mid-year 2017 - Bentall Kennedy€¦ · ♦ Canadian commercial real estate investment activity...

mid-year 2017CANADA

PROPERTY MARKETS

Healthy fundamentals despite se-lect regional and sector challenges

CAPITAL MARKETS

Stable economic, political and property environments attract record capital flows

ECONOMY

Encouraging broad-based growth in Canada leaves the oil shock in the rearview mirror

ContentsGlobal Economy

U.S. Economy

Canadian Economy

Capital Markets

Office

Retail

Industrial

Multi-Residential

1

2

3

4

5

7

9

11

KeyPROPERTY TYPE METRICS

VACANCY / AVAILABILITY

ABSORPTION

NEW SUPPLY

RENT

BENTALL KENNEDY RESEARCH SENTIMENT

Positive < > Negative

CANADA PERSPECTIVE | MID-YEAR 2017 1

Global Economy

A POSITIVE OUTLOOK FOR THE U.S. AND CANADA

OIL PRICES FAILING TO SUSTAIN A RECOVERY

Sources: IMF | U.S. Energy Information Administration, Reuters (WTI Spot Price); June 2017 value = week of 6/16

♦ The U.S. and Canadian economies are poised for improved growth in 2017-18, and will lead many other industrialized nations.

♦ Europe provides upside as the French and, potentially, German elections favor status quo. “Free money” policies are finally having the desired effect on growth.

♦ German industrial production is strong and business and consumer confidence in the Euro-Area are near multi-year highs.

♦ Headwinds persist, however, as geopolitical uncertainty and recent terrorist attacks weigh on growth. Tourism in Europe has ebbed and flowed.

♦ China posted modestly better than expected GDP growth in 17Q1 of 6.9%, aided by government spending and export growth. Risks remain and Moody’s recently downgraded China’s credit rating due to rising debt levels.

♦ Oil prices have trended lower in 2017 as OPEC production cuts have been offset by Non-OPEC production and sluggish global oil consumption.

♦ Cheap oil remains a headwind for oil exporting countries, but benefits consumer driven econo-mies, namely the U.S.

2010

2011 - 15 Avg. 2016 2017 Fcst. 2018 Fcst.

2011 2012 2013 20152014 2016 2017

WT

I Sp

ot

Pri

ce ($

/bar

rel)

An

nu

al R

eal G

DP

Gro

wth

(%)

100

120

50

70

20

80

30

90

40

110

60

2.25

2.75Euro Area

Canada

United Kingdom

United States

1.00

1.50

0.25

0.00

1.75

0.50

2.00

0.75

2.50

1.25

Growth on more solid footing across regions

12.7% DECREASE IN OIL PRICES, FROM $51.91 TO $45.30 Week of 12/16/16 vs 6/16/17

U.S. EconomyCANADA PERSPECTIVE | MID-YEAR 2017 2

Major indicators showing the U.S. expansion has legs

♦ U.S. GDP growth was slow out of the gates in 17Q1, but should improve as the year progresses. Still our expectation for upper 2.0%-range growth in 2017 has moderated.

♦ The post election climate is more unsettled than anticipated. Increased government spending and tax and regulatory reform are likely to take some time. Policy uncertainty will be a persistent drag on growth.

♦ The U.S. dollar remains strong, but has come down from its post-election bounce. A cheaper dollar may support a resurgence in U.S. exports.

♦ Corporate earnings and profits are showing signs of strength aided by a healthy domestic consumer and improving conditions in Europe.

♦ Industrial production is at its highest level in more than two years. Car sales have taken a step back, however, presenting a potential headwind.

♦ Major indicators such as the ISM indices point to expansionary conditions for both manufacturing and non-manufacturing sectors.

♦ Job growth is encouraging despite recent modera-tion due to the maturing business cycle and a labour market that is near full employment.

♦ Unemployment is now below its pre-recession trough and strengthening wage growth is increas-ingly evident.

