2018 CANADIAN ECONOMIC OUTLOOK AND …Knowledge/...President’s Letter The 2018 Canadian Economic...

2018 CANADIAN

ECONOMIC OUTLOOK AND

MARKET FUNDAMENTALS 20TH ANNUAL EDITION

2018 Economic Outlook& Market Fundamentals

20th Annual Edition | January 2018

Copyright © 2018 by Morguard Investments Limited. All rights reserved.

Any request for reproduction of this research report should be directed to:

Keith ReadingDirector of [email protected]

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 2018 Canadian Economic Outlook & Market Fundamentals Report provides a comprehensive review and outlook for the major real estate product classes and major metropolitan areas across Canada. We trust you will find the Report’s contents useful as you plan your real estate investment and management strategies in the coming year. At Morguard we look to our Research team to provide insight and analyses of market, financial, demographic and economic trends in order to effectively manage the complexities of real estate through sector and market cycles to realize its full potential.

During 2017, a number of factors impacted Canada’s commercial real estate sector performance including stronger-than-expected economic growth, energy sector stabilization, new housing market policies implemented by various government levels, higher interest rates and retail sector uncertainty to name just a few. Against this backdrop commercial real estate returns remained fairly attractive driven in large part by income growth. Vancouver and Toronto continued as the most coveted of Canada’s metropolitan areas for investment.

Vigorous demand on the part of investors translated into record sector transaction sales volume. Commercial property sold at a record pace during much of 2017 with annual volume forecast to surpass the previous record high of $34.1 billion set last year. This demand pressure pushed property values to a new benchmark high in certain segments and regions of the market.

Looking ahead, the Canadian real estate investment outlook is generally positive. Sustained economic growth will continue to boost performance. Rental market stability will continue across much of the country in support of attractive returns. The flow of capital should continue to surpass the long-term average assuming a sufficient supply of properties brought to market. Investors will continue to focus on core markets, well-leased existing assets, new developments and transit-oriented opportunities. Unprecedented change will continue to unfold in the nation’s retail sector, a period that will be marked with the closure of Sears Canada stores and the evolution of spending patterns. Energy sector driven markets will gradually recover with sector investment slowly rising.

There are risks associated with our outlook, including economic, political, social, financial and demographic factors. We believe 2018 will be a year of advancement for Canada’s commercial real estate sector. As your real estate advisor, we look forward to helping create value and realizing the fullest potential of 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 2018 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

SOLID ECONOMIC GROWTH TREND REPORTED A healthy rate of expansion was forecast for Canada’s economy for 2017 fueled by a stronger-than-expected first half of the year. In its autumn forecast, the Conference Board of Canada (CBOC) called for real Gross Domestic Product (GDP) growth of 2.6% for the 12-month period. Previously, Canada’s economy had gone through a two-year period of slower growth with real GDP expanding by a modest 0.9% and 1.5% in 2015 and 2016, respectively. Economic activity surged during the first six months of 2017 resulting in annualized growth of 3.7% in the first quarter. The second quarter performance blew past most forecasts with annualized expansion of 4.5%. Consumer spending was a key contributor to the first-half surge as Canadian consumers appeared to ignore the fact that household debt levels reached an all-time high. Material gains in energy export volume and residential investment were also significant drivers of economic expansion. Household spending activity was supported by healthy job market advancement and moderately higher wages. Gains in household wealth and low borrowing rates were also supporters of increased spending. In short, a solid increase in economic output was forecast for Canada’s economy over 2017 after two years of slow growth.

LABOUR MARKET CONDITIONS IMPROVED SIGNIFICANTLY Markedly stronger labour market characteristics were observed during much of the past year. Total national employment was on pace to rise to a 10-year high by the end of 2017. Gains were tallied in each of the first 11 months of 2017 for a total of 344,000 new jobs. The nation’s services sector outperformed during the period while the broader goods-production sector also registered progress. The construction sector was one of the biggest contributors to the rise in total employment over the 11-month period. A large share of the 2017 job growth was comprised of full-time positions, which was an indication of the strength of the market. Job growth dragged the national unemployment rate down to its lowest level since 2008. The national average rested at 6.1% at the end of September. The rate was the lowest recorded in decades, aside from a brief period just before the Great Recession. The rate edged slightly higher later in the year as more people entered the labour force. The combination of tighter labour market conditions, low levels of economic slack and close to 10-year low unemployment resulted in modest upward pressure on wages. The national average hourly wage was up 2.2% by the end of September with much of the increase taking place during the summer months. Wage inflation was relatively modest in 2017 despite healthier labour market conditions overall.

HOUSEHOLD SPENDING BOOSTED ECONOMIC PERFORMANCE Household spending was a key driver of economic growth during 2017 in keeping with the trend of the past several years. Household spending was expected to increase by close to a 10-year high of 2.9% in 2017. The combination of a stronger labour market, low interest rates, the Canada Child Benefit and modest wage increases was the main drivers of the rise in consumption levels. In addition, increased disposable income and lower savings rates also supported spending growth. In some cases increased spending was justified in light of rising property values or the wealth effect. In the first quarter of 2017 alone spending spiked by an annualized 4.8% followed up by an impressive 4.6% boost in the second quarter. The strongest increases in household spending recorded in 2017 were tallied in the necessities-based categories including education, health care, rent, utilities and insurance. Discretionary spending categories also posted strong gains. The question that remained unanswered as 2017 came to a close was whether the household spending growth rate of the past year was sustainable.

NATIONAL ECONOMIC REPORT

HIGHLIGHTS

• Canada’s economy was expected to expand by a solid 2.6% in 2017, a forecast that was based upon a robust first half of the year and more modest advancement in the second half.

• There were 344,000 new jobs created in the first 11 months of 2017 which represented a 10-year annual high with gains recorded in both the services and goods production sectors of the economy.

• The Bank of Canada raised its target rate by 25 bps in each of July and September of 2017 and January 2018 in an attempt to cool an overheated economy and housing market.

• Higher prices supported modest recovery in Alberta’s oil sector during 2017 resulting in regional economic stabilization and increased optimism.

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).

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F

%

Canadian Real GDP Growth% Change

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

2018 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS 3

MONETARY POLICY TIGHTENEDTighter monetary policy was implemented by the Bank of Canada (BofC) recently following a prolonged period of looseness. The bank increased its target rate by 25 bps in each of July and September of 2017 and January of 2018. The moves were designed to address risks related to record-high levels of household debt, the potential for inflation above and beyond the bank’s target of 2.0% for 2018 and an overheated economy and housing market. The two successive increases effectively reversed the recent 50 bps decrease initiated to reduce the economic fallout from the energy sector downturn. The bank’s monetary policy tightening had a number of impacts during 2017. Initially market mortgage rates increased which was expected. At the same time the Canadian dollar increased in value resulting in a level of uncertainty for the export sector. In combination, higher interest rates and new government housing market policy appeared to have impacted housing market conditions. Housing market activity and price inflation slowed, particularly in Toronto’s white-hot resale market. At the same time, national economic growth began to slow. Consequently, the bank adopted was expected gradually increase rates during 2018 with up to three addition increases forecast.

HOUSING MARKET RISK ROSE Canadian housing market risk increased during 2017 given the continued emergence of sector headwinds. An area of increased risk was related to recently implemented government policies enacted to reduce the level of riskier mortgage debt and cool overheated markets in specific regions. Ideally a “soft landing” market scenario was the preferred outcome of the implementation of these policies. However, the potential for a significant housing market correction and adverse economic impacts increased. In October of 2016, tighter rules were implemented to try to reduce the volume of riskier mortgage debt and the financial vulnerability of Canadian households. The Canada Mortgage and Housing Corporation (CMHC) reported a significant drop in the issuance of insured mortgages in the first quarter of 2017 indicating government policy was having a positive impact. In addition, the overheated Vancouver and Toronto housing markets exhibited signs of cooling. At the same time, however, a lower rate of economic expansion began to emerge early in the second half of 2017. Looking ahead, rules for non-insured mortgages were set to tighten in January of 2018 resulting in additional housing market risk over the near term. This may generate additional sector headwinds and further increases in Canadian housing market risk over the near term.

MODEST OIL SECTOR RECOVERY EMERGED A modest recovery emerged in Canada’s oil sector during the first half of 2017 in support of a strong national economic growth trend. Production and crude oil exports surged through to the fall of 2017 a performance that was bolstered by increased output capacity. Drilling activity resumed through much of 2017 having come to a virtual halt in the previous year. Income and investment levels also improved. A modest recovery in oil prices was the catalyst for increased sector activity. In the fall of 2017 oil prices eclipsed the $50 per barrel mark with the strengthening of global demand. The Russia/Saudi Arabia agreement to limit production volume was also a boon for Canada’s oil sector. The recent sector improvement followed a period of close to three years during which capital budget cuts, bankruptcy, job losses, consolidation and sales of businesses were commonplace. Over the next 12 to 24 months the recovery is expected to slow, due to the negative impacts of rising costs. Capacity levels remained depressed as 2017 came to a close given low levels of investment over the past few years. Despite these challenges, the oil sector is forecast to continue to slowly recover.

NATIONAL ECONOMIC REPORT

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

%

Monetary ConditionsInflation Measured As % ∆ Over 1 Year Ago

Cdn Overnight Rate Target Inflation Rate Total CPI Core CPISource: Bank of Canada

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

-150

-100

-50

0

50

100

150

%

Thou

sand

s of

Job

s

Labour MarketMonth-Over-Month Trending

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

$25.0$27.5$30.0$32.5$35.0$37.5$40.0$42.5$45.0$47.5$50.0$52.5

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Mill

ions%

Retail SalesMonth-Over-Month Trending

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

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0

50

100

150

200

250

300

%

Thou

sand

s

Housing MarketMonthly Trends

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


INVESTMENT PERFORMANCE WAS GENERALLY HEALTHYCanada’s office sector exhibited generally healthy investment market characteristics over the recent past with the Greater Toronto Area (GTA) and the Greater Vancouver Area (GVA) outperforming. The sector registered an attractive annual average total return of 5.5% for the 12-month period ending September 30, 2017 in the MSCI Index. The GTA and GVA outperformed with returns of 9.2% and 11.3%, respectively, over the same time period. Of the remaining markets tracked, the Greater Calgary Area (GCA) and Greater Edmonton Area (GEA) posted negative results and the Greater Ottawa Area (GOA) and Greater Winnipeg Area (GWA) generated moderately positive results. In addition to relatively attractive overall investment performance, a healthy volume of capital into the office sector was also observed over the recent past. A total of $5.5 billion in transaction volume was recorded during the first half of 2017, which represented an all-time high. Once again the GVA and GTA outperformed with the two accounting for almost 70.0% of the total. Demand was robust across the broader sector, with the two markets generating the strongest interest. Investor confidence remained relatively high at prevailing yields particularly for newly built, transit-oriented developments and downtown assets. This pressure pushed sector values moderately higher in most regions, which was in keeping with the broader health of the sector.

LEASING MARKET STRENGTH PERSISTED The overall strength of Canada’s office leasing market persisted over the recent past despite ongoing challenges in oil-sector driven regions. Several markets posted cycle-low or low vacancy resulting in a measure of imbalance. The nation’s aggregate vacancy rate stood at a healthy 12.8% as of the end of the third quarter of 2017 having edged 10 bps lower year over year. Tighter conditions observed in the nation’s downtown areas with average vacancy of 11.1% reported. The GTA and GVA outperformed with market vacancy of 8.5% and 8.1% overall and 4.0% and 5.0% downtown, respectively. The outlier with regard to the market’s strong vacancy profile was Alberta where levels continued to range close to the record high. Greater Calgary Area (GCA) and Greater Edmonton Area (GEA) vacancy rested at record highs of 27.4% and 20.3% downtown and 25.2% and 19.7% overall, respectively. Vacancy was relatively stable and low in the rest of Canada’s major population centres. The strength of the market’s vacancy profile was driven by healthy demand patterns over the past year. Growth in the technology, professional services, finance, insurance and real estate and education sectors resulted in the absorption of space, with the public sector also chipping in. Conversely, energy sector mergers and acquisitions activity eroded demand in Alberta. The overall demand pressure pushed rents higher downtown while suburban rents largely stabilized. Upward pressure was strongest for newly completed towers, which was indicative of the market’s broader strength.

MODEST STRIDES WILL BE MADE The outlook for Canada’s office sector is one of modest progression. Supply-side metrics will slowly strengthen with demand continuing to outpace supply. Moderate economic growth will support space demand across the market with technology and professional services businesses driving expansion. Various shared workspace initiatives will add to the demand pressure. The market’s demand supply dynamic will support modest rent growth particularly for newly built space and improved Class A space. Leasing market progress will support investment returns to the benefit of owners. Investment demand will remain robust resulting in mild upward pressure on values. Investment fundamentals will continue to attract capital to the sector from both domestic and international sources. Competition for a limited number of core opportunities will remain a market fixture along with modest progression over the near term.

OFFICE OUTLOOK

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Toronto

Winnipeg

Vancouver

Ottawa

Montreal

National

Halifax

Edmonton

Calgary

8.0

9.7

9.9

10.8

12.4

13.1

16.7

19.9

25.6

%

Vacancy RatesTo Second Quarter - 2017

Source: CBRE Limited

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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy National Historical & Forecast Aggregates

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

-6-4-20246810121416

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply National Historical & Forecast Aggregates

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

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

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-

16Se

p-17

%

Annualized Returns Rolling 1-Year RCPI/IPD Office Performance

Office Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2017


HIGHLIGHTS

• The GTA and GVA were not only the most active investment markets over the recent past but also exhibited some of the strongest leasing fundamentals of the country’s largest urban centres.

• Canadian leasing fundamentals were among the strongest reported across North America, driven in large part by above-average demand on the part of technology, professional services and financial services companies.

OFFICE INVESTMENT REPORT

INVESTMENT MARKET TRANSACTIONSMONTREALProperty Date Price SF PSF Purchaser

Nexus Technoparc Nov-17 $35.1 M 133,428 $263 BTB REIT

4150 Ste Catherine W Aug-17 $37.6 M 141,009 $267 Redbourne

455 Rene Levesque W Jun-17 $173.2 M 375,973 $461 GWL Realty Adv.

OTTAWAProperty Date Price SF PSF Purchaser

59 Camelot Dr Sep-17 $21.5 M 106,000 $203 Morguard

Constitution Square Sep-17 $480.6 M 1,060,000 $453 Greystone/Cand.

383, 385 Terry Fox Dr Aug-17 $100.1 M 254,318 $394 Crestpoint

Minto Place (50%) Mar-17 $188.0 M 945,030 $398 Investors Group

TORONTOProperty Date Price SF PSF Purchaser

610 Chartwell Rd Dec-17 $38.4 M 102,736 $373 Canpro Investmts.

5255 Yonge St Sep-17 $24.5 M 242,617 $202 Crown Realty

Heron’s Hill Aug-17 $76.1 M 299,538 $254 Adgar/Montez

586 Argus Rd Aug-17 $18.5 M 74,570 $248 Morguard

123 Commerce Valley Aug-17 $66.5 M 203,522 $327 Morguard

777 Bay St (75%)* Jul-17 $398.1 M 888,800 $597 Greystone/Bimcor

ICBC Peel Portfolio Jun-17 $32.5 M 188,300 $173 True North REIT

56 The Esplanade Jun-17 $60.0 M 76,112 $788 Allied REIT

2300 Meadowvale Jun-17 $30.5 M 242,000 $126 Crown Realty

25, 75 Watline Ave Jun-17 $25.8 M 157,810 $163 Nicola-Crosby

Commerce West May-17 $95.0 M 411,842 $231 Slate Asset Mgt.

The Airway Centre Apr-17 $155.0 M 681,874 $227 G.T.A.A.

West Metro Corp. Ctr. Apr-17 $145.0 M 616,364 $235 Slate Asset Mgt.

111 Peter St Apr-17 $125.6 M 252,021 $498 Crown Realty

22 College St Apr-17 $19.5 M 33,514 $582 Halmont Propert.

1929 Bayview Ave Apr-17 $49.2 M 130,388 $377 Crestpoint

700 University Ave Apr-17 $433.0 M 1,218,950 $355 KingSett Capital

Dominion Public Bldg. Mar-17 $275.1 M 362,886 $758 Larco Investmts.

Miss. Exec. Ctr. (50%) Mar-17 $167.0 M 1,079,650 $309 True North REIT

105 Gordon Baker Rd Mar-17 $33.7 M 153,380 $219 Antoo Ltd

KITCHENER/WATERLOOProperty Date Price SF PSF Purchaser

295 Hagey Blvd Mar-17 $15.8 M 92,807 $170 Europro

CALGARYProperty Date Price SF PSF Purchaser

Artis Quarry Pk Blvd Oct-17 $98.0 M 311,308 $315 Bentall Kennedy

DREAM Portfolio Feb-17 $204.2 M 1,505,520 $136 Slate Asset Mgt.

TransCanada (50%) Jan-17 $257.4 M 940,430 $547 HOOPP

EDMONTONProperty Date Price SF PSF Purchaser

9888 Jasper Ave Aug-17 $60.6 M 181,664 $334 Leder Foundation

Enbridge Pl/HSBC Mar-17 $50.0 M 588,427 $85 AIMCO

VANCOUVERProperty Date Price SF PSF Purchaser

Gateway Place* Aug-17 $36.0 M 94,500 $381 Industrial Alliance

Northwest Medical Ctr Jun-17 $43.5 M 51,640 $842 Millenium Group

1148 Hornby St Jan-17 $20.8 M 29,992 $694 Wesgroup

*share sale

Industrial17%

Office24%

Retail22%

Multi-Suite15%

Land15%

Hotel6%

Total Sales By Product18 Months to June 2017


Halifax1% Montreal

12%

Ottawa3%

Toronto40%

Edmonton2%

Calgary9%

Vancouver31%

Other2%

Office Sales By CMA 18 Months to June 2017


-10.0 -5.0 0.0 5.0 10.0 15.0

EdmontonCalgary

MontrealWinnipeg

OttawaNational

HalifaxToronto

VancouverVictoria

-4.9-3.3

1.5

5.25.5

5.5

5.7

9.2

11.3

12.2

%

Office Total Returns For The 1-Year Period Ending Sept 2017

Source: © MSCI Real Estate 2017


BULLISH PHASE OF THE CYCLE WAS EXTENDED The bullish phase of the investment cycle was extended in the industrial property sector over the recent past. Properties tracked in the MSCI Index posted an annual average total return of 7.8% for the period ending September 30, 2017. This was 150 bps better than the average for all asset types over the period and ranked second only to the multi-suite residential rental sector. The performance was punctuated by the strongest income growth of the major asset types and modest capital appreciation. The sector also extended its run of healthy transaction closing volume recently. During 2017, industrial sales volume surpassed both the short-term and long-term averages by a significant margin. A total of $3.6 billion in closed transactions with a minimum sale price of $1.0 million was reported during the first six months of 2017. The first-half pace was up sharply from the 2.8 billion in sales recorded during the same time period a year earlier. Moreover, the pace was far stronger than the five-year average for the first half of $2.2 billion. The uptick in activity reflected the market’s strong demand backdrop. Pension funds, Real Estate Investment Trusts (REITs), Real Estate Operating Companies (REOCs), institutions and private capital groups vigorously pursued sector opportunities. For the most part demand consistently exceeded the supply of assets available for acquisition. Consequently, modest upward pressure on value was evident across the market. The robust demand cycle reflected the extension of the sector’s bullish investment cycle over the recent past.

LEASING MARKET ADVANCEMENT WAS RECORDED Canada’s industrial leasing market continued to gain ground during the past year resulting in tighter conditions in most regions. The catalyst for the most recent leasing market advance was stable and healthy demand. The continued blossoming of the warehouse and distribution sector resulted in the steady absorption of vacant space in most regions. New, consolidated and restructured distribution networks translated into additional demand pressure. More specifically, businesses actively involved in the movement and delivery of consumer goods and e-commerce purchases were key demand-drivers. Regional manufacturers also accounted for expansion activity reported over the past few quarters. Finally, technology companies expanded in several markets. By the second half of 2017, there were hints that healthier demand patterns could emerge in Alberta after a prolonged period of weakness. The strength of the national demand cycle resulted in upward pressure on average rents in several markets. Pressure was strongest for newer and/or highly functional space with a more modest upward trend reported for older less functional space. In addition, expansion activity resulted in tighter conditions in many regions. National availability hit a cycle-low of 4.6% by the end of the second quarter of 2017 with even tighter conditions reported in the country’s core markets of GVA and GTA. To some extent, cycle-low availability limited the market’s overall rate of advancement over the recent past.

POSITIVE OUTLOOK INCLUDES MEASURE OF RISKCanada’s industrial sector outlook is one of continued progress over the near term against a backdrop of modest risk. Demand for industrial space will continue to outdistance supply resulting in development volume closer to the long-term average. Sustained economic growth, driven in part by modest expansion in Alberta, will boost leasing demand. At the same time rents will continue to slowly ascend. Supply constraints and leasing market gains will boost investment performance and attract investment. The resulting demand-pressure will drive values slightly higher. The main risks to the outlook include the potential for negative outcomes related to North American Free Trade Agreement (NAFTA) negotiations, a potential slowdown in economic growth and a prolonged oil sector slump. Against this backdrop the outlook is generally stable and healthy.

INDUSTRIAL OUTLOOK

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Toronto

Vancouver

Winnipeg

National

Ottawa

Montreal

Edmonton

Calgary

Halifax

2.7

3.0

3.9

4.7

4.8

6.9

8.5

9.3

10.9

%

Availability RatesTo Second Quarter - 2017


3.0

4.0

5.0

6.0

7.0

8.0

9.0

3

4

5

6

7

8

9

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F20

22F

%

$ p.

s.f.

Industrial Rent & Vacancy National Historical & Forecast Aggregates

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

-20

-10

0

10

20

30

40

50

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F20

22F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply National Historical & Forecast Aggregates


-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-

16Se

p-17

%

Annualized Returns Rolling 1-Year RCPI/IPD Industrial Performance

Industrial Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2017


HIGHLIGHTS

• Investors acquired industrial investment property at a rapid rate recently resulting in $3.6 billion in transaction volume reported during the first six months of 2017, well above the five-year first-half average.

• Leasing market conditions remained tight during 2017 as demand outpaced supply in most markets and rents gradually increased for highly functional and recently built space.

INDUSTRIAL INVESTMENT REPORT


Hymus Portfolio Nov-17 $17.7 M 260,933 $68 Redbourne

5500 Trans Canada Aug-17 $43.0 M 511,484 $84 Summit REIT


2215 Gladwin Cr Jun-17 $22.0 M 198,000 $111 CMHC Pension


Investors Group GTA Dec-17 $66.1 M 358,734 $184 Summit REIT

Martinrea GTA Nov-17 $31.5 M 287,675 $110 Crestpoint

1330 Martin Grove Rd Oct-17 $19.4 M 163,300 $119 Carttera

330 Humberline Dr Sep-17 $23.9 M 255,026 $80 Summit REIT

1865 Clements Rd Aug-17 $24.0 M 181,850 $124 Pure REIT

2250 Islington Ave Aug-17 $30.5 M 275,914 $110 Greystone/Rice

2777 Langstaff Rd Aug-17 $73.4 M 471,051 $156 Pure REIT

100 Sandalwood Pkwy Aug-17 $101.0 M 764,182 $132 Pure REIT

2616 Sheridan Grdn Dr Aug-17 $15.3 M 114,350 $134 Summit REIT

Investors Richmd. Hill Aug-17 $28.0 M 192,819 $145 Berkshire Axis

7525 & 7535 Financial Jun-17 $32.8 M 270,016 $121 Crestpoint

4 Overlea/Banigan Jun-17 $15.7 M 86,600 $181 New-Can Realty

1870 Albion/209 Carr. Jun-17 $22.3 M 298,154 $75 OPGI

Mold-Masters Halton Jun-17 $14.3 M 180,750 $79 Skyline REIT

240 South Blair St Jun-17 $27.4 M 291,281 $94 Manulife Financial

225 Rexdale Blvd Jun-17 $33.7 M 303,724 $111 Rathcliffe Prop.

2150 Steeles/Torbram Apr-17 $20.2 M 191,859 $105 Greystone/Panat.

8875 Torbram Rd Apr-17 $158.3 M 895,038 $177 Concert Prop.

Granmercy Trust Prtflo Mar-17 $22.5 M 297,620 $75 Summit REIT

2335 Speers Rd Feb-17 $28.2 M 260,830 $108 Summit REIT

4700-4900 Dixie Rd Feb-17 $15.3 M 140,135 $110 Greystone/Panat.

124-26 Milner/Ironside Feb-17 $11.5 M 129,608 $89 Annapolis Fin.

100, 107 Alfred Khne. Feb-17 $113.0 M 1,115,633 $101 HOOPP

1601, 1635 Tricont Ave Jan-17 $21.1 M 259,181 $81 LaSalle Invstmt.

8495 Goreway Dr Jan-17 $35.0 M 360,000 $97 Greystone/Rice

400 Nugget Ave Jan-17 $49.5 M 635,124 $78 Blackwood Prtnrs


5505, 5543 72 Ave SE Sep-17 $65.8 M 652,016 $101 Richmond Hldgs

5716 Burbank Cr SE Sep-17 $16.2 M 111,651 $145 PC Urban

Meridian Business Ctr Feb-17 $15.8 M 143,154 $110 York Realty

303 58 Ave SE Feb-17 $17.0 M 120,690 $141 Summit REIT

5820 11th St SE Jan-17 $19.0 M 225,160 $84 Burns LC Ltd


4103 84 Ave Aug-17 $13.5 M 162,860 $83 Goldman Group

11448 149 St Jun-17 $10.9 M 89,785 $121 Guardian Capital


9255 194 St* May-17 $27.5 M 185,123 $149 Greystone

*share sale

Halifax1% Montreal

10%Ottawa

2%

Toronto45%

Edmonton8%

Calgary10%

Vancouver19%

Other5%

Industrial Sales By CMA 18 Months to June 2017


Industrial17%

Office25%

Retail22%

Multi-Suite15%

Land15%

Hotel6%



-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Edmonton

Calgary

Winnipeg

Montreal

Ottawa

National

Vancouver

Toronto

-0.3

2.1

3.4

6.4

7.1

7.8

12.6

13.3

%

Industrial Total Returns For The 1-Year Period Ending Sept 2017

Source: © MSCI Real Estate 2017Kief Business Park Feb-17 $15.5 M 128,554 $121 Beedie Group


SOFTNESS WITNESSED BUT RESULTS STILL SOLIDCanada’s retail property sector posted another period of solid investment market performance over the past year against a backdrop of increased sector risk. The MSCI Index produced a solid total sector return of 6.1% for the period ending September 30, 2017. While down 250 bps from the same period one year ago, due to a a flattening or modest back up in rent growth and cap rates for some categories, the result was solid nonetheless. In addition to the solid investment performance, the flow of capital into the sector has been extremely strong, as softeness in the sector prompted vendors to place product on the market for sale. In the first half of 2017, a total of $5.3 billion in transaction closing volume was reported. The sector was on track to easily set a 17-year high for sales activity. A range of groups acquired properties recently, which provided a reliable outlet for those trying to cull their positions. As a result pricing generally held but investors did, however, exercise increased caution when assessing value for riskier assets and secondary markets. Changes in consumer behaviour, the use of new technology and a range of other sector shifts have combined to drive risk perception higher for both investors and owners. The viability of certain assets and retailers has been a constant sector theme given the closure of stores over the past few years. Against this backdrop of increased uncertainty, investment market performance has been relatively healthy, but we expect continued moderation over the near term.

LEASING MARKET RESILIENCE CARRIED OVER Retail leasing market resilience carried over through much of the past year despite major changes that continued to unfold in the broader sector. National vacancy remained fairly tight resting at 4.6% as of the end of the first half of 2017 according to CBRE statistics. The rate fell a modest 30 bps year over year. The MSCI Index recorded average vacancy of 8.1% up 40 bps over the same time period. Both performances reflected a modicum of resilience given a steady stream of store closures over the past couple of years. Over the same time period, average asking rents remained relatively stable for prime space. This was the result of steadiness in certain market segments and downward pressure in others. Upward pressure was most commonly observed for newly built space. Luxury and international category expansion remained fairly brisk. This led to the relatively quick absorption of new space in expansions to some of the nation’s most dominant centres. The discount sector was also a source of growth. Despite this activity there were a number of sector challenges that continued to unfold. The most impactful was the stream of store closures including Sears Canada, reductions in chain footprints and changes in space usage as a result of online shopping. Despite these challenges, however, a measure of leasing market resilience was maintained.

