2015 market outlook - active

2015 Canadian Market Outlook

Commercial real estate trends and drivers in 2015

NATIONAL OVERVIEW

CANADIAN MARKET OUTLOOK 2015

2In 2015, the Canadian commercial real estate market will move from the cusp of change into the midst of it. While many Canadians have been fixated on residential real estate, the commercial property market is now poised for rapid expansion and potential transformation. Driving this change are demographic, economic and technological shifts which are altering business practices, consumer preferences and commercial real estate decisions.

Tenants are being confronted with record industrial construction and an ongoing office development cycle, while Canadians are poised for churn in the retail sector and the evolution of seniors housing in this country. A wave of investment capital is flooding Canadas major cities, which are struggling to cope with rapid population growth. And no matter where you are on the commercial real estate spectrum, accessibility is a topic that unifies all property types and cities across the country.

The ability to move people and goods is increasingly challenging in almost every location from coast to coast. Transportation is a major issue with few quick solutions. While some will be fixated on the possibility of higher interest rates in 2015, many more will be consumed with how employees get to work and the speed with which goods get to market.

The 2015 Outlook provides a roadmap for navigating the Canadian commercial real estate market in each city and asset class in the year ahead. There is no shortage of intriguing storylines and important considerations for tenants, owners and investors alike.

Factors affecting real estate decision making

+ + = =

Demographics Economics TechnologyChanging Business Practices and Employee Preferences

Commercial Real Estate Decisions


INVESTMENT

4INVESTMENT

An historic amount of capital is propelling Canadian commercial real estate into new territory. The commercial real estate investment market is experiencing simultaneous maturation and expansion. New players, capital sources, and heightened scrutiny will be important factors in the year ahead for commercial real estate investors.

We have never seen the capital markets so deep, with domestic and global capital pursuing commercial property across Canada. Real estate has a larger role than ever before in many investment portfolios. The challenge is finding a home for all this capital, says Peter Senst, CBREs President of Canadian Capital Markets.

Interest rates are likely the only factor that could give investors pause. That said, neither stable nor rising interest rates are overly problematic says Paul Morassutti, Senior Managing Director of CBREs Valuation & Advisory Services.

Anticipating interest rate movements is extremely difficult, but one thing is certain; we are nearing the end of a 30-year secular decline in interest rates. Whenever it occurs, a rate hike in response to stronger economic growth shouldnt be feared because stronger real estate fundamentals will add balance to the equation, says Morassutti. He also takes comfort in the fact that the REIT industry is conservatively levered, Canadian institutional investors are among the most sophisticated in the world and both undertake disciplined underwriting.

In 2015, investors will continue focus on core, quality product in Canadas largest cities. Morassutti notes that, An issue facing the whole commercial real estate industry is the difficulty of

differentiating between core and secondary product. The line is not absolute. Our cities are changing rapidly and so too is our concept of location and redevelopment potential.

Investors will increasingly turn to construction, increased density and the repositioning to achieve an assets highest and best use. New construction and redevelopment are two of the ways that investors can execute their core investment strategies and be successful in the hunt for yield. Scarcity of quality product is not a Toronto or Canadian phenomenon, its a global challenge, says Senst.

Senst anticipates strong interest when opportunities arise, with cash buyers, led by Canadas pension funds, likely to come out on top. This group will drive the market for an extended period of time. Headline deals will be dominated by the big institutions and its only going to become more competitive as foreign investors test the dominance of domestic players, says Senst.

Dynamic capital markets do not necessarily equate to willing sellers and property sales. Canadian commercial real estate purchases are expected to total $25.5 billion in 2015, just slightly off the $26.5 billion that is anticipated for year-end 2014 and $26.8 billion that was recorded in 2013. When it comes to Canadian commercial real estate, investors will likely be left wanting more of a good thing.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 F 2015 F

$ M

illio

ns

Volume Projected

SOURCE: CBRE LIMITED, ALTUS, REALTRACK INC.

Canadian Investment Volume


OFFICE

6OFFICE

Businesses are demanding more from their offices at a time when developers are adding 21.7 million sq. ft. of new office stock to the market. Changing demographics, new workplace strategies and an investment landscape that rewards new construction are all factors that will shape the office market in 2015, but they will not necessarily work in concert with each other.

In 2014, millennials replaced baby boomers as the largest group in the Canadian labour force. Their work style and needs will become increasingly dominant and alter the Canadian office landscape. That shift is already being felt as employers look to attract top, young talent. Dont be surprised to see an HR executive at the table when meeting with prospective office tenants in 2015. HR will be among the groups advocating for new workplace strategies, which emphasize flexible layouts, collaboration, increased mobility, and wellness all at a cost effective rate.

Ross Moore, CBREs Director of Research, says, This growing cohort will also want their office space to tick the box in terms of sustainability and amenities, both in their office building and in the surrounding neighbourhood.

As traffic congestion worsens in major Canadian cities, access to transit will be absolutely paramount. Being connected, both to transportation and advanced communication infrastructure, will be key to an office landlords ability to attract tenants and support rent growth.

What is your buildings WalkScore or TransitScore? What is your buildings WiredScore? These terms are sure to be part of the office leasing lexicon in 2015, says Moore.

One segment of the office market worth paying attention to is Canadas fast growing tech sector. A growing number of new media companies have made it clear that they have a strong preference for urban settings, but not necessarily the traditional looking glass office tower. Formerly overlooked locations just outside Central Business Districts will do just fine with the support of this sector. Toronto, Montreal, Calgary and Vancouver will all see the maturation of this trend in the year ahead.

The needs of the next generation of office employees and the growing tech sector are likely to be met by the next generation of office buildings. Modern office buildings are being constructed across the country, and markets like Montreal are experiencing the first significant office construction in decades. Investors will continue to reap larger returns by building new than they would by purchasing existing office towers, since much of the existing stock requires significant capital investment. The looming question is to what degree can the countrys existing office stock remain competitive? Moore says that we will get a better idea of who will benefit from the changing office landscape and who will be at a disadvantage in 2015. The outcome is likely to hinge on physical limitations to change and adaptation, as well as landlord willingness to reinvest in existing buildings.

All of these office market trends will take shape against a backdrop of moderate office employment growth and office absorption in 2015. Vacancy rates are likely to drift higher in most markets, although not enough to significantly change the dynamic between landlords and occupiers. In 2015, old stock will co-exist with the new builds and we will gain a better understanding of whether the two categories will coalesce or result in a divided market. Office leasing is always in a state of flux, but never more so than at present.

0% 10%

Industrial

1.2%

0% 10%

Office

5.0%

Construction as a Percentage of Inventory

Downtown Office Vacancy Rates

Canada 6 of 10 CitiesU.S. 6 of 57 Cities


INDUSTRIAL

8INDUSTRIAL

The Canadian industrial market is charging ahead and shows no sign of slowing. Distribution activity had dominated the market in recent years, thanks to an influx of foreign retailers. However, an improving U.S. economy and low Canadian dollar could provide a boost to manufacturers in Ontario and Quebec, which would allow the industrial market to fire on all cylinders in 2015.

Already boasting some of the lowest industrial availability rates in North America, Canada is building a record 19.9 million sq. ft. of industrial space, which is expected to be leased as quickly as it is completed. Andrew Wright, CBREs Industrial Practice Leader in Canada, cautions that market watchers who have concerns about office construction should not paint the industrial sector with the same brush.

The industrial market is very prudent and is capable of quick adjustments since new construction usually takes less than 12 months to complete. The demand is there. In fact, there would be even more industrial construction in Western Canada if serviced land was available, says Wright.

Calgary, Vancouver, Edmonton and Winnipeg account for 45.0% of industrial construction despite only representing 28.0% of the countrys industrial inventory. The energy sector is likely to continue to drive Calgary and Edmonton to the head of the industrial pack in 2015. Demand has yet to soften in spite of the lowest oil prices in four years. Energy projects have long horizons, which should provide continued stability and growth in these markets.

More than any other factor, supply chain ef ficiency will be of utmost importance for industrial companies in 2015. Proximity to highways, intermodal yards, and customers will be critical. Location and mobility will be more central to industrial real estate decisions than rental rates. Secondary locations will provide opportunities for those who are cost driven, says Wright.

