REALPAC / FPL Canadian Real Estate Sentiment Survey...The REALPAC / FPL Canadian Real Estate Sentiment Survey 7 Exhibit 2: Perspectives on Real Estate Market Conditions (% of respondents)

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REALPAC / FPL Canadian Real Estate Sentiment Survey

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The REALPAC / FPL Canadian Real Estate Sentiment Survey

Table of Contents

Exhibits

Topline Findings 3

Data Collection 3

General Market Conditions 5

Asset Values 8

Debt Capital 9

Equity Capital 10

Participants 11

Exhibit 1A: REALPAC/FPL Canadian Real Estate Sentiment Index 5

Exhibit 1B: Real Estate Roundtable Sentiment Index (U.S.) 6

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

© 2021, Ferguson Partners 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 Ferguson Partners 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 Ferguson Partners LLC.

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

Topline Findings

Data CollectionData was collected during October 2020. In the report below, 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.

• Moving into 2021, uncertainty in the Canadian real estate market continues, as many remain hopeful that a vaccine is imminent.

• Transaction volume remains low, resulting in inconclusive asset valuations. Distressed transaction activity has yet to emerge in Canada.

• Lenders remain active. There is an increased level of scrutiny during the due diligence process with many less willing to engage in higher risk investments.

• Equity capital is available; however, investors are increasingly discerning when evaluating investment track records and leverage ratios.

REALPAC (Real Property Association of Canada), FPL Advisory Group, and Ferguson Partners are pleased to announce the results from the fourth quarter 2020 REALPAC/FPL/Ferguson Partners 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 and asset managers, financial services providers, and operators and 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.

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Please direct all inquiries regarding this study to:

Michelle Rutledge Director – Canada

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

t 647.417.3157e [email protected] fergusonpartners.com

Jeff Hauswirth Vice Chairman

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

t 647.417.3155e [email protected] fergusonpartners.com

Kris Kolenc Manager, Research & Sustainability

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

t 416.642.2700 x238e [email protected] realpac.ca

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General Market Conditions


Moving into 2021, uncertainty in the Canadian real estate market continues, as many remain hopeful that a vaccine is imminent.

“Out of the gate, everything paused in April [2020]. We were surveying the damage. We saw a big surge back in summer with land transacting quite rapidly, and office opportunities coming onto the market.”

“The business environment mimicked the personal environment.”

“[Now in October 2020], the fog has come back as people take a pause while looking at what the future holds.”

“I would describe market conditions at a lower level in Q4 2020 versus 2019, but still stable and reasonable. There’s high liquidity in the marketplace for mortgage debt, and refinance opportunities are very solid. We are seeing fewer transactions as there are not as many sales. Refinancing or repositioning financing and development financing are all quite strong.”

“The next 12 months will see a tremendous number of small businesses fold and the result will be much higher vacancies, lower rents, and higher cap rates. Overall 2021 and 2022 will be very difficult for commercial real estate; however, the downturn will be good for transactions in the later part of 2021, and much of 2022.”

“We are noticing a discrepancy in REIT pricing versus the private market. Even among apartment and some industrial names, which continue to see strong private demand.”

“Economic growth outlook is uneven. After an initial bounce back from the COVID-19 decline, growth will be moderate. High-touch sectors like restaurants and travel will take longer to recover. The second wave will continue to negatively impact the economy over the last few months of 2020, and likely through much of 2021. However, we enter the final quarter of 2020, a light at the end of the tunnel appears to be forming – either with a vaccine or acceptance that COVID will be around longer, and adjustments will be made.”

“[There are] more unknowns today than at any given time in the last 20 years. With the exception of hospitality and retail, private markets are slower to react as players in the market try to digest. [There’s a] slow realization that previously unassailable sectors like office and residential will be impacted, but the extent is a question mark. If unemployment remains where it is for a period of time, and government support ebbs, it will have an impact across the spectrum. The biggest factors in a recovery are treatments/vaccines for COVID-19 as well as continued government support, and a subsequent stimulus/recovery plan.”

“As a population, we need to return to our normal work activity and patterns in a safe manner. This will have a dramatically positive impact on our economy, our

Note: Data was not collected in Q4-19 and Q1-20 for the REALPAC/FPL Real Estate Sentiment Index.

