realpac / fpl canadian real estate sentiment survey · topics: (1) overall real estate conditions,...

Real property. Real leadership.

REALPAC / FPL Canadian Real Estate Sentiment Survey

Q12 0 1 9

2

The REALPAC / FPL Canadian Real Estate Sentiment Survey

Table of Contents

Exhibits

Topline Findings 3

Data Collection 3

General Market Conditions 5

Key Real Estate Considerations 7

Asset Values 8

Debt Capital 9

Equity Capital 10

Participants 11

Exhibit 1: REALPAC/FPL Canadian Real Estate Sentiment Index 6

Real Estate Roundtable Sentiment Index (U.S.)

Exhibit 2: Perspectives on Real Estate Market Conditions 7

Exhibit 3: Real Estate Asset Values 8

Exhibit 4: Availability of Debt Capital 9

Exhibit 5: Availability of Equity Capital 10

© 2019, FPL Advisory Group LLC. All rights reserved. No business or professional relationship is created in connection with any provision of the content of this document (the “Content”). The Content is provided exclusively with the understanding that FPL Advisory Group LLC is not engaged in rendering professional advice or services to you including, without limitation, tax, accounting, or legal advice. Nothing in the Content should be used in or construed as an offer to sell or solicitation of an offer to buy securities or other financial instruments or any advice or recommendation with respect to any securities or financial instruments. Any alteration, modification, reproduction, redistribution, retransmission, redisplay or other use of any portion of the Content constitutes an infringement of our intellectual property and other proprietary rights. However, permission is hereby granted to forward the Content in its entirety to a third party as long as full attribution is given to FPL Advisory Group LLC.

The views and opinions expressed by each participant are such individual’s own views and are not necessarily the views of FPL Advisory Group LLC or such participant’s employer.

Topline Findings

Data CollectionData was collected during January 2019. In the pages that follow, survey responses are supplemented by excerpts from interviews conducted with senior executives from Canadian property developers and owners, institutional investors, asset managers, and other organizations.

• While capital continues to chase quality product in urban markets, government intervention persists, acting as a major contributor to rising interest rates, among other implications.

• A strong demand for office, residential, and industrial persists throughout the major city centres. Despite public noise, well-located retail is performing well.

• Overall, asset levels remain steady; there continues to be a slight increase in multi-residential and industrial classes, but values are generally unchanged.

• Debt capital is available and accessible, particularly for high quality product; resulting in an increasingly competitive lending market.

• Those with established track records have no trouble accessing equity, while less established groups may find it more challenging this year.

REALPAC (Real Property Association of Canada) and FPL Advisory Group are pleased to announce the results from the first quarter 2019 REALPAC / FPL Canadian Real Estate Sentiment Survey. The survey is the industry’s most comprehensive measure of senior executives’ confidence in the Canadian commercial real estate industry. This quarter, the survey captured the thoughts of a wide variety of industry leaders, including CEOs, presidents, board members, and other executives from a broad set of industry sectors, including owners & asset managers, financial services providers, and operators & related service providers. The quarterly survey measures executives’ current and future outlook on three topics: (1) overall real estate conditions, (2) access to capital markets, and (3) real estate asset pricing. Survey respondents represent the retail, office, industrial, hotel, multi-family, residential, and senior residential asset classes.

3


4


Please direct all inquiries regarding this study to:

Michelle RutledgeDirector - Canada

Ferguson Partners Canada TD Bank Tower 66 Wellington Street West, Suite 4020 Toronto, Ontario M5K 1E7 Canada

t 647.417.3157e [email protected] fpl-global.com

Jeff HauswirthVice Chairman

Ferguson Partners Canada TD Bank Tower 66 Wellington Street West, Suite 4020 Toronto, Ontario M5K 1E7 Canada

t 647.417.3155e [email protected] fpl-global.com

Kris KolencCoordinator, Research & Sustainability

REALPAC 77 King Street West, TD North Tower Suite 4030, PO Box 147 Toronto, ON M5K 1H1 Canada

t 416.642.2700 x238 tf 1.855.REALPAC (732.5722)e [email protected] realpac.ca

The most comprehensive measurement of senior executives’ confidence in the Canadian commercial real estate industry

5

General Market Conditions

While capital continues to chase quality

product in urban markets, government

intervention persists, acting as a major

contributor to rising interest rates, among

other implications.

