Morguard - 2016 Real Estate Investment Trends to Watch in Canada

MISSISSAUGA, ON, Jan. 18, 2016 /CNW/ - Morguard is predicting a fifth consecutive year of positive results for Canada's commercial property sector in 2016. Investors will continue to achieve attractive portfolio returns, finishing the year close to or slightly below 2015.  Solid performance is forecast based on generally positive rental market leasing characteristics in the Canadian property sector, against a backdrop of elevated global economic risk.

"The generally positive 2016 Canadian commercial real estate sector includes a measure of risk," said Keith Reading, Director of Research at Morguard. "Investors will exercise caution in acquiring riskier assets over the near term, given an environment of sluggish global economic growth and uncertainty, a low Canadian dollar, and a persistent oil slump."

As predicted, the ongoing oil sector malaise continues to dampen economic performance, resulting in a mixed growth trend. In the first six months of 2015, a short-lived recession unfolded. However, early predications showed Canada's economic growth trend improved in the third quarter of 2015, with annualized growth of 2.1% forecast for 2016 by the Conference Board of Canada (CBOC). Regionally, expansion rates varied widely, with Alberta falling into recession and Vancouver and Toronto posting healthy gains.

Canadian income producing commercial property transaction volume is expected to trend close to the long-term average annual total of $21.1 billion CDN in 2016, slightly below the 2015 total.  Access to low-cost debt and equity capital will continue to attract investment in a sector with stable yields and income. The highest quality and lowest risk properties will be highly sought after by a range of investor types including: private capital, pension funds, institutions, and publicly-traded entities. This will fuel demand beyond the current supply of existing income producing assets and hold values at peak levels in Canada, forcing investors to look to joint ventures, unique investment vehicles, and new developments to build their portfolios.

In the 2016 Economic Outlook and Market Fundamentals Research Report released today by Morguard Corporation (TSX: MRC), the company published a detailed analysis of 2016 real estate trends to watch in Canada. The full Report is available at www.morguard.com.

Highlights - 2016 Real Estate Investment Trends to Watch in Canada

• Canada's commercial property sector continues to generate attractive investment returns, as evidenced by the MSCI Index total average return of 7.1% for the 12-month period ending September 30, 2015.
• On average, returns will be largely income-driven over the near term, while property values remain stable.
• Investment demand will outpace the supply of properties for sale, with this capital pressure supporting property values that will continue to hover near the cycle peak.
• Lenders will actively compete to provide low-cost debt capital to proven investors, operators, and developers of commercial property in 2016.
• As predicted, Alberta's reign as one of the nation's economic growth leaders came to an abrupt end recently, a performance that will likely be repeated in 2016 unless oil prices recover more quickly than anticipated.
• New supply risk will be an ongoing issue in Canada's office sector, with over 17.0 million SF of new construction scheduled for completion over the next four to five years.
• During the next few years, a number of owners of aging office buildings will be forced to contend with elevated vacancy levels in their portfolios, given a tepid demand pattern and the relocation of some tenants to newly constructed towers.
• Rental growth will be modest across the multi-suite residential market over the near term, in part due to the existence of rental controls in several provinces.
• Office sector rents will be eroded in Calgary and Edmonton over the near term, with the potential for declines in regions with excess vacancy due to the combined effects of new construction and tepid demand.  
• Near-term retail sector performance will be impacted by the continued unfolding of changes in market dynamics including: e-commerce, shrinking store size, the Target hangover, the expanding luxury market segment, a low Canadian dollar, and ongoing changes and consolidation of distribution networks.  

Office
Canada's office sector will face strong headwinds in 2016, which will most certainly impact performance. Investment performance will be fairly positive, although returns will likely continue to trend lower. The potential for material capital growth is low, as the trend appears to have come to an end in 2014. Therefore, income will be the main driver of returns over the near term. There will be two major headwinds that will impact the sector.  The first is the ongoing development cycle, against a backdrop of modest demand. This combination will negatively impact income growth levels in more than one market over the near term. Calgary, Toronto, Vancouver, and Edmonton are likely to face the strongest supply headwinds. The second headwind related to office sector performance is the ongoing oil slump. This has already eroded market fundamentals in Calgary and Edmonton. As 2016 progresses, further downward pressure on income performance is likely to occur. While some gains will be posted in specific segments of the office sector over the near term, these could be more than offset by anticipated performance headwinds.   

