home Price Index. A series of measures were announced by the federal finance minister in October of this year to further address Canadian housing market risk. The standardization of stress tests for all insured mortgages including those with fixed rates and a minimum term of five years, was enacted. Beginning in October, borrowers with high-ratio mortgages and less than a 20.0% down payment must be qualified for a five-year conventional mortgage at the higher of, 4.64% or the contract rate. This was enacted to prevent consumers from taking on too much debt and financial vulnerability. In particular, the new mortgage qualification policy was targeted toward first-time buyers, given a higher instance of high-ratio mortgages in this market segment. As 2016 came to a close, Canada’s housing market showed material signs of cooling, indicating government policies were having the desired impact.

OIL SECTOR REMAINED A DRAG ON ECONOMIC GROWTHCanada’s energy sector slump contributed to the national economic growth outlook in 2016, as investment, prices, demand and exports remained depressed. The sector’s struggles were estimated to have reduced national economic output by up to 50 bps over the year. In an October report, the CBOC predicted a $10.0 billion pre-tax loss for Canada’s oil production industry for 2016. A “slower than anticipated cost-cutting response” was thought to have had an impact on the sector’s bottom line as well. The Alberta wildfires added to the sector’s struggles. The sharp decline in sector investment negatively affected overall business investment. Oil prices increased slightly during 2016 but remained below levels required to support investment. Consequently, production will fall slightly in 2016 for the first time since the 2008 financial crisis. Production and pricing held at the cycle low, given weak global demand patterns and excess supply. Export volume, in turn, trended lower this year as a result. As the months passed, the sector’s struggles filtered through to the broader economy and limited expansion. In the second half of 2016, oil prices edged higher. For businesses and consumers across the region, this gave some cause for optimism that the sector had reached a bottom. However the damage had clearly already been done, in that growth had been hampered over much of the past couple of years.

NATIONAL ECONOMIC REPORT

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Housing Starts (LS) 5-Year Mortgage Rate (RS)Source: Statistics Canada, CMHC

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Employment Growth (LS) Unemployment Rate (RS)Source: Statistics Canada

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Month/Month % Change (LS) Monthly Level (RS)Source: Statistics Canada


CORE MARKETS BOOSTED PERFORMANCEThe Canadian office property sector posted largely healthy investment fundamentals over the past year, with the strongest performance trends observed in Vancouver and Toronto. Properties tracked in the MSCI Index generated an average total return of 6.0% over the 12-month term ending at the close of the third quarter of 2016. Of the country’s major markets, Vancouver and Toronto outperformed with returns of 15.2% and 10.9% respectively. Edmonton and Calgary posted poor results of (0.4%) and (8.1%) respectively, due to the negative impact of the energy sector malaise on capital and income results. Strong capital flows into the sector were reported as investors sought the relative stability of Canada’s office market. Emphasis was placed on the two most stable cities, Vancouver and Toronto, where 85.2% of first-half volume was focused. Private capital, pension funds, and increasingly, foreign investors were the most active market participants. Demand was particularly strong for prime assets in the markets mentioned above, resulting in a measure of upward pressure on value. Low interest rates and access to funds continued to facilitate strong sector performance over much of the past year.

LEASING MARKET CONDITIONS VARIED MARKEDLYRegional variation in office leasing conditions over the past year resulted in the modest erosion of national market fundamentals. Disparate vacancy trends were the most obvious area of variability in 2016. The national vacancy profile softened modestly, ending the third quarter at 12.9% up from 11.8% a year earlier. Similar increases were reported in both the suburban and downtown submarkets. Regionally, vacancy trends varied significantly. Healthy demand characteristics resulted in largely positive vacancy characteristics in Toronto and Vancouver. In Toronto, for example, year-over-year vacancy declined from 9.9% to 9.1%, as of the three-quarter mark of 2016. Tenant expansion in Vancouver’s new and existing downtown inventories supported healthy vacancy levels as well. Conversely, Calgary’s office market continued to suffer the effects of the ongoing oil sector slump. Vacancy levels hit benchmark highs over much of 2016, with some market pundits suggesting a 30.0% rate was not out of the question next year. The steady delivery of large-scale new developments and weak demand will push vacancy higher to some degree. Edmonton’s office market has been relatively resilient during the oil sector slump to date. However, new supply will more than likely push vacancy levels higher in the coming months. In other markets, stabilization was the overriding leasing market theme over 2016, with weaker demand commonly reported. This stability ran counter to the broader market trend, which contained significant variation.

PERFORMANCE OUTLOOK IS MIXEDOffice sector performance will remain somewhat mixed over the near term, in keeping with the recent trend. On the one hand, newly built space will continue to attract tenants and command the respective market’s highest rents. The nation’s strongest markets, Toronto and Vancouver, will continue to outperform. On the other hand, owners of older buildings in several markets will face elevated vacancy and be forced to offer incentives to maintain occupancy and income. Oversupply will continue to be a challenge in Calgary and Edmonton. Winnipeg and Ottawa will see some strengthening over the near term. Both investment and leasing appetite will be generally healthy over the near term, with new or existing transportation nodes gaining in popularity. In terms of performance, investment returns will be solid overall, with Alberta continuing to underperform. National economic growth will boost space demand in 2017. The national economic growth trend will pick up in 2017, in support of office space demand.

OFFICE OUTLOOK

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Annualized Returns Rolling 1-Year RCPI/IPD Office Performance

Office Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2016

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Vacancy RatesTo Third Quarter - 2016

Source: CBRE Limited

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Office Demand & Supply National Historical & Forecast Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)Source: CBRE Limited; CBRE Econometric Advisors

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Office Rent & Vacancy National Historical & Forecast Aggregates

Net Effective Rent (LS) Vacancy Rate (RS)Source: CBRE Limited; CBRE Econometric Advisors


HIGHLIGHTS

• Investors continued to favour Canada’s core office markets over the recent past, with Vancouver and Toronto accounting for over 85.0% of capital flows into the sector in the first half of 2016.

• Foreign investors were increasingly active in their pursuit of Canadian office properties, with particular emphasis on the downtowns of Vancouver and Toronto.

OFFICE INVESTMENT REPORT

INVESTMENT MARKET TRANSACTIONSMONTREALProperty Date Price SF PSF Purchaser

16 Pl. du Commerce Dec-16 $16.5 M 164,774 $100 Groupe Mach

1350-1360 Rene-Lev Dec-16 $429.0 M 933,033 $456 Investors/GWL

Tour Scotia (50%) Sep-16 $79.0 M 331,456 $350 Monit Investmts.

1 Holiday Ave Jun-16 $22.8 M 127,366 $179 Groupe Petra

2045 Stanley St (50%) Apr-16 $12.5 M 110,398 $226 Nobel REIT

2101 St Catherine W Feb-16 $11.0 M 52,527 $209 BTB REIT

OTTAWAProperty Date Price SF PSF Purchaser

DREAM REIT Ottawa Jul-16 $74.3 M 426,203 $174 KRP Properties

770 Broadview Ave Jan-16 $12.9 M 40,000 $322 Mohawk REIT

TORONTOProperty Date Price SF PSF Purchaser

9050 Yonge St Nov-16 $22.5 M 91,277 $247 Montez/Adgar

3650 Victoria Pk Ave Nov-16 $34.0 M 154,300 $220 True North REIT

2233 Argentia Rd Sep-16 $30.8 M 146,674 $210 Crown Realty

250 University Ave Sep-16 $84.8 M 152,528 $556 Northam Realty

461 King St W Aug-16 $82.0 M 81,091 $1,011 Allied REIT

Scotia Plaza (50%) Jun-16 $654.5 M 1,976,690 $662 AIMCO/KingSett

3000-3100 Steeles E Jun-16 $57.5 M 235,673 $244 Slate Asset Mgt.

2425 Matheson Blvd E Jun-16 $47.8 M 187,614 $255 Lasalle Investmt

30 Eglinton Ave W May-16 $48.0 M 165,060 $291 KingSett Capital

4701, 4715 Tahoe Blvd May-16 $98.3 M 301,231 $326 Triovest Realty

Dundee REIT Markh. Apr-16 $79.7 M 317,040 $251 Redbourne Grp.

901 King St W (50%)* Apr-16 $61.0 M 254,449 $479 Sunlife Assur.

6355 Viscount Rd Apr-16 $22.0 M 75,781 $290 Manulife Financ.

2010 Winston Pk Dr Apr-16 $19.7 M 79,137 $249 Fengate Capital

1200 Bay St Mar-16 $86.8 M 96,284 $901 Prowinko/Kroon

Allstate Corporate Ctr. Mar-16 $148.6 M 575,969 $258 Crown/Crestp.

30,64,70 Jefferson Ave Mar-16 $31.0 M 78,820 $393 Allied REIT

1 St Clair Ave E Feb-16 $35.0 M 69,132 $506 Slate AM

IVG Burlington Jan-16 $64.8 M 435,443 $149 Lasalle Investmt

KITCHENER/WATERLOOProperty Date Price SF PSF Purchaser

408-412 Albert St Sep-16 $30.9 M 154,854 $200 Sandvine Corp.

CALGARYProperty Date Price SF PSF Purchaser

505 2nd St SW Oct-16 $23.0 M 122,470 $188 HNC 505

EDMONTONProperty Date Price SF PSF Purchaser

105 St Gov’t.Building Aug-16 $18.5 M 100,000 $185 Wentworth Prop.

VANCOUVERProperty Date Price SF PSF Purchaser

Bentall Ctr I-IV (33%)* Jun-16 $367.2 M 1,474,000 $755 Anbang Insur.

United Kingdom Bldg * May-16 $115.0 M 212,000 $542 Private

Bentall Ctr I-IV (67%)* Apr-16 $688.0 M 1,474,000 $668 Anbang Insur.

Revenue Cda Bldg* Apr-16 $71.4 M 139,569 $512 Reliance Propert.

Royal Centre* Mar-16 $425.0 M 589,000 $722 Royal Ctr(BOPC)-10.0 -5.0 0.0 5.0 10.0 15.0 20.0

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Vancouver

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Office Total Returns For The 1-Year Period Ending Sept 2016

Source: © MSCI Real Estate 2016

*share sale

Industrial17%

Office22%

Retail18%

Multi-Suite21%

Land16%

Hotel6%

Total Sales By Product18 Months to June 2016


Halifax1% Montreal

11%

Ottawa4%

Toronto56%

Edmonton1%

Calgary2%

Vancouver24%

Other1%

Office Sales By CMA 18 Months to June 2016



SOLID INVESTMENT PERFORMANCE CHARACTERISTICS POSTEDThe industrial sector posted healthy investment performance characteristics over 2016, extending the medium-term trend. Investment performance remained attractive, as evidenced by the MSCI Index average total return of 6.7% for the 12-month period ending on September 30, 2016. The sector’s major markets bolstered the average, with Toronto, Montreal and Vancouver posting returns of 8.5%, 8.8% and 11.6% over the same term, respectively. Ottawa also registered a solid showing at 5.8%, with Edmonton and Calgary a measure of resilience with low single-digit results. Attractive medium-and near-term performance ensured demand patterns remained healthy over the recent past. In particular, investors continued to source assets in a sector with a history of performance resilience during periods of economic softness. Demand from pension funds, private capital, capital market participants and others combined bested the supply of asset available for acquisition. However, there was a sufficient volume of product available to support strong closed transaction volume in 2016. In the first half of 2016, $2.8 billion of industrial assets changed hands in the country’s largest urban centres. The total was up 10.8% over the same period a year earlier. Roughly two-thirds of first-half sales were in the core markets of Toronto, Vancouver and Montreal. The demand supply dynamic fuelled aggressive bidding on assets offered for sale and pushed prime asset values slightly higher. This pressure was most pronounced in the country’s three largest markets. This growth supported healthy investment performance for the industrial sector during 2016.

LEASING MARKET STRENGTH HELD FIRM Canada’s industrial sector continued to exhibit positive leasing market fundamentals over the recent past, building on the trend of the past few years. Recent occupancy patterns offered evidence of the market’s fundamental health. National occupancy rested at a strong 95.8% at the end of the third quarter of 2016. This was indicative of the market’s overall tightness, which has been a fixture since the 2008 financial crisis. National occupancy has ranged between 95.0% and 97.0% dating back to 2010. In the past year developer discipline ensured conditions remained tight as new development completion volume rested below the medium-term average. Space demand also supported supply-side resilience over the recent past. The only exception to this trend was in Calgary and Edmonton, where demand has gradually slowed as a result of the economic downturn in the region. A large portion of demand has been rooted in business sectors tied to online shopping and e-commerce. At the same time, modest resurgence in the nation’s manufacturing sector has added to the demand pressure. Buildings with high ceilings attracted the most interest, with older less functional space also popular as functional space supply dwindled. The supply shortfall allowed owners to raise rents in most jurisdictions, except for Edmonton and Calgary where modest downward pressure on rents was evidenced. Overall, however, Canada’s industrial leasing market continued to progress in 2016.

CONTINUED SECTOR PROGRESS FORECASTA number of factors will contribute to another successful industrial sector performance over the near term. An improved domestic economy and continued U.S. advances will drive space demand. Canada’s GDP will expand by over 2.0% over 2017, boosting business activity in most sectors and regions. Stabilization in the nation’s oil and gas sector will also limit the erosion of sector fundamentals. E-commerce will continue to boost demand for industrial space. Low interest rates and the value of Canada’s dollar are expected to benefit the manufacturing sector and exporters. Owners of industrial property will continue to realize income growth and stability. This will contribute to positive investment performance and support continued progress over the near term.

INDUSTRIAL OUTLOOK

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Annualized Returns Rolling 1-Year RCPI/IPD Industrial Performance

Industrial Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2016

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Availability RatesTo Third Quarter - 2016


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Net Effective Rent (LS) Availability Rate (RS)Source: CBRE Limited; CBRE Econometric Advisors

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HIGHLIGHTS

• Companies with ties to the consumer goods sector, online shopping and e-commerce were the leading sources of industrial space demand.

• Investment demand continued to outdistance the supply of core assets available for acquisition, which capped transaction closing volume and resulted in modest upward price pressure on prime assets brought to market.

INDUSTRIAL INVESTMENT REPORT


Dagenais W, Garand Sep-16 $14.5 M 249,321 $58 Morguard

10001 Metropolitain E Aug-16 $37.5 M 310,179 $121 Crestpoint

Sun Life Lachine Jun-16 $16.9 M 298,371 $56 GPM

Brunswick/Tecumseh Feb-16 $15.8 M 298,663 $53 Desjardins GAM


130 & 140 Iber Rd May-16 $11.7 M 98,675 $119 Huntington Prop.


1590 S Gateway Rd Dec-16 $23.8 M 195,322 $122 ICBC

Erin Mills Mississauga Dec-16 $88.3 M 502,496 $176 GWL Realty Adv

5900 Finch Ave E Dec-16 $13.3 M 166,751 $80 Soneil Internat.

33 Green Belt Dr Dec-16 $18.0 M 142,000 127 OTT Financial

335 Britannia Rd E Nov-16 $18.4 M 207,449 $90 Menkes Devpmt.

7510 Bren Rd Oct-16 $17.2 M 201,104 $85 Greystone

8551 Weston/10 West Sep-16 $15.7 M 98,935 $159 DH Property Mgt.

200, 240 Viceroy Rd Sep-16 $18.0 M 152,595 $118 Berkshire Axis

2100 Islington Ave Jul-16 $91.5 M 947,000 $97 Rice Group

1515 Matheson Blvd E Jul-16 $15.2 M 140,000 $109 Private

Shepp. E/Morningside Jun-16 $14.0 M 144,100 $97 Soneil Internat.

7835 Highway 50 Jun-16 $11.7 M 90,150 $130 DuRock Alfacing

2000 Kipling,13 Bethr. Apr-16 $18.8 M 267,299 $70 Gramercy Trust

9501-9601 Hwy. 50 Apr-16 $100.0 M 994,942 $101 Metrus Propert.

73, 83 Commerce Vall. Mar-16 $12.1 M 80,965 $149 Canadian Urban

12333 Airport Rd Mar-16 $64.9 M 568,000 $114 Bentall Kennedy

955-977 Pantera Dr Feb-16 $10.9 M 99,040 $110 Westphalen

2714 Bristol Circle. Feb-16 $10.4 M 52,841 $197 Extrudex

Bristol/Upper Middle Jan-16 $44.3 M 448,077 $99 Fengate Capital

6170 Edwards Blvd Jan-16 $21.6 M 209,900 $103 Prologis

6701 Financial Dr Jan-16 $13.9 M 115,896 $120 Ironwood Bay


1616-1620 27 Ave NE Oct-16 $22.8 M 217,751 $105 Telus Pension

Barlow Centre Sep-16 $21.3 M 226,613 $94 York Realty

3343, 3501 54 Ave SE Aug-16 $12.7 M 147,727 $86 Summit Ind REIT

290144 Township 261 Jun-16 $63.2 M 502,809 $126 Fiera Properties

25 Dufferin Pl SE May-16 $83.9 M 652,959 $128 CT REIT

283009 Logistics Dr Mar-16 $31.0 M 264,650 $117 H&R/Crestpoint


4737 97 St Oct-16 $12.3 M 75,000 $163 Imperial Equities

4104 & 4340 78 Ave Aug-16 $16.0 M 170,273 $98 Nicola Crosby

14404 128 Ave Jul-16 $33.0 M 309,077 $107 Summit Ind REIT

3004 51 Ave Jan-16 $47.0 M 290,020 $162 OpTrust


27452 52nd Ave Sep-16 $10.3 M 77,160 $133 Innotech Hldgs

8400, 8500 River Rd Mar-16 $49.5 M 293,487 $167 Bentall Kennedy

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Halifax

Calgary

Edmonton

Ottawa

National

Toronto

Montreal

Vancouver

-2.5

2.3

3.0

5.8

6.7

8.5

8.8

11.6

%

Industrial Total Returns For The 1-Year Period Ending Sept 2016


*share sale

Industrial17%

Office22%

Retail18%

Multi-Suite21%

Land16%

Hotel6%



Halifax1% Montreal

16%Ottawa

3%

Toronto43%

Edmonton4%

Calgary10%

Vancouver20%

Other3%

Industrial Sales By CMA 18 Months to June 2016



CAPITAL FLOWED INTO SECTOR AT RECORD PACEInvestors exhibited confidence in Canada’s retail sector despite the potential for long-term impacts of changing consumer behaviour and store occupancy patterns on performance. Core properties were highly sought after by a range of investment groups in 2016, with preference given to properties with development upside potential and increasingly urban retail. These trades exhibited top of the market yields. Very few dominant or fortress properties were exposed to the market this past year. Bidding was quite aggressive overall. Strong demand resulted in the sale of $3.1 billion in retail property in the first six months of 2016. The continuation of this pace would set a new benchmark volume high, surpassing the 2011 peak. The strength of the bidding backdrop and access to low-cost capital resulted in modest upward pressure on values. This bolstered investment performance, along with stable and positive income growth. Prime properties tracked in the MSCI Index posted an attractive annual average return of 8.3% for the 12 months ending September 30, 2016. Recent performance strength has reinforced the notion of acquiring dominant assets. Online shopping continues to grow and has impacted retailer occupancy in certain markets and segments. Additionally, online shopping has continued to provide opportunities for others to augment their bricks and mortar businesses. This has fostered changes in retailer occupancy patterns in certain market segments. Against this backdrop of change, investors continued to show confidence in the sector.

CHANGING RETAIL LANDSCAPE AFFECTED LEASING MARKET Changes sweeping through the Canadian retail shopping centre industry have had a material impact on leasing market conditions. A major catalyst for change has been the continued growth and emergence of online shopping. In some cases, retailers have been able to achieve stronger combined revenues from e-commerce and physical stores. For others, occupancy strategies have changed. A byproduct of online shopping has been reduced foot traffic in some shopping centres, which affected retailer revenues and vacancy patterns. Another major change in the retail sector has been the growing popularity of Black Friday shopping. This shift was expected to have an impact on revenue for retailers and rents. Retailers have made adjustments while continuing to emphasize Boxing Day. Demographic shifts have also affected leasing market characteristics. For example, the desire of young workers to live close to their places of employment or mass transit has created new leasing opportunities. Other trends affecting leasing markets across the nation included: the trend toward smaller stores, the growth in luxury retail, and the increased presence of food outlets and entertainment shopping centres.These trends and the broader “sea of change” affecting the national leasing market are expected to continue to evolve the consumer landscape over time.

OUTLOOK IS RELATIVELY HEALTHY The market will continue to digest major tenant failures and consolidations of the past two years, with progress expected on several fronts. For the most part, national occupancy will continue to range close the recent peak. The abundance of recycled space will generally hold rents in check. The winds of change industry-wide will have an impact on performance in some segments of the market. The ongoing impacts of online shopping, a low Canadian dollar, demographic trends and shifting consumer behaviour will be felt across the market. Once again, retailers and landlords will be forced to adjust in order to maintain occupancy and productivity. Flagship malls will outperform, with discount and food retailers also posting solid growth. The mid-market will face challenges, which will result in increased vacancy for some landlords over the near term. The potential for high profile closures remains a possibility. On balance, however, the retail sector will continue to reward investors with leasing market stability and stable performance.

RETAIL OUTLOOK

-10.0

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20.0

25.0

Sep-

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p-87

Sep-

88Se

p-89

Sep-

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p-91

Sep-

92Se

p-93

Sep-

94Se

p-95

Sep-

96Se

p-97

Sep-

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p-99

Sep-

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p-01

Sep-

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p-03

Sep-

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p-05

Sep-

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p-09

Sep-

10Se

p-11

Sep-

12Se

p-13

Sep-

14Se

p-15

Sep-

16

%

Annualized Returns Rolling 1-Year RCPI/IPD Retail Performance

Retail Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2016

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Mar

-14

Sep-

14M

ar-1

5Se

p-15

Mar

-16

Sep-

16

%

Retail Vacancy RatesNational Trending Across Property Types

Super Regional Regional Community Centre Neighbourhood


$744

$912

$708$648

$804

$588 $564

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

$0$100$200$300$400$500$600$700$800$900

$1,000

National BritishColumbia

Alberta Prairies Ontario Quebec Atlantic

%

Dol

lars

Per

Squ

are

Foot

Mall Sales Non-Anchor Tenant Sales - YTD To June 2016

Sales Per Square Foot (SAAR) - LS Change Year-Over-Year - RS

Source: International Council of Shopping Centres, Canadian Mall Report

$19,

703

$20,

185

$20,

391

$20,

290

$20,

687

$20,

811

$21,

693

$22,

186

$22,

659

$22,

920

$23,

367

$23,

299

$23,

612

$24,

224

$24,

216

$24,

599

$24,

793

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F

%

Consumer StrengthMeasuring Canadian Purchasing Power

Real Personal Disposable Income Per Capita - LSEmployment Growth - RSUnemployment Rate - RSRetail Sales Growth - RS

Source: Conference Board of Canada


HIGHLIGHTS

• The rate at which capital flowed into Canada’s retail property sector during much of the past year was in line with the most recent peak of 2011.

• Investment property demand remained broadly positive over 2016, which was reflected in strong capital flows, upward pressure on prime asset values and aggressive bidding patterns.

RETAIL INVESTMENT REPORT


777 St Catherine St W Sep-16 $41.8 M 25,384 $1,647 Pontegadea

Carrefour Monseigneur May-16 $24.0 M 148,271 $162 Strathallen

Centre Chateauguay May-16 $31.3 M 209,519 $149 Grp. Mach/Quint

100-1800 Auguste Mar-16 $29.5 M 171,576 $172 Manulife Financ.

First Capit. GMA(50%) Feb-16 $71.0 M 543,060 $262 Desjardins Fin.


Emerald Plaza May-16 $26.1 M 154,344 $169 Private


3105-3115 Winston Ch Dec-16 $12.5 M 46,090 $270 Tanson Propert.

3362-3370 Yonge St Nov-16 $29.0 M 17,900 $1,620 Crombie REIT

81 Yorkville Ave/Bellair Oct-16 $15.5 M 12,700 $1,220 Prowinko Cda.

25 Kings Cross Rd Oct-16 $14.0 M 77,662 $180 Private

215 Morrish Rd Aug-16 $11.1 M 42,350 $262 OKR Investments

12720-12788 Hwy. 50 Jul-16 $39.7 M 174,241 $228 Desjardins Fin.

Shops of Summerhill Jun-16 $42.0 M 30,820 $1,363 RioCan/Tricon

Lakeridge Plaza Jun-16 $13.7 M 77,550 $177 Interras

2965 Kingston Rd May-16 $31.0 M 80,374 $386 First Capital

Castlefield Design Ctr May-16 $29.0 M 181,575 $160 Crestpoint

Goldmanco GTA May-16 $46.2 M 117,400 $394 Crombie REIT

87 Front St E/Mkt. St Apr-16 $50.5 M 47,112 $1,072 Northam Realty

400-408 Bloor St W Mar-16 $15.8 M 20,000 $790 Private

77 Yorkville Ave Mar-16 $13.6 M 3,500 $3,885 Prowinko Cda.

8855 Woodbine Ave Mar-16 $20.2 M 44,234 $456 Apple Cheer Inc.

Clarkson Gateway Ctr Feb-16 $10.0 M 38,800 $258 Slate AM

10620 Yonge St Feb-16 $25.5 M 63,692 $400 Aftal Internat.

85 Bloor St W Jan-16 $37.0 M 13,810 $2,679 RioCan REIT

KITCHENER/WATERLOOProperty Date Price SF PSF Purchaser

Forest Glen Sep-16 $31.0 M 127,294 $244 ICBC

Waterloo Commons May-16 $21.5 M 72,165 $298 Private


Midnapore Mall Jun-16 $38.2 M 150,141 $254 Arlington Realty


Terra Losa Oct-16 $97.1 M 257,033 $378 Bentall Kennedy

Beaverbrook Square May-16 $13.1 M 46,651 $280 Wentworth Prop.


Big Bend Crossing* Apr-16 $65.0 M 302,000 $215 Private

Mission Junction* Apr-16 $68.1 M 282,533 $241 LaSalle Investm.

Boundary Park Plaza Apr-16 $24.2 M 54,033 $448 Private

Landmark Plaza Feb-16 $14.1 M 28,262 $500 JACP Holdings

Peninsula Village* Feb-16 $78.3 M 170,706 $458 First Capital

1424 W Broadway Jan-16 $19.8 M 7,756 $2,553 Value Prop. Grp

Royal City Centre* Jan-16 $114.7 M 361,386 $317 Dava Developm.

-2.0 0.0 2.0 4.0 6.0 8.0 10.0

Halifax

Edmonton

Montreal

Winnipeg

Ottawa

Calgary

National

Victoria

-1.1

4.8

5.0

6.0

7.5

7.8

8.5

8.7

%

Retail Total Returns For The 1-Year Period Ending Sept 2016


*share sale

Halifax1% Montreal

19%

Ottawa3%

Toronto38%

Edmonton3%

Calgary6%

Vancouver27%

Other3%

Retail Sales By CMA 18 Months to June 2016


Industrial17%

Office22%

Retail18%

Multi-Suite21%

Land16%

Hotel6%




SECTOR REMAINED HIGHLY SOUGHT-AFTER Canada’s multi-suite purpose-built residential rental sector remained high on the wish list of a range investors, which helped drive healthy performance trends over the past year. Pension funds, private capital, institutions and publicly traded entities scoured the nation’s prime and secondary urban areas for acquisition opportunities. Generally, the volume of capital targeted for the sector surpassed product availability. However, there was sufficient availability to generate strong capital flows into the sector. Closed transaction volume over the first half of 2016 represented a record high dating to 2001. This result validated the health of the market’s demand profile. Available prime assets received multiple bids, which resulted in modest upward pressure on value. The resulting capital growth contributed to solid investment performance. Properties tracked in the MSCI Index posted an annual average total return of 8.5% for the year ending on September 30, 2016, with fairly even contributions from both the income and capital components. Attractive performance has been a hallmark of the sector dating back to 2010. Attractive performance contributed to the rationale for the continued investment and competition for assets in the sector over the recent past.