“Volatility is the theme. Bond rates are falling, capital markets have recovered a bit, and there’s discussion that a recession may not be [imminent]. High quality deals (even at low yields) are still attracting bids and interest. Despite these prices being too low, people are buying at those rates and saying rents will grow, so it’s all speculative.”

“Highly volatile! You have to pick your spots and it’s going to take some fortitude to invest in this environment. Diligence must be better and you have to have courage to execute.”

“Foreign buyers have slipped away so it calls into question whether there is a temporary entrenchment.”

“Value of your people in a downward market is incredibly important.”

“For the best quality stuff, there’s lots of depth and participants. If it’s a Tier 2 offering, some of that money has dried up. There might be a little less demand on the very large transactions; but if you’re a mid-sized transaction, there’s lots of depth.”

“The negativity on secondary markets is overblown. Retailers are making more money in secondary locations than primary, because supply and demand is slanted towards the retailer’s benefit. Geographically, there are impediments.”

“Approval times are lengthened and fees continue to rise despite market slowdown. Project approval timelines have increased 50%.”

“The biggest challenge is a cooling trend on new product absorption, predominantly brought about by price levels and affordability, and compounded by policy at both the provincial and federal levels (tax structures and stress tests)—that has affected it more on the higher than the lower end. There’s a need and desire for housing, but it puts

affordability more at risk. There’s a spike in prices on the low end as demand shifts, and policies are actually hurting the people that they’re trying to help.”

“The wild card is government intervention. There’s a lot of desire at all levels of government to try and tinker. There’s interest rate hikes and stress testing with homebuyers. We are also seeing it at the provincial level with trying to implement tax policies to dissuade money laundering, and there are lots of initiatives that municipalities are trying to enact. All with good intentions, but not well thought out, which makes us nervous, especially if the government continues to want to intervene.”

“Things have been choppy the last couple months. Toronto has remarkably low vacancy rates. There’s rental rate appreciation and increasing value.”

“We went from a manic period in Nov/Dec 2018 to what seems like a calming of the waters; real estate is seeming like a better asset class.”

“There’s more concern; a ‘risk off’ attitude. There are fewer people actively competing on the hard asset side; investors are being more cautious across the board for the EU, Canada, and the U.S., with Canada facing more headwinds than the U.S. right now.”

“Rare to see this much change in the industry with how occupiers are using space to the way technology is intersecting, the concept of artificial intelligence; flexible offices are taking down massive amounts of space. Pricing isn’t coming down and, although cap rates should be going up, [competition] is keeping it in place and the bid is widening. We’ll have a slow down in 2019 in pricing. There’s a ton of capital to fill and start the next wave of real estate investment. Bullish from the macro level, but we do need a pricing correction to take hold.”

“We see full and growing employment, stable to strong GDP growth, and a world population that is growing; there’s a ton of capital. We remain cautiously optimistic. We should have a relatively active year in Canada as we’ve had three record trading years in a row.”



6

* The REALPAC/FPL Canadian Real Estate Sentiment Index and The Real Estate Roundtable Sentiment Index, organized by FPL

Advisory Group, are created using the same survey methodology, questions, and timing.