SECTOR SHOULD CONTINUE TO PROSPER DESPITE CHALLENGESCanada’s retail sector will continue to progress over the near term despite a number of headwinds. Canada’s economy will expand by a solid 2.6% in 2017 and 2.0% in 2018 which will help drive retail sales growth of 5.8% and 2.4%, respectively. Relatively healthy consumption patterns will continue to drive sales for retailers in many categories. Consequently, retailer expansion activity will support leasing fundamental stabilization. However, as was the case over the past few years, the retail sector will be forced to contend with a number of headwinds. Demographic and technological changes in shopping patterns will continue to force retailers and property owners to adjust. The closure of Sears Canada stores will present a more direct challenge for some owners as certain markets will be hit with a flood of new supply. Investors will be forced to adjust to a higher sector risk profile. Emphasis will be placed on stable assets. Owners will face ongoing changes in store size, closures and space usage. To be sure, however, in adjusting to various headwinds sector gains will be made.

RETAIL OUTLOOK

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-

16M

ar-1

7Se

p-17

%

Retail Vacancy RatesNational Trending Across Property Types

Super Regional Regional Community Centre Neighbourhood


$792

$924

$732

$636

$864

$636 $576

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

$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 Annualized Non-Anchor Tenant Sales - June 2017

Sales Per Square Foot (SAAR) - LS Change Year-Over-Year - RSSource: International Council of Shopping Centres, Canadian Mall Report

$20,

389

$20,

291

$20,

692

$20,

812

$21,

691

$22,

186

$22,

655

$22,

916

$23,

365

$23,

302

$23,

612

$24,

175

$24,

204

$24,

757

$25,

040

$25,

118

-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

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

%

Consumer StrengthMeasuring Canadian Purchasing Power

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

Source: Conference Board of Canada

-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-

16Se

p-17

%

Annualized Returns Rolling 1-Year RCPI/IPD Retail Performance

Retail Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2017


HIGHLIGHTS

• The volume of retail investment property sales was expected to reach a 17-year high in 2017 with $5.3 billion in transaction volume already recorded in the country’s major urban centres during the first six months of the year.

• Ongoing demographically driven shifts in consumer spending behaviour continued to impact retail sector performance in 2017 a trend that will persist over the near-to-medium term.

RETAIL INVESTMENT REPORT


257-347 Sir Wilfred La Nov-17 $15.4 M 60,606 $254 Choice REIT

3450 Ontario Rd E Oct-17 $19.5 M 69,500 $281 Monit Investmts

Place Vertu Aug-17 $117.9 M 735,933 $160 Fiduciaire P.V.


Merivale Centre Nov-17 $57.5 M 219,220 $262 First Capital

325 Greber Blvd Gatin. Oct-17 $21.0 M 73,413 $286 Skyline REIT


1 Bloor St E Podium Nov-17 $192.4 M 86,000 $2,237 First Capital

201 Lloyd Manor Rd Oct-17 $25.8 M 73,204 $352 CREIT

21 Avenue Rd Sep-17 $20.5 M 15,000 $1,364 Pemberton Grp.

Aurora Shopping Ctr Aug-17 $42.2 M 123,150 $343 Fiera Properties

297-301 College St Aug-17 $28.0 M 30,429 $920 Sun Life

Milliken Crossings Jul-17 $45.0 M 139,465 $323 Lesso Mall

710 Mt Pleasant Rd Jun-17 $10.9 M 14,904 $731 Goldmanco

360 McLevin Ave Jun-17 $15.0 M 34,230 $438 Toronto Equity

Valley Creek Plaza Jun-17 $18.1 M 23,203 $619 Jindal Devts.

Promenade Mall Apr-17 $249.0 M 690,461 $361 Liberty/Serruya

St. Jane Plaza Mar-17 $10.0 M 29,197 $343 Realux Jane Sh.

1988, 2028 Avenue Rd Mar-17 $12.5 M 11,933 $1,048 College St Prop.

327-333 Queen St W Mar-17 $17.1 M 15,761 $1,085 Crestpoint

Sun Valley Square Jan-17 $14.4 M 29,500 $486 Canvas Devts.

KITCHENER/WATERLOO/GUELPHProperty Date Price SF PSF Purchaser

328-386 Speedvale Av Dec-17 $26.0 M 115,838 $225 Firm Capital

Sportsworld Crossing Mar-17 $37.0 M 191,422 $193 Tricap Capital


2115 4 St SW Aug-17 $10.3 M 17,623 $582 Ronmore Devlprs

Creekside Crossing Mar-17 $24.4 M 73,471 $332 GWL Realty Adv.


Summerside Plaza Dec-17 $24.0 M 46,571 $515 Fateh Developmts

Daly Grove Ctr Sep-17 $13.8 M 33,311 $414 Elite Investments

Lakeside Landing May-17 $33.0 M 104,561 $316 Lakeside Landing

Mill Creek Ctr May-17 $19.9 M 38,704 $514 EPC Capital

Callingwood Sq Mar-17 $24.4 M 49,343 $486 Private


Marine Way Market* Oct-17 $174.0 M 267,000 $589 GWL Realty Adv.

3003-3033 Grandview Jul-17 $21.5 M 36,529 $589 Glassman Mgt.

Columbia Sq Plaza Jun-17 $97.7 M 166,000 $589 Kunyuan Intern.

Taylor’s Crossing* Jun-17 $24.0 M 44,000 $545 Hungerford Prop.

Galileo on Robson Jun-17 $16.2 M 17,515 $925 Amacon Devt.

1705 Marine Dr Mar-17 $16.0 M 8,228 $1,945 Golco Enterprises

Sevenoaks Ctr* Feb-17 $214.0 M 568,317 $377 Sevenoaks SC LP

3095-3097 Granville Feb-17 $10.1 M 10,000 $1,010 Dayhu Investments

*share sale

Industrial17%

Office24%

Retail22%

Multi-Suite15%

Land15%

Hotel6%



Halifax2%

Montreal12%

Ottawa3%

Toronto30%

Edmonton8%

Calgary6%

Vancouver37%

Other4%

Retail Sales By CMA 18 Months to June 2017


0.0 2.0 4.0 6.0 8.0 10.0 12.0

HalifaxCalgary

MontrealOttawa

VictoriaEdmontonWinnipegNationalToronto

Vancouver

0.6

1.8

2.3

2.7

3.2

3.7

5.4

6.18.7

11.0

%

Retail Total Returns For The 1-Year Period Ending Sept 2017



DURABILITY OF CURRENT PHASE OF CYCLE WAS EVIDENCED The durability of the current phase of the cycle was evidenced in recent investment market conditions. The Canadian multi-suite residential rental sector generated an attractive annual average total return of 8.5% for the year ending September 30, 2017 as reported in the MSCI Index. The result was the strongest of the major asset types tracked with industrial finishing second over the same time period. The 8.5% return was distributed fairly evenly between its income and capital growth components. To some extent, the recent strength of sector investment was the result of healthy demand characteristics. Pension funds, private capital, REITs, REOCs and institutions competed regularly to acquire assets in this sector given its history of strong performance. On balance, however, availability fell short of total investment demand. Regardless of this fact, recent sector transaction closing volume was above average. In the first half of 2017, $2.6 billion in multi-suite rental property was sold with the largest contributions made by Greater Montreal Area (GMA), GTA and GVA. The total represented the highest first-half volume dating back to 2012, and was markedly higher than the long-term average. The sector’s demand pressure pushed values moderately higher and cap rates moderately lower. This pressure was strongest for core properties that were either recently built or high-rises located downtown. The upward pressure on value was indicative of the overall durability of the current phase of the investment cycle.

RENTAL DEMAND SURPASSED SUPPLY Multi-suite residential rental demand outpaced supply during 2017 resulting in healthier overall market fundamentals. There were three main drivers of the market’s recent demand outperformance. The first was historically high levels of international migration. Second, more young workers were able to secure employment and rent an apartment. The third demand-driver was the aging of Canada’s population, with more older people choosing to sell their homes and move into rental accommodation. Increased demand for rental accommodation occurred during a period when the addition of rental units to inventory fell sharply. Between October 2016 and October 2017 there were 23,000 additional units added to the national built inventory, down sharply from the roughly 40,000 units added a year earlier. The combination of healthy demand and more moderate supply additions resulted in tighter conditions. National vacancy fell by 70 bps year over year to 3.0% as of October of 2017, effectively erasing increases tallied in 2015 and 2016. The October 2017 rate mirrored the 10-year average for the CMHC’s sample. The resulting demand supply imbalance pushed rents higher across much of the country. Between October 2017 and October 2016 the national average two-bedroom rent increased by 2.7%. Upward pressure on rents was expected to continue over the near term as a function of the market’s demand supply imbalance.

CURRENT PHASE OF THE CYCLE WILL BE EXTENDEDThe current phase of the Canadian multi-suite residential rental sector cycle will continue to unfold over the near term. Rental market conditions will stabilize with national vacancy holding at or near the long-term average of 3.0%. As a result, rents will continue to rise given the ongoing supply imbalance. Expanded rent controls will curtail increases beyond inflation levels, however, in several regions. In markets like the GTA and GVA, sustained demand will be a byproduct of a lack of affordability resulting from the run up in values over the past few years. Healthy rental market fundamentals will furnish owners with stable and secure income performance and attract investment capital into the sector. Investment demand will surpass supply and push values gradually higher. In short, conditions reported in the multi-suite residential sector over the near term will substantiate the extension of the current phase of the cycle.

MULTI-SUITE RESIDENTIAL OUTLOOK

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

2017

F

2018

F

2019

F

Canadian Housing MarketPricing vs. Demand

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

0.0 2.0 4.0 6.0 8.0

Victoria

Vancouver

Toronto

Halifax

Winnipeg

Ottawa

National

Montreal

Calgary

Edmonton

0.5

0.8

1.1

2.8

3.1

3.0

3.9

4.1

6.8

6.9

0.5

0.7

1.3

2.6

2.8

3.0

3.9

3.9

7.0

7.1

%

CMA's Rental VacancyRates for Structures of 3 units+

20162017F

Source: CMHC, Housing Market Outlook

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17YTD

%

National Affordability Indicator % of Income to Service Home Ownership Costs

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

-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-

16Se

p-17

%

Annualized Returns Rolling 1-Year RCPI/IPD Residential Performance

Multi-Suite Residential Sector Total Real EstateSource: RCPI; © MSCI Real Estate 2017


HIGHLIGHTS

• Bullish investment market characteristics were reported over the recent past, a performance that was punctuated by strong demand, attractive returns, stable and positive income growth and a modest rise in property values.

• Demand outdistanced supply across much of the national rental market over the past year resulting in upward pressure on rents and cycle low vacancy levels.

MULTI-SUITE RESIDENTIAL INVESTMENT REPORT

INVESTMENT MARKET TRANSACTIONSMONTREALProperty Date Price Suites P.S. Purchaser

2121, 2125 St Mathieu Sep-17 $53.8 M 249 $215,878 InterRent REIT

5999 Monkland Ave May-17 $46.4 M 165 $281,212 GWL Realty Adv.

OTTAWAProperty Date Price Suites P.S. Purchaser

1220 Merivale Rd Nov-17 $30.0 M 184 $163,043 Paramount Prop

1440 Mayhew, Rosnthl Apr-17 $17.8 M 157 $113,057 Golden Equity

Maritime/Great Lakes Mar-17 $96.6 M 268 $360,511 Killam/KingSett

TORONTOProperty Date Price Suites P.S. Purchaser

212 Davis Dr Dec-17 $75.0 M 225 $333,323 Homestead

2300 Marine Dr Nov-17 $15.2 M 47 $322,340 Realstar Group

24 Forest Manor Rd Nov-17 $35.2 M 128 $275,391 Homestead

2185 Lawrence Ave E Nov-17 $25.0 M 142 $176,056 Shelborne Capit.

123 Parkway Forest Oct-17 $63.4 M 198 $320,155 CREIT/Wdbrne.

1450 Sheppard Ave W Sep-17 $37.2 M 181 $185,525 SiteLine Group

365 Eglinton Ave E Aug-17 $14.5 M 48 $302,083 Akelius Canada

Ventures ULC Portfolio Jul-17 $71.2 M 198 $359,470 Akelius Canada

Redwood Brampton Jul-17 $122.0 M 415 $293,857 Realstar Group

190-200 Exbury Rd Jun-17 $65.7 M 308 $213,312 Azuria Group

2777 Kipling Ave Jun-17 $55.0 M 325 $169,231 Minto Group

132 Berkeley St (50%) Jun-17 $26.9 M 177 $303,390 Oxford Properties

110 Wellesley St E Apr-17 $13.8 M 48 $286,979 Akelius Canada

4 Treewood St Mar-17 $13.6 M 82 $165,854 Starlight Invstmts

Silverspring Park Feb-17 $84.0 M 430 $195,349 Starlight Invstmts

Wilston Portfolio Jan-17 $19.5 M 157 $124,204 Shelborne Capit.

3311 Bathurst St Jan-17 $20.8 M 102 $203,922 Starlight Invstmts

KITCHENER/WATERLOOProperty Date Price Suites P.S. Purchaser

1042 Paisley Rd, Glph May-17 $55.9 M 180 $310,667 Starlight Invstmts

CALGARYProperty Date Price Suites P.S. Purchaser

Har-Par Portfolio Nov-17 $142.5 M 685 $208,000 Timbercreek Am

Pakview Village Apts. Jun-17 $35.7 M 204 $175,000 Har-Par Invts.

EDMONTONProperty Date Price Suites P.S. Purchaser

Salisbury Village Aug-17 $67.5 M 296 $228,041 Killam REIT

1 Vandelor Rd Jan-17 $42.5 M 198 $214,646 Realstar Group

Edgewater on Jasper Jan-17 $191.0 M 694 $275,216 Resport Equities

VANCOUVERProperty Date Price Suites P.S. Purchaser

Novore* Dec-17 $90.8 M 282 $316,376 Realstar Group

Regency May-17 $38.4 M 243 $158,025 Onni Group

Westview Manor May-17 $18.0 M 71 $253,521 Wesgroup

2150 Pandora St May-17 $26.3 M 101 $260,396 Prospero Intern.

Braemar Gardens May-17 $21.5 M 126 $170,635 Realstar Group

Barafield Apartments Apr-17 $42.0 M 109 $385,321 Hollyburn Prop.

Riviera Apartments Mar-17 $13.3 M 37 $358,108 Hollyburn Prop.

Park Towers* Mar-17 $40.0 M 83 $481,928 Mayfair Prop.

*share sale

Industrial17%

Office24%

Retail22%

Multi-Suite15%

Land15%

Hotel6%



Halifax2%

Montreal24%

Ottawa9%

Toronto21%

Edmonton10%

Calgary5%

Vancouver21%

Other8%

Multi-Suite Sales By CMA 18 Months to June 2017


-5.0 0.0 5.0 10.0 15.0

Calgary

Edmonton

Halifax

Montreal

Ottawa

National

Toronto

Vancouver

-3.6

-2.1

5.8

6.1

6.3

8.1

11.2

13.9

%

Multi-Suite Total Returns For The 1-Year Period Ending Sept 2017



HIGHLIGHTS

• Broadly positive investment trends were observed in Canada’s commercial real estate sector in 2017 including stable and healthy demand, record-high transaction volume and stable to moderately higher core property values.

• The pace at which investment property sales were reported in 2017 suggested transaction volume was set to reach a record annual high, and that investors were confident in the sector.

INVESTMENT OUTLOOKLATE PHASE OF INVESTMENT CYCLE WAS REFLECTED IN RECENT MARKET CHARACTERISTICS Commercial property investment performance continued to approximate income returns recently which reflected the late phase of the current cycle and the sector’s perceived stablity. Canada’s commercial real estate sector generated an average annual total return of 6.3% in the MSCI Index for the 12-month period ending September 30, 2017. The result was comprised primarily of a healthy income growth rate and modest capital appreciation. Although the return was below the long-term average, it was attractive nonetheless in a low yield environment. High levels of investor confidence remained characteristic of the investment market. Core assets in prime markets were highly sought-after by a range of investment groups, particularly in the GVA and GTA. The resulting demand pressure pushed core property values moderately higher. Investors did, however, exhibit a modicum of caution when riskier assets were assessed. While demand for riskier assets was healthy overall, the increased scrutiny was an indication of the maturing of the investment cycle. Despite the increased scrutiny, the strength of the market’s demand cycle supported record-high transaction volume. By the fall of 2017, it appeared annual transaction volume would surpass the previous high of $34.7 billion set in 2016. Investor confidence was in keeping with the low interest rate environment and positive economic conditions in most markets.

INVESTMENT SALES ACTIVITY ACCELERATED The rate at which Canadian investment properties were sold during 2017 reached an all time high. There was a total of almost $22.0 billion in investment property sales volume recorded during the first six months of 2017 alone. This total represented an acceleration in activity over the same time period a year earlier. Moreover, it provided evidence of the level of confidence investors had in the market. Transaction volume spiked by 35.5% year over year during the first half. In addition, there was a healthy pipeline of properties expected to trade hands in the second half of the year. The flow of capital into the commercial real estate sector over the recent past was strongest in the office and retail sectors. The office sector accounted for 25.0% or $5.5 billion of the total sales volume recorded during the first six months of 2017. The retail sector finished a close second during the same period. Investment sales activity was strong in the remaining asset classes over the same time period which mirrored the previous year’s trend. The recent strength of the capital cycle was a function of high levels of investor confidence.

A number of factors supported investor confidence during 2017. Prevailing property yields were at levels that justified investment for most groups. As a result, pension funds, REITs, REOCs, various private and institutional groups continued to allocate investment funds to the sector. The rationale for investment was supported by the continued access to low cost debt and equity capital. Although interest rates have been on a rising path for much of 2017 and early 2018. As a result, investors were able to achieve positive leverage on acquisitions. Some investors were able to rationalize acquisitions given the spread between property yields and long-term bond yields. Average property yields for core assets were 350 to 400 bps higher than bond yields in some cases. Investors were able to achieve a premium for investing in the sector. Investor confidence was also boosted by largely stable and healthy rental market fundamentals. Rental market fundamentals were expected to improve over the near term with the exception of energy sector-driven markets like Calgary and Edmonton which remained relatively weak. Finally, the broadly positive economic outlook was also a source of confidence for investors looking to acquire assets in Canada’s real estate sector.

Halifax1%

Montreal12%

Ottawa4%

Toronto36%Edmonton

6%

Calgary7%

Vancouver29%

Other4%

National Sales By CMA 18 Months to June 2017


-4.0 0.0 4.0 8.0 12.0

CalgaryEdmonton

HalifaxMontreal

OttawaWinnipeg

VictoriaNationalToronto

Vancouver

-0.8

-0.72.4

2.84.95.05.0

6.39.7

11.4

%

All Property Total Returns For The 1-Year Period Ending Sept 2017


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

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

$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

$34.7

$39.0

$ B

illio

ns

Investment ActivityTotal Investment Volume

Domestic Foreign 2nd Half '17 Forecast

Source: CBRE LimitedSource: CBRE Limited


GTA AND GVA WERE DOMINANTThe emergence of the GTA and GVA as the country’s most attractive investment property markets continued to unfold over the past year. During the first six-months of 2017, GTA commercial property investment sales totaled $7.2 billion for a 33.0% share of total national volume. GVA sales totaled $7.4 billion, which represented a 34.0% share for the same time period. Sales in the two markets surged year over year with growth of 50.0% and 25.0% in the GVA and GTA, respectively. Office and retail garnered the strongest interest. Previously, the two markets accounted for 58.4% of the national total for 2016. The surge in activity and overall dominance of these two markets pushed pricing to new benchmark highs while cap rates edged lower. Despite the modest cap rate compression property yields remained sufficiently attractive when compared with long-term bond yields. The yield premium was one of many factors that continued to support the emergence of the GVA and GTA as the nation’s most popular investment markets.

SECTOR RISK CONTINUED TO EVOLVECanadian real estate investment market risk continued to evolve over the past year against a backdrop of generally healthy performance. A main area of sector risk was related to factors that might have a negative impact on the national economy. More specifically, economic protectionist policy implementation south of the border could have a negative impact on Canada’s economic outlook. By the fall of 2017, it appeared the NAFTA was in serious jeopardy. An end to the agreement could cause a major disruption in North America’s and by extension Canada’s economic growth trend. Additionally, a ‘buy American’ sentiment was also a risk with regard to Canada’s economic outlook. Protectionist policy in the U.S. was a serious risk for Canada’s export industry, particularly the oil sector. Another area of risk for the Canadian economy and commercial real estate sector was related to record consumer debt levels. Interest rates increased twice during 2017 and in January of 2018. There were concerns that further increases could have a significantly negative impact on the most financially vulnerable of Canadian households. The concern was that these households might not be able to pay their debt servicing costs which might cause a sharp correction in the national housing market. Such an event would have negatively impacted the national economy. By the late stages of 2017, commercial property sector risk was relatively modest despite its continued evolution over the recent past.

MINIMAL SECTOR PERFORMANCE VARIATION FORECASTWe expect few significant changes in real estate sector performance over the near term as the current cycle continues to mature. Investment performance will mirror that of the past year. Attractive returns will be generated, supported by stable and positive income growth and modest capital appreciation. The supply of core assets will once again fall short of demand resulting in aggressive bidding. This will ensure values hold at peak leveld at a minimum, with the potential for small increases for exceptional assets. The GVA and GTA will remain the preferred regions for investors looking for stable returns. Investors will continue to access low-cost capital which will support the rationale for investment. Riskier assets will also be popular, although investors will scrutinize them more closely and look for longer-term upside. The shortfall in core supply will see some investors continue to build their portfolios with new developments. The retail and energy-driven markets will be monitored closely given recent sector challenges. Rental markets will remain relatively buoyant given sustained economic growth overall. Alberta’s economy will continue to stabilize as the energy sector slowly recovers. In short, the commercial real estate property market will continue to gain ground over the near term with few significant shifts in sector trends from those of the recent past.

INVESTMENT OUTLOOK

0.01.02.03.04.05.06.07.08.09.0

10.0

Mar

-00

Sep-

00M

ar-0

1Se

p-01

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

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ar-0

7Se

p-07

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-08

Sep-

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ar-0

9Se

p-09

Mar

-10

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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-

16M

ar-1

7Se

p-17

%

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 17YTD*

1,99

474

9

253

359

1,37

8

1,72

61,

855

2,21

8

2,27

2

2,59

12,

945

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

2,88

3

Mill

ions

REIT Capital ActivityPublic Equity Issuance

REOCs REITs (Transaction Value Shown)Source: RBC Capital Markets *mid-November 2017

0.0

2.0

4.0

6.0

8.0

10.0

12.0

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

7.8

7.1 8.

0

6.7

9.4

5.5

6.2 7.

5 8.3

9.9

6.1

7.3

9.5

9.4

11.4

8.1

8.0

9.1

8.6 9.2

%

IPD ReturnsAnnualized Returns By Property Type To Sept 2017

Industrial Office Retail Apartment

Source: © MSCI Real Estate

0.01.02.03.04.05.06.07.08.09.0

10.0

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

9.2

4.5

8.1

4.1

0.5

0.6 0.7 1.

0

-5.9

4.4

3.6

6.6

4.5

5.7

4.1

6.4

6.3 6.

9

8.5

8.5

%

Relative PerformanceComparing Annualized Returns To Sept 2017

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

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


SUSTAINED MEDIUM-TERM EXPANSION FORECASTA more modest but sustained rate of economic expansion is forecast for the medium term. The CBOC is predicting real GDP will increase by an annual rate of 1.8% from 2018 through to 2021. The fairly modest rate of expansion is expected to unfold over the second half of 2017 resulting in an annual advance of 2.6% for the year. Gains will be fairly broad based over the next few years. An aging population and below-average productivity are key determinants of the moderately positive medium-term growth trend. Another growth moderator will be lower rates of residential investment than during the housing market peak of the past few years. A range of government policy measures instituted over the past 12 to 18 months have reduced both activity levels and price growth in the housing market recently, a trend that is expected to persist over the near term. Consumer spending will also ease over the forecast period, which will also reduce the rate at which the economy expands to a more sustainable level. A relatively modest recovery in the nation’s energy sector is also expected to temper growth over the medium term. Investment in plant facilities and equipment will be relatively modest over the forecast period. Coincidentally, public sector spending will slowly rise despite large deficits in several jurisdictions. Even with this uptick, the medium-term growth outlook for Canada’s economy is moderately healthy.

CONSUMERS WILL KEEP SPENDINGCanadian households will continue to spend fairly freely over the next few years despite record-high debt levels. Household spending is expected to increase by 2.9% in 2017, representing a seven-year high. Over the subsequent two to three years increases will be more modest but remain generally positive. The combination of weaker job creation activity, record household debt and smaller wage gains will temper household spending over the medium term. Previously, the relatively strong rate of housing value growth supported household wealth and spending patterns. However, values are expected to rise at a slower rate over the forecast period. Therefore, consumers will continue to spend at a lower rate.

LABOUR MARKET WILL GRADUALLY STRENGTHENCanadian labour market conditions will continue to improve over the near term although gains will be more modest. In 2017 a total of 344,00 new jobs were created in the first 11 months, which was already a decade-high annual total. Next year a further 171,000 jobs will be created as forecast by the CBOC. Total employment will increase by 1.4% this year followed by an annual average of roughly 1.0% between 2018 and 2021. During the same period a sustained decline in the nation’s unemployment rate is projected. The rate will gradually fall to 6.0% by the close of 2021 from a four-year high of 6.6% at the end of 2017. This will coincide with a slow but sure rise in personal income per capita. In short, sustained labour market gains are forecast for Canada’s labour market over the next few years.

HOUSING MARKET SOFT LANDING WILL CONTINUE TO UNFOLD Canada’s housing market’s “soft landing” will continue to unfold over the near term. As of October of 2017, existing home sales were beginning to rise modestly having slowed by a little over 10.0% from springtime peak. In addition, the average Canadian home price rose for a third consecutive month in October following five monthly declines. GTA prices are down 11.0% year over year as of October with mild upward pressure evident. In British Columbia listings are up, with activity down 16.0% from the spring 2016 peak. The slowdown in activity and price growth reported during 2017, and return to more sustainable growth is evidence that a “soft landing” in Canada’s housing market was underway. We anticipate this shift in market performance will continue over the near term.

ECONOMIC OUTLOOK

50

60

70

80

90

100

110

120

130

140

Mar

-02

Sep-

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ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

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ar-0

7Se

p-07

Mar

-08

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ar-0

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p-09

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-14

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ar-1

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p-15

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-16

Sep-

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7Se

p-17

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

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

%

Official Policy RatesInternational Monetary Conditions

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

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

0.0 0.5 1.0 1.5 2.0 2.5

WinnipegCanada

MontrealVictoriaHalifaxOttawaRegina

SaskatoonEdmontonVancouver

CalgaryToronto

1.41.81.8

1.92.12.1

2.22.2

2.32.3

2.42.5

%

CMA Real GDP Growth2018 - 2021 Forecast

Source: Conference Board Of Canada

3.1

3.2

2.6

2.1 1.

0

-2.9

3.1

3.1

1.7 2.

5

2.6

0.9 1.5

3.1

2.0

3.8

3.3

2.7

1.8

-0.3

-2.8

2.5

1.6 2.

2

1.7 2.

6 2.9

1.5 2.

2 2.7

-4.0

-2.0

0.0

2.0

4.0

6.0

04 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F

%

Economic Growth Real GDP Growth - Historical & Forecast

Canada United States WorldSource: Conference Board Of Canada (Dec 2017); International Monetary Fund (Oct 2017)

METROPOLITAN ECONOMIC & REAL ESTATE OUTLOOK


LABOUR MARKET FELL FLATHalifax Census Metropolitan Area (CMA) labour market performance underwhelmed during 2017. Total employment was forecast to expand by just 0.1% for the year given a weak performance posted during the first three quarters. Employment growth in the services sector was almost completely offset by reductions in the goods production side of the economy. The CMA’s unemployment rate was expected to rise to 6.6% by the close of 2017 up from 6.2% at the end of 2016. The rising trend was the result of increased migration volume which boosted the region’s labour force.