Exhibit 1A: REALPAC/FPL Canadian Real Estate Sentiment Index*

58

43

28

Future conditions

Overall

Current conditions

Q4

90

80

70

60

50

40

30

20

10

‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4


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* The REALPAC/FPL Canadian Real Estate Sentiment Index and the Real Estate Roundtable Sentiment Index are measured on a scale of 1–100. Each is the average of a Future Index and a Current Index. To register an Index of 100, all respondents would have to answer that they believe conditions are “much better” today than one year ago and will be “much better” one year from now. 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 1B: Real Estate Roundtable Sentiment Index (U.S.)*

61

44

27

Future conditions

Overall

Current conditions

Q4

90

80

70

60

50

40

30

20

10

‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20

Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4

mental health, and our general personal and family well-being. Clearly, there are exceptions for individuals that are aged, have compromised health conditions or other unique circumstances; and these situations need to be managed with safety, support, and compassion. For others, employers have gone to great expense to make workplaces safe. Further, people generally behave in their work environments. We are seeing the spread of the virus in social settings - the places that people are least compliant, yet we are relaxing those restrictions and not focusing on the benefits that a safe work-environment provides. If we want to improve the economy, we need to get back to work, restrict our personal social gatherings, and commit personally to supporting the businesses that are part of our lifestyle. Government support, while critical, cannot do this alone. Kudos to the BC government and the BC public employees union for announcing and beginning the implementation of a return to the workplace program.”

“There remains a significant amount of uncertainty regarding the next 12 months, as well as the lasting impacts of the pandemic. Companies that are able to adapt and pivot will be well-positioned in the medium- to long-term. Some asset classes may see significant and permanent decreases in investment over the next few years as changes in consumer preference accelerate (malls, office space that is not flexible, hotel).”

“Ongoing restrictions and a voluntary transition to remote working will likely have a significant impact on office occupancy in the near-term as major employers may actively look to offer employees more flexible work terms and look to improve the efficiency of the office footprint. Retail and restaurants will bear the largest brunt from this. Social distancing restrictions, and overall fear will continue to drive online purchasing trends which could continue to impact bricks and mortar retail. From a policy perspective, governments should transition to a more targeted approach to “flatten the curve” and enable as many businesses as possible to continue to operate.”

“The retail industry will not recover for a while. I believe 2 years minimum and realistically 3 years, as there will be lots of premises to backfill or redevelop. The consumer is there, and the rebound was strong in many retail segments once we re-opened. However, the re-closure is a problem. It’s causing anxiety for business owners and consumers. There are also supply chain and labour disruptions that need to be resolved. The quantum and timing of government aid needs to be set forth as the uncertainty of that is causing further issues rather than being helpful.”

“There is more and more discussion around time theft by employees. Productivity is slipping on the brokerage side, and culture is suffering to an extent due to work from home (for example, communication via email versus in-person).”


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

100

75

50

25

0

100

75

50

25

0

Q3-20 Q4-20 Q4-20 Q3-20 Q4-20 Q4-20Canada Canada

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

U.S. U.S.

Much worse

Much better

Somewhat worse

About the same

Somewhat better

“Technology is an enabler; real estate as a whole is going through a transformation period. We need great talent at the table to envision what that’s going to look like. Big platforms are looking at changing the fundamental cost structure. What will it look like 10 years from now?”

“Retail immediately took a dive [as COVID-19 numbers rose and lockdowns were implemented] with office still having a lot of question marks.”

“We are seeing slow but thoughtful leasing velocity. The biggest impact in the office space is from a valuation perspective. Assets are taking longer to lease up.”

“In multi-family, there is a housing shortage in Canada. There is short-term compression on rents. The biggest impact is immigration, which fuels multi-family.”

“Land has been very popular.”

“The biggest question is: ‘What’s the fall out in November/December?’ For example, when deferred mortgage payments catch up to people.”

“We expect contraction in the housing market, and continued rent compression.”

“COVID-19 is putting huge pressure on landlords and retailers. [We’re all] worried about what the banks will do in this situation.”

“It is difficult to make sweeping comments about the overall market, as certain segments like multi-family and industrial continue to do well while retail is struggling. The jury is out on how office will fare.”

“Retail has its own unique challenges, while the multi-residential and warehouse sectors are almost unaffected.”

“We are entering the first stage of a 12-24 month economic recession. Some sectors will outperform, but most will experience moderate to significant corrections. All levels of government will play a key role on the length and depth of these recessionary conditions. Ultimately, government policies/programs will have significant implications impacting the real estate markets.”