PROJECTED 2017 GDP GROWTHWSJ Economic Survey - May 2017

2.2%

ISM INDICES POINT TO CONTINUED ECONOMIC EXPANSION

U.S. GROWTH EXPECTED TO IMPROVE SLIGHTLY

Government

Net Exports

Inventories

Residential Investment

Nonres. Investment

Consumption

WSJ Survey

Total

5-Year Average

Sources: U.S. Bureau of Economic Analysis, Dow Jones (WSJ Economic Survey, May 2017) | Institute for Supply Management

2000 2003 2006 2009 20132001 2004 2007 2010 20142002

ISM Non Manufacturing Index

ISM Manufacturing Index

2005 2008 2011 20152012 2016 2017

ISM

Ind

ex (>

50

is e

xpan

sio

nar

y)U

.S. R

eal G

DP

Gro

wth

(%, S

AA

R)

55

3

65

5

30

-2

-4

40

0

45

1

50

2

60

4

35

-1

-3

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

2016Q3

2016Q4

2017Q1

2017 P

roj.

2018 P

roj.

♦ The Bank of Canada raised its overnight rate by 25bps for the first time in seven years, along with increasing its GDP growth forecast for 2017.

♦ Trade deficit is expected to narrow as export activity improves. Sustainable growth hinges on continued strength of export oriented sectors.

♦ Solid output in the manufacturing sector signaling that non-commodity export activity is emerging as another key driver of economic growth.

♦ Alberta’s economy is recovering from the oil-in-duced recession as conditions in the energy sector have stabilized.

♦ Prospect of oil prices reaching levels that could encourage new capital investments in Alberta’s oil patch is still tentative.

♦ Toronto housing market is beginning to cool owing in part to the Ontario Fair Housing Plan.

♦ Solid employment growth reflects improving businesses confidence but wage growth remains subdued.

♦ Downside risks include: NAFTA renegotiations damaging trade relations; a hard landing in the housing market weighing on domestic demand; and fragility in oil prices.

Canadian EconomyImpressive broad-based growth

Residential Investment ManufacturingConsumption Business InvestmentNon-Commodity Exports

Source: Statistics Canada, Haver Analytics


EXPANSION OF ECONOMIC DRIVERS

CANADA REAL GDP GROWTH

Q22014

Q22015

Q22016

Q12015

Q12016

Q32014

Q32015

Q32016

Q42014

Q42015

Q42016

Q12017

Government

Inventories

Nonres. Investment

Total

Net Exports

Residential Investment

Consumption

5-Year Average

GD

P G

row

th (%

Ch

ang

e A

nn

ual

ized

) 6.0

10.0

(4.0)

(10.0)

(8.0)

–

2.0

4.0

8.0

(2.0)

(6.0)

(12.0)

♦ Canadian commercial real estate investment activity continues to soar in 17Q1 with the larg-est quarterly volume on record.

♦ Gateway markets of Toronto, Vancouver and Montreal continue to attract foreign capital, creating additional pricing pressures.

♦ Debt capital continues to be plentiful and cheap except for secondary markets and higher risk sub-sectors.

♦ Cap rates flattening out except for high quality assets in major markets with rent rolls that possess term and credit.

♦ Expect further isolated yield compression in industrial, multi-residential and office markets that offer more favourable NOI growth prospects.

♦ Cap rate spreads over risk-free remain above their long-term average, providing some cush-ion to absorb higher interest rates.

♦ Strong investor capital flows will be a primary driver to help preserve values.

♦ With further cap rate compression limited, returns will be largely income oriented with capital appreciation driven by NOI growth.

Capital MarketsRecord transaction volume continues

CANADIAN INVESTMENT VOLUME

$11.8BillionLARGEST TRANSACTION VOLUME FOR A SINGLE QTR IN THE PAST 5 YEARS

CANADIAN REAL ESTATE TOTAL RETURN DECOMPOSITION

* Q1 2017 represents the 12-month trailling return; decomposition of the valuation effect was not known at the time of print, therefore assumed to be same as 2016

Sources: CBRE | MSCI/IPD Realpac


2012

$30.6

2012

2006

$24.0

NOI Growth (YoY)Income Return Total ReturnValuation Effect Long-Term Average

5.8%17Q1*

20062001

2013

$26.8

2013

2007

$32.1

20072002

2014

$26.1

2014

2008

$21.7

20082003

2015

$26.1

2015

2009

$13.0

20092004

2016

$34.5

2016

2010

$19.5

20102005

2017

$11.9

$31.9

2017Q1

2011

$23.6

2011

Tota

l Inv

estm

ent

Vo

lum

e ($

Bill

ion

s)

$40.0

$20.0

$30.0

$10.0

$0.0

2017 Projection

YTD - Q1 2017

Investment Volume

Per

cen

t (%

)

-10

-15

0

-5

5

15

10

20

25

Office

10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 6 MSF

♦ Office fundamentals are still weak in parts of the country but upward pressure on vacancy has eased in recent quarters.