STABILIZATION WAS OVERRIDING RENTAL MARKET THEMECanada’s multi-suite residential rental market posted continued stability and strength over the past year, in keeping with long-term trend. Demand remained largely healthy across most markets except for Alberta. Demand grew steadily weaker in this region due to the adverse effects of the commodities on labour market conditions. In the balance of the nation, migration patterns, the gradual recovery in youth employment and the aging population supported rental demand. The rising cost of ownership in most regions forced many renters to continue renting. Positive demand characteristics supported low and stable vacancy. National vacancy stood at 3.4% in October of 2016, up just 10 bps year over year for the country’s 30 largest markets. Regionally there were signs of weakness, with Calgary and Edmonton posting material increases in vacancy. However, outside of commodities-focused markets, conditions remained tight. Overall, demand outpaced supply, which boosted the average two-bedroom rent up 2.0% for a same sample of buildings tracked by the Canada Mortgage and Housing Corporation (CMHC). The rate of rental growth in the sector remained fairly stable, in keeping with the broader market performance over 2016.

SECTOR WILL CONTINUE TO DRAW INVESTMENT CAPITALThe Canadian multi-suite rental sector will continue to be a favoured destination for investment capital over the near term. The sector’s long history of stable and positive performance will be key to ongoing investment in the asset class. The sector’s recent record of rental market performance will also continue to attract investors. Pension funds, institutions, public entities and private capital are poised to invest low-cost debt and equity capital. Furnished with the appropriate desire and funds, investors will be able to close the sale of available assets. However, once again, transaction closing volume will depend on availability. Competition for core assets will be fierce and bidding aggressive. Consequently, modest upward pressure on values will persist, resulting in benchmark low cap rates. The resulting capital growth will boost overall performance. Returns are expected to remain attractive and likely range in the mid to high single digits. Persistent rental market stability will be supportive of investment performance. Rents will continue to gradually rise, in keeping with the past few years. Asset owners will generally enjoy low vacancy and strong demand for rental accommodation. Rental market strength will be in keeping with the overall health of the sector, which will drive investment activity.

MULTI-SUITE RESIDENTIAL OUTLOOK

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16YTD

%

Affordability Indicator % of Income to Service Home Ownership Costs

Single-Detached CondosSource: RBC Economics - RBC Housing Affordability Measure

0

100,000

200,000

300,000

400,000

500,000

600,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

Canadian Housing MarketPricing vs. Demand

Housing Starts (RS) Housing Sales (RS) Average Housing Prices (LS)Source: Conference Board Of Canada; CREA; CMHC

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Sep-

86Se

p-87

Sep-

88Se

p-89

Sep-

90Se

p-91

Sep-

92Se

p-93

Sep-

94Se

p-95

Sep-

96Se

p-97

Sep-

98Se

p-99

Sep-

00Se

p-01

Sep-

02Se

p-03

Sep-

04Se

p-05

Sep-

06Se

p-07

Sep-

08Se

p-09

Sep-

10Se

p-11

Sep-

12Se

p-13

Sep-

14Se

p-15

Sep-

16

%

Annualized Returns Rolling 1-Year RCPI/IPD Residential Performance

Multi-Suite Residential Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2016

0.0 2.0 4.0 6.0 8.0

Victoria

Vancouver

Toronto

Winnipeg

Halifax

Ottawa

National

Montreal

Edmonton

Calgary

0.7

0.5

1.6

3.0

3.2

3.4

3.9

4.0

7.0

8.0

0.6

0.8

1.6

2.9

3.4

3.4

3.8

4.0

4.25.3

%

CMA's Rental VacancyRates for Structures of 3 units+

20152016F

Source: CMHC, Housing Market Outlook


HIGHLIGHTS

• Income and capital performance was fairly evenly distributed over the past year in support of an annual average total sector return of 8.5% for properties tracked in the MSCI Index.

• If the pace of transaction activity in the first half of 2016 that generated $3.7 billion in closed sales were to continue through the balance of 2016, a new benchmark annual high would be set dating back to 2001.

MULTI-SUITE RESIDENTIAL INVESTMENT REPORT

INVESTMENT MARKET TRANSACTIONSMONTREALProperty Date Price Suites P.S. Purchaser

1101 Rachel St E Mar-16 $21.6 M 127 $169,685 InterRent REIT

Chabrier, Laval, Jolivet Feb-16 $26.5 M 256 $103,516 Groupe Armid

Cromwell Portfolio Jan-16 $120.5 M 415 $290,361 Akelius Canada

OTTAWAProperty Date Price Suites P.S. Purchaser

Minto Ottawa Jun-16 $180.3 M 850 $212,118 CAPREIT

1047 Canadian Shield Jun-16 $60.9 M 173 $352,107 Killam

160 Chapel St Feb-16 $67.0 M 370 $181,081 Morguard REIT

TORONTOProperty Date Price Suites P.S. Purchaser

Vantage Towers Oct-16 $57.0 M 329 $173,252 Minto Group

2, 4 Greentree, Clearv. Oct-16 $14.1 M 115 $122,391 Marlin Spring

Berkley Developments Sep-16 $47.1 M 270 $174,361 Starlight Invts.

65 Times Ave Aug-16 $16.0 M 63 $253,968 KingSett Capital

80 Mornelle Crt Jun-16 $38.0 M 265 $149,057 Conundr./Q Res

414 Willowdale Ave Jun-16 $15.0 M 67 $223,881 O’Shanter Dev’t

Bellanada Toronto May-16 $41.0 M 132 $310,606 Hollyburn Prop.

1731-1739 Victoria Pk May-16 $16.8 M 129 $130,000 Centurion REIT

85 Henderson Ave Apr-16 $16.4 M 71 $230,282 CAPREIT

25 Trudelle St Apr-16 $32.4 M 216 $150,000 Golden Equity

Denwin Portfolio Apr-16 $19.3 M 131 $146,947 Starlight Invts.

560 Birchmount Rd Apr-16 $16.6 M 103 $161,165 Medallion Corp.

205, 207 Morningside Feb-16 $27.5 M 214 $128,505 Minto Group

170 Dudley Ave Jan-16 $20.5 M 143 $143,357 Beaux Propert.

625 Roselawn Ave Jan-16 $27.1 M 91 $297,253 O’Shanter Dev’t

KITCHENER/WATERLOOProperty Date Price Suites P.S. Purchaser

460 Belmont Ave W Jul-16 $43.0 M 172 $250,000 Realstar

300 Regina St N Jan-16 $84.0 M 412 $203,883 Timbercreek AM

CALGARYProperty Date Price Suites P.S. Purchaser

Auburn Landing Jul-16 $51.2 M 238 $215,000 Boardwalk REIT

The Birkenshaw Mar-16 $50.2 M 215 $233,500 Homestead

Aura II (50%) Jan-16 $35.0 M 158 $443,038 Hydro-Québec

EDMONTONProperty Date Price Suites P.S. Purchaser

2703 James Mowatt Tr Oct-16 $37.0 M 200 $185,175 Skyline REIT

Edge by City Vibe Sep-16 $33.3 M 182 $182,750 Boardwalk REIT

Vita Estates Jun-16 $29.6 M 162 $182,750 Boardwalk REIT

Oliver Residences May-16 $66.3 M 207 $320,048 ICM Group

5400 Clover Bar Rd Jan-16 $46.1 M 208 $221,679 Skyline REIT

VANCOUVERProperty Date Price Suites P.S. Purchaser

210 & 230 E 2nd St Sep-16 $24.0 M 64 $375,000 GWL Realty

Berkeley Apartments Jun-16 $43.0 M 71 $704,918 Reliance Prop.

1230 & 1270 Burnaby* Jun-16 $17.3 M 45 $383,333 Lotus Pacific

Graystone Manor Jan-16 $18.1 M 47 $385,106 Concord Pacific

396 E 2nd Ave Jan-16 $12.7 M 53 $239,245 Living Balance

Burleigh Walk* Jan-16 $32.0 M 115 $278,261 Belmont Prop.

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Calgary

Edmonton

Halifax

Ottawa

Montreal

National

Toronto

Vancouver

1.5

2.1

5.3

6.2

7.5

8.5

11.7

14.0

%

Multi-Suite Total Returns For The 1-Year Period Ending Sept 2016


*share sale

Industrial17%

Office22%

Retail18%

Multi-Suite21%

Land16%

Hotel6%



Halifax1%

Montreal23%

Ottawa10%

Toronto27%

Edmonton8%

Calgary4%

Vancouver21%

Other6%

Multi-Suite Sales By CMA 18 Months to June 2016



HIGHLIGHTS

• Investor confidence in Canada’s commercial property sector translated into record-high capital flows through much of 2016, with annual sales projected to surpass the most recent peak of 2007.

• Prime asset values edged slightly higher than the cycle peak in 2016, with investors seeking yield against a backdrop of equity market volatility and moderately higher sector risk.

INVESTMENT OUTLOOKSOLID PROPERTY SECTOR INVESTMENT TRENDS REPORTEDCanada’s commercial property investment market registered another period of largely stable and healthy performance over the past year as the mature phase of the cycle persisted. Transactions closed at a record pace through much of the year after a relatively slow start. The strong flow of capital into the sector was facilitated by pension funds, private capital, capital market groups and, increasingly, foreign investors, all of which continued to try to access reliable sources of yield. Investors looked to Canada’s property market as a source of attractive and relatively stable yields. Close to record-low interest rates supported brisk transaction closing activity over the past year. Access to low-cost capital and the search for yield translated into aggressive bidding on available properties. In particular, prime assets in core markets attracted strong and often multi-bid scenarios. This generated moderate upward pressure on core property values. The upward value trend was supportive of attractive property sector investment performance. The MSCI Index recorded an annual average return of 7.4% for the year ending on September 30, 2016. This was up slightly year over year, with income growth accounting for roughly two-thirds of the result. The recent performance trend reflected the recent health and stability of the property sector as the current phase of the cycle continued to mature.

CAPITAL CYCLE PEAKEDThe flow of investment capital into Canada’s commercial property sector was expected to reach a four-year high in 2016, as the cycle peaked. At the three-quarter mark of 2016, a total of $27.4 billion in commercial property had been transacted year to date, with annual sales projected to surpass the most recent annual peak of $32.1 billion in 2007. The 2016 year-to-date total was bolstered by record volume recorded in each of the second and third quarters. All property classes posted strong advances, with stabilization recorded in the multi-suite sector. Investors looked to source relatively stable yield against a backdrop of low global growth. The rationale for investing in the Canadian property market also lay in the fact that government bond yields continued to hold at all-time lows and global equity markets remained volatile and at historically high price to earnings ratios. Foreign investment groups played an increased role in the property investment market over the past year, in large part due to political uncertainty across the globe. Chinese and German groups were most active, securing a number of core assets in prime markets at peak pricing. According to CBRE statistics, foreign investors accounted for 22.0% of total transaction volume in the first six months of 2016 and 41.0% of third-quarter trades. Emphasis was placed on the country’s strongest economic regions, Vancouver and Toronto. Another significant contribution to the peak capital cycle this year was the decision by some investors to sell off partial interests in assets to reconfigure partnerships or for increased diversification. This activity presented a number of significant acquisition opportunities throughout the year. Still others took advantage of the pricing environment to redeploy capital or realize profit. Most recently, a number of groups have combined on large-scale often mixed-use developments and redevelopments in order to build core assets in a market where supply fell short of demand. Despite this predicament, the capital cycle peaked through much of 2016 with no end in sight.

FOREIGN CAPITAL RETURNED TO THE FOLDThe presence and influence of foreign capital on the Canadian commercial property market increased over the past year, as groups looked to the sector for relatively stable and attractive investment yield. Foreign groups were highly active in pursuing the relative security attainable with acquiring assets in the nation’s most diverse and strongly performing economies. By dollar volume, groups based in China and Hong Kong and Germany accounted for

-5.0 0.0 5.0 10.0 15.0

CalgaryEdmontonWinnipegMontreal

OttawaNationalVictoriaToronto

Vancouver

-1.4

2.35.9

6.46.7

7.4

9.1

11.114.3

%

All Property Total Returns For The 1-Year Period Ending Sept 2016


Halifax1% Montreal

15%

Ottawa6%

Toronto39%

Edmonton5%

Calgary6%

Vancouver25%

Other3%

National Sales By CMA 18 Months to June 2016


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F

$13.2$14.6

$13.0

$17.3$19.9

$24.0

$32.1

$21.7

$13.0

$19.5

$23.6

$30.6$26.8

$26.1 $26.1

$35.0

$ B

illio

ns

Investment ActivityTotal Investment Volume

Domestic Foreign Q4 '16 Forecast

Source: CBRE LimitedSource: CBRE Limited


$1.3 billion in the first half of 2016 alone. Activity was skewed somewhat during this period by the roughly $1.0 billion acquisition of the Bentall Centre by Chinese insurance giant Anbang. For much of 2016, foreign acquisition activity was focused in the nation’s core office markets. Major office property acquisitions completed via this European-based or-backed capital included the Royal Centre in Vancouver for $425 million and 250 University Avenue in Toronto $84.8 million. A few smaller retail assets were also acquired by foreign investors during 2016. Moreover, as the year drew to a close, a foreign group was rumoured to have acquired another major office asset at the intersection of Yonge Street and Dundas Street in Toronto. Aggressive bidding on the part of foreign investors effectively priced out domestic bidders on specific assets. Over the near term, off-shore capital was expected to branch out into other major urban markets, driving investment in Canada’s property sector.

SECTOR RISK INCREASED PERIODICALLYProperty sector performance risk increased at various times during the past year, a trend that was rooted in domestic and foreign events. In Canada, the ongoing slump in the oil and broader commodities market continued to hamper economic progress. The resulting low-growth environment was reflected in disappointing business investment and export volume. The potential for an extended commodities malaise was also cause for concern. Beyond Canadian borders the United Kingdom’s decision to leave the eurozone cast a shadow on the European and global economies. A series of socio-political events were also sources of increased global uncertainty, which could have a negative impact on economic stability. These included but were not limited to the Syrian refugee crisis, breaches of cybersecurity, the potential for further mass migrations, China’s financial vulnerability and the potential for financial crises in several emerging markets due to high levels of debt. The 2016 U.S. election outcome and the new government’s protectionist policies were also seen as a threat to the global economic outlook.These measures could limit global trade and commerce. Finally, the potential impacts of rising interest rates came to the fore in the final weeks of 2016, as the Fed increased its key lending rate by 25 bps. This was the latest in a steady stream of events that resulted in increased property investment market risk.

SECTOR OUTLOOK IS GENERALLY POSITIVEThe near-term outlook for Canada’s commercial property investment market is generally positive, with few changes in recent performance expected. Once again there will be no shortage of low-cost debt and equity capital looking to the sector for yield. A range of foreign and domestic groups will continue to source prime assets in the country’s largest urban areas. Market-dominant properties in secondary markets will also generate strong interest. The strength of the market’s demand profile will result in aggressive bidding and multiple offers in many cases, which may push prime asset values slightly higher. With values likely to stabilize overall, investment performance will once again be largely income-driven. This will be the byproduct of largely positive leasing market performance. Forecast national economic expansion of roughly 2.0% over the next couple of years should support demand for industrial and office space. International migration, the aging population and gains in the national labour market will drive demand for multi-suite rental property. Demand for retail space will continue, although e-commerce will erode progress in specific segments of the market. Investors will exercise a measure of caution, given the potential impact of interest rate increases south of the border and a plethora of external risks. An extended commodities slump is also a concern. However, the overall sector outlook is promising.

INVESTMENT OUTLOOK

0.0

3.0

6.0

9.0

12.0

1-Year 3-Year 5-Year 10-Year 15-Year

6.7 7.

3

8.7

7.4

9.6

6.0

6.7

9.7

9.7 10

.1

8.5

9.1

11.1

10.5 11

.6

8.5

8.1

10.1

9.4

9.4

%

IPD ReturnsAnnualized Returns By Property Type To Sept 2016

Industrial Office Retail Apartment


-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1-Year 3-Year 5-Year 10-Year

-0.2

8.3

4.2 4.

9

0.5

0.8

0.8 1.5

9.9

9.2

8.5

7.8

12.8

8.5

8.4

8.5

8.1 8.1 10

.4

9.8%

Relative PerformanceComparing Annualized Returns To June 2016

S&P/TSX Index T-Bill FTSE TMX Long BondTSX REIT Index IPD Index

Source: © MSCI Real Estate 2016; RBC CM; TSX Datalinx; SCM; PC Bond Analytics

0.01.02.03.04.05.06.07.08.09.0

10.0

Dec

-99

Jun-

00D

ec-0

0Ju

n-01

Dec

-01

Jun-

02D

ec-0

2Ju

n-03

Dec

-03

Jun-

04D

ec-0

4Ju

n-05

Dec

-05

Jun-

06D

ec-0

6Ju

n-07

Dec

-07

Jun-

08D

ec-0

8Ju

n-09

Dec

-09

Jun-

10D

ec-1

0Ju

n-11

Dec

-11

Jun-

12D

ec-1

2Ju

n-13

Dec

-13

Jun-

14D

ec-1

4Ju

n-15

Dec

-15

Jun-

16D

ec-1

6

%

Yield Spreads Cap Rates vs. 10-Year GOC Bonds

GOC 10-Year Yield Office-CBD Retail-RegionalIndustrial-Multi Tenant Apartment-Suburban

Source: AltusInSite, Bank of Canada

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

1,99

4

749

253

359

1,37

8

1,72

6

1,85

5

2,21

8

2,27

2

2,59

1

2,94

5

1,09

6

1,89

6 3,79

6

4,93

8 5,74

6

4,60

1

2,11

2

1,82

0

2,81

9

Mill

ions

REIT Capital ActivityPublic Equity Issuance

REOCs REITs (Transaction Value Shown)Source: RBC Capital Markets


ECONOMIC GROWTH TO ACCELERATE A BITCanadian economic growth will accelerate over the near term, resulting in a moderately brighter outlook. GDP will increase by 2.0% in 2017 according to the most recent CBOC forecast. This will follow a fairly tepid 2016 expansion of 1.3%. Forecast stabilization in the nation’s commodities sector will be key to the uptick in business activity, driven in part by the slow take-up of excess supply and slightly stronger demand for oil and gas. Coincidentally, Canadian export output will improve by 2.3% in 2017 after a sluggish 1.0% advance in 2016. A number of federal measures are also expected to drive improved economic growth in 2017, with the newly instituted child benefits, changes to personal income taxes and infrastructure spending having the most impact. Finally, spending by the public sector will provide an economic boost over the near term after a prolonged period of fiscal restraint. Spending by the public sector will, along with private sector business growth, support a stronger economic growth trend over the next couple of years.

RETAIL SALES MODERATION TO CONTINUERetail sales growth will moderate over the next couple of years as consumers exercise a measure of caution. Advances will average 2.7% and 1.9% over 2017 and 2018, respectively. A more robust growth trend will push sales higher by 3.8%. The rationale for the more moderate growth forecast is likely related to three trends. First, consumers are paying more attention to their balance sheets in light of record debt levels. Second, confidence is being eroded by poor labour market performance. Third, consumers are recognizing the need to save for retirement. In combination, these three concerns will keep retail spending growth below the recent peak.

LIMITED LABOUR MARKET PROGRESS FORECASTCanadian labour market progress will continue to underwhelm over the next 12 to 18 months, given a fairly modest economic growth trend. Approximately 198,000 new positions will be created during 2017, representing a markedly stronger performance than the expected 108,000 in 2016. While better than last year, the 2017 total is representative of subpar growth when compared to periods of strong economic progress. The 2017 forecast represents a fourth consecutive year of fewer than 200,000 jobs created. The weak growth trend will hamper improvement in the national unemployment rate. A marginal decline of 20 bps to 6.8% is forecast year over year as of the end of 2017. Coincidentally, wage gains will also be fairly mild, in keeping with the medium-term trend. In short, Canada’s labour market performance will continue to disappoint over the near term, due in large part to a moderate economic growth cycle.

COOLING TREND PREDICTED IN HOUSING MARKET Canada’s housing market will continue to cool off in the coming year following an extended period of price growth. The cooling will be precipitated by the ongoing impact of new mortgage and tax regulations instituted in 2016. The potential for rising interest rates could also dampen market progress over the near term. In the resale market, price growth will continue to moderate, a trend that emerged in the late stages of 2016. National pricing will fall by a modest 2.0%. In Vancouver, one of the nation’s most overheated markets, prices will fall by up to 10.0% year over year by the end of 2017. The nation’s other hot market, Toronto, will see more conservative growth as the market remains tight. Additionally, a weaker housing start trend is forecast for B.C. and Ontario. Nationally, starts will slide to an average of 180,000 units in 2017 from the forecast 194,000 this year. In short, Canada’s housing market will steadily cool over the near term as the effects of new mortgage and tax regulations continue to take effect.

ECONOMIC OUTLOOK

0.0 0.5 1.0 1.5 2.0 2.5 3.0

CanadaHalifax

MontrealWinnipeg

ReginaOttawa

SaskatoonVictoriaToronto

EdmontonCalgary

Vancouver

1.81.8

1.92.0

2.12.22.2

2.32.5

2.62.7

2.9

%

CMA Real GDP Growth2015 - 2018 Forecast

Source: Conference Board Of Canada

5.2

1.8 3.

0

1.8 3.

1

3.2

2.6

2.1 1.

0

-2.9

3.1

3.1

1.7 2.2 2.5

1.1

1.3 2.

0

4.1

1.0 1.

8 2.8 3.

8

3.3

2.7

1.8

-0.3

-2.8

2.5

1.6 2.

2

1.7 2.

4 2.6

1.6 2.

3

-4.0

-2.0

0.0

2.0

4.0

6.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F 17F

%

Economic Growth Real GDP Growth - Historical & Forecast

Canada United States WorldSource: Conference Board Of Canada (Dec 2016); International Monetary Fund (Oct 2016)

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

%

Official Policy Rates International Monetary Conditions

US Federal Funds Rate European Central Bank Target RateBank of Japan Policy Rate Cdn Overnight Lending Rate

Source: Bank Of Canada; Federal Reserve Board; European Central Bank; Bank of Japan

50

60

70

80

90

100

110

120

130

140

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Mar

-14

Sep-

14M

ar-1

5Se

p-15

Mar

-16

Sep-

16

Inde

x*

Consumer ConfidenceConsumer Optimism About Economic Conditions

Canada U.S.Source: CBOC, University of Michigan Consumer Sentiment *Base year: Cdn=2014, U.S.=1966

METROPOLITAN ECONOMIC & REAL ESTATE OUTLOOK


LABOUR MARKET CONDITIONS IMPROVEDConditions in the Halifax CMA labour market improved during much of 2016, following a largely weak performance in the previous year. Employment was on pace to increase by over 226,000 by the end of 2016, bolstered by continued economic growth. This represented a 0.8% expansion in 2016, following a 0.3% advance in the previous period. Key contributions to employment growth have been manufacturing, construction, business services and non-commercial services. Strong prospects for employment pushed more people into the labour market, which will product a slight lift in the unemployment rate year over year to 6.5% from 6.3%.

HOUSING STARTS EBBED AFTER 2015 SURGEResidential construction activity eased during much of the past year, following a 50.0% increase reported during 2015. The CBOC projected a 20.0% decline in residential starts in 2016, following a surge in activity over the previous 12 months. A slowdown in multi-suite development was the cause of the recent downshift in activity, which more than offset growth in single-family starts. Looking to 2017, housing starts were expected to stabilize. stabilization trend was antOverall, the CBOC

RETAIL SALES PICKED UP FOLLOWING SLUGGISH PERIOD Retail sales picked up recently in support of a stronger growth trend forecast for the year. The rebound in retail sales forecast for 2016 was predicated on higher levels of consumer confidence and a stronger job market. Over the year, sales were projected to increase by 4.0%, following a rare decline of 0.8% reported in 2015. The recent strengthening of the retail sales growth trend was expected to continue through the balance of 2016 and into 2017.

NEAR TERM LOOKS POSITIVEThe near-term economic outlook for the Halifax CMA economy is largely and relatively healthy. The regional economic growth trend will stabilize, with expansion of 2.5% in 2017, just 10 bps shy of the 2016 result. Growth will be buoyed by ongoing shipyard activity, construction output and broad-based services sector expansion. While not quite as robust as 2016, retail sales will advance by 3.0%. Labour market progress will help boost spending over the near term, with employment growth to improve over the 2016 level. The 1.2% rise in employment for 2017 will slow a bit in 2018, with the ranks of the employed increase by 0.7%. Housing construction starts will stabilize over 2017, following a reduction in activity levels this year. The slowdown will be concentrated in multi-suite starts. Despite this blemish, the overall outlook for Halifax’s economic drivers is generally encouraging.

HALIFAX ECONOMIC REPORT

ECONOMIC SNAPSHOT

In its August forecast, the CBOC indicated that Halifax CMA’s economy was on pace to expand by 2.6% in 2016. The region’s manufacturing and construction sectors were the main drivers of growth through three-quarters of the year. The manufacturing performance was boosted by activity in the Halifax Shipyard as forecast. The relatively robust economic growth trend over 2016 was expected to support healthier employment growth and consumer confidence levels. Retail sales, in turn, were forecast to increase by 4.0% in 2016, following a contraction of 0.8% in 2015.

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%

Economic GrowthHistorical & Forecast Aggregates

Average Annual GDP Growth - RS Average Annual CPI Growth - LS


0

50

100

150

200

250

300

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%

Labour MarketHistorical & Forecast Aggregates

Labour Force - RS Employment Growth - LS Unemployment Rate - LS


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%

Housing SectorHistorical & Forecast Aggregates

Single Starts - RS Multiple Starts - RS 5-Year Mortgage Rate - LS


-2

-1

0

1

2

3

4

5

6

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%

Demographic TrendsHistorical & Forecast Aggregates

International Migration - RS Interprovincial Migration - RSIntercity Migration - RS Population Growth - LS



HALIFAX OFFICE REPORT

STRENGTH AND WEAKNESS EVIDENCED IN LEASING PERFORMANCE It has been difficult to determine the overall strength of Halifax’s office leasing market over the past year, given a relatively uneven performance. The demand cycle was fairly positive, supported by a fairly strong economic growth trend. GDP was forecast to expand by 2.6% during 2016, the third strongest growth rate of the nation’s 13 largest CMAs. Demand was boosted by expansion activity in both the public and private sectors. Despite the healthy demand picture, supply-side conditions continued to soften over much of 2016. Downtown and suburban occupancy levels edged lower, driven largely by increased vacancy in older properties. Overall market occupancy fell by close to a full percentage point year over year, ending the third quarter at 85.1%. The recent introduction of new supply and an increase in sublease space more than offset expansion activity in this market. In 2015 alone, 318,000 square feet of new supply was added to market inventory. Falling occupancy levels resulted in modest downward pressure on average rents. Averages across the market either stabilized or fell modestly. The absence of a firm rental rate trend was emblematic of the market’s overall performance.