The emphasis on location will only increase as e-commerce activity grows and same day delivery is offered in Canadian markets. Demand for distribution and fulfillment centres will increase and may spur the regeneration of industrial facilities located close to urban areas. Theres the potential that well-located buildings that were previously deemed obsolete will have a second life, says Wright. While this is certainly a longer-term trend, we may see the first signs of a shift in demand in the Greater Toronto Area starting in 2015.

Western Canada Punches Above Its Weight

TOTA

L I

NDUSTR

IAL CONSTRUCTION

TOTAL

INDUSTRIAL INVENTORY

EAST WEST

WEST

EAST


RETAIL

10

$15.2 B $18.9 B

$34.0 B

2010

2012

2018

*

RETAIL

After a strong, multi-year run, the Canadian retail market finds itself in a state of flux. Retailers and landlords have digested significant changes, including a wave of new foreign entrants, the introduction of outlet malls and a retooling of the department store sector. Now, with the pace of bricks and mortar retail sales growth slowing, the market appears poised for yet another round of adjustment.

The Canadian retail market stepped into the spotlight in the midst of the global recession, but now finds itself competing with improving economic conditions and strong retail sales growth in traditional retail hotspots, including the U.S. Tom Balkos, a Canadian Director of CBRE Limiteds Retailer Services Group, says that despite many successful rollouts, the difficulties facing Target have caused foreign retailers to approach the Canadian market with caution.

Weve had many landmark retail moments in Canada in recent years and we are primed for more. We are at a critical moment for the department store sector, and what transpires over the next two years will set the stage for the decade that follows, says Balkos.

In 2015, department stores will continue to evolve, as Sears forges ahead with right sizing its footprint and Target retools its distribution network and product offering to better address the needs of Canadian consumers. The decisions made by both Sears and Target have the potential to cause significant churn in the marketplace as competitors and new entrants respond to their actions and size opportunities.

Changing shopping habits are another factor that retailers will have to contend with in 2015. The desire for convenience and cost efficiencies is encouraging more bulk shopping. This will be a boon for wholesalers like Costco, which are expected

to capture additional market share, says Balkos. Consumers spending patterns are also creating greater polarization, especially in fashion, as both the luxury and discount segments win at the expense of mid-market retailers.

He also points to the continued growth of e-commerce as another driver of change. Balkos notes that, Not all retailers will be equally affected by online shopping. Discount department stores, including Walmart and Target, will face pressure from aggressive pricing by Amazon and other foreign entries who are investing in Canada. Looking ahead, the retailers that will dominate are those that enhance the shopping experience and evolve towards a Bricks AND Clicks model as opposed to the traditional notion of Bricks vs Clicks.

One trend that is unlikely to change is growing Canadian interest in the outlet malls that have opened in rapid succession across the country. Outlet mall construction will continue in the next few years and these new developments will be greeted with solid sales numbers. However, Balkos notes that this sector is rapidly approaching equilibrium and the pace of construction will slow thereafter.

In an environment of change, the bold and the visionaries will benefit most. Many will pause and assess changes on the retail front in 2015, but those who seize opportunities will win big because Canada remains a relatively strong market and the long-term outlook for the retail sector is solid, says Balkos.

L U X U R Y R E T A I L

VALUE RETAIL

Online Shopping Forecast

SOURCE: STATISTICS CANADA; FORRESTER RESEARCH


MULTIFAMILY

12

MULTIFAMILY

While much of the rental housing conversation remains focused on condominiums, Canadas purpose-built rental stock is arguably the countrys most stable commercial property type. Thankfully for multifamily property owners, stability is a desirable quality these days.

Backed by solid fundamentals and record low mortgage rates, multifamily properties will continue to attract strong pricing and record low cap rates in many parts of the country. Rapid urban population growth has left many multifamily properties in desirable locations close to Central Business Districts and amenity filled neighbourhoods. In 2015, these properties will be given a second look to ensure that they represent the highest and best use. For select properties, there may be opportunities to increase density and grow revenue.

Private investor affinity for multi-unit residential real estate is unlikely to change. One shift on the investment front is the expectation that Canadas REITs will increase their presence in this sector. REITs, along with a small group of pension funds, could play a large role on both the acquisition and development front. As a result, new, large scale multifamily developments could start to take shape in Canada.

With housing prices showing no signs of abating and interest rates expected to remain low, the multifamily sector is poised for another year in which renter and investor demand grossly outweighs supply.


HOTELS

14

HOTELS

Canadas hotel market has stepped out from the shadow cast by the other commercial property types and shows no sign of surrendering the spotlight. Fundamentals continue to improve and stable pricing is enticing institutional quality product onto the market. Consistently strong hotel investment volumes and rising room rates are likely to keep hotels at the forefront of the commercial real estate conversation in 2015.

Bill Stone, Executive Vice President of CBRE Hotels in Canada, is optimistic for a host of reasons. The relatively robust Canadian economy is strengthening corporate, convention and leisure travel and suggests the hotel sector will continue on its recent winning streak, says Stone. Planes are full of travellers and owners are confident enough to raise room rates following years of lethargic growth.

Increased occupancy and average daily rates are pushing Revenue per Available Room (RevPAR) higher in many markets, most notably in Windsor, Banff, Quebec City, Montreal, Victoria, Vancouver and Toronto. With a lower Canadian dollar, U.S. cross-border trips are expected to increase hotel demand in Canada in 2015. The market will be further bolstered by limited new supply, with most of the new stock to be delivered in fast growing Alberta. These trends should provide a solid foundation for hotel fundamentals throughout Canada

We are finding that a lot of owners are taking the time to reinvest in hotel properties, which are generating higher returns, says Stone. In addition to renovated guest rooms, Stone points to the fact that hotels in prime locations are being revitalized with the addition of compatible retail, restaurant and bar options, which are enhancing the overall guest experience and investor returns. Further, some properties are being acquired to convert to alternative uses such as seniors homes, residential condominiums and student residences. The conversion opportunities allow properties to trade at much higher values and reduce the hotel inventory, benefiting the remaining hotels in a market.

The hotel investment market has operated in a sweet spot for the last couple of years and the conditions for success will likely remain in place in 2015. With a select group of owners looking to rebalance their portfolios or exit the hotel market altogether, a steady supply of quality assets will come to market, which will be met with a healthy supply of investment capital. Canadian hotels will be pursued by a mix of domestic and international investors, especially those from the U.S., China and Europe who are active in the market.

Hotels have been known as a niche asset class, but the trajectory of the hotel market is bound to garner second looks. Few vehicles for capital preservation will also offer the growth potential of hotel assets in Canada in 2015.

2014R e v P A R O N T H E R I S E

WINDSORTORONTO

MONTREALQUEBEC CITY

VANCOUVERBANFFVICTORIA

SOURCE: STATISTICS CANADA; BANK OF CANADA

$364TRANSACTIONS38

WESTERN

$38TRANSACTIONS

EASTERNCENTRAL

$413TRANSACTIONS

MILLION$815 94

YTD Q3 2014NATIONAL VOLUME

HOTELS

5

51

45%

5%

51%

Regional Transaction Overview


SENIORS HOUSING

16

SENIORS HOUSING

Canadas seniors housing market continues to post some of the best metrics compared to all other income producing real estate assets in the country. After the supply boom in 2006 / 2007, the seniors housing market has re-established balance. Sean McCrorie, Director in CBREs Seniors Housing & Healthcare Group, says matching supply and demand in advance of the expected surge of aging baby boomers will be a major challenge going forward.

Were still 10-15 years from a major demographic shift that favours seniors housing. While the market will likely exercise more restraint when it comes to new supply, it is unclear how enough supply can be prudently built to meet the demand that we all know is coming, says McCrorie.

Relatively strong fundamentals persist across most parts of the country. Vacancy rates continue to edge down, with demographics and a changing perception of seniors housing bolstering the market. McCrorie says that while a surge in demand from baby boomers is some ways off, there will be a major push to educate this cohort on the changing reality of seniors living in 2015.

Theres no one way to retire. Expect to receive a new perspective on seniors housing in the years ahead, says McCrorie. The industry is beginning to do a better job promoting itself and the product it offers. Seniors living spans a broad range of lifestyle options, which increasingly are well integrated with surrounding communities. The focus is on providing an environment which facilitates a high quality of life. A more favourable view of the sector could lift penetration rates from the current 8.9%i of the target market and fuel demand over the coming decade.