♦ Bifurcation remains between Alberta and the rest of Canada as office va-cancy rates in Calgary and Edmonton are at or near historical highs.

♦ An active development cycle deliv-ered a steady flow of new supply over the past few years.

♦ A new development wave has kicked off in Toronto but new projects are not scheduled to come online until 2020. New projects in Vancouver are likely not far behind.

♦ Deteriorating fundamentals in Alberta continue to weigh heavily on national rent levels, outweigh- ing growth in the tighter markets of Toronto and Vancouver.

♦ Landlords in Alberta are likely to re-main focused on occupancy, sacrific-ing higher rental rates.

-7.4% YoY Growth

13.1%Vacancy

10Million SF

10-YEAR AVERAGE VACANCY 9.6%

as of 17Q2

Quarterly Vacancy Trend

10-YEAR AVERAGE ANNUAL RENT GROWTH 1.6%

10-YEAR AVERAGE ANNUAL DEMAND GROWTH 3 MSF

♦ The technology/creative tenant base has emerged as a key source of demand for office space. This trend should mitigate some downside risk in the traditional office using sectors.

♦ Absorption has been experiencing positive momentum over the past three quarters, in sync with impressive full-time job growth.

6Million SFfour quarters ending 17Q2

Quarterly Demand Trend

four quarters ending 17Q2

Quarterly Supply Trend

as of 17Q2

Quarterly YoY Rent Trend

RentVacancy

Office fundamentals improving, underpinned by a strengthening economy and robust job growth

New SupplyAbsorption


Source: CBRE

♦ Leasing activity has been healthy in both the downtown and suburban markets outside of Alberta, with 70bps and 90bps growth in occu-pancy YTD, respectively.

♦ Professional/Tech employment has grown con-siderably since the recession, hedging softer growth within traditional users.

♦ Federal government focused on fostering inno-vation. Tech sectors in Toronto, Vancouver and Montreal poised to experience further growth.

♦ Shared office space has become another source of demand, with global and niche operators ca-tering to both freelance and enterprise users.

♦ Downtown Toronto remains one of tightest mar-kets in North America despite a steady flow of new supply. New development cycle kicked off this spring.

♦ Alberta demand remains tepid with vacancy rates expected to remain elevated at or near historic levels.

♦ Downside risks include: further office space ra-tionalization and automation of knowledge work resulting in employment dislocation.

Office

REGIONAL VACANCY — CLASS A OFFICE (CBD + SUBURBAN)

Vancouver TorontoCalgary Edmonton Ottawa Montreal National

Souces: Statistics Canada, Haver Analytics | CBRE


Q2 2016

Q2 2017

10yr Avg

Per

cen

t (%

)

25

10

5

15

20

0

17Q2 VACANCY, DOWNTOWN TORONTOSource: CBRE

3.8% OFFICE USING EMPLOYMENT

2012 2013 20142008 20152009 20162010 20172011

Ind

ex: 0

8Q

1 =

100 115

125

90

100

105

110

120

95

FIRE

Professional/Tech

Public Admin

Averages misleading, masking “regional bifurcation”

Retail


♦ Vacancy has been upward trending in recent years due to secular headwinds.

♦ Super-regional malls, needs-based shopping centres, and urban formats performing well whereas regional malls and community centres remain challenged.

♦ Majority of the space currently under construction is concentrated in the major urban markets of Toronto, Van-couver and Calgary.

♦ Capital investment continues to be focussed on urban mixed-use developments.

♦ Despite generally healthy fundamen-tals, expect rent growth to be con-strained as consumers and retailers face mounting headwinds.

♦ With former-Target vacancy still remaining, along with Sears closing stores and dissolution imminent, add-ed market vacancy is likely to exert downward pressure on rents.

1.9% YoY Growth

4.6%Vacancy

7Million SF


as of 16Q4

Annual Vacancy Trend



♦ Retail sales remain healthy however downside risks to consumer spending are increasing with elevated debt levels and the outlook for higher interest rates.

♦ Too much space, changing consumer preferences and the acceleration of ecommerce will continue to challenge retail demand.


