Morguard - 2015 Real Estate Investment Trends to Watch in Canada

MISSISSAUGA, ON, Feb. 13, 2015  /CNW/ - Morguard is predicting a fourth consecutive year of positive performance for Canada's commercial property sector in 2015. Investors are expected to achieve attractive returns once again, driven in large part by the stability and growth in rental income.

Sales of commercial property will top $25 billion CDN - slightly below the 2014 total - but higher than the long-term average of $20.7 billion CDN. Healthy and stable fundamentals will attract a range of investors armed with low-cost debt and equity capital. Core offerings will receive interest from pension funds, institutions, private capital groups, and capital market groups who continue to slowly return to the market. This demand will hold property values at the peak of the cycle, having stabilized through much of 2014.

"Investment returns will be largely income-driven, with some investors looking increasingly to new construction as a core strategy," said Keith Reading, Director of Research at Morguard. "Boosting income performance will be a focus for existing portfolios. Investors have already shown a willingness to move up the risk ladder in sourcing value-add opportunities to achieve their investment objectives."

The oil price plunge that took place through the second half of 2014 is expected to dampen economic growth. At the end of 2014, growth projections were downgraded, with an expectation that energy sector-focused markets would no longer lead the growth charge. In late January 2015, the Bank of Canada shocked the financial community by lowering its target for the overnight lending rate by 25 bps to 0.75%. The intention was to stimulate growth at a time when the global economy was showing signs of weakness. This loosening of monetary policy was set in place to help offset the loss of revenues due to the oil crisis. Even with the recent energy sector malaise, the outlook for Canada's commercial property performance remains moderate.

In the 2015 Economic Outlook and Market Fundamentals Research Report released today, Morguard Corporation (TSX: MRC) ("Morguard"), provides a detailed analysis of 2015 real estate trends to watch in Canada. The full Report is available at www.morguard.com.

Highlights - 2015 Real Estate Investment Trends to Watch in Canada

• Owners of high quality commercial property will be able to achieve satisfactory yields over 2015, as values hold at the peak for the cycle and income characteristics remain stable and healthy.
• Lenders will be aggressive in their attempts to place debt in the real estate sector in 2015, while consumers look to take advantage of the recent decrease in mortgage rates.
• Investor appetite will continue to surpass the supply of available income-producing property.
• The recent plunge in oil prices will affect economic growth rates in resource-driven regions and the country as a whole, which will impact the property sector as a service provider to the economy.
• Western Canada's reign as the nation's economic growth leader will likely come to an end in 2015, as non-resource dominated regions like Ontario move to the forefront.
• Supply risk will continue to impact the nation's office markets, given the construction and completion of more than 13.0 million SF of newly built space over the next few years.
• Older properties will be faced with increased vacancy levels in 2015, as tenants look to relocate to newly building and more efficient properties.
• Income performance will be the major driver of investment returns, supported by occupancy characteristics, moderately positive demand, and rising rents for the best assets in each property sector.
• Rental growth will be recorded in the industrial and multi-unit residential sectors, with a less positive trend anticipated for office and retail.
• Increased competition in the retail sector will be a factor over the near term - in the past year Target, Mexx, Jacob, and Le Chateau have either filed for bankruptcy or announced store closings as sales figures fell short of expectations.

Office

The Canadian office property market will continue to advance in 2015, despite the existence of some fairly strong headwinds. Investment performance will be fairly healthy, although returns will trend lower as the cap rate compression of the past few years subsides. The income component of the 2015 performance will remain largely stable and strong. Investors will target core-quality office towers in prime markets, given access to low-cost debt and equity capital. Moreover, the sector's long-term history of capital growth and income security will attract interest. The prospects for rental growth are somewhat uneven. Newly built towers will outperform, as tenants crave the most efficient space. Excess vacancy will likely materialize in older buildings, with landlords looking to take this opportunity to re-position their assets for the future. On balance, rental market fundamentals will likely continue to soften, especially in Calgary, where oil companies have already begun to shed space. However, solid performances in certain segments of the office rental market will result in a successful 2015.   