Seniors housing has accounted for an increasing share of commercial real estate investment volume over the last decade, especially over the last two years due to large portfolio sales. This upward trend is likely to be sustained in 2015 as the seniors housing investment pool continues to broaden. Institutions and pension funds are expected to be increasingly active in this sector.

The strength and familiarity of the Canadian seniors housing market, along with low cap rates, has also attracted the attention of U.S. and overseas buyers. In particular, two out of the three largest U.S. seniors housing investors have made significant purchases in Canada from 2012-2014, and they are expected to increase their Canadian holdings in 2015.

Were in the first of nine innings when it comes to seniors housing. This sector has come a long way and the time to seize opportunities is now, says McCrorie.i CMHC Seniors Housing Report 2014. Table 2.3. National capture rate at 8.9%, measured as the proportion of the population aged 75 and over living in the survey universe, which excludes long-term care (nursing home) properties.

-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2008 2009 2010 2011 2012 2013 2014 YTD

$ M

illi

on

s

0%

2%

4%

6%

8%

10%

12%

14%

16%

1971 1981 1991 2001 2011 2021 2031 2041 2051 2061

SOURCE: CBRE LIMITED, REALTRACK INC.

SOURCE: CONFERENCE BOARD OF CANADA AND STATISTICS CANADA

Age 75+ Population as a % of Total Population

Seniors Housing & Care Transaction Volume

REGIONAL OVERVIEW


The 2010 Winter Olympics elevated

Vancouver to the world stage, and opened the floodgates to an influx

of demand from new companies migrating to

Vancouver.Norm Taylor Executive Vice President

and Managing Director, Vancouver

VANCOUVERLeasing is a hot topic in Vancouver. The city is in the midst of the largest office development cycle in its history, with over 2.0 million sq. ft. of new office space under construction and scheduled for completion within an 18-month window. Weve been setting record office rental rates, but the impact of this new supply remains to be seen, says Norm Taylor, CBRE Limiteds Executive Vice President and Managing Director of British Columbia Operations. He remains optimistic in a market that is persistently popular with investors and tenants alike.

The 2010 Winter Olympics elevated Vancouver to the world stage, and opened the floodgates to an influx of demand from new companies migrating to Vancouver, most notably technology companies, says Taylor, who explains that many of the big technology players Amazon, Facebook, Twitter, Microsoft and Sony have since set up shop or increased their footprint in Vancouver. This demand from international technology players is offsetting slower growth in traditional, local businesses forestry, mining and engineering.

In the Class AAA office market, vacancies continue to decline. However, with much of the office inventory more than 40 years old, owners who are reluctant to invest and upgrade their properties will likely see them sit vacant longer and rents decline.

Youd think the new supply would cool the demand for purchasing office buildings, but it hasnt, says Taylor. Demand remains strong. Investors and owner-occupiers continue to look for office buildings to buy in Vancouvers core business district and the cap rates have been some of the most aggressive weve seen in the marketplace.

2PROJECTS TO WATCH

International investors, who used to focus on residential real estate, are now very focused on office buildings, shopping centres and commercial property a trend Taylor sees continuing through 2015.

Retail is another hot topic, with global luxury brands like Christian Dior, Jaeger-LeCoultre, and Nordstroms moving into both downtown and some select suburban markets like West Vancouver. Formerly lined with tourist shops, Alberni Street has been transformed into a mecca for high fashion retailers and top-quality restaurants. Taylor predicts that consumer spending will continue to grow and drive the economy.

In the industrial market, land scarcity remains a perennial issue. The citys scenic topography makes it difficult to assemble land parcels that are needed for large-scale development and big projects are rarely built on a speculative basis. The new Boundary Bay Industrial Park is located on trucking routes to the east and south, along with convenient access to the Deltaport and the airport. Phase 1, a 440,000 sq. ft. speculative development which is the largest ever built in Vancouver, is now 75.0% leased and ahead of developer leasing assumptions. Demand for this type of project illustrates the strength of the market and the need to move quickly when unique opportunities like this arise. Phase two of this development consists of an additional 430,000 sq. ft. building and will begin construction in early 2015.

Because of land constraints, Vancouver is at the forefront of property redevelopment efforts. The recent zoning relaxation in the Mount Pleasant area near the Olympic Village has sparked

a flurry of activity in the market. Warehouses are being quickly snapped up by investors and owner-occupiers for redevelopment into higher density uses, including office, retail and residential properties. Each building is now closely examined in an attempt to determine if thats the highest and best use, says Taylor. Industrial buildings, strip malls, auto dealers all offer great redevelopment opportunities.

Transit has become an important factor for investors and occupiers. When an investor looks at a building on a yield basis, if its off-transit in the suburbs, it will be discounted significantly compared to an office building within 500 metres of a SkyTrain station, says Taylor. Suburban business parks battling vacancy issues have revitalized their business by thinking creatively and offering shuttle service to transit.

With bridges and tunnels essential to moving people and goods in a city that is constrained by mountains, rivers and the sea, infrastructure will always play an important role in Vancouver. The SkyTrain expansion to the east towards high-growth areas and the upcoming replacement of the George Massey Tunnel on the main route to the U.S. are likely to have a positive impact on the market.

Were always going to be geographically limited in this market, says Taylor. Opportunities dont arrive very often and investors and occupiers need to pay attention when they do.

PACIFIC CENTREDeveloped by Cadillac Fairview, Pacific Centre encompasses 290,000 sq. ft. of Class AAA office space and 565,000 sq. ft. of mixed-use space. Microsoft and Sony Corporation have preleased a significant portion of the office space in 725 Granville Street, while Nordstrom is the main retail anchor.

www.pacificcentre.ca

BOUNDARY BAY INDUSTRIAL PARKStrategically located minutes from the Delta Container Port and Highway 99, this development meets the needs of large distribution users who will benefit from greater proximity to the port.

www.boundarybayindustrialpark.ca

THE EXCHANGE OFFICE TOWERCredit Suisses $200.0 million venture into B.C. is a 31-storey speculative LEED Platinum office tower in the financial district of Vancouver. It will be the last completed building in the ongoing development cycle and is poised to accommodate the next phase of economic growth.

www.theexchangebuilding.ca

Doing More With Less

Vancouver

114 km2Montreal

365 km2Toronto

641 km2


Were very optimistic on growth but it will be hugely tempered by the fact that we dont have

enough people to support the economy.

Greg Kwong Executive Vice President and Regional Managing Director, Alberta

CALGARYDespite the drop in oil prices in the latter half of 2014, theres a sense of long-term momentum and growth in Calgary, says Greg Kwong, Executive Vice President & Regional Managing Director for CBRE Limited in Alberta. Even with fluctuations in financial markets and a reduction of energy prices, labour shortages seem to be the major factor tempering the optimism and growth fuelled by the energy boom.

Construction in all sectors office space, hotels, industrial, retail is infusing new supply into the market and is expected to be absorbed quite comfortably.

New supply has been good for both leasing and investment sales. Were very optimistic on the industrial and retail markets, says Kwong. Rental rates will continue to grow and were expecting growth in absorption and vacancy to drop over the next year. Downtown office leasing, which is mostly in the sublet market, is expected to cool slightly given the tepid energy market. The industrial market continues to grow and mature and we can source whatever space a customer wants, he says. However, some of the bigger players looking for distribution buildings have had to build their own.

Most asset classes are modernizing to accommodate changing tenant demands. In retail, new mid-size malls are being built to serve growing communities. Old industrial buildings, most of which were built in the 1950s and 60s, are making way for new structures that meet modern requirements. The office towers reshaping the skyline are all Class AAA-standard, satisfying current demand for higher-quality buildings with modern amenities.

4PROJECTS TO WATCH

Calgary

102.5 sq. ft. / capita

Kwong says there are huge amounts of capital local, national and international chasing product to buy in Calgary. Im continually surprised by the amount of global recognition we get for a city our size. A number of years ago, the word got out that Calgary is an international market that offers plenty of opportunities.

The market has matured and now offers a diverse mix of supply across all sectors. Kwong believes the available properties are diverse enough to satisfy tenant demand and whats currently being built will be absorbed quite comfortably.