LARGELY STABLE INVESTMENT TRENDS DISPLAYEDTrends observed in Halifax’s office property investment market over the recent past were in keeping with those of the past few years. Property yields were unchanged, on average, although a modicum of upward pressure was evidenced for riskier assets. Property values continued to hold at the peak for the cycle, especially prime assets in prime locations with stable tenant rosters. The supply of assets available for acquisition was also fairly stable, continuing to fall short of demand. There were few significant transactions reported in 2016, with local buyers acquiring smaller assets most frequently. The rationale for investing in this market supported healthy demand characteristics. Investors were drawn to the region by broadly positive fundamentals. Economic growth patterns were among the strongest of the nation’s larger urban centres, driven by Halifax’s shipbuilding and construction sectors. In keep with the past few years, investors were somewhat cautious, given weakness in the regional leasing market. Once again, investors exhibited the highest levels of interest in the market’s best properties. Private equity groups in particular were most selective. Outside of this selectivity, investment market characteristics were largely unchanged from those reported over the past few years.

SECTOR OUTLOOK IS UNEVENThe outlook for Halifax’s office property sector is somewhat mixed. A relatively robust economic growth outlook for 2016 and 2017 should result in leasing market gains. Expansion activity will increase, which will gradually push occupancy levels higher in both newer and older buildings. Organizations in the market for space will be able to source premises in the city’s downtown core at a fraction of the cost of larger urban centres nationwide. While tenant demand will be a plus over the near term, vacancy levels will continue to rise. Therefore, tenants will enjoy a larger number of leasing options. For landlords, this will mean increased competition when renewing existing tenants and attracting new ones. The introduction of newly built space will add to the upward vacancy trend. By the close of 2016, the 60,000-square-foot Wright and Burnside Campus and the 120,000-square-foot second phase of EON Square will be completed. These will be followed up by the completion of the expanded Nova Centre in early 2017. These projects will drive vacancy higher than current levels and will generate modest downward pressure on rents. This will have a negative impact on investment performance. However, yields will remain unchanged, along with most other investment market conditions. In short, the outlook for this market is fairly mixed. On the one hand investment performance will remain positive, while leasing market trends soften.

TRENDING STATISTICS


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 +/-, yet indicate a growing/shrinking trend over a specified time horizon).

0.0

5.0

10.0

1-YEAR 3-YEAR 5-YEAR 10-YEAR

1.2

3.3

7.1

9.1

6.0

6.7

9.7 9.7

%

Historical PerformanceFor The Period Ending Sept 2016

Halifax Office National Office


-300

-200

-100

0

100

200

300

400

500

600

700

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Thou

sand

s of

Squ

are

Feet

%

Office Demand & Supply Halifax Historical & Forecast Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)

Source: CBRE Limited; CBRE Econometric Advisors

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Halifax Historical & Forecast Aggregates

Net Effective Rent (LS) Vacancy Rate (RS)



HALIFAX INDUSTRIAL REPORT

ACTIVITY WAS FOCUSED IN NEW DEVELOPMENTSActivity in Halifax’s industrial sector has been focused in new developments across the market. A significant share of this activity took place in Burnside Business Park. Several companies have taken occupancy of leased or owned properties in the area in 2016, with more planning to do the same in fairly short order. In some cases, this activity involved the purchase of industrial condominiums, with others choosing to lease space. Freight companies catering to the Port of Halifax were the most active securers of space in the park. Companies slated to occupy newly built space in the park include Sunsel Systems for 75,000 square feet and Nova Truck Centre for 36,000 square feet. The relocation of industrial space users to new developments had a somewhat negative impact on supply fundamentals. In some cases, relocations contributed to increased vacancy overall as previously occupied premises remained vacant. Some groups offered their existing space for sublease. On aggregate, market occupancy decreased as users and owners moved into newly developed space. CBRE reported occupancy of 87.6% for the Greater Halifax Area at the close of the second quarter of 2016. The CBRE figure is down 330 bps from a year earlier. The decline in occupancy levels was sharpest in the existing inventory as sublease offerings increased. As the focus of growth, the market’s newly built properties exhibited relatively stronger trends overall.

INVESTMENT MARKET WAS STEADY AND QUIETStabilization characterized the Greater Halifax industrial investment market performance over much of 2016, with few major transactions reported. To some degree, the concentration of property ownership in this market has limited activity. Many groups have become keenly aware of the benefits of owning property in this market and the barriers to re-entry if they chose to sell. For this reason, transaction activity was been fairly muted in 2016, as well as over the past few years. This trend held firm despite the potential for portfolio pruning. Ownership stability was accompanied by generally stable investment market conditions over the past year. Property values held steady, with little transaction evidence in support of a material change. Leasing market conditions continued to support income growth, with some downward pressure reported for older properties with excess vacancy. Functional properties in prime locations registered values at the peak for the cycle. Investment demand outpaced supply, with private equity groups being the most active. The historical dominance of local private equity continued to characterize the demand backdrop overall. In short, stable demand and low levels of transaction closing activity characterized Halifax’s industrial investment market over the past year, in keeping with the medium-term trend.

ECONOMIC OUTLOOK WILL DRIVE SECTOR GAINSHalifax’s economic growth forecast will be conducive to industrial sector progress over the near term. The CMA’s economy is forecast to expand by roughly 2.5% next year, following a similar rate of expansion in 2016. The robust growth outlook will be driven by ongoing shipbuilding activity and regional construction projects. This output will drive demand for industrial space. Traffic at the Port of Halifax is also expected to bolster demand. Positive demand patterns coupled with a slowdown in the delivery of new industrial construction will strengthen leasing market fundamentals. Developers will delay projects in the coming year as vacancy rises in the existing inventory and rents edge lower. Subsequently, excess vacancy will be slowly absorbed, resulting in more stable income performance for landlords. Improved investment performance will gradually unfold. At the same time, the propensity to sell these assets will decrease. During that transitional phase, the industrial market will continue to progress, driven in large part by solid economic growth performance.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▼ ▬Lease Rates ▬ ▬New Supply ▼ ▬


-5.0

0.0

5.0

10.0

1-YEAR 3-YEAR 5-YEAR

-2.5

1.6

4.56.77.3 8.7

%


Halifax Industrial National Industrial


-200-150-100-50050100150200250300

80828486889092949698

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Thou

sand

s of

Squ

are

Feet

%

Industrial Demand & Supply Halifax Historical Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)Source: CBRE Limited

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

%

$ p.

s.f.

Industrial Rent & Vacancy Halifax Historical Aggregates

Net Effective Rent (LS) Availability Rate (RS)Source: CBRE Limited


HALIFAX RETAIL REPORT

LEASING MARKET STABILITY PERSISTEDRetail leasing market conditions were largely unchanged over the past year despite a relatively active environment. Occupancy characteristics mirrored those of the previous year. Market vacancy of 8.2% was reported by Cushman & Wakefield in its second-quarter 2016 survey. This represented a 10 bps decline year over year for the 9.9 million square feet of retail space tracked. Outside of IKEA’s announced new build at Dartmouth Crossing of 328,000 square feet, construction activity remained fairly muted over the past year. Less than 100,000 square feet of new construction completions were reported in all of 2015. A similar trend was forecast for 2016 as well. While supply patterns in this market were largely unchanged, the same was also true for demand characteristics. National groups continued to look to Halifax for expansion opportunities. At the same time, however, a number of retailers continued to struggle with the impacts of online shopping and a low Canadian currency value. U.S. retailer expansion in this market was also virtually non-existent. These demand trends were also a factor in this market last year. The lack of year-over-year variation in demand and supply dynamics was also the underlying theme in the market’s rental cycle. Retail rents across much of the market were unchanged, in keeping with the national trend. In fact, rents have been relatively stable since 2014. The stability of rents in this market over 2016 reflected the broader market performance theme.

INVESTMENT ACTIVITY SURGEDThe health of Halifax’s retail property investment market resulted in a marked increase in transaction closings. Private capital groups exhibited confidence in the market, taking a dominant position in the investment market. Pension funds and institutions were also active pursuers of prime assets in this market over the past few years. This demand strength factored into a sharp increase in transaction activity over the past year. A total of $86.2 million in sales were recorded in the first six months of 2016, which represented the strongest pace of activity dating back to 2012. Notable assets that traded during the period included Park West Centre for $29.0 million, Wal-Mart Bayers Lake for $22.1 million and Westphal Plaza for $12.4 million. For the most part, prime asset values held firm at the peak for the cycle. During the recent surge in activity, the average value of strip centres reached a new benchmark high. This came against a backdrop of increased transaction activity in a market that continued to post strong fundamentals.

RECENT PERFORMANCE TRENDS WILL CONTINUEMinimal variation on recent performance trends is forecast for Halifax’s retail sector over the near term. Leasing market stabilization will persist, although performance will vary by market segment. The market’s best malls will continue to thrive; some centres will continue to adjust to changes in consumer preferences. Aggregate vacancy, rents and activity levels will mirror those of the past few years. Investment market conditions will also be largely the same as those observed over the past few years. Investors will continue to cite the prevailing economic growth profile and historical trends as the rationale for investment. For example, the CMA will be among the growth leaders in economic performance over the next 12 to 24 months, compared with the nation’s largest urban centres. National groups will remain selective, looking primarily at prime assets in their ongoing search for yield. Local and regional private groups will also compete for the few assets offered for sale. Limited availability will ensure values hold at current levels. At the same time, income growth will boost investment performance. In short, Halifax’s retail sector will continue to advance over the near term at a pace similar to that of the past few years.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▬ ▬


-5.0

0.0

5.0

10.0

1-YEAR 3-YEAR

-1.1

4.2

8.59.1

%


Halifax Retail National Retail


-$4

-$2

$0

$2

$4

$6

$8

$10

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsHalifax Historical & Forecast Aggregates

Retail Sales - RS Growth In Personal Disposable Income Per Capita - LS


$8$23

$76

$27$6

$172

$86

$22

$57

$90

$277

$57 $55

$18

$86

$0

$50

$100

$150

$200

$250

$300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions

Investment ActivityRetail Investment Volume to June 2016



HALIFAX MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET RISK WAS LOW There was little evidence of risk in Halifax’s multi-suite rental sector over the recent past, in keeping with the long-term trend. Consistently positive demand characteristics were observed during much of 2016 and the previous year. The leading source of rental demand was the region’s aging population. More specifically, the movement of baby boomers from single-family homes to rental property supported a strong demand cycle. Migration patterns, both interprovincial and international, also drove rental demand. Fewer Nova Scotians have left the province to work in Alberta, given the ongoing oil sector malaise. Consistently positive demand patterns over the past year were a factor in broadly strong supply-side characteristics. The Halifax CMA posted an average occupancy rate of 97.4% in October 2016, markedly lower than the 10-year average. The rate increased by 80 bps year over year as an indicator of the market’s strength. Only minor variations in occupancy have been reported dating back to 2013. After a period of softness prior to 2013, market occupancy has grown progressively stronger. In turn, rents have also increased steadily, holding at the peak for the cycle over the past year. Overall, there were few indications of rental market risk over the past year, in keeping with the medium-term trend.

NOT MUCH HAS CHANGEDThere were few changes in investment performance in the GHA multi-suite residential rental sector over the past year, with investors reaping the rewards. Investment returns remained attractive, with the MSCI Index generating an average annual return of 5.4% for the year ending September 30, 2016. The return was down just 10 bps over the previous 12-month period. The lion’s share of the result was income-driven. The capital cycle remained fairly muted for a second consecutive year. Performance stability was a factor in what was a stable demand backdrop in this market over the past year. Once again, local private groups were most active in pursuing investment property to acquire, a trend that has been a market fixture long-term. This was particularly the case for assets with a sale price of under $5.0 million. For higher-priced offerings, national groups were more active, with private capital, publicly traded entities and pension funds being present. The relative strength of the demand backdrop was in support of peak values for the cycle, which has been the case for several quarters. This consistency was in line with most investment performance metrics over the past few years.

RENTAL MARKET TRENDS SHOULD BOOST INCOME LEVELS AND INVESTMENT PERFORMANCENear-term investment performance will be driven by the continued strength of the regional rental market. Rents will hold at the peak for the cycle overall, with slight increases forecast. Upward pressure on rents will be rooted in tight supply characteristics and above-average demand. The aging of Halifax’s population will drive demand for rental accommodation in the region’s baby-boomer population. A healthy economic growth cycle and resulting job opportunities will draw international and interprovincial migrants to Halifax. This group are typically renters in their first year of residence. For some, the challenge of sourcing vacancy rental units will be significant, given occupancy levels in the high nineties. Construction completions will fail to alleviate the shortage of available units over the near term. The combination of positive demand patterns and limited availability will result in upward pressure on rents across the multi-suite residential rental market in 2017. Condominiums offered for rent will help to some extent but not enough to reduce the upward pressure significantly. The modest rise in average rents will drive investment performance, which will be largely income-driven for the foreseeable future.

TRENDING STATISTICS


Vacancy Rate ▼ ▲Net Absorption ▬ ▬Lease Rates ▲ ▲New Supply ▼ ▲


0.0

5.0

10.0

15.0


5.3 5.8 6.6 7.28.5 8.110.1

9.4%


Halifax Multi-Suite National Multi-Suite


$10

$49

$143

$167

$76

$161

$41 $44 $50

$210

$161

$44

$121

$60 $56

$0

$50

$100

$150

$200

$250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions

Investment ActivityMulti-Suite Investment Volume to June 2016


0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

3.6

2.8 2.72.3

2.93.3 3.2 3.1

3.4

2.92.6

2.4

3.0 3.23.8

3.4 3.23.6

%

Average Rental Vacancy Apartment Structures Of Three Units And Over

Source: CMHC


ECONOMIC SNAPSHOT

MODERATELY HEALTHIER LABOUR MARKET TRENDS REPORTEDModerately healthier labour market conditions were reported in the Montreal CMA at the three-quarter mark of 2016, in keeping with the 2015 trend. Employment levels were set to rise by 0.9% by the end of the year after growth of 1.1% in 2015. This growth was surprisingly positive, given fairly large losses of jobs in the region’s aerospace industry. On a more positive note, the regional unemployment rate was set to fall 50 bps year over year to 8.0%. A three-year high of 8.5% was set in 2015. Moderate gains were tallied through much of 2016. Labour conditions improved through much of the past year despite a weaker-than-expected economic performance.

MULTI-SUITE RESIDENTIAL BUILDERS PULLED BACKBy the end of the summer, housing starts in the Montreal CMA were on track to fall by 8.0% over 2016. The main driver of this trend was a sharp dip in multi-suite starts. Builders grew increasingly concerned about rising inventories following a high level of starts in 2015. The CBOC forecast called for 14,600 units to be started in 2016, down from 16,300 starts in the previous year. After the builder pullback of 2016, starts were projected to rise modestly in 2017.

RETAIL SALES GROWTH TREND FIRMEDEvidence of a firmer retail sales growth trend was reported in the first half of 2016, resulting in a more robust forecast for the full year. Total retail sales for the Montreal CMA were projected to rise by 4.5% over 2016, following an average of 2.3% over the previous two-year period. A fairly solid employment growth trend was seen as a driver of improved spending patterns. In 2017, the city’s 375th anniversary was viewed as a driver of tourism growth and retail sales growth.

MORE ROBUST GROWTH TREND TO UNFOLD IN 2017A more robust economic growth profile is forecast for the Montreal CMA over the next three years. Economic output will increase by an average of 2.0% in 2017 and 2018. Manufacturing output will contribute to the uptick, with output to accelerate by 1.8% in 2017 an annual average of 2.0% through to 2020. Infrastructure spending will be a boon to the local economy, with projects like the $4.2 billion Champlain Bridge and the $3.7 billion Turcot Interchange. Non-residential private development will also support the positive economic outlook. Services sector output is also set to strengthen in support of the growth trend. A stronger economic outlook will, in turn, drive healthier employment trends, with the unemployment rate forecast to fall to 7.7% by the end of 2017. Job market progress will drive retail consumption, with sales expected to rise by 3.7% in 2017 and 3.4% in 2018. In short, Montreal’s economic prospects for the near term look healthier.

The Montreal CMA’s 2016 economic growth trajectory has fallen short of last year’s forecast. In the fall of last year, the CBOC forecast average GDP expansion of 2.2%. However, the rate was downgraded to 1.6% by the fall of this year. In its fall forecast, the CBOC indicated the regional unemployment rate would rest at 8.0% at year-end, which was higher than previously thought. Despite these downgraded forecasts, the Montreal CMA economic performance of 2016 was relatively positive overall, which pushed the retail sales growth rate to a three-year high.

MONTREAL ECONOMIC REPORT

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

500

1,000

1,500

2,000

2,500

-3.0

0.0

3.0

6.0

9.0

12.0

15.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

5

10

15

20

25

30

35

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-30-20-100102030405060

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





MONTREAL OFFICE REPORT

CHANGING TENANT DEMANDS DICTATED LEASING TRENDS The changing needs of today’s tenant continued to play a major role in the GMA’s leasing market performance of the recent past. Increasingly, both public and private sector office space requirements have become increasingly sophisticated, driving market trends. The most common and impactful of these over the past year were the need for state-of-the-art, environmentally sustainable space; access to public transit; and a range of amenities and flexible space configurations to achieve efficiencies. To a large extent, these requirements dictated success. The largest share of leasing activity took place in the market’s loft space and in newer towers, which were positioned to meet tenant demands. Owners of older buildings offered incentives in order to compete for tenants. In spite of these efforts, excess vacancy was an issue. The redevelopment of loft space and construction of new office towers to meet tenant demands pushed vacancy higher over the past few years. However in 2016, vacancy began to stabilize. In the past year, however, vacancy showed signs of stabilization. The rate of 13.8% reported at the end of the third quarter was unchanged from the end of 2015. At this level, the prospect of significant rental rate growth was low. The needs of GMA office tenants and resulting construction cycle were expected to drive vacancy higher over the near term and have an impact overall leasing market performance.

INVESTMENT TRENDS REFLECTED CYCLE MATURITYConditions commensurate with the mature phase of the Canadian commercial property investment cycle were evidenced in Montreal’s office sector over the past year. Property values settled at the peak for the cycle for the few prime assets brought to market for acquisition. The maturity of the local property value cycle was reflected in MSCI return trends. Montreal office assets tracked in the index posted an annual average return of 6.8% for the year ending on September 30 2016. Much of this performance was income-driven, with minimal capital growth recorded. In the open market, cap rates were also largely stable for core quality offerings, although a modest rise in yields for riskier assets was noted. Demand for investment-grade assets was consistently positive, with plenty of available capital, both debt and equity. For the most part, product availability continued to fall short of overall demand. The health of the demand backdrop was evidenced in the few major asset sales that took place, which were generally well received. In short, the maturity of Montreal’s office sector investment cycle remained an underlying market theme over the past year.

REPEAT OF RECENT PERFORMANCE PATTERNS The outlook for Montreal’s office sector will see a repeat of most trends observed over the recent past. A moderately stronger economic growth outlook will drive business growth and office space demand. The Montreal economy is expected to expand by 2.0% over 2017 and 2018, in line with the national growth trend. The technology sector will be a major factor in driving demand for office space, resulting in healthy activity in the market’s loft and newly built buildings. A period of overbuilding over the past few years will result in excess vacancy in the city’s suburbs. This will hold overall market vacancy above the national average. A healthy pipeline of new developments will continue to push vacancy higher as supply outdistances demand. Vacancy may eclipse the 15.0% mark over the near term, which will buffer against material growth in rents in some market segments. Overall, downward pressure on rents will have an impact on investment performance. Therefore, returns will likely edge lower but remain attractive to investors. This, along with the strong desire for yield, will produce healthy investment demand patterns over the near term. In short, investment and leasing trends forecast for the near term will mirror most of those observed over the past year.

TRENDING STATISTICS


Vacancy Rate ▬ ▲Net Absorption ▬ ▬Lease Rates ▬ ▼ New Supply ▲ ▲


0.0

5.0

10.0

15.0

1-YEAR 3-YEAR 5-YEAR 10-YEAR 15-YEAR

6.8 5.9 7.38.1 8.4

6.06.7

9.7 9.7 10.1%


Montreal Office National Office


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Montreal Historical & Forecast Aggregates



4.0

6.0

8.0

10.0

12.0

14.0

16.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Montreal Historical & Forecast Aggregates




MONTREAL INDUSTRIAL REPORT

LEASING PERFORMANCE UNDERWHELMED Leasing fundamentals continued to soften in Montreal’s industrial property sector over the past year after a run of positive results over the medium term. During much of 2016, vacancy levels have risen and growth has stalled. Previously, the market had undergone a four-year period of progression, which included a fairly healthy development and demand cycle. In the past year, construction activity slowed, with a modest 419,000 square feet completed in the first half of 2016 and 865,744 square feet under construction at the midway mark of the year. Previously, construction completions peaked at 2.6 million square feet during 2015. Demand, measured by net absorption, has also slipped sharply in 2016. Net absorption was negative at 1.4 million square feet in the first half of 2016, following a minor slide over the previous 12-month period. Prior to the recent slide, net absorption peaked at 3.9 million square feet over 2014. The combined effects of weaker demand and the delivery of new supply, albeit at a slower pace, pushed aggregate market availability higher. CBRE reported market availability of 8.1% at the end of the third quarter of 2016, up 60 bps from the same point in 2015. To some extent the market’s weakened supply position hampered growth in average rents in most market segments. The broader erosion of leasing fundamentals over the past year was expected to ease in 2017, driven by a stronger economic growth outlook.

GENERALLY HEALTHY INVESTMENT TRENDS OBSERVEDMontreal’s industrial sector posted another period of generally healthy investment market performance through much of 2016, in keeping with much of the post-financial-crisis era. Investment demand outpaced the supply of assets available for acquisition. Despite this relationship, there were plenty of transactions completed recently. A total of $446.9 million in industrial property changed ownership over the first three quarters 2016. While slightly below the pace of last year, the total was already higher than the average annual volume for the preceding three-year period. In keeping with the national medium-term trend, regional and national groups were active market participants in 2016. Private-equity groups were the most active in the sector. Sourcing acquisitions was once again challenging, which was also a characteristic of the sector over the past few years. Satisfying investor appetite for functional property was most difficult. Those willing to accept older, less functional properties had a somewhat easier time. While the challenges of sourcing acquisitions in this market was a constant in 2016, so too was healthy investment performance. The Montreal industrial sector posted an attractive annual average return of 8.8% for the year ending September 30, 2016. This performance was a reflection of the market’s strength over the past year and over the medium term.

SECTOR OUTLOOK IS MODERATELY BRIGHTERA slight improvement in Montreal’s industrial property market conditions is forecast for the near term. The combination of fewer construction completions and slightly stronger demand will result in modest downward pressure on availability in 2017. At the same time, rents will stabilize, with the potential for slight increases for newer space as the market tightens. A moderately stronger economic growth trend will be the catalyst for the improved outlook, with GDP forecast to expand by 2.0% in each of 2017 and 2018. Rental market stability will drive income and overall investment performance. In turn, leasing market progress will support investment performance stability. Demand will continue to surpass the supply of assets available for acquisition, which will help hold values at current levels. The market will continue to generate attractive returns, rewarding owners of functional properties. Regional and national groups will look to this market for yield. In short, market conditions will improve marginally over the near term.

TRENDING STATISTICS


Vacancy Rate ▲ ▬ Net Absorption ▬ ▲ Lease Rates ▬ ▼ New Supply ▼ ▼


0.0

5.0

10.0


8.87.3 8.0

6.6

9.1

6.7

7.38.7

7.4

9.6

%


Montreal Industrial National Industrial


-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Montreal Historical & Forecast Aggregates


0.0

2.0

4.0

6.0

8.0

10.0

12.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Montreal Historical & Forecast Aggregates



MONTREAL RETAIL REPORT

LEASING MARKET WAS ACTIVE There was plenty of action reported in the GMA retail leasing market over the recent past, a period that included the physical or announced opening and closure of a number of retail outlets. The city’s highest-profile shopping thoroughfare, Saint Catherine Street, was a prime example of this trend. Stores scheduled to open on the street between 2016 and 2018 included MAC, Addition Elle, Atrizia, H&M, Chocolats Favoris and a four-level Saks Fifth Avenue. Conversely, there were a number of stores expected to close on Saint Catherine Street, including prominent names such as Tommy Hilfiger and Bedo. Across the GMA several high-profile openings were announced recently. Saks Off 5th was expected to open two new stores, a 44,840-square- foot location in the Montreal Eaton Centre and a 26,000-square-foot store at Mirabel Premium Outlets. MEC was expected to open a new location in Laval in 2016, totalling 23,600 square feet. MAC, Suitsupply and Structube were also slated to open flagship stores in Montreal in 2016. Despite these expansions and openings the market recorded negative absorption due to a number of failures and closures. Aggregate market vacancy edged 30 bps higher to 4.7% year over year as of the end of the second quarter of 2016. Over the same period, Power Centre vacancy fell 20 bps to 4.0% and Regional Centre vacancy rose 50 bps to 4.5%. Aggregate demand has been fairly modest over the recent past, resulting in modest downward pressure on peak rents. Against this backdrop, leasing market activity levels remained relatively brisk.

INVESTMENT MARKET HEALTH PREVAILED The GMA retail property sector registered generally healthy investment market characteristics over the past year in keeping with the national trend. The volume of capital earmarked for this market outstripped the supply of assets available for acquisition. Investors continued to exhibit confidence in the market’s long-term fundamentals. At the same time, most were able to rationalize current yield achieved in relation to their perception of risk. As a result, demand remained largely healthy, which was evidenced when core assets were offered to the market. Bidding was generally aggressive, ensuring property values held at the peak for the cycle. Private capital, pension funds and other institutional investors actively pursued market opportunities. Acquisitions successfully completed in the past year included Terrarium Centre, Place Pierre Boucher and a 50.0% interest in a portfolio of centres sold by First Capital. At the three-quarter mark of 2016, a total $809.6 million in retail property had sold year to date. The market was on pace to reach an annual record high for transaction closing volume. In addition to strong transaction volume, positive investment performance was also posted. Montreal assets included in the MSCI Index posted an annual average total return of 5.0% for the 12-month period ending on September 30, 2016. While down from the 2013 peak, the result was still relatively positive. In short, broadly positive investment market conditions were reported in over the recent past, a trend that was expected to prevail over the near term.

STABILITY WILL BE DOMINANT NEAR-TERM THEME The most prominent theme for GMA retail property market performance over the near term will be stabilization. Leasing conditions will hold steady as retailers continue to adjust to structural industry changes. Retailers will continue to seek opportunity in a market with a solid near-term economic outlook and solid long-term fundamentals. Average annual growth of 2.0% over 2017 and 2018 will support retail sales growth. Spending patterns should support productivity stabilization. Active management will be key to stabilizing income as store closures and downsizing activity continue in specific retail categories. Success in this regard will be a major factor in leasing and investment market performance over the near term.

TRENDING STATISTICS


Vacancy Rate ▬ ▲Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▬ ▲


0.0

5.0

10.0

15.0


5.05.2

9.7 10.0 10.5

8.59.1

11.110.5

11.6

%


Montreal Retail National Retail


$0

$10

$20

$30

$40

$50

$60

$70

-1.0

1.0

3.0

5.0

7.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsMontreal Historical & Forecast Aggregates



$266 $255

$815

$308

$566$735

$508$320

$589$710 $665

$559

$1,945

$910

$578

$0

$500

$1,000

$1,500

$2,000

$2,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




MONTREAL MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET STABILIZATION PREVAILED Stabilization was the overriding theme for the GMA multi-suite residential rental market performance of the past year, following a two-year period of rising vacancy. Aggregate market vacancy was unchanged over the period, holding at 3.9% year over year as of October 2016. This stabilization was the net result of positive demand patterns and increased supply. Migration characteristics were a rental demand driver over the past year. Statistics Canada recorded a 48.0% increase in immigrants landing in Quebec from July 2015 to July 2016 over the previous period. This offset declines in youth employment and competition from the rental condominium market. Demand was also strong enough to absorb the 2,500 rental units added to inventory between July 2015 and July 2016. Over the past few years, builders have shown a willingness to construct rental units geared to an aging population. This pushed vacancy gradually higher over 2014 and 2015, a trend that eased this year. Market conditions over the past year supported modest rental growth. The market average two-bedroom monthly rent increased by 2.0% year over year, as of October 2016. The average increased from $760 to $791, driven in large part by an increase in the number of new units and increased costs. The modest upward rent trend was a reflection of the stability observed in the GMA rental market over much of 2016.

