SPERSPECTIVE - BENTALLGREENOAK
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Perspective
Perspective
C AStates
United NADA
MID-YEAR 2020 UPDATE
COVID-19
Cautious optimism on virus containment,
rehiring, and successful reopening of
economies.
ECONOMY
Uneven and gradual recovery is expected to
erode real estate operating income to varying
degrees across property types.
SPACE MARKETS
Healthy property fundamentals, strong
investor demand, and low interest rates should
provide resiliency through the downturn.
BENTALLGREENOAK CANADA
U.S. PERSPECTIVE
PERSPECTIVE| | JUNE
JULY 2020
2020 2
CONTENTS
3 Perspective 2020 Themes Update The path to a “new normal”
We are living in unprecedented times,
5 COVID-19
marred by escalating economic, political
and social tensions that have been
6 Global Economy
accelerated by the COVID-19 pandemic. As
we try to make sense of how the recovery
8 Canadian Economy
might unfold, we begin by revisiting the
themes laid out at the start of the year in
14 Real Estate Space Markets
Perspective 2020. Many of the themes
remain front and centre and in most cases
22 Real Estate Investment
have been amplified. What follows is a
chartbook highlighting the underlying
trends that will shape the economic outlook
and its impact on the commercial real
estate market.
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 3
PERSPECTIVE 2020 THEMES UPDATE
COVID-19 has amplified many existing trends
Counteracting the slowdown AMPLIFIED Increasing portfolio resilience AMPLIFIED
ONUS ON FISCAL POLICY TO DRIVE GROWTH SUSTAINABLE INVESTING HELPS DRIVE PERFORMANCE
Canada is well positioned from a fiscal standpoint to stimulate growth When it comes to health, safety and wellness of employees this pandemic has
compared to its G7 peers. The Canadian federal government’s fiscal response raised the minimum acceptable standard for occupiers of commercial real
to the crisis has been swift and unprecedented with measures amounting to estate. Investors and their managers who have already made sustainability a
more than C$300 billion or 14% of GDP. But how much more will be needed to priority will reap further benefits as a result of this health crisis.
bridge the gap to the other side of the crisis?
Portfolio considerations in a low yield environment
Focusing on long-term trends amid uncertainty REAL ESTATE’S PORTFOLIO ENHANCING ATTRIBUTES
IMPLICATIONS OF AGING DEMOGRAPHICS
Commercial Real Estate (CRE) has an uphill battle in the near term as the crisis
Older demographics have been the most vulnerable to the virus as more than has hit the “main street” economy hard. Forced business closures will challenge
80% of the COVID-19 (COVID) deaths in Canada are people older than 70 real estate’s typically stable cash flow producing characteristics in the short
years of age, with many in long-term care facilities. Efforts to improve the run. However, over the long run, low interest rates and investors’ search for
health span of older populations will have transformative implications for real yield will continue to benefit the asset class.
estate as a result of COVID-19.
Technology permeating all aspects of real estate AMPLIFIED
PROPTECH FINDING PRODUCT/MARKET FIT
The largest work from home (WFH) experiment in history has accelerated the
adoption of new technologies in order to remain productive. In executing a
planned return to the office, there are many technologies that will need to be
integrated into office buildings to mitigate against current and future health
risks.
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 4
PERSPECTIVE 2020 THEMES UPDATE
COVID-19 has amplified many existing trends
The housing affordability crisis benefit as a result. Lower immigration for the foreseeable future will also be a
MORE RENTALS PART OF THE SOLUTION drag on population growth in urban centres as it had previously more than
offset outward migration.
Becoming a homeowner has become more challenging as CMHC has
strengthened its mortgage insurance underwriting criteria by 1) reducing
maximum debt-service ratios; 2) increasing the minimum qualifying credit Future of workplace-as-a-service AMPLIFIED
score; and 3) eliminating the ability to use borrowed down payments. These FLEX OFFICE PAUSES AFTER THE FAILED WEWORK IPO
changes could hurt both first-time and move-up buyers which will be positive
Occupiers are now beginning to focus on “return to office” strategies and are
for purpose-built rental demand. However, higher unemployment will be a
re-evaluating their space requirements in both a COVID and post-COVID
headwind for both rental and homeownership markets.
world. Flex office/coworking operators will struggle through COVID, but as
companies re-imagine how the workplace is defined, flex office will play a
Rising development costs critical role in the recovery phase. Flexibility and optionality will be even more
RESTRAINING NEW SUPPLY important for firms moving forward.