With the energy sector at the heart of the economy, everyones keeping an eye on approvals for proposed pipelines, which would alleviate the current challenge of getting oil and gas to market.

When people place that $100.0 million bet on buying a downtown office building, theyre buying it for 50 years, says Kwong. Whats happening in energy will have a long-term impact on all aspects of the market.

As the economy booms, low employment and high disposable income are attracting luxury brands and proving to be a boon for restaurant sales. A lack of labour still looms as the one factor that could really hamper long-term growth. Were very optimistic on

growth but it will be tempered by the short-term reduction in oil prices and the fact that we dont have enough people to support the economy, says Kwong. The federal governments reforms to the Temporary Foreign Workers Program have already been felt here. Some hotel and retail development projects have halted and other projects havent been able to proceed because they just cant find the people to do the work, says Kwong. Its a remarkable facet of an otherwise very positive and growth-focused story.

Calgarys ring road project, which is currently more than three quarters completed, is expected to open access to new residential and industrial areas, as well as transport routes. The citysprime location as a distribution hub has already attracted large-scale players such as Walmart and Home Depot, but better road access to the west, north and south will provide further opportunities. Were seeing development already underway north of the airport, says Kwong. Theres a 15-20-year supply of development there that will definitely have a positive impact on the market.

NORTHERN GATEWAY AND KEYSTONE XL PIPELINEProposed pipeline projects could provide Canadian energy producers with access to overseas markets and more competitive pricing, which would bolster fundamentals across all asset classes.

www.gatewayfacts.ca

SOUTHWEST CALGARY RING ROADCompletion of the 16.0 km southwest section of the ring road will create a 100.0 km uninterrupted highway connecting with Calgarys major streets. Drive times will be shortened and direct links will be available to major industrial centres and distribution facilities.

www.transportation.alberta.ca

INTERNATIONAL TRANSBORDER CONCOURSE, CALGARY AIRPORTWith Canadas longest runway now complete, the supporting terminal will open Calgary to more overseas routes, which will be a positive catalyst for the retail, industrial and hotel sectors and provide long-term stimulus for the residential and office markets.

www.albertacanada.com

REVITALIZATION OF THE EAST VILLAGEThis massive project will see 49.0 acres of mostly vacant land turned into a vibrant mixed-use community, which will epitomize the Live, Work, Play model that is being championed by cities across Canada.

www.calgarymlc.ca

Punching Above Its Weight

Vancouver


Vancouver


Toronto

27.1 sq. ft. / capitaToronto


Montreal


Montreal


OFFICE SPACE INDUSTRIAL SPACE

Calgary



The longevity and long-term outlook

for our industrial business, which drives

the balance of the economy, is very good.

David Young Executive Vice President and Managing Director, Edmonton

EDMONTONPowered by oil and gas, Edmontons economy continues to grow, attract investment capital and new residents. Its a buoyant economy with significant growth still ahead, says Dave Young, Executive Vice President and Managing Director of CBRE Limiteds Edmonton operations.

The biggest impact is being felt in the industrial market, where supply is having a hard time keeping up with the demand for space. Most players want to be close to rail, the go-to option for getting gas and oil to market until theres progress on the proposed pipelines. Trying to find space on rail right now is a difficult undertaking, says Young. Long-term investment in the energy sector is having a robust effect on the market. Vacancy continues to be one of the lowest in North America which is leading to continued rental growth.

The longevity and long-term outlook for our industrial business, which drives the balance of the economy, is very good, says Young.

In nearly all aspects of the market, the trickle-down effects of the energy sector can be observed. Population growth and jobs are leading new residential development and driving low-vacancy in commercial real estate. High disposable incomes are attracting new entrants into the luxury retail market. Theres a lot of disposable income in this market, along with many young professionals who like to spend it, says Young. The retail market is expected to be strong well into the future.

6PROJECTS TO WATCH

Despite strong migration, with Edmonton outpacing Calgary in terms of population growth in recent years, the demand for labour continues to outstrip supply. With 72.4% employment and fewer opportunities to bring in temporary foreign workers due to federal government reforms, finding enough staff -- from engineers to hospitality staff -- is a challenge for most businesses and will remain so for the foreseeable future, says Young.

Infrastructure investment is also expected to drive growth in the coming years. The new Edmonton Arena District (EAD), as well as investments in arts and culture with the development of the new Royal Alberta Museum just east of the EAD, will revitalize the core and bring people downtown. Another positive for the city and suburban areas is the expected completion of the Anthony Henday freeway system, which will provide critical connections to energy markets in northern Alberta and to much-needed industrial land in the northeast quadrant of the city.

Young believes the big challenge in the downtown office market could be a risk of oversupply over the next three years as new buildings are completed. Landlords of older buildings will likely face downward pressure on rents and may need to step up their reinvestment programmes to keep older properties competitive.

In the suburban office market, construction, engineering and oil field service companies are all looking for office space closer to their clients. The suburban office market should remain in good shape in the near term, he says.

Young expects the investment market in 2015 to be very similar to 2014 The capital is there but investors cant find the core industrial and retail properties they want to buy, so theyve been building their own.

The business optimism in Edmonton and across the region is extremely high, says Young. The market is hugely dynamic and growth-driven and there are a myriad of industries and activities around energy from research and development, to technology and manufacturing contributing to the growth. The oil and gas sector will help our market well into the future, says Young. If we can get access to more serviced land next year, leasing and investment activity will outpace this years numbers.

NORTHEAST ANTHONY HENDAY DRIVEAnthony Henday Drive will be completed in the fall of 2016 and will boost activity in northeast Edmonton. There is strong demand for land in this area, but a lack of transportation has held back development.

www.northeastanthonyhenday.com

EDMONTON ARENA DISTRICTArena District is a multi-billion dollar project by Katz Group of Companies and WAM Development Group that spans 25.0 acres of office, retail, hospitality, residential and hotel properties. The project will revamp Edmontons urban core. Delta Hotels has already partnered to create a luxury hotel and condo tower.

www.ead.ca

41ST AVENUE SOUTHWEST INTERCHANGEThe City of Edmonton, in partnership with Leduc County, is upgrading 41 Avenue Southwest as a major arterial roadway to provide full access to the QEII Highway. This will support the ongoing development in the south of Edmonton and north of Leduc.

www.edmonton.ca

Destinations in Demand(Two-Year Population Growth Rate)

Edmonton

7.4%Calgary

6.7%


Were hearing from institutional investors

that they would like to set up shop in

Winnipeg, and Im tremendously excited

about the activity I see ahead.

Trevor Clay Sales Associate, Winnipeg

WINNIPEGMajor investment into downtown infrastructure by both the federal and provincial governments has helped drive private investment thats bringing life back to downtown Winnipeg. We call it the Winnipeg Jets effect, says Trevor Clay, Sales Associate for CBRE in Winnipeg.

With the Jets back in town, the new architectural gem Museum of Human Rights now open and several big construction projects underway, theres a new energy in Winnipeg thats driving a push for revitalization. Its something we havent seen in a while, says Clay, and its definitely creating some excitement here.

The $180.0 million expansion of RBC Convention Centre will enable the city to attract much larger conferences that will have a positive ripple-effect throughout downtown. Other projects predicted to draw people back into the city are Centrepoint, a mixed-use development across from the MTS Centre, and the redevelopment of the old Canada Post building, which will house hundreds of staff when it becomes the new Winnipeg Police headquarters. All of these projects are due for completion in 2015.

Large scale, speculative office developments are not the norm here. Developments typically have to be mixed-use and offer a residential component to meet return expectations, says Clay.

Several major transactions in 2014 confirmed the value of the citys Class A investment properties and are inspiring activity in the market. Clay says: Cap rates are aggressive for institutional grade assets. Class A properties in Winnipeg are not trading at much

8PROJECTS TO WATCH

of a discount compared with other markets. Going forward he predicts cap rates will remain stable and demand should continue to be strong for quality commercial investment opportunities.

An interesting new trend is that suburban office tenants are giving downtown locations a second look. Drawn to new amenities and opportunities in the reinvigorated central business district, theyre seeing the city in a more positive light and reconsidering their options. Despite the limited public transit system, Clay says downtown is still the most accessible location for all parts of the city.