SOLID INVESTMENT MARKET TRENDS POSTEDThe GMA multi-suite residential rental sector investment performance of the past year featured largely positive outcomes. Properties tracked in the MSCI Index posted a third consecutive attractive average return for the 12-month period ending on September 30, 2016. The 7.5% return was the strongest annual result dating back to 2012. The uptick was the result of capital growth reported over the year following a similar period of decline. Coincidentally, income growth was stable and healthy. The capital ascent was a reflection of market activity as investors showed a willingness to push pricing higher for prime assets. Recent investment market strength was evidenced in largely positive demand patterns over the past year. Local, regional and national groups showed confidence in the sector outlook and were comfortable with current yields. On recent sales, vendors were able to achieve pricing objectives, given strong bids. This dynamic translated into strong transaction closing activity, with $969.2 million in sales recorded in the first three quarters of 2016. This represented the second strongest pace dating back to 2001. Recent transaction volume was another piece of evidence in support of the market’s persistently positive performance over the past year.

SLIGHT IMPROVEMENT IN RENTAL FUNDAMENTALS PREDICTEDRental demand will gradually strengthen over the next couple of years, bolstered by an improvement in net migration patterns. A slow rise in net migration from an average of 23,000 in 2013 and 2014 is forecast, which will support rental demand. The again of the local population will provide an additional boost in rental demand over the near term. The positive demand backdrop for the next couple of years will lead to ongoing vacancy stabilization. The CMHC is calling for vacancy to decline by a modest 10 bps in each of 2017 and 2018. Fewer condominiums will be completed over the next couple of years, which will reduce competition for purpose-built rental landlords. This will promote continued growth in rents, albeit at a relatively low rate. Slightly higher rents will support landlord income performance and overall investment returns. The potential for small lifts in property value will also drive performance. At the same time, the GMA investment market will remain active and healthy. The sector’s history of stability will attract investors, as will the long-and short-term outlook. Consequently investment fundamentals will mirror those of the past year at a minimum, driven in part by a stable and positive rental demand trend.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▬ ▲ Lease Rates ▲ ▲ New Supply ▬ ▲


0.0

5.0

10.0

15.0


7.55.6 7.0 7.3

8.5 8.110.1

9.4%


Montreal Multi-Suite National Multi-Suite


$722

$416 $461

$706 $677

$846$946

$605

$836$900

$1,355

$829 $813

$1,490

$527

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions



0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

1.5

0.6 0.71.0

1.52.0

2.72.9

2.4 2.52.7

2.52.8 2.8

3.4

4.0 4.0 3.8

%


Source: CMHC


LABOUR MARKET MOMENTUM WAS MODESTThere was evidence that Ottawa’s job market momentum had increased moderately in 2016, which marked the continuation of the 2015 trend. Progress through to the three-quarter mark of 2016 supported the CBOC’s projection of a 0.9% increase in employment for the year. This represented a moderate lift in momentum over the 0.5% advance recorded during 2015. Public sector employment was projected to rise by 0.6% this year, given the federal government’s announced spending of $11.6 billion in fiscal 2016-2017. Previously, more 10,000 public administration jobs were cut between 2012 and 2015. In short, moderately stronger momentum has begun to build in Ottawa’s labour market.

HOME BUILDERS EXHIBITED CAUTIOUS OPTIMISM Cautious optimism on the part of Ottawa’s home builders was expected to result in a modest increase in housing starts this year. Residential housing starts were forecast to rise modestly this year, with a similar expectation for 2017. This year, an anticipated increase of 6,700 starts, or 2.8%, was projected. Although below the 10-year average of 8,600, the increase represented optimism on the part of the region’s builder community. Lower inventories and a stronger economy were cited as reasons for the improvement in builder confidence this year.

STRONGER RETAIL SALES PATTERN EMERGEDRetail sales growth picked up as 2016 progressed, resulting in a more robust forecast for the year. The prediction represented a significantly stronger consumption level compared to that of the previous year, when a 2.3% gain was recorded. Once again, the surge in sales volume was predicated on an improved labour market and economic growth cycle this year. There was a modest easing of the growth trend forecast for 2017.

NEAR-TERM OUTLOOK IS BRIGHTERThe near-term outlook for Ottawa’s economy is materially brighter. A key determinant of the rise in economic output is that public sector austerity measures appear to have lessened significantly. In fact, the federal government appears to have loosened its purse strings in announcing a number of spending initiatives. At the same time, the region’s private sector is also showing signs of expansion. The culmination of public and private sector activity will be GDP expansion of 2.2% in 2017. This rate is 50 bps higher than the 2016 forecast and will mark the strongest advance in several years. In the subsequent three-year period through to 2020, similar growth rates are forecast. In turn, a more robust growth trend will translate into retail sales gains of 3.5% in each of 2017 and 2018. Employment gains will follow a similar path. In short, the regional outlook is one of steady progress.

OTTAWA ECONOMIC REPORT

ECONOMIC SNAPSHOT

The gradual emergence from a period of weak economic growth continued in the Ottawa region over the past year. GDP was forecast to expand by 1.7% this year, following 1.6% in 2015. The private sector contributed significantly to healthier expansion levels recently, which should boost regional employment by 0.9% in 2016. Unemployment was forecast to edge 10 bps higher to 6.6% as more workers entered the labour force. Retail sales and housing starts were on a rising path in 2016, due in part to a healthier economic and labour market outlook.

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0100200300400500600700800900

-4.0-2.00.02.04.06.08.0

10.012.014.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

2

4

6

8

10

12

14

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-5

0

5

10

15

20

-1.0

0.0

1.0

2.0

3.0

4.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





OTTAWA OFFICE REPORT

LEASING MARKET PROGRESS WAS LIMITED Leasing market progress was fairly limited over the past year, given below- average demand and supply characteristics. On balance, demand remained generally quite weak. Previously, the market’s landlords anticipated the federal government might expand its office footprint in light of recent budget statements. However, there have been few indications that a significant growth program was imminent. In the private sector, a number of businesses took advantage of market conditions to secure space in newer buildings in the downtown area. In some cases this activity included small expansions, with some tenants relocating from the suburbs. Generally, tenants in the market for space were attracted by public transit and other amenities. At the same time, some of these groups sought space efficiency at the most favourable of lease terms. The focus of recent activity has been in the region’s technology sector, as well as in the professional services industry, which has historically been the largest occupier of space in this market. For the most part, demand remained relatively weak over the past year, with increased vacancy more than offsetting this progress. Over the past year, vacancy continued to range between 200 and 250 bps above the long-term average. More than one market survey suggested vacancy had either stabilized or edged slightly higher, resulting in stable to slightly lower rents, on average. Recently built or turnkey space commanded a premium. However, the broader growth cycle was weak, which reflected market performance of the past 12 to 18 months.

FEW CHANGES IN INVESTMENT MARKET CONDITIONS RECORDEDChanges in Ottawa’s office property investment market were relatively minor over the recent past as the current phase of the cycle persisted. Investors continued to scour the market for acquisitions to meet yield objectives. Product availability fell short of the volume of capital available, however. Local and national groups were active, with private capital, pension funds and institutions all making their presence known. The influence of the public sector on this market continued to be a major capital draw. The demand backdrop of the past year mirrored much of the post-financial-crisis period. The volume of capital and demand strength of the recent past had an impact on the bidding environment and the market’s value cycle. When prime properties were offered to the market for sale, there were multiple bids. Competition prompted some to bid higher, which drove values higher. This resulted in new benchmark highs for prime assets. The stabilization of property value over the past year boosted investment performance. Office properties tracked in the MSCI Index registered an annual average return of 6.6% for the period ending on September 30, 2016. This outcome was largely income-based as the capital values inched higher. While the most recent return was 200 bps better than the previous period, returns remained moderately attractive. This advance was in keeping with market performance over the past year.

GRADUAL STRENGTHENING FORECASTOttawa’s office sector will undergo a period of moderate strengthening over the near term. Economic activity is forecast to improve over the final few months of 2016 and 2017. This will support government spending, which bodes well for the office market. The Liberal government budget should boost demand for office space, in light of the creation of 16,900 jobs during the first half of 2016. However the lack of interest shown by the public sector in smaller buildings may lead to the re-purposing or demolishing of older Class B and C properties. A stronger economy and public sector activity should gradually pull vacancy down toward the 10.0% mark. This tightening will bolster income and overall performance for owners and stabilize rents overall. Coincidentally, investment market trends will be largely unchanged. The volume of capital seeking yield will surpass supply, ensuring values hold at the peak. In short, Ottawa’s office sector will continue to strengthen over the near term.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▼ ▬Lease Rates ▬ ▬New Supply ▼ ▲


0.0

5.0

10.0

15.0


6.64.7

7.28.3

10.0

6.06.7

9.7 9.7 10.1%


Ottawa Office National Office


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Ottawa Historical & Forecast Aggregates



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Ottawa Historical & Forecast Aggregates




OTTAWA INDUSTRIAL REPORT

LEASING MARKET CONSISTENCY EXHIBITEDLeasing market consistency was the dominant performance characteristic observed in Ottawa’s industrial property sector recently. Activity was focused in the market’s small to medium-sized tenant segment. For the most part, tenants relocated to premises that were very close in size to their previous space. There was little expansion reported. What little growth occurred was offset by the introduction of new supply. The lack of a firm growth trend resulted in continued supply-side stabilization. Market availability rested at 5.7% as of the end of the third quarter of 2016. While down just short of 80 bps year over year, the rate had been steady over the preceding two-year period. Despite the recent dip in availability, vacancy edged 10 bps higher over the same period. An identical rate was registered two years earlier. Ottawa’s industrial building cycle stabilized over the past year, in keeping with the existing building trends. A total of less than 200,000 square feet of new supply was projected for all of 2016. The total was representative of what has been a conservative construction cycle over the past several years. Less than 100,000 square feet of industrial space was under construction as 2016 came to a close. Relatively minor changes in inventory were consistent with the market’s overall performance during 2016 and much of 2015.

INVESTORS WERE INTERESTED AND ACTIVE A range of investment groups exhibited high levels of interest in acquiring income-producing assets in this market during 2016. High levels of interest were evidenced in recent transaction activity. Over the first nine months of 2016 a total of $98.9 million in sales of industrial property was completed. Year-to-date activity was similar to that of the past two years and in line with the preceding five-year average. In 2016, sales volume was limited only by product availability rather than any demand shortfall. There was more than enough capital available from a variety of sources for investment in this market. Private groups were the most active in sourcing income-producing property, with pension funds and institutions also scouring the market for opportunity at the top of the pricing spectrum. At this level, however, opportunities were rate, with most activity focused on smaller buildings. The market’s relatively small inventory also limited opportunity for investors. Despite being small in size, the market continued to post strong investment performance of late. This was another attraction for investors. Property included in the MSCI Index generated an attractive average return of 5.8% for the year ending on September 30, 2016. This result marked a seventh consecutive year of strong performance, making it easy to see why investors held this market in high regard.

PROGRESS WILL BE SLOW BUT SUREOttawa’s industrial sector will continue to make progress over the near term, fuelled in part by a stronger economic growth trend. The Ottawa-Gatineau economy is forecast to expand by an annual average of close to 2.2% over 2017 and 2018. The growth rate is marginally stronger than the preceding two-year average of just short of 1.7%. A modest increase in government spending is the basis for the upgrade. The resulting improvement in business confidence will support leasing demand over the forecast period. Consumer goods companies and Ottawa’s tech sector will continue to be the focus of activity over the near term. Demand will be sufficiently strong to reward owners with income stability and modest growth. Healthy leasing fundamentals will remain an attraction for investment and drive performance. The absence of a significant development cycle will also be a positive, in that a relatively small number of tenants will vacate the existing inventory of buildings. Therefore, the market will continue to slowly advance over the forecast period.

TRENDING STATISTICS


Vacancy Rate ▬ ▼ Net Absorption ▼ ▲ Lease Rates ▬ ▬New Supply ▼ ▼


0.0

5.0

10.0

15.0


5.86.7

9.3 8.7

10.9

6.77.3

8.77.4

9.6%


Ottawa Industrial National Industrial


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Ottawa Historical & Forecast Aggregates


-1.0

-0.5

0.0

0.5

1.0

1.5

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & SupplyOttawa Historical & Forecast Aggregates



OTTAWA RETAIL REPORT

LEASING FUNDAMENTALS STEADIEDThere was little fluctuation in leasing fundamentals observed in Ottawa’s retail sector over the recent past despite what has been a relatively active period. Vacancy increased but remained generally healthy according to recent market surveys. Cushman & Wakefield, for example, posted a 50 bps increase in vacancy over the first half of 2016. CBRE reported a more conservative 10 bps rise to 5.2% over the same period. The relative vacancy stabilization over the period resulted in a similar pattern for rents. Generally, rents for newly built space in prime locations held at the peak for the cycle. Rents for less desirable space edged lower. The lack of material fluctuation in leasing market conditions unfolded during a period of healthy market activity. Activity was often focused in newly developed space. The newly completed 75,000-square-foot Kanata Commons boasted The Brick and La-Z-Boy as anchors. In September of 2016, Cabela’s opened a second Ontario location measuring 70,156 square feet on Palladium Drive. Lastly, the 120,000-square-foot Shops of Tenth Line was largely pre-leased upon completion. Offsetting at least part of this expansion activity were a number of store closures. Despite an active backdrop, there was little change in macro leasing fundamentals over the past year.

SECTOR WAS HIGHLY SOUGHT-AFTER Ottawa’s high-quality retail assets were top of mind for investors looking to increase their exposure to this market. The market’s history of attractive performance continued to attract investment. Recent performance built on this long-term trend, with the MSCI Index reporting an annual average sector return of 7.5% for the period ending September 30, 2016. This marked a fourth consecutive year of positive performance. Private capital, institutions, publicly traded entities and pension funds were active in their pursuit of properties with strong tenant rosters in established shopping nodes. Despite a modest level of investment offerings, a healthy rate of transaction closing activity was reported when compared with the past couple of years. Transaction volume was boosted by a number of partial interest trades. According to CBRE figures, slightly more than $140.0 million in sales volume was recorded over the first three quarters of 2016, a slightly stronger pace that that of the past couple of years. Significant sales closed during 2016, including a 75.0% interest in Orleans Gardens for $31.8 million and the sale of Merivale Plaza in Nepean for $26.1 million. Activity levels were hampered by a lack of product as demand for retail assets in this market remained robust.

MATURING OF CURRENT CYCLE WILL PERSISTThe maturing of Ottawa’s retail sector leasing and investment cycles will persist over the near term. A moderately stronger economic growth cycle will support consumer spending and retailer sales figures. The Ottawa CMA will generate economic growth of roughly 2.2% in 2017, following a modest 1.6% in 2016. The more robust rate of economic activity will drive healthy retail sales growth of 3.5% in each of 2017 and 2018. In keeping with the 2016 trend, some retailers will continue to expand, while others reduce their footprints or close altogether. Newly built space will be popular. Overall, the mature phase of the leasing cycle will persist as rents and vacancy stabilize. Stable leasing performance will help drive investment performance. Returns will remain fairly attractive. The market will be favoured by investors armed with plenty of low-cost capital. Competition will support peak property values in the prime asset market segment. In summary, barring a major shift in the economic and financial outlooks, Ottawa’s retail property cycle will continue to mature.

TRENDING STATISTICS


Vacancy Rate ▲ ▬ Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▬ ▬


0.0

5.0

10.0

15.0


7.5 6.5

10.49.7

10.9

8.59.1

11.110.5

11.6

%


Ottawa Retail National Retail


$0

$5

$10

$15

$20

$25

-3.0

0.0

3.0

6.0

9.0

12.0

15.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsOttawa Historical & Forecast Aggregates



$131

$216

$160

$275

$36

$87

$142

$227

$196

$97

$244

$307

$152$173

$73

$0

$50

$100

$150

$200

$250

$300

$350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




OTTAWA MULTI-SUITE RESIDENTIAL REPORT

MARKET TIGHTENED DUE TO STRONGER DEMAND Ottawa’s multi-suite residential rental market tightened over the past year, due primarily to stronger demand fundamentals. Between October 2015 and October 2016, aggregate market occupancy increased from 96.6% to 97.0% according to the most recent CMHC survey. As conditions tightened over the period, availability rates also declined, from 5.6% to 4.7%. This was an indication of continued tightening. The recent tightening was driven by a strengthening of demand fundamentals over the period. The combination of increased net migration and labour market progress bolstered rental demand. In particular, a sharp increase in employment levels in the 15-24 age group was a determining factor in healthier rental demand. Young workers who find their first jobs often rent first. Demand outpaced new supply over the period, resulting in tighter conditions. Increased tightness over the past year was a factor in the market’s rental growth cycle. The average two-bedroom rent increased by 2.1% from October 2015 to October 2016, markedly stronger than the 1.5% and 0.5% advances in 2014 and 2015, respectively. For the market’s owners, a return to healthier growth levels was welcomed, along with a stronger demand cycle and tighter conditions.

INVESTMENT PERFORMANCE WAS LARGELY POSITIVE Ottawa’s multi-suite residential rental sector investment performance of the past year was generally quite strong, in keeping with the national trend. The sector continued to generate attractive returns over the past year. Properties included in the MSCI Index registered an annual average return of 6.2% for the year ending September 30, 2016. The result was up by almost 200 bps over the previous period, driven by a modest rate of capital growth. Over the previous two-year period growth was negligible as returns were primarily income-driven. The marginally stronger capital growth trend was a byproduct of market activity. National and regional groups were forced to compete for the relatively smaller number of assets offered for sale over the past year. As a result of the competitive environment and the pressure to source yield, investors pushed pricing higher, which translated into modest upward pressure on value. Indeed, supply fell short of demand over the past year as a small number of significant assets were brought to market. Outside of a major townhome portfolio transaction, the number of significant multi-suite sales could be counted on one hand. Aside from the relatively small number of major transactions, the past year was characterized by broadly positive investment market performance.

NEAR-TERM TRENDS WILL MIRROR THOSE OF THE RECENT PASTNear-term trends in Ottawa’s multi-suite residential rental market will mirror those of the recent past. Returns will remain attractive, driven largely by the income component. Capital values should stabilize, following a modest upward trend over the past year. The volume of capital available to invest will continue to surpass the supply of assets offered for sale. The shortfall in availability will limit activity levels. As a result, investors will continue to struggle to source suitable assets in this market. There will few significant assets brought to market, which will frustrate groups looking for ways to increase their exposure to the region in short order. The inability to acquire a critical mass of properties in this market has been a fixture for decades. Few changes in investment market performance are forecast over the near term, a trend that will also play out in Ottawa’s rental market. Conditions will remain tight, as was the case last year. Occupancy will continue to range near the 97.0% mark. Healthy demand patterns will persist, driven in large part by net migration and labour market advances. Rents will increase over the near term by roughly the same 2.0% rate reported in 2016. In summary trends in this sector forecast for the near term will be similar to those of the past year.

TRENDING STATISTICS


Vacancy Rate ▲ ▼ Net Absorption ▬ ▲Lease Rates ▬ ▲ New Supply ▲ ▬


0.0

5.0

10.0

15.0


6.2 5.07.7 8.28.5 8.1

10.19.4%


Ottawa Multi-Suite National Multi-Suite


0.0

1.0

2.0

3.0

4.0

5.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

0.2

0.8

1.9

2.9

3.9

3.3

2.3 2.3

1.4 1.5 1.61.4

2.52.9

2.6

3.4 3.43.0

%


Source: CMHC

$220 $216

$124$192

$156

$240

$163$228

$154$226

$768

$398 $397

$285

$594

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




ECONOMIC SNAPSHOT

ECONOMIC PERFORMANCE BOOSTED LABOUR MARKETThe Toronto CMA’s recent record of economic expansion translated positively into the region’s labour market. Employment was on pace for an annual advance of 1.6%. Growth in the manufacturing sector was seen as a key to the upward shift in employment levels in 2016. In the goods sector, this growth was expected to help offset losses in the primary and utilities sectors. Overall services sector employment was predicted to rise by 1.5%, with the goods-producing sector increasing by 2.4% in 2016. Employment gains had limited impact on the employment rate, which held close to the 7.0% mark in 2016 as more people entered the workforce. On the whole, however, labour market conditions improved as a result of a healthy economic backdrop.

HOUSING STARTS TO MODERATE AFTER TORRID PACE OF 2015Toronto CMA housing starts tailed off this year, following a surge in output recorded in 2015. Residential output is forecast to rise by 2.6% during all of 2016, after a strong 6.9% lift over the previous year. Momentum softened as a result of fewer multi-suite starts. The 2015 momentum was a result of high levels of residential investment, with starts ballooning to 42,287 units. Slightly more than 38,000 starts are forecast this year and a similar result for 2017.

RETAIL SALES PERFORMANCE MIRRORED ECONOMIC OUTLOOKRetail sales growth over the past year was bolstered by the regional economic performance. Retail sales growth of 4.6% was forecast for 2016 following a slightly less robust 4.4% in 2015. The recent retail sales growth cycle was a byproduct of a healthy economy. The resulting employment growth, estimated at 109,000 over 2016-17, supported the regional spending pattern. Record-high consumer debt levels seemed to have little impact on sales volume, which was boosted by a strong economy and labour market.

FEW SIGNS OF WEAKNESSThe Toronto CMA economy will continue to advance over the near term, finishing second to Vancouver in terms of growth. The CMA will generate an increase in economic output of 2.6% in 2017, with a similar result in the subsequent period. Numerous non-residential construction projects and increased tourism activity due to a low Canadian dollar value will help drive output over the near term. The resulting growth in employment of 1.8% will pull the unemployment rate down to the mid-sixes. Moreover, a solid economic growth trend will provide a base for retail sales growth of almost 4.0% in each of 2017 and 2018. The services sector will continue to expand as well. Multi-unit residential development will generate increased output in sectors that service this market. On balance, the near-term economic outlook for the Toronto CMA is predominantly healthy and stable.

Canada’s largest metro has been a growth leader over the past couple of years. Second only to Vancouver of the country’s major urban centres, Toronto’s economy was on pace to grow by 3.4% in 2016. Economic outperformance translated positively into the regional labour market. Employment was set to expand by a more modest 1.6% in 2016 after a stellar 2.0% gain in 2015. While steady this year, the unemployment rate was yanked down by a full percentage point to 7.0% in 2015. Improved labour market conditions supported solid retail sales growth.

TORONTO ECONOMIC REPORT

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

10

20

30

40

50

60

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-60-40-20020406080100120140

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-8.0

-4.0

0.0

4.0

8.0

12.0

16.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





TORONTO OFFICE REPORT

LEASING PERFORMANCE WAS SURPRISINGLY STRONGStronger-than-expected demand for GTA office space over the recent past resulted in some of the strongest leasing fundamentals in North America. The growth trend was fairly widespread, with the technology, financial services, education, business services and medical sectors leading the way. A large share of expansion activity took place in the downtown submarket, with emphasis placed on newly constructed towers. Tenants from various sectors relocated from older buildings and in some cases from suburban locations to lease newer, more flexible and more environmentally sustainable space. The increased importance of retaining young skilled workers was also a factor in leasing decisions. Increasingly, young workers have exhibited preferences for public transit access and/or proximity to their residences. The stronger-than-expected growth cycle was key to strong fundamentals over the recent past. Rents increased in all classes of space downtown, midtown and along the subway line, with the strongest growth reported in new towers. Excess vacancy in the suburbs resulted in rental stabilization. Space absorption was another area of surprising strength over the recent past. Demand kept pace with the ongoing delivery of new supply as most newly constructed space was pre-leased. A larger-than-expected share of the resulting backfill space was also absorbed more quickly than expected. The demand cycle ensured vacancy levels remained relatively low. Downtown vacancy of 4.2% at the end of the third quarter of 2016 was the lowest on record dating back more than a decade. This result was the best indicator of what was a surprisingly strong leasing market performance over the past year.

BIGGER WAS CLEARLY BETTER The GTA office sector displayed one of the strongest investment performances in the country over the past year. An annual average total return of 14.5% was posted in the IPD Index for the period ending on September 30, 2016. The result was second only to Vancouver’s office sector. Capital and income growth were factors in this performance. This growth was a reflection of the broader market trend. Demand pressure, both from foreign and domestic sources, resulted in high values on the sale of core assets. As a result, yields compressed after a period of stabilization. Investors competed for core assets, as a relatively safe place to place capital. Foreign groups in particular view this market favourably against a backdrop of increased global risk. Toronto’s position as the country’s deepest and largest business centre was a significant draw. The surprisingly strong leasing performance of the recent past added to the justification for investment. This supported the GTA office sector’s bullish performance of the recent past.

INVESTMENT MARKET CONDITIONS TO FIRMThe GTA office investment market will continue to post positive performance characteristics over the near term. A key component of this trend will be strong, healthy demand. The nation’s largest and most stable market will garner the attention of investors looking for stable and attractive yield. Ample supply of low-cost debt and equity capital will support activity in this market. All major investment groups will look on the market favourably, in keeping with the long-term trend. Foreign capital will continue to push the envelope on value, in the quest for stable investments. This could drive values to a level that few can justify. Returns will continue to attract buyers. Riskier assets will generate strong interest as well, especially for niche investors. Leasing market conditions will bolster investment performance, with rental growth continuing in prime downtown towers. Relatively weak suburban office space demand will hamper progress, but long-term investors will remain committed. In short, positive investment market attributes will continue to characterize the GTA office sector.

TRENDING STATISTICS


Vacancy Rate ▼ ▲Net Absorption ▬ ▬Lease Rates ▼ ▬New Supply ▼ ▬


0.0

5.0

10.0

15.0


10.9 10.0 11.410.1 9.5

6.06.7

9.7 9.7 10.1%


Toronto Office National Office


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Toronto Historical & Forecast Aggregates



0.0

4.0

8.0

12.0

16.0

20.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Toronto Historical & Forecast Aggregates




TORONTO INDUSTRIAL REPORT

LEASING MARKET STRENGTH CONTINUEDThe GTA industrial leasing market continued to forge ahead over the past year as demand kept pace with supply. Industrial space demand characteristics acted as a foundation for leasing market gains. Consumer goods companies were most active, especially those with connections to e-commerce and the broader retail delivery network. Companies with U.S. customer bases were also drivers of growth. Noteworthy expansions also took place in the manufacturing sector, buoyed by the low Canadian dollar. In general, the health of the regional economy was key to the market’s demand strength. Strong demand patterns had a positive impact on supply fundamentals. The strength of the demand cycle and the resulting rental growth continued furnished developers with the requisite confidence to build. During the first three quarters of 2016, a total of almost 2.0 million square feet of new industrial space was completed. This followed the 7.3 million square feet during the previous year. A large portion of development activity was for larger-bay users, who required state-of-the-art distribution space. Though encouraging, development volume was well below the long-term average. Furthermore, it did little to improve the space shortages reported in this market. Despite this growth, availability rates reflected significant market imbalance. At the three-quarter mark of 2016 availability stood at 3.4%, the lowest level recorded in over a decade. Even with the shortfall in availability, the market registered continued progress over the past year.