Inflationary pressures have subsided due to the economic fallout but the
outlook over the longer term is more uncertain. Virus mitigation measures Extended runway for industrial AMPLIFIED
employed on construction sites are creating productivity challenges leading to SUPPLY CONSTRAINTS TRUMP ANY PULLBACK IN DEMAND
higher costs. Developers will face an increased backlog in obtaining building
Industrial real estate fundamentals were exceptionally strong prior to COVID
permits and entitlements. While raw materials prices have fallen, supply chain
with historically low availability and soaring rents. Industrial won’t be immune
disruptions could raise prices on intermediate and finished construction goods.
from a downturn, but demand for logistics and warehousing space should
Meanwhile, resulting layoffs in the construction sector have created slack in
remains strong to support the growth in ecommerce that has accelerate during
labour supply, but the structural challenges of an aging workforce remain and
COVID.
could now be exacerbated by early retirements.
Opportunities in emerging talent centres AMPLIFIED
BEYOND TORONTO AND INTO THE GREATER GOLDEN HORSESHOE
The future of urbanization is being heavily debated as a result of COVID’s
attack on dense metropolitan areas. We are certainly not in the camp that is
calling for the death of cities, but we do expect to see a continued trend of
outward migration as household preferences shift towards more living space
and flexible work arrangements. Suburban areas and secondary markets may
“As companies re-imagine how the
AMPLIFIED workplace is defined, flex office will play a
critical role in the recovery phase.”
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 5
COVID-19
“The hammer” gives way to “the dance”
Regions at different stages of containment
Daily New Cases by Country
DAILY
From NEW
April CASES
14th BY8th
to June COUNTRY • While progress has been made in “flattening the curve,”
FROM APRIL 14TH TO JUNE 8TH definitive signs that the COVID-19 pandemic has been
fully contained remain elusive and vary across
Canada (96,204)
countries. As of June 6th, the rate of daily new cases
China (84,634) globally appears to be gaining momentum. After
Germany (184,193) success in containing the initial wave, Japan and South
France (150,315) Korea have experienced a rise in newly reported cases
in recent weeks. It is uncertain whether this is
UK (286,198)
suggesting a second wave of the pandemic.
Italy (234,998)
Japan (17,174) • Canada is trending in the right direction, but the
downward trend of daily new cases has been
South Korea (11,814)
inconsistent across the major provinces. Approximately
US (1,915,712) Green: Below 5 Day Avg 86% of cases are in Quebec and Ontario with a large
Orange: Above 5 Day Avg
World (6,931,000) proportion of fatalities among a 70+ age cohort.
April May June Quebec is seeing noticeable signs of improvement
while, the results are still mixed for Ontario.
Daily New Cases by Province
DAILY NEW CASES BY PROVINCE • The US leads the world with approximately 1.9 million
From
FROMApril 14th
APRIL to TO
14TH June 8th8TH
JUNE cases as of June 6th. With widespread mass
demonstrations currently taking place across major US
Quebec (53,047) cities, it remains to be seen whether this will result in an
Ontario (30,860) acceleration of new cases over the coming weeks.
Alberta (7,202)
BC (2,659)
Nova Scotia (1,059)
Saskatchewan (654)
Manitoba (289)
NL (261)
PEI (27) Green: Below 5 Day Avg
Orange: Above 5 Day Avg
NB (146)
April May June
Source: BGO Canada Research, Macrobond, World Health Organization
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 6
GLOBAL ECONOMY
Synchronized shock around the world
Global leading indicators plummet
Purchasing Managers' Index (PMI)
+50 = Expansion, As Of May • With a simultaneous demand and supply shock from
widespread lockdowns, the global economy has taken a
60 severe hit. Purchasing Managers’ Indices (PMIs) have
55
plummeted, especially for services, as ongoing social
distancing weighs on retail-oriented businesses.
50 Encouragingly, the manufacturing and services outlooks
45 are showing signs of bottoming out across advanced
40 and emerging economies.
35
Advanced: Manufacturing Emerging: Manufacturing • Real GDP forecasts across advanced economies have
30 been significantly downgraded. As the world slowly
Advanced: Services Emerging: Services emerges from the lockdown, the recovery is further
25
clouded by escalating U.S.-China tension along with
20
Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20
social unrest in the U.S. and Hong Kong.