While theres plenty of movement in the office market, its mostly tenants moving between submarkets or buildings, and there isnt substantial demand from new office tenants. Office vacancy rates continue to hover around 10.5% downtown and just under just under 13.0% in the suburban office market.

Theres a much more positive outlook in the industrial market, with growth expected to come from new tenants and new construction. On the leasing side, new logistics companies are entering the market, which is helping to offset the loss of some larger distribution centres to Calgary. The aerospace industry continues to have a substantial presence in Winnipeg with three major players manufacturing here.

A lack of serviced land is currently hampering industrial growth in the northwest, but the area offers huge potential. CentrePort Canada is currently working on securing water and septic services to 20,000 acres of land, which would unlock opportunities for both industrial and residential development.

Bentall Kennedy has acquired 130 acres of land in the northwest quadrant of the city, where they plan to build a mix of manufacturing and distribution buildings. This project will drive activity in the area for the foreseeable future.

In recent years, Winnipeg has seen the completion of a number of major infrastructure projects. The city is now reaping the benefits of its new, award-winning airport terminal, the CentrePort Canada inland port expansion and new CFL stadium at the University of Manitoba. The first phase of the Bus Rapid Transit (BRT) corridor has also been constructed. Clay says future plans to expand the BRT further south will likely attract commercial and multifamily development around the transit corridor and have an impact on the market.

With all the investment and revitalization, Clay says Winnipeg has a new energy and a positive outlook for the coming year. Were hearing from institutional investors that they would like to set up shop in Winnipeg, and Im tremendously excited about the activity I see ahead.

RBC CONVENTION CENTRE EXPANSIONThe $180.0 million expansion will nearly double the rentable area to 264,000 sq. ft. when completed in 2016. There will be an additional 133,000 sq. ft. of exhibition space, a new ballroom and expanded underground parking.

www.wcc.mb.ca

NEW POLICE HEADQUARTERS DOWNTOWNConstruction was recently completed on a new 600,000 sq. ft. downtown headquarters for the Winnipeg Police Service. The former Canada Post building on Graham Avenue was purchased in 2009 for $31.6 million and redeveloped at a cost of $178.4 million.

CENTREPORT AND BENTALL KENNEDY INDUSTRIAL DEVELOPMENT, NORTHWEST WINNIPEGBentall Kennedy recently acquired 130.0 acres of land in northwest Winnipeg and is in the process of developing a plan for the site, which will focus on building a new format distribution and manufacturing facility.

Winnipeg Jets Effect Winnepehg/jets/efekt/verb

1. The ability of a professional hockey team to bring life and investment to downtown Winnipeg


From an investment perspective, we think retail will be strong,

the office sector will be solid and the industrial

sector will be quite robust in 2015.

Peter Whatmore Senior Vice President and Executive Managing Director, Southwestern Ontario

LONDON & KITCHENER-WATERLOO

The cross currents of the Canadian and global economy are evident in London and Kitchener-Waterloo. Above all, Southwestern Ontario continues to be a market worthy of future investment, says Peter Whatmore, CBRE Limiteds Senior Vice President & Executive Managing Director, Southwestern Ontario.

With most of the significant plant closures in London now complete, employment growth is dominating the conversation. The good news is that most of the large facilities along the 401 corridor have been leased or sold and are in the hands of new operators. Those facilities are regaining some employment, which Whatmore notes is particularly encouraging, particularly for the service and retail sectors.

One issue that isnt likely to change soon is the stubbornly high office vacancy rate in London. Significant changes in the retail sector, such as large department store closures and shopping mall conversions to office space over the past decade, created the surplus office space that has taken time to absorb. While a marginal decline in vacancy can be expected next year, Whatmore anticipates that it will be 2016 before meaningful improvement takes hold.

The industrial market looks more promising. Were expecting a substantial amount of the vacant industrial inventory to be absorbed, so there could be opportunities for speculative construction from mid-2015 and possibly into 2016, says Whatmore.

Road infrastructure projects, such as the new Wonderland Road on the west side (scheduled for completion in early 2015) and the extension of Veterans Memorial

10

PROJECTS TO WATCH

Parkway (soon to start) will open up potential areas for industrial development in the region.

While national buyers are taking a pause, regional investors will be active in London. Theres unlikely to be much activity in Class A and B office product, which is tightly held, but multifamily, retail and industrial holdings may provide a lift in the overall market activity from this year. Whatmore says he doubts 2015 will be a record year, but believes it is likely to be a good stable year for the market, provided interest rates stay in the current range.

Local government is attempting to encourage the revitalization of the city core by waiving development charges for high-rise residential development. Thus far, Whatmore feels it is having a measurable impact.

Meanwhile, a different story is unfolding in the Kitchener-Waterloo area. This market has mostly absorbed the tremendous amount of office and industrial space delivered by the repositioning of the major high-tech tenant in the market. Some suggested it could take as long as 10 years to take down that space but we forecast that it will be absorbed in two to three years, says Whatmore. The entire portfolio sold in 2014 and some of the assets have since been resold.

Investor interest remains high in Kitchener-Waterloo, as evidenced by the recent trade of the Sun Life Tower and a number of significant high-rise condominium projects that are under construction. Its a good indicator of a strong, healthy marketplace, says Whatmore. From an investment perspective, we think retail will be strong, the office sector will be solid and the industrial sector will be quite robust in 2015 in Kitchener, Waterloo, Cambridge and Guelph. Many investors are focused on revenue sustainability, which is achievable in this market.

The start of construction on the long-discussed rapid transit project has created a hotbed of activity. New high-rise residential buildings are going up and theres been a significant increase in retrofitting of office and old industrial properties close to the rapid transit route, which bodes well for the projects impact on the market.

Meanwhile, in spite of the profound changes to major players in the market, Kitchener-Waterloos technology sector is alive and well. It is expected to drive new development and create great opportunities in this vibrant market.

VETERANS MEMORIAL PARKWAY EXTENSION Veterans Memorial Parkway is a key corridor that will provide increased access to the City of London, Highway 401, and the London International Airport. This corridor has the potential to open up good tracts of industrial land to development.

www.london.ca

REDEVELOPMENT VICTORIA HOSPITAL LANDS This unique 12.6 acre residential/mixed-use redevelopment opportunity is located on the bank of the Thames River in the SoHo neighborhood, just south of the Londons downtown core.

www.cbre.ca/

WATERLOO REGION LRT Construction has begun and the LRT, which is expected to be complete in 2017. Demand is expected to be high and retrofitting will take place around the LRT stations, in particular the Colombia Street node, which is located on the edge of University of Waterloo.

www.rapidtransit.regionofwaterloo.ca

BREITHAUPT BLOCK Winner of the Canadian Urban Institute 2014 award for best overall redevelopment, Breithaupt Block is located centrally in Kitchener-Waterloo, and is steps away from large condominiums. This property will support the Live, Work, Play culture that is embraced by technology companies like Google.

www.thebreithauptblock.com

Unemployment Improvement(Oct. 2014 Unemployment Rate)

London

7.5%(down 40 bps y-o-y)

Waterloo Region

6.3%(down 40 bps y-o-y)


Rents havent decreased despite significant

new construction, but were starting to see

deal structures that are slightly more favourable

for tenants.John OToole Executive Vice President

and Executive Managing Director, Toronto

TORONTOEmployee recruitment and retention are at the heart of office real estate decisions in the Greater Toronto Area. Any discussion about the need for future office space both downtown and in the suburban market must address accessibility, congestion and infrastructure, says John OToole, CBRE Limiteds Executive Vice President and Executive Managing Director, Toronto. With the average commute time in the GTA now over an hour long, tenants and owners alike are increasingly focused on access to amenities and adaptability.

Torontos new buildings are not only changing the skyline, but the bottom line as well through increased operating efficiencies and improved employee productivity. With the workplace becoming leaner and more efficient, the amount of space occupied by each worker has declined. Driven in part by these new workspace goals, new construction continues apace downtown.

Over 5.8 million sq. ft. of downtown office space is being built as part of the 2013-2017 construction cycle. Nearly half of that new space will be delivered by early 2015. OToole says 58.0% of the new buildings have been leased to date, and they are in a better position from a leasing perspective than new builds were in the previous cycle.