HOUSING STARTS SURGEDHousing starts were expected to surge in 2017 driven by both the single detached and condominium market segments. In total 2,650 starts were forecast for the year by the Conference Board. This total was the highest on record dating back five years. Conversely non-residential development activity slowed despite recent project starts including: the Centre for Ocean Ventures and Entrepreneurship, the Queen’s Marque, renovations to Dartmouth General Hospital and larger retail developments for IKEA and Cabela. Looking ahead, residential construction activity was forecast to moderate but remain healthy following a sharp increase this year.

SERVICES SECTOR MOMENTUM INCREASED The Halifax CMA registered increased services sector momentum over the near term, a trend that was expected to continue for the next few years. Output was projected to rise 1.9% in 2017 following a modest 1.6% lift in 2016. A further 2.2% expansion was predicted for 2018 driven by stronger performance patterns in several sub-sectors including: wholesale and retail trade, finance, insurance and real estate and business services. The strong growth trend was forecast in business services with average annual expansion of 3.4% in each of 2017 and 2018.

ECONOMIC GROWTH TO STRENGTHEN The Halifax CMA 2018 economic growth will be the strongest on record dating back to 2011. Economic output will increase by 2.2% in 2018 as a consequence of healthy gains in the construction, manufacturing and broader services sectors. After a brief slowing trend this year construction output will increase by a robust 4.2% in 2018. A byproduct of the stronger growth cycle will be a firmer employment growth trend. Total employment is expected to rise by 1.5% in 2018 following a tepid 0.1% over the previous 12 months. In turn, labour market progress will advance retail sales by 2.9%. In short, the Halifax CMA economic growth trend will improve during 2018 following a period of relatively slow growth in 2017.

HALIFAX ECONOMIC REPORT

ECONOMIC SNAPSHOT

A third consecutive year of slow growth was forecast for the Halifax CMA economy in 2017. The CBOC expected real GDP to expand by 1.4% just short of the 1.5% annual average over the preceding two-year period. A key driver of 2017 growth was the region’s manufacturing sector. However the primary and utilities and construction sectors were expected to record reduced output. Services sector output was projected to rise by 2.0%. Advances were also predicted for the wholesale and retail trade and the finance, insurance, and real estate sectors.

0

50

100

150

200

250

300

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketHalifax Historical & 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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorHalifax Historical & Forecast Aggregates

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


-3-2-1012345678

-2.0

-1.0

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

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsHalifax Historical & Forecast Aggregates

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


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

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthHalifax Historical & Forecast Aggregates

Average Annual GDP Growth Average Annual CPI GrowthSource: Conference Board Of Canada


HALIFAX OFFICE REPORT

OVERSUPPLY WAS SUPPORTIVE OF TENANT’S MARKET Office users were able to take advantage of excess supply in the Halifax Regional Municipality (HRM) market over the past year. To some extent tenants were often able to dictate lease terms given vacancy levels that rested in the mid-to-high teens. Downtown, vacancy stood at 18.3% at the midway mark of 2017 which was far higher than the national average. Overall market vacancy reached a high point dating back over two decades. Looking ahead, the market’s position of oversupply was expected to intensify with the delivery of 420,000 square feet of newly built space over the next few years. Of this total 300,000 square feet of newly built space was scheduled for completion in the downtown area in 2017. Excess vacancy has forced landlords to offer greater free rent periods and other inducements across the market in order to secure tenants. Oversupply and the resulting competition among landlords has driven rents progressively lower on average. Coincidentally tenants have been able to access higher quality space at relatively low rents. Additionally, tenants have taken increasingly aggressive negotiating stances upon lease renewal or relocation. With few indications of a downward vacancy trend over the next few years the HRM office market will continue to favour tenants.

SOLID INVESTMENT MARKET PERFORMANCE RECORDEDThe HRM office sector registered a relatively stable and positive investment market performance over the past year. Properties tracked in the MSCI Index registered an annual average total return of 5.7% for the year ending September 30, 2017. This result was comprised of stable and healthy income growth for this subset of properties. At the same time a modest capital decline was reported. The solid performance level of the past year came during a period of stable and healthy demand characteristics. National groups continued to target the region’s best towers. Regional and local groups tended to focus on smaller or higher risk assets given their more intimate knowledge of the market’s regional nuances. The strength of the market’s demand backdrop was a driver of relatively healthy transaction completion volume over the recent past. In the first half of 2017, total sales volume of $53.4 million was recorded. The total was more than twice the total recorded for all of 2016. For the most part vendors were able to achieve satisfactory pricing levels when selling assets. On average, yields were unchanged from the previous year. In summary, the HRM recent investment market performance of the recent past was relatively healthy and stable in keeping with that of the past few years.

RECENT SECTOR THEMES WILL PERSISTThe near-term outlook for the HRM office market performance includes a significant degree of consistency. A continued oversupply of office space will erode leasing market performance indicators over the next 12 to 24 months. Vacancy levels will continue to rise beyond the 25-year record highs recorded during 2017. The delivery of 300,000 square feet at the Nova Centre by the end of the year will drive vacancy levels higher. In turn excess vacancy will drive rents lower. The softening trend will play out despite a relatively rosy economic growth forecast. The HRM economy is forecast to grow 1.4% over 2017 followed by 2.2% in each of 2018 and 2019. Much of this progress will be focused in the manufacturing sector. However it will spill over into slightly stronger demand in the office market. The volume of existing and new vacancy on the market for lease will more than offset material progress. As a result landlords are expected to continue to offer healthy inducement packages to try to fill the abundance of space on the market. Tenants will remain in the driver’s seat during negotiations on new leases and in renewal scenarios. Oversupply will continue to negatively impact values through much of the sector in keeping with the recent trend. Investors, however, will continue to target assets in this market against a backdrop of consistently weak performance.

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).

-300-200-1000100200300400500600700

75

80

85

90

95

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s of

Squ

are

Feet

%

Office Demand & Supply Halifax Historical & Forecast Aggregates


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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Halifax Historical & Forecast Aggregates


0.0

5.0

10.0

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

5.7

3.1

5.3

7.8

5.56.2

7.58.3

%

Historical PerformanceFor The Period Ending Sept 2017

Halifax Office National Office



HALIFAX INDUSTRIAL REPORT

INDICATIONS OF EARLY PHASE OF RECOVERY CYCLE WERE OBSERVED There were signs of recovery observed in the Greater Halifax Area (GHA) industrial leasing market during the first half of 2017 following a period of below-average performance. A moderate downward availability trend was reported during the first half although the 10.9% rate was still markedly higher than the long-term average. Prior to late 2014, single-digit availability was the norm dating back more than 15 years. The recent modest downward availability trend was supported by the absence of a material development cycle and its potentially negative impact on supply fundamentals. The recent downward availability trend was also a product of improved demand patterns witnessed through much of the past year. A consequence of the stronger demand trend was the absorption of 134,265 square feet of space according to CBRE data. Previously just 22,472 square feet of space was absorbed in all of 2016. The market’s largest submarket, Dartmouth, led the charge in terms of net absorption. The HRM economy is expected to strengthen by 2018 with growth pegged at 2.2% in each of 2018 and 2019. As a result we anticipate the continued emergence of the recent recovery cycle over the near term resulting in the gradual strengthening of leasing fundamentals.

INVESTMENT DEMAND PATTERNS STABILIZEDIndustrial property investment demand has stabilized during the recent past despite below average performance characteristics. A range of local and national groups exhibited interest in acquiring assets in this market. The strongest positive sentiment was typically shown for functional properties with secure tenant rosters. Local groups were the most active of participants over the past year given their long-term view of the market. In keeping with the long-term trend availability failed to keep up with demand due in large part to the relatively small inventory of buildings in this market. This was reflected in transaction volume which totalled a modest $3.3 million for just three sales. The pace of closing activity was well below that of 2016 when $69.8 million was tallied. The stabilization of investment demand was somewhat surprising given recent performance characteristics. Total returns were barely in the black during the first half of 2017 on the heels of a 0.8% return for the year ending on June 30, 2016. Despite the weak performance of the recent past investors continued to view the long-term market prospects favourably resulting in stable overall demand patterns.

MOMENTUM IS EXPECTED TO BUILDPositive momentum is projected to gradually increase over the near term in light of a more robust manufacturing-driven economic outlook. Increased output in the region’s ship building industry during 2018 and 2019 will be a catalyst for industrial sector momentum. Coincidentally, a rise in container traffic through Halifax Harbour will also support positive performance characteristics over the near term. Consequently industrial space demand will increase. Expansion activity in the manufacturing-related and warehouse and distribution sectors will be the primary demand sources. This will slowly drive availability rates lower in extending the trend of the first half of 2017. Absorption patterns will also improve particularly for functional space in Dartmouth where availability will meet the increased demand. The firming and strengthening of industrial demand will push rents gradually higher as the market tightens. Rents should remain at levels to justify new construction which will initially be design build in format. The continued strengthening of leasing fundamentals may kick off speculative development by the second half of 2018. Improvements in leasing market conditions will support positive income performance for owners. At some point over the next 12 to 24 months property values should stabilize, adding to the increasing market momentum over the near term.

TRENDING STATISTICS


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


-300-200-1000100200300400500600700

80828486889092949698

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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 2017

%

$ p.

s.f.

Industrial Rent & Vacancy Halifax Historical Aggregates

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

-5.0

0.0

5.0

10.0

3rd Qtr 2017 1-YEAR* 2-YEAR* 3-YEAR*

1.7

-2.5

1.6

4.52.4

6.7 6.77.3

%


Halifax Industrial National Industrial

Source: © MSCI Real Estate 2017 *1, 2 and 3-year for period ending Sept 2016


HALIFAX RETAIL REPORT

STABILIZATION CARRIED THROUGH MUCH OF THE PAST YEARThere were few significant shifts in leasing market fundamentals reported over the past year in the GHA retail sector. There was little variation in vacancy characteristics. Average market vacancy rested at 5.4% as of the midway mark of 2017 down just 20 bps year over year. The power centre average of 7.3% was unchanged over the same period. The regional centre average was up 20 bps holding at 2.0%. Supply-side stability was a byproduct of a moderately positive demand trend. For the most part retailer expansion activity offset store closures which would otherwise have boosted vacancy levels. The most significant expansion to take place recently was the opening of a much anticipated 328,000 square foot IKEA store at Dartmouth Crossing. Additionally Zara’s first Atlantic Canadian store opening at the Halifax Shopping Centre was another plus for the market. The 25,400 square foot store opened in August to generally positive reviews. The largely positive demand backdrop was reflected in absorption volume statistics. A total of 114,800 square feet of retail space was absorbed over the first six months of 2017. The total was the first material increase in occupied space recorded since 2012. Aside from this shift leasing market conditions were essentially unchanged year over year in this market in 2017.

INVESTMENT TRENDS WERE SOMEWHAT MIXED Investment market trends observed over the recent past have been relatively mixed. On the positive side of the ledger investors continued to gain access to properties with attractive income attributes. Both local and national groups were active in this regard. For most the prospect of stable and healthy performance over the long term was a key consideration in the decision to explore the market for opportunities. Despite strong interest, transaction closing volume dipped sharply. During the first half of 2017 a meagre $1.0 million in retail property sales was recorded contrasting the robust $86.2 million over the same period a year earlier. Total annual sales of $182.2 million were completed in 2016 which represented an annual high dating back to 2012. The mixed investment market performance of the recent past was also evidenced in MSCI return statistics. The HRM retail sector posted an annual average total return of 0.6% for the 12 months ending September 30, 2017. This result was comprised of stable and healthy income growth which was largely offset by a 3.7% cumulative capital loss of 3.7% over the period. This mixed result was typical of the broader sector investment performance of the past year.

DOMINANT NEAR-TERM MARKET THEME WILL BE CONSISTENCYConsistency will characterize the HRM retail sector performance over the near term. Tight conditions will prevail in the leasing market despite the introduction of newly vacated space to the market. More specifically, Sears store closures at Penhorn Mall and the outlet centre near Halifax Shopping Centre represent two large blocks of vacant space. Even with this new space market vacancy is expected to continue to hover near the 5.0% mark. Tenant expansion activity will be sufficiently robust as to offset vacant space added to the market. Consistently healthy leasing market fundamentals should translate into stable and positive income performance patterns for the market’s landlords. The market’s conservative development cycle will guard against a significant run up in vacancy over the next 12 to 24 months. Low vacancy levels should, in turn, continue to hold rents close to the cycle high. Once again income performance will have a positive impact on investment performance. Against this backdrop investment demand will remain generally healthy given a belief in the health of the regional economy and retail sector over the long term. Positive sentiment on the part of retailers and investors will support consistently healthy sector performance for the near term.

TRENDING STATISTICS


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


-$4

-$2

$0

$2

$4

$6

$8

$10

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

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

$182

$1$0

$50

$100

$150

$200

$250

$300

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

Mill

ions

Investment ActivityHalifax Retail Investment Volume To June 2017


-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1-YEAR 3-YEAR 5-YEAR

0.6 0.7

6.56.1

7.3

9.5

%


Halifax Retail National Retail



HALIFAX MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET STABILIZATION HELD FIRM The fundamental health of HRM’s multi-suite residential rental market persisted during the past year with only minor fluctuation in year over year performance. Demand characteristics were generally positive. International migration supported rental demand, as did the decision on the part of families to have chcildern later and labour market trends. A steady supply of new arrivals from other countries to the region boosted rental demand. Newcomers to the HRM have historically rented accommodation during their first year or two of residence until they become familiar with the area. Younger adults have increasingly chosen to have children later in life and have, as a result, delayed purchasing a home and continued to rent. These demographic influences ensured rental demand patterns were broadly positive over the recent past. The health of the rental demand trend was a driver of consistently strong vacancy patterns in the HRM. The CMHC called for an average market vacancy rate of 2.8% for the fall of 2017 in its most recent forecast. Previously, vacancy had ranged between 2.6% and 3.8% dating back to 2013. The relative stability of the market’s vacancy trend over the past few years was mirrored in its construction cycle. Following a modest slowdown in construction starts in 2016 activity is projected to rebound this year in line with the 2015 level. The combination of consistently positive demand and fairly stable vacancy continued to support modest rental rate growth. Averages edged up slightly over the past year a trend that was typical of recent market performance.

CONSISTENCY CHARACTERIZED INVESTMENT PERFORMANCEConsistency characterized the HRM multi-suite rental property sector investment performance over the past year. An extension of the mature phase of the cycle was reflected in investment returns tracked in the MSCI Index. A solid total return of 5.8% was posted for the properties in the HRM over the 12-month period ending September 30, 2017. The result marked a seventh consecutive year of healthy overall performance. Solid income growth made up much of the result in keeping with the trend of the past few years. Most HRM investment market performance characteristics of the past year were consistent with those of the recent past. For example, demand patterns were largely unchanged. Private capital groups were the most active pursuers of assets in this market. National groups were also present but their appetite for larger assets went unfulfilled for the most part. Regardless, there was no shortage of capital available to invest. To a large extent the strength of the demand cycle ensured property values remained close to peak levels. Previously, values had been on a steady upward path from 2010 to 2013. The recent stabilization of property values was in line with the broader HRM investment market performance.

GENERALLY POSITIVE OUTLOOK FORECAST FOR NEAR TERMThe near-term outlook for the HRM multi-suite rental sector is generally positive given a forecast improvement in performance drivers. Moderately stronger economic growth will buoy rental demand in all its forms. Manufacturing and ship building activity will drive job market advances. Therefore, international and inter-provincial migration is expected to remain relatively healthy as new arrivals look to take advantage of increased employment opportunity. Solid demand fundamentals will ensure vacancy levels remain low. The CMHC is forecasting vacancy will edge higher to 3.0% and 3.3% in 2018 and 2019, respectively. This stability will result in modest upward pressure on average rents and income stabilization for owners. Income security and a flat property value trend will extend the market’s run of healthy investment performance. The market’s ongoing stability will continue to attract investors of various types. However, supply will fall short of the volume of capital looking for a home in the HRM. Aside from the shortfall in availability, the market outlook is mostly positive.

TRENDING STATISTICS


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


$10

$49

$143

$167

$76

$161

$41 $44 $50

$210

$161

$44

$121

$60

$106

$35

$0

$50

$100

$150

$200

$250

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

Mill

ions

Investment ActivityHalifax Multi-Suite Investment Volume To June 2017


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

2017

F20

18F

2019

F

3.6

2.8 2.72.3

2.93.3 3.2 3.1

3.4

2.92.6

2.4

3.03.2

3.83.4

2.6 2.83.0

3.3

%

Average Rental Vacancy Halifax Apartment Structures Of Three Units & Over

Source: CMHC

0.0

5.0

10.0


5.8 5.5 5.8 6.0

8.1 8.09.1

8.6

%


Halifax Multi-Suite National Multi-Suite



ECONOMIC SNAPSHOT

SUPRISINGLY STRONG LABOUR MARKET CONDITIONS REPORTEDThe GMA labour market posted stronger than forecast gains during 2017 driven by economic outperformance. The region’s unemployment rate was on pace to set an all-time record low by the end of the year falling to 6.5% from 7.6% in 2016. Robust economic growth in 2016 was expected to boost employment by 1.6% annually for 2017 and 2018. Major contributions to the labour market progress of the recent past came from both the goods and services sectors reflecting increased consumer and business confidence.

CONSTRUCTION SECTOR REBOUND WAS A BOONThe GMA construction industry looks to have rebounded during 2017 resulting in a skyline dotted with cranes. Sector employment was on pace to increase by 5.1% during the year according to the CBOC forecast. At the same time output was forecast to expand for the first time since 2012 at a rate of 3.1% this year and 2.1% in 2018. Housing starts were on a rising path with an expectation of reaching a five-year peak of 19,700 for 2017. A number of large public investments were also catalysts of the sector turnaround.

SERVICES SECTOR POSTED SUSTAINED GROWTHThe GMA services sector remained a key growth driver during 2017 having offset goods production challenges in the past. Services sector expansion was forecast to reach a 17-year high of 3.3% this year following a robust 2.8% in 2016. Key sector segments that contributed to the recent strength were transportation and warehousing, finance, insurance and real estate and business services. Expanded output resulted in strong employment growth with 55,000 jobs expected to be created.

GROWTH TO MODERATE OVER THE NEXT COUPLE OF YEARSGMA economic growth is projected to moderate over the near term following a record level of expansion in 2017. The CBOC is forecasting average annual real GDP growth of 2.0% for 2018 and 2019. Certain sectors are poised to outperform over the medium term in terms of contributing to overall growth. The broader services sector will see the strongest growth with gains in personal services, finance, insurance and real estate, and transportation and warehousing output forecast. Sustained economic expansion will result in relatively stable employment trends. The unemployment rate will hold close to record low levels resting at 6.5% in 2018 with a slight decrease in 2019 to 6.4%. Employment is also forecast to stabilize following a strong 3.2% lift this year. Sectors forecast to see the strongest employment growth in 2018 include manufacturing at 5.5% and, personal services at 3.8% and transportation and warehousing at 3.9%. A significant number of major infrastructure projects will boost economic output in the GMA which will held drive modest but positive economic growth over the next couple of years.

Montreal’s economy was on pace to expand by a stellar 3.2% in 2017 according to the CBOC’s autumn forecast. This performance was driven by resurgent growth in the goods production sector following a five-year long slump. Increased construction and services sector output also contributed to the 2017 outperformance. The economic surge generated positive job market performance patterns. In addition the economic performance produced a solid lift in retail sales, housing starts and income growth. Economic growth was forecast to settle into a more modest pace of close to 2.0% over the next few years.

MONTREAL ECONOMIC REPORT

0

500

1,000

1,500

2,000

2,500

-3.0

0.0

3.0

6.0

9.0

12.0

15.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketMontreal Historical & Forecast Aggregates



0

5

10

15

20

25

30

35

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorMontreal Historical & Forecast Aggregates



-30-20-100102030405060

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsMontreal Historical & Forecast Aggregates



-2.0

-1.0

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

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthMontreal Historical & Forecast Aggregates



MONTREAL OFFICE REPORT

TENANTS HELD THE UPPER HANDThe GMA office leasing market fundamentals continued to favour tenants over the past year in keeping with the medium-term trend. Vacancy levels remained markedly higher than the most recent peak which provided tenants with a range of space options. Aggregate vacancy in the low double digits was reported for all classes of space combined in more than one market survey. As a result tenants were often exposed to a range of space alternatives in most submarkets when seeking to expand or renew their existing leases. The relative abundance of choice for tenants forced landlords to offer incentives to entice tenants to their buildings. In some cases this created downward pressure on achieved rents. Periphery downtown nodes and midtown saw plenty of leasing activity during 2016 and 2017. The driver of this activity was the ability of tenants to source lower rents relative to prime towers in the downtown core. For some this allowed access to higher quality space in newer or more prominent buildings. Renovated loft space was also a popular choice with tenants over the past couple of years. Until recently, however, demand has been fairly muted overall resulting in modest absorption volume as well as marginal fluctuation in average rents. Submarkets with excessive vacancy, often in suburbs, have seen rents decline. In many cases tenants were able to assume an advantageous position in negotiations.

INVESTMENT TRENDS REFLECTED CYCLE MATURITYInvestment market conditions observed in the GMA office sector over the recent past reflected the maturation of the current cycle. Core properties remained in high demand, particularly downtown. This market was often seen as an alternative to the GTA and GVA where pricing had peaked, competition was intense and opportunities limited. Demand for GMA assets outdistanced supply resulting in competitive and aggressive bidding scenarios. This activity ensured pricing continued to hold close to the peak for the cycle. The maturing of the capital cycle was reflected in MSCI return data. GMA properties tracked in the index generated an annual average total return of 1.5% for the year ending September 30, 2017. In 2017, the capital trend was essentially flat. During the 12-month period income growth was healthy which offset the second-half 2016 capital decline. Against this backdrop, market activity remained relatively brisk. In the first half of 2017 a total of $593.7 million in office property sales were reported. The total represented a significant increase over the previous year’s pace when $470.3 million in sales were closed over the same period. Despite the increase there was enough evidence in support of the market’s cycle maturation observed over the past year.

MODEST GAINS FORECAST FOR NEAR TERMModest gains are forecast for the GMA office sector over the near term in light of a forecast easing of the recent economic growth trend. The regional economic growth trend is forecast to moderate over the near term after a robust period of expansion in 2017. A 2.0% increase in output for 2018 and 2019 will support modest demand for office space. However, new supply will limit progress as vacancy levels remain elevated. Downtown leasing momentum will offset rising vacancy and downward pressure on rents in midtown and the suburbs. On aggregate this will produce fairly stable and positive income performance over the next couple of years in keeping with the medium-term trend. Technology, research and traditional office user groups will be key drivers of space demand going forward. The investment market cycle should continue to mature. Values and yields will hold at recent levels although there is a possibility of cap rate compression for exceptional assets brought to market. This compression would be in keeping with the near-term sector theme of modest progression.

TRENDING STATISTICS


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


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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Montreal Historical & Forecast Aggregates


-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

2017

F20

18F

2019

F20

20F

2021

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Montreal Historical & Forecast Aggregates


0.0

5.0

10.0

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

1.5

3.7

4.9

6.5

7.9

5.56.2

7.58.3

9.9

%


Montreal Office National Office



MONTREAL INDUSTRIAL REPORT

LANDLORDS’ MARKET BEGAN TO EMERGERecent progress in the GMA industrial leasing market resulted in the emergence of conditions that favoured landlords. During the past year the supply of functional space fell short of demand. Availability hit an all-time low by the mid-point of 2017 at 6.9% according to CBRE statistics. In particular, larger spaces with a minimum clear height of 24 feet were the most highly sought after, and in the shortest supply. Demand pressure was enhanced by a stronger-than-expected economic growth trend through much of 2017. The market’s demand supply dynamic resulted in gradual and sustained upward pressure on average rents. Landlords were able to command higher rents for prime space while enjoying a more advantageous negotiating position. Previously, achieved rents on new leasing were below asking levels. However, the recent market tightening closed the gap significantly. New supply dynamics supported the emergence of a landlords market in the GMA over the recent past. For the most part new supply has been build-to-suit during 2016 and much of 2017. As a result there was effectively zero square feet of available space added to inventory for tenants to lease. The shortfall in overall availability supported the emergence of market fundamentals that favoured the sector’s owners.

BROADLY STABLE AND POSITIVE INVESTMENT TRENDS REPORTED The past year saw generally stable and positive investment market trends reported in the GMA industrial sector. A range of national and local groups looked to invest funds in the market’s investment-grade inventory of properties. Functional assets in established nodes were most popular but were unfortunately in relatively short supply. Despite the shortfall, transaction closing activity has been fairly stable and healthy. A total of $287.6 million in property sales were completed in the first half of 2017 down slightly from the $312.0 million recorded over the same time period a year earlier. The demand pressure of the past year stabilized property values near the peak for the cycle. This was reflected in MSCI Index results. The GMA industrial sector generated a solid average annual return of 6.4% for the year ending September 30, 2017. The result was made up entirely of income growth as the capital return was essentially zero. The strength of the income result was driven by the health of the sector’s recent leasing performance. Owners have been able to bolster income performance given tighter conditions overall and rising rents for functional space. The general health of the leasing performance to some extent mirrored that of the investment market over the past year. PERFORMANCE DRIVER FORECAST BODES WELLThe GMA industrial sector performance-driver forecast bodes well for continued progression over the near term. From a macro standpoint 2017 economic growth is poised to improve over the relatively modest 1.3% expansion in 2016. Subsequently, economic growth will moderate to roughly 2.0% expansion in 2018 and 2019. Montreal’s 375th anniversary celebrations will add to the positive economic growth outlook. Economic growth will support expansion in the industrial leasing market with technology and warehouse and distribution users leading the way. At a minimum availability should hold close to the cycle low of 6.9% with the possibility of further reductions. The resulting upward pressure on rents will be a boon for owners looking to achieve secure income growth. Income security and growth for owners of industrial property will drive positive investment performance. Coincidentally property values are expected to hold at current levels. The net result of income growth and a stable capital trend should see returns remain in the black. Stable and positive leasing fundamentals will draw investment to the market. Once again, supply will not fully meet demand. Despite this imbalance the market will be relatively liquid. This liquidity is one component of the stable and healthy GMA industrial property investment performance forecast for the near term.

TRENDING STATISTICS


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


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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Industrial Rent & Vacancy Montreal Historical & Forecast Aggregates


-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

2017

F20

18F

2019

F20

20F

2021

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & Supply Montreal Historical & Forecast Aggregates


0.0

5.0

10.0


6.47.3 7.1

5.8

8.87.8

7.18.0

6.7

9.4

%


Montreal Industrial National Industrial



MONTREAL RETAIL REPORT

RESILIENCE CHARACTERIZED LEASING MARKET PERFORMANCE The GMA leasing performance of the past year reflected a measure of resilience despite ongoing sector challenges. Overall demand patterns were generally positive resulting in a number of new store openings. The most notable of these was the expansion of Ogilvy’s on Sainte Catherine Street and new Saks OFF 5th stores at CF Galeries d’Anjou and the Eaton Centre. While the GMA has endured its share of store closures and downsizing, recent expansion activity has offset some of these losses. The resilience of the GMA retail leasing market was also evidenced in supply-side metrics. Average market vacancy stood at a low of 4.5% at the close of the first half of 2017, down 20 bps year over year. The market has posted low vacancy levels over the past few years despite store closures and consolidation activity. Over the past year the relative stability of retail rents was yet another testament to the GMA retail sector’s resilience. However, there were a number of challenges that had a somewhat negative impact on leasing market performance. Retailers were forced to contend with higher Gross Rent to Operating Cost (GROC) ratios and changing consumer shopping patterns related to e-commerce. These challenges hampered leasing market progress although the market remained relatively resilient overall.

STABLE DEMAND PATTERNS OBSERVED AGAINST BACKDROP OF WEAKER PERFORMANCE Investment demand remained healthy during the past year against a backdrop of weaker investment market fundamentals. National and local groups continued to try to invest in this market as has been the case for several years. To some extent this was evident in the continued sale of assets over the past year. The continued stabilization of the demand cycle occurred during the past year when overall performance trended downward. Properties tracked in the MSCI Index generated an average total return of 2.3% for the year ending September 30, 2017. This was down from 5.1% tallied a year earlier. The 2017 performance reflected the gradual decrease in average capital value in this market. In contrast, income performance remained strong and stable. In addition to the downward performance trend, market liquidity also declined. In the first half of 2017 a total of $327.3 million in retail properties sold across the GMA. This activity level was down sharply from the previous year when $577.8 million in sales was reported over the same period. The reason for the reduction in sales was that few large-scale assets traded. Activity was comprised largely of shopping smaller centres. A number of value-add properties also sold as vendors took advantage of the pricing cycle and shortage of prime assets for acquisition. Despite the decline in transaction volume however demand was healthy and stable even as performance trends softened over the past year.