Unprecedented levels of monetary and fiscal stimulus
are providing much needed support in the near term.
Most baseline forecasts assume there is no second
wave of the virus and that a vaccine is developed in
Global GDP Forecast early 2021. On the vaccine front there has been
Annual % Change positive progress with several candidates looking to
complete the final phase of clinical trials by late
-3.0%
World summer.
Advanced Economies -6.1%
-5.2%
Japan
United States -5.9%
-6.2%
Canada
-6.5%
United Kingdom
Germany -7.0%
-7.2%
France
-8.0%
Spain
Italy -9.1%
-12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
Apr Jan Apr Jan
2020F 2020F 2021F 2021F
Source: IHS Markit, International Monetary Fund
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 7
GLOBAL ECONOMY
Monitoring the reopening of economies
Mobility increasing, but cautiousness remains
Country Mobility
By Trips And Length Of Stay Indexed To Pre-COVID Levels, As Of June 8th • The path to a “new normal” is not only dependent on
policy measures but also on the perceived health risk.
120 Despite the easing of lockdowns, real time mobility
Pre-COVID Level metrics reflect a sense of cautiousness among the
100 broader population base. In the absence of a vaccine
mobility should improve gradually, however, it could
80 Workplace also see an uptick in the near term as demonstrations
Retail continue to take place across major cities around the
60
world.
40
• Except for South Korea, mobility around retail and
20 workplace locations is still noticeably below pre-COVID
levels across advanced economies. Workplace mobility
0 will also vary across sectors. The goods-producing
United Canada United States France Italy Germany Japan South Korea sectors will likely see mobility recover quicker as
Kingdom factories begin to reopen. Meanwhile, professional
services could see a prolonged period of working from
home and see less activity around office premises.
Urban Mobility Urban mobility, as measured use of public transit, is
Planned Trips Via Public Transit Indexed To Pre-COIVD Levels As Of June 8th also well below the norm across many North American
cities. However, Montreal, Toronto and Vancouver
120
are beginning to see a rise in public transit ridership as
Pre-COVID Level their economies reopen.
100
80 Montreal Toronto
Vancouver Boston
60 Chicago Los Angeles
New York City San Francisco
40 Seattle
20
0
15-Mar 27-Mar 8-Apr 20-Apr 2-May 14-May 26-May 7-Jun
Source: Geotab
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 8
CANADIAN ECONOMY
Canadian economic recovery dashboard
High-frequency HEAT MAP
25-Apr 1-May 8-May 15-May 22-May 29-May 5-Jun
S&P/TSX Discretionary 93
S&P/TSX Industrial 91
Financial
S&P/TSX Composite 89
S&P/TSX Financials 83
S&P/TSX Real Estate 77
Geotab Commercial Traffic 102
Geotab Gas Station Visits
Economic
81
WTI Price 79
Indeed New Job Postings 63
Open Table Reservations 16
Apple Driving Index 127
Google Retail Mobility 71
Mobility
Flight Radar Volume 63
Google Workplace Mobility 58
Citymapper Transit Trips* 23
Note: Shading indexed to pre-COVID-19 levels (Feb 2020) of 100; Heat map = red below and green above 100; Current level in right-most column; *Toronto, Montreal and Vancouver
High-frequency data moving in the right direction
• High-frequency data is trending in the right direction but is reflecting a sense Despite mixed results in economic and mobility indicators, financial markets
of cautiousness. Real-time economic indicators such as commercial traffic clearly suggest that the “the worst is behind us” and that a recovery is
and gas station visits are picking up, which is a very positive sign that underway. However, volatility remains elevated, and performance has been
business activity is resuming. In contrast, the pace of new job listings on uneven across sectors, led primarily by technology and telecom. We remain
Indeed continues to tread water, while restaurant reservation activity on skeptical that equity markets have appropriately priced-in the economic fallout
Open Table is non-existent. Additional measures of mobility remain below from the pandemic.
pre-COVID levels except for driving activity.
Source: BGO Canada Research, Google, Apple, Geotab, Macrobond, OpenTable, Indeed, Citymapper
BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 9
CANADIAN ECONOMY
Unemployment reaches historic levels
How many layoffs will prove to be temporary?
