CAP RATE COMPRESSION CONTINUESOur review of completed retail transactions in the mid-size retail plaza market for the first four months of 2016 shows a continued lowering of capitalization rates, highlighting investor appetite for retail assets. A significant number were bought with the aid of vendor takeback mortgages….which may also have had a role in increasing the sale price. Low 5 cap rates are becoming the norm, even for locally tenanted properties, and if a plaza has one good national tenant (or more) in place, the caps are can be in the high 4’s. As before, much of the demand is coming from off-shore money, and we do not expect this to abate significantly in the near future.

SELECTED SALE TRANSACTIONS › JANUARY - APRIL 2016-

A LANDLORD’S ALTERNATIVEThe objection most frequently expressed regarding the sale of a property is: “I don’t want to pay all that tax”. Often the fact that landlords are paying an on-going tax of 46% on their ordinary income, versus a one time payment of about 21% on a capital gain is overlooked. Then there is the concern of replacing the income with a secure, conservative investment. One approach is to use tax efficient investment strategies for the proceeds of a sale, like T-SWP’s (an abbreviation for a tax efficient systematic withdrawal plan) which may be able to return to you the same after tax income you’re getting now, without having to run a plaza. The basic idea is to invest in a blue chip pool of stocks managed by a leading mutual fund company (such as Fidelity) and have regular dividend with-drawals comprised mainly of the return of capital, which is taxed at very low rates. In the modeling we have done with the help of Jeff Wachman at Assante Wealth Management we have shown that owners can often have the same after tax income as they would if they held the plaza for fifteen years and then sold it. Additionally, owners have the advantage of a liquid investment spread across a variety of businesses. There are advantages in terms of estate planning, as well as freeing up the time and uncertainty associated with running a retail plaza. Of course every owner’s situation is unique, but we would be pleased to have Jeff Wachman look at your situation and see if it makes sense for you.

ADDRESS SIZE SF PRICE NOI CAP

RATE NOTABLE TENANTS

306 Guelph Street, Halton Hills

8,294sf $4,000,000 $203,371 5.1 100% occupied, primarily with local tenants

2077-2105 Royal Windsor Drive, Mississauga

38,800sf $10,000,000 $600,000 6.0 100% occupied, Scooter’s Roller Palace, Harvey’s, Goodyear, Avis and Budget car rental.

8855 Woodbine Avenue, Markham

44,234sf $20,180,000 $1,022,751 5.1 85% occupied, primarily local tenants.

10620 Yonge Street, Richmond Hill

63,692sf $25,500,000 $1,225,000 4.8 100% occupied with national and local tenants: Value Village, St. Louis, Shopper’s Drug Mart

RETAILLANDLORD UPDATE

A quarterly newsletter for the retail landlord community MAY 2016

Avison Young Commercial Real Estate (Ontario) Inc., Brokerage77 City Centre Drive, Suite 301 Mississauga, Ontario, Canada L5B 1M5T 905.712.2100 F 905.712.2937

The information contained herein was obtained from sources deemed reliable and is believed to be true; it has not been verified and as such, cannot be warranted nor form any part of any future contract.

avisonyoung.com

PLAZARETAIL

LANDLORD UPDATE

A quarterly newsletter for the retail landlord community

COURT ALLOWS RENT LOSS CLAIMS BY LANDLORDS FROM MAJOR VANCOUVER TRANSIT PROJECTIn a ruling that could set a national precedent, the B.C. Supreme Court found that the construction of the Skytrain project on Cambie Street in Vancouver negatively impacted rental values for some properties, and that those owners may be eligible for compensation on an individual basis. If your property is negatively affected by a major public construction project, you may want to explore your options with your legal advisor.

CONTACT US FOR A PRICE ESTIMATE AND RECOMMENDED PROCESSWe’d be delighted to provide a no-obligation valuation of your property and a recommended process to attain the best value. It can be presented as an “off market” opportunity to a select buyer group, or marketed more broadly with a bid process to the retail investment community. Over the past two years, Avison’s GTA team has sold over 500,000 square feet of retail real estate valued at more than $100,000,000. We can put together a team of professionals to best market your property.

PROPERTIES CURRENTLY OFFERED FOR SALE I A selection of Avison Young and other Brokerage listings

We would be pleased to represent buyers for any of these opportunities.

FISCAL SNAPSHOT FROM THE AVISON YOUNG MARKET MONITOR

Area Size Price Guidance NOI Notable Tenants

Mississauga 101,115sf $20,000,000 $1,000,000 Factory Direct, Soft-Moc, What-A-Bagel, Fabric Town

Sudbury 35,600 sf $4,475,000 $346,500 Metro, Scotiabank, Anytime Fitness

Contact Avison Young for intelligent mortgage financing solutions.

Flag on the Horizon…Seven years of steadily increasing values for nearly any market segment is a good run and it is certainly true about real estate. January 2016 arrived and revealed a dip in Moody’s/Real Capital Analytics Commercial Property Price Index. This is the first recorded negative reflection of the national market in the U.S. in seven years. Grant it, a minor dip is nothing to get too excited about, unless February and March reveal a similar downturn.

There are a couple of reasons that Moody’s suggest may be the cause for the index downturn. One is that the CMBS market has essentially gone glacier, brought on by It is a combination of the turbulence in the bond market and the heightened concerns over credit markets. The credit concerns are partially caused by the deep decline in commodity prices and resulting business bankruptcies and loan default rates that have made investors nervous and to look for more spread. As a result, CMBS spreads are no longer competitive in the market and thus the stall. This is true in Canada and the U.S. In the U.S., starting in June 2016 there is roughly $10 billion per

month that will be maturing and looking for a new home through refinancing. With a mired CMBS market, there are now some concerns that refinancing cracks may start to appear. Does this have the makings of a liquidity crunch in the back half of the year? Moody’s go on to say that “This is a significant milestone that signals a shift in sentiment among commercial property investors in underway.” The larger picture reveals that there are also risk adjusted retention rules (Dodd-Frank Wall Street Reform and Consumer Protection Act) nearing implementation that will impact the appetite that bank and other issuers may have on securitized debt going forward.