SECTOR DRIVERS INDICATE GRADUAL PROGRESSIONA positive performance-driver outlook is indicative of continued progression in the GMA retail sector over the near term. Sustained economic growth and job market progress will continue to drive retail sales and expansion activity. Retail sales are projected to rise by 3.5% in 2017 and average 2.4% annually in 2018 and 2019. The healthy fundamental outlook will draw funds to the sector which will boost investment performance. Demand will surpass the supply of high quality assets once again. Leasing market stabilization will support investment performance while property values slowly stabilize. The largely positive sector outlook will be an attraction for investment into this market. Consequently properties placed on the market for sale are expected to generate strong interest. Overall, the near-term picture for the GMA retail sector is positive given a healthy performance-driver forecast.

TRENDING STATISTICS


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


$0

$10

$20

$30

$40

$50

$60

$70

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

2017

F20

18F

2019

F20

20F

2021

F

Bill

ions

%

Retail ConditionsMontreal Historical & Forecast Aggregates



$266 $255

$815

$308

$566$735

$508$320

$589$710 $665

$559

$1,945

$910$1,077

$327

$0

$500

$1,000

$1,500

$2,000

$2,500

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

Mill

ions

Investment ActivityMontreal Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


2.34.0

7.28.4

9.9

6.17.3

9.5 9.4

11.4

%


Montreal Retail National Retail



MONTREAL MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET STEADIED GMA multi-suite residential rental market conditions steadied over the past year as demand largely kept pace with supply. The market’s vacancy level was expected to settle at 4.1% as of October of 2017. Vacancy was expected to have edged 20 bps higher from 3.9% a year ago. There was little variation in vacancy across the various unit sizes over the same period. Average vacancy was highest in the bachelor market segment. Youth employment rates have been stubbornly high for much of the past two years. Despite this weakness demand for rental accommodation has been generally healthy and stable during 2017. International migration was a boon for the sector, a demographic that has typically rented during the first year of residence. Inter-provincial migration patterns were also a positive influence on demand. The recent rise in construction activity resulted in increased choice for renters looking for condo-quality finishes and amenities. New rental supply volume surpassed levels recorded between 2011 and 2014, hence the slight upward vacancy trend. On average market rents continued their gradual ascent over the past year despite a relatively flat vacancy curve. The upward rental pressure was one of the few exceptions to the generally stable rental market performance rule of the past year.

HEALTHY INVESTMENT MARKET PERFORMANCE POSTED Healthy GMA multi-suite residential rental investment market performance patterns were reported over the past year in keeping with the national trend. Investor confidence was evidenced in strong transaction closing volume totals. There was a total of $727.4 million in investment property sales recorded during the first half of 2017. The market was on track for another year of more than $1 billion in sales volume. Moreover, the pace was in line with 2012 peak which was also the case for the previous two years. Strong liquidity patterns recorded over the past year were a byproduct of healthy demand characteristics. Institutional, private and public capital scoured the market for suitable assets to acquire over the past couple of years. In 2017, the bidding environment was persistently aggressive resulting in modest increases in property value. Well located high-rise properties with solid occupancy profiles garnered the strongest of interest and peak pricing. The upward value trend, along with stable and positive income performance, were reflected in overall investment performance. GMA properties contained in the MSCI Index registered an attractive total return of 6.1% for the year ending September 2017. This marked a third consecutive year of solid results. This performance strength was commensurate with the market’s performance theme of the past few years.

POSITIVE PERFORMANCE TO CONTINUE OVER NEAR TERMThe GMA multi-suite residential sector is expected to post largely positive performance metrics over the near term. Modest momentum is forecast for the GMA’s economy which is forecast to expand by 1.9% in 2017. This will push total employment slightly higher in each of 2017 and 2018. Labour market progress is expected to drive demand for rental accommodation along with generally positive migration patterns both international and inter-provincial. Supply is expected to outpace demand by a modest margin resulting in a slight upward vacancy trend. The CMHC is predicting vacancy will rise from 4.1% this year to 4.3% in 2018 and 4.4% in 2019. The reason for the upward trend is largely related to the increased volume of new construction. The resulting rise in vacancy will moderate upward pressure on rents over the next 12 to 24 months. Averages will continue to hold close to the market peak. This will positively influence performance with returns likely holding in the mid -single digits. This performance, along with healthy market fundamentals will attract investors. In short, the market will continue to post stable and healthy performance patterns over the near term.

TRENDING STATISTICS


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


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

2017

F20

18F

2019

F

1.5

0.6 0.71.0

1.52.0

2.72.9

2.4 2.5 2.7 2.52.8 2.8

3.4

4.0 3.9 4.1 4.3 4.4

%

Average Rental Vacancy Montreal Apartment Structures Of Three Units & Over

Source: CMHC

$722

$416 $461

$706 $677

$846$946

$605

$836 $900

$1,355

$829 $813

$1,490

$1,218

$727

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

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

Mill

ions

Investment ActivityMontreal Multi-Suite Investment Volume To June 2017


0.0

5.0

10.0


6.1 5.9 6.16.8 7.2

8.1 8.0

9.18.6

9.2

%


Montreal Multi-Suite National Multi-Suite



LABOUR MARKET CONDITIONS IMPROVEDA marked improvement in labour market conditions was observed over the past year led by the region’s largest employer. Since 2016 the federal government has upped its spending program significantly which boosted hiring activity. There was an expectation of 11,000 new jobs created in 2017 up from the 5,900 annual average over the past five years. Employment growth was forecast to outdistance labour force expansion. In turn, the unemployment rate will range close to the 6.0% mark through to 2019. Solid income growth for workers was anticipated over the projection period with the strongest increase occurring late in the cycle. All in all the region’s labour market has undergone a material improvement over the past year a trend that will continue over the near term.

IT WAS A BUSY TIME FOR CONSTRUCTION SECTOR The region’s construction sector was a key driver of economic growth over the past year with both the non-residential and residential markets holding their own. Sector output was on a pace to expand by 3.0% in 2017 driven by several high profile government projects and a housing market rebound. Infrastructure projects were the largest contributor to the construction sector output increase including the new O-Train project, the widening of Highway 417, the makeover of Parliament Hill and the rehabilitation of the Supreme Court of Canada building to name a few. Residential starts were expected to rise by 10.1% in 2017, reaching a four-year high of 7,830 units. Much of the activity was in multi-family projects.

STRONG RETAIL SALES PATTERN UNFOLDEDStrong retail sales growth was forecast for 2017 following a three-year high rate of expansion in the previous year. Sales were expected to increase by 5.2% over 2017 following the 5.7% surge in 2016. A healthy economic growth trend and resulting improvements in labour market conditions were the main drivers of retail sales strength. While growth will moderate over the near term, the trend will remain positive.

NEAR-TERM OUTLOOK IS STABLE AND HEALTHYThe Ottawa-Gatineau economic outlook is relatively bright despite a more moderate growth rate. In each of 2018 and 2019 GDP is forecast to increase by 2.2% and 2.1%, respectively. The city’s public sector will key the positive outlook, along with an uptick in the region’s technology sector. REduced spending on the part of the public sector is a downside risk to the outlook. The broader services sector will also drive economic activity. In particular Canada’s 150th birthday related tourism will be an added boon. A healthy economy will support stable and healthy employment trends and retail spending over what should be a positive near-term economic performance.

OTTAWA ECONOMIC REPORT

ECONOMIC SNAPSHOT

The continued emergence from a prolonged period of slow economic growth continued in the Ottawa-Gatineau region over the past year. GDP was on pace to increase by 2.5% this year following a 1.9% advance in 2016. Labour market conditions were expected to follow suit with total employment rising by 1.5% in 2017 and a more modest 1.0% in 2018. Strong retail sales growth of 5.2% this year followed an even more robust 5.7% in 2016. Finally, housing starts rose during the past year with 7,830 forecast by the CBOC for 2017 and an average of 7,525 annually for 2018 and 2019.

0100200300400500600700800900

-4.0-2.00.02.04.06.08.0

10.012.014.0

2000

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2011

2012

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2015

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2017

F20

18F

2019

F20

20F

2021

F

Thou

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s

%

Labour MarketOttawa Historical & Forecast Aggregates



0

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4

6

8

10

12

14

0.0

2.0

4.0

6.0

8.0

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12.0

14.0

2000

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2017

F20

18F

2019

F20

20F

2021

F

Thou

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s

%

Housing SectorOttawa Historical & Forecast Aggregates



-5

0

5

10

15

20

-1.0

0.0

1.0

2.0

3.0

4.0

2000

2001

2002

2003

2004

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2006

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2011

2012

2013

2014

2015

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2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsOttawa Historical & Forecast Aggregates



0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthOttawa Historical & Forecast Aggregates



OTTAWA OFFICE REPORT

MOMENTUM CONTINUED TO BUILD IN DOWNTOWN LEASING MARKET Positive momentum was on the rise in the downtown leasing market over the past year in support of broadly stable fundamentals. The source of much of the renewed confidence on the part of local businesses was increased public sector spending and hiring over the past year. This was, in part, driven by a stronger-than-expected national economic growth trend in the first half of 2017. The combination of government and technology sector expansion activity boosted office space demand. Technology companies continued to locate and/or expand downtown to access younger more educated workers. In particular, Class A and higher quality Class B landlords benefited from the improved demand cycle. Class A vacancy stood just below the 5.0% mark as of the end of the first half of 2017 down almost 100 bps year over year. Rents remained below those required to justify new development in the city’s downtown core. As a result, there was upside on rents in well-located and modernized buildings. Class B and C landlords continued to lower rents to secure long-term government leases. Some owners chose to retrofit and renovate their buildings in order to attract tenants. Looking ahead, positive momentum was forecast for the downtown market as was the case over the past year.

RECENT ACTIVITY SIGNALLED INVESTMENT MARKET HEALTHThe health of the Greater Ottawa Area (GOA) investment market was evidenced by the recent sale of prominent downtown office properties. The sale of a 50.0% non-managing interest in Minto Place in the second quarter of 2017 and the sale of Constitution Square in the second half reflected the broadly stable and healthy investment market backdrop. There was no shortage of demand for these assets indicating the confidence investors have had in the sector and region. Reportedly both assets commanded benchmark-high pricing as an indication of the strength of the market’s value cycle. Further, even with record-low property yields investors continued to exhibit confidence in this market. Investor confidence factored into recent transaction volume totals. In the first half of 2017, $593.7 million in office property sales were reported in the GOA contrasting the $34.8 million over the same period a year earlier. The rationale for investing in this market continued to be a function of the region’s positive economic outlook including increased government sector spending and hiring. This positive investor sentiment was a key aspect of the broadly positive investment market performance and sale of prominent downtown office assets over the past year.

THE GOOD TIMES SHOULD CONTINUE TO ROLLThe GOA office market will continue to generate positive outcomes over the near term given a solid fundamental outlook. Office space demand will continue to come from expansion in the government and technology sectors. Demand should be strong enough to drive vacancy moderately lower overall, particularly downtown. Suburban availability will remain somewhat elevated, holding close to 2017 levels through much of the coming year. Rents are expected to slowly rise downtown given relatively tight conditions. Owners of Class A and B properties will realize rental growth as they will be the leading demand focus. Positive income performance will support investment returns. This should drive investment performance which will remain largely income based. For this reason an annual average return in the mid-single digits is highly probable for the coming year following a 5.5% MSCI Index average from the 12-month period ending September 30, 2017. The prospect of continued healthy performance metrics will continue to attract investors to this market. While we may not see as many prominent towers sold, demand will remain robust. In short, the good times should continue for this market over the near term both in the leasing and investment sectors.

TRENDING STATISTICS


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


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

75

80

85

90

95

100

2000

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2009

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2011

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2017

F20

18F

2019

F20

20F

2021

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

0

5

10

15

20

25

2000

2001

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2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Ottawa Historical & Forecast Aggregates


0.0

5.0

10.0


5.5 5.66.5

7.5

9.6

5.56.2

7.58.3

9.9

%


Ottawa Office National Office



OTTAWA INDUSTRIAL REPORT

IMBALANCE WAS THE PREVAILING LEASING MARKET THEMEThe prevailing theme in the GOA industrial leasing market over the recent past was one of material imbalance. For tenants looking to expand there were a limited number of suitable options in most size ranges. More specifically, owner/occupiers and tenants found it difficult to source contiguous available space in excess of 10,000 square feet. For this reason many were forced to make do with their existing space and hold off on expansion or risk having no options upon lease expiry. The availability shortfall was evidenced in recent market data. Average GOA industrial availability dipped to a 10-year low of 4.8% as of the midway mark of 2017 according to CBRE. The region’s two largest submarkets, the South and East, posted availability rates of 4.9% and 5.3%, respectively. There was little relief from the shortage of available space options as a result of new construction. In the past few years a small number of projects have been completed with little or no additional availability upon completion. With few available space options market wide landlords were able to gain the upper hand in lease negotiations. Consequently they were also able to command higher rents. This trend was likely to continue given few prospects for relief from the market imbalance that persisted over the past year.

MINIMAL CHANGE IN INVESTMENT MARKET CONDITIONS REPORTED There were few significant shifts in investment market conditions recorded over the past year as the current phase of the cycle continued to unfold. Transaction volume remained relatively modest with $56.9 million in sales closed during the first half of 2017. The total was down from the also fairly modest $71.5 million in sales completed over the same time period a year earlier. Investment performance was also relatively consistent over the past year with the MSCI Index properties generating an annual average return of 7.1% for the period ending September 30, 2017. The result was markedly stronger than the 5.7% return reported for the previous period. Investment demand was also generally unchanged year over year in keeping with the broader market theme. Investor confidence remained high. National and regional groups were active in their search for functional properties with attractive tenant profiles. When this type of property was offered for sale bidding and competition was aggressive. Investors were attracted to the market’s solid long-term performance and stability. The demand consistency of the recent past was consistent with the broader market theme.

MARKED SHIFT IN SECTOR PERFORMANCE IS UNLIKELY Significant shifts in sector fundamentals are unlikely over the near term given a moderately healthy performance-driver outlook. A measure of imbalance will continue to characterize the leasing market. Space demand is forecast to outdistance supply. Economic growth of 2.5% this year and 2.2% in 2017 will translate into healthy demand for industrial space. Availability levels will remain low as a result. A tepid development cycle will offer little relief from the shortage of functional space for tenants looking to expand. Shortages of serviced developable land will continue to limit the volume of new developments in this market as was the case over the past several years. Giant Tiger’s decision to move to Cornwall will roughly 300,00 square feet of vacancy over the next two years in three locations. However, pent-up demand will see this space leased fairly rapidly. The market’s demand cycle will continue to push rents gradually higher. The resulting income growth will support attractive returns. Capital values will hold at 2017 levels with the possibility of slight upward movement in some cases. Transaction volume will be dictated by the availability of assets offered on the market which is consistent with the trend of the past several years. In summary, we anticipate few material changes in sector performance over the near term which will remain broadly positive.

TRENDING STATISTICS


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


-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

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2017

F20

18F

2019

F20

20F

2021

F

Mill

ions

of S

quar

e Fe

et

%

Industrial Demand & SupplyOttawa 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

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2007

2008

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2011

2012

2013

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F20

18F

2019

F20

20F

2021

F

%$ p.

s.f.

Industrial Rent & Vacancy Ottawa Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


7.1 6.87.6

8.0

10.5

7.87.1

8.06.7

9.4%


Ottawa Industrial National Industrial



OTTAWA RETAIL REPORT

MODEST RETAIL MARKET GAIN REPORTEDA period of modest gain was reported in the GOA retail leasing market over the recent past in keeping with the national trend. Development and redevelopment activity over the recent past provided evidence of healthy confidence levels on the part of developers and tenants. Market vacancy stood at 4.7% as of the midway mark of 2017 down 20 bps year over year. These ratios have been typical of the past few years. The strength of the market’s vacancy profile was supported by a range of retailer expansions. The Beer Store and Shopper’s Drug Mart, for example, agreed to take space at Shoppers City East along with Costco with construction set to commence at a later date. New Value Village, LCBO, Panago, Tim Hortons, Marshalls, Indigo and Dollarama were also scheduled to expand in 2018. In other positive news Marshalls and Indigo had already committed to space at the new SmartCentre development in Orleans. Offsetting some of the gains reported in the market over the past year was the continued struggles of some retailers with the erosion of sales due to e-commerce and higher GROCs. Changes in shopper preferences was also eroded progress over the past year. In some cases this resulted in the reduction of space on the part of some stores and the closure of others. The best example of this trend was the closure of Sears Canada stores in the GOA. Overall however, the GOA leasing market remained on a positive path recently, although gains were fairly modest.

CURRENT PHASE OF THE INVESTMENT CYLE WAS PROLONGED The current phase of the GOA retail sector investment cycle was extended over the past year in keeping with the national trend. Demand was strongest for centres occupied largely by national tenants with long lease terms. In keeping with the national trend demand surpassed the supply of these types of assets available for acquisition. To fill the void some groups looked to development, redevelopment or expansion of existing centres to build their core portfolios. Despite limited availability transaction closing volume edged slightly higher during the first half of 2017. During this period a total of $88.1 million in sales volume was recorded up from $73.3 million over the same time period a year earlier. Persistently healthy demand in the face of limited supply resulted in the stabilization of property values following a marginal decline as captured in MSCI Index results. GOA retail assets generated an average annual return of 2.7% for the year ending September 30 2017. Income growth matched that of the previous year while the capital cycle leveled. Returns were projected to remain largely income-driven over the near term a trend that was in keeping with the forecast extension of the current phase of the cycle.

SUSTAINED PROGRESS FORECAST OVER NEAR TERMSustained progress is forecast for the GOA retail sector over the near term in keeping with the recent trend. The Ottawa CMA economy is expected to expand by 2.5% this year and 2.2% in 2018 representing the strongest increases since 2008. The resulting job growth rooted in the public sector will be a boon for the retail sector overall. The local consumer base will continue to spend relatively freely which will drive sales for retailers in this market. As a result expansion activity on the part of existing and new entries to the region will support demand for retail space. At a minimum therefore rents will hold at current levels. The closure of regional Sears Canada stores will push vacancy higher but rates will remain fairly healthy. This space will require extensive re-positioning or redevelopment. Solid leasing market conditions overall will result in income growth which will make up the majority of the sector’s total return over the near term. The healthy fundamental outlook will attract considerable interest in this market on the part of investors. Therefore, bidding on assets brought to market will be aggressive, which will help support the broader market theme of sustained progress over the near term.

TRENDING STATISTICS


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


$0

$5

$10

$15

$20

$25

-3.0

0.0

3.0

6.0

9.0

12.0

15.0

2000

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2017

F20

18F

2019

F20

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2021

F

Bill

ions

%

Retail ConditionsOttawa Historical & Forecast Aggregates



$131

$216

$160

$275

$36

$87

$142

$227

$196

$97

$244

$307

$152$173

$212

$88

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$350

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

Mill

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Investment ActivityOttawa Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


2.7

4.8

7.18.5

10.6

6.17.3

9.5 9.4

11.4

%


Ottawa Retail National Retail



OTTAWA MULTI-SUITE RESIDENTIAL REPORT

RENTAL DEMAND IMPROVED MARKEDLY Stronger multi-suite residential purpose-built rental accommodation demand in 2017 was the result of a number of factors. Growth in the CMA’s student population was a key factor in the rise in demand for rental accommodation. Migration patterns were another positive influence on demand levels in 2017 as well. This included inter-provincial, intra-provincial and international inflows of individuals and families into the area. A sharp increase in international migration of 62.0% year over year was seen as of June of 2017. Historically, new arrivals from all three sources have resulted in healthier rental demand patterns. The uptick in demand recorded in 2017 supported stable and healthy supply-side characteristics. The CMHC projected average market vacancy would hold at the 3.0% mark through to the close of 2017 with supply and demand offsetting each other to a large extent. At the same time modest upward pressure on rents was expected reaching another record high. The average GOA two-bedroom rent was forecast to rise from $1,201 per month to $1,225 per month representing a 2.0% increase. The upward rental rate trajectory was a factor in the recent surge in new construction. For the first time since 2002 the volume of rental units under construction surpassed condominiums underway. The surge in rental construction was in part a reaction to the strength of the market’s demand cycle of the recent past.

BULLISH RUN WAS EXTENDED The GOA multi-suite residential investment market’s bullish run was extended through to the end of 2017. Evidence of the extension during 2017 was contained in recent MSCI Index results. A total annual return of 6.3% was reported for the 12-month period ending September 30, 2017. The result was driven by a stable income growth trend and material capital growth. This marked a fourth consecutive period of attractive results following the 2013 peak. The health of the investment market’s demand backdrop provided further evidence of its prolonged bullish phase of the cycle. Various groups were actively pursuing acquisition opportunities in the market during 2017. Pension funds, institutions, private capital and REITs endeavoured to either establish themselves in the market or add to their existing portfolios. However, in keeping the national trend, availability fell short of demand. As a result ,a modest $58.7 million in transaction volume was recorded in the first half of 2017 down sharply from the previous year’s pace when $594.2 million in sales volume was reported. Aside from the shortfall in availability, most other market trends reflected the continued bullish phase of the cycle during 2017.

STEADY AS SHE GOES FORECAST FOR NEAR TERMThere are few material changes the GOA multi-suite residential rental market performance anticipated over the near term with the continuation of the current phase of the cycle. Rental market conditions will mirror those of the past few years. In 2018 vacancy was forecast to rise by just 20 bps. The main driver of the slight upward trend will be an increase in the number of new units built. By 2019 the trend will intensify with a further 20 bps lift forecast by the end of the year. The increase in vacancy however will have little impact on the rental growth cycle with rents forecast to rise by the level of inflation over the next two years. Demand for rental accommodation is expected to stabilize following a sharp rise in 2017. The demand-supply dynamic will be largely unchanged with conditions remaining relatively tight. The largely stable rental market outlook will support investment performance which should be relatively flat year over year. Demand will continue to outpace the supply of assets available for acquisition. Therefore, sales volume will remain fairly muted. High-rise assets will be most popular with investors, however, a relatively small number will be offered for sale. As observed in the past few years, older low-rise buildings will make up much of this activity. This consistency will be the overriding near-term market theme.

TRENDING STATISTICS


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


0.0

1.0

2.0

3.0

4.0

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2000

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F20

18F

2019

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

3.43.0 3.0 3.2

3.4

%

Average Rental Vacancy Ottawa Apartment Structures Of Three Units & Over

Source: CMHC

$220 $216

$124$192

$156$240

$163$228

$154$226

$768

$398 $397

$285

$685

$59

$0

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$800

$900

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

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Investment ActivityOttawa Multi-Suite Investment Volume To June 2017


0.0

5.0

10.0


6.35.6

7.1 7.58.1 8.0

9.18.6

%


Ottawa Multi-Suite National Multi-Suite



ECONOMIC SNAPSHOT

HEALTHY ECONOMY SUPPORTED LABOUR MARKET ADVANCEMENTAdvances recorded in the Toronto CMA labour market were the result of a firm economic growth cycle during 2017. A total of roughly 46,000 new jobs were forecast for the year which represented a continuation of a trend that saw 131,500 jobs created between 2014 and 2016. The 1.4% increase in employment for 2017 should drive the unemployment rate down to 6.7% from 7.0% in 2016. Strong population growth contributed to the recent labour market progress. Certain business sectors made significant contributions to job growth recently. The manufacturing sector for example was on pace for a 4.1% increase in employment following declines of 1.5% annually over the previous three-year period. Strong results were also expected in the wholesale and retail, non-commercial services and personal services sector.

HOUSING MARKET MODERATION PERSISTEDThe Toronto CMA housing market cooled during much of 2017 in part due to the impacts of tighter mortgage rules announced in the fall of 2016. In addition, residential condominium construction cooled and affordability also hampered housing market progress. A weakened residential investment cycle continued to unfold this year. Housing starts were expected to fall to 36,100 units in 2017 down from 38,829 over 2016. A slowdown in resale activity also unfolded during the past year. Multiple bidding scenarios became less frequent and values steadily declined. Additionally, the listings-to-sale ratio was also impacted by an increase in homes offered for sale. Finally home-equity appreciation eased, which also reduced some of the frothiness that characterized the market in 2016.

RETAIL SALES GROWTH CONTINUED BUT PACE SLOWEDThe Toronto CMA continued to rack up solid retail sales growth figures in 2017 although the rate of increase eased. Sales were forecast to rise by a solid 3.5% in 2017 following a three-year run of stronger performance. Despite record consumer debt levels, the sales growth forecast called for healthy gains over the next few years.

NEAR-TERM ECONOMIC FORECAST IS BRIGHTThe Toronto CMA economy will continue to gain ground over the next few years with more sustainable rates of expansion forecast. Economic growth will average 2.4% annually between 2018 and 2021 according to the most recent CBOC forecast. This rate of expansion is expected to support generally positive labour market conditions over the forecast term. Employment levels will expand by an annual average of 1.9% over the same time frame. Population growth of roughly 1.4% will help drive economic growth and labour market performance. In short, the Toronto CMA economic forecast will have a positive effect on most market fundamentals over the near term.

Canada’s largest metropolitan area was the economic growth leader among the country’s major urban areas in 2017 with expansion of 2.9%. This followed an even more robust 4.1% expansion in 2016. The services and manufacturing sectors have been key growth drivers in 2017 with the construction sector posting more modest advancement. The housing sector cooled as 2017 progressed while non-residential investment continued to impress. Strong population growth was also supportive of Toronto CMA economic growth over the recent past.

TORONTO ECONOMIC REPORT

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Housing SectorToronto Historical & Forecast Aggregates



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500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

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-4.0

0.0

4.0

8.0

12.0

16.0

2000

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F20

18F

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Labour MarketToronto Historical & Forecast Aggregates



-60-40-20020406080100120140

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000

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2007

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F20

18F

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F20

20F

2021

F

Thou

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%

Demographic TrendsToronto Historical & Forecast Aggregates



-3.0-2.0-1.00.01.02.03.04.05.06.07.0

2000

2001

2002

2003

2004

2005

2006

2007

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F

2018

F

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F

2020

F

2021

F

%

Economic GrowthToronto Historical & Forecast Aggregates



TORONTO OFFICE REPORT

EXTENDED PERIOD OF LEASING MARKET STRENGTH CONTINUED The GTA leasing market continued its lengthy run of positive performance over the past year with the downtown submarket leading the way. Healthy tenant expansion activity resulted in the continued absorption of vacant space across the market over the recent past. Downtown a total of 1.2 million square feet of space was absorbed in the first six months of 2017 with a slightly more modest total of 952,000 square feet reported in the suburbs. For the past few years demand has been particularly strong downtown. Technology companies accounted for the largest share of this expansion. For many, Canada offered a relatively low cost alternative to the U.S. In addition, a strong local economy supported expansion programs across most business sectors. In the suburbs tenant expansion has been generally more muted. Tenants have sought out lower cost suburban alternatives. The health of the demand cycle over the past year drove rents higher, particularly downtown. This trend was a byproduct of tighter conditions. Downtown vacancy rested at 3.8% as of the end of the first half of 2017 down a full percentage point year over year. In the suburbs vacancy rested at 13.1%, down 160 bps year over year. Conditions were much tighter downtown despite the delivery of more than 1.4 million square feet of new supply over the 18-month period ending June 30, 2017. Downtown tenants contended with few alternatives and cycle-high rents. Rent growth downtown was in keeping with the broader market theme of strong performance.

INVESTMENT CONDITIONS REFLECTED STRENGTH AND STABILITY Investment market conditions reported in the GTA office sector over the past year were representative of its broad-based strength and stability. Demand for core quality assets was stronger than for most other markets in the country with perhaps the exception of the GVA. Competition for assets brought to the market for sale was high between national and international groups. Investment rationale was largely based upon the market’s stability and growth over the long term. Indeed, downtown properties have been extremely popular with investors for the past few years. The GTA office market was particularly attractive for investors looking for a safe place to park funds in light of global instability. The strength of the demand cycle positively influence investment performance. Properties tracked in the MSCI Index posted an annual average return of 9.2% for the year ending September 30 ,2017. This attractive outcome was comprised of stable income growth and cumulative capital growth of 4.0%. In addition to healthy returns the strength of the investment market performance of the past year was also evidenced in transaction volume totals. In the first half of 2017 a total of almost $2.0 billion in office properties were traded in the GTA area, up 10.2% from the same time period a year earlier. Positive closing volume totals recorded over the recent past was in line with the broader market theme.