Labour Market
• The labour market has lost approximately 2.6 million
jobs since February, pushing the unemployment rate to
19,500 0 an all-time high of 13.7%. This understates the full
19,000 Employment, Thousands (LHS) impact on the labour market as Statistics Canada
2
18,500
Unemployment Rate Inverted % (RHS) estimates that one third of the labour market is either
4 out of work or working less than 50% of their regular
18,000
hours. May’s jobs figures were encouraging with a net
17,500 6
gain of almost 300,000 jobs. This suggests that many
17,000 8 are being hired back as a result of the economy
16,500 reopening and/or government programs working
10
16,000 effectively to preserve payrolls.
12
15,500
14
• On average, a 1.0% increase in the unemployment rate
15,000 reduces real GDP growth by roughly 1.2%. With the
14,500 16 unemployment rate at 7.8% at the end of March and
08 09 10 11 12 13 14 15 16 17 18 19 expected to rise to 20% by June in a conservative
downside scenario, the implied loss of real GDP for
2020 Q2 could exceed14%.
Real GDP Vs Unemployment Rate
Relationship Between Real GDP Growth And Unemployment Rate, 1966 Q2 - 2020 Q1 • The shape of the recovery will depend on how swiftly
the economy reopens, workers are rehired, and demand
4
rebounds. We are mindful that massive government
3 stimulus may be distorting the underlying economic
Q/Q REAL GDP GROWTH (%)
reality. Will sustainable demand return by the time
2
government programs expire in the fall? Will there be
1 an enduring shock to consumer and business
confidence?
0
-1
-2
-3 y = -1.1662x + 0.7058
R² = 0.329
-4
-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1
Q/Q PPT CHANGE IN UNEMPLOYMENT RATE (%)
Source: BGO Canada Research, Macrobond, Statistics CanadaBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 10
CANADIAN ECONOMY
Service-oriented sectors hit hardest
Job Loss By Sectors
Employment Change From February 2020 To May 2020, Thousands
200
100
0
-100 -5
-29 -28 -24 -9
-200 -87
-138 -125
-300 -192 -171 -168
-242 -226 -223 Change from April to May
-400
Combined Change in March & April from February
-500 Total Change from February to May
-600
-700 -573 -475
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Disproportionate impact on most vulnerable First signs of recovery
Compared to prior employment downturns, the COVID-19 lockdown has Office-using sectors such as finance, insurance, and real estate (FIRE) and
disproportionately impacted people-facing industries. Unfortunately, these tend professional/ scientific/technical have held up much better to date, but there is
to be lower-paying jobs in sectors such as accommodation/food services and risk to these jobs the longer the economy takes to restart. Meanwhile, industrial
wholesale/retail trade. These sectors, especially accommodation/food services, oriented sectors such as construction and manufacturing experienced sizable job
face an additional challenge of reduced service capacity due to ongoing physical losses in March and April but experienced a mild recovery in June as plants
distancing requirements during the recovery phase. reopened and development projects ramped up again.
Source: BGO Canada Research, Macrobond, Statistics CanadaBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 11
CANADIAN ECONOMY
Second wave impacts
Liquidity Profitability Solvency
Current Assets To Current Liabilities As Of 2019 Q4 Operating Profit To Revenue As Of 2019 Q4 Asset To Debt As Of 2019 Q4
Education, Health & Social… Finance, Insurance & Real Estate Finance, Insurance & Real Estate
Finance, Insurance & Real Estate Education, Health & Social… Prof essional, Scientific & Technical
Agriculture, Forestry & Logging Utilities Manuf acturing
Prof essional, Scientific & Technical Information & Cultural Industries Mining, Quarrying, Oil & Gas
Construction Transportation & Warehousing Other Services
Average Average Wholesale & Retail Trade
Wholesale & Retail Trade Arts, Entertainment & Recreation Administrative & Support Services
Administrative & Support Services Agriculture, Forestry & Logging Average
Utilities Prof essional, Scientific & Technical Education, Health & Social…
Other Services Other Services Construction
Manuf acturing Mining, Quarrying, Oil & Gas Arts, Entertainment & Recreation
Information & Cultural Industries Accommodation & Food Agriculture, Forestry & Logging
Transportation & Warehousing Manuf acturing Transportation & Warehousing
Arts, Entertainment & Recreation Administrative & Support Services Accommodation & Food
Accommodation & Food Construction Information & Cultural Industries
Mining, Quarrying, Oil & Gas Wholesale & Retail Trade Utilities
0.0 1.0 2.0 3.0 4.0 5.0 0.0 0.1 0.2 0.3 0.4 0.5 0.0 2.0 4.0 6.0 8.0 10.0 12.0
Office-using employment is more resilient
• The longer the downturn, the greater risk of a second wave of job losses that • The accommodation/food services sector is highly leveraged and tends to
could spread to other sectors, including white collar professions. The extent operate with slim working capital and profit margins, while wholesale/retail
of job losses will depend primarily on an individual firm’s financial health, but trade is much more liquid and solvent. Meanwhile, the financial position for
we can look to aggregate sector financial positions to understand where industrial-oriented sectors is rather mixed.
stress is more likely to materialize.