“It’s a tail of two markets if you’re looking at industrial and office. Office is full of uncertainly and has had few transactions. Industrial is a very strong market, with historically low vacancy rates and lease rates across Canada. Rental rates on industrial are approaching office rates, if not passing them. For manufacturing, there is a strong consumer demand for products. It’s hard to find quality space. Everyone is talking about the Amazons of the world with Canadian Tire and Walmart increasing warehouse space. Companies will be deciding if work from home actually increases their employees’ productivity, which will influence the office sector. Regardless of how the vaccines roll out, office will still be a necessity, and I believe that there will be a desire to go back into office and a fear of missing out on promotions if employees don’t get face time. Small retailers like Queen Street and downtown Oakville have lots of vacancies. Power centres are being negatively affected. Big shopping centres are doing better. A lot of retail is repositioning into other uses.”

10 8

51

22

1 3 2

2420

8

47

60

13

32 29

14

42

10 7

52

44

2

15

1818

19

10 16

2 1

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

100

75

50

25

0

100

75

50

25

0

Canada Canada


U.S. U.S.

Much lower

Much higher

Somewhat lower

About the same

Somewhat higher

Q3-20 Q4-20 Q4-20 Q3-20 Q4-20 Q4-20

Asset ValuesTransaction volume remains low, resulting in inconclusive asset valuations. Distressed transaction activity has yet to emerge in Canada.

“We took the view that, i) office would be impacted by slower leasing, ii) retail would see value hit, iii) multi-family would hold, and iv) industrial is up, non-stop, and the hottest asset class.”

“Although it’s a bit harder to put a pin in valuations because of the level of transactions, property values are holding. Cap rates are holding and debt costs are lower, so investors continue to be attracted to the space. I think it’s a reflection of the amount of private capital in the marketplace and those still actively seeking investments in the commercial space.”

“There is a bifurcation in real estate values. Residential and industrial are still doing well while retail and, to a lesser extent, office is struggling. This will not change as there are some systemic changes taking place in the use of real estate.”

“The question regarding asset values is so broad, it’s difficult to say. It differs across asset classes. Retail and office, plus seniors and nursing, are down, but multi-family is relatively unchanged so far and industrial, with its COVID-19 resilient tenants, may be higher.”

“Industrial is up. Transaction volume is down. Office hasn’t done much, again there’s not enough transaction volume. No distressed sales out there yet that I’ve seen.

Q1 was super strong, while Q2 and Q3 have really slowed down. The user side is doing very well because interest rates are so low. Cap rates haven’t increased and a lot of that is due to the low interest rates.”

“At a macro level, rent rolls are being suppressed because businesses are uncertain. With that being said, if your rent is questionable, that’s going to have an impact on your asset value and it will spread a lot of cold water on transactions. Within retail, the pandemic is driving the impact. The bricks and mortar contest against online will continue. Tenants are in trouble as the pandemic accelerates asset devaluation in retail. On the commercial side, I think that it is a temporary issue. I see the watermark on operating expenses showing up right now. There’s not a lot of movement in assets so there’s not a lot of transactions to show if this is a true downturn. Depending on a company’s capital structure, organizations might get aggressive on devaluing assets to give themselves a bit of head room for the next couple years, but that’s more aggressive tax planning. There’s devaluation because of rent, and the watermark on operating expenses. This is where technology comes in and delivers. In a building that is not run efficiently, technology will offer operating costs on a fixed basis causing NOI to go up.”


8

6 4 6

34 39 39

66

6259

1629 27

6

2420

2 6 5

2210 15

48 26 29

100

75

50

25

0

100

75

50

25

0

Debt CapitalLenders remain active. There is an increased level of scrutiny during the due diligence process with many less willing to engage in higher risk investments.

“Everybody put a pause on issuing debt. The safest [asset class for placing debt] seems to be multi-family. It’s difficult to access mezzanine debt or anything aggressive.”

“We’ve been in the market three to four times for different debt capital.”

“The dichotomy among the lending community is staggering. Rates change so quickly.”

“We prefer Tier 1 and Tier 2 banks. Tier 1 banks are most cautious while Tier 2 banks are more willing to have a conversation. Alternative lenders see this as an opportunity.”

“I think that most of the lenders in the debt space are finding success in doing business. We’ve got our second highest volume on record so it’s reasonable.”

“Competition among lenders is high as everyone is looking for assets. I would say that the sector has shrunk in that lenders are weary of certain asset classes (retail and office in particular). If you have the same volume target but you don’t want to lend on retail or office, then the competition increases for multi-family and industrial.”