Annual Demand Trend


Annual Supply Trend

as of 16Q4

Annual YoY Rent Trend

RentVacancy New SupplyAbsorption

Consumer backdrop supportive of retail spending but secular headwinds are clouding the outlook for retailers


Source: CBRE

♦ Despite the dreary headlines, bricks and mortar retail continues to play a dominant role in the Canadian retail landscape.

♦ Mall productivity growth healthy in Toronto and Vancouver; Montreal is gaining momentum with improved employment outlook; Alberta malls remains challenged but retail sales showing recent improvement.

♦ New entrants to the Canadian market are taking a measured approach; meanwhile existing retail-ers expanding their store counts are concentrat-ed amongst a few players.

♦ Ecommerce accounts for only 3.9% of all core retail sales but it’s growing at an impressive +40% YoY.

♦ There are few retailers that are “getting digital right”—those that do are attracting a dispropor-tionate share of consumers’ wallets.

♦ Needs-based retail, urban formats and top-tier malls remain the best bets but Amazon’s acquisition of Whole Foods signals that it wants to win everywhere, including figuring out experiential retail.

Retail

MALL SALES PRODUCTIVITY BY PROVINCE

MOST VULNERABLE CATEGORIES

General Merchandise Clothing & Accessories Electronics & Appliances

Furniture & Home Furnishings Sporting Goods, Hobby, Book & Music Off ice Supplies, Stationary, Gifts

Source: ICSC Research

Canada

Mal

l Sal

e P

SF

An

nu

al C

han

ge

Vancouver Toronto Calgary Edmonton Ottawa Montreal


$0 8%

$2006%

4%

$400 2%

0%

$6002%

$800 4%

$1,0006%

8%

$1,200

Mall Sales Annual % Change

10%

$761 $1,045 $926 $778 $758 $695 $631

Can retailers keep up with the pace of change to stay relevant?

ONLINE CORE RETAIL SALES PENETRATION

3.9%

Industrial


♦ Availability continued to experience downward pressure over the past year and is now at the lowest level since 04Q3.

♦ Key manufacturing and trade hubs such as Vancouver and Toronto are among the tighest industrial markets in North America

♦ Owing to a steady flow of new supply, current volume of space under con-struction is well below the cycle peak of 23 million sf in 15Q3.

♦ Construction activity should pick up over the near term as developers look to take advantage of favourable demand conditions.

♦ Rental growth lost some momentum over the past year mainly due to weak conditions in Alberta.

♦ Meanwhile the balance of the country continues to experience upward pres-sure on rents.

4.5% YoY Growth

4.7%Availability

12Million SF

10-YEAR AVERAGE AVAILABILITY 6.1%

as of 17Q2

Quarterly Availability Trend



♦ Macro fundamentals have been sup-portive of demand. This trend should persist as manufacturing remains strong and export activity picks up.

♦ Industrial demand should continue to get additional support from the ongoing growth of ecommerce across Canada.


Quarterly Demand Trend


Quarterly Supply Trend

as of 17Q2

Quarterly YoY Rent Trend

RentAvailability New SupplyAbsorption

Low oil prices, a competitive Canadian dollar, stronger growth Stateside, and the rise of ecommerce should continue to fuel robust tenant demand.


Source: CBRE

♦ Solid manufacturing production and shipments have been supported by improving U.S. demand and a lower Canadian dollar. Vancouver, Toronto and Montreal should benefit most with strong ties to U.S. trade.

♦ Conditions in Vancouver remain tight as demand for newer generation distribution space out- weighs supply.

♦ Calgary’s role as a key distribution hub for West-ern Canada continues to support the recovery of its industrial market.

♦ Given its strong ties to the oil patch, a tentative capex outlook should weigh on Edmonton’s indus-trial market.

♦ As non-commodity export activity picks up, indus-trial demand should remain healthy in manufactur-ing hubs such as Toronto and Montreal.

♦ Ongoing penetration of ecommerce into tradition-al retail remains a key demand driver of newer generation space.

♦ Older generation space should garner increased attention as retailers look to integrate “the last mile” of their distribution networks.