• There have been a few notable retail bankruptcies in Canada to date,
• From a liquidity, solvency and profitability standpoint, office-using sectors including retailers Reitmans and Sail Outdoors and we expect more
such as FIRE and professional/scientific/technical services are better insolvency issues across both small business and larger enterprises.
positioned to withstand the current shock. These sectors are also more
responsive to work from home arrangements and face fewer operational
disruptions.
Source: BGO Canada Research, Macrobond, Statistics CanadaBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 12
CANADIAN ECONOMY
MTV economies hit hardest
Metro Employment Metro Employment
Thousands, May 2020 May 2020
-457 Oshawa, ON -3%
Toronto, ON 209 13%
-221 Saskatoon, SK -12%
Vancouver, BC 67 12%
-107 Toronto, ON -13%
Calgary, AB 29 7%
-6 Vancouver, BC -15%
Oshawa, ON 23 6%
-280 Regina, SK -11%
Montréal, QC 18 5%
-125 Calgary, AB -12%
Edmonton, AB 18 4%
-21 Winnipeg, Manitoba -8%
Saskatoon, SK 17 4%
Winnipeg, Manitoba -37 Hamilton, ON -15%
15 3%
Hamilton, ON -64 Edmonton, AB -16% 3%
11
Ottawa-Gatineau, ON/QC -102 KCW, ON -12%
9 2%
Regina, SK -15 Ottawa-Gatineau, ON/QC -13%
6 1%
KCW, ON -36 Montréal, QC -13%
5 1%
Victori a, BC -19 Québec, QC -13%
-9 -3%
Québec, QC -60 Next 19 Markets -12%
-12 -4%
Next 19 Markets -265 Victori a, BC -10%
-77 -5%
Change May, YTD Change from pre-GFC peak % Change May, YTD % Change from pre-GFC peak
• The impact of the job losses varies across metros, with larger cities such as • Montreal and Toronto are COVID-19 hot spots and the “interconnectedness”
Montreal, Toronto and Vancouver (MTV) among the hardest hit. Together across their metropolitan areas along with a greater propensity for global
MTV have lost more than 900,000 jobs combined this year, representing over travel are vulnerabilities. These risks are exacerbated by recent mass
50% of the national total. These metros saw the their labour forces shrink by gatherings and demonstrations.
13-15% and have nearly given back all the jobs that had been gained since
the Global Financial Crisis (GFC) within span of five months. Energy • The MTV economies are also dependent on trade and more exposed global
dependent economies in Alberta also experienced significant job loss as they economic conditions. Any material disruptions in the supply chains of
have been ravaged not only by COVID-19 but a plunge in oil prices. intermediary goods will negatively impact the manufacturing sector in
Montreal and Toronto. Meanwhile, weak global demand for commodities will
• As the main economic and corporate hubs in Canada, MTV are well weigh on Vancouver’s resources sectors. On the upside, these markets
positioned to bounce back, especially if tourism and consumer demand continue to be premier destinations for the tech sector, and this will be a key
recover quicker than anticipated. However, given their density, these metros driver of economic growth over the longer term.
are particularly vulnerable to a second wave and a more prolonged economic Source: BGO Canada Research, Macrobond, Statistics Canada
downturn.BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 13
CANADIAN ECONOMY
Uneven and prolonged recovery
Capacity challenges
Canadian Real GDP • With plenty of uncertainty regarding the state of the
Index, Q4'19 = 100 Or Q3'08 =100 pandemic, there is little consensus on the economic
GFC (Q3'08 - Q4'10)
2.25 yr. recovery outlook for Canada and the U.S. However, it is
105 becoming clear that it will not be a “V-shaped”
Oxford Economics (May 2020) recovery, as it is more likely to be uneven and
1.75 yr. recovery
100 prolonged. Household consumption drives each of
Moody's (April 2020) these economies and will play an important role in the
95
2.5 yr. recovery recovery phase. While many facets of the economy will
experience a swift bounce, absent a vaccine, many
service-oriented sectors are likely to face both capacity
90
and demand challenges.