Exhibit 1:

REALPAC/FPL Canadian Real Estate Sentiment Index*

Exhibit 1b:

Real Estate Roundtable Sentiment Index (U.S.)*

51

47

51

45

50

42

Future conditions

Future conditions

Overall

Overall

Current conditions

Current conditions

Q3

Q3

90

80

70

60

50

40

30

90

80

70

60

50

40

30

‘09

‘09

‘10

‘10

‘11

‘11

‘12

‘12

‘13

‘13

‘14

‘14

‘15

‘15

‘16

‘16

‘17

‘17

‘18

‘18

‘19

‘19

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q3

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1

Q1


Key Real Estate Considerations

A strong demand for office, residential, and industrial persists throughout the major city centres. Despite public noise, well-located retail is performing well.

“Industrial is booming with asking rental rates; it’s a dramatic increase due to the scarcity in the market and new speculative builds. Cap rates have come down and lease rates increased so people will be shocked at the value.”

“Industrial appetite remains exceptionally strong in all major markets (Toronto, Vancouver, Calgary, and Montreal). There is continued strong demand from tenants; very good appetite to push rent. Retail is not the flavour of the month for most institutional investors; we are starting to see good quality assets (6-7% yield basis).”

“The core+ office and value add office – are very strong in Toronto, Vancouver, and Montreal. Pricing is coming off a little.”

“As you get new deliveries of spaces, you’ll see the market moderate a little.”

“Multi-residential across Ontario has remained strong; even in Calgary, we’re maintaining and getting our fair share of deals. Multi-family and industrial hold their own.”

“Core real estate its very positive today, strong demand. Commercial (with the exception of Alberta) is doing very well, also buoyed by strong demand.

[Our] level of confidence in our tenants’ business lines, condos, rental apartments, senior housing; office and industrial, and public infrastructure (schools, police, and P3 projects) is high; however, entirely dependent on government; slow up at government level.”

“From a macro perspective, retail is actually doing very well, contrary to what you’re seeing on the news. Overall, retail in Canada is doing okay.”

“Residential rental business is very hot; single detached homes and condos are becoming more of an issue; strong rental demand persists in urban markets.”

“Larger markets like the GTA and Ottawa have been very strong from an occupancy and operations perspective. We’ve seen turnover drop in Toronto, a trend that began in 2017 when the provincial government expanded rent control.”

“Calgary and Edmonton are a little different; we’ve started to see pricing power again. Job levels have returned to a pre-crisis level with Edmonton always being a bit steadier than Calgary.”

“Mixed-use, residential, and industrial remain the dominant asset classes; with mixed-use only if it’s in core markets. Retail continues to be a non-investment oriented class, especially among institutional players. Your success is completely dependent on your tenant’s success.”

Exhibit 2: Perspectives on Real Estate Market Conditions (% of respondents)

100

75

50

25

0

100

75

50

25

0

Q4-18 Q1-19 Q1-19 Q4-18 Q1-19 Q1-19

Canada Canada

Today vs. One Year Ago One Year From Now vs. Today

U.S. U.S.

7

Much worse

Much better

Somewhat worse

About the same

Somewhat better

Overall, asset levels remain steady; there continues to be a slight increase in multiresidential and industrial classes, but values are generally unchanged.

“Retail in particular seems to be weak. Downtown office is very strong, especially for the premiere buildings. Lack of availability will drive prices as lease rates go up. In residential, infill downtown high rise is very active.”

“We’re holding. There may be a bit of value appreciation through yield compression in the higher parts of the market.”

“We’re not seeing any downward pressures on our valuations through appraisals; from 2018, we’ve had some major lifts.”

“We’ve seen pricing on the high end come off significantly year-over-year, while on the mid-level, it’s been neutral; lower level product has gone up. On land, it’s held pretty steady, although there’s mounting pressure for declining land values, which is a result of slower absorption and continued increases in construction costs.”

“There’s a decline in asset values. In retail in particular, there’s too much supply.”

“Assets that have had a little downward pressure have been in Calgary.”

“Asset values are very steady and we’re not anticipating any sign of cap rate compression.