FUNDAMENTAL OUTLOOK IS POSITIVE The fundamental outlook for the GTA office market is healthy, which should translate into positive performance trends. Sustained annual economic growth of slightly better than 2.0% over the next few years will support tenant expansion activity. New construction will be absorbed at a healthy pace. Therefore, leasing conditions will remain fairly tight resulting in continued upward pressure on rents downtown and stabilization in the suburbs. Tenants will be forced to look further afield to achieve lower gross rents and more choice. Leasing market progress will continue to drive income growth. As a result investment returns will be attractive. Investment demand will continue to surpass the supply of properties available for acquisition resulting in aggressive bidding. The health of the market’s demand cycle will be one of a number of elements in what should be a positive sector performance over the near term.

TRENDING STATISTICS


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


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

75

80

85

90

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100

2000

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2017

F20

18F

2019

F20

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2021

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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Toronto Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


9.210.4 10.2 9.4 9.6

5.56.2

7.58.3

9.9%


Toronto Office National Office



TORONTO INDUSTRIAL REPORT

LEASING MARKET FORGED AHEADThe GTA industrial sector posted consistently strong leasing fundamentals during 2017 in extending the current cycle phase. As the second half of 2017 began availability rested at a 15-year low of less than 3.0%. Available space was at a premium in most submarkets and size ranges across the GTA. The combination of record-low availability and stable demand for industrial space in which to expand resulted in upward pressure on average rents. The owners and managers of newly built and the most functional of properties were able to command higher rents on average. They were also able to increase rents at a higher rate than owners of older or less functional properties. However, rents increased to some degree across the market. It was clear during 2017 that average rents were at levels required to justify new construction. However, the volume of new construction stood below the long-term average offering only modest relief from the shortage of available space. Indeed, new construction leased up fairly rapidly either before or shortly after completion. The health of the market’s supply and rental growth characteristics was driven in large part by stable and positive demand. Demand for industrial space over the past year was moderately healthy. As was the case over the past few years, businesses involved in the distribution of consumer goods were key drivers of space demand during 2017. This included those that were focused on ‘last mile’ delivery. The positive demand backdrop was representative of the market’s continued progression over the recent past.

INVESTMENT TRENDS WERE INDICATIVE OF CYCLE’S RESILIENCEBroadly positive GTA industrial investment market fundamentals observed over the recent past were indicative of the durability of the current cycle. Strong demand patterns were evident whenever a core income-producing property was offered for sale. Pension funds, institutions, REITs and private groups were generally aggressive bidders. This environment supported property values that held at the peak for the cycle. In particular, new or highly functional single tenant properties with strong tenant covenant were the most sought after. However, most properties with secure income streams were also popular. Investors continued to try to access properties in a market that provided healthy performance metrics over the near and long term. Evidence of this performance profile was contained in recent MSCI Index results. The GTA industrial sector posted an annual average return of a stellar 13.3% for the year ending September 30, 2017. The result was strongest on record dating back to 2006. In addition, the most recent return represented a continuation of a three-year upward trend that was indicative of the current investment cycle’s resilience.

PERFORMANCE DRIVERS POINT TO CONTINUED PROGRESSIONThe GTA industrial sector will continue to thrive over the near term given a positive performance-driver forecast. The GTA economic growth trend is expected to moderate in 2018 following a robust 3.7% advance in 2017. The 2.5% expansion slated for 2018 will drive fairly healthy demand for industrial space. The resulting labour market progress and personal income growth will generate positive domestic demand which will also positively impact businesses that occupy industrial space. Demand will continue to surpass the supply of available space resulting in modest upward pressure on rents. Availability will hold close to the 15-year low of 2.7% in 2017. Strong leasing fundamentals will support performance with returns remaining attractive. The generally positive sector outlook will continue to draw investment funds to the market from a variety of sources. Competition for prime assets will remain intense which could potentially drive values beyond the cycle peak. The main risks to the positive outlook are the impact of interest rate hikes and NAFTA negotiations. Assuming these are averted, the GTA industrial sector will continue to gain ground over the near term.

TRENDING STATISTICS


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


-15

-10

-5

0

5

10

15

20

75

80

85

90

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100

2000

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2017

F20

18F

2019

F20

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2021

F

Mill

ions

of S

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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

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2006

2007

2008

2009

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2011

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2013

2014

2015

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2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Industrial Rent & Vacancy Toronto Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


13.3

9.8 9.3

6.3

8.97.8

7.18.0

6.7

9.4%


Toronto Industrial National Industrial



TORONTO RETAIL REPORT

CHANGING CONSUMER SPENDING PATTERNS WERE IMPACTFUL Shifts in consumer spending patterns had various impacts on the GTA leasing market over the past year. The shift toward online shopping has had a major impact on demand for retail space. In some cases retailers have capitalized on this trend while others have adjusted to smaller stores sizes. In some cases retailers have reduced store counts or closed up altogether. For owners of shopping centres changing retailer space needs have presented opportunities and challenges. To date, GTA owners have been able to adjust, which has resulted in a stable vacancy trend. At the midway mark of 2017 GTA vacancy stood at 4.6% down 30 bps year over year. Shifts in consumer spending patterns had positive and negative impacts on various retail market segments. The most obvious examples of positive impacts included expansion in the discount and luxury segments. Stores like Dollarama, Nordstrom and Hermes have expanded during 2017. There has also been a plethora of new restaurants and necessities-based stores that have set up new locations recently. At the same time, Sears, a number of fashion outlets and other stores have closed with their failure to adjust to the changing retail environment. To date, however, demand for newly built and well-located space in the GTA remained fairly brisk for much of the past year. As a result, rents have generally stabilized overall. Over the near term, consumer spending habits were expected to evolve and impact leasing fundamentals.

POSITIVE PERFORMANCE TALLIED AS CYCLE MATUREDThe GTA retail sector registered generally healthy investment market trends over the recent past as the mature phase of the cycle unfolded. The market generated another period of healthy performance which was captured in MSCI Index results. The GTA retail sector posted an average total return of 8.7% for the 12-month period ending September 30, 2017. This was down from the previous year’s 11.7% return due in large part to a weaker capital growth trend. Despite this, however, the return was still attractive. The recent and long-term record of sector returns attracted investment funds to this market over the past year. A strong $1.3 billion in transaction volume was reported in the first half of 2017 up 21.6% over the same time frame a year ago. The health of this liquidity trend was predicated on high levels of investor interest in this market. Pension funds, private groups, institutions and REITs were active participants in the market for retail asset acquisitions in the GTA. The highest quality of properties with strong national tenant rosters were the most popular including grocery-anchored assets. Demand outpaced the supply of prime assets offered for sale despite the perceived rise in sector risk related to the closure of stores and the negative impact of online shopping. This dynamic as much as any other was a key component in what was a healthy investment market over the past year.

SECTOR THEMES WILL BE CONSISTENT OVER THE NEAR TERMMaterial change in GTA retail sector performance over the near term appears unlikely. The regional economy is forecast to expand by roughly 2.5% in 2018 following an even stronger rate of expansion in 2017. A byproduct of the economic growth outlook will be healthy labour market progress and personal income growth. In turn, retail sales will continue to rise boosting sales for retailers. Expansion activity should continue to impress over the next couple of years as retailers look to capitalize on the market’s fundamental health. This bodes well for retail leasing fundamental overall. The closure of Sears will be a hit to the market, although a significant portion of the space will be released or redeveloped given the fact many of the stores are located in prime centres. Investment market performance will stabilize over the near term despite the emergence of higher risk levels over the past year. In short, the GTA retail sector will continue to gain ground in a repeat of recent performance patterns.

TRENDING STATISTICS


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


$0

$20

$40

$60

$80

$100

$120

-2.0

0.0

2.0

4.0

6.0

8.0

2000

2001

2002

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2007

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2011

2012

2013

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2015

2016

2017

F20

18F

2019

F20

20F

2021

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

$2,288

$1,254

$0

$500

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$1,500

$2,000

$2,500

$3,000

$3,500

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

Mill

ions

Investment ActivityToronto Retail Investment Volume To June 2017


0.0

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10.0

15.0


8.7 9.310.6 10.3

11.8

6.17.3

9.5 9.4

11.4

%


Toronto Retail National Retail



TORONTO MULTI-SUITE RESIDENTIAL REPORT

VACANCY DIPPED TO 15-YEAR LOW Persistent tightening in the GTA multi-suite rental market was expected to result in 15-year low vacancy this year. At the end of 2017 vacancy was forecast to stand at 1.1% marking a low dating back more than 15 years. The year-end rate represented a 20 bps dip from the previous year and a 50 bps decline from the 1.6% rate reported for both 2014 and 2015. For the past several years demand has consistently outdistanced the supply of vacant units resulting in significant imbalance. There was more than one catalyst for the market’s demand strength over the recent past. Continuously high levels of international migration over the past few years to the GTA has been a driver of rental demand. Rental demand was boosted by the fact that the price of purchasing a home was too high for many residents. The 2017 introduction of the Rental Fairness Act has been supportive also supported rental demand. The act expanded rent controls to include all private rental units. As a result, rental units have become more attractive from a price standpoint. For this reason a sharp increase in new construction is expected over the near term. However, demand for rental accommodation will more than keep pace and hold vacancy close to the 15-year low expected by the end of 2017.

INVESTMENT MARKET WAS HEALTHY AND ACTIVEThe GTA multi-suite residential rental investment market racked up another year of strong results and activity. Investor appetite outdistanced the supply of premium quality assets during 2017, in keeping with the trend of the past several years. Pension funds, REITs, institutions and private capital continued to acquire large-scale assets from private families. The low cost of debt was a catalyst for investment sales as was the sector’s preferred status within the investment community. The general health of the demand cycle supported healthy levels of transaction closing volume. A total of $579.2 million in sales volume was reported during the first half of the year. The continuation of the first half pace would see annual 2017 surpass the $1 billion mark for a third consecutive year. In addition to robust closing activity investment performance has also been strong of late. The MSCI Index reported an annual average total return of 11.2% for properties tracked in this market for the year ending September 30, 2017. The result was the second highest for the same period since 2013. The income component of the return was stable and healthy which coincided with a healthy dose of capital growth. As 2017 came to a close, it looked as though the recent run of healthy investment market performance and liquidity levels would continue for at least the next few quarters.

THE FUTURE REMAINS BRIGHTThe outlook for Canada’s second largest multi-suite residential rental market is generally bright. Investor appetite will continue to best the supply of high quality assets brought to market by a significant margin. For this reason sales will be made up largely of Class B and C assets. The demand pressure will ensure cap rates continue to hover close to all-time lows of the past year. Many of the purchasers that were active over the past few years will remain so over the near term. Their challenge will be to try to reduce expenses in a market that has seen the expansion of rent controls in 2017. While the investment market continues to soar over the near term the GTA rental market will also exhibit healthy characteristics. As mentioned previously high prices in the ownership market and migration patterns will continue to drive rental demand. At the same time renters will likely hold off on transitioning to ownership given rising interest rates and the relatively low cost of renting. Even with an expected surge in construction activity forecast for the near term vacancy levels will continue to rest below 2.0% and near the 15-year low. In short, there are few indications that this market will weaken over the near term resulting in a relatively bright outlook.

TRENDING STATISTICS


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


0.0

1.0

2.0

3.0

4.0

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2000

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F20

18F

2019

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

1.31.1 1.0

1.2

%

Average Rental Vacancy Toronto Apartment Structures Of Three Units & Over

Source: CMHC

$882

$558

$1,277

$711

$940$832 $874

$453

$774

$1,067

$1,563$1,585

$1,177

$1,631

$1,160

$579

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

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

Mill

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Investment ActivityToronto Multi-Suite Investment Volume To June 2017


0.0

5.0

10.0

15.0


11.2 11.012.4

10.69.7

8.1 8.09.1 8.6 9.2%


Toronto Multi-Suite National Multi-Suite



MANUFACTURING SECTOR RUN OF SUCCESS PERSISTEDThe Winnipeg CMA manufacturing sector’s extended run of strong performance continued in 2017. Sector output was set to increase by 2.0%. Previously, output had improved in five out of six years between 2011 and 2016 according to CBOC data. This year the bus manufacturing and aerospace industries led the way. Increased manufacturing output translated into solid advances in sector employment. Manufacturing employment was expected to increase by 3.1% in 2017.

NON-RESIDENTIAL CONSTRUCTION BOLSTERED ECONOMY Non-residential construction was a source of increased economic output in the Winnipeg CMA this year. A number of major projects boosted output and sector employment. Several projects had already broken ground including True North Square and the southwest transit extension. Activity was expected to remain fairly brisk over the near term given the soon-to-be-started St. Regis hotel site project and Skycity Centre. A number of education-related projects were set to boost output along with a burgeoning hotel sector.

STEADY LABOUR MARKET PROGRESS RECORDEDThe Winnipeg CMA labour market registered steady gains during the past year supported by the health of its economic growth trend. The CBOC predicted the creation of 12,170 new positions during 2017 and 2018 combined. This followed the 13,750 created over the previous 24-month period. This year the finance insurance and real estate and public administration sectors posted the strongest increases in employment at 9.5% and 11.8%, respectively. The creation of new jobs over the past year was expected to drive the unemployment rate down from 6.5% at the end of 2016 to 5.8% year over year. Over the near term Winnipeg’s job market was forecast to gradually improve in keeping with the trend of the past few years.

ECONOMIC GROWTH TREND TO EASEWinnipeg’s economic growth trend is forecast to soften over the near term following stronger expansion patterns in 2016 and 2017. Real GDP was projected to increase by a more modest 1.4% over 2018 and 2019 after an average annual rise of 3.0% over the previous 24-month period. The 2018-2019 rate of expansion is the slowest since the 2009 recession. A sharp decline in housing starts will negatively impact the construction and related professional services sectors. Transportation and warehousing activity will also dip along with wholesale and retail trade. Stable employment growth will continue with a marked reduction set for 2019 to 2021. Retail sales expansion is also forecast to moderate in 2018 with growth of 2.7% following an annual average of 4.6% in 2016 and 2017. In short, Winnipeg CMA’s strong run of the past couple of years will come to an end next year.

WINNIPEG ECONOMIC REPORT

ECONOMIC SNAPSHOT

The CBOC forecast called for economic expansion of 3.6% over 2017 following a strong showing in the previous year when real GDP increased by 3.2%. In 2017, the Winnipeg CMA economy was on pace to expand by the highest rate dating back almost two decades. The strong economic backdrop was expected to boost employment by 1.3% following a tepid 0.1% lift in 2016. Stronger employment prospects were the impetus for increased migration to the region. Most other economic indicators were projected to improve this year with retail sales increasing by 4.9% and housing starts rising to 5,541 from 4,054 in 2016.

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Labour MarketWinnipeg Historical & Forecast Aggregates



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Housing SectorWinnipeg Historical & Forecast Aggregates



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0.0

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Demographic TrendsWinnipeg Historical & Forecast Aggregates



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F

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%

Economic GrowthWinnipeg Historical & Forecast Aggregates



WINNIPEG OFFICE REPORT

STABILITY CHARACTERIZED LEASING MARKET PERFORMANCEBroad-based stability characterized the Greater Winnipeg Area (GWA) office leasing performance of the recent past. Overall vacancy patterns were unchanged year over year although there was some variation in certain submarkets and across building classifications. Aggregate market average vacancy of 9.7% was posted at the midway mark of 2017, virtually matched the rate of a year ago according to CBRE data. There was some downward movement in the Class A market segment with vacancy falling 90 bps from 7.0% to 6.1% over the same period. The Class B inventory offset this improvement in rising from 7.7% to 9.5%. Geographically, downtown vacancy rose by a modest 40 bps to 9.5% while the Class A tightened to 6.1% from 7.9% a year earlier. Suburban vacancy fell by 230 bps year over year to 10.2%. A number of demand characteristics caused the fluctuation in vacancy by geography and building classification. On the positive side of the ledger high tech startups absorbed a significant volume of space and drove vacancy lower. Increased public sector spending also boosted demand. Conversely, a number of larger companies carried out rightsizing initiatives resulting in smaller space footprints. In a few cases companies were forced to vacate space that was under redevelopment. Moderately healthy demand translated into a fairly stable aggregate rental rate trend over the past year. Tighter conditions downtown produced modest upward pressure on rents but the overall market trend was flat. The absence of material additions to the GWA built inventory over the past year was another factor in what was a period of generally stable and healthy office leasing fundamentals.

INVESTMENT MARKET REFLECTED NATIONAL TRENDS The GWA office sector investment market performance of the past year was reflective of broader national trends. Demand patterns were generally positive with pension funds, institutions, private capital and REITs all seeking core properties in this market. Prime assets with stable tenant rosters were in demand in keeping with the national trend. The number of assets brought to market over the past year fell short of the volume capital available for investment. The shortfall was most notable at the top end of the market which is largely made up of the highest quality and largest assets. This dynamic was evidenced in closed transaction totals. In the first half of 2017, a total of $68.2 million in sales were completed down from the 2014 peak of $287.3 million. Nationally, supply also fell short of demand despite an increase in transaction closing volume. There were also common elements in the investment performance of the national office sector and that of the GWA. In both cases income was largely stable and a slight decrease in capital value was reported for the year ending September 30, 2017. The total national return for the period was 5.5% while the GWA result was only slightly lower at 5.2%. MSCI results were further evidence of the broad-based similarity between the recent national and GWA office investment performance trends.

SECTOR FORECAST IS GENERALLY POSITIVE The forecast for the GWA office sector is largely positive. Following robust economic expansion of 3.6% in 2017 a more modest 1.4% advance is predicted for 2018. As a result office space demand will also moderate over the near term. In turn, vacancy levels will stabilize along with average rents. The completion of True North Square in the second half of 2018 will produce some upward pressure on vacancy and rents in older properties but not enough to produce a significant softening of fundamentals. The largely healthy leasing outlook will continue to support investment particularly for the market’s prime assets. As the maturing of the investment cycle continues to unfold values will stabilize along with income performance. In short, both the leasing and investment market forecasts call for generally stable and positive performance over the near term.

TRENDING STATISTICS


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


-400

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75

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F20

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Thou

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Squ

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%

Office Demand & Supply Winnipeg Historical & Forecast Aggregates


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6.0

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14.0

0

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F20

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%

$ p.

s.f.

Office Rent & Vacancy Winnipeg Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


5.2

7.69.2 8.4

10.8

5.5 6.27.5 8.3

9.9%


Winnipeg Office National Office



WINNIPEG INDUSTRIAL REPORT

TIGHTER CONDITIONS FAVOURED MARKET’S LANDLORDSGWA leasing market conditions became increasingly favourable for its landlords over the recent past. The market continued to tighten as 2017 progressed with availability ranging close to the 5.0% mark through 2016 and much of 2017. Market availability slipped even further in the first half of 2017 coming to rest at 3.9% according to CBRE with Colliers International posting a similar figure. CBRE figures suggested the rate had fallen by 100 bps year over year while the Colliers’ average was unchanged. In each case availability rested at a level that allowed landlords to assume a position of advantage with regard to lease negotiations. There were few options for tenants looking to expand or consolidate smaller multiple locations into one. Consequently, landlords have become more aggressive in commanding higher rents. This was the case for both new leases and in renewal scenarios. Landlords were able to take advantage of low availability and moderately healthy demand characteristics. The low Canadian dollar and a strong local economy boosted the region’s manufacturing sector in support of the demand cycle. Warehouse and distribution businesses have also expanded of late due to a strong economic backdrop and domestic demand. Medical marijuana production has also added to the market’s demand strength. Healthy demand resulted in the absorption of excess space and downward availability trend. This process supported leasing market conditions that favoured its landlords.

STABILITY WAS OVERRIDING INVESTMENT MARKET THEMEThe overriding investment market theme for the GWA industrial sector over the past year was stability. The investment demand backdrop was largely unchanged as national and local investors continued to view the market favourably. To some extent this was reflected in transaction volume statistics. In the first half of 2017 a total of $29.4 million of industrial properties were sold in this market following $114.7 million during 2016. While the pace at which assets were sold has slowed it was more a function of supply rather than a decline in demand. When prime assets were brought to market, there was no shortage of prospective buyers who continued to bid aggressively. This dynamic has been the norm in the market for several years. Market stability was also evidenced in investment market performance over the past year. GWA industrial assets tracked in the MSCI Index tallied an annual average return of 3.4% for the period ending September 30, 2017. While returns have trended downward they remained fairly attractive. In summary, conditions in the GWA industrial investment market were largely stable year over year in a performance theme that was common across the country.

MODERATELY HEALTHY PERFORMANCE FORECAST Moderately healthy performance patterns are forecast for the GWA industrial sector over the near term. A slower economic growth trend is forecast for 2018 following a robust expansion level over the previous two-year period. The slow-growth outlook will support modest expansion activity resulting in mild pressure on already low availability levels. Quadreal’s 220,000 square foot development in the north west along with newly built space at the South Landing Business Park and Bishop Grandin Crossing will meet the needs of tenants unable to access suitable space in existing buildings in 2018. These projects are likely to drive availability rates higher. However, they will remain at healthy levels. Rents are expected to slowly rise in the second half of 2017 prior to the construction of new developments. Subsequently, a levelling trend will unfold. The main risk to the outlook for the GWA industrial sector is the outcome of the NAFTA negotiations. In particular the market’s manufacturing and exporters will be most directly impacted by changes to the NAFTA. Barring a negative outcome, however, the market outlook is moderately healthy.

TRENDING STATISTICS


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


-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

2017

F20

18F

2019

F20

20F

2021

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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Industrial Rent & Vacancy Winnipeg Historical & Forecast Aggregates


0.0

5.0

10.0


3.42.7

3.54.5

7.87.1

8.0

6.7%


Winnipeg Industrial National Industrial



WINNIPEG RETAIL REPORT

LEASING MARKET STABILIZATION UNFOLDEDThere were minor fluctuations in GWA retail leasing fundamentals reported over the past year despite the continued emergence of broader sector trends. Supply-side characteristics were fairly stable during 2016 and much of this year. Average market vacancy rested at 4.8% as of the end of the first half of 2017 having ranged near the 5.0% mark throughout 2016. Both the regional and power centre vacancy levels were markedly lower year over year however aggregate vacancy was fairly flat. The health of the market’s vacancy profile was somewhat surprising given store closure activity. Vacancy stabilization recorded over the recent past was bolstered by the market’s construction cycle. In the first half of 2017 a total of 400,000 square feet of new supply was readied for occupancy most of which was pre-leased or absorbed shortly after completion. Stable vacancy patterns and a conservative development cycle ensured rents held firm over the same period. Net rents for prime retail space were largely unchanged as a result of the market’s demand supply dynamic. Retailers were reluctant to pay higher rents given the uncertainty surrounding shifts in the broader market. Changes in the business models of retailers were also a factor in the flat rental rate cycle. In summary, stabilization was the main theme for the GWA leasing market performance of the past year against a backdrop of significant sector change.

CONSISTENCY CHARACTERIZED INVESTMENT MARKET TRENDS The GWA retail sector investment market performance of the recent past was characterized by consistency. Returns as measured by the MSCI Index have been fairly positive for much of the past couple of years. Most recently a total average return of 5.4% was reported for the 12-month period ending September 30, 2017. The result was down 60 bps over the previous period due in large part to a weaker capital growth trend. Although capital growth has slowed income growth has been remarkably stable. Income growth levels have fluctuated less than 10 bps dating back over two years. Consistency was also evident in other aspects of the GWA retail investment market over the past few years. Demand has been mostly stable and healthy. National and regional groups have attempted to increase their exposure to this market. Attractive yields and income performance have been a draw for investors. Economic and leasing fundamentals have also attracted various investor groups to this market. In keeping with the national trend, however, supply has consistently fallen short of demand. This was reflected in transaction volume statistics over the past couple of years. Modest transaction closing volume has been the norm recently with $94.7 million, $94.7 million and $51.1 million in property sales completed in 2015, 2016 and the first half of 2017, respectively, following the peak of $354.1 million in 2014. The transaction consistency that began in 2016 was in line with the broader performance.

FEW SIGNS OF WEAKNESS FOR NEAR TERMThere is little evidence to suggest a weakening of GWA retail sector fundamentals over the near term. The Winnipeg CMA economy will moderate over the near term following two years of strong growth. GDP is forecast to advance by 1.4% in 2018 following rates of 3.2% and 3.6% in 2016 and 2017, respectively. Expansion will drive income, employment and sales growth in support of retail sales. The resulting leasing market expansion will ensure vacancy levels remain low. Solid leasing and economic fundamentals will continue to draw capital to the market. Sears Canada store closures will push vacancy levels higher, however, expansion activity should offset at least part of the lost ground. Persistent leasing market strength and a flat capital cycle will generate positive returns. Ongoing leasing stability and economic growth will draw capital to the market. Investment activity will be dictated by access to suitable income-producing properties. The shortfall may be the only negative in an otherwise stable and healthy sector performance over the near term.

TRENDING STATISTICS


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


$0

$2

$4

$6

$8

$10

$12

$14

0.0

2.0

4.0

6.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Bill

ions

%

Retail ConditionsWinnipeg Historical & Forecast Aggregates



$46$30

$117

$153 $161

$71 $70 $80

$131

$41

$86

$299

$354

$95 $94

$51

$0

$50

$100

$150

$200

$250

$300

$350

$400

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

Mill

ions

Investment ActivityWinnipeg Retail Investment Volume To June 2017

Source: Colliers International

0.0

5.0

10.0

15.0


5.4

7.4

11.7 12.113.1

6.17.3

9.5 9.4

11.4

%


Winnipeg Retail National Retail



WINNIPEG MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET WAS FAIRLY BALANCED GWA multi-suite residential rental market characteristics of the past year were indicative of a moderate level of balance. Rental demand kept up with the supply of vacant units both in the existing inventory and in newly constructed properties. Demand was supported by labour market advances as a result of the region’s robust economic growth trend. Real GDP was forecast to expand by 3.7% in 2017. The resulting influx of migrants from various sources and measured progress in youth employment also impacted rental demand positively. Migrants flowed into the region to take advantage of the employment opportunities. Evidence of the market’s balance was contained in vacancy characteristics reported recently. Average market vacancy was expected to edge slightly higher to 3.1% by the end of 2017 up just 30 bps year over year. This relative stability occurred during a period of increased new construction in the latter half of 2017. Somewhat surprisingly, rents continued to rise during the same time period. The average two-bedroom monthly rent of $1,095 forecast for the end of 2017 represented a 2.5% increase year over year. While the increase eclipsed the inflation rate, rental market conditions observed over the past year indicated the market was still fairly balanced.

INVESTMENT MARKET SLOWED DESPITE HEALTHY DEMAND Transaction volume dipped sharply over the past year and a half despite generally strong investor appetite for the acquisition of investment properties in the GWA market. There was a total of slightly below $90.0 million in sales of multi-suite residential rental properties reported in 2016. The total was significantly lower than the preceding 10-year annual average of $144.2 million. The slowdown carried over into 2017 with just short of $20 billion in transaction volume tallied during the first half of the year. The plunge in closing volume, however, was fairly misleading in terms of being representative of market demand. Rather, the dip was the result of lack of product availability at the upper end of the market. There were no sales with a sale price of at least $50.0 million completed over an 18-month period ending June 30, 2017. In both 2016 and 2017 year to date there were no transactions of scale. The majority of sales were in the small-to-medium-size range. Demand for assets brought to market was generally healthy. A range of investors looked to gain a foothold or expand their portfolios in the GWA. Private capital was arguably the most active in this regard in keeping with the historic norm. The market’s long-term performance history and solid growth outlook attracted investors over the recent past. Despite the health of the demand profile of the past couple of years, transaction volume ranged below the decade average.