BULLISH INVESTMENT TRENDS RECORDED Persistent strength was reported in the GTA’s industrial property investment market over the past year, in keeping with the medium-term trend. There was evidence of this strength in MSCI Index return data. The sector generated a bullish return of 8.5% for the 12-month period ending September 30, 2016. The return bested those of the preceding two years. Moreover, the result marked a sixth consecutive year of healthy performance. This medium-term strength was emblematic of a market that continued to generate significant interest within the property investment community. Demand outdistanced supply, in keeping with the broader property investment market. Generally, the market exhibited investment demand characteristics. A range of private groups looked for opportunities, which were not as plentiful as most would have liked. The most sought-after segment of the market was in the largest and most established submarkets, such as Mississauga and Brampton. Premium pricing was typical for newer and highly functional assets. Older, less functional assets were also in demand. The overall demand supply imbalance positively influenced the value cycle. Cap rates edged lower during 2016, given material demand pressure. In short, the market’s medium-term strength continued to characterize performance in the past year.

FEW SIGNALS OF WEAKNESS FOR NEAR TERMThe near-term outlook for the GTA industrial sector is one of stable and healthy investment and leasing conditions. Forecast economic expansion of roughly 2.4% in 2016 and 2.2% in 2017 by the CBOC will drive domestic demand. Continued U.S. economic growth will also drive business growth, particularly for the market’s exporters. This will once again translate into positive industrial space demand. Distribution and warehouse businesses will continue to dominate the demand cycle. Leasing imbalance will persist. As a result, availability should range close to the 95.0% threshold. Rental growth and demand patterns will continue to justify new developments, with volume holding below the long-term average. Rental growth will support investment performance. Investment demand will best the supply of assets available for purchase. Consequently, values will hold at the peak for the cycle, with the potential for modest increases for the highest-quality offerings. In short, this market will continue to register advances over the near term.

TRENDING STATISTICS


Vacancy Rate ▼ ▬ Net Absorption ▼ ▬Lease Rates ▲ ▬New Supply ▼ ▬


0.0

5.0

10.0


8.5 7.7 8.6

6.1

8.8

6.7

7.38.7

7.4

9.6

%


Toronto Industrial National Industrial


-15

-10

-5

0

5

10

15

20

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Toronto Historical & Forecast Aggregates


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

%

$/p.

s.f.

Industrial Rent & Vacancy Toronto Historical & Forecast Aggregates



TORONTO RETAIL REPORT

LEASING MARKET SENT MIXED MESSAGES Trends observed in the GTA retail leasing market over the recent past included a measure of inconsistency. On the one hand, there were a number of positive trends. Reported leasing metrics were generally stable and healthy. For example, regional and power centre vacancy stood below the 5.0% mark. In addition, asking rents held firm. Another positive for this market was the arrival of new market entries and expansion activity in the luxury market segment. Names that set up shop, were planning to or expanded included Saks Fifth Avenue, Nordstrom, Simons and Holt Renfrew. A plethora of other segments of the market posted expansion activity including discounters, fast fashion and restaurants. Expansions that took place over the recent past absorbed a number of large vacancies. On the other hand, there were a number of worrisome trends observed in the GTA leasing market. Some retailers made the decision to shed space or downsize store formats, which resulted in excess vacancy. Others struggled with the negative impact of a low Canadian dollar. In certain retail categories, productivity dipped, forcing closures or downsizing. In some cases, owners of retail assets had to contend with increased vacancy and retailer requests for rental abatements. Most of negative influences on the GTA retail leasing market were the result of industry-wide trends. As a result, leasing market trends were somewhat inconsistent, which was also the case in most regions across the country.

CONTINUED INVESTMENT MARKET STRENGTH REPORTEDCanada’s largest retail market registered largely positive investment market characteristics over the past year. The most recent MSCI Index results offered evidence of strong performance. Retail property tracked in the index registered an annual average return of 11.8% for the 12 months ending September 30, 2016. The result represented a fourth consecutive double-digit performance. A fourth consecutive period of healthy capital growth was also tallied, adding to stable income growth. Investment demand was also strong over the past year, mirroring the national outlook. The market’s near-and long-term performance continued to draw investors. In general, a range of investor groups, both institutional and private, were active in their pursuit of both core and opportunistic acquisitions. However, in keeping with the broader market, access to product was limited. Despite the shortfall, transaction closing activity was brisk. By the three-quarter mark of 2016, $1.6 billion in sales were completed, slightly ahead of the previous year’s pace. Assets brought to market were generally met with strong bids, satisfying vendor expectations. The volume of sales completed was an indication of the broader market strength recorded over the past year.

MINIMAL VARIATION IN SECTOR CHARACTERISTICS FORECAST There will be little variation in sector performance over the near term, with stabilization forecast for both the leasing and investment markets. Leasing fundamentals will hold firm despite headwinds as a result of industry-wide shifts. The impact of e-commerce, a low Canadian dollar and the erosion of the mid-market will continue to present challenges for some owners. The market’s best malls will continue to thrive, given their ability to attract the most popular retailers and generate strong traffic flow. In general, property investment returns will be attractive, fueled by a combination of stable income patterns and modest capital growth. The market’s history of investment performance, accentuated by solid leasing fundamentals, will draw equity and debt capital to this market. Capital availability will surpass the supply of assets for sale, which will ensure values hold at the peak for the cycle. Competition for prime assets will be fierce. The health of the demand cycle will factor into what will be continued investment market strength over the near term.

TRENDING STATISTICS


Vacancy Rate ▼ ▬ Net Absorption ▬ ▲ Lease Rates ▬ ▬New Supply ▲ ▲


0.0

5.0

10.0

15.0


11.8 10.4 11.910.8

11.8

8.59.1

11.110.5

11.6

%


Toronto Retail National Retail


$0$10$20$30$40$50$60$70$80$90$100

-2.0

0.0

2.0

4.0

6.0

8.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsToronto Historical & Forecast Aggregates



$1,014$1,104

$1,079

$1,716$1,544

$1,377

$977

$560

$1,493

$2,954

$1,352

$2,447$2,616

$1,894

$1,031

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




TORONTO MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET TIGHTENING RECORDEDConditions in the GTA multi-suite residential sector continued to tighten over the past year, as vacancy dipped to a five-year low. Aggregate vacancy of 1.4% was reported in the most recent CMHC survey released in the fall of 2016, down from 1.6% a year earlier. The rate was the lowest recorded since 2011. Moreover, average vacancy across the various unit sizes stood below the 2.0% mark. A big reason for ongoing tightness in this market over the past year was a generally strong demand cycle. An increase in the number of newly formed households in younger worker age cohorts and positive net migration characteristics were key drivers of demand for rental accommodation. Coincidentally, the high cost of home ownership forced many families to continue renting as affordability declined. Rental market tightness and healthy demand over the recent past were catalysts for rental growth across the GTA. Landlords were able to command higher rents in general, which supported income growth. Average GTA two-bedroom monthly rents increased by 3.2% year over year as of the fall of 2016 for the CMHC’s same sample. Growth virtually mirrored that of the past year, surpassing the provincial guideline increase. The market’s owners reaped the benefits of higher rents, coupled with tighter supply patterns.

SOLID RESULTS REPORTED IN INVESTMENT MARKETStabilization was the overriding performance theme in the GTA multi-suite residential rental property investment market over the past year. The sector continued to generate strong performance characteristics over the same period. An attractive 11.7% return was posted for the 12 months ending September 30, 2016. This result extended a stretch of double-digit returns dating back to 2011. Capital growth was the strongest on record dating back three years. At the same time, income growth was stable and healthy. The upward value trend was partially the result of robust demand. On the whole, demand outdistanced the supply of available properties, in keeping with the broader market. A range of private capital groups were the most active acquirers of assets in this market over the recent past in matching the national trend. Bidding pressure drove values higher on average, resulting in modest cap rate compression. Even with the shortfall in availability, a significant volume of properties was sold. A total of $870.3 million in sales volume was recorded over the first three quarters of 2016. Though limited by availability, the total was further evidence of the health of the GTA market over the past year.

THE FUTURE IS BRIGHTThe outlook for the GTA multi-suite rental sector is one of continued health and stability. The market will remain a favourite of investors, given a long history of attractive performance. An above-average economic growth outlook will also draw funds to the market. Positive investor sentiment will ensure demand outpaces supply. In turn, property values will hold at the peak for the cycle. Further cap rate compression is not out of the question. The capital cycle will support investment performance, as will a healthy rental market outlook. Rental market tightness will remain a fixture over the near term, buoyed by the interplay between demand and supply. The arrival of immigrants to the region will drive rental demand. The steady, though slower, rise in home prices will limit transitions from rental to purchase. In addition, an increase in millennial household formation will have a positive impact on the rental demand cycle. Positive demand attributes over the next couple of years will drive construction activity higher, although volume will fall short of levels required to drive vacancy higher. Therefore, conditions in the GTA rental market will remain tight. For this reason, rents will continue to climb, which will boost income for owners. Rental growth will punctuate the generally bright outlook for the sector over the near term.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▬ ▲ Lease Rates ▲ ▲ New Supply ▲ ▲


0.0

5.0

10.0

15.0


11.7 10.613.0

10.7

8.5 8.110.1

9.4%


Toronto Multi-Suite National Multi-Suite


$882

$558

$1,277

$711

$940$832 $874

$453

$774

$1,067

$1,563$1,585

$1,177

$1,631

$720

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions



0.0

1.0

2.0

3.0

4.0

5.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

0.60.9

2.5

3.8

4.3

3.7

3.2 3.2

2.0

3.1

2.1

1.41.7 1.6 1.6 1.6 1.6 1.7

%


Source: CMHC


ECONOMIC EXPANSION ENSURED LABOUR MARKET PROGRESSContinued progression in Winnipeg’s labour market was driven by a strong economic growth cycle over much of the past year. Increased economic activity proved to be a catalyst for job growth, with employment levels projected to increase by a modest 0.9% over 2016 by the CBOC. Most major business sectors are expected to see rising levels of employment, except for transportation and warehouse. Increasingly, people entered the workforce in 2016, which was expected to nudge the unemployment rate 10 bps higher year over year.

RESIDENTIAL CONSTRUCTION SLOWED AFTER BRISK PERIOD The marked slowdown in new home starts reported over much of 2016 was primarily a byproduct of excess inventory. According to CBOC data, more than 4,000 units commenced during each of 2014 and 2015. As inventories built, builders adjusted accordingly. The slowing trend was not overly surprising, given activity reached a high point over the preceding four-year period dating back to the 1980’s. The forecast 3,550 unit starts in 2016 were still above the long-term average of 2,665 units despite the slowdown. City council’s decision to impose growth fees on new housing starts in May of 2017 was also seen as a dampener on activity over the near term.

CONSUMPTION BEGAN TO SURGEThe retail sales pace increased during the first half of 2016, leading to a revised growth forecast of 5.9% for the full year. The CBOC forecast represented a sharp contrast to the modest increase of 1.3% in 2015. Economic growth and the resulting labour market advances had a positive impact on consumer confidence and, by extension, spending. Shopping patterns were a positive influence on the region’s wholesale and retail trade sector and on warehouse demand. Following the 2016 surge in spending, retail sales growth was expected to slow in 2017 and the following couple of years.

STABLE AND HEALTHY ECONOMIC PERFORMANCE PREDICTEDSolid economic performance trends are forecast over the near term in the Winnipeg CMA. Output will expand by 2.3% in 2017, only slightly below the pace of the previous year. This will match the provincial average and best the national rate by 30 bps. The rise in economic output will be relatively broad-based, with the manufacturing, services and construction sectors all contributing. Labour market conditions, in turn, will also improve. Personal income and employment growth will increase. The unemployment rate will fall by 40 bps over 2017 to 5.7%, the lowest mark in the preceding five-year period. In summary, the outlook for Winnipeg’s economy is relatively stable and healthy, building on a four-year run of above-average growth.

WINNIPEG ECONOMIC REPORT

ECONOMIC SNAPSHOT

Winnipeg’s economic growth rate bested the national average by a significant margin in 2016. By the end of the year, output was expected to have increased by 2.5%. A national average of 1.3% was forecast. Both the manufacturing and services sectors were expected to post healthy expansion, in part due to a low Canadian dollar and solid U.S. demand. The recent economic strength was a catalyst for labour market advancement and retail sales growth. The region’s transportation sector fuelled economic activity this year, driven by bus, rail and aerospace contracts.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

100

200

300

400

500

600

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

1

2

3

4

5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-10

-5

0

5

10

15

20

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





WINNIPEG OFFICE REPORT

LEASING MARKET GAINS TALLIEDConditions in Winnipeg’s office leasing market improved over the recent past, a performance that was focused in the downtown. Tenant expansions were more common in the downtown area over the latter half of 2015 and much of 2016. The submarket’s newest and most modern space was in high demand, resulting in an increasingly competitive environment as options dwindled. Restored brick and beam was also popular. Demand was markedly weaker in the market’s suburbs. To a large extent, tenants were unable to source enough Class A state-of-the-art space in suburban locations, which hampered progress. Demand divergence between downtown and the suburbs was evidenced in supply-side characteristics. Downtown vacancy fell by 160 bps year over year, ending the third quarter of 2016 at 9.5%, whereas suburban vacancy fell by just 20 bps to 12.5% over the same period. The recent downward slide in downtown vacancy resulted in modest upward pressure on rents for prime space. Through the balance of the submarket, rents were unchanged on average. There was virtually no upward pressure on suburban rents as vacancy levels remained elevated. Over the balance of 2016 and into 2017, leasing market progress was expected to continue downtown.

INVESTMENT MARKET TRENDS EMULATED NATIONAL AVERAGE Investment market characteristics observed over the recent past in Winnipeg’s office sector were generally stable and healthy. Investment performance was positive, as evidenced in MSCI Index statistics. Properties tracked in the index generated an attractive annual average return of 6.6% for the 12-month period ending September 30, 2016. The result was almost completely income-driven as the capital growth cycle slowed. Values held at the peak for the cycle, following an extended period of growth. The ongoing health of the market’s capital cycle was evidenced in the open market. Investors showed a willingness to pay top dollar for prime assets. While there was not an abundance of high-quality assets brought to market, prices generally ranged at the top of the cycle. There has been some upward movement in value over the past year, driven by strong demand. This pressure was the result of a relative abundance of low-cost capital looking to find a home in Canada’s office sector. This manifested itself in transaction activity in this market during 2016. While the first half of 2016 saw relatively low levels of sale activity, 2015 was one of the most active periods in the past decade. The effort exerted by investors in their attempts to acquire property over the recent past helped boost overall market performance.

CHANGE IS COMINGChange, in the form of new supply, is coming to Winnipeg’s office sector over the next couple of years, which will have an impact on performance over the near to medium term. The largest and most significant new development is True North Square downtown, to which tenants will relocate from existing Class A buildings in order to secure higher quality space. A total of 365,000 square feet of office space is scheduled for occupancy in 2018, with the possibility of more. Scotiabank and Thompson Dorfman and Sweatman LLP have already signed on as anchor tenants. The question to be answered is whether the market can absorb the resulting Class A backfill space. It is quite likely that occupancy will fall to some extent. Overall downtown pressure on rents will occur, with Class B buildings hit hardest. Conversely, if demand remains healthy, much of the newly constructed and backfill space will be leased. Then occupancy and rents will stabilize. We believe, given a stable and positive economic outlook for the next few years, that the decline in occupancy will be modest. Consequently, an appreciable decline in average rents is unlikely. One thing is for sure: True North Square will generate significant tenant movement and have an impact on income performance for more than one owner.

TRENDING STATISTICS


Vacancy Rate ▼ ▼Net Absorption ▲ ▬Lease Rates ▲ ▬New Supply ▼ ▬


0.0

5.0

10.0

15.0


6.6

9.311.4

9.3

11.3

6.06.7

9.7 9.7 10.1%


Winnipeg Office National Office


-400

-300

-200

-100

0

100

200

300

400

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Thou

sand

s of

Squ

are

Feet

%

Office Demand & Supply Winnipeg Historical & Forecast Aggregates



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Winnipeg Historical & Forecast Aggregates




WINNIPEG INDUSTRIAL REPORT

ECONOMIC GROWTH BOLSTERED LEASING PERFORMANCEWinnipeg’s economic growth cycle helped drive industrial leasing market progress over the past year. Industrial space demand was rooted in specific business sectors, which included some of the market’s largest occupiers of space. These included transportation and warehouse, manufacturing and consumer-goods-related businesses. Winnipeg’s exporting businesses also contributed to the demand cycle. Not to be outdone, the region’s agricultural sector was also an active segment of the current market tenant base. The relative health of the local economy helped stabilize leasing fundamentals, with GDP forecast to expand by 2.3% in 2016, up 60 bps year over year. Generally positive demand characteristics helped strengthen supply-side fundamentals. The 77.3 million square feet of industrial property in this market boasted an availability rate of inventory of 4.9% as of the end of the third quarter of 2016. The rate was down 20 bps from the same period a year earlier. The lack of any significant development activity over the past three years helped maintain low availability levels for much of the past few years. Tight conditions in this market ensured rents held at the peak for the cycle over the past year. Rental stability was a byproduct of a healthy leasing market demand supply dynamic, which was a result of an above-average regional economic growth cycle.

POSITIVE INVESTMENT RESULTS GENERATEDWinnipeg’s industrial sector registered broadly positive investment market trends over the second half of 2015 and much of 2016. A recent record of income growth and stability boosted performance. As 2015 came to a close, the recent property value growth cycle appeared to have stalled. However, income more than offset the minor loss in value over the 12-month period ending September 30, 2016. As a result, the market posted an annual average total return of 5.7% over the same period. The strength of the market’s income performance was an attraction for investors. A range of local and national groups scoured the market for opportunities. The historical dominance of local private capital persisted over the past year. However, pension funds, institutions and others made their presence known. The strength of the demand cycle resulted in relatively healthy transaction closing volume over the past several quarters. The $157.6 million in sales recorded in 2015 represented the highest level of activity dating back to the most recent peak in 2007. The $60.3 million in sales completed in the first half of 2016 represented a continuation of strong capital flows in this market over the recent past. The above-average flow of capital into this market of late was an element of what has been a period of continued investment market advance.

STABILIZATION IS THE MOST LIKELY SECTOR SCENARIOThe near-term outlook for Winnipeg’s industrial sector is one of stabilization and modest advancement. The forecast will be driven by an above-average economic growth cycle. The most recent CBOC forecast called for economic expansion of 2.3%, 2.0% and 2.0% in 2017, 2018 and 2019, respectively. The resulting increases in output across the region’s business sectors bode well for industrial space demand. Therefore, it is reasonable to deduce that leasing fundamentals will, at a minimum, stabilize. Availability will hold close to the 95.0% mark. Expansion activity will ensure rents continue to gradually rise in certain segments of the market, with stabilization to persist in others. The health of the income backdrop will support solid return characteristics. Near-term advances and the market’s history of performance will drive capital flows. A range of private and institutional capital will continue to try to source product in this market. Once again, this will be a challenge for some. Others will be successful in their pursuit of yield and diversification. Healthy investment demand will be a factor in near-term stabilization in Winnipeg’s industrial sector.

TRENDING STATISTICS


Vacancy Rate ▬ ▼Net Absorption ▬ ▬Lease Rates ▬ ▲New Supply ▼ ▬


0.0

5.0

10.0

15.0


5.7

9.79.0 8.3

10.1

6.77.3 8.7

7.4

9.6%

Historical PerformanceFor The Period Ending Dec 2015*

Winnipeg Industrial National Industrial

Source: © MSCI Real Estate 2016 *Dec 2015 is the last datapoint currently available

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Winnipeg Historical & Forecast Aggregates


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Winnipeg Historical & Forecast Aggregates



WINNIPEG RETAIL REPORT

LEASING MARKET RESILIENCE WAS TESTEDRelatively stable leasing market conditions were reported over the past year despite headwinds rooted in broader sector shifts. Relatively stable vacancy characteristics were reported recently, although a slight upward trend was evident. CBRE statistics showed a rate of just 4.2% at the midway mark of 2016, unchanged from the end of 2015. A similar theme was reported for rents, which were largely unchanged over the same period. While the overriding statistical theme was one of stabilization, broader retail market trends generated headwinds. The strongest leasing market headwind came in the form of store closures. In October Sobeys announced the closure of its store on Burrows Avenue by the end of 2016. Winnipeg-based Ben Moss jewelry chain served notice it would close its doors, affecting 54 stores across the country. Early in 2016 the Bay reduced its footprint by a full floor downtown. However the news wasn’t all bad. In the Southwest, Seasons has seen healthy leasing activity. Ivanhoe Cambridge’s Outlet Collection Winnipeg has also assembled an impressive roster of stores. The new outlet format has been well received in most markets, such as Toronto, Montreal and Ottawa. This activity offset at least some of the negative impacts of broader sector trends over the past year.

POSITIVE INVESTMENT MARKET CHARACTERISTICS TALLIEDWinnipeg’s retail property sector posted another period of positive investment market characteristics over the past year, in keeping with the national trend. Investment performance was attractive, with an annual average return of 6.0% recorded for properties tracked in the MSCI Index for the year ending on September 30, 2016. While the capital growth trend continued to ease, income growth was stable and healthy. Largely healthy investment demand characteristics accompanied the recent period of attractive performance. The usual market participants looked to increase their foothold in this market In the first six months of 2016 a total $60.6 million in transaction closing volume was reported by Colliers International. While this pace was stronger than the previous year, it was far below the long-term average. The most significant transaction reported in this market in 2016 was the sale of Emerald Plaza. Product availability continued to fall short of demand, in keeping with the national trend. Hence, bidding on available assets brought to market was brisk. This ensured values for the most part held at the peak for the cycle, which was the case across much of the Canadian property investment market.

CONDITIONS SHOULD IMPROVERetail market conditions should gradually improve over the near term, although there will be ongoing performance headwinds. The CBOC is forecasting solid economic growth of 2.5% for 2016 and 2.3% for 2017. This will support labour market gains and retail spending growth of 5.9% in 2016 and 2.4% next year. As a result, many retailers will see productivity increase. For others, factors such as a low dollar will erode profits. On aggregate, however, there will be enough strength within Winnipeg’s retailer tenant base to support leasing market progress. Therefore, occupancy levels will remain healthy. At the same time rents will be largely unchanged. Public sector hiring will support sales revenues, following a period of downsizing. The resulting leasing market stability will drive investment performance and draw capital to the market. Demand will surpass the supply of assets, which will extend the period of property value stabilization. Investors will continue to look to Winnipeg for yield, ensuring healthy investment demand. Prime assets will be highly sought after, in keeping with the national trend. In summary, conditions in Winnipeg’s retail sector will slowly improver over the near term, despite moderately strong headwinds.

TRENDING STATISTICS


Vacancy Rate ▬ ▼Net Absorption ▲ ▲Lease Rates ▬ ▲New Supply ▲ ▲


0.0

5.0

10.0

15.0


6.0

11.713.8 13.2 13.4

8.59.1

11.110.5

11.6

%


Winnipeg Retail National Retail


$0

$2

$4

$6

$8

$10

$12

$14

0.0

2.0

4.0

6.0

8.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsWinnipeg Historical & Forecast Aggregates



$30

$117

$153 $161

$71 $70 $80

$131

$41

$86

$299

$354

$95

$61

$0

$50

$100

$150

$200

$250

$300

$350

$400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions


Source: Colliers International


WINNIPEG MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET STABILIZED AS RENTS CONTINUED TO RISE Winnipeg’s multi-suite residential rental market exhibited signs of stabilization over the past year as average rents continued their ascent. Evidence of stabilization was contained in the market’s vacancy trend over the past year. In its fall survey, the CMHC reported aggregate vacancy of 3.8% for the Winnipeg CMA, down just 10 bps year over year. This trend was most prominent in the one-bedroom and two-bedroom unit size market segments, which combined make up just over 90.0% of total inventory. One-bedroom vacancy edged higher by 30 bps year over year as of October 2016. Two -bedroom vacancy fell by 50 bps over the same period. These modest vacancy changes offset each other, driving overall market stability. Vacancy stabilization was a byproduct of the market’s demand backdrop over the recent past. Healthy migration patterns resulted in downward pressure on vacancy. However, weak employment market trends served to reduce the downward pressure. While Winnipeg’s vacancy cycle stabilized, rents continued to rise. The average two-bedroom monthly rent increased by 2.0% year over year as of October of 2016. While this growth was above the provincial guideline increase of 1.1%, it fell short of the previous period’s advance of 3.3%. Recent growth has been a function of an increased inventory of newer buildings, which are exempt from provincial guidelines. To some extent, rising rents have run counter to broader market stabilization over the recent past.

DEMAND FOR GOOD QUALITY PRODUCT REMAINED HIGH Investor confidence in Winnipeg’s multi-suite rental property sector remained high over the past year, given current risk-reward parameters. Assets offered for sale were generally met with strong interest from a range of investment groups. Positive demand characteristics helped drive transaction activity, which was evidenced in transaction closing statistics. A four-year annual high was posted in 2015, with a total of $137.4 million in sales volume. In the first half of 2016, a slower pace of closing activity unfolded, resulting in $39.8 million in sales. However, the slowdown was a function of product availability rather than a weaker demand cycle. Momentum was expected to pick up in the second half, which should boost activity. Demand pressure continued to support the steady rise in property values. This trend bolstered income performance and growth. Recent performance built on an already impressive history of solid results. For this and other reasons, Winnipeg’s multi-suite residential sector remained highly sought after over the recent past.

NEAR-TERM PERFORMANCE STABILITY FORECASTWinnipeg’s multi-suite residential sector will continue to generate healthy performance trends over the near term. Leasing market conditions will mirror those of the past year. Stable occupancy characteristics are expected to persist, with vacancy holding in the high nineties. New supply completions will have limited impact on occupancy but will continue to drive average rents higher. The overall health of the local rental market will be a byproduct of a healthy demand cycle. Provincial migration volume will boost demand in this market. The majority of new arrivals tend to set up residence in Winnipeg. Having risen by 128.0% in 2016, growth in provincial migration will remain strong. Migrants will continue to try to source employment opportunities in a region with a healthy economic growth forecast. Ongoing rental market stabilization will draw investment capital to the region over the near term. Investors will continue to try to source yields in this market as was the case over the past few years. To some extent, local groups will have an edge, given their ability to source assets in this market more easily. A more intimate knowledge of the market will help in this regard. In summary, another period of stable and positive performance is forecast for this market over the near term, barring an unforeseen change in the economic or financial cycle.

TRENDING STATISTICS


Vacancy Rate ▲ ▬ Net Absorption ▬ ▬Lease Rates ▲ ▬New Supply ▲ ▬


0.0

1.0

2.0

3.0

4.0

5.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2.0

1.4 1.2 1.31.1

1.71.3

1.5

1.0 1.10.8

1.1

1.7

2.5 2.52.9 3.0

3.2

%


Source: CMHC

$71

$5

$82

$28

$63

$151

$30

$200

$165

$54

$76 $97

$137

$40

$0

$50

$100

$150

$200

$250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions



0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

Housing MarketPricing vs. Demand

Average Price - LS Housing Units Sold - RS

Source: CREA (MLS®); CMHC


ECONOMIC SNAPSHOT

RESILIENCE CHARACTERIZED JOB MARKET PERFORMANCERegina’s labour market exhibited somewhat surprising resilience over the past year despite a relatively tepid economic growth trend. Employment levels rose in 2015, with a similar lift forecast this year. Total employment was expected to rise by 0.8% over 2016, subsequent to a 0.9% increase in 2015. These performances represented surprising levels of labour market resilience, given an economic contraction in 2015 and a fairly tepid rate of expansion over 2016. The CMA’s unemployment rate was expected to rise by a full percentage point in 2016 to 5.4%. However, even if this forecast proved to be accurate, the rate will have continued to rest at least 100 bps below the national average.