The new buildings are providing plenty of competition for older stock. Once the additional rent savings, relocation costs, build-out and alternative workplace strategies are accounted for, the cost of moving to a new building may be on par with moving into an existing property. Given high relocation costs, transactions throughout the GTA have been weighted more heavily towards renewals than relocations. This trend

12

PROJECTS TO WATCH

is strongest in suburban markets. Downtown leasing activity is more balanced with renewals accounting for 53.0% of all deals over 50,000 sq. ft. in the last five years.

The balance point between a tenants market and a landlords market is around 8.0-9.0% vacancy, and the downtown office vacancy rate is only 5.3% overall, says OToole. Rents havent decreased despite significant new construction, but were starting to see deal structures that are slightly more favourable for tenants. In 2015, he expects downtown leasing activity to remain strong and the demand for quality space to continue to outstrip supply. Future growth is expected to come from the traditional source the finance sector as well as technology, advertising and media.

In contrast to downtown tenants, suburban tenants are much more value-driven and budget-conscious. They continue to optimize their space by reducing their real estate footprints, says Werner Dietl, Executive Vice President and Managing Director of CBREs Toronto West Office. Parking ratios demanded by tenants keep going up as tenants densify, but transit is still a factor for many suburban tenants.

Dietl says the 2.0 million sq. ft. of office space currently under construction in the suburban markets is well within historical averages. A significant number of the new suburban office buildings are design-build and many are pulling tenants out of existing inventory, rather than attracting new net growth. This speaks to an ongoing flight to quality, as tenants move from existing stock to higher-quality buildings, says Dietl.

New construction is being focused in specific nodes, while other areas continue to exhibit elevated vacancy rates. Areas in demand combine accessibility whether that is transit or the parking facilities that tenants demand with quality space, explained Dietl. Submarkets with access to transit, amenities and newer facilities will continue to enjoy strong demand at the expense of older, less accessible areas. In particular, the Meadowvale and Highway 10/401 nodes will see good activity levels.

While the industrial market is less reliant on public transit, the old adage of location, location, location still holds true. Industrial availability rates are very low across the GTA, which is spurring

construction and encouraging tenants to reconsider older industrial stock. In some cases, owners of older vacant buildings have found tenants in the form of non-traditional industrial users, including caterers and recreational activities to name a few.

The momentum in the industrial market is widespread, unlike years past when modern logistics facilities accounted for the bulk of leasing and investment activity, says Dietl. In fact, the best potential for rent growth is in the more dense nodes like Etobicoke. These areas will be particularly appealing for retailers and e-commerce businesses that favour sites close to transport networks that ensure speedy delivery to consumers.

Industrial developers have weathered another round of municipal development charge increases, but rental rates are firming up, which is making it easier for developers to bear this cost. Developers continue to move forward with construction despite increasing costs; however, we have seen an increase in redevelopment projects and efforts to attain development charge credits, which indicates that rising costs are a factor in decision making, Dietl said. Further development charge increases have the potential to shape construction activity and curb new development.

Major investments in infrastructure are expected to deliver benefits throughout the region. The Union Station revitalization will make the commute more efficient and downtown more accessible to tenants from the suburbs once it is completed in 2016. The Toronto-York Spadina subway extension, also due for completion in 2016, will open access to and contribute to the growth of the North York West and Vaughan submarkets, while the Eglinton Cross Town line will improve accessibility across that corridor. In the east end of the city, the extension of Highway 407 is expected to have significant impact in terms of improving commuting times and may spur further development in that area. Meanwhile, in the west end, there are encouraging signs of transit improvements in the Bus Rapid Transit extension that will connect Mississaugas pivotal Airport Corporate Centre to the City Centre market. These projects are emblematic of the influential role of transit and accessibility as drivers of both market activity and tenant intentions in the coming year and beyond.

UNION STATION REVITALIZATIONThe $640.0 million revitalization of Union Station is one of Canadas Top 100 Infrastructure Projects. It will provide greater access for commuters in and out of Torontos south core, and will include a new atrium structure.

www.metrolinx.com

TORONTO-YORK SPADINA SUBWAY EXTENSIONConstruction on the Toronto-York Subway Extension is scheduled for completion in the fall of 2016 and will carry an estimated 20,200 riders per day. It is the first subway line to cross a municipal boundary in the region and will attract new development to North York West and Vaughan.

www.ttc.ca/Spadina/

QRC WEST Queen Richmond Centre is a landmark mixed-use 285,581 sq. ft. development in Torontos Downtown West submarket. It is already 78.0% preleased and features modern design and amenities. Construction is expected to be complete in May 2015.

www.qrcwest.com


In moving from a small city to a larger city,

were leaving the old Ottawa behind. It will

be exciting to see what happens next.

Shawn Hamilton Vice President and Managing Director, Ottawa

OTTAWAThe federal government occupies half of the leased office space in downtown Ottawa, and its Workplace 2.0 strategy is having a significant impact on the market. The government is changing the way they do business and its impacting everything, says Shawn Hamilton, Vice President, CBRE Ottawa.

Like most large employers, Canadas federal government is introducing alternative workplace strategies in a bid to maximize efficiency. As a result, government agencies have been condensing their footprints and moving out of older buildings, causing the office vacancy rate to rise in Ottawas downtown core.

Two new government property initiatives bookending the city will have a further impact on the downtown core in 2015. The Department of National Defence plans to consolidate staff from various downtown locations to the old Nortel campus on the west side. In the east, the Communications Security Establishment is expanding next door to the Canadian Security Intelligence Service.

With the federal government downsizing and very little private sector demand downtown, the market is really quite flat, says Hamilton. The lack of velocity has produced neutral or slightly negative absorption of office space. The federal election in 2015 will likely have an impact on the market, as businesses and government agencies press the pause button until the dust settles.

Other trends in office leasing are obsolescence and a flight to quality. Newer Class A buildings are attracting tenants from the older Class A buildings, and tenants in Class C

14

PROJECTS TO WATCH

properties are moving up to Class B space. Were coming to a crucial point for Ottawas aging buildings, he says. Owners will increasingly need to consider refurbishing or demolishing office properties.

While downtown real estate is dominated by the government, its a different story in Kanata. Kanata, known as Canadas other technology hub, is a private sector market that is governed by the ups and downs of the technology sector, which has been showing signs of recovery. With access to a steady stream of educated talent from several post-secondary institutions, Kanata is a hotbed of innovation. There were several large transactions in Kanata in 2014 and Hamilton expects the growth and recovery to continue next year.

The industrial market, much of which is also tied to the government, isnt likely to change much in 2015. Were not seeing new demand or growth, says Hamilton. Theres about 200,000 sq. ft. of industrial space coming into the market in the short term, but tenant movements will largely equate to a game of musical chairs. Despite this, Hamilton expects that face rates in Ottawas industrial market will continue to be higher than the national average.

A new trend thats changing the cityscape in Ottawa is the emergence of full-service, live, work, play neighbourhoods. All-in-one developments, such as the redevelopment of the Lansdowne

Park area and the proposed development at the old Domtar paper mill site on the Ottawa River, will allow residents to do everything locally. Ottawa is starting to develop self-sustaining communities, much like what has happened in cities like Toronto, says Hamilton, noting its a big change from the previous model where people lived in the suburbs and commuted downtown for work.

Two infrastructure investments are expected to have long-term positive impacts throughout Ottawa. The Confederation Line, Ottawas new state-of-the-art rapid rail transit system, is scheduled for completion in 2017 and will move people around the city more efficiently. In the meantime, Highway 417, the citys east-west artery is being expanded to accommodate Rapid Bus Transit and alleviate congestion.

Hamilton says were seeing a real change in Ottawa as it becomes a new, more sustainable, more diversified city. In moving from a small city to a larger city, were leaving the old Ottawa behind. It will be exciting to see what happens next.

CONFEDERATION LRTThe first phase of this public transit project will increase density with a mix of residential, office and retail development around the LRT stations. The federal government will likely lease up commercial space in close proximity to LRT stations.

www.confederationline.ca

417 HIGHWAY EXPANSIONThe Highway 417 expansion is scheduled for completion in the fall of 2015 and will alleviate traffic congestion and delays by adding in two additional lanes.

www.queenswayexpansioneast.com

GOVERNMENT WORKPLACE 2.0The federal government plans to rejuvenate their offices using new guidelines that embrace modern and flexible workplace strategies, a reduction in space per employee, more sustainable and strategically located buildings, along with greater accessibility and worker amenities.

www.tpsgc-pwgsc.gc.ca

Washington, D.C.Total Office Inventory 125,186,473 sq. ft.Overall Office Vacancy 11.3%Average Class A Gross Asking Rent $56.92 per sq. ft.