FEW CHANGES IN NEAR-TERM PERFORMANCE FORECAST There are few indications that near-term performance will change drastically over the next 12 months. Rental market conditions will hold fairly firm with vacancy set to rise by just 10 bps year over year to 3.2% from 3.1% as of October of 2017. Demand will keep pace with supply once again, despite an 8.9% increase in construction activity year over year as of August of 2017. Average rents will continue to slowly ascend as new units are completed. Developers continue to exhibit confidence in the market in light of the solid economic outlook. Rental market and investment fundamentals will attract investors as was the case over the past few years. Once again, however, access to product will erode transaction volume. To some extent new developments downtown will present some opportunities for investors but likely not enough to meet all of their objectives with regard to placing capital in the market. The demand supply imbalance will ensure property values hold at the 2017 level. Investors will be able to achieve healthy and stable income performance as in the past few years. This consistency will be typical of the overall market trend over the next year and likely longer.

TRENDING STATISTICS


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


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F

Housing MarketPricing vs. Demand

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

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

2017

F20

18F

2019

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 2.8

3.1 3.2 3.2

%

Average Rental Vacancy Winnipeg Apartment Structures Of Three Units & Over

Source: CMHC

$14

$71

$5

$82

$28

$63

$151

$30

$200

$165

$54

$76 $97

$137

$90

$20

$0

$50

$100

$150

$200

$250

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

Mill

ions

Investment ActivityWinnipeg Multi-Suite Investment Volume To June 2017



ECONOMIC SNAPSHOT

JOB MARKET PROGRESS CARRIED OVERThe GRA’s labour market progression carried over into 2017. CMA employment was forecast to increase by 1.0% in 2017 following an annual average of 0.9% over the previous two-year period. The forecast rise in employment was expected to push the unemployment rate slightly lower ending 2017 at 5.2% from 5.3% a year earlier. Still more good news was that personal income per capita was set to rise 0.6% after a 1.0% dip in 2016. Conditions in the GRA labour market are expected to be tight over the near term due largely to continued progress over the past few years.

MANUFACTURING SECTOR OUTPUT SOAREDThe GRA’s manufacturing sector has generated healthy output growth over the past year and surpassed the national average rate of expansion. During 2017 output was expected to rise by 4.9% after an even stronger 5.4% in 2016. The regional manufacturing sector has traditionally provided equipment to the resource sector. Resource sector stabilization has been a boon for the region. Despite increased output, manufacturing sector employment trends have been disappointing. Sector employment was forecast to increase by close to 1,500 jobs this year. However ,this fell short of making up for the 9.0% dip in 2017. Increased sector output over the past two years offered hope for additional employment growth over the near term.

HOUSING STARTS ROSE DESPITE OVERSUPPLY A modest increase in housing starts was reported for 2017 despite excess inventory in both the multi-suite and single family markets. The CBOC was projecting 1,860 unit starts in 2017 up from the post-recession low of 1,560. The GRA’s economic slump of 2015 and 2016 markedly reduced demand for new homes. As a result, the unsold inventory of homes increased. The multi-unit in particular suffered through the most acute increase in unsold inventory. This year some of the unsold units were taken out of circulation as demand rebounded resulting in the 2017 increase in housing starts.

OUTLOOK IS PROMISING The outlook for the GRA economy is promising given a moderate growth projection. Real GDP is expected to increase by a modest 2.1% in 2018 with similar annual gains through to 2021. The outlook is predicated on continued progress in the region’s resource sector. Under this assumption the labour market will remain tight. Coincidentally, slow retail sales growth in 2018 of 1.6% will strengthen between 2019 and 2021. Personal income will also steadily rise over the next few years resulting in healthier retail sales volume. After a slowdown in 2018 housing starts, volume will steadily rise. In short, the GRA’s economic forecast calls for moderate growth in 2018 followed by a more robust trend through to the end of the decade.

The Greater Regina Area’s (GRA) economy appeared to have turned a corner this year with real GDP projected to expand by 2.9%. This growth was expected to drive employment growth of roughly 1.0% in 2017. The city’s manufacturing sector contributed to the improved economic growth trend along with expanded services and construction output. The strongest output growth was generated in the wholesale and retail trade sector. The improvement in the economic growth cycle was also a driver of a strong retail sales advance and a higher volume of housing starts.

REGINA ECONOMIC REPORT

0

50

100

150

200

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketRegina Historical & Forecast Aggregates



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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorRegina Historical & Forecast Aggregates



-4

-2

0

2

4

6

8

-1.0-0.50.00.51.01.52.02.53.03.54.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsRegina Historical & Forecast Aggregates



-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthRegina Historical & Forecast Aggregates



REGINA INDUSTRIAL REPORT

RELATIVELY MINOR SHIFTS IN LEASING MARKET PERFORMANCE REPORTED There were few changes in leasing market conditions recorded during the latter half of 2016 and much of 2017. Vacancy continued its slow ascent in coming to rest at 3.4% as of the end of the third quarter 2017 according to Colliers’ data. The rate was up less than 20 bps from the end of the first quarter. The relatively minor increase in vacancy was largely caused by the introduction of new supply to the market. Demand fell short of new supply resulting in the slight upward movement in vacancy. Aggregate GRA market vacancy was one of the lowest in the country despite resting at a decade high. In both 2016 and 2017 Regina’s economy was firmly entrenched in a period of slow growth in part due to the resource sector downturn. The result of the slow growth trend has been a weaker demand cycle relative to the most recent peak and downward pressure on rents. The good news, however, has been that there was a greater supply of best-in-class space available for tenants to lease. Much of this space was delivered recently with a total of 200,000 square feet of new construction completed over a 12-month period ending on June 30, 2017. However, this activity had minimal impact on vacancy levels. Marginally higher vacancy over the past couple of years was typical of the market’s overall performance.

INVESTMENT MARKET LANDSCAPE WAS COMPETITIVE Competition for the acquisition of industrial property in the GRA was generally healthy during the past year with availability falling short of demand. During the first half of 2017 just seven industrial property sales took place all of which were relatively small according to Colliers International. Prospective buyers included both investors and end users. Local groups were the most active given their superior knowledge of the local market. Most were keenly aware of the benefits of owning property in this market including a history of healthy capital retention and income growth. Low interest rates and the relatively low volume of lease alternatives cast ownership in a favourable light for investors and users alike. On the whole demand outpaced the supply of assets offered for sale in part due to the size of the market. The supply imbalance and resulting competitive environment had an impact of other market characteristics. For example, sale prices rested close to 2014 and 2015 levels in 2017 after a modest uptick in the previous year. This supported fairly stable yields overall. There was little near-term upside in value despite the bidding backdrop, which was generally competitive.

FORECAST OUTLOOK IS MODERATELY HEALTHYThe GRA industrial sector outlook is moderately healthy through to the end of 2017 and in 2018. The key determinant of this forecast is a return to economic growth following a mild decline in 2015 and a flat performance in 2016. The GRA economy is projected to expand 2.9% in 2017 according to the CBOC. Subsequently average annual growth of 2.2% was projected for 2018 through to 2021. The outlook is predicated on continued recovery in the resource sector. Moderately healthy rates of economic expansion will boost employment levels by an average of 1.0% in 2017 and 0.8% in 2018. The resulting domestic demand will be reflected positively in the industrial leasing market. Increased consumer spending will support the warehouse and distribution sectors. This should at the very least result in the stabilization of rents and vacancy levels over the near term. In turn, healthier leasing fundamentals will boost investment performance. Improved leasing and investment performance will draw capital to the market at a potentially higher rate than over the recent past. At a minimum investment demand will match that of the past few years. In short, the GRA industrial sector is expected to exhibit moderately stronger fundamentals over the near term assuming modest regional economic advances over the next couple of years.

TRENDING STATISTICS


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


0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Thou

sand

s of

Squ

are

Feet

Industrial New Supply Regina Historical Aggregates

Source: Avison Young

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$ p.

s.f.

Industrial Net RentRegina Historical Aggregates


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 2016 2017

%

Industrial VacancyRegina Historical Aggregates



ECONOMIC SNAPSHOT

LABOUR MARKET PROGRESS UNDERWHELMED The Saskatoon CMA’s labour market performance was somewhat disappointing in 2017 despite a stronger economic growth trend. Total CMA employment was forecast to rise by 0.8% this year. However, the unemployment rate was expected to hold well above the 20-year average. By the end of the year a rate of 8.1% was anticipated far beyond the 20-year average rate of 5.5%. The increase in job seekers in 2017 surpassed job growth, hence the elevated rate of unemployment. Stronger labour market performance was expected to emerge in 2018.

IMPROVED SERVICES SECTOR GROWTH TREND EMERGEDA more robust services sector growth trend emerged this year on the heels of a modest increase recorded in 2016. The CBOC called for sector expansion of 3.6% during 2017 following a modest 1.7% over the previous year. A key driver of improved services growth was the wholesale and retail sector. Expansion of 11.1% was forecast this year after two straight years of regression. Job and retail sales growth were the root of increased trade output. Business services growth was a driver of increased broader services sector output of late. The professional and computer services sectors were expected to drive business services output higher by 1.9%. Services growth was expected to continue in 2018 albeit at a less robust pace.

CONSTRUCTION DOWNDRAFT SUBSIDEDConstruction sector output in the Saskatoon CMA stabilized this year following two successive reductions in 2015 and 2016. Output was projected to increase by a modest 1.0% in 2017 following regressions of 18.0% and 13.0% in 2015 and 2016, respectively. Permit values were unchanged yeaer over year as of June 2017. A rebound in housing starts was the main cause for the year-to-date progress. However, stronger housing starts growth was unlikely given an excess of unsold condominiums and single family homes. For now however, construction activity appeared to have leveled after a period of contraction.

MORE CONSERVATIVE GROWTH FORECAST FOR NEAR TERMThe Saskatoon CMA’s economic outlook is one of moderate expansion following a sharper increase in output this year. In 2018 real GPD will increase by 2.0%. This progress will be strong enough to support employment growth of 1.2%. The region’s unemployment rate will be yanked down to 6.6% from 8.1% at the end of 2017. Job gains will improve and outpace labour market increases. Retail sales advancement is also expected to slow in 2018 with growth of 1.4% forecast after a robust 5.2% lift this year. A modest uptick in housing starts will unfold after a marked dip in 2017. Overall, the Saskatoon CMA outlook calls for moderately healthy growth over the near term.

With recovery having emerged late last year the Saskatoon CMA’s economic growth cycle strengthened in 2017. The CBOC projected real GDP would increase by a healthy 3.6% in 2017 before moderating next year. Increased economic output was expected to drive labour market progress. Total employment was set to rise by 0.8% in 2017 although the employment rate will remain stubbornly high. A surge in retail sales was anticipated this year after a weak growth trend in 2016 and a contraction in 2015. Housing starts slipped for a third consecutive year in 2017 due to a weaker housing market overall.

SASKATOON ECONOMIC REPORT

-6

-4

-2

0

2

4

6

8

10

12

-1.0

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

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsSaskatoon Historical & Forecast Aggregates



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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorSaskatoon Historical & Forecast Aggregates



0

50

100

150

200

250

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketSaskatoon Historical & Forecast Aggregates



-3.0-2.0-1.00.01.02.03.04.05.06.07.08.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthSaskatoon Historical & Forecast Aggregates



SASKATOON RETAIL REPORT

LEASING MARKET CYLE DURABILITY DISPLAYED The durability of the Greater Saskatoon Area’s (GSA) retail leasing market cycle was demonstrated during the past year against a backdrop of weak economic performance. Despite a rising trend vacancy remained relatively low. The average market vacancy rested at 4.8% as of the close of the first quarter of 2017 up 100 bps year over year. Retailers found it difficult to source suitable space in a number of subsectors and submarkets over the past year even as vacancy reached a six-year high. Overall, demand for retail space was stable and healthy during much of 2017 and 2016. Retail operators exhibited confidence in the market’s long-term prospects even as the resource sector slump continued. This confidence was reflected in the number of new store openings including: high profile brands like GoodLife, Bed Bath and Beyond, Sobeys Extra, Fatburger, Save-on-Foods at Kensington. The lease up of former Target space was also a boon for the market. The resilience of the market’s demand cycle over the past few years was a catalyst for new development activity. According to a recent ICR survey a total of 81,250 square feet of new supply was scheduled for completion in 2017 alone. This marked the continuation of a decade-long construction boom. While the rate of new supply completions has slowed activity has been remarkably healthy given the economic climate of the past couple of years. The resilience of the market’s development cycle was in keeping with its leasing performance.

CONSISTENCY WAS DOMINANT INVESTMENT MARKET THEMEA large measure of consistency was evident in the GSA’s retail property investment market performance of the recent past. Property values were largely static with cap rates holding at levels reported a year ago for high quality assets. Higher risk asset pricing decline slightly given the increased sector uncertainty related to changes in shopping behaviours. It had become clear that the era of cap rate compression had ended. Demand characteristics remained generally positive, particularly for the highest quality properties. The few high quality assets brought to market for sale were often small but well received. This was reflected in transaction volume which totalled $48.0 million during the first half of 2017 down from the 2016 pace of activity. Despite the downward transaction closing volume trend various investment groups showed interest in acquiring assets in this market. National and local groups continued to look to Saskatoon as a source of core quality properties. However, the supply of suitable properties available for acquisition fell short of demand. This dynamic has been a constant over the past couple of years as have most other investment market trends reported over the past year.

PERFORMANCE-DRIVERS SUPPORT CONTINUED PROGRESS The GSA’s retail sector performance-driver forecast is supportive of continued progression. Real GDP is forecast to expand by 3.6% this year and 2.0% in 2018 following two consecutive contractions. The economy will generate healthier job market trends over the next two years which will have a positive impact on retail spending levels. The region’s population will rise by 2.6% in 2017 with a relatively high portion of the increase due to new family formation. Families tend to be the one of the highest spending groups which bodes well for the retail sector. The performance-driver forecast will translate into increased demand for retail space as retailers look to capitalize on an improved economic and employment backdrop. Excess space will be absorbed and rents will slowly firm up. Tighter conditions will ensue with newly built space remaining attractive. While leasing conditions strengthen investment market conditions will remain relatively stable. Demand will continue to outpace the supply of properties available to acquire. This situation will dampen transaction closing volume as has been the case for the past few years. Despite the shortfall in availability the broader market outlook is generally positive given the sector’s performance-driver outlook.

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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Bill

ions

%

Retail ConditionsSaskatoon Historical & Forecast Aggregates



$104

$52 $43

$147

$10

$55

$28

$64

$24

$43

$25 $33

$48

$0

$20

$40

$60

$80

$100

$120

$140

$160

05 06 07 08 09 10 11 12 13 14 15 16 17YTD

Mill

ions

Investment ActivitySaskatoon Retail Investment Volume To June 2017


$0

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$100

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$350

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05 06 07 08 09 10 11 12 13 14 15 16 17YTD

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ions

Investment ActivityVolume of Total Saskatoon Sales To June 2017

Industrial Multi-Family Retail Office Land OtherSource: Colliers International


ECONOMIC SNAPSHOT

SLOW RISE IN OIL PRICES RESULTED IN ECONOMIC SURGE The gradual strengthening of oil prices during 2017 was expected to boost economic output. GDP was on pace to rise by a robust 4.6%, following two sharp contractions of 3.0% and 3.2% in 2015 and 2016, respectively. Gains in output have taken place in the city’s most important business sectors in 2017 including: primary and utilities, construction and wholesale and retail trade. Output was expected to expand by roughly 3.0% in each of the goods production and services sectors over 2017.

GRADUAL CONTRUCTION SECTOR RECOVERY EMERGEDA slow recovery began to emerge in the GCA’s construction sector in 2017 after a two-year period of weakness. The strengthening of the energy sector and resulting labour market progress boosted housing demand this year. Starts in the new home market were forecast to rise to 12,000 units this year, 12,200 in 2018 by the CBOC. While there remains an oversupply of unsold inventory volume has declined significantly of late. Non-residential construction also showed signs of firming in 2017. Infrastructure spending was expected to provide a boost while office building activity had slowed sharply. Increased residential and non-residential construction over the past year indicated a gradual recovery was underway.

MORE JOBS MORE SPENDINGThe return of job growth this year was a catalyst for an expected increase in retail sales. Employment was on track for a 2.7% increase over 2017. Labour market gains were expected to boost retail sales and wholesale and retail trade output by 9.0% and 7.0%, respectively. Previously, retail sales increased by a modest 1.2% in 2016 having declined 2.6% in 2015. Expanded output in retail and related sectors was a boon for the broader economy overall.

RECOVERY PACE WILL BE MODESTThe pace of the CCA’s economic recovery will be fairly slow over the near term due in large part to modest gains in energy pricing and activity. Between 2018 and 2020 real GDP is forecast to rise by an average of 2.4% annually. In turn, employment gains will also be fairly moderate over the same time period. Increased oil production in more than one jurisdiction will ensure pricing gains will underperform those reported during the pre-recession peak. Consequently, the GCA’s economy and labour market will progress slowly. Labour market progress will pull the unemployment rate down to 7.7% by 2018 from the 22-year high of 9.4% in 2016. Sustained economic and labour market advancement will drive average annual retail sales growth of 2.2% in 2018 and 2019. In addition, housing demand will also rise for both the new and resale segments. In short, the outlook for the GCA economy is one of modest progression over the near term.

A significant transformation was forecast for the Greater Calgary Area’s (GCA) economy in 2017 given the emergence of the early stages of recovery in the oil sector. Economic output was on track to increase by 4.6% this year according to a recent CBOC forecast. The surge in activity was expected to drive strong employment growth of 2.7% resulting in an employment rate near the national average. Retail sales were forecast to rise given a healthier job market. A slow recovery in the region’s construction sector was also anticipated during 2017 following sharp declines in housing starts.

CALGARY ECONOMIC REPORT

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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2016

2017

F

2018

F

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F

2020

F

2021

F

%

Economic GrowthCalgary Historical & Forecast Aggregates


01002003004005006007008009001,000

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

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2013

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2017

F20

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F20

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2021

F

Thou

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s

%

Labour MarketCalgary Historical & Forecast Aggregates



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

2000

2001

2002

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2004

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2006

2007

2008

2009

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2011

2012

2013

2014

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2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorCalgary Historical & Forecast Aggregates



-10-50510152025303540

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

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2017

F20

18F

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F

Thou

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%

Demographic TrendsCalgary Historical & Forecast Aggregates




CALGARY OFFICE REPORTRECOVERY CYCLE WAIT CONTINUED DESPITE ECONOMIC SURGE The wait for the GCA office leasing market recovery continued during much of the past year despite a marked improvement in economic activity. Anemic demand continued to plague the market although smaller tenant activity showed signs of strengthening. The shedding of space by oil companies continued to have an impact on market fundamentals particularly downtown. Ongoing sector merger and acquisition added further vacancy onto the market. Demand was comprised largely of companies taking advantage of lower rents to move up to higher quality space upon lease renewal. The lengthy demand drought that persisted during 2017 continued to support cycle high vacancy. Downtown vacancy increased to a cycle-high of 27.7% as of the second quarter of 2017. The rate was close to triple the level recorded prior to the recession in 2014. Suburban vacancy was slightly less than double the rate reported by the end of 2014 at 22.0%. The upward vacancy trend was exacerbated by the continued delivery of new towers downtown. The most recent example was Brookfield Place East totalling 1.4 million square feet of which 1.2 million square feet was vacant upon completion. Excess vacancy both downtown and in the suburbs continued to hold rents at the cycle low. Landlords were forced to offer incentives to entice tenants to commit to space. Tenants in both Class A and B buildings were often able to secure space in newly built towers at reasonable rates. Conditions in the GCA office leasing market remained depressed during much of the past year despite the region’s emergence from recession and renewed economic growth cycle.

INVESTMENT MARKET WAS RELATIVELY QUIET The GCA office property investment market was relatively quiet during much of the past year. Activity levels were relatively muted compared to the most recent peak of 2013. A total of $563.0 million in sales volume was reported for the first half of 2017 with a relatively smaller number of large-scale sales recorded. Investors were hesitant to invest in a market that had performed poorly over the past few years. In addition, there was little transactional evidence to determine pricing. One of the few significant transactions of 2017 saw Slate Asset Management acquire 12 properties for approximately $200.0 million from Dream Office REIT at an aggressive pricing level. Slate’s acquisition was a major vote of confidence for the market’s long-term future. Slate’s decision came during a period of weak performance. The city’s leasing market was mired in a slump that included cycle-low rents and weak demand. At the same time investment performance metrics underwhelmed. The MSCI Index posted an annual total return of -3.3% for this market driven by a 10.4% decline in capital value for the 12-month period ending September 30, 2017. As the year progressed the GCA’s oil sector-driven economy surged following a two-year period of regression in 2015 and 2016. Despite the encouraging economic backdrop, however, conditions in the city’s office property investment remained relatively unchanged.

RECOVERY CYCLE WILL TAKE TIME The GCA’s office market recovery cycle will take several years given the extent and length of its decline. Economic growth began to surge in 2017, however, the expansion pace was forecast to moderate over the next few years along with the rebound in the oil sector. Historically, there has been a time lag between economic and office leasing market recovery. Additionally, merger and acquisition activity continues to erode office leasing fundamentals during 2017 and likely beyond. Additionally, there is a time lag between economy growth and office market recovery. For this reason it may be some time before leasing market fundamentals materially improve. Moreover, it could be some time before property values stabilize. In short, it will likely take a few years for the GCA’s office sector recovery cycle to emerge.

TRENDING STATISTICS


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


-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

2017

F20

18F

2019

F20

20F

2021

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

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2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Calgary Historical & Forecast Aggregates


-5.0

0.0

5.0

10.0

15.0


-3.3 -2.6

2.5

5.7

10.1

5.56.2 7.5 8.3

9.9

%


Calgary Office National Office



CALGARY INDUSTRIAL REPORT

LEASING MARKET CONFIDENCE APPEARED TO BE ON THE RISEConfidence in the GCA’s industrial leasing market looked to be on the rise during 2017 due in large part to increased economic activity. Evidence of increased market confidence was contained in recent leasing demand patterns. Smaller bay demand picked up in the first half particularly for units measuring between 2,000 square feet and 20,000 square feet. The lease up of space in this market segment accounted for a significant portion of the total net absorption in the first half of the year. A total of almost 680,000 square feet of space was absorbed during the first half of 2017, which contrasted the 1.1 million square foot negative result over the preceding 12-month period. The uptick in tenant confidence levels and resulting space absorption positively drove availability lower. Average market availability stood at 9.3% as of the midway mark of 2017 down 50 bps from the decade-high reported at year end 2016. The market’s developers exhibited increased confidence during 2017. Bentall Kennedy and partners Highfield and Hillwood served notice that construction would begin on 400,000 of speculative square feet in High Plains Industrial Park for completion in 2018. This was the first major development announced in close to two years. At the time of the announcement 357,000 square feet of new development was underway made up largely of smaller buildings. The announcement provided tangible evidence of renewed confidence on the part of the project sponsors. More broadly, it offered further evidence of the recetn rise in confidence levels related to the GCA industrial leasing market outlook.

INVESTMENT DEMAND PATTERNS STABILIZED AGAINST BACKDROP OF WEAKER PERFORMANCEGCA industrial sector investment demand remained relatively stable over the past year against a backdrop of weaker performance. Various groups both private and public continued to pursue functional assets with strong tenant rosters. Local private capital tended to focus on riskier assets with upside potential. The investment demand stability supported property values to some extent. Coincidentally, demand continued to drive transaction closing activity. CBRE statistics indicated a total of $358.9 million in property sales was completed in the first half of 2017 up sharply from the $148.5 million during the same time period a year earlier. Against this backdrop of healthy demand, sector performance was relatively weak. Properties contained in the MSCI Index generated an annual average return of a modest 2.1% for the period ending September 30, 2017. This performance was comprised of a cumulative capital decline of 3.1% and a slightly weakened income component. Recent leasing market softness was the cause of the income downdraft. Market rental rates rested at the cycle low and availability was close to the cycle high during 2017. Despite underwhelming sector performance, investment demand remained surprisingly stable.

MOMENTUM TO SLOWLY BUILDPositive momentum is expected to slowly build in the GCA’s industrial sector over the near term. Sustained moderate economic growth is forecast for the CMA which will translate positively into the industrial sector. The modest recovery in oil prices and rise in production bode well for continued leasing market gains. Business confidence will also improve which will support demand for industrial space. At some point in 2018 rents and occupancy will begin to slowly rise. Sector confidence will result in increased development activity. Consumer spending will rise moderately which will boost warehouse and distribution activity and demand for industrial space. The gradual firming of leasing market conditions will support income performance. The capital cycle will also eventually stabilize assuming the economic recovery is sustained. Then investment performance should improve in keeping with the positive momentum that will gradually build over the near term.

TRENDING STATISTICS


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


-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

2017

F20

18F

2019

F20

20F

2021

F

Mill

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of S

quar

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et

%

Industrial Demand & Supply Calgary Historical & Forecast Aggregates

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

Source: CBRE Limited; CBRE Econometric Advisors

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

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2017

F20

18F

2019

F20

20F

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F

%

$ p.

s.f.

Industrial Rent & Vacancy Calgary Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


2.14.3

7.2 7.5

10.5

7.87.1

8.0

6.7

9.4%


Calgary Industrial National Industrial



CALGARY RETAIL REPORT

PERIOD OF LEASING MARKET RESILIENCE WAS EXTENDED The past year marked the continuation of an extended period of leasing market resilience in the GCA retail sector. Evidence of this leasing market resilience was captured in vacancy characteristics. Average vacancy of 3.5% was reported by CBRE as of the end of the second quarter 2017. The rate was up just 20 bps year over year and stood marginally higher than the ten-year average of 2.8%. The market’s weak spot is downtown where reduced daytime traffic has led to increased vacancy. Further evidence of the market’s resilience was contained in new construction patterns. In the first half of 2017 a total of 329,936 square feet of new supply was completed with a further 594,788 square feet in the second half of 2016. Demand has been fairly brisk on the part of retailers looking for newly built space. The resilience of the market’s development cycle was also evident in its construction pipeline. A further 1.3 million square feet of space was under development as of the midway mark of 2017. Tenants have shown a willingness to pay higher rents for new space. While the market exhibited resilience there were challenges to overcome. There were a number of store closures, reductions in stores size and evidence of saturation in the big box sector. Despite these challenges the overriding market theme of resilience prevailed over the past year.

INVESTMENT MARKET REMAINED SOMEWHAT LIQUIDCalgary’s institutional grade retail investment market remained relatively liquid over the past year. Pension funds, private capital groups, publicly traded entities and other institutions looked to the GCA retail sector to fulfill their investment objectives. Most were confident in the sector’s outlook despite the ravages of the energy sector downturn of the last few years. Moreover, many were keen on acquiring retail assets in a market that had a solid history of long-term performance. For the most part, however, the supply of suitable properties available for acquisition fell short of demand. This dynamic had an impact on the volume of sales completed recently. In the first six months of 2017 a modest total of $149.2 million in sales volume was recorded. This pace of activity was markedly lower than the peak of 2012 when $434.0 million in sales volume was posted for the first half of the year. In most cases when high quality properties were offered for sale there were multiple buyers who bid fairly aggressively. This showed that there was a significant volume of capital looking to be placed in the market even during a period of relatively weak performance. MSCI Indexed properties generated a modest total return of 1.8% for the 12-month period ending September 30, 2017. The income portion of this performance was stable and healthy. However, a cumulative decline in capital value of 2.5% offset more than half of the posted income growth. Despite the modest return the market continued to exhibit a healthy level of liquidity over the recent past.

BRIGHTER DEMAND-DRIVER FORECAST BODES WELLThe GCA’s retail sector is expected to benefit from a healthier demand-driver performance over the near term. Sustained economic growth is forecast between 2018 and 2020 with real GDP expanding by between 2.0% and 2.5% over the period annually. The resulting employment and wage growth will support rising levels of retail spending. In turn, retailers will see slightly better sales volume totals which should drive expansion. This will offset losses related to changing consumer spending patterns. As a result leasing market progress will continue over the forecast period. While Sears Canada closures will be a challenge at least some of the space will be leased up quickly. Ongoing leasing market progress will support income growth and stability for owners and investment performance which should improve. As the economic recovery is sustained international and national retailers will look to expand into this market. A healthy performance-driver forecast will draw new stores to the market over the near term.