There’s still a significant amount of money out there to be invested so the demand is still high. It’s a seller’s market.”

“Values vary by asset class and geography. Industrial and multi-family are getting more expensive. Office in Vancouver and Toronto has the ability to get more expensive while secondary markets are flat. Land will become a big question mark.”

“There is separation based on asset location (major markets versus secondary). Toronto, Ottawa, Calgary, Edmonton, Vancouver, and Montreal – we see valuation holding nicely. Depending on where your asset is located, you see some cap rate compression.”

“In secondary markets, cap rates are going up; beyond general business sentiment, interest rates are having a greater impact here.”

“There’s more capital chasing and lots of real estate, with industrial very competitive, but there’s still an underlying concern around interest rates.”

“Because there are no trades, nothing is changing, but I predict things will dip down a bit.”

“With regards to valuation, we saw transactions in Toronto where there’s no supply available so it’s really hard. We’re not seeing cap rates come back up. Bond rates went up in the beginning of 2018 before settling back down later in the year.”

Much lower

Much higher

Somewhat lower

About the same

Somewhat higher


8

Asset Values

Exhibit 3: Real Estate Asset Values (% of respondents)


100

75

50

25

0

Q4-18 Q1-19 Q1-19

Canada U.S.

100

75

50

25

0

Q4-18 Q1-19 Q1-19

Canada U.S.

Much worse

Much better

Somewhat worse

About the same

Somewhat better


9

Debt CapitalDebt capital is available and accessible,

particularly for high quality product;

resulting in an increasingly competitive

lending market.

“There’s a lot of money out there, whether it’s equity or debt. We raised over $300 million in debt for a retail portfolio and for an industrial asset– a good bid, and competitive pricing on both. Debt is still available and we don’t have any trouble.”

“Debt capital is absolutely there. It’s very competitive.”

“Debt capital is still very available for the right sponsor and the right purpose, although scrutiny has increased from lenders. It’s more available today than it was a year ago because banks have come back into the space.”

“Mortgage debt is still available. The risk profile has increased because of the continued interest rate appreciation.”

“There’s no trouble with credit. Even in a rising interest rate environment, there’s still significant debt available; however, a late entrant into the market might not have as much access to debt.”

“Debt capital is deep and good.”

“[Debt capital] is super plentiful for high quality real estate. For a value-add play, lots of credit. Spreads are still very strong for both types of real estate.”

“There’s lots of debt capital available with very aggressive pricing. We’re seeing opportunities to go 10 year versus 5 with single digit basis points to go a further 5 years.”

“So far so good. We’ve never seen this much demand for equity and debt as we have today.”

Exhibit 4: Availability of Debt Capital (% of respondents)

100

75

50

25

0

100

75

50

25

0

100

75

50

25

0

100

75

50

25

0

Q4-18 Q1-19 Q4-18 Q1-19Q4-18 Q1-19 Q4-18 Q1-19

Canada CanadaU.S. U.S.


Much worse

Much better

Somewhat worse

About the same

Somewhat better

10


Exhibit 5: Availability of Equity Capital (% of respondents)

Equity Capital

Those with established track records have no

trouble accessing equity, while less established

groups may find it more challenging this year.

“There’s less equity capital out there but it’s still available. Some people think that we’re at the top of the market so a bit less out there.”

“Canadian equity is looking outside of Canada due to a lack of availability and they think that they will find higher returns.”

“Equity capital is still strong. Large investors are still allocating to alternatives and I think you’ll continue to see that trend.”

“There’s a sweet spot for mid-size and high quality assets, and I think that will persist through 2019. Office markets in Calgary and Vancouver are very strong. Even retail that is well-located on transit is [attractive] where there’s an opportunity for densification. Residential and industrial are as strong as ever; housing prices are still a long way from being affordable which prevents renters from justifying buying.”

“If you can acquire and build multi-family, you’re building an income stream for a long time.”