OttawaTotal Office Inventory 39,324,139 sq. ft.Overall Office Vacancy 9.0%Average Class A Gross Asking Rent $37.17 per sq. ft.

Capital Comparison (Q3 2014)


Were seeing a real transformation of

the city as a result of urban densification, redevelopment and

key infrastructure investments.

Alexandre Sieber Senior Vice President and Senior Managing Director, Montreal

MONTREALThe 2015 outlook for Montreal is promising, with some big investments coming to fruition and a number of positive trends driving the market.Significant improvements to infrastructure in the Greater Montreal Area (GMA) are underway, while transit accessibility continues to drive demand for office space both downtown and in midtown. Technology and IT companies in particular are eager to secure LEED-certified, modern workspaces within walking distance of the metro.

Recent economic development efforts are also paying off, attracting foreign investment. Thanks to a powerful combination of advantages including government tax incentives; a bilingual, educated workforce; excellent access to the U.S. market; an intermodal transport hub; and some of the most competitive occupancy rates in North America -- the Greater Montreal Area is an appealing market for a growing number of companies from both Europe and the U.S.

In 2013, Montreal attracted more than $1.3 billion in foreign investment which has created close to 3,000 new jobs for the city, says Alex Sieber, Senior Vice President and Senior Managing Director, CBRE Quebec Operations. The impact of that investment is being felt in the commercial real estate market.

Limited land supply, however, is having a tightening effect on the industrial market. Retail and food sector just-in-time inventory management is driving demand for warehouse and distribution centre space, particularly along highways offering good access to markets. But with land on the island both costly and scarce, companies have to move

16

PROJECTS TO WATCH

MONTREAL

and invest further afield to secure sufficient property for larger facilities. Redevelopment of several former refinery properties in the east end will create some new supply, while a growth of development activity is also anticipated along the southwest shore and further into the outskirts of the region.

The industrial market is doing well, spurred on by the accelerating U.S. economy, softening Canadian dollar and companies re-shoring, says Sieber.

As the economy improves, 2015 should see the office market stabilizing, with leasing rates moving slowly towards more historical values. Growth in IT-related industries is expected to continue, and with it, the demand for midtown loft space, creating new, up-and-coming neighbourhoods. A key trend that will continue is the repurposing of older buildings for new use; a noteworthy example is the conversion of the former Merck campus to a combination of both residential and renovated office space.

After higher-than-anticipated activity in the trophy asset category in 2014, the year ahead is likely to see more typical investment volumes. A good mix of investments and smaller transactions are creating a strong outlook, albeit one with questions about how the current picture will unfold. An increase in interest rates, fluctuations in cap rates, the stability of the local and provincial

economy and the impact of government economic measures could alter the investment sales landscape.

The retail sector is dynamic and changing. The big name chains are seeking to place their flagship stores in downtown Montreal, so were still seeing growth in core retail streets, says Sieber, who explains that smaller companies in this area are feeling the impact of this activity.

The face of the downtown core is changing with more residential projects and increased densification. All these newcomers to downtown will need services, so we continue to forecast new entrants - more urban grocery stores, furniture stores and other businesses into these communities.

Two infrastructure projects of huge strategic importance to Montreals growth will transform the look and efficiency of the city over the next few years. The $5.0 billion Champlain Bridge replacement and the $3.7 billion Turcot Interchange reconfiguration will try the patience of commuters and investors alike, but the short-term pain will have tremendously positive and far-reaching impacts for years to come.

Other significant investments are changing the real estate landscape as well. The new $4.0 billion, state-of-the-art le Centre hospitalier de lUniversit de Montral (CHUM) and McGill University Health Centre (MUHC), both set to open in 2015, will bolster Montreals reputation as a hub for science and biotech research, development and teaching. Sieber believes there will be a trickle effect as the population and traffic increase the MUHC alone is expected to bring over 14,000 people a day into its neighbourhood - and other businesses gravitate towards these areas, opening new medical offices, grocery stores and retail nearby. Transit improvements designed to accommodate shifting traffic patterns will in turn drive greater economic activity.

Were seeing a real transformation of the city as a result of urban densification, redevelopment and key infrastructure investments, says Sieber. Over the coming years, these will have a huge payoff in attracting growth, new business activity, investments and people. And with an unprecedented alignment of the political and business communities in support of economic growth, were looking at a stronger foundation and positive future.

NEW OFFICE DEVELOPMENTSSeveral new office buildings are in the works, including the 495,000 sq. ft. Deloitte Tower, the 56.0 acre Quartier Evolution Business Park and the 885,000 sq. ft. head office and distribution facility for Jean Coutu Group.

LARGE SCALE TRANSPORTATION PROJECTSThe federal government is investing $5.0 billion on the replacement of the Champlain Bridge, which will be the busiest bridge in Canada once completed in 2018 and will serve as a strategic trade corridor with the U.S.

www.pontchamplainbridge.ca

SUPER HOSPITALSTwo super hospitals, McGill University Health Centre and Centre Hospitalier de lUniversit de Montreal, are the largest buildings to be constructed in Montreal since the 1976 Olympics. Positive economic benefits are expected and there may be redevelopment opportunities as older facilities are vacated.

www.muhc.ca/new-muhc/dashboard www.chumontreal.qc.ca/

$1.3 BillionForeign Investment in 2013

$4.5 BillionLocal Infrastructure Spending Over Next Three Years

$5.0 BillionCommercial Real Estate Sales in 2014


Its a good time to identify commercial real

estate opportunities and get into the market before momentum puts

options out of reach.Bob Mussett Senior Vice President

and Senior Managing Director, Halifax

ATLANTIC CANADATheres an air of optimism in the real estate market in Halifax, mirroring the mood of a region gathering momentum. Theres great value here, says Robert Mussett, Senior Vice President & Senior Managing Director, Halifax. Its a good time to identify commercial real estate opportunities and get into the market.

That momentum is being driven by shipbuilding and energy, two industries that are gathering steam and bringing the kind of investment and jobs that will deliver long-term impacts across multiple sectors of the economy. The Royal Canadian Navys $25.0 billion contract to build new ships at the Halifax Shipyard is expected to bring more than 10,000 jobs to the region, while the Hebron oil platform in Newfoundland will bring massive investment to that province. Meanwhile, off the south coast of Nova Scotia, Shell and BP have already completed deep sea seismic work with oil drilling exploration expected to commence in the fall of 2015.

This activity is a welcome change in a region thats seen little growth in recent years, compared with the rest of Canada.

Mussett says commercial real estate in the region has solid fundamentals and is known for its steady-as-she-goes performance. A local buyer acquired 50 Innovation Drive (the former Blackberry building) in Halifax, which will be fully leased by year end, highlighting the strength of the market and the need to act when opportunities arise.

In the tightly-held industrial market, there are few trades. Investors tend to hold industrial properties because its a small market and quality assets are limited, says

PROJECTS TO WATCH

18

PROJECTS TO WATCH

ATLANTIC CANADA

Mussett. The steady performer theme particularly applies to the industrial and office markets.

The suburban office market continues to perform well, as newer space, short commutes, and free parking play a key role in employee retention and satisfaction. These factors provide the basis for most office location decisions in Halifax. Mussett says Halifax is unique in that suburban office space is more attractive to many users than downtown locations, and he predicts that the trend of new office construction in the suburbs will continue for some time.

Demand for industrial space has been solid across Atlantic Canada, maintaining very healthy vacancy and rent levels. In Newfoundland, rents are reflective of the growing oil market. While the industrial availability rate in Halifax, now 7.7%, is up slightly from last year, Mussett says its not a concern. The industrial market has been very steady for decades and that will continue, says Mussett. As shipbuilding accelerates, he expects to see further tightening in availability and industrial rates to increase, as well as ongoing benefits in this sector.

Retail has been performing steadily. While there isnt any significant building on the horizon for this mature market which has 27.0 sq. ft. of retail space per person, U.S. retailers that are rolling out in other parts of Canada are expected to make their way east. Retail is very much an infill market and there will be select opportunities for new grocery anchored neighbourhood strips.