DISTRIBUTION ACTIVITY

REGIONAL AVAILABILITY

Industrial

Vancouver Edmonton Calgary Toronto Ottawa Montreal National

Sources: Statistics Canada, Haver Analytics | CBRE


2012 2013 20142008 20152009 20162010 20172011

Per

cen

t (%

)

Q2 2016

Q2 2017

10yr Avg8

10

4

6

2

7

9

3

5

1

0

ind

ex: 2

00

8 Q

1 =

100

130

150

Wholesale Trade

Export

Manufacturing Shipments

90

110

70

120

140

80

100

“Industretail” drives performance

260 bpsINCREASE IN NATIONAL OCCUPANCY YOYSource: CBRE

Multi-ResidentialProperty fundamentals remain healthy and supportive of stable rent growth

10-YEAR AVERAGE ANNUAL SUPPLY GROWTH 16K UNITS

♦ National vacancy above long-term average is largely a function of elevat-ed rates in Alberta.

♦ Vacancy remains exceptionally tight in the markets of Toronto and Vancou-ver as renter formation outpaces new supply.

♦ New supply continues to be delivered at or near record levels across most major markets.

♦ 2016 marked a record year for new purpose-built rental completions and another strong year for the secondary rental market (condos).

♦ Rent growth continues to trend well above inflation even within rent con-trolled provinces.

♦ Alberta is the only exception where rents continue to fall (albeit at a decelerating pace) and inducements are still required to attract tenants.

2.4% YoY Growth

3.3%Vacancy

24kUnits


as of 16Q4

Quarterly Vacancy Trend


10-YEAR AVERAGE ANNUAL DEMAND GROWTH 9K UNITS

♦ Demand continues to be driven by robust immigration, urbanization and increased renter formation due to deteriorating affordability of home ownership.

♦ These demand drivers are anticipated to persist, providing a positive outlook for the sector.

16kUnitsfour quarters ending 16Q4

Annual Demand Trend


Annual Supply Trend

as of 16Q4

Annual YoY Rent Trend

RentVacancy New SupplyAbsorption


Source: CBRE, CMHC

Multi-Residential

APARTMENT VACANCY RATE

Canada CMA

8

4

6

2

7

3

5

1

0

Per

cen

t (%

)

Vancouver Edmonton Calgary Toronto Ottawa Montreal

Sources: Statistics Canada l CMHC

♦ Population growth fueled by immigration is continuing to drive strong demand, particularly in Toronto, Montreal and Vancouver.

♦ Tenant demand for new multi-res product is strong across most markets as renters are willing to pay a premium for high quality finishes and life-style amenities.

♦ Opportunities for purpose-built rental are devel-oping in markets that previously would not have supported the economics to justify new projects.

♦ The jury is still out on how the newly implemented rent controls in Ontario will impact market fundamentals.

♦ Developers are building larger suites to attract a more diversified, “want-to-rent” tenant base.

♦ Although, a push towards smaller units could potentially be a by-product of new rent control policies in Ontario, enabling developers to move rents to market more frequently.

40,976

94,503

16,181

69,353

37,31135,139

Average Annual Population Growth

International Net Migration (%)

Montréal, Quebec

Ottawa, Ontario

Toronto, Ontario

Calgary, Alberta

Vancouver, BCEdmonton, Alberta

61.5%

39.8%

68.5%

26.4%

86.7%

34%

POPULATION GROWTH 5 YEAR CHANGE


2016 Long-Term Average2015

Institutional investors increasingly active in developingpurpose-built rental

For institutional use only.

ABOUT BENTALL KENNEDY

Bentall Kennedy, a Sun Life Investment Management company, is one of the largest global real estate investment advisors and one of North Amer-ica’s foremost providers of real estate services. Bentall Kennedy serves the interests of more than 550 institutional clients with expertise in office, retail, industrial and multi-residential assets throughout Canada and the U.S. Bentall Kennedy is a member of UN PRI and a recognized Respon-sible Property Investing leader ranked among the top firms around the globe in the Global Real Estate Sustainability Benchmark (GRESB) for the sixth consecutive year since GRESB was launched.

For more information, visit www.bentallkennedy.com.

For more information about Perspective, please contact:

Phil Stone, VP, Head of Research, Bentall Kennedy (Canada) Limited Partnership [email protected], 416 681 7955

This document is intended for institutional investors only. It is not for retail use or distribution to individual investors. The information in this document is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this document.

http://www.bentallkennedy.com

mid-year 2017 - Bentall Kennedy€¦ · ♦ Canadian commercial real estate investment activity...

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