Industrial

Canada's industrial sector is expected to be the Canadian property market's top performer in 2015. In the nation's rental markets, occupancy will continue to range close to the peak, given a conservative construction cycle and solid demand characteristics in the post financial crisis period. The US economic rebound will be a key driver of export demand in manufacturing markets like Toronto and Montreal. In Vancouver, manufacturing is also expected to continue to recover, which bodes well for rental market conditions. Across most regions, domestic demand for consumer goods will support ongoing strength. Alberta will be monitored to see if the oil crisis has an adverse effect on its industrial market. Outperformance is forecast for Canada's industrial sector in 2015, which will be reflected in investment fundamentals. Demand will be brisk, in keeping with the 2014 trend, as investors believe the sector holds more upside in value relative to the remainder of the property asset classes.  Property values are expected to rise modestly, given a strong rental rate growth forecast. For some investors, development will form a larger part of their core strategies, as product availability remains a challenge. In short, the outlook for Canada's industrial property market is generally sound.

Retail

The Canadian retail property sector will continue to exhibit progress in 2015, as the market continues to evolve. Throughout 2014, rental market conditions reflected the peak of the current cycle. Rents in established malls, high streets and nodes held at their highest level for the cycle. At the same time, occupancy rates were strong and stable, resting well beyond the 90.0% threshold in most cities. The strength of the rental market was forecast to continue into 2015, even with the recent announcement that Target would close its Canadian stores, most of which are expected to be re-leased in short order. Recent store closure announcements will have only modest impacts on retail rental market conditions in the coming year. Recent examples include: Mexx, Jacob, Target, and Jones New York. Target's exit will open up opportunities for retailers that were previously unable to source premium space.

In 2015, Canada's retail sector will generate strong investment performance, in keeping with the trend of the past few years. Retail assets will generate attractive returns in the coming year. For the past few years the sector has outperformed the other major asset classes, a trend that could quite possibly be repeated. Investors will compete intensely for retail assets brought to market, given the history of strong results. Regional and Super-regional malls will once again be in short supply, as they have performed admirably over the years for their existing owners. A broad range of investors, including off-shore, will continue to try to gain a foothold in the sector. The solid forecast for retail sales will add to the rationale for investment in this sector. The depth of the demand cycle will ensure values range close to the cycle peak. In short, there is a fairly high probability that 2015 will feature another period of strong performance for Canada's retail property sector.

Multi-Unit Residential

Stability will characterize the multi-unit residential sector in the coming year, a trend that has been repeated over the past several years. The rental market demand-supply dynamic will maintain the imbalance that has been a fixture in this sector for some time. As a result, rents will continue to rise, albeit at a slower pace than in previous years. Growth rates will track inflation, in keeping with the long-term trend. Several provinces that have provincial rental rate guidelines in place will act as a cap on growth. Occupancy is expected to fall slightly below the 2014 peak in most cities, but vacant units will remain in short supply. On aggregate, strong rental market performance will support healthy investment market fundamentals.

Investment market characteristics in 2015 will mirror most that were observed in the previous year. Investment returns will be attractive and mostly income based. Income security, a hallmark of the sector for more than a decade, will attract investment. There will be a shortage of available product, relative to the volume of capital looking to real estate for yield. A range of both public and private groups will scour the country for assets to acquire. In competitive bidding situations, values will hold at the peak and in some cases rise modestly. Investors will continue to pay close attention to capital expenditures and their effect on performance. Capital costs have become increasingly important over the past several years, given the fact that a large portion of the investible universe has passed its expected life span. Despite the age of the nation's building stock, 2015 looks to be another successful year for multi-unit residential sector.

About Morguard
Morguard is a major North American real estate and property management company. It has extensive retail, office, industrial, multi–unit residential and hotel holdings owned directly, or through its investment in Morguard REIT (TSX: MRT.UN) and Morguard North American Residential REIT (TSX: MRG.UN). Morguard also provides real estate management services to institutional and other investors. Morguard's combined real estate portfolio is valued at $15 billion.

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SOURCE Morguard Corporation