REDUCTION IN RESIDENTIAL CONSTRUCTION VOLUME POSTEDHousing starts were forecast to decline for a fourth consecutive year through 2016 due in large part to a persistent excess of unsold homes. Forecast construction volume of 1,330 for 2016 was below the recent 2013 peak, when a total of 3,122 homes were started. The excess of unsold homes was most pronounced in the multi-suite market segment, which prompted a forecast 40.0% reduction in activity. The unsold single-detached volume was less of an issue, following the peak in December of 2015. Between January and August of this year, single-family home construction volume had increased over the same period in 2015. In short, the anticipated erosion of the residential construction cycle in 2016 was focused in the multi-suite segment of the market.

COMMODITIES SECTOR RECOVERY WILL BE KEYRegina’s economic outlook will be dictated by the pace of recovery in the global commodities market. As of the autumn of 2016, recovery had thus far been slow, although the worst of the decline appeared to be over. Weakness in the oil, potash and agricultural sectors will continue to be a drag on economic activity. Output is expected to rise by a fairly modest 1.3% over 2016, in line with the national average. The 2017 result will also track the national trend, with growth ranging close to the 2.0% mark. Economic growth rates will be similar through to the end of the decade, falling far short of the average of 4.0% for the decade ending in 2014. The moderate economic growth trend over the next 12 months will translate into equally modest job growth. Having peaked in 2016, the provincial capital’s unemployment rate will slowly fall. On the plus side, manufacturing employment will rise by 6.0% in 2017, although this will fall short of losses in 2016. The lack of a firm recovery in the city’s labour market will have an impact on retail consumption patterns, with modest growth forecast for 2017 and 2018. In summary, Regina’s economy recovery will be modest over the near term, barring a significant rebound in the commodities sector.

Regina’s economy appears to have turned a corner in 2016, resulting in expansion of a modest 0.5% projected for the year. Continued weakness in the oil, potash and agricultural sectors hampered growth, which fell far short of recent levels. A similarly underwhelming job market performance characterized much of the past year. The unemployment rate was on a rising path, with a full percentage point increase anticipated year over year by the end of 2016. In keeping with a number of large Canadian metros, retail sales were surprisingly strong during much of 2016.

REGINA ECONOMIC REPORT

-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.08.0

-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.08.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

50

100

150

200

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

3.0

6.0

9.0

12.0

15.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-6

-4

-2

0

2

4

6

8

-1.0-0.50.00.51.01.52.02.53.03.54.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





REGINA INDUSTRIAL REPORT

LEASING DEMAND SLOWEDRegina’s industrial leasing demand cycle softened over much of 2016, driven by reduced expansion activity in the region’s oil, potash and agricultural sectors. The slowdown was directly tied to the broader softening of the regional economic growth trend that began in 2015. As a result, leasing demand softened following a close to five-year run of steady tenant expansion activity. The fact that this market continued to command some of the highest rents in the nation was also a factor in the sharp slowdown in expansion activity over much of 2016. Tenants held off on leasing decisions over the past year in anticipation of lower rents. As lower rents failed to materialize, activity levels slowed significantly. Colliers International reported an average industrial net rent of $11.83 per square foot at the end of the first quarter of 2016, virtually unchanged from the same time a year ago. The slowdown in industrial leasing activity that took place over the past year eroded supply fundamentals. Avison Young reported a 200 bps increase in vacancy over a 12-month period ending March 31, 2016. Vacancy has already increased by 200 bps over the preceding year, driven once again by the ongoing oil and potash industry slumps. Next year Regina’s economic growth cycle was forecast to strengthen, which should at the very least stabilize demand.

INVESTMENT MARKET WAS STABLE AND QUIET Stabilization characterized the Greater Regina industrial investment market over the recent past against a backdrop of limited activity. National and local investment groups continued to try to source income-producing assets in this market that had attractive yield characteristics. The shortfall in availability relative to the volume of capital available was in keeping with the national trend. Regina’s relatively small and tightly controlled inventory made sourcing income-producing property even more of a challenge. To some extent, this played out in recent activity. Over the first three quarters of 2016, a total 16 industrial properties sold according to Colliers International. In a number of cases, transacted properties were in need of renovation or redevelopment. Therefore, sale values were depressed. The most significant sale year to date was 855 Park Street. Pricing reflected the property’s need for renovation. Newer and more functional properties commanded higher prices, indicating that values for prime assets were largely stable. In short, investment performance in Regina’s industrial sector was generally stable over the near term, with a limited number of properties sold.

SECTOR STABILIZATION TO SLOWLY UNFOLDRegina’s industrial sector will gradually stabilize over much of 2017, driven by modest advancements in the region’s resource sectors. This will drive a moderately healthier economic growth across the CMA over the next couple of years. Economic output is forecast to increase by a robust 3.0% over 2017 after a tepid 0.7% gain in 2016. The stronger growth cycle should boost demand for industrial space in this market. Companies active in the resource sector will lead the charge. New developments across the region will attract tenants and owner-occupiers looking for new premises with state-of-the-art systems. These include the Global Transportation Hub, Carson Business Park, Wellings Industrial Park and Parker Industrial Park. Renovated older space will also be popular. Central Regina will see little in terms of new development, given shortages of developable land. The new phase of expansion in Regina’s industrial leasing market over the near term will lead to the stabilization of rents across the market next year, with the potential for a renewed upward trend by 2018. In turn, positive investment performance will continue to reward owners of assets in this market. At the same time, investors will seek out opportunities. In short, Regina’s industrial sector will gradually stabilize over the near term, due in large part to a modest recovery in the region’s resource sector.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▼ ▬Lease Rates ▬ ▬New Supply ▼ ▬


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

%

Industrial VacancyRegina Historical Aggregates

Source: Avison Young

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

$ p.

s.f.

Industrial Net RentRegina Historical Aggregates


0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Thou

sand

s of

Squ

are

Feet

Industrial New Supply Regina Historical Aggregates



ECONOMIC SNAPSHOT

ECONOMY FAILED TO GENERATE MATERIAL JOB GROWTH Job creation activity remained relatively weak over much of 2016, given the absence of a firm economic growth cycle over the recent past. Economic growth was fairly subdued during 2016 after a 0.4% contraction in regional output was reported in 2015. As a result of this run of weak performance, employment was forecast to fall by 0.9% according to the CBOC autumn forecast. Coincidentally, the region’s unemployment rate was set to reach a four-year peak of 6.3% by the end of 2016. Even so, the rate has continued to range significantly lower than the national average for several years. Job losses continued to build in the manufacturing sector in 2016, with employment set to fall by 9.0%. Manufacturing employment had already fallen sharply in 2014 and 2015 by 18.0% and 11.0%, respectively. Job growth was expected to disappoint through 2016, given a relatively muted economic growth pattern.

HOUSING CONSTRUCTION DECLINED AS DEMAND FALTEREDResidential construction starts steadily declined during much of 2016 due to a significant drop in housing demand. Starts were projected to fall by 14.0% in 2016 by the CBOC after a sharper 35.0% plunge in the previous year. The downward trend was expected to slow in 2017 as the unsold inventory of homes is gradually reduced. In 2016, inventories of newly built homes reached a record high. The region’s builders had ramped up construction during the economic boom years; many of those homes have sat empty. As the local economy faltered, demand for new homes dwindled. This led to the correction in the new home construction market that began last year and carried through to 2016.

ECONOMIC RECOVERY WILL BE GRADUALSaskatoon’s economic fundamentals are forecast to gradually improve over the near term, in keeping with most of Canada’s commodities-focused metros. Output will expand by an average of 2.0% in each of 2017 and 2018. This will support moderately stronger labour market conditions. Over the same period, employment will increase by an annual average of 1.6%. Personal income per capita will rise by a similar rate. The region’s unemployment rate should decline gradually over the period, falling to a five-year low by 2019. To some extent, labour market progression will factor into slightly healthier housing market trends. The volume of unsold, newly built homes will decline. In turn, the recent string of sharp reductions in residential starts will ease. More stable economic performance will be a factor in continued retail sales volume growth. Consumption will pick up after 2017, resting at or near the 3.0% mark through to the end of 2017. While the gradual recovery in Saskatoon’s economy appears to have begun, ongoing weakness in the commodities market remains a risk for the outlook.

Recovery appears to have emerged for Saskatoon’s economy in 2016 on the heels of a modest contraction in 2015. Economic stabilization was tied to marginally higher oil pricing. Despite the beginnings of a slow recovery, employment trends remained weak. Employment was forecast to decline in 2016, following a weak 0.5% rise in 2015. At the same time, housing start volume continued to fall this year, resulting in a four-year low set in 2016. Both the business services and personal services sectors reported weakness in 2016, as did the region’s manufacturers.

SASKATOON ECONOMIC REPORT

-3.0-2.0-1.00.01.02.03.04.05.06.07.08.09.0

-3.0-2.0-1.00.01.02.03.04.05.06.07.08.09.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

50

100

150

200

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-6

-4

-2

0

2

4

6

8

10

12

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





SASKATOON RETAIL REPORT

RESILIENCE EVIDENCED IN LEASING PERFORMANCE Retail leasing performance characteristics reported over the recent past were indicative of the market’s resilience. Market fundamentals were generally stable and healthy over the period against a backdrop of a weakened economic growth trend and changes in consumer behaviour across the broader market. Evidence of the market’s resilience was indicated in occupancy characteristics. The market’s average occupancy stood at 96.8% at the midway mark of 2016, up 10 bps from the same time a year earlier. The absorption of newly constructed space offered additional evidence of the market’s resilience. Leasing activity overall was strong enough to apply modest upward pressure on rents, particularly for prime space. Restaurant and other service retailer activity was another indicator of the market’s stability over the recent past. Costco announced a second store will be opened in Saskatoon’s Meadows Market, currently under development in the Rosewood area. There was a surprising level of activity recorded recently despite sector headwinds. The first was a weak economic growth cycle. Economic output was forecast to rise by a modest 1.7% this year following a 0.4% contraction in 2015. The second was the continued growth in online shopping which had both positive and negative repercussions for some retailers. Despite these challenges, Saskatoon’s retail leasing performance was stable and healthy.

SOLID INVESTMENT MARKET CHARACTERISTICS DISPLAYED Conditions in Saskatoon’s retail property investment market over the past year were generally positive. There were few changes in performance characteristics over most of 2016 when compared with the previous year. The capital cycle matured, with values generally holding at the peak for the cycle. Activity levels remained fairly positive. In the first half of 2016, a total of $18.4 million in retail property traded hands. While this pace was stronger than the previous period it fell short of the recent peak of 2012 when $60.0 million in sales was completed. Closing volume was limited by the relatively small inventory of assets offered for sale rather than by the availability of debt and equity capital. Investment demand remained stable and generally healthy. Investors continued to show interest in this market, with local groups moving to the fore. Competition for the relatively few assets brought to market was above average, resulting in a healthy bidding environment. In short, investment conditions reported in this market over the recent past were generally healthy and stable.

PROSPECTS FOR ONGOING STRENGTH LOOK GOODThe outlook for Saskatoon’s retail sector looks relatively positive, given an expected regional economic strengthening and the market’s recent history of resilience. Saskatoon appears to have taken an economic step forward, resulting in an upgraded growth outlook. The CBOC’s forecast calls for a 2.0% gain in output for the CMA in each of 2017 and 2018. The premise behind the forecast is gradual recovery in the national and local resource sectors. A stronger economy will boost employment levels in both 2017 and 2018. This will drive a rebound in retail sales growth rates, following a reduction of 1.8% in 2015. Healthier spending patterns will be a welcome sight for the market’s retailers. In turn, demand for retail space will improve. This will ensure leasing market conditions remain tight, in support of income stability and growth for landlords. Income growth will support positive investment performance over the forecast period. Performance trends will attract capital to the market, which will continue to exceed the volume of assets offered for sale. Sourcing assets for acquisition will continue to be a challenge. Vendors will be able to achieve pricing objectives, given a willing audience. Outside of the shortfall in product availability, another period of investment market health is forecast for Saskatoon’s retail sector.

TRENDING STATISTICS


Vacancy Rate ▬ ▬Net Absorption ▬ ▬Lease Rates ▲ ▲New Supply ▼ ▲


$0

$2

$4

$6

$8

$10

-4.0-2.00.02.04.06.08.0

10.012.014.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsSaskatoon Historical & Forecast Aggregates



$0

$50

$100

$150

$200

$250

$300

$350

$400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions

Investment ActivityVolume of Total Saskatoon Sales to June 2016

Industrial Multi-Family Retail Office Land OtherSource: Colliers International

$104

$52 $43

$147

$10

$55

$28

$64

$24

$43

$25 $18

$0

$20

$40

$60

$80

$100

$120

$140

$160

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




ECONOMIC SNAPSHOT

EMPLOYERS CUT COSTS AND JOBS AS ECONOMY FALTERED Calgary’s labour market fundamentals were continually eroded in 2016, driven in large part by losses in the oil and related sectors. Total employment in the CMA was forecast to decline by 1.7% over 2016 by the CBOC, with the CMHC predicting a more substantial decline. Significant job losses have already taken place at the head offices of oil companies. In 2015, employment levels increased. However, as the oil sector downturn continued, companies had little choice but to shed jobs to try to control costs. By the end of 2016, the Calgary CMA was expected to post an unemployment rate of over 8.0%, beating the national average for the first time in decades. At the same time, oil prices showed signs of stabilization, which was thought to be a starting point for fewer layoffs.

HOUSING STARTS PLUNGEDA second consecutive year of sharply reduced housing start volume was reported for 2016 as a result of markedly weaker overall housing demand. The CBOC called for a record low 8,000 unit starts in 2016, marking the lowest annual volume since 1996. Moreover, it paled in comparison to the record 17,100 units completed in 2014. The CMHC forecast called for a similar level of starts in 2016, between 8,300 and 9,300. Builders were expected to concentrate on unsold units. A modest increase in starts is anticipated for 2017 as demand will take time to improve following what is expected to be a modest economic recovery.

SLIGHT UPTICK IN RETAIL CONSUMPTION EXPECTEDA modest increase in retail consumption was anticipated over the full year in 2016 after a slight contraction was reported in the previous year. Retail sales growth of 2.6% was forecast by the CBOC for 2016. In the previous year, sales had declined by 0.4%. The 2016 increase in sales represented a measure of resilience on the part of Calgary’s consumers, even though the progression will have fallen short of the 2012-13 peak.

RECOVERY WILL BE SLOWThe pace of Calgary’s economic recovery will be slow, given an equally gradual rise in oil prices. In the latter half of 2016, prices began to stabilize and increase slightly. This trend will continue into 2017 according to many market prognosticators. Economic output will increase by 2.0%, which is below the national average. In turn, a modest increase in employment is forecast. Similarly tepid advances in retail consumption and housing starts are forecast for 2017. By 2018, Calgary’s economy is expected to strengthen as oil prices gradually rise. The main risk to the moderately positive outlook is the prospect of an extended oil price slump.

Low oil prices continued to take a significant bite out of Calgary’s economic performance this year, resulting in a second consecutive reduction in GDP. Output was on pace to decrease by 2.1% over 2016, following a more significant retreat of 3.2% in 2015. Investment and construction activity fell sharply. Business sectors with direct and indirect ties to oil have been negatively affected. Weaker employment, housing and retail sales trends were reported as the oil sector malaise persisted. The city’s office market was hit hardest with occupancy benchmarks falling to an all time low.

CALGARY ECONOMIC REPORT

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




01002003004005006007008009001,000

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

2

4

6

8

10

12

14

16

18

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-10

0

10

20

30

40

50

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





CALGARY OFFICE REPORTLANDLORDS CONTINUED TO SUFFER The erosion of Calgary’s office leasing market fundamentals persisted through much of 2016, a trend that began in the second half of 2014. The more than two-year period of leasing market weakness was the result of a sharp drop in space demand. The root of the decline was the ongoing correction in the global oil market which reverberated through the Alberta oilsands and regional economy. As production slowed, oil companies and related organizations reduced overhead by cutting back on staff and space. Some delayed occupancy of significant blocks of pre-committed space in newly built towers. This led to a sharp increase in premium-quality sublease space with plenty of term left. The energy sector slump eroded economic activity across most of the region’s business sectors. As a result, sublease availability increased and occupancy levels fell further. The weak demand cycle resulted in the steady erosion of supply fundamentals. Net absorption dipped to record-high negative benchmarks. Aggregate occupancy stood at 77.8% for the market’s Class A inventory and 77.6% for all classes combined as of the third quarter of 2016. Downtown occupancy stood at 78.2% and 78.5%, for Class A and all classes respectively. The Class AA occupancy rate rested close to the 85.0% mark downtown. The market’s ongoing development boom added to the downward occupancy pressure. As occupancy fell, rents followed suit. Many landlords were forced to offer large inducement packages, pushing effective rates down to single digits in many cases. Tenants were able to move up the quality ladder at a relatively low cost. As 2016 came to a close, there appeared to be few indications that the erosion of market fundamentals would end soon.

INVESTMENT ACTIVITY WAS REDUCED TO A TRICKLECalgary’s office property investment activity ground to a virtual halt in the past year. The number of significant transactions closed during 2016 could be counted on one hand. Investors chose to wait and see what the ultimate outcome of the region’s economic and office market corrections would be. Moreover, the full impact of the malaise on property pricing was also yet to be determined. The lack of transactional evidence was also a concern for investors with regard to establishing value. There were indications that property values were on a steady decline with no end in sight. MSCI results showed a (8.1%) return for Calgary office for the year ending September 30, 2016. Results also showed a cumulative capital decline of (23.0%) for the sector since the first quarter of 2015. Uncertainty surrounding the length of the oil sector slump and its impact on the office market was top of mind for investors. In the meantime, the market was expected to remain quiet, while owners developed strategies to stabilize tenancy and income.

FEW SIGNS OF QUICK RECOVERY There are few signs of a quick turnaround for Calgary’s office market as 2016 enters its final few days. Conditions in the local economy and oil sector were expected to slowly improve. By the end of 2017, oil sector revenues are expected to slowly strengthen. In turn, the regional office market would gradually stabilize. However, stabilization will take time, given the completion of new space over the next few years. Elevated vacancy and modest demand will ensure rents hold far below those of the most recent peak. As the market begins to stabilize, investment demand should pick up. Some groups will look to acquire assets early in the recovery cycle. At first prime assets will be most popular, with riskier assets eventually following suit. As confidence builds values should slowly rise. This could however take some time. Until a sustainable energy sector driven recovery unfolds the market will remain depressed. Space demand will remain weak for much of 2017, resulting in cycle low rents and cycle high vacancy. In short, there are few indications of a quick rebound for this market, resulting in continued performance uncertainty.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▬ ▬Lease Rates ▼ ▼New Supply ▬ ▬


-10.0

-5.0

0.0

5.0

10.0

15.0


-8.1

0.5

8.2 8.5

11.0

6.06.7

9.7 9.7 10.1

%


Calgary Office National Office


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

70

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Calgary Historical & Forecast Aggregates



0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

5

10

15

20

25

30

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Calgary Historical & Forecast Aggregates




CALGARY INDUSTRIAL REPORT

LEASING MARKET SOFTENING UNDER WAYThe erosion of Calgary’s industrial leasing fundamentals continued through much of 2016, extending the current phase of the cycle that began in the second half of 2015. Demand for industrial space softened as a result of reduced output in the region’s energy and manufacturing sectors. Economic sluggishness was also a key to the sharp decline in expansion activity in this market. The downward demand trajectory led to a sharp decline in total square feet absorbed in 2016 thus far. Through the first three quarters of 2016 absorption was (887,600) square feet according to CBRE statistics. The result contrasted with the 3.7 million square feet absorbed in 2014. There was a negligible amount of space absorbed over 2015, when the market first began to slow. The weakened demand phase of the cycle created a modest oversupply of space available for lease. Availability increased by 150 bps over the first three quarters of 2016. At 9.6%, availability stood 490 bps above the most recent cycle low at the end of 2014. For landlords, this presented challenges in maintaining occupancy in their respective properties but also limited opportunities to raise rents. Tenants, however, welcomed the increase in available options to lease. Tenants also welcomed downward pressure on rents in certain segments of the market. Weaker demand and downward pressure on rent factored into the decline in construction activity over 2016. The erosion of the market’s development cycle was in keeping with the broader market theme.

INVESTMENT PERFORMANCE WAS MIXEDTrends observed in Calgary’s industrial investment market over the recent past were somewhat mixed. Demand remained fairly healthy, as local, national and foreign capital looked for opportunities in this market. The limited number of properties brought to market were well received, with the most functional of assets being the most popular. The solid demand backdrop resulted in $483.1 million in sales volume recorded over the first three quarters of 2016. Healthy demand and transaction closing volume were to some extent contrary to broader market fundamentals; that is, an economy and leasing market that were being steadily eroded. To some extent, the demand cycle also ran counter to the sector’s performance characteristics. MSCI-indexed assets tallied a rather weak total average return of 2.3% for the year ending on September 30, 2016, following a much stronger 8.8% over the previous period. The slide was rooted in reductions in property value, a trend that has been in place since early 2015. Property values have fallen by a cumulative average of 3.5% since the first quarter of 2015. Conversely, income performance has been stable and healthy over the same period. The uneven component performance recorded over the most recent 12-month period was representative of the broader market trend.

IMMEDIATE BOUNCE-BACK NOT IN THE CARDSThe prospects for the emergence of a sector recovery over the near term are quite low. Calgary’s economy is forecast to stabilize next year, with modest expansion expected in the second half of 2017. GDP is forecast to expand by 2.0% in 2017 and 2.9% in 2018. Oil prices are expected to slowly rise, resulting in fewer layoffs and budget cutbacks. Gradual stabilization is also forecast for the local job market by 2017. At the same time, business services, personal services and wholesale and retail trade will return to the black. The recovery will be a welcome sight for the region’s consumers and businesses. In the past however there has been a lag of up to a year between economic recovery and industrial market recovery. As a result, the outlook for Calgary’s industrial sector will brighten as 2017 progresses. However, it could take until 2018 before conditions improve. In the meantime, investment performance will remain relatively weak. Investors will, however, continue to acquire assets in this market, given its long-term viability.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▼ ▬Lease Rates ▼ ▼New Supply ▼ ▼


0.0

5.0

10.0

15.0


2.3

7.59.7 9.2

11.0

6.77.3 8.7 7.4

9.6%


Calgary Industrial National Industrial


-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Calgary Historical & Forecast Aggregates


0.01.02.03.04.05.06.07.08.09.010.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Calgary Historical & Forecast Aggregates



CALGARY RETAIL REPORT

LEASING MARKET EXHIBITED SIGNS OF STABILIZATION Calgary’s retail leasing market exhibited signs of stabilization in the second half of 2016, following a period of weakness. In the second half, vacancy trended lower, following a significant increase in the first half. As 2016 came to a close, vacancy rested at a healthy 3.4%. Vacancy in the city’s CBD had risen steadily into the double digits as the office market correction took its toll on street-front retailers. However, vacancy began to decline in the second half. At the same time, leasing activity picked up, resulting in a number of new service store openings. Recent expansions included two new MEC locations, luxury brands Saks Fifth Avenue at Chinook Centre and Nordstrom Rack at Deerfoot Meadows and Simons on Stephen Avenue. While these announcements were encouraging, there have been a number of store closures taking place in 2016, which negatively affected leasing market performance. The combination of modest increases in oil prices and retail leasing activity however resulted in higher levels of confidence in Calgary’s retail sector. This sentiment resulted in a sharp increase in development activity. According to Barclay Street information, 500,000 square feet of new inventory was delivered during 2016. A further 2.5 million square feet of new supply was forecast for 2017. The success of these projects will likely hinge on the continuation of the modest rebound in activity that took place in the second half of 2016.

CAPITAL FLOWED FREELY The flow of capital into Calgary’s retail sector reached a record pace recently against a backdrop of solid investment performance. The sale of retail assets in this market reached $363.6 million over the first three quarters of 2016. The pace was the strongest on record dating back to the most recent peak in 2012 according to CBRE statistics. The most significant transaction reported in 2016 was RioCan’s acquisition of a 50.0% interest in Beacon Hill for $106.5 million. The record flow of capital into this market in 2016 occurred during a period of solid investment performance characteristics. Properties tracked in the MSCI Index registered an attractive annual return of 6.8% for the year ending on September 30, 2016. The retail sector posted peak pricing levels over the recent past, unlike most other sectors more directly affected by the oil sector downturn. In addition to solid returns, demand patterns were also healthy over the recent past. In keeping with the national trend, a significant number and range of investment groups attempted to source opportunities in this market. The availability of low-cost debt and equity funds was the driver of strong bidding on assets brought to market. Demand pressure supported a positive value cycle and the flow of capital into this market.

EXTENDED RECOVERY FORECASTThe improvement in retail leasing performance in the second half of 2016 is expected to continue over the near term. This outlook is tied to the anticipated recovery in Alberta’s commodities sector. Recently, oil prices first firmed and then began to slowly rise. This had led to optimism with regard to the economic outlook. The unfolding of economic recovery over the near term bodes well for the region’s labour market and retail spending patterns. This optimism will translate positively in retail leasing market performance. Demand for retail space is forecast to rise, resulting in even tighter conditions. At the same time, retail developers will continue to invest in this market. With rents forecast to firm and rise, investment performance will remain positive. Property values will hold at the peak as owners reap the rewards of healthy income and capital trends. The market should continue to adjust to broader retail sector trends such as online shopping, a low Canadian dollar and the development of trade areas next to transit and high-density residential developments. On balance, retail leasing conditions are forecast to improve slowly, as the oil sector recovers.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▼ ▬Lease Rates ▼ ▬New Supply ▲ ▲


0.0

5.0

10.0

15.0


7.8

11.913.7

12.513.8

8.59.1

11.110.5

11.6

%


Calgary Retail National Retail


$0

$5

$10

$15

$20

$25

$30

$35

-6.0-4.0-2.00.02.04.06.08.0

10.012.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsCalgary Historical & Forecast Aggregates



$329

$251

$585

$404

$621

$796

$657

$519

$239

$441

$733

$243

$401

$276

$155

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




CALGARY MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET SOFTNESS HELD FIRM Calgary’s multi-suite residential rental sector continued to suffer the effects of the energy sector and regional economic slumps. Demand for rental accommodation remained markedly weaker than levels witnessed during the previous economic peak. Fewer migrants have come to the area in search of employment opportunities, which has also eroded rental demand. Rising unemployment levels will have a negative impact on rental demand. Weaker demand patterns resulted in upward pressure on vacancy. The CMHC reported a 25-year record-high vacancy of 7.0%, in its fall 2016 survey. The rate was 200 bps higher year over year. Excess vacancy was also a function of increased supply. Incomes fell for many owners, given excess vacancy and downward pressure on effective rents for new tenants and those coming up for renewal. Increasingly landlords were forced to offer free rent and other incentives to entice prospective tenants. In addition to an increase in incentives offered, asking rents also declined. The average two-bedroom monthly rent was set to fall from $1,332 to $1,270 year over year as of October of 2016. With few signs of a sharp rebound in the regional energy sector and economy, conditions in Calgary’s multi-suite residential rental market were expected to continue to remain weak into 2017.

INVESTMENT MARKET EXHIBITED RESILIENCE A measure of resilience was observed in Calgary’s multi-suite residential rental market investment performance recently despite a generally weak fundamental backdrop. Generally positive demand characteristics were observed, as a range of investment groups continued to exhibit strong interest in assets brought to market. Groups with positions in the market looked for opportunities to expand their portfolios. Others attempted to gain a foothold in a market that continued to provide attractive yields. The confidence shown by most groups was rooted in their belief in the long-term strength of the sector. In particular its ability to generate stable income performance was a significant draw. Evidence of the market’s resilience was contained in MSCI Index data. At total return of 1.5% was recorded for the 12 months ending on September 30, 2016. Despite recent rental market weakness income growth accounted for the modestly positive result. Property values continued to decline, a trend that began in the second half of 2015. In the open market, there was evidence of cap rate decompression for higher risk assets, while prime asset yields held firm for the most part. A further indication of the market’s resilience was its liquidity pattern. Transaction volume totaled $214.6 million over the first three quarters of 2016, virtually matching the total for all of 2015. This pace was the strongest dating back to the 2012 peak. Activity was another indication of the market’s resilience exhibited over the recent past.