85
Debt will weigh on consumer confidence
80 • Elevated household debt in Canada will weigh on
Q4'19 Q2'20 Q4'20 Q2'21 Q4'21 Q2'22 Q4'22 consumer spending, particularly for discretionary items.
The Canadian economy is also more dependent on
trade, especially with the U.S. with respect to
commodity and manufacturing exports. This poses
U.S. Real GDP additional challenges if U.S. and global demand remains
Index, Q4'19 = 100 Or Q2'08 =100 weak.
105
Oxford Economics (May 2020)
2.0 yr. recovery
100
GFC (Q2'08 – Q2’11)
95 3.0 yr. recovery
Moody's (April 2020)
2.5 yr. recovery
90
85
80
Q4'19 Q2'20 Q4'20 Q2'21 Q4'21 Q2'22 Q4'22
Source: BGO Canada Research, Moody’s, Oxford Economics, Macrobond, Statistics
CanadaBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 14
REAL ESTATE SPACE MARKETS
Entered the crisis from a position of strength
• Except for retail properties, the Canadian commercial
Under Construction real estate market was on firm footing heading into the
Vacancy
(% of Inventory) lockdown. Driven by an insatiable appetite for logistics
and warehousing space, the industrial market was
'00-'20 setting historical benchmarks in availability, rental rates
07Q4 19Q1 19Q4 20Q1 07Q4 20Q1
Avg and new construction. The downtown office market
was experiencing robust demand from a thriving tech
Multi-Residential1 2.6% 2.4% 2.4% 2.2% 2.2% 1.0% 3.5%
sector while leasing activity in transit-oriented
suburban markets was strong. The strength of the
Office2 10.3% 6.7% 11.3% 10.8% 10.2% 4.0% 4.0%
labour market, eroding home ownership affordability,
and robust immigration were key drivers of multi-
Office Excluding Alberta 9.8% 7.3% 8.0% 7.2% 6.6% 2.1% 5.1% residential demand. Retail was already undergoing a
significant transformation which will only be
Retail3 5.2% 3.3% 9.9% 9.1% 9.1% n/a n/a accelerated by COVID. While the death of retail is
greatly exaggerated, ongoing challenges will continue
Industrial4 5.2% 5.7% 3.0% 3.0% 3.1% 1.1% 1.3% to reprice the sector.
• The extent of the impact on these demand drivers is
1Two Bedroom units; No update for 20Q1 just beginning to unfold, but a fundamentally sound
2Six major markets (VAN, EDM, CAL, TOR, OTT, MON) commercial real estate market is well positioned to
3No update for 20Q1 withstand the economic shock without any major
4Availability rate dislocation. Growth drivers are most evident in large
corporate and population centres such as Vancouver,
Toronto and Montreal. Given their economic and social
diversity, these major Canadian markets should lead the
recovery and continue to thrive over the long term.
• To date, rent collection has surprised to the upside with
most of the stress occurring in retail, particularly
enclosed shopping malls. This suggests that
government support programs are working and that
perhaps businesses were more resilient than business
sentiment surveys indicated.
Source: BGO Canada Research, CBRE Econometric Advisors, MSCI REALPAC
Canada Property Index, CMHCBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 15
REAL ESTATE SPACE MARKETS
Quick take: Canadian sector outlook
MULTIFAMILY INDUSTRIAL OFFICE RETAIL
RENT COLLECTION: RENT COLLECTION: RENT COLLECTION: RENT COLLECTION:
95% 88% 92% 60%
SHORT TERM LONG TERM SHORT TERM LONG TERM SHORT TERM LONG TERM SHORT TERM LONG TERM
MODERATE RISK LOW RISK MODERATE RISK LOW RISK MODERATE RISK MODERATE RISK HIGH RISK HIGH RISK
• Housing demand is relatively • Shift to ecommerce has been • White collar economy relatively • Necessity-based retail a clear
inelastic; reduced population accelerated, particularly in the less impacted by the virus to date, winner as restaurant sales shift
mobility slows turnover packaged foods/grocery space but will not be spared from a back to grocery
• Temporary halt to immigration • Potential move towards higher cyclical downturn • Current conditions are
and potential disruption to 2020- inventory levels for greater • Conflicting impacts from increased accelerating the demise of
21 school yr. present risks supply chain flexibility, which remote work and increased already struggling retailers
• Tenants may seek lower cost could include re-shoring workplace distancing • Greater shift to online
housing in less dense locations • Extremely tight fundamentals • Long-term implications from purchasing but stores playing a
over the medium term position the sector to weather remote work unclear but risk to key role in fulfillment
the downturn the downside
Note: Rent Collection figures are BGO estimates based on third-party survey date and experience with managed portfolios. Source: BGO Canada Research
Information presented that is not historical fact is based on current expectations, estimates, projections, opinions and beliefs
and are subject to change. These figures are intended to reflect the overall institutional real estate market consisting of
core/core + asset and are presented for informational purposes only.BENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 16
MULTI-RESIDENTIAL
Weaker immigration to slow rental apartment demand
Unlikely to have a lasting impact
Canada Immigration
Thousand Permits • As expected, immigration is slowing and will remain slow
Temporary Foreign Workers Humanitari an in the short run as Canada continues to fight the
100 pandemic. Over the past decade, immigration has been
International Mobility Program International Study
90 the primary driver of population growth. Any sustained
Permanent Residents
80 deviation from pre-COVID levels will have a materially
negative impact on growth, particularly for Toronto,
70
Vancouver and Montreal.