TRENDING STATISTICS


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


$0

$5

$10

$15

$20

$25

$30

$35

-6.0-4.0-2.00.02.04.06.08.0

10.012.0

2000

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2005

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2011

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F20

18F

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F

Bill

ions

%

Retail ConditionsCalgary Historical & Forecast Aggregates



$329

$251

$585

$404

$621

$796

$657

$519

$239

$441

$733

$243

$401

$276

$513

$149

$0

$100

$200

$300

$400

$500

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$700

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$900

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

Mill

ions

Investment ActivityCalgary Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


1.8

6.4

10.8 10.5

13.3

6.17.3

9.5 9.4

11.4

%


Calgary Retail National Retail



CALGARY MULTI-SUITE RESIDENTIAL REPORT

TENANTS HELD THE UPPER HAND GCA multi-suite residential rental market charcterisitics observed over the past year favoured its tenants. Tenants were treated to an abundance of choice when seeking out vacant units to rent. For the most part this was the case across the various size categories and submarkets. Add this to the additional rental options in the condominium sector and tenants were often able to be more choosey than during the period before the oil sector downturn. This was a boon for renters who were new arrivals to the region. Demand for rental accommodation was buoyed by the inflow of migrants and a stronger job market and economy. In the purpose-built rental market vacancy continued to hover close to the 25-year high recorded in October of 2016. A year later, market vacancy remained elevated. The vacancy rate was forecast to fall just 20 bps by the end of October 2017 from 7.0% a year earlier according to the most recent CMHC forecast. In 2017, tenants were able to choose from a higher number of vacant units at generally low prices. The recent erosion of market fundamentals forced landlords to come to terms with lower achieved rents on new leases and lower effective rents. Many owners were forced to offer more incentives to compete. Rents were largely below those of the pre-oil sector downturn. In short, GCA multi-suite residential rental market fundamentals favoured its tenants during the past year including cycle-high vacancy and cycle-low rents.

INVESTMENT DEMAND BELIED PERFORMANCE BENCHMARKS To some extent the strength of the GCA multi-suite residential rental investment property demand trend ran counter to market performance. Institutional groups scoured the market for core properties to acquire during 2017. However, the number of properties offered for sale over the year fell short of demand by a fairly wide margin. Similarly, private groups looking for value-add acquisitions were also often out of luck. The shortfall in availability reflected fairly muted transaction closing activity over the past 18 months. Transaction volume totalled $133.6 million in the first half of 2017 following the equally modest $247.5 million during all of 2016. Product availability has limited sales activity for the past five years dating back to the 2012 peak at $486.3 million. Investment performance also ran somewhat counter to the demand trend over the recent past. GCA properties contained in the MSCI Index tallied an annual average total return of -3.6% for the period ending September 30, 2017. The poor showing was the result of cumulative capital erosion of 7.0% over the period and a progressively weaker income growth trend. Of note, however, was that cap rates in the open market were generally stable over the same time period. In general terms, however, performance benchmarks for this market over the past year were somewhat contrary to the overall demand cycle.

GRADUAL STABILIZATION PREDICTED OVER NEAR TERMConditions in the GCA multi-suite residential sector are projected to slowly stabilize over the next few years. Stronger migration patterns and labour market improvement will boost rental demand over 2018 and 2019 driving vacancy levels slowly downward. At the same time new supply additions to inventory will ease. Stronger demand will drag vacancy levels gradually lower and rents should also slowly flatten. As a result landlords will see their incomes firm. Slow but sure rental market advancement will add to the justification for investing in this market. Therefore investment demand will continue to outpace the supply of properties available for acquisition. In turn, transaction volume will remain depressed. National and regional groups will make up the majority of the buyer pool over the next few years. However, new entries to the Canadian market will look at the GCA more closely than in the past. The demand pressure will result in a firmer value trend by later 2018 as the market stabilizes.

TRENDING STATISTICS


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


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000

2001

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2003

2004

2005

2006

2007

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2011

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2013

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F20

18F

2019

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

7.0 6.86.0

5.0

%

Average Rental VacancyCalgary Apartment Structures Of Three Units & Over

Source: CMHC

$129

$203

$139

$198

$479

$556

$269

$90$112 $126

$486

$184 $202 $216$248

$134

$0

$100

$200

$300

$400

$500

$600

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

Mill

ions

Investment ActivityCalgary Multi-Suite Investment Volume To June 2017


-5.0

0.0

5.0

10.0

15.0


-3.6

2.6

6.27.5

10.18.1 8.0

9.1 8.6 9.2%


Calgary Multi-Suite National Multi-Suite



LABOUR MARKET PROGRESS WAS SLOW BUT SUREEdmonton CMA labour market progression of the past year was relatively modest against a backdrop of strong first-half economic growth. Employment was projected to expand by a modest 0.4% in 2017 after no change in the number of employed in the previous year. The unemployment rate was on track to rise to 8.2% from 7.3% at the end of 2016. The rise was due to a stronger increase in the labour market relative to employment.

HOME BUILDER CONFIDENCE IMPROVED ALONG WITH ECONOMYGEA home builder confidence improved this year given an expected rise in new home demand. Builders believed that demand would rise as the regional economy continued to strengthen. As a result the CBOC predicted a total of 11,700 new home starts in 2017 after a sharp plunge in volume in 2016. The 2016 dip followed the 2015 total of 17,100 units driven in large part by a surge in multi-unit starts in the first quarter. The GEA economic growth cycle was forecast to moderate in 2018 with housing starts activity following suit.

PURSE STRINGS WERE OPEN AGAINConsumer spending volume picked up significantly in 2017 with employment and personal disposable income growth increasing. Retail spending was on track for an increase of 8.3% in 2017 following an annual average decline over the preceding two years. Stronger retail consumption levels were expected to boost wholesale and retail trade output by 4.5% this year and a more modest 1.1% in 2018. Prior to this year retail sales and retail and wholesale trade output had eroded broader services sector progress. In 2017, however, the trend reversed as a function of stronger retail sales and wholesale and retail trade output.

MODEST RECOVERY PROJECTED AFTER 2017 SURGE The GEA economic recovery will moderate over the near term following a sharp increase in output recorded in 2017. Real GDP was projected to expand by 2.2% in 2018, a rate that will be matched the following year. The driver of more moderate growth will be conservative gains in oil prices. Oil prices eclipsed the $50 per barrel mark in the first half of 2017 resulting in higher levels of investment and drilling by oil companies. In turn, the GEA’s manufacturing sector is expected to benefit from this activity and increased oil sands production. Moderately healthy economic expansion will boost total employment by 1.2% in 2018 and 1.6% in 2019. At the same time personal income growth will support steady retail sales gains of 2.4% over the same time period. After a slight dip in 2018 housing will also rise steadily. Housing demand will help drive progress in the professional services sector. In short, a modest recovery is forecast for the GEA economy over the next few years in keeping with the provincial trend.

EDMONTON ECONOMIC REPORT

ECONOMIC SNAPSHOT

The Edmonton CMA economy was expected to expand by a stellar stellar 3.9% in 2017 following a three-year period of contraction. The healthier rate of expansion resulted in strong labour market growth but slow employment growth. Stronger economic output was driven by higher oil prices resulting in increased sector investment and drilling activity. Increased retail spending was expected in 2017 given gains in disposable income. Similarly, employment market strengthening was set to boost housing demand. Manufacturing and construction activity were also expected to increase this year.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthEdmonton Historical & Forecast Aggregates


01002003004005006007008009001,000

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketEdmonton Historical & Forecast Aggregates



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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorEdmonton Historical & Forecast Aggregates



-10-50510152025303540

-1.0-0.50.00.51.01.52.02.53.03.54.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsEdmonton Historical & Forecast Aggregates




EDMONTON OFFICE REPORT

EROSION OF LEASING FUNDAMENTALS CONTINUED The erosion of GEA office leasing fundamentals continued over much of the past year despite a modest recovery in oil prices. A significant oversupply of vacant space remained a dominant market theme. Market vacancy threatened to push past the 20.0% mark in 2017 having risen steadily over a period of more than two years. Oversupply was an issue across building classes with the Financial Core submarket exhibiting vacancy levels beyond the market average of slightly less than 20.0% as of the end of the first half of 2017. Excess supply was a byproduct of weak demand patterns which have been a constant in the post commodities downturn time period. In the past, public sector demand filled the office space demand void during periods of economic weakness. To date, however, public sector expansion has been modest at best. The energy sector slowdown negatively impacted other sectors of the economy which effectively reduced space demand across the market. Excess supply and weak demand over the past year forced owners to offer more liberal incentives to lease up this space. Moreover, they were forced to contend with the plethora of sublease offerings that were often already discounted. As a result, rents continued to rest at the cycle low. Some owners decided to upgrade their properties in order to compete with newly built space over the long term at a time when market fundamentals were being steadily eroded.

INVESTOR TRENDS REFLECTED MARKET SLUMP Trends observed in the GEA office property investment sector were in large part dictated by the market’s leasing performance. Transaction closing volume was slightly ahead of last year’s pace as of the midway market of 2017. A total of $144.7 million in sales were reported following the 2016 annual total of just $128.0 million. The 2017 year-to-date total was somewhat misleading, however, as it was comprised mostly of the $104.8 million sale of Dream Office REIT’s GEA portfolio to Slate Asset Management. The price paid for the portfolio acquisition raised more than a few eyebrows. This year activity levels remained well below the peak as was the case over the preceding two years. For the most part investors were hesitant to acquire assets in a market they believed would take years to recover. The market’s leasing market slump was also reflected in overall performance. Office buildings tracked in the MSCI Index tallied an annual average total return of -4.9% for the year ending September 30, 2017. While the income component was relatively stable there was a cumulative capital decline of 11.7% over the 12-month period. The average value of properties tracked in the index has now decreased in every quarter dating back to June 2014. Weak performance metrics were one of several investment sector trends that were adversely affected by the market’s leasing performance during the past year.

CORRECTIVE PHASE TO GRADUALLY EASE Toward the end of 2017 there were indications that the current market will begin to ease over the near term. The GEA economy began to expand in the first half of 2017 with more moderate progress forecast over the next few years. Higher oil prices were key to the recent rise in economic and oil sands activity. Assuming this trend continues it is reasonable to believe that office market fundamentals will slowly stabilize. However, this may take longer than in the past given the extent and duration of the current market downturn. As a result vacancy will continue to range in the mid-to-high double digits in the second half of 2017 and into 2018. The completion of the 600,000 square foot Stantec Tower in 2018 will add vacancy to the market. Therefore, it may take a year or more for the market and potentially longer before rents stabilize. In the meantime, while the market will eventually rebound it may take longer than expected.

TRENDING STATISTICS


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


-600

-400

-200

0

200

400

600

800

1000

1200

1400

75

80

85

90

95

100

2000

2001

2002

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2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s of

Squ

are

Feet

%

Office Demand & Supply Edmonton Historical & Forecast Aggregates


0.0

5.0

10.0

15.0

20.0

25.0

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

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2009

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2011

2012

2013

2014

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2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Edmonton Historical & Forecast Aggregates


-5.0

0.0

5.0

10.0

15.0


-4.9-2.4

2.6

6.8

12.2

5.5 6.27.5 8.3

9.9

%


Edmonton Office National Office



EDMONTON INDUSTRIAL REPORT

LEASING MARKET CONDITIONS FAVOURED TENANTS GEA leasing market conditions favoured tenants during the past year. Tenants were able to access a relative abundance of options to expand or relocate given cycle-high availability. As the first half of 2017 came to a close availability rested at 8.5% according to CBRE statistics. The rate was the highest on record dating back more than two decades having doubled over the past 24-month period. In general, tenant demand has been weak during much of the past two years, which coincided with the energy sector downturn and resulting broader recession. The demand softening began in sectors linked to the oil sector and then spread across most other business sectors. As a result, downsizing and consolidation activity eroded demand. Consequently, space absorption totals dipped sharply and turned markedly negative. The weakened demand cycle coupled with record-high availability in 2017 resulted in downward pressure on average rents. Landlords were forced to contend with heightened competition levels across various segments of the market. As 2017 progressed rents declined for older generation space with smaller discounts offered for the highest quality availabilities. Fewer tenants in the market forced owners to be more aggressive when negotiating lease rates and terms. Lower rents were typical of leasing market conditions that favoured the tenant over the past year in the GEA.

INVESTMENT MARKET CHARACTERISTICS WERE MIXED There were both positive and negative characteristics observed in the GEA industrial investment market over the past year. On the plus side of the ledger investment demand was generally positive. Investors increasingly emphasized the acquisition of highly functional properties with strong tenant covenants and long-term leases to achieve their investment objectives. Core offerings were met with strong interest from a range of institutional and private groups. The health of the market’s demand cycle supported the $94.5 million in sector sales volume recorded in the first half of 2017 which was significantly higher than the trailing three-year and five-year annual averages according to CBRE data. Another positive investment market characteristic reported over the past year was stable and healthy income growth. During the 12-month period ending September 30, 2017 properties captured in the MSCI Index registered a healthy and stable income return of 5.9%. This virutally matched the previous year’s result. However, the overall return for the same time period was a modest 3.0%. which included a significant decline in capital value. Other negative market characteristics included low product availability and the erosion of leasing market fundamentals. Overall, recent investment market characteristics were relatively mixed.

SLOW RECOVERY IS THE MOST LIKELY FORECAST SCENARIOThe GEA industrial property sector is poised for a modest recovery over the near term. The CBOC is forecasting Edmonton’s economy will expand by a robust 3.9% this year followed by a more modest rate of expansion between 2018 and 2021. This rate of growth will support leasing market stabilization within two years. However, the recovery will be gradual. Rents will slowly stabilize along with availability which had reached a record high this year. Demand should also slowly strengthen over the next couple of years. Gradual recovery in oil prices forecast for the next 24 to 36 months will boost demand for industrial space in the sector and eventually in the broader economy. Depending on the pace of activity rents will also stabilize. It may be some time before a new development cycle begins as there is plenty of excess space to be absorbed before rents begin to climb. By the end of 2018 leasing conditions should have improved enough to support healthier investment performance. At the same time investor confidence will strengthen and potentially lead to another growth phase of the market cycle.

TRENDING STATISTICS


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


-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

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2017

F20

18F

2019

F20

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2021

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

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F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Industrial Rent & Vacancy Edmonton Historical & Forecast Aggregates

Net Effective Rent (LS) Availability Rate (RS)

Source: CBRE Limited; CBRE Econometric Advisors

-5.0

0.0

5.0

10.0

15.0


-0.3

3.4

6.88.2

10.5

7.8 7.18.0

6.7

9.4

%


Edmonton Industrial National Industrial



EDMONTON RETAIL REPORT

SOLID LEASING PERFORMANCE POSTED The GEA retail leasing market extended its recent run of solid performance over the past year as the winds of broader sector change continued to blow. Demand characteristics were generally positive. A number of new store openings took place recently including Saks OFF 5th at Skyline Power Centre, Mountain Co-Op, Fluevog Shoes, Simons, and Indochino, The Rec Room and Mujosh at West Edmonton Mall. To a large extent expansion activity offset store closures and the movement to smaller store sizes that took place as a response to changes in consumer spending behaviour over the past few years. Generally positive space demand patterns supported strong vacancy characteristics over the recent past. The market’s vacancy rate fell 30 bps to 3.9% year over year as of the midway mark of 2017. At the same time tight conditions ensured rents held close to the peak for the cycle. For the most part there were few options for tenants looking to expand in the existing inventory. New supply completed recently was leased up prior to completion or shortly thereafter. The continued delivery of new supply over the past year was another indicator of the market’s continued health. There was 438,000 square feet of new supply completed in the first half of 2017 with a further 715,304 square feet in the market’s development pipeline. Developers continued to show confidence in the GEA retail sector even as significant sector shifts in shopping patterns continued to unfold. Development activity was a byproduct of the strong leasing market performance reported over the past year.

INVESTMENT MARKET MOMENTUM HAD STAYING POWER Positive momentum continued to unfold in the GEA retail investment market over the recent past in building on a strong second half of 2016. Investment activity was relatively robust during the first half of 2017 with $307.5 million in sales completed. The activity level represented the strongest first half dating back to the 2012 peak. Moreover, the first half 2017 pace was markedly stronger year over year with $135.7 million in transaction volume recorded during the first half of 2016. The recent surge in investment activity in the GEA retail sector was an indication that investors were confident in the market’s outlook. Despite having only recently emerged from recession investors exhibited a willingness to bid aggressively on high quality assets offered for sale. For riskier assets a measure of caution was exercised with regard to offers to purchase in light of uncertainty with regard to the regional economic outlook. Positive investment market momentum was also evident in performance characteristics of the recent past. Properties contained in the MSCI Index registered a modest total annual return of 3.7% for the 12-month period ending September 30, 2017. With the emergence of an economic recovery in early 2017 positive investment market momentum was expected to continue to build over the near term.

STEADY SECTOR IMPROVEMENT FORECAST Progress in the GEA retail sector will be slow to unfold over the near term in keeping with the regional economic forecast. After a surge in output in 2017, economic growth will moderate over the subsequent three to four years. As a result retail sector momentum will be slow but sure. Leasing market conditions will remain tight as vacancy continues to range close to the 5.0% mark. Demand will continue to keep pace with supply ensuring modest upward pressure on rents. Excess space in the downtown core will continue to be a black mark on the leasing market. However, broader leasing market trends will remain postive. Investment market conditions will be largely unchanged. Properties in this market will continue to generate healthy income performance and attractive returns. Therefore, investment demand will continue to surpass the supply of high quality assets for sale. In short, the GEA retail sector will successfully navigate the loss of Sears and changing shopping patterns and drive slow but steady progress over the near term.

TRENDING STATISTICS


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


$0

$5

$10

$15

$20

$25

$30

$35

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000

2001

2002

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2004

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2009

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2017

F20

18F

2019

F20

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2021

F

Bill

ions

%

Retail ConditionsEdmonton Historical & Forecast Aggregates



$215$257

$136

$229

$124

$307

$217

$142$176

$400

$570

$369

$262

$98

$624

$351

$0

$100

$200

$300

$400

$500

$600

$700

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

Mill

ions

Investment ActivityEdmonton Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


3.75.3

8.710.1

11.9

6.17.3

9.5 9.4

11.4

%


Edmonton Retail National Retail



EDMONTON MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET MAY HAVE REACHED AN INFLECTION POINTAs 2017 progressed it appeared the GEA multi-suite residential rental market had reached an inflection point. After a three-year upward path vacancy started to stabilize with evidence of mild downward pressure observed. The average market vacancy rate trended downward from the 7.1% cycle-high of October 2016 during 2017. A rate of 6.9% was forecast for the end of 2017, down 20 bps year over year. Previously, vacancy had spiked to a 25-year high of 7.1% from just 1.7% 24 months before. For the first time in over three years demand was forecast to surpass supply in 2017 resulting in supply side stabilization. Demand strengthened during much of the past year, a performance that was driven by increased activity in the energy sector and modest job growth. Uncertainty as to the sustainability of economic recovery was also a factor in the improved rental demand trend. Some renters adopted a wait and see attitude before making the decision to purchase a home. While the market’s demand trend improved, the number of newly constructed unoccupied units dwindled. Vacancy in this segment of the market was pegged at 3.9% as of the midway mark of 2017. Overall, however, average market rents remained depressed. Landlords offered incentives and lower rents to prospective tenants than before the oil sector slump. The average two-bedroom monthly rent was expected to dip to $1,229.0 by October 2017, from $1,200.0 a year earlier. Despite the decline, stabilization of the GEA rental market appeared to have commenced.

UNEVENNESS CHARACTERIZED INVESTMENT MARKET TRENDSThe 2017 GEA multi-suite residential investment market performance was largely mixed. On the one hand demand was relatively stable with concrete high-rises and newly built properties generating strong investor interest. The positive overall demand trend included groups looking for core properties and those maintaining a value-add investment strategy. The health of the demand environment resulted in a fairly healthy level of transaction completions. In the first six months of 2017 transaction volume of $134.4 million was tallied. Although activity dipped sharply from last year’s record pace the total was in line with the 10-year average. The drivers of reduced transaction volume during 2017 were two-fold. First, the availability of newer high-rise core properties fell short of demand. Secondly, for much of 2017 vendors and purchasers have differed in their opinion on pricing in a market with higher vacancy levels and lower rents. While investment demand stabilized and transaction volume rested close to the long-term average during 2017 the market’s performance benchmark underwhelmed. The MSCI Index reported an annual average return of -2.1% for properties it tracked over a 12-month period ending September 30, 2017. The weak result was a function of a material capital decline that offset income growth. This performance unevenness mirrored the broader market trend.

GRADUAL RECOVERY FORECASTThe GEA multi-suite residential rental sector is expected to enter a period of gradual recovery over the near term. Rental market benchmarks will improve with vacancy falling to 6.2% from 7.1% at the close of 2016. Rents will begin to stabilize in 2018 as demand continues to best supply. By 2019 momentum will become more positive driven in large part by a healthier job market and economy. More stable oil prices will be a driver of moderately healthy economic growth which will attract migrants who typically rent upon arrival. Modest advances in the rental market will result in more stable income growth for owners and hopefully the stabilization of property values in the latter half of 2018. The brighter fundamental outlook will continue to draw investment capital to the market. In turn, investment performance will also become gradually more stable.

TRENDING STATISTICS


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


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000

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F20

18F

2019

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

7.1 6.9

6.2

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%

Average Rental Vacancy Edmonton Apartment Structures Of Three Units & Over

Source: CMHC

$175 $204$149 $147

$209

$659

$202$139$160 $157 $122

$318$270

$399

$723

$130

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$500

$600

$700

$800

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

Mill

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Investment ActivityEdmonton Multi-Suite Investment Volume To June 2017


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0.0

5.0

10.0


-2.12.1

6.17.1

8.1 8.09.1 8.6

%


Edmonton Multi-Suite National Multi-Suite



ECONOMIC SNAPSHOT

JOB MARKET PROGRESS SLOWED Labour market conditions continued to improve over much of 2017 although the pace was significantly below that of the previous year. Employment was set to rise by 2.4% this year after a surge of 4.7% over 2016. Despite the more modest growth rate employment gains were expected to drive unemployment down to a nine-year low of 5.1% by the end of 2017. Sectors with the healthiest gains in employment in 2017 included the information and cultural sector, financial insurance and real estate and transportation and warehousing at 11.5%, 6.3% and 7.5%, respectively.

HOUSING MARKET PERFORMANCE INDICATORS WERE MIXED Trends reported in the GVA housing market were somewhat mixed over the recent past due in large part to the new foreign buyers tax and tighter mortgage rules. The unsold inventory of multi-residential units fell sharply to near the 10-year low. Conversely, the higher-priced single family home inventory reached an historic high. Demand for lower priced homes has been relatively healthy while higher priced demand has lagged. Looking ahead, a relatively healthy economic outlook bodes well for housing demand over the near term.

SERVICES SECTOR GROWTH TRENDED DOWNWARD GVA services sector output growth began to trend downward in 2017. The main cause of the weaker growth trend was the foreign buyer tax. Sector output was forecast to expand by 3.7% in 2017 and 2.6% in 2018. Previously, growth averaged just over 4.0% annually in the past five years. Even with the emergence of a slower services sector growth trend this year the most significant industries are expected to post gains this year and next.

ECONOMIC GROWTH FORECAST IS MORE TEMPERATE The forecast for the GVA economy calls for more temperate expansion, a trend that will impact most industrial sectors over the near term. The CMA’s economy is forecast to expand by 3.2% in 2017 with a more tepid progression of 2.5% in 2018. This outlook will temper expectations in most subsectors of the local economy over the near term. Factors that will continue to contribute the slower growth outlook include, a less robust housing market, the negative impact of a slightly higher Canadian dollar on exports and a lack of housing affordability. The forecast slower rate of economic expansion will translate into slower job growth activity. Total GVA employment is expected to increase by 1.5% in 2018 which will push the unemployment rate down by 10 bps to 5.0% by the end of the year. Labour market progress will support housing demand and fairly strong housing starts. Starts will surpass the 10-year average in 2018. In summary, more modest economic growth forecast for the near term will support the ongoing health of the region’s overall fundamentals.

The Vancouver CMA economy continued to gain ground during 2017 although the rate of expansion was more moderate. Forecast growth of 3.2% for the year was off the pace of the preceding three-year period when the annual rate of expansion averaged just over 4.0%. The growth trend boosted employment levels with a 2.4% increase projected for 2017. Retail sales continued on a fairly sharp upward path in 2017. Headwinds surfaced over the past year for British Columbia’s housing, energy and forestry sectors which could have a significant impact on the GVA economy over the near term.

VANCOUVER ECONOMIC REPORT

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-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000

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F

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Economic GrowthVancouver Historical & Forecast Aggregates


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F20

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2021

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sand

s

%

Labour MarketVancouver Historical & Forecast Aggregates



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5

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6.0

8.0

10.0

12.0

14.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

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2014

2015

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2017

F20

18F

2019

F20

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2021

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s

%

Housing SectorVancouver Historical & Forecast Aggregates



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0.0

1.0

2.0

3.0

4.0

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F20

18F

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%

Demographic TrendsVancouver Historical & Forecast Aggregates




VANCOUVER OFFICE REPORT

LEASING MARKET FORGED AHEAD The GVA office leasing market continued to gain ground over the past year in extending the growth phase of the cycle. Demand patterns remained healthy with technology-related businesses being the most active. The city continued to draw skilled workers required by the sector at a relatively reasonable cost. Traditional office space occupier business sectors were also in expansion mode during the past year as a result of strong economic growth and services sector expansion. Demand was strongest in the downtown and Burnaby submarkets where tenants were able to access high quality space on transit lines. The continued strength of the market’s demand cycle resulted in increasingly tight supply-side characteristics. Downtown vacancy fell to a two-year low of 6.9% as of the end of the second quarter of 2017 for all building classes combined. The suburban rate rested at an 18-month low of 13.0%. Larger tenants found it increasingly difficult to source vacancy options across the market which benefited the market’s landlords who were often able to command higher rents on average. Upward rent pressure was strongest for the market’s best properties. With few new developments scheduled for completion over the next couple of years conditions were expected to remain tight. By the second half of 2017 there was much speculation as to the potential for another wave of new developments to meet demand. In the meantime the GVA leasing market continued to thrive.

RUN OF STRONG INVESTMENT PERFORMANCE CONTINUED The GVA office sector extended its run of healthy investment trends over the past year while remaining a highly sought-after asset class. The region’s prime towers attracted the interest of investors. The health of the demand cycle was evidenced by the range of groups looking to place capital in this market over the past year. Most were drawn by the region’s economic outlook, strong leasing fundamentals and history of healthy recent and historic investment performance. As has been the case for several years demand surpassed supply. Institutional groups continued to target a relatively limited supply of core assets in established nodes with strong transit linkages. Local groups tended to look more frequently at ‘value-add’ assets. Generally, strong demand patterns supported transaction closing activity with $1.9 billion in properties sold over the first half of 2017. A significant portion of the record first half volume included Cadillac Fairview’s disposition of a 50% share of its Vancouver portfolio and Ivanhoe Cambridge’s sale of Metrotower I and II. The strong market liquidity trend was posted during a period of attractive performance. GVA properties tracked in the MSCI Index posted an annual total return of 11.3% for the year ending September 30, 2017 which was the highest of the major Canadian office markets. Returns have been healthy for an extended period in keeping with the broader market performance trend.

ANOTHER SOLID PERFORMANCE ON TAPThe GVA office sector will continue to thrive over the near term. Economic growth and resulting business expansion will remain a positive influence on leasing market performance. Tightness is expected to continue to characterize the market over the near term given a relatively conservative development cycle and ongoing demand pressure. Vacancy will range slightly below the 2017 level. Landlords, in turn, will be able to dictate lease terms especially those with high quality and/or recently built vacancy. The resulting income growth should support returns that will likely rest in the low double digits. The near-term strength of the market will attract various groups looking to establish or grow their portfolios. Pension funds, institutional groups and private capital are expected to compete for the relatively low number of properties offered for sale. Yields, therefore, will hold at the cycle low. In short, the GVA office sector is poised for another period of solid performance trends over the near term.