Industrial
Continued progress is expected to characterize Canada's 2016 industrial sector performance, after a successful post financial crisis period of results. Leasing fundamentals will remain strong, as was the case over the past year. The strength of the sector's demand profile in the coming year will be rooted in the warehouse, logistics, and procurement sectors. In a repeat of the recent trend, consumer goods distributors will lead the way in terms of industrial space demand. The focus of expansion activity will be in newly built properties, especially for larger users of warehouse space. The low Canadian dollar and a healthy U.S. economy are expected to support expansion activity. Positive demand characteristics will support equally healthy occupancy patterns in the existing inventory of industrial property in 2016. At the same time, development activity will be conservative by historic standards, ensuring supply-side metrics favour owners. Rents will, at the very least, hold steady at 2015 levels in the coming year with limited increases in scenarios where vacancy is in short supply. Overall, the solid leasing outlook will support investment performance in the coming months.

Canada's industrial sector is expected to generate another period of healthy investment performance in 2016, in extending the medium-term trend. Returns in 2016 will be close to the 2015 result, which will be mostly income-driven. Property values will hold at 2015 levels, although in specific cases investors will push pricing higher for assets with added strategic value. Buyer competitiveness will be a factor going forward, particularly for assets with strong tenant rosters. A range of investors will exhibit interest in both core and riskier assets in prime markets. In secondary markets, private groups will dominate purchasing activity. In short, Canada's industrial property market will see progression in both the leasing and investment markets - a trend that has been in place for much of the post financial crisis period.    

Retail
The Canadian shopping centre property market's run of success over the past several years will ease somewhat in 2016. The sector will be forced to contend with ongoing bankruptcies and downsizing in categories that continue struggle through various market influences. The fundamental health of the retail leasing market will remain largely intact. However, the impact of e-commerce and changing consumer behavior will result in a period of adjustment that will negatively impact performance. National occupancy will fall moderately, although Vancouver, Ottawa, and Edmonton will remain tight. Most other large CMAs will see occupancy edge lower and range close to the national average. A number of national and international retailers will expand into the Canadian market in 2016, partially offsetting rising vacancy. Regional malls will be the focus of much of this demand. A number of new tenancies have been announced in new expansion space in some of the nation's largest and highest profile regional centres for 2016. The successful lease up of this space and existing space in regional centres will support peak rents in this sub-category of the market. In the wider market, however, there will be some weakness, particularly in power centres and smaller retail strips. On balance, the shopping centre leasing market will be under some stress in 2016, resulting in uneven performance.  

Multi-Suite Residential
Near-term multi-suite residential sector performance will be characterized by strength and stability, in keeping with the long-term trend. Rental market conditions will remain strong for the most part, although some softening will take place in Calgary and Edmonton. Occupancy will continue to range between 97.0% and 98.0%, indicative of material imbalance. Record levels of new development will provide some relief to the ongoing shortfall in supply. However, the market will remain tight. Rental rate growth will occur in most jurisdictions, except for Alberta where occupancy levels will edge progressively lower due to the ongoing oil slump. The continued multi-suite residential market stability and health over the near term will provide a solid base for investment performance patterns.  

Canada's multi-suite residential investment market will also stabilize over the near term, in keeping with the mature phase of the current cycle. Strong demand characteristics will ensure property values hold at the peak for the cycle. A range of public and private capital groups will continue to look to the long-term health of the sector as rationale for investing in the sector. For many, the promise of positive and stable income performance will remain the main sector attraction. The largely positive rental market outlook will support this rationale. As a result, the sector will be consistently liquid. Demand will continue to outdistance the supply of assets for sale, forcing investors to source off-market opportunities. In so doing, transaction volume will remain healthy. In summary, the multi-suite residential sector will exhibit generally strong and stable investment and rental market performance over the near term.  

About Morguard
Morguard Corporation (TSX: MRC) is a major North American real estate and property management company.  It has extensive retail, office, industrial, multi–suite 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 $15.5 billion.

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