What is making the credit markets crazy? The forecasted default rates for commodity related businesses and the high yield markets may have something to do with it. Fitch rating agency have forecasted an increase in high yield bond defaults of 33% equaling close to $90 billion, the highest on record. For the energy sector, Fitch estimates a default rate in excess of 20% during 2016 – over $40 billion worth of energy bonds are predicted to fail to perform. Lastly, the metals/mining sector default is projected to reach 20%, with the coal subsector reaching a whopping 60%. With these projections focused on the U.S., one can assume that the Canadian market place will look similar in many respects.

The folks who are in charge of managing risk at the institutional level are a little nervous about the calamity of commodity prices and the fallout that is projected to be seen over 2016. This nervousness, which may be well founded, could also have a contagion effect that may spill over to performing real estate debt decisions. The outcome later on in the year could very well marked with lenders potentially becoming more selective, offering lower leverage, tighter structuring and possibly wider spreads.

Bank of Canada Rate

BoC Rate Bank Prime Lending

March 2016 0.75 2.70One month ago 0.75 2.70One year ago 1.00 2.85

Fiscal Snapshot

Government of Canada Benchmark Bond Yields

5-Year 10-Year Long

March 2016 0.68 1.23 2.00One month ago 0.66 1.18 1.97One year ago 0.77 1.36 1.99

Indicative Commercial Mortgage Spreads*Over Government of Canada Bond YieldsConventional 5-Year 10-Year

March 2016 1.75 - 2.00 1.85 - 2.25

One year ago 1.85 - 2.15 2.00 - 2.25

Insured 5-Year 10-Year

March 2016 1.00 – 1.20 1.05 – 1.25

One year ago 0.90 - 1.25 0.95 - 1.40

*Spreads are indicative of high quality real estate in major Canadian markets.

APRIL 2016

Debt Market Monitor

National Debt Capital Markets Services

Flag on the Horizon…Seven years of steadily increasing values for nearly any market segment is a good run and it is certainly true about real estate. January 2016 arrived and revealed a dip in Moody’s/Real Capital Analytics Commercial Property Price Index. This is the first recorded negative reflection of the national market in the U.S. in seven years. Grant it, a minor dip is nothing to get too excited about, unless February and March reveal a similar downturn.

There are a couple of reasons that Moody’s suggest may be the cause for the index downturn. One is that the CMBS market has essentially gone glacier, brought on by It is a combination of the turbulence in the bond market and the heightened concerns over credit markets. The credit concerns are partially caused by the deep decline in commodity prices and resulting business bankruptcies and loan default rates that have made investors nervous and to look for more spread. As a result, CMBS spreads are no longer competitive in the market and thus the stall. This is true in Canada and the U.S. In the U.S., starting in June 2016 there is roughly $10 billion per

month that will be maturing and looking for a new home through refinancing. With a mired CMBS market, there are now some concerns that refinancing cracks may start to appear. Does this have the makings of a liquidity crunch in the back half of the year? Moody’s go on to say that “This is a significant milestone that signals a shift in sentiment among commercial property investors in underway.” The larger picture reveals that there are also risk adjusted retention rules (Dodd-Frank Wall Street Reform and Consumer Protection Act) nearing implementation that will impact the appetite that bank and other issuers may have on securitized debt going forward.

What is making the credit markets crazy? The forecasted default rates for commodity related businesses and the high yield markets may have something to do with it. Fitch rating agency have forecasted an increase in high yield bond defaults of 33% equaling close to $90 billion, the highest on record. For the energy sector, Fitch estimates a default rate in excess of 20% during 2016 – over $40 billion worth of energy bonds are predicted to fail to perform. Lastly, the metals/mining sector default is projected to reach 20%, with the coal subsector reaching a whopping 60%. With these projections focused on the U.S., one can assume that the Canadian market place will look similar in many respects.

The folks who are in charge of managing risk at the institutional level are a little nervous about the calamity of commodity prices and the fallout that is projected to be seen over 2016. This nervousness, which may be well founded, could also have a contagion effect that may spill over to performing real estate debt decisions. The outcome later on in the year could very well marked with lenders potentially becoming more selective, offering lower leverage, tighter structuring and possibly wider spreads.

Bank of Canada Rate

BoC Rate Bank Prime Lending

March 2016 0.75 2.70One month ago 0.75 2.70One year ago 1.00 2.85

Fiscal Snapshot

Government of Canada Benchmark Bond Yields

5-Year 10-Year Long

March 2016 0.68 1.23 2.00One month ago 0.66 1.18 1.97One year ago 0.77 1.36 1.99

Indicative Commercial Mortgage Spreads*Over Government of Canada Bond YieldsConventional 5-Year 10-Year

March 2016 1.75 - 2.00 1.85 - 2.25

One year ago 1.85 - 2.15 2.00 - 2.25

Insured 5-Year 10-Year

March 2016 1.00 – 1.20 1.05 – 1.25

One year ago 0.90 - 1.25 0.95 - 1.40

*Spreads are indicative of high quality real estate in major Canadian markets.

APRIL 2016

Debt Market Monitor

National Debt Capital Markets Services

Thomas A. Bollum BrokerRetail Property Services Group905.283.2338tom.bollum@avisonyoung.com

If you have any questions regarding selling or buying a retail asset – or have a question you’d like addressed in a future Landlord Update, please contact me directly at the coordinates below: