THE POWER OF DISCIPLINED INVESTING Real Estate Market Report March,
There continues to be demand for core real estate in major Canadian markets and institutional investors continue to show interest in quality assets. REITs are expected to be selective buyers in as financing costs are lower since the Bank of Canada (BoC) decreased the overnight rate to.7% in January. Seymour Street Office, Vancouver, BC Figure : Overnight Rate. Target Overnight Rate (%)..8.... Dec- May- Oct- Mar- Aug- Jan- Source: Statistics Canada. As at Mar,. Despite lower oil prices, institutional investors continue to be positive regarding the long-term growth prospects of Western Canada.
Investment Market Canadian employment was up 8,7 for March, which was better than expectations. The jobless rate was stable at.8%. Manitoba led in year-over-year (YOY) employment growth at.%. Figure : YOY Employment Growth According to RBC Economics, Saskatchewan s non-energy sector (potash and agriculture production in particular) should provide an offset to the weaker energy sector. Figure : Potash Production (YOY % change) % Growth (Year Over Year) - - - - - - BC AB SK MB ON QC NB NS PEI NL CANADA Source: Saskatchewan Industry and Resources. RBC Economics. As at Dec,. Source: Statistics Canada. As at Mar,. RBC Economics expects the Canadian economy to grow by.% in and.% in. Economic performance across the provinces is likely to be divergent. In the short- to mid-term, Alberta is likely to see cuts to capital expenditure, which may cause net in-migration and consumer confidence to soften. Net oil consuming and export intensive provinces are likely to benefit. This would include Ontario, British Columbia, Manitoba and Quebec. Bond yields continued to trend downwards during the first quarter of, with the -year Government of Canada (GoC) yields ending the quarter at.%. This is basis points (bps) lower than the start of the year. When the BoC cut their rates, commercial banks also cut their prime rate by bps to.8%. Figure : -year GoC. Figure : Real GDP (Average Annual % Change).. F F. Real GDP (Average Annual % Change) - -... Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- Source: Bank of Canada. As of Mar,. - BC AB SK MB ON QC NB NS PEI NL Canada Source: RBC Economics. As at March. BMO Capital Markets. As at Mar,. Ibid. RBC Economics. As at March. Quarter, Page
Commercial mortgage rates have generally followed overall interest rate levels; however, mortgages on high-quality real estate in prime locations still provide a spread between 7 8 bps for -year and 8 bps for -year terms. With the low level of interest rates, commercial mortgage lenders are focused on protecting the absolute income level of their portfolio by utilizing floor rates. Floor rates are the absolute minimum mortgage rate provided by lenders. 77 Bloor Street West Office, Toronto, ON Through, we saw downward pressure on the spread between GoC yields and mortgage rates. With the further decline in interest rates in, floor rates are taking effect and this is starting to put some upward pressure on overall mortgage spreads. Figure : Five-year Mortgage Spreads 8 Basis Points Dec- May- Oct- Mar- Aug- Jan- Source: RBC Capital Markets. Bank of Canada. As at Mar,. The national cap rate decreased four basis point to.7% in Q-. Cap rates in Calgary have increased slightly for non-core assets. CBRE Limited. As at Q-. Quarter, Page
Office The national office vacancy rate at the end of the first quarter was.%. This is up bps from the previous quarter. The downtown vacancy rate was 8.9% compared to 8.% at the end of. There was a total of. million square feet of downtown office space given back to the market; Calgary represented approximately 7% of this space. Figure 7: Class A Vacancy 8 Downtown Suburban Total Demand from technology companies has picked up in recent quarters. In Toronto, the technology industry accounted for approximately 7% of leases in. 7 Most of this is happening just east and west of the financial core. Demographic trends are playing an important role in the work space. Millennials are demanding more open concept and collaborative work spaces versus traditional cubicles. Having game rooms, bars and healthy snacks available is becoming the norm as employers compete for top talent. Figure 9: Open Concept Office % 8 Vancouver Calgary Edmonton Winnipeg Toronto Ottawa Montreal Halifax Canada Source: CBRE Limited. As at Mar,. Increase in sublease space in Calgary is also putting pressure on asking rents. Nationally, the average class A net rental rate has remained stable at $.8 per square foot for downtown office space. At the end of net rent was $. per square foot. Figure 8: Downtown Class A Net Rent Q- Q- Source: istockphoto.com. Jun,. According to CBRE Limited, rents for these types of work spaces located just east and west of the financial core has risen faster than rents for space in the financial core. King Street West Office, Toronto, ON $ Vancouver Calgary Edmonton Winnipeg Toronto Ottawa Montreal Halifax Canada Source: CBRE Limited. As at Mar,. CBRE Limited. As at Mar,. Ibid. 7 Colliers International & Bloomberg. As at December. Quarter, Page