Halifaxs multifamily residential market is still working through the wave of supply that was delivered in recent years. This has caused the vacancy rate to rise to the mid-4.0% range. This will result in a pullback on new construction as developers let the market absorb new supply.

Once shipbuilding goes into full production, Mussett predicts the sluggish single family residential sector will rebound and stimulate activity in the broader market. I think as the housing market gains traction, we will see improved fundamentals in all commercial asset classes, and more investor interest in the market.

He says now is the time for investors to take a look at Atlantic Canada. The market offers great opportunity, great value and reliable, steady returns. And with the huge potential of offshore oil developments and shipbuilding gathering momentum, the impact on this small market will be significant.

TRANSCANADA ENERGY EAST PIPELINEIf approved, this 4,600 km pipeline will carry 1.1 million barrels of crude oil each day from Alberta and Saskatchewan to Eastern Canada. Construction on a new tank terminal is expected in the Saint John, New Brunswick area, creating a surge of industrial activity.

www.transcanada.com

SHIPBUILDINGPreparations for Irving Shipbuildings $25.0 billion contract with the Royal Canadian Navy are underway. Shipbuilding activity will increase employment and cause the manufacturing sector to grow 7.1% in 2015 according to the Conference Board of Canada.

www.irvingshipbuilding.com

HEBRON OILThe Hebron heavy oil field located off Newfoundland is estimated to produce more than 700.0 million barrels of recoverable resources. Project construction is underway, which will create jobs, provide research and development opportunities and bolster royalty and tax revenues.

www.hebronproject.com

NEW CONVENTION CENTERDowntown Halifaxs Nova Centre is a $1.0 million sq. ft. mixed-use development that is expected to be complete in early 2016. This development will add 150,000 sq. ft. of office space to downtown Halifax and expand the property tax base and spur provincial economic benefits.

www.novacentre.ca

Halifaxs Ship is Coming In

30 Years

10,000 Jobs

$25 Billion

STATISTICS

MARKET STATISTICS

OFFICE INDUSTRIAL

INVESTMENT

DOWNTOWN 2013 2014F 2015F YoY

Vacancy Rate 7.8% 7.9% 8.7%

Class A Net Rental Rate (per sq. ft.) $25.40 $25.34 $25.58

Absorption (sq. ft. in millions) (3.21) 3.18 1.25

New Supply (sq. ft. in millions) 0.88 3.95 3.34

Under Construction (sq. ft. in millions) 14.64 11.22 8.62

SUBURBAN 2013 2014F 2015F YoY

Vacancy Rate 12.2% 13.4% 13.5%


Absorption (sq. ft. in millions) 1.43 1.12 2.75



OVERALL 2013 2014F 2015F YoY

Vacancy Rate 9.7% 10.3% 10.8%





2013 2014F 2015F YoY

Availability Rate 5.8% 5.3% 5.1%

Net Rental Rate (per sq. ft.) $5.99 $6.12 $6.24

Sale Price (per sq. ft.) $101.16 $104.35 $108.94




TRANSACTIONS (in $millions) 2013 2014F 2015F YoY

Office $5,390 $7,183 $5,465

Industrial $5,825 $4,353 $5,383

Retail $5,826 $6,898 $4,931

Multifamily $4,167 $3,414 $4,269

ICI Land $3,937 $3,923 $3,619

Hotel $1,669 $707 $1,800

Total $26,815 $26,478 $25,467

CANADA

MARKET STATISTICS

OFFICE INDUSTRIAL

MULTIFAMILY

INVESTMENT

RETAIL


Vacancy Rate 6.1% 7.1% 10.8%


Absorption (sq. ft. in millions) (0.43) (0.04) 0.62

Class A Cap Rate (%) 4.50-5.25 4.50-5.25 4.50-5.25




Vacancy Rate 12.1% 14.7% 16.5%



Class A & B Cap Rate (%) 5.75-6.50 5.75-6.50 5.50-6.25




Vacancy Rate 9.1% 10.9% 13.6%





2013 2014F 2015F YoY





Class A&B Cap Rate (%) 5.50-6.25 5.50-6.25 5.50-6.25



TRANSACTIONS (in $millions) 2013 2014FF 2015F YoY

Office $447 $517 $520

Industrial $687 $675 $675

Retail $1,304 $860 $800

Multifamily $441 $450 $450

ICI Land $567 $500 $500

Hotel* $106 $255 $350

Total $3,552 $3,257 $3,295

*Market and surrounding region 2013 2014F 2015F YoY

Retail Sales (YoY)* 1.2% 5.6% 4.2%

Neighbourhood Cap Rate (%) 5.50-6.00 5.50-6.00 5.50-6.00

* Conference Board of Canada

2013 2014F 2015F YoY

Overall Vacancy Rate** 1.7% 1.8% 1.7%

Apartment Cap Rate (%) 4.25-4.75 4.25-4.75 4.25-4.75

**Canada Mortgage and Housing Corporation

VANCOUVER

MARKET STATISTICS

OFFICE INDUSTRIAL

MULTIFAMILY

INVESTMENT

RETAIL


Vacancy Rate 9.1% 8.6% 9.2%



Class A Cap Rate (%) 5.00-6.00 5.00-6.00 5.00-6.00




Vacancy Rate 11.0% 10.9% 12.3%



Class A & B Cap Rate (%) 5.75-7.00 5.75-7.00 5.75-7.00




Vacancy Rate 9.8% 9.4% 10.3%





2013 2014F 2015F YoY





Class A&B Cap Rate (%) 5.50-6.75 5.25-6.75 5.25-6.75




Office $1,002 $800 $900


Retail $243 $400 $200


ICI Land $443 $350 $300

Hotel* $225 $54 $200

Total $2,745 $2,304 $2,275

*Market and surrounding region

2013 2014F 2015F YoY




2013 2014F 2015F YoY




CALGARY

MARKET STATISTICS

OFFICE INDUSTRIAL

MULTIFAMILY

INVESTMENT

RETAIL


Vacancy Rate 9.7% 10.2% 9.5%



Class A Cap Rate (%) 5.25-6.00 6.50-7.00 6.50-7.00




Vacancy Rate 11.8% 13.1% 10.7%



Class A & B Cap Rate (%) 6.25-7.25 7.00-7.50 7.00-7.50




Vacancy Rate 10.5% 11.3% 10.0%





2013 2014F 2015F YoY





Class A&B Cap Rate (%) 5.50-7.00 5.50-7.50 5.50-7.50




Office $351 $225 $75


Retail $369 $250 $200


ICI Land $864 $900 $700

Hotel* $189 $16 $150

Total $2,477 $1,816 $1,625

*Market and surrounding region 2013 2014F 2015F YoY




2013 2014F 2015F YoY




EDMONTON

MARKET STATISTICS

OFFICE INDUSTRIAL

MULTIFAMILY

RETAIL


Vacancy Rate 10.8% 10.0% 9.8%



Class A Cap Rate (%) 6.00-6.50 5.50-6.00 5.50-6.00




Vacancy Rate 14.2% 12.6% 12.1%

All Class Net Rental Rate (per sq. ft.) n/a n/a n/a


Class A & B Cap Rate (%) 7.00-8.00 6.75-7.75 6.75-7.75




Vacancy Rate 11.7% 10.6% 10.4%





2013 2014F 2015F YoY





Class A&B Cap Rate (%) 6.50-7.50 6.25-7.25 6.25-7.25



2013 2014F 2015F YoY




2013 2014F 2015F YoY




WINNIPEG

MARKET STATISTICS

OFFICE INDUSTRIAL

MULTIFAMILY

INVESTMENT

RETAIL


Vacancy Rate 16.4% 15.9% 15.5%



Class A Cap Rate (%) 7.00-7.50 6.75-7.25 7.00-7.50




Vacancy Rate 12.2% 11.3% 9.4%

All Class Net Rental Rate (per sq. ft.) n/a n/a n/a


Class A & B Cap Rate (%) 7.50-8.50 7.25-8.00 7.50-8.00




Vacancy Rate 15.6% 15.0% 14.2%

Class A Net Rental Rate (per sq. ft

2015 market outlook - active

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