“[Equity capital] is still very readily available for the right spots, but definitely harder to get if your sponsor is less experienced. Smaller players are having a struggle getting equity, which is a function of the cycle.”

“Aside from industrial or residential equity capital, things are tough for retail and office. However, with the right relationships and support from investors, you can still raise quite a lot of equity.”

“[Availability of equity capital] is still deep but investors are prepared to sit on their wallets.”

“Availability of equity depends on size of company, e.g., we continue to have access to multiple sources of capital. Unsecured market is becoming wild, very volatile.”

“For a quality real estate portfolio that is well managed with track records, there’s a lot of money. For proven operators and quality assets, there’s equity available.”

“If you’re in multi-residential, most issuers are finding it really strong; at least as strong as last year.”

100

75

50

25

0

100

75

50

25

0

100

75

50

25

0

100

75

50

25

0

Q4-18 Q1-19 Q4-18 Q1-19Q4-18 Q1-19 Q4-18 Q1-19

Canada CanadaU.S. U.S.


11


Participants

Aberdeen Standard InvestmentsTino Argimon

Adgar Investments & Development, Inc.Chris Tambakis

Alberta Investment Management Corp. (AIMCo)Micheal Dal Bello

Aspen Properties Ltd.R. Scott Hutcheson

Avison YoungMark RoseAmy Erixon

Berkley Property Management, Inc.Paul Chisholm

Boardwalk REITSam Kolias

Bosa Properties Inc.Michael Deighton

BSR REITJohn Bailey

Canada Post Pension PlanTom McCulloch

Canadian Mortgage Capital Corp.Robert Goodall

CanderelRichard Diamond

CanFirst Capital ManagementAllan Perez

CBRE LimitedPeter D. Senst

Colliers InternationalScott Addison

Concert Properties Ltd.Brian McCauleyAndrew Tong

Crown Realty PartnersLes Miller

CT REITKen Silver

Dell Corporation Realty Ltd.Michael Dell

Dorsay Development Corp.Geoffrey Grayhurst

Fiera Properties Ltd.Jens Ehlers Peter Cuthbert

First Capital Realty Inc.Adam Paul

Forgestone Capital ManagementKeith Jameson

Fusion HomesLee Piccoli

Geoffrey L. Moore Realty, Inc.Geoffrey Moore

Great-West LifeJim Anderson

Integrated Asset ManagementDavid Pappin

InvescoPaul Malizia

Investment Management Corporation of OntarioBrian Whibbs

Ivanhoe Cambridge, Inc.Nathalie Palladitcheff

KingSett Capital Inc.Anna Kennedy

Kircher Research Associates Ltd.Hermann Kircher

Margolis Capital Commercial Mortgage ProfessionalsRon Margolis

Menkes Developments Ltd.Peter Menkes

Minto Group Inc.Michael Waters

MIYA Consulting, Inc.Kevin Miyauchi

Nicola WealthPaul Kevener

Northam Realty Advisors Ltd.Peter Filardi

Partners Real Estate Investment Trust Jane Domenico

PIRETTeresa Neto

QuadReal Property GroupRemco Daal

Realstar GroupWayne Squibb

Realtech Capital Group, Inc.James McPherson

RioCan REITQi Tang

Slate Asset Management L.P.Blair Welch

Strathallen Capital Corp.Kelly Smith

Triovest, Inc.Vince BrownPrakash David

(Please note that this is only a partial list. Not all survey participants elected to be listed.)

REALPAC 77 King St WestTD North TowerSuite 4030 PO Box 147Toronto, ON M5K 1H1

Ferguson Partners Canada The Exchange Tower 130 King Street West Suite 1800 Toronto, ON M5X 1E3

t 416.642.2700 tf 1.855.REALPAC (732.5722)w realpac.ca

t 416.865.3385w fpl-global.com

realpac / fpl canadian real estate sentiment survey · topics: (1) overall real estate conditions,...

Documents