MINIMAL IMPROVEMENT EXPECTED FOR 2017Progress in Calgary’s multi-suite residential sector will be fairly limited over the near term. Demand for rental accommodation will continue to disappoint until the regions energy sector stabilizes. The resulting economic stabilization will be slow and gradual. Therefore, an improvement in rental demand will take time. The typical drivers of demand, migration and youth employment, will gradually improve, but not enough to have a material impact on the market until the second half of 2017. Consequently, vacancy will hold close to the 25-year high of 7.0% for the near term. Despite elevated vacancy and a soft demand cycle, some landlords will continue to generate income growth. To some extent this will offset declines in property value. Prime asset values will hold fairly firm, while downward pressure persists for higher risk assets. Investment demand will be stable and healthy. As a result, vendors will generally be able to achieve pricing objectives. In short, conditions in this market will improve slightly over the near term, with little change in overall performance themes.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▬ ▬Lease Rates ▼ ▼ New Supply ▲ ▬


0.0

5.0

10.0

15.0


1.5

8.510.4 10.7

8.5 8.110.1 9.4%


Calgary Multi-Suite National Multi-Suite


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

1.3 1.2

2.9

4.4 4.3

1.6

0.5

1.52.1

5.3

3.6

1.91.3 1.0 1.4

5.3

8.07.5

%

Average Rental VacancyApartment Structures Of Three Units And Over

Source: CMHC

$129

$203

$139

$198

$479

$556

$269

$90$112 $126

$486

$184 $202 $216

$141

$0

$100

$200

$300

$400

$500

$600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




LABOUR MARKET PROGRESS STALLEDEdmonton’s labour market progression came to a grinding halt in 2016 following an extended run of growth. For the most part, forecasts indicated little change in total employment was anticipated this year. The CMHC August 2016 forecast called for “little change” in employment levels in the Edmonton CMA during 2016. The CBOC forecast a 0.6% increase over the same period. Regardless of the eventual outcome, it was clear that the region’s five-year run of material growth had come to an end. To no one’s surprise, the end of this successful run was rooted in the prolonged downward trend for oil prices that began in the second half of 2014. One of the few labour market bright spots in the past year has been the public sector, which partially offset some of the losses. Following the trend in Calgary, Edmonton’s unemployment rose beyond the national average before 2016 came to a close.

WEAK JOB MARKET ERODED HOUSING DEMANDConsistently weak labour market performance over the past 12 to 24 months contributed to a marked reduction in housing demand. A weakened labour market and reduced migration to the area were a negative influence on demand for new housing. As unsold inventories steadily built over 2016, builder confidence declined. As a result, construction starts were projected to dip sharply this year. The CMHC indicated starts would rest between 8,500 and 9,500 over 2016, down from the 17,050 peak of the previous year. Over the first eight months of 2016, MLS sales were down 8.0% year over year. Rental demand also took a turn for the worse, with a steady rise in vacancy and incentives offered to potential renters. On balance, demand for housing in the Edmonton CMA softened, along with the region’s labour market, over 2016.

SOME LEVEL OF STABILIZATION TO EMERGEA measure of stabilization is forecast for Edmonton’s economy in the coming year, driven in large part by recovery in the region’s oil sector. Drilling activity and investment will support increased economic output. In 2017, the Edmonton CMA will generate expansion of roughly 2.0% according to the CBOC autumn forecast. Despite the brighter outlook, employment levels will fall slightly, and retail sales growth will slow to 0.8%. By 2018 the economic outlook will strengthen, with 2018 GDP forecast to increase 2.7% for the CMA. In turn, housing market will also firm. Migration patterns will improve in support of increased rental demand. Resale housing demand will recover slowly but not until late 2017 or early 2018. By late 2018, pricing is also expected to firm. In keeping with the outlook for Calgary, economic recovery will be determined by the strength and timing of stabilization in the regional oil and gas sectors.

EDMONTON ECONOMIC REPORT

ECONOMIC SNAPSHOT

Low oil prices continued to have a negative impact on Edmonton’s economy over 2016, resulting in a forecast second consecutive year of reduced output. The CMA’s primary and utilities and manufacturing sectors suffered the most, with construction demand also hampering economic activity. Oil companies laid off workers as investment and drilling activity stalled. Construction activity was reduced significantly due to a slowdown in both residential and non-residential projects. Consumer confidence levels fell, which eroded consumption. The region’s housing market also softened in 2016.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

100

200

300

400

500

600

700

800

900

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

2

4

6

8

10

12

14

16

18

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-10-50510152025303540

-1.0-0.50.00.51.01.52.02.53.03.54.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

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2009

2010

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2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





EDMONTON OFFICE REPORT

LEASING CHARACTERISTICS CONTINUED TO DETERIORATEA consistently weak economic performance since the latter stages of 2014 has had negative repercussions for Edmonton’s office leasing market. For much of the past year, occupancy levels have steadily fallen, resting at 85.5% as of the end of the third quarter of 2016. An excess of sublease availability has added to the supply-side challenge for the market’s landlords with vacant space to lease. Newly constructed buildings leased up at rents higher than those achieved in the existing inventory. In many cases, tenants relocated to smaller spaces in newer towers from older buildings. As a result, market occupancy fell by 240 bps overall year over year, as of the third quarter of 2016. Over the same period downtown and suburban occupancy fell by 280 bps and 190 bps to 86.7% and 83.6%, respectively. As occupancy rates fell average rents followed suit. The relatively few tenants in the market were able to secure space at discounted rates with increased incentives. At the same time, energy services companies looked to reduce costs by reducing office space usage. While oil prices have increased from the February 2016 low of US$30.62 per barrel, revenues continue to hit the bottom lines of many office users in Edmonton. For this reason, office leasing fundamentals and the broader economy are expected to continue to face significant headwinds for the balance of the year.

ACTIVITY SLOWED DUE TO LACK OF PRICING CLARITY Closing activity in Edmonton’s office property investment market over the past year fell short of expectations, given a lack of clarity with regard to asset valuations. The region’s oil sector correction and subsequent economic slowdown were a catalyst for the low rate of transaction closing activity. Investors and vendors alike waited for a clear indication of how much property values would decline during the current phase of the cycle before making decisions on whether to buy or sell. Properties tracked in the MSCI Index posted an average cumulative decline in capital value of 7.3% for the year ending on September 30, 2016, following 8.6% in the previous year. As a result, vendors and purchasers struggled to pinpoint property values at various times during 2016. Investors remained confident in the market’s long-term performance outlook. However, they looked for insight as to when the right time would be to invest in order to maximize results. To date, income performance has been fairly stable. However, the continued softening of leasing market fundamentals pointed to the potential for further value erosion. Until values stabilize, investment closing activity will remain below levels recorded prior to the onset of the downturn in the region’s oil sector and broader economy.

RECENT SECTOR TRENDS WILL HOLD STEADY OVER NEAR-TERMNear-term trends in Edmonton’s office sector will generally mirror those that were observed over the past year, barring an abrupt change in economic performance. While not as hard hit as Calgary, Edmonton’s economy will continue to stumble over the balance of 2016. In its spring forecast, the CBOC indicated the Edmonton CMA’s economy would contract by 0.6% during 2016. Ongoing weakness in the region’s energy sector will once again be the driver of this underperformance, which will continue to have a negative impact on office leasing fundamentals. Leasing market progress will be hampered by ongoing demand softness, resulting in falling occupancy levels and downward pressure on rents. Competition for tenants will rise with the completion of new construction projects. At the three quarter mark of 2016, more than 2.0 million square feet of space was under construction across the market. This will push occupancy lower market wide. Landlords will be forced to try to minimize losses in income and downward pressure on asset value. The erosion of market fundamentals over the near term will be in line with the performance of Edmonton’s office sector of the recent past.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▬ ▬Lease Rates ▼ ▼New Supply ▲ ▬


-5.0

0.0

5.0

10.0

15.0


-0.41.3

6.8

11.013.5

6.06.7

9.7 9.7 10.1%


Edmonton Office National Office


-600-400-2000200400600800100012001400

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Thou

sand

s of

Squ

are

Feet

%

Office Demand & Supply Edmonton Historical & Forecast Aggregates



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Edmonton Historical & Forecast Aggregates




EDMONTON INDUSTRIAL REPORT

LEASING MARKET SOFTENED AFTER PERIOD OF STRENGTHEdmonton’s industrial leasing market softened markedly over the past year, extending a trend that emerged in the latter half of 2014. Demand for industrial space remained below levels reported previously as a result of the regional economic slowdown. Oil sector related demand in particular continued to disappoint. The demand slump spread to most other sectors of Edmonton’s economy. Initially, the correction in the commodities market reduced the volume of industrial space requirements. More recently, demand was ratcheted down further resulting in even lower levels of demand. Sharply reduced demand has had a materially negative impact on most other leasing market fundamentals recently. The market’s availability rate stood at 8.8% as of the third quarter of 2016, up 170 bps year over year. The rate is also up 440 bps from the beginning of the market correction. The combination of rising availability levels and weakened demand resulted in downward pressure on rents. At the same time, the market’s construction pipeline was reduced substantially, following a three-year peak period. In summary, Edmonton’s industrial leasing performance of the recent past was reflective of the corrective phase of the current cycle, a trend that was expected to continue into 2017.

DEMAND STABILIZED AS PERFORMANCE METRICS WEAKENED Core industrial assets continued to capture the imagination of a range of real estate investors over the past year despite measurably weaker investment performance characteristics. Demand for functional properties with solid tenant rosters outpaced the supply of assets offered for sale. This imbalance resulted in relatively few major transactions being completed in 2015 and much of 2016. The strength of the market’s demand profile over the past few years was somewhat surprising, given the downward path of performance characteristics. An underwhelming economic growth rate over the past couple of years has eroded leasing market conditions. During this period, downward pressure on rents has reduced income performance for owners in this market, who have been forced to contend with excess vacancy. The downward income trend was reflected in MSCI Index performance data. On average, income returns trended gradually lower over an 18-month period ending at the three quarter mark of 2016. The market’s capital performance for the same period also softened. A cumulative capital loss of 3.2% was tallied. However, despite the disappointing investment and leasing performances of the recent past, investment demand remained somewhat surprisingly robust.

TRANSITIONAL PHASE OF CYCLE TO PERSISTEdmonton’s industrial property market will continue to transition over the near term as the sector adjusts to low levels of economic output fueled by the ongoing slump in the energy sector. In the investment market, demand for core assets will stabilize further, given a relative abundance of inexpensive capital available for investment. Once again, supply will fall short of demand. Performance metrics will disappoint as values and the rate of income growth slowly decline. Coincidentally, the continued erosion of leasing fundamentals, including rents, will also hamper performance over the balance of 2016 and perhaps longer. Rental market occupancy is forecast to steadily fall, which will affect the bottom lines of owners in this market. Rising vacancy will prove to be advantageous to tenants in the market for space as the volume of available options increases. The market’s development cycle will ease, extending the trend that emerged over 2015 and much of 2016. The market’s pipeline of projects will remain below par. Landlords will look to retain tenants as leases come up for expiry by offering lower rents and incentives. Some will be forced to reckon with excess vacancy as will the broader market during this period of transition that should last well into next year.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▬ ▬Lease Rates ▼ ▼ New Supply ▼ ▲


0.0

5.0

10.0

15.0


3.0

7.1

10.0 10.311.2

6.77.3 8.7 7.4

9.6%


Edmonton Industrial National Industrial


-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Edmonton Historical & Forecast Aggregates


0.01.02.03.04.05.06.07.08.09.010.0

0

2

4

6

8

10

12

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Edmonton Historical & Forecast Aggregates



EDMONTON RETAIL REPORT

AREAS OF LEASING STRENGTH AND WEAKNESS OBSERVEDLeasing market conditions in retail sector over the recent past included areas of strength and weakness. On the one hand, there was a plethora of new store openings and announcements made throughout 2016. Many of these involved luxury, discount and food retailers. Recent announcements included two new Saks Off 5th stores at South Edmonton Common and Skyview Power Centre, Whole Foods at South Park Centre, Chachi’s Chipotle and Panda Express at South Edmonton Common, Simons at the Premium Outlet Collection near the airport, JOEY and State & Main in the downtown area. Optimism surrounding new stores in this market coincided with upward vacancy pressure due to several store closings over the recent past. The most noteworthy of these were vacancies left behind by the closures of Future Shop and Target. Development activity reported in this market over the recent past was indicative of healthy leasing performance. Major projects under construction included Currents of Windermere, Manning Town Centre and Village, Erin Ridge, Premium Outlets Edmonton and Albany Market. In addition, four of the city’s largest enclosed malls were set to undergo renovations. Despite this activity, there were other signs of weakness reported recently in this market. The moderation of the city’s retail spending patterns over the past year had negative impacts for some retailers. Mid-market stores were typically the hardest hit. After a prolonged period of expansion, bar and restaurant spending levelled. In short, both positives and negatives were reported in this market over the recent past, in keeping with the broader sector trend.

SOLID PERFORMANCE REPORTED AS CYCLE MATURED Edmonton’s retail sector registered another period of solid investment performance over much of 2016 as the mature phase of the cycle unfolded. Returns trended lower, but remained fairly attractive. A modest total average return of 3.0% was posted in the MSCI Index over the 12 months ending on September 30, 2016. The income-driven result represented a continuation of a downward return trend that has been in place since the 2012 peak. While income growth was relatively stable, it was clear the capital cycle had matured. The fairly positive overall performance was tallied against a backdrop of generally positive investment demand characteristics. In general, investors exhibited ongoing confidence in this market with their continued quest for secure long-term yields. The resulting demand depth was a factor in fairly strong capital flow patterns. Over the first three quarters of 2016, a total of $358.4 million in retail assets was sold in this market. The total surpassed the sales volume reported for all of 2015 and represented the strongest showing since the 2012 peak. This activity level indicated that more often than not vendors and purchasers were able to come to terms on pricing. Solid capital flows over much of 2016 was in line with the broader market performance.

PROGRESS WILL CONTINUE OVER NEAR TERMContinued progression will be the overriding theme in Edmonton’s retail sector over the near term. Edmonton’s economy is forecast to improve markedly in 2017, which bodes well for its retail sector. The CBOC forecast calls for economic output to increase by 2.0% during 2017, following a second consecutive annual contraction in 2016. The resulting labour market progress will boost spending. For retailers this should boost sales and bottom lines. In turn, demand for retail space should also improve. Leasing performance should follow suit, which will support income growth. Leasing market progress will add to the justification for investment. Even if the local economy continues to falter, investment demand will continue to outdistance the supply of assets offered for sale as was evidenced in 2016. Investors believe in the market’s long-term outlook. Therefore, prime assets will be in high demand regardless of near-term trends. In short, we can expect some degree of progress over the near term.

TRENDING STATISTICS


Vacancy Rate ▼ ▲Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▼ ▲


0.0

5.0

10.0

15.0


4.8

8.5

11.4 11.712.7

8.59.1

11.110.5

11.6

%


Edmonton Retail National Retail


$0

$5

$10

$15

$20

$25

$30

$35

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsEdmonton Historical & Forecast Aggregates



$215$257

$136

$229

$124

$307

$217

$142$176

$400

$570

$369

$262

$98 $103

$0

$100

$200

$300

$400

$500

$600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




EDMONTON MULTI-SUITE RESIDENTIAL REPORT

MARKET OCCUPANCY CONTINUED TO DECLINEThe combination of demand moderation and new supply eroded rental market fundamentals in Edmonton’s multi-suite rental residential market. The cause of the demand moderation was twofold. First, a reduced number of migrants arrived in the CMA looking for employment. Labour market conditions had weakened significantly of late. Second, household formation volume slowed significantly, as fewer young workers were able to secure employment. The persistent slump in the region’s energy sector and broader economy were the catalysts for the moderation in rental demand overall. The markedly weaker demand cycle over the past year resulted in the erosion of rental market fundamentals. Occupancy rates have fallen significantly of late, from 95.8% in October of 2015 to a 10-year low of 92.9% as of October of 2016. The result was markedly lower than what was forecast in the spring of this year. Weaker occupancy patterns were exacerbated by the delivery of newly built units. There were 3,162 new rental units added to inventory between July 2015 and June 2016, with an additional 2,194 units under construction as of August of 2016. In combination, increased supply and a softer demand cycle drove effective rents lower. Incentives offered by the market’s landlords increased, which compromised their bottom lines. As 2016 came to a close, it was clear that Edmonton’s rental market had gone through a period of demand and supply softening, punctuated a downward occupancy trend.

SOLID INVESTMENT CHARACTERISTICS WERE EXHIBITED Generally positive investment market characteristics were reported in Edmonton’s multi-suite residential rental sector over the recent past, in keeping with the national trend. Demand for rental sector assets remained relatively steady, particularly for concrete high-rise assets. Newly built low-rise properties were also highly sought after, given their popularity with renters. Newer and/or concrete high rises tended to command higher rents and offer superior amenities. Investment demand patterns mirrored the national average. For the most part demand bested the availability of assets for purchase. As a result, values held close to the peak. Investment performance of the past year was also fairly positive. MSCI-tracked assets posted an annual average total return of 2.1% for the year ending on September 30, 2016. This investment performance was entirely income-driven, as the value component continued to gradually slide. Increased transaction closing volume was another element of what has been a period of positive investment market characteristics. Despite the modest return, transaction activity remained healthy. A total of $309.6 million in sales were completed in the first three quarters of 2016 according CBRE figures. This represented the strongest rate of capital flow dating back to the 2012 peak. Increased activity levels punctuated what was a period of largely healthy investment market trends over the recent past.

REPEAT OF RECENT PERFORMANCE A LIKELY SCENARIOTrends reported in Edmonton’s multi-suite residential rental market over the past couple of years will hold firm for the balance of this year and during 2017. Rental market conditions will remain relatively weak as new supply drives vacancy higher. While the new supply cycle will ease, the overhang of activity of the past couple of years will continue to support record-high vacancy. Owners contending with increased vacancy will continue to offer incentives to potential tenants, which will erode income. However, the rate of erosion will be fairly modest. Therefore, investment performance will be primarily income-driven again over the near term. With little change in sector trends expected over the near term, investors will continue to scour the market for acquisitions that provide satisfactory yields during periods of economic weakness. As such, investment activity will remain healthy assuming there is sufficient product supply. In short, the sector will perform much as it has over the recent past over the near term.

TRENDING STATISTICS


Vacancy Rate ▲ ▲Net Absorption ▼ ▼Lease Rates ▲ ▲ New Supply ▲ ▼


0.0

5.0

10.0

15.0


2.1

6.8

10.8 10.8

8.5 8.110.1 9.4%


Edmonton Multi-Suite National Multi-Suite


$175$204

$149 $147

$209

$659

$202

$139 $160 $157$122

$318$270

$399

$262

$0

$100

$200

$300

$400

$500

$600

$700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions



0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

1.40.9

1.7

3.4

5.3

4.5

1.21.5

2.4

4.5 4.2

3.3

1.71.4 1.7

4.2

7.0 7.0

%


Source: CMHC


ECONOMIC SNAPSHOT

EVIDENCE SUPPORTED LABOUR MARKET PEAK There was a substantial body of evidence to support a peak for the Vancouver CMA labour market in 2016. In the final few months of the year, total employment growth looked to be on pace for a 22-year high of 3.9% according to CBOC figures. Much of the recent growth was in full-time positions, with 77,300 added in the first eight months of the year alone. Over half of this advance was tallied in the wholesale and retail trade and information, culture and recreation sectors. Strong growth was also reported in the manufacturing, health care, social assistance and construction segments of the regional economy. During 2016, the unemployment rate for the CMA was expected to fall by a modest 20 bps to 5.7%, with the entry of workers into the labour force buffering against a stronger downward trend.

HOUSING STARTS ACCELERATED Demand-supply imbalance in Vancouver’s resale housing market was a factor in the sharp increase in housing starts in the first half of 2016. The CBOC forecast a record total of housing starts over the full year of close to 28,400. The increased propensity on the part of sector builders to build high-density projects led to a focus on multi-unit activity. To some extent, demand for new homes was a byproduct of job and population growth. As well, the price gap between new construction and resale homes had narrowed. Demand was also bolstered by the dwindling of the number of newly built unsold homes. Starts were projected to moderate next year and in 2018 but remain above the medium-term average.

ECONOMY TO FORGE AHEAD DESPITE GROWTH MODERATION Vancouver will remain an economic growth leader over the next couple of years despite more moderate advances. After a rock-solid performance this year, economic growth of 2.8% and 3.1% were forecast during 2017 and 2018, respectively. Similar progress is also forecast for 2019 and 2020. Housing construction will slow over the forecast period but remain well above the preceding five-year annual average. Employment growth will also moderate, while continuing to pull the unemployment rate progressively lower. By the end of 2017, the 5.0% barrier may be crossed. Non-residential construction activity will continue to add to total economic output, with the highest-profile project being the $1.8 billion International Airport expansion. The bright economic and employment outlook will drive solid retail consumption characteristics, with a more than 3.0% average increase in sales forecast over 2017 and 2018. The CMA’s manufacturing sector will continue to improve as a low Canadian currency value boosts output by 3.2% in 2017. The services sector will also register continued advances over the forecast period. In short, after a record year, Vancouver’s economy will post further advancement over the near term.

The Vancouver CMA economy outperformed most other major Canadian urban centres in 2016 with annual growth approaching the 4.0% mark. This translated into equally strong advances in total employment across most sectors. The regional housing market began to cool as 2016 neared its end, following a prolonged period of price inflation rooted in a significant level of supply-demand imbalance. Federal and provincial measures were enacted to cool the market, including a foreign buyer tax and stricter borrowing requirements.

VANCOUVER ECONOMIC REPORT

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0

5

10

15

20

25

30

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-20

-10

0

10

20

30

40

50

60

70

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





VANCOUVER OFFICE REPORT

LEASING PERFORMANCE SUPPORTED ONGOING BALANCE Vancouver’s office leasing performance of the recent past supported largely balanced conditions. Office space demand was broadly positive through all of 2015 and much of 2016. The most important contributor to this trend and to the absorption of space during this time period was the region’s technology sector. A high degree of confidence in the region’s economic growth rate was also a key determining factor in the market’s demand cycle of late. Private businesses looked to occupy premium-quality space in order to attract and retain qualified employees. Demand for state-of-the-art premises at public transit hubs was often met by recently built towers. In 2015, just shy of 1.8 million square feet of new supply was completed downtown, with a further 755,000 square feet under construction as of the end of the third quarter of 2016. In the suburbs, 171,650 square feet of new space was built in 2015, with another 907,525 square feet under development as of the third quarter of 2016. Against a backdrop of positive demand patterns and a healthy construction cycle, rents steadily increased. Overall, the market remained fairly balanced through to the three-quarter mark of 2016.

INVESTMENT MARKET OUTPERFORMEDVancouver’s office sector exhibited some of the strongest investment market characteristics in the country over the recent past. From an investment performance standpoint, the sector’s returns were the strongest of all asset classes and regions tracked in the MSCI Index. A total annual average return of 15.2% was registered for the 12-month period ending on September 30, 2016. The result was 310 bps higher than the second-place finisher, Victoria. The outperformance was driven by significant capital appreciation and stable and healthy income growth. Strong leasing market fundamentals supported the strength of the income performance. At the same time, cap rates continued to compress. Demand patterns, along with those of Toronto, were the strongest of Canada’s major markets during 2016. While local and national groups exhibited confidence in investing in this market, foreign groups also made their presence known. The 2016 acquisition of four phases of the Bentall Centre for over $1 billion by China’s Anbang Insurance Group was a prime example of offshore interest in Vancouver’s office sector. The overall depth of the buyer pool looking to acquire assets in Vancouver’s office sector was a reflection of the market’s outperformance exhibited over the recent past.

PERFORMANCE-DRIVER FORECAST BODES WELLVancouver’s office sector demand-driver forecast is indicative of consistently positive performance trends over the near term. The local economy is projected to expand by an annual average of 3.1% over 2017 through to 2020. This follows a robust 3.2% forecast for this year. The resulting expansion in business activity will support demand for office space. The strength of the demand trend over the forecast period will coincide with the delivery of a number of new office developments. Therefore, tenants will be able to source high-quality space for their business operations. Leasing market conditions will remain balanced over the near term as rents slowly rise. The technology sector will once again be front and centre in the office market in driving demand. The broadly positive leasing forecast will help support investment performance. The health of the economic backdrop will draw investors to this market, which should support peak values. With a slow growth forecast for the national economy, low interest rates will continue to favour investment activity. Foreign buyers will continue to try to capitalize on currency trends and look to Vancouver’s office sector as a secure place to park capital. In short, another period of broad strength is forecast for this market over near term, given a positive performance-driver outlook.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▼ ▬


0.0

5.0

10.0

15.0

20.0


15.2

10.0 11.012.2 11.5

6.06.7

9.7 9.7 10.1

%


Vancouver Office National Office


0.02.04.06.08.010.012.014.016.018.020.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Office Rent & Vacancy Vancouver Historical & Forecast Aggregates



-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Vancouver Historical & Forecast Aggregates




VANCOUVER INDUSTRIAL REPORT

EXPANSION PHASE OF CYCLE CONTINUEDVancouver’s leasing performance of the recent past was in keeping with the growth phase of the current cycle. Economic expansion supported space demand, as tenants and owner-occupiers increased their footprints. A significant portion of this demand was rooted in the logistics and warehouse sectors, which has been the case dating back several years. In fact, demand has been generally quite robust for several years. The strength of the demand backdrop resulted in a significant tightening trend in this market recently. By the end of the third quarter of 2016, availability hit a record low dating back to early 2008. At 3.8%, availability had dipped to its lowest level dating back to early 2008. As vacant space options became increasingly scarce, rents steadily increased to reach a peak for the cycle. Increasingly tight conditions and rising rents were keys to the market’s construction cycle of the past couple of years. Vancouver’s built inventory of industrial space has increased by an average of 2.2 million square feet annually between 2010 and 2015. During the first three quarters of 2016, the growth cycle continued when a further 2.8 million square feet of new supply added to inventory, with another 4.3 million square feet under construction. This activity took place despite a shortage of zoned land. The strength of the development cycle in 2016 reflected the market’s underlying performance theme of the past few years.

INVESTMENT MARKET MOMENTUM OBSERVED Vancouver’s industrial sector generated another period of investment market health over the past year, prolonging the trend of the past few years. The market continued to generate attractive investment performance characteristics. The MSCI-Indexed assets posted an annual average total return of 11.6% for the 12-month period ending on September 30, 2016. This result marked just the second double-digit return dating back to 2012. The positive performance cycle has been a fixture dating back to 2010. Historically, there has been a disconnect between market rents and value, which has widened with the compression of cap rates of late. The market’s record of healthy investment performance was a supporter of investor confidence in this market recently and over the medium term. A range of private capital, pensions and institutional investors scoured the market for investment opportunities. Product availability fell short of demand, a common theme across the broader Canadian investment market. The supply shortfall ensured bidding on available assets was aggressive, which resulted in moderate cap rate compression and peak values for the cycle. Upward pressure on rents in what was a strong leasing environment pushed values higher. In summary, Vancouver’s industrial sector maintained its position of overall health over the past year, a trend that showed few signs of abatement in the near future.