“Low interest rates are a major positive, helping lower our costs, while revenues decline.”

“The debt side is doing great compared to last year with regards to refinance. Anyone looking to buy or lend is doing a lot more due diligence.”

Much worse

Much better

Somewhat worse

About the same

Somewhat better

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

100

75

50

25

0

100

75

50

25

0

Q3-20 Q4-20 Q3-20 Q4-20Q3-20 Q4-20 Q3-20 Q4-20Canada CanadaU.S. U.S.



9

51

56

22

1012 15

51 39

5340

6 8 5

47 48

9 7

622

4 2422 17

4115

29

29

3831

22 28

2 4 2

100

75

50

25

0

100

75

50

25

0

Equity CapitalEquity capital is available; however, investors are increasingly discerning when evaluating investment track records and leverage ratios.

“Equity is minimal.”

“[Equity capital is] not as bad as we thought it would be. Alignment between objectives with investors is very important. We would not go on a road show right now.”

“We have had groups express interest. Investors are looking for a history of being conservative with debt. There are more conversations around risk mitigation versus track records.”

“People are looking for anywhere where they can find a decent level of risk adjusted return. There is a lot of capital moving into the space in private markets in general, whether it’s equity or debt.”

Much worse

Much better

Somewhat worse

About the same

Somewhat better

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

100

75

50

25

0

100

75

50

25

0

Q3-20 Q4-20 Q3-20 Q4-20Q3-20 Q4-20 Q3-20 Q4-20Canada CanadaU.S. U.S.



10

49 5047

14 6 11 4

43

8 5 10

3452 43 51

4 4 9 46

18 14 12 2 2 2 110

23 2930

46

36 35 40

41

2 2 1

Participants

ACM Advisors Ltd.Ishbel Buchan

Adgar Canada Inc.Chris Tambakis

Alberta Investment Management CorporationMicheal Dal Bello

Alberta Teachers Retirement FundTino Argimon

Avison Young (Canada) Inc.Mark Rose

BentallGreenOakPaul Mouchakkaa

Brookfield Asset Management Inc.Ash Lawrence

BTB Real Estate Investment TrustMathieu Bolte

Canada ICI Capital CorporationDale Klein

Canada Life Assurance CompanyJim Anderson

Canada Post CorporationTom McCulloch

Canadian Mortgage Capital CorporationRobert Goodall

Canderel Management (West) Inc.Richard Diamond

CanFirst Capital ManagementAllan PerezPaul Braun

CMLS Financial Ltd.David Franklin

Colliers International Group Inc.Scott AddisonRoelof van Dijk

Crestpoint Real Estate Investments Ltd.Colin MacKellar

Crombie REITDonald Clow

Crown Realty PartnersLes Miller

CT Real Estate Investment TrustLesley Gibson

Dell Corporation Realty Ltd.Michael Dell

Dorsay Development CorporationGeoffrey Grayhurst

Epic Investment ServicesCraig Coleman

Fengate Asset ManagementJaime McKenna

Forgestone Capital Mgmt. LPTrevor Blakely

Geoffrey L. Moore Realty, Inc.Geoffrey Moore

Granite REITKevan Gorrie Teresa Neto

Investment Management Corporation of OntarioBrian Whibbs

Ivanhoé Cambridge Inc.Nathalie Palladitcheff

KingSett Capital Inc.Anna Kennedy

Kircher Research Associates Ltd.Hermann Kircher

Lincluden Investment Mgmt. Ltd.Derek Warren

MIYA Consulting, Inc.Kevin Miyauchi

Morguard Investments LimitedPamela McLeanKeith Reading

Nova Scotia Pension Services CorporationChris Taylor

Raymond James BankDaniel Simunac

Realstar Group, Inc.Wayne Squibb Greg Speirs

Realtech Capital Group Inc.James McPherson

RioCan Real Estate Investment TrustEdward Sonshine

RYCOM CorporationCasey Witkowicz

Skyline Group of CompaniesMike Bonneveld

TD Asset Management Inc.Jeff Tripp

Vancity Community Investment BankCaroline Rauhala

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


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

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

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

t 647.417.3150w fergusonpartners.com

Documents

REALPAC / FPL Canadian Real Estate Sentiment Survey...The REALPAC / FPL Canadian Real Estate Sentiment Survey 7 Exhibit 2: Perspectives on Real Estate Market Conditions (% of respondents)