TRENDING STATISTICS


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


-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

2017

F20

18F

2019

F20

20F

2021

F

Mill

ions

of S

quar

e Fe

et

%

Office Demand & Supply Vancouver Historical & Forecast Aggregates


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

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Office Rent & Vacancy Vancouver Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


11.3 11.310.5 10.6

12.0

5.56.2 7.5

8.39.9%


Vancouver Office National Office



VANCOUVER INDUSTRIAL REPORT

EXTENDED GROWTH PHASE OF CURRENT CYCLE PREVAILED The GVA industrial leasing market growth phase of the current cycle was extended through to the end of the first half of 2017. A characteristic of this extended phase has been generally healthy demand for industrial space across the region. The warehouse and distribution sector was a primary source of demand driven by a strong local economy and demand market. Consumer goods-related groups were active acquirers of vacant space either through expansion or consolidation. Increased manufacturing output also helped absorb some of the vacancy space in the market along with a burgeoning film industry. Expansion activity resulted in significant downward pressure on market availability. Availability dipped to an all-time low of just 3.0% by the end of the second quarter of 2017 having fallen from 6.2% just two years ago. The downward availability pressure and tightening resulted in upward rental pressure. Rents rested at the cycle peak and justified a rather robust development cycle. A total of 4.6 million square feet of new supply was delivered over an 18-month period ending at the midway mark of 2017. The total was lower than only the GTA of the nation’s major industrial markets. A further 4.5 million square feet of space was under development as of the end of the first half. This activity was an indication of the extension of the market growth cycle that persisted through to the end of the first half of the year.

INVESTMENT TRENDS WERE AMONG NATION’S HEALTHIEST The GVA’s industrial property sector registered one of the strongest investment market performances in the country over the past year. Properties contained in the MSCI Index registered an annual average return of 12.6% for the year ending September 30, 2017. The return was the second highest of the nation’s largest urban areas tracked next to the GTA at 13.3% over the same time period. Solid income and capital gains contributed to the recent market performance strength. The GVA industrial sector also exhibited strong investment demand characteristics over the period. The region was neck and neck with the GTA as a preferred location in which investors looked to invest capital. A range of groups both national and local looked for opportunities in the GVA which was widely viewed as one of nation’s most attractive markets. Some were forced to look at development as a core strategy given relatively limited opportunities for investment. Demand has routinely outpaced supply during the post financial crisis period. This relationship factored into the 9.6% decline in closing volume recorded year over year during the first half of 2017. Moreover, the $591.2 million in sales recorded fell short of the market’s potential. There was a significant supply of investment capital forced to the sidelines in light of the shortfall in availability. Despite the underutilization of these funds, the market exhibited generally positive performance attributes over the recent past.

GROWTH PHASE OF THE CURRENT CYCLE WILL EASEThe GVA industrial growth phase of the current cycle will likely moderate over the near term in line with the economic outlook. Vancouver’s economy is forecast to expand by roughly 2.5% in 2018 on the heels of a 3.2% advance this year. The gearing down of economic growth over the near term will reduce demand on the part of the market’s largest user groups. More specifically, expansion activity in the warehouse and distribution and manufacturing sectors will slow. More moderate space demand will reduce upward pressure on rents and downward pressure on availability. To be sure, however, leasing market fundamentals are expected to remain strong and stable. Landlords will, in turn, see more modest income performance. Despite a more modest growth cycle, however, investors will continue to view the market as a preferred destination in which to invest. In short, the market will continue to progress despite a softening of the region’s economic growth cycle.

TRENDING STATISTICS


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


-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

2017

F20

18F

2019

F20

20F

2021

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

1011

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

%

$ p.

s.f.

Industrial Rent & Vacancy Vancouver Historical & Forecast Aggregates


0.0

5.0

10.0

15.0


12.611.4

10.5

8.8

11.2

7.8 7.1 8.0 6.7

9.4%


Vancouver Industrial National Industrial



VANCOUVER RETAIL REPORT

LEASING MARKET VIBRANCY REMAINED A FIXTURE Vibrancy continued to characterize the GVA leasing market over the recent past, a performance that featured a steady inflow of international retailers. In a broad sense a range of international, national and local retailers contributed to what was a period of healthy demand. The market welcomed a number of leading international brands including: Hublot, Prada, Versace, Montclair, Burberry and Nelson. Many of these new arrivals set up operations in the central business district and Gastown. Alberni and Robson Streets were prime locations for higher end retailers to establish themselves. Suburban expansion activity was also fairly robust over the past year particularly in newly constructed or redeveloped properties. Examples included a second phase of McArthur Glen Designer Outlets totalling 78,000 square feet and the 140,000 square foot Willowbrook Centre expansion. Healthy space demand over the past year was key to the maintenance of low vacancy levels. Average market vacancy stood at a low 4.8% as of the end of the first half of 2017. While the rate was up 70 bps year over year there were limited options for tenants looking for prime space in most nodes. The lack of options in many locales supported rents that continued to hold at the peak on average except for Alberni Street where moderate growth was recorded. Rents remained at levels required to justify new construction. Larger developments often involved expansions to existing centres. New developments reflected the continued leasing market vibrancy of the past few years.

INVESTMENT MARKET WAS STABLE AND HEALTHY Recent GVA investment market conditions were relatively stable and positive with the extension of the current phase of the cycle. Activity levels were somewhat surprising given shortages of product available for acquisition over the past few years relative to demand. In the first half of 2017 a total of $1.5 billion in sales was reported surpassing the total for all of 2016 according to CBRE data. Significant contributions to the total were the sales of Sevenoaks Shopping Centre, Oakridge Centre and Pacific Centre. The sharp increase in activity during this period was a clear indication of the health of the market’s demand backdrop. Regional, national and international buyers actively pursued assets in this market in 2017 a trend that was evident over the past several years. A number of private groups also made their presence known. Bidding was generally quite aggressive overall resulting in moderate upward pressure on core property values. Cap rate compression was also relatively modest in the aftermath of a steady decline previously. The modest upward value trend was evidenced in Canada’s leading investment benchmark of late. The MSCI Index reported an annual average total return of 11.0% for the 12-month period ending September 30, 2017. The result was the strongest of the nine major markets tracked for a second consecutive year. Healthy investment performance was another element in what were generally stable and positive market trends over the recent past. MARKET WILL CONTINUE TO OUTPERFORM The GVA retail property market will continue to outperform over the near term. A steady stream of international and national retailers are expected to enter or expand within this market. The resulting absorption of space will ensure vacancy levels hold close to the 2017 low. Steady increases in consumer spending will support healthy bottom lines of retailers and owners of retail properties. The resulting income growth will continue to boost returns for owners of assets in this market. A modest upward value trend will also be a positive influence on overall returns. The market will once again generate the strongest returns of the major urban centres across Canada. Healthy leasing fundamentals and the resulting rental rate growth will continue to support new construction. The forecast lease up of this space will be additional evidence of the market’s outperformance.

TRENDING STATISTICS


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


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

-1.0

1.0

3.0

5.0

7.0

9.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Bill

ions

%

Retail ConditionsVancouver Historical & Forecast Aggregates



$725$604

$728$831

$688 $689$468 $490

$930$783 $793

$1,304

$886$1,078

$1,608

$2,814

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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

Mill

ions

Investment ActivityVancouver Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


11.0

12.3 11.811.1

12.7

6.17.3

9.5 9.4

11.4

%


Vancouver Retail National Retail



VANCOUVER MULTI-SUITE RESIDENTIAL REPORT

RENTAL MARKET EXHIBITED SUSTAINED IMBALANCEThe overriding GVA multi-suite residential rental market theme of the past year was sustained imbalance. Above-average demand for rental accommodation continued to characterize the market. Net migration was, in part, a driver of this trend. In addition, demand was buoyed by the fact that the incomes of many residents were too low to be able to afford to purchase a home in this market. For many down payments on new homes were taking longer to accumulate. Population growth and stronger labour market conditions were also a positive influence on rental demand. Demand has consistently outdistanced supply in this market over the past few years including 2017. As a result, vacancy rates have been 1.0% or lower between 2014 and 2016 with a forecast rate of 0.8% by the close of this year. A byproduct of robust rental demand and tight conditions was an upward trend for rents across the market. The CMHC forecast suggested the average one-bedroom monthly rent would rise from $1,159.0 to $1,240.0. This represented a 7.0% increase year over year as of October 2017. The two-bedroom average was expected to rise from $1,450.0 per month to $1,530.0 for a 5.5% increase over the same time period. Rental inflation was also a result of new supply additions to inventory that typically commanded above-average rents. Moreover, relatively sharp increases in average rent were typical of a market that had exhibited a significant degree of imbalance over the past year.

INVESTMENT MARKET FIRED ON ALL CYCLINDERSThe GVA multi-suite residential rental sector registered one of the strongest investment market performances of the past decade. Investment demand was particularly strong with various local and national groups scouring the market for opportunities to place capital in the market. Newer high-rise properties were most highly sought after although all other segments of the market were popular. Investors were attracted to the market by the region’s economic strength, rental market advancement and ability to attract international and inter-provincial migrants. The resulting investment demand pressure powered another strong run of sales activity during the first half of 2017. A total of $678.2 million in transaction volume was posted for this market period of transaction closing activity in building on the more than $1.0 billion in each of 2015 and 2016. Activity in 2017 was on pace to crack the $1.0 billion mark for a third consecutive year. Even though activity levels had peaked supply continued to fall short of the volume of capital potentially allocated for the market. The health of the market’s fundamentals over the past year was reflected in the capital cycle and overall investment performance. MSCI Indexed assets in this market registered an annual average return of 14.5% for the year ending September 30, 2017. The return included capital growth of 9.8% over the period and solid income performance. The total return was the highest on record dating back to 2012 and was indicative of a market that was firing on all cylinders.

PERSISTENT STRENGTH PROJECTED Recent market performance strength will continue over the near term. Rental market conditions will remain tight with demand surpassing supply. Market vacancy will hold close to the 1.0% market in 2018 and 2019 resulting in continued imbalance. Consequently upward pressure on rents will persist. Higher rents will boost income performance for owners who will experience fully or close to full occupancy. The health of the rental market and most other investment performance drivers will continue to drive investment performance. Therefore, some owners will be reluctant to sell, which will place a limit on activity levels. Investors will continue to target high-rise assets downtown and increasingly suburban properties where rental growth has been strongest of late. In short, the continued performance strength of this market will prevail over the near term.

TRENDING STATISTICS


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


0.0

1.0

2.0

3.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F

1.4

1.0

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 0.7 0.8

1.0 1.1%

Average Rental Vacancy Vancouver Apartment Structures Of Three Units & Over

Source: CMHC

$406 $400$465

$597$689

$640

$289

$647

$414 $450

$815

$441$533

$1,231

$1,100

$678

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

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

Mill

ions

Investment ActivityVancouver Multi-Suite Investment Volume To June 2017


0.0

5.0

10.0

15.0


13.9

11.9

9.3 9.2

11.0

8.1 8.09.1 8.6

9.2%


Vancouver Multi-Suite National Multi-Suite



LABOUR MARKET CONTINUED TO TIGHTEN An increased level of tightness was predicted for the Victoria CMA’s labour market over 2017. The creation of 7,100 jobs was forecast over the 12-month period building on the successes of the preceding 24 months. Previously 5,500 jobs were lost between 2008 and 2017. However, these losses were more than recouped with 9,000 positions created in 2015 and 2016. The 2017 progress was expected to drive the unemployment rate down to a four-year low of 4.2% by the end of the year. This represented a 100 bps plunge. Looking ahead a sharp slowdown in job creation numbers was forecast for the near term.

HOUSING STARTS PEAKEDHousing starts volume in the Victoria CMA hovered close to the cycle peak in 2017. The CBOC projection of 2,700 units over 2017 represented the second highest annual total of the past 11 years. The 2,900 starts reported in 2016 was a 27-year high. Starts have surged over the past two years as the inventory of unsold newly built homes plunged. The recent rise in the number of housing starts included both single-detached and multi-unit homes. However, multi-unit projects led the charge. A modest reduction in new home starts was projected over the near term in light of rising interest rates and a slower economic growth trend.

PUBLIC SECTOR PURSE STRINGS WERE OPENThe Victoria CMA’s public sector contributed significantly to the increased economic output of 2017. Output was predicted to expand by 2.2% in 2017 due to increased sector spending. In 2016, the sector accounted for 30.0% of total GDP. The British Columbia government posted a surplus in 2017 which supported increased spending. Previously, the provincial government had exercised restraint which resulted in reductions in output between 2010 and 2014. Over the near term public sector spending was projected to slow as large budget surpluses are eroded.

ECONOMIC ADVANCEMENT WILL BE CONSERVATIVE A more conservative economic growth trend will unfold for the Victoria CMA over the near term in keeping with the national outlook. Output will increase by 2.2% in 2018 and 2.0% in 2019. As a result, employment growth will follow suit expanding by a modest 0.2% in 2018 and 1.1% in 2019. The unemployment rate will edge higher to 4.4% and 4.3% over the same time period. Personal income levels will increase materially over the forecast period which will support retail sales growth of roughly 2.2% over the next three years. A modest downward housing start trend is predicted at the same time. In short, the economic outlook for the Victoria CMA is one of sustained modest growth over the near term.

VICTORIA ECONOMIC REPORT

ECONOMIC SNAPSHOT

A slight slowing of the Victoria CMA’s economic growth trend was forecast for 2017. A real GDP advance of 2.4% was predicted this year following two consecutive lifts of 2.8% in each of 2015 and 2016. Growth for 2017 was projected to support the creation of 7,100 jobs resulting in a further tightening of an already tight labour market. Housing starts were also set to moderate this year after a stellar 2016. A fourth consecutive year of strong retail sales growth was predicted for 2017 after a three-year run of healthy advances. Income growth and tight labour market conditions have boosted spending patterns over the recent past.

-2.0

-1.0

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

2017

F

2018

F

2019

F

2020

F

2021

F

%

Economic GrowthVictoria Historical & Forecast Aggregates


0

50

100

150

200

250

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Labour MarketVictoria Historical & Forecast Aggregates



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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Housing SectorVictoria Historical & Forecast Aggregates



-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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Thou

sand

s

%

Demographic TrendsVictoria Historical & Forecast Aggregates




VICTORIA OFFICE REPORT

CONSTRAINED SUPPLY IMPACTED LEASING PERFORMANCE Supply constraints in Victoria’s downtown office market had a significant impact on leasing conditions over the recent past. Downtown vacancy rested at 6.1% as of the end of the first half of 2017 with a prohibitively low 1.4% rate for the Class A market segment. The Class B rate was also close to the cycle low at 5.4% according to Colliers International statistics. For tenants low vacancy levels presented a number of challenges. There were few options for tenants looking to relocate or expand into space in the market’s highest quality downtown buildings. When tenants were able to source suitable space to lease landlords had the upper hand in negotiating lease terms. For this reason there was upward pressure on rents. In some cases, tenants were forced to take space that was less than ideal. As a result, a significant portion of activity was focused in the Class B inventory. For the most part, tenants were forced to contend with a shortage of space options.

SUBURBAN MARKET ACTIVITY SLOWED The suburban leasing market was relatively quiet during much of the past year driven in large part by a slowdown in tenant expansion activity. There were fewer expansions reported in the private sector in addition to more muted public sector growth. The slowdown was reflected in the submarket’s absorption pattern, with a slightly negative total reported over the first half of 2017. The tepid demand trend of the past year was also a driving force behind the submarket’s rental rate trend. On average rents stabilized given the lack of a firm demand trend and a fairly generous supply of vacant space. Essentially, vacancy was largely unchanged year over year. The suburban rate stood at 10.1% as of the first half of 2017 according to Colliers International. A significant portion of total suburban vacancy was comprised of recently built space in the Uptown expansion and Eagle Creek Village. Despite signs of strong interest on the part of tenants in the market, this space was still on the market as of the midway mark of 2017. Leasing activity was expected to pick up in the second half of the year following a relatively slow first half.

INVESTMENT MARKET STABILIZEDGenerally stable and healthy investment market conditions were reported in Victoria’s office sector over the past year. Properties tracked in the MSCI Index posted an attractive annual average return of 12.2% for the year ending September 30, 2017. This marked a second consecutive double-digit performance. Investor demand was also generally stable and healthy over the past year in keeping with the medium-term trend. However, product availability was far below demand. Colliers International reported a total of nine buildings sold over the first half of 2017, six of which were acquired by owner-users. All six of these sales netted a sale price of $2.6 million or less. The shortage of significant sales was not uncommon for this market given its relatively small size. Despite this fact investment demand remained relatively strong. The health of this market was also evident in the value cycle. Values increased moderately over the year, driven by stronger leasing market conditions and the demand pressure. This trend was in line with the broader market performance.

THE OUTLOOK IS BROADLY POSITIVEVictoria’s near-term outlook looks generally positive. Landlords are hopeful of a pickup in leasing activity and continued upward pressure on rents downtown. Their suburban counterparts are hopeful the recent rise in office space requirements will persist. A number of rumours have circulated through the market that more than one large user is looking for space and will be forced to take up space in the suburbs. A fairly positive economic growth outlook will also boost demand for office space. Even if the improvement is modest market conditions will at a minimum slowly strengthen.

TRENDING STATISTICS


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


0.0

2.0

4.0

6.0

8.0

10.0

12.0

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

7.68.6 8.7

5.9

4.0

2.92.4

4.5

9.18.3 8.1

8.89.6

9.2

7.8 7.9

%

Victoria Office VacancyTo Second Quarter - 2017


$14 $21

$58

$34 $41

$60

$32

$99

$55

$42

$59 $55

$95

$48

$104

$91

$136

$77

$0

$20

$40

$60

$80

$100

$120

$140

$160

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

Mill

ions

Investment ActivityVictoria Office Investment Volume To June 2017

Source: Colliers International; RCA

0.0

5.0

10.0

15.0

1-YEAR 3-YEAR 5-YEAR

12.29.8

8.7

5.56.2 7.5

%


Victoria Office National Office



VICTORIA INDUSTRIAL REPORT

LEASING ACTIVITY SURGEDA surge in leasing activity was reported in the Greater Victoria industrial market recently after a five-year long slowdown. Activity was boosted by a sharp increase in demand across multiple business categories. More specifically, expansion in the technology, shipyard and housing sectors led to an increase in space demand. The resulting increase in leasing activity generated total net absorption of 281,123 square feet between the summer of 2016 and 2017. This was by far the strongest result dating back five years. Recently, demand has consistently outpaced supply by a significant margin which resulted in the ratcheting down of the market’s average vacancy rate. Overall market vacancy dipped sharply to 2.4% from 4.9% a year ago. The downward trend was observed across the region’s major submarkets. Over the past two years vacancy has fallen from a high of 6.0%. In addition to the sharp downward vacancy trend, the recent surge in leasing activity led to the rapid lease up of new developments. A total of almost 50,000 square feet of newly constructed space was added to Greater Victoria’s inventory over a 12-month period ending in the summer of 2017. Tenant’s committtdd to much of this new space. As a result of this success, construction activity was expected to increase materially over the near term. The expected uptick was another potentially positive outcome related to the recent spike in leasing activity.

ALL QUIET ON THE INVESTMENT FRONT Greater Victoria’s industrial investment market remained quiet during 2016 and much of 2017 as few properties were offered for sale. Concidentally, demand remained fairly robust. The market’s history of low vacancy and recent economic performance continued to draw interest from national and local groups who were forced to compete with owner-users. In particular owner-users looked for ownership opportunities as close to the city’s core as possible. The strength of the demand backdrop supported property values which ranged at or near the cycle peak. Investors sought to take a position or expand their existing portfolios in this market to take advantage of healthy fundamentals. However, there were few opportunities.

DEVELOPMENT ACTIVITY WAS EXPECTED TO INCREASE The Greater Victoria industrial development cycle was forecast to strengthen over the near term given significant leasing market imbalance. Demand for industrial space is expected to continue to outpace supply which will support rents required to justify development. With market vacancy already at a cycle-low of just 2.4% tenants often had difficulty in sourcing suitable space. The market’s demand supply dynamic was expected to support increased development over the next 12 months. The most obvious focus of this activity was in Keating, Sidney and Langford which was viewed as the logical site for development given a relatively abundant supply of land.

DEMAND-DRIVERS WILL SUPPORT PROGRESSION The Greater Victoria industrial sector demand-driver forecast is indicative of continued progress. The CBOC is predicting the local economy to expand by 2.1% in each of 2017 and 2018. The city’s manufacturing sector will lead the way along with new housing construction. Both sectors will drive demand for industrial space. As a result, recent market imbalance will continue with vacancy continuing to rest well below the 5.0% mark. This should kick off new development activity as rents steadily rise. The combination of leasing market and economic expansion will draw investors. Once again, however, many will struggle to source product or lose out to owner-users. Overall the sector will continue to progress over the near term given a solid demand-driver outlook.

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 16 17YTD

Thou

sand

s of

Squ

are

Feet

%

Industrial Demand & Supply Victoria Historical Aggregates

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


6.5

7.0

7.5

8.0

8.5

9.0

9.5

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

7.1 7.17.3 7.3 7.4

7.6 7.7

8.0

8.3

8.6 8.68.9

9.09.2 9.2 9.2

9.0

Mill

ions

of S

quar

e Fe

et

Victoria Industrial InventoryTo Second Quarter - 2017


$3

$22

$13 $8

$27

$18 $14

$45

$24

$38 $44 $42

$13

$36

$50

$41

$73

$19

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

Mill

ions

Investment ActivityVictoria Industrial Investment Volume To June 2017



VICTORIA RETAIL REPORT

DOWNTOWN REVIVAL CONTINUED TO UNFOLD Victoria’s street-front retail market revival continued to progress over the past year resulting in stronger leasing fundamentals. A number of factors contributed to the upswing in activity and the continued emergence of the downtown retail market. The first factor was increased tourism traffic which boosted demand for retail offerings. A second driver of the downtown retail renaissance was growth in technology jobs in the area which boosted day-time shopping. The third factor was increased multi-suite residential density which expanded the number of shoppers in the downtown trade area. The aggregate impact of these three factors was an increase in demand for a broader range and higher number of retail offerings in the downtown core. The focus was initially on food and dining and a range of service retail uses. An improved demand backdrop led to the opening of a number of stores. Recent examples included: EI Furniture Warehouse, Giant Cycles, Modern Beauty Supplies, Frank’s Modern Diner, Fuego, and Levit just to name a few. The absorption of vacant space over the past year drove vacancy levels downward. Vacancy drifted down into the single digits during the first half of 2017 having peaked in the low teens a year earlier. Absorption was strongest for spaces ranging from 800 square feet to 2,000 square feet. Stores larger than 5,000 square feet in the downtown area have proven more difficult to lease up. The steady lease up of space over the recent past resulted in modest upward pressure on rents. Stronger overall leasing fundamentals reported recently were an indicator of the downtown retail revival which took place over the same time period.

LEASING FUNDAMENTALS SUPPORTED DEVELOPMENT ACTIVITY Victoria’s retail leasing fundamentals justified new construction activity over the past year. Rents were sufficiently high enough to rationalize the financial decision to build. Low vacancy levels across much of the market left tenants with few options to expand. Peak rents and tight conditions overall justified construction activity in this market. A number of projects both in the downtown and suburban areas were underway or expected to start shortly. In the downtown area, for example, of number of new retail spaces were developed as part of mixed-use complexes. The Yello on Yates Street, 750 Pandora Avenue and 1075 Pandora Avenue were expected to deliver a combined total of 25,400 square feet of new retail space, according to a recent Cushman and Wakefield Marketbeat report. The revitalization of “The Fairfield Block” and the Townlines Hudson District added to the total volume of space constructed in the downtown area. The rapid absorption of this space was forecast given a fairly robust downtown demand cycle. Additional development activity was underway in Langford totalling 68,900 square feet with a further 15,000 square feet at the Pacific Centre. One of the largest developments underway was expansions of Mayfair Shopping Centre and Belmont Market. These were typical of projects underway during the past year that were justified by leasing fundamentals. MOMENTUM TO CONTINUE OVER NEAR TERMPositive momentum reported in Victoria’s retail sector over the past year is expected to persist over the near term. A relatively healthy economic growth outlook will continue to drive employment gains of 1.8% in 2017 and 0.8% in 2018. Retail sales growth of 4.2% and 2.1% over the same time period will support the region’s retailers. A confident consumer and income growth for retailers will continue to strengthen leasing fundamentals. In turn, investment performance will remain fairly attractive in line with the 3.2% total return tallied for the year ending September 30, 2017. Investment demand will continue to outdistance supply. Access to high quality assets will be limited. Despite this limitation, sector momentum will remain positive over the near term.

TRENDING STATISTICS


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


$0

$1

$2

$3

$4

$5

$6

-2.0

0.0

2.0

4.0

6.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F20

20F

2021

F

Bill

ions

%

Retail ConditionsVictoria Historical & Forecast Aggregates



$35 $19

$60

$108

$155

$72 $61

$193

$62

$18

$252

$100

$32

$343

$101

$242

$131

$48

$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 16 17YTD

Mill

ions

Investment ActivityVictoria Retail Investment Volume To June 2017


0.0

5.0

10.0

15.0


3.2

6.07.0 7.3

10.9

6.17.3

9.5 9.4

11.4

%


Victoria Retail National Retail



VICTORIA MULTI-SUITE RESIDENTIAL REPORT

RENTAL FUNDAMENTALS FAVOURED THE REGION’S LANDLORDSVictoria’s multi-suite residential rental market fundamentals favoured the region’s owners in 2017 in keeping with the trend of the past several years. Owners of assets in this market were able to achieve full or close to full occupancy in the past year in support of strong income growth and security. There was no change in market vacancy forecast with a rate of 0.5% holding firm year over year as of October 2017. Limited vacancy was a byproduct of demand supply imbalance that has characterized the market over the past few years. The market’s recent record of healthy demand patterns was driven by a number of factors. Regional economic growth boosted employment levels resulting in increased demand for rental accommodation. In addition, house prices reached levels that forced families and individuals to rent rather than pay the high cost of ownership. For landlords this meant a secure existing tenant roster and strong interest in units that were available for rent. The strength of the market’s demand profile and close to record-low vacancy served to drive rents higher. CMHC expectations pointed to increased average rents in both the one-bedroom and two-bedroom market segments. The one-bedroom average monthly rent was forecast to increase by 6.4% year over year as of October 2017 to $970.0. The two-bedroom average was expected to rise by a slightly less robust 6.1% over the same period to $1,260.0 per month. This growth was in keeping with the overriding market theme of the past year of market fundamentals that favoured the landlord.

INVESTMENT ACTIVITY AND PRICING TRENDED HIGHERVictoria’s multi-suite residential rental investment market generated increased activity levels and upward pressure on pricing during 2017. Transaction volume increased by 56.5% year over year over the first half of 2017. Transaction volume during this period totalled $118.1 million contrasting the relatively modest $64.0 million in sales recorded over the same time period a year earlier according to Colliers International data. The year-over-year surge in closing volume was partially a function of increased availability. In a general sense market fundamentals were only slightly stronger. Moreover, demand has been relatively healthy over much of the past three years. However, the other major driver of increased sales closing volume during 2017 was a willingness on the part of investors to pay higher prices to acquire assets in this market and in so doing achieve lower yields. Investors had grown frustrated with low levels of availability and heightened competition and pricing in Vancouver and the Lower Mainland. Coincidentally, rising rents and record low vacancy levels added to the rationale for paying higher prices. In addition, some owners capitalized on peak pricing in order to realize profit from property sales. In summary, various factors contributed to a marked increase in investment sales and modest upward pricing pressure in this market during 2017.

MARKET STRENGTHS WILL CARRY OVER The health of the current phase of the market cycle will continue for at least the next 12 months. Rental demand will surpass supply. Strong migration patterns including older demographics will ensure vacancy remains prohibitively low for renters looking for a new home. Rising rents will continue to support development, particularly downtown. The strength of the rental market over the near term will boost investment. At the same time, investors will continue to pay peak prices for assets in this market. Newer properties will be highest on the priority list of national groups. However, a lack of suitable product availability will see most sales take place in the older building segment of the market. The shortfall in availability across the market will once again see some groups effectively forced to the sidelines. The transaction volume forecast is uncertain. Otherwise the market performance for the next 12 to 18 months will be stable and healthy.

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

$800,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

F20

18F

2019

F

Housing MarketPricing vs. Demand

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

TRENDING STATISTICS


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


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

2017

F20

18F

2019

F

1.8

0.5

1.5

1.1

0.6 0.5 0.5 0.5 0.5

1.4 1.5

2.1

2.7 2.8

1.5

0.6 0.5 0.5

1.0

1.5%

Average Rental Vacancy Victoria Apartment Structures Of Three Units & Over

Source: CMHC

$6 $11 $23 $19 $14

$43

$93

$148

$50

$18

$100

$68 $88

$22

$130

$222

$166

$118

$0

$50

$100

$150

$200

$250

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

Mill

ions

Investment ActivityVictoria Multi-Suite Investment Volume To June 2017


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, Canada 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 (CBOC), 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, Altus-Insite Research, International Council of Shopping Centers (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.

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