60
-29%
50 27 • Compared to last year, the number of immigration
40
permits issued in March 2020 has fallen by nearly 30%.
19 We expect permit levels to remain suppressed for the
30
20 balance of the year and they could remain so over the
20 11 medium term as the federal government risks losing the
3 3 social license on immigration, especially if
10 4 4
9 6 unemployment remains elevated.
0
MarJ-19
- 2019 Mar - 2020
J-20
However, over the longer term, the following drivers
should persist:
10 Year Population Change 1. Canada remains an attractive destination due to its
Persons, From 2009 To 2019 political stability and high quality of life.
1,600,000 2. Dependence on immigration to alleviate the skilled
labour shortage from an aging population.
Aggregate Change
1,200,000 3. Strong tech sector demand for skilled labour as it
Aggregate Change Less Immigration continues to build critical mass in the major markets.
800,000 4. International students will continue to be attracted to
Canadian institutions for the quality of education and
-93%
400,000 the employment opportunities upon graduation.
-51% -46%
-91% -146% -53% • On balance, we don’t expect a net negative impact on
0 immigration over the long run. Large and diverse metro
areas such as Vancouver, Toronto and Montreal should
-400,000
continue to be the preferred destinations for
Toronto Vancouver Montreal Calgary Edmonton Ottawa international migrants.
Source: BGO Canada Research, Immigration Refugee Citizenship Canada, Statistics
CanadaBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 17
RETAIL
Headwinds mount, but early signs of recovery
Cyclical slowdown adds to secular challenges
Canadian Consumer Spending Pre-covid-19 • Real household consumption and retail sales had
% Change Y/Y already begun to contract prior to COVID-19. Slower
8% consumer and mortgage credit growth was a
contributing factor, but it was also a signal that
6% households were making improvements in their balance
sheets. This cyclical slowdown merely adds to the
4%
secular challenges plaguing the sector, namely rising
2%
ecommerce sales and shifting consumer preferences
from goods to experiences. With household
0% consumption comprising roughly 60% of Canadian
GDP, the economic recovery will depend largely on
-2% how well the consumer bounces back.
-4%
Real Household Consumption Real Retail Sales Inevitable bankruptcies pulled forward
-6%
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
• The forced shutdown of non-essential bricks-and-
mortar retailers due to COVID-19 will likely end up
pulling forward many retail bankruptcies that would
otherwise have taken years to unfold. In contrast,
Canadian Consumer Spending During Covid-19
essential retailers in grocery and pharmacy continue to
Y/Y % Change In Debit & Credit Card Spending
experience strong sales. Growth in ecommerce during
20% the pandemic has surged, but how much of this
increased demand will be sustained once economies
reopen?
0%
• The decline in consumer spending in March and April
has been unparalleled as credit and debit card
-20% transaction data from RBC indicates. However, these
data suggest that spending declines have bottomed out
and a recovery is underway
-40%
-60%
7-Jan 22-Jan 6-Feb 21-Feb 7-Mar 22-Mar 6-Apr 21-Apr 6-Ma y
Source: BGO Canada Research, Macrobond, Statistics Canada, RBCBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 18
INDUSTRIAL
Strong fundamentals provide a cushion