EXTENSION OF GROWTH CYCLE A PROBABLE OUTCOMEThere is a fairly strong case to be made for the continuation of Vancouver’s industrial growth cycle over the next few years. The economic forecast calls for strong average annual growth of 3.1% from 2017 through to 2020 according to the CBOC forecast. This will follow a similarly robust expansion this year. In turn, this will drive demand for industrial space, particularly in the warehouse and distribution sectors. The film industry will also continue to be a demand contributor. Demand depth will promote continued supply tightness and upward rental rate pressure. Availability should hold below the 5.0% mark for the forecast period. Rents will continue to justify new development, with completion volume holding in the two-to-three-million-square-foot range. A healthy leasing outlook performance will provide a solid foundation for investment performance. Values may level off at the peak; however, income growth stability should support attractive returns. This outcome will attract investment capital to a market that continues to exhibit growth characteristics over the next few years.

TRENDING STATISTICS


Vacancy Rate ▼ ▬ Net Absorption ▬ ▬Lease Rates ▲ ▲ New Supply ▬ ▬


0.0

5.0

10.0

15.0


11.610.0 10.0

9.6

10.9

6.77.3 8.7

7.4

9.6%


Vancouver Industrial National Industrial


-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Vancouver Historical & Forecast Aggregates


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0123456789

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

2018

F

2019

F

2020

F

%

$/p.

s.f.

Industrial Rent & Vacancy Vancouver Historical & Forecast Aggregates



VANCOUVER RETAIL REPORT

LEASING MARKET FIRED ON ALL CYLINDERSVancouver’s retail sector posted the strongest leasing fundamentals in 2016, fuelled in large part by regional economic outperformance. British Columbia led the nation in economic expansion over the year, which pushed the province to the top of the retail spending ranking as well. The resulting labour market and income growth was a veritable magnet for retailers looking to expand. Luxury retailers in particular scanned the market for opportunity. These and other stores expanding or announcing future openings included American Eagle Outfitters, La Vie en Rose, Michael Kors, Kate Spade, Loblaws City Market, Bass Pro Shops, Burberry and Hermes. Robust demand patterns were a factor in the market’s development cycle of late. A number of developments were either under way or planned in order to meet expansion requirements of retailers looking to expand. Significant developments under way included Ivanhoe Cambridge’s Tsawwassen Mills, Tsawwassen Commons, Park Vancouver and an expanded section of the Village according to Cushman & Wakefield. Demand patterns also fuelled rental rate growth in prime locations across the GVA. In particular, the growing luxury node downtown and new developments were able to command the highest rents. Low vacancy was also a factor in upward rental pressure during the past year. Vacancy stood at 4.1% at mid-year 2016, up marginally year over year. This tightness was a reflection of the market’s overall strength over the past year.

INVESTMENT MARKET SOARED The GVA retail property sector registered an impressive investment market performance over the past year, extending the current phase of the cycle. Sector returns flirted with the recent peak, culminating in an annual average of 13.8% for properties tracked in the IPD Index for the year ending on September 30, 2016. Capital growth reached a high dating back to 2012, while income performance remained steady and strong. The capital growth cycle reflected broader market conditions. Demand outpaced the supply of available assets, which resulted in upward pressure on value. Prime assets with strong tenant rosters were the focus of this pressure. Investors exhibited high levels of interest in acquiring assets that were transit oriented and had redevelopment potential. A range of investment groups competed willingly for acquisitions over the recent past, which resulted in healthy capital flow characteristics. A total of $1.2 billion in retail assets traded hands over the first three quarters of 2016. A new record-high annual total was likely going to be set for 2016, surpassing the previous high of $1.3 billion in 2013. The overall strength of the market’s capital cycle was in keeping with what was an impressive investment market performance over the past year.

EXTENSION OF CURRENT PHASE OF CYCLE FORECASTConditions reported in the GVA retail sector over the past year will be repeated over the near term. The continued strength of the regional economic growth cycle will promote healthy retail spending, labour market conditions and income growth. As a result, retailers in this market will enjoy relatively high levels of productivity on average. Expansions will continue to characterize the leasing market, which will be focused in new developments and established main streets. Luxury, discount and restaurants will account for much of this growth, in keeping with the recent trend. Leasing conditions will remain tight, which will continue to support a healthy rental cycle. Leasing market advancement will factor into investment performance, which will hover close to that of the past few years. Investors will show high levels of interest in acquiring assets in this market. As a result, capital flows have the potential to hold at the current levels, assuming product availability holds firm as well. In summary, near-term GVA retail sector performance characteristics will mirror those of the past year.

TRENDING STATISTICS


Vacancy Rate ▬ ▲Net Absorption ▬ ▬Lease Rates ▲ ▬New Supply ▬ ▲


0.0

5.0

10.0

15.0


13.812.4 12.6

11.712.6

8.59.1

11.110.5

11.6

%


Vancouver Retail National Retail


$0$5$10$15$20$25$30$35$40$45

-1.0

1.0

3.0

5.0

7.0

9.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsVancouver Historical & Forecast Aggregates



$725

$604

$728$831

$688 $689

$468 $490

$930

$783 $793

$1,304

$886

$1,078$1,020

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions




VANCOUVER MULTI-SUITE RESIDENTIAL REPORT

RENTAL DEMAND OUTPACED SUPPLY Demand for rental accommodation outdistanced supply in Vancouver’s multi-suite residential rental sector over the past year. Rental demand was bolstered by both local and regional trends. Until recently, housing prices in the Vancouver area reached record highs, effectively pricing many families out of the market and forcing them to continue to rent. A strong local economy also boosted demand for rental accommodation. The resulting strength in the region’s job market, particularly for tourism-related businesses, generated increased interest in rental units. Migration from other western Canadian regions also supported rental demand patterns. Many people previously employed in the energy sector moved farther west looking for work. Healthy demand characteristics over the past year produced significant supply pressure in a market with limited capacity. In short, supply fell short of rental demand, which drove occupancy below the 99.0% mark for the first time since 2008. The resulting tightness pushed average rents higher in most submarkets. This proved to be a challenge for some renters, who were exposed to bidding wars in some cases. New construction offered little relief from the shortage of available suites. Developers tended to look beyond City of Vancouver borders to build, given shorter planning approval timelines. On balance, landlords held the upper hand in this market when establishing rents on suites as demand outpaced supply.

FEW SIGNS OF INVESTMENT MARKET SOFTNESS RECORDEDVancouver’s multi-suite residential sector registered continued investment market strength over the past year, prolonging the current phase of the cycle. Demand was broadly strong even as upward pricing pressure persisted. Domestic and foreign capital buyer groups have been the most active, in acquiring smaller assets over the past few years. However, larger institutional buyers continued to show their interest in trying to source product. The depth of the market’s demand profile was not all that surprising, given the sector’s recent and long-term record of performance. Properties tracked in the MSCI Index generated an annual average return of 14.0% for the year ending on September 30, 2016. This was the strongest annual result on record dating back to 2012. The capital growth cycle strengthened significantly as the rate of income growth edged higher year over year. Attractive market returns coincided with healthy liquidity levels over the recent past. In the first three quarters of 2016 alone, $993.1 million in transaction volume was posted. This pace of activity was on par with the previous year. This was further evidence of the demand-depth reported over the past year, which was in keeping with the overall market performance.

SECTOR WILL OUTPERFORM There is a substantial body of evidence to suggest that Vancouver’s multi-suite residential rental market will outperform over the next couple of years. The CMA’s economy will continue to expand beyond the national average, esting the 3.0% mark this year through to 2020. As a result, the local job market will attract an above-average number of migrants. This demographic is known to rent upon arrival, thereby bolstering rental demand. In addition, a portion of renters will continue to be priced out of the sale market in support of stable occupancy levels. For at least the next two years, occupancy will remain close to the 99.0% mark. Tight conditions overall will drive rents higher and bolster income growth for owners. At the same time, strong fundamentals will attract investment in a market that continues to generate attractive returns. Therefore, upward pricing pressure is likely to persist, while cap rates continue to rest at all-time lows. Once again, demand will outpace the supply of assets available to acquire, which may reduce investment volume over the near term. However, outside of this, the market will remain vibrant and outperform over the next couple of years.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▲ ▬Lease Rates ▲ ▲ New Supply ▬ ▬


0.0

5.0

10.0

15.0


14.0

9.4 9.7 9.98.5

8.1

10.1

9.4%


Vancouver Multi-Suite National Multi-Suite


$406 $400$465

$597$689

$640

$289

$647

$414 $450

$815

$441$533

$1,231

$625

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Mill

ions



0.0

1.0

2.0

3.0

4.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

1.41.0

1.4

2.0

1.3 1.4

0.7 0.70.5

2.11.9

1.4

1.8 1.7

1.00.8

0.50.8

%


Source: CMHC


LABOUR MARKET PROGRESSION RECORDED Broadly positive labour market trends were reported this year, building on progress made in 2015. Employment growth of 1.7% was forecast by the CBOC for all of 2016, matching the 2015 advance. An even stronger performance was predicted by the CMHC, with employment growth pegged at 4.1% this year. The region’s services sector was expected to drive employment increases this year with key contributions from the wholesale and retail Trade and business services sectors. The goods sector was on pace for a 12.3% employment reduction, with the largest decline in the construction sector at 17.0%. Despite the loss, labour market conditions improved. During 2016, unemployment was forecast to decrease by 40 bps to 5.4%, returning to the 2014 level following a 40 bps increase last year. Labour market conditions are expected to continue to improve in the next year in a repeat of the 2016 trend.

HOUSING DEMAND SURPASSED SUPPLYHousing demand in the Victoria CMA surpassed the supply of available homes for purchase or rent this year, which created a position of material imbalance. Construction starts of between 2,500 and 2,700 units were forecast for 2016, which represented the potential for an increase of over 32.0% year over year. This surge came on the heels of a 50.0% jump in 2015. With household formation expected to peak, rental market conditions remained tight. The CMHC called for multi-suite purpose-built rental market vacancy to rest at just 0.7% by October of this year. This was virtually unchanged year over year. Tenants looking to rent this year were hard-pressed to source vacant units. Victoria’s resale market also exhibited imbalance over the past year. The result of this trend was continued price growth and a shorter time required to sell a home.

GOOD TIMES WILL CONTINUE TO ROLLVictoria’s near-term economic outlook is relatively stable and healthy and which will include a prolonged period of expansion. Economic output will rise by 2.4% in 2017 and 2.3% in 2018, just shy of the 2016 result. The region’s public sector will continue to rebound, in asserting itself as a key driver of expanded output. The wholesale and retail trade sector will once again lead the way in terms of growth in the services sector. Increased output will drive job growth, with employment expected to expand by 1.7% in 2017 and 2.1% in 2018. The resulting increase in consumer confidence will bolster consumption levels, with growth averaging 2.6% annually in 2017 and 2018. After a brief pause in 2017, housing starts will steadily rise over the forecast period. Public sector funded construction projects will also be a plus. In short, Victoria’s economic outlook is generally upbeat, driven in large part by increased spending on the part of the region’s public sector.

VICTORIA ECONOMIC REPORT

ECONOMIC SNAPSHOT

The Victoria CMA’s rate of economic expansion was expected to reach a nine-year high in 2016 dating back to 2007. Output was forecast to increase by 2.5% over the year, representing a substantially stronger rate than the national average of 1.3%. The CMA’s public sector austerity measures had hampered progress over the past few years. However the provincial government posted a surplus this year and began to increasing sending. The strengthening of the region’s economic growth keyed advances in employment and income. In turn, housing market activity and consumer spending patterns improved.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

%%




0

50

100

150

200

250

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%




-2

-1

0

1

2

3

4

5

6

7

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Thou

sand

s

%





VICTORIA OFFICE REPORT

LEASING MARKET TOOK A TURN FOR THE BETTERVictoria’s office leasing market looked to have taken a healthy forward step in the late stages of 2015 and the first half of 2016 after two years of relatively sluggish demand. The region’s private sector was the source of a healthier demand profile over this time period. In particular, the region’s technology sector has been a contributor to improved demand recently. Increased demand on the part of the private sector produced decidedly healthier space absorption patterns. Colliers International reported absorption of 101,979 square feet in the downtown and suburban submarkets combined year over year as of the end of the second quarter of 2016. The lion’s share of the absorption took place in the suburbs at 80,344 square feet, with 37,000 square feet at the newly completed Eagle Creek Village. The recent leasing activity uptick resulted in moderately tighter characteristics. Overall market occupancy rose by almost 60 bps year over year, holding at 91.0% at the end of the first half of 2016. This was the highest rate dating back to 2012. Both the downtown and suburban submarkets posted stronger occupancy levels, year over year. Increased occupancy led to a broader stabilization of rents after a period of downward pressure. In short, the region’s recent leasing market progression contrasted with the performance of the past two years.

HEALTHY INVESTMENT MARKET CONDITIONS WERE EVIDENT Generally positive investment market conditions continued to characterize Victoria’s office sector over the past year, a performance that included stable transaction closing activity. Investment demand remained stable and healthy over the past year as investors viewed the market’s performance outlook in a favourable light. Victoria’s economic and real estate market stability were attractions for investors. The healthy demand backdrop had a positive impact on transaction closing volume, with roughly $40 million in sales completed in the first half of 2016. During the same time period a year earlier, a total of $37.3 million in sales volume was recorded, indicating a fairly stable activity level. The combination of positive investment demand patterns and fairly limited product availability over the recent past pushed cap rates slightly lower. This was evidenced when buildings in prime locations with stable long-term income were brought to market. Recent examples included 1022 Government Street and the Rithet Building. In summary, Victoria’s office sector continued to generate broadly positive investment market characteristics over the recent past, a trend that will likely persist through the balance of this year and beyond.

PERFORMANCE-DRIVER OUTLOOK INDICATES STRENGTHENINGThe performance-driver forecast for the next few years is supportive of stronger office sector fundamentals over the forecast period. A firmer economic growth trend is predicted for the Victoria CMA over the next few years, which will boost space demand. The CBOC is forecasting GDP will expand by between 2.2% and 2.4% annually from 2016 through to and including 2020. Business sectors that have traditionally occupied office space will drive a significant portion of this expansion. The provincial government, a key tenant in this market, is expected to post a surplus over the next few years. Therefore, we anticipate solid demand trends in Victoria’s office leasing market over the forecast period. This bodes well for the next wave of new supply downtown in 2018, with the anticipated completion of Capital Park and 1515 Douglas. Moreover, recently built projects in the suburbs will also be met with healthy interest on the part of tenants. Overall, forecast leasing market strength over the next few years will support income growth for owners of prime assets, which will drive positive investment performance. In short, the forecast for Victoria’s office market looks bright over the next few years, which will benefit property owners and attract investors.

TRENDING STATISTICS


Vacancy Rate ▼ ▼ Net Absorption ▲ ▬Lease Rates ▬ ▬New Supply ▬ ▬


0.0

5.0

10.0

15.0

1-YEAR 3-YEAR

12.1

8.2

6.06.7

%


Victoria Office National Office


0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

7.68.6 8.7

5.9

4.0

2.92.4

4.5

9.18.3 8.1

8.89.6 9.5 9.0

%

Office VacancyTo Second Quarter - 2016


$14 $21

$58

$34 $41

$60

$32

$99

$55

$42

$59 $55

$95

$103

$104

$83

$20

$0

$20

$40

$60

$80

$100

$120

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

Mill

ions

Investment ActivityOffice Investment Volume to June 2016

Source: Colliers International; RCA


VICTORIA INDUSTRIAL REPORT

LEASING MARKET MOMENTUM EMERGEDIncreased momentum was the predominant theme in Victoria’s industrial leasing market in 2016, driven in large part by more robust economic growth. The most obvious manifestation of this momentum was increased occupancy. Occupancy rose to 95.1% by the end of the first half of 2016, following a 15-year low of 94.3% reported by Colliers International a year earlier. Occupancy increased in all submarkets over the past year except for Esquimalt. The stronger occupancy profile was the end result of what has been healthy leasing activity in the past year. In fairly short order, absorption turned positive to the tune of close to 100,000 square feet after a materially negative result of 66,468 square feet for the 12-month period ending at mid-year 2015. Expansion in the region’s residential, technology and tourism sectors, as well as a busy dockyards, were cited as drivers of increased absorption. In addition, the region’s manufacturers also accounted for a significant share of the recent increase in demand for industrial space. This growth was the byproduct of a healthier economic growth rate of late, with an industrial GDP growth rate of 3.1% in 2016. This outpaced the overall rate of expansion, at 2.3%. Overall, a stronger regional economy was the key to increased leasing market momentum during 2016.

POSITIVE INVESTMENT TRENDS REGISTERED The GVA’s industrial property market registered largely positive investment trends recently, in line with the broader sector performance. Transaction closing volume increased year over year, indicating investors were comfortable investing in this market at prevailing yields. A total of $45.9 million in sales volume was tallied for the year ending at the end of the first half of 2016. This was up from $37.8 million, or 21.4%, from the previous 12-month period. For the most part, transactions in the under $5.0 million price range were the most plentiful, in keeping with the long-term trend. Activity was driven by healthy demand from a variety of sources. Local, regional and national groups were all active to varying degrees. However, they were forced to compete with owner-users in an environment that was conducive to owning industrial property. Healthy demand produced a modicum of downward pressure on cap rates as value increased slightly. The value cycle was also positively affected by growth in rents as leasing conditions improved this year. Positive investment performance has been mostly income-based, which was also the case in most other markets across the country. This commonality was also the case for the period of positive investment market characteristics reported in this market over the past year.

MOMENTUM FORECAST FOR NEAR TERM The momentum reported in the GVA industrial sector in 2016 is expected to continue over the near term, driven once again by a healthier economic growth trend. In its spring 2016 forecast, the CBOC forecast called for real GDP to expand by 2.3% in 2016, followed by growth of 2.4% in each of 2017 and 2018. Previously, expansion failed to cross the 2.0% mark annually back to 2011. A portion of this activity will occur in the region’s warehousing and manufacturing sectors which have typically bolstered industrial space demand. A low Canadian dollar and shipyard activity will also stimulate industrial growth. Demand will continue to drive the market’s largely build-to-suit construction market and generate upward pressure on rents for newer and well-located functional space. The forecast health of the Victoria industrial leasing market will attract investors looking for above-average yields relative to the country’s major markets. However, competition from owner-users will make acquisitions fairly hard to come by. In summary, the outlook for Victoria’s industrial sector over the next few years is one of consistently positive performance.

TRENDING STATISTICS


Vacancy Rate ▼ ▬ Net Absorption ▲ ▬Lease Rates ▬ ▲ New Supply ▼ ▬


-100-50050100150200250300350400

75

80

85

90

95

100

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

Thou

sand

s of

Squ

are

Feet

%

Industrial Demand & Supply Victoria Historical Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)Source: Colliers International

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

7.1 7.1 7.3 7.3 7.47.6 7.7

8.08.3

8.6 8.68.9 9.0

9.2 9.2 9.2

Mill

ions

of S

quar

e Fe

et

Industrial InventoryTo Second Quarter - 2016


$3

$22

$13 $8

$27

$18 $14

$45

$24

$38

$44 $42

$13

$28

$50

$35

$20

$0

$10

$20

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

Mill

ions

Investment ActivityIndustrial Investment Volume to June 2016



VICTORIA RETAIL REPORT

LEASING FUNDAMENTALS IMPROVEDModerately stronger leasing fundamentals were observed in Victoria’s retail sector in 2016, which was a cause for optimism for some of the market’s owners. While vacancy levels remained elevated, there were signs of advancement. In the downtown area, for example, vacancies were slowly being absorbed. While much of this activity involved smaller tenants, the trend was in the right direction. Downtown vacancy ranged in the low teens at the midway mark of 2016, according to a Cushman & Wakefield report. However, a downward trend looked to have taken hold. Leasing activity outside of the downtown also showed signs of modest improvement. Vacancy levels were significantly lower, driven by activity in newer developments. Eagle Creek, for example, attracted more than its share of demand, given its proximity to Victoria’s General Hospital. In certain suburban nodes, vacant options became fairly limited as 2016 progressed. On the whole, moderately healthy leasing activity did little to materially affect rents. However, the recent uptick in space absorption was cause for optimism on the part of the market’s landlords.

INVESTORS VIEWED MARKET FAVOURABLY ONCE AGAINA range of national and local investors continued to search for opportunities in this market over the recent past. An attraction for many was the performance history of the market over the past several years. In keeping with the property market trend, returns have been attractive dating back to 2009. Most recently, properties included in the MSCI Index posted an annual average return of 8.7%, for the year ending on September 30, 2016. Over the same period, property values have steadily increased, following a period of stabilization over the previous 18 months. The market’s recent and long-term performance history remained a draw to this market for investors. Most looked to Victoria to achieve increased diversification. Many were forced to contend with a very limited supply of assets available for acquisition, which limited sales activity. Local groups have traditionally acquired smaller assets, whereas national groups have sought to acquire properties with larger price tags with national tenant rosters. In short, there was plenty of evidence to suggest investors viewed this market favourably over the recent past.

DEMAND-DRIVER FORECAST BODES WELLVictoria’s retail sector will be the beneficiary of an improved demand-driver forecast over the near term. The Victoria CMA economic growth profile is expected to strengthen over the next couple of years. Economic output will increase by an annual average of 2.3% between 2016 and 2018. This expansion is markedly healthier than the preceding three-year average of just shy of 1.0%. A more robust economy will be a catalyst for solid employment and income growth over the forecast period. In combination with a strong housing market, these will drive solid retail sales and retail trade and ho-using activity. Recovery in the public sector will also boost economic output and spending volume over the near term. The healthy demand-driver forecast will be a boon for the retail property market. Retail consumption growth will drive store revenues. In addition, the strength of the demand-driver forecast will result in expansion activity, both on the part of retailers in the market already and for new entries. The resulting demand improvement will build on the steady absorption of vacant space that took place in the second half of 2016. This trend will slowly drag vacancy rates lower, as the leasing market gradually tightens. Newly built space will continue to attract the most attention, which will eventually create upward pressure on rents. The demand-driver forecast is expected to support broadly positive investment market characteristics over the near term. Victoria’s retail sector will continue to be an attractive destination for the allocation of capital. A healthy demand-driver outlook will help many groups to justify placing capital in this market.

TRENDING STATISTICS


Vacancy Rate ▼ ▼Net Absorption ▬ ▬Lease Rates ▬ ▬New Supply ▬ ▬


0.0

5.0

10.0

15.0


8.76.8

8.6 8.9

11.2

8.59.1

11.110.5

11.6

%


Victoria Retail National Retail


$0

$1

$2

$3

$4

$5

$6

-2.0

0.0

2.0

4.0

6.0

8.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

2018

F20

19F

2020

F

Bill

ions

%

Retail ConditionsVictoria Historical & Forecast Aggregates



$35 $19

$60

$108

$155

$72 $61

$193

$62

$18

$252

$100

$32

$121

$101

$252

$14$0

$50

$100

$150

$200

$250

$300

$350

$400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

Mill

ions




VICTORIA MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET CONDITIONS FAVOURED LANDLORDSConditions in the Greater Victoria multi-suite residential rental market favoured its landlords over the past year. Occupancy remained tight, holding at 99.5% in October of 2016 having fallen by 10 bps year over year. For the most part landlords were able to achieve close to full occupancy. The lack of vacant options for prospective tenants in this market resulted in significant imbalance. Landlords were able to command higher rents during 2016, in keeping with the trend of the past few years. The average two-bedroom monthly rent in the Victoria CMA was $1,188.0 as of October of 2016 for the CMHC’s same sample of buildings. The average represented a 5.3% increase year over year. Growth was recorded across all unit size categories over the same period. This continued to rental growth cycle of the past few years. As a result, landlords continued to achieve healthy income growth assuming they were able to control expenses. Rents continued to hold at levels that justified new development. There were 855 multi-suite rental units under construction as of March of 2016, following a total of 1,218 over the previous three-year period. This willingness to invest in new supply was a byproduct of market conditions that had favoured owners of multi-suite rental property over the recent past.

SOLID DEMAND CHARACTERISTICS REPORTEDSolid demand patterns were reported in Victoria’s multi-suite purpose-built residential sector over the recent past. Accelerated price growth in the homeownership market over the past few years ensured many first-time buyers continued to rent accommodation. Post-secondary students were also stable source of rental demand. International students in particular supported the positive rental demand environment. Population growth driven by migration was another source of rental demand in this market. In short, solid demand patterns were reported over the recent past, which created significant market imbalance.

INVESTMENT TRENDS WERE STABLE AND HEALTHYVictoria’s investment market performance of the recent past was mostly stable and positive. Despite limited product availability, demand patterns were generally healthy. In particular, local investors continued to look for opportunities in what remains a relatively small market. National and international groups also exhibited strong interest in a market that offered diversification and stable performance. Even with the fairly extreme shortage of properties for sale, transaction volume increased. Colliers International reported a total of $58.4 million in sales in the first six months of 2016. This was up sharply from the same period a year earlier when roughly $30.0 million in sales was completed. Much of the 2016 activity was focused in properties valued at less than $10.0 million. The increase in activity this year was somewhat misleading as it was the result of one sale. Dunsmuir House sold for $17.0 million. For the most part, off-market sales have made up the majority of sales in the region. In general, capital flows in this market have been fairly healthy and a reflection of the market’s overall stability.

LITTLE CHANGE FORECASTConditions observed in this market over the recent past will be repeated over the near term. Rental market imbalance will persist as demand outpaces supply. This will drive rental growth and solid investment performance for the market’s owners. Migration patterns will continue to support healthy rental demand. At the same time rents will reach new benchmark highs. Peak rents will allow developers to justify new construction projects. However the inventory of units will stabilize given the ongoing removal of properties from the market. In short, Victoria’s near-term rental market outlook will mirror that of the recent past.

TRENDING STATISTICS


Vacancy Rate ▬ ▬ Net Absorption ▬ ▬Lease Rates ▲ ▲ New Supply ▬ ▬


0.0

1.0

2.0

3.0

4.0

5.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

1.8

0.5

1.51.1

0.6 0.5 0.5 0.5 0.5

1.4 1.5

2.1

2.7 2.8

1.5

0.6 0.7 0.8

%


Source: CMHC

0

2,000

4,000

6,000

8,000

10,000

12,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F20

17F

Housing MarketPricing vs. Demand

Average Price - LS Housing Units Sold - RSSource: CREA (MLS®); CMHC

$6 $11 $23 $19 $14

$43

$93

$148

$50

$18

$100

$68

$88

$130

$130

$178

$43

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16YTD

Mill

ions



AcknowledgementsResearch Resources

In the course of compiling the statistical information and commenting on real estate markets, nationally, 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, Canada Newswire, Canadian Mortgage and Housing Corporation (CMHC), The Canadian Real Estate Association (CREA), CBRE Econometric Advisors, CBRE Limited, CIBC World Markets, 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, Insite-Altus Research, International Council of Shopping Centres (ICSC), 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, Scotia Capital, Statistics Canada, TD Economics, Toronto Star, Torto Wheaton Research, TSX Datalinx, United States Department of the Treasury, Urban Land Institute, York Communications

Morguard’s core strength is real estate ownership, management and investment. With a strategic focus on high-quality assets and diversification, we realize the potential of real estate through consistent investment performance. Our primary business strategy is to generate stable and increasing cash flow and asset value by improving the performance of the real estate investment portfolio and by acquiring and developing real estate properties in sound economic markets. We have developed a broad and efficient real estate platform in North America to manage our own real estate portfolio, as well as invest and manage real estate on behalf of institutional clients. Today, our owned and managed Real Estate Portfolio is valued at $16.3 billion.

To contact us, visit MORGUARD.COM.

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