Retail Retail sales are forecasted to grow.8% in and.% in according to RBC Economics. British Columbia, Ontario and Manitoba are expected to lead the pack in both years. This is a shift from the last five years when Alberta was leading in retail sales activity. In addition, tenant demand has led to a gradual decline in vacancy rates since 9. Figure : Retail Vacancy Rate 7 Figure : Retail Sales (Average Annual % Change) F F % % 9 Source: Conference Board and Centre for Study of Commercial Activity. As at Dec,. BC AB SK MB ON QC NB NS PEI NL Canada Source: RBC Economics. As at March. Property fundamentals in retail have been relatively stable with retail vacancy rates at.% in Canada. 8 There has been limited new supply of retail space in Canada over the last years. Figure : New Supply Over Total Space % New Supply/Total Space Average 8 9 Source: Conference Board and Centre for Study of Commercial Activity. As at Dec,. However, there have been some pockets of weakness. There continues to be announcements of big-box retailers reconfiguring or closing stores. The most recent examples are Target, Future Shop and Comark. Vacancy is likely to increase as these tenants vacate their space. According to CBRE Limited, Target s departure was mainly due to misreading the Canadian consumer and Future Shop s closure was mainly due to an overlapping network of stores with Best Buy. This emphasizes the importance of having retail in strategic locations that are more hands on (i.e. areas with fitness centres, theatres, restaurants, etc.). These tenants act as ancillary draws to the traditional retail tenant. Even with Target and Future Shop closing, 8 international retailers came into Canada in. This compares to in and 9 in. Most of the new entrants are luxury retailers predominantly from U.S. and European markets. 9 Notable names in include : Nordstrom Calgary Muji Toronto Karen Millen Montreal H&M Home Edmonton Versace Home - Vancouver 8 Conference Board and Centre for Study of Commercial Activity. As at Dec,. 9 CBRE Limited. As at Dec,. Ibid. Quarter, Page 7
Industrial The availability rate of industrial was.8% at the end of the first quarter. This is up bps from last quarter. However, over the last five years the availability rate has been steadily declining. Net rents have also increased as a result. Figure : E-commerce Forecast Figure : Availability, Vacancy and Net Rent Rate (%) 7....8.. Price per sq.ft. ($) Retail Sales ($ Billions) Total Retail Sales Level 9 8 8 Physical Retail Sales Minus Auto Sales (L) Online Retail Sales (L) Total Retail Sales Level (L) % Online (R) E-Commerce as a % of Retail Sales. Source: Conference Board and Centre for Study of Commercial Activity. As at Dec,. Q- Q- Q- Q-..8 Availability Rate (%) Vacancy Rate (%) Avg. Net Rent ($ per sq.ft.) Source: CBRE Limited. As at Mar,. Over the long term, we believe that the industrial property type will continue to be positively impacted by e-commerce, a lower Canadian dollar and tenants focusing on cost and supply chain rationalization. E-commerce contributed less than % of total retail sales in. By, it is forecasted to be about %. As companies like Amazon, and traditional bricks and mortar retailers, look to supplement in-store sales with an online presence (omni-channel), this should provide positive momentum for industrial properties. The lower Canadian dollar is expected to help manufacturers and exporters. This should further spur industrial demand. As tenants look to cut costs, it is important for industrial buildings to be strategically located; have access to multiple major land transportation routes; and be in close proximity to airports, railway hubs and sea ports. Modern buildings with high ceilings also allow tenants to be more efficient with their space. Rue Raymond-Lasnier (Adidas Distribution Centre) Industrial, Montreal, QC CBRE Limited. As at December. Quarter, Page 8
Multi-unit Residential Multi-unit residential properties continue to be in demand and add value to investors. A major reason for this is the rise in the cost of home ownership. National housing affordability reached.7% for bungalows, 8.% for two-storey homes and 7.% for condos. This is the percent of pre-tax household income that is needed to service the cost of owning a home. Land constraints are also restricting development in two of Canada s major cities: Toronto (Greenbelt) and Vancouver (Agricultural Land Reserve). TH Ave SW Multi-unit Residential Calgary, AB Figure : Vacancy Rate 7 % 8 Source: Canada Mortgage and Housing Corporation. As at October. Immigration, employment and household formation remain positive for the rental market. If interest rates start to rise, it should further support demand for this property type. Royal LePage, Statistics Canada, RBC Economics Research. As at Dec,. Quarter, Page 9
Conclusion We believe strategically located, well-leased properties with strong, long-term tenant covenants that result in growing income streams will drive performance. With the spread between capitalization rates and bond yields widening to record levels in January, we believe that investment demand will continue to be robust for institutional-grade, well-located assets in core markets. FOR FURTHER INFORMATION PLEASE CONTACT: Nazmin Gupta Senior Vice-President () 9-88 nazmin.gupta@greystone.ca Andrew Croll, CFA Product Specialist () 9-87 andrew.croll@greystone.ca Greystone.ca This document is for informational purposes only. It is not meant as investment advice and is not an offer, solicitation or recommendation to purchase or sell any security. There is no assurance that any predictions or projections will actually occur. Past performance is not necessarily indicative of future results. Commentary reflects the opinions of Greystone Managed Investments Inc. as of the date of the document. This document was developed from sources believed to be reliable, but is not guaranteed to be accurate or complete. Greystone Managed Investments Inc. All rights reserved. PROTECT GROW BUILD Quarter, Page
Headquartered in Regina, with additional offices in Winnipeg, Toronto and Hong Kong, Greystone Managed Investments Inc. is one of Canada s largest asset managers, providing investment management services to its broad client base since 988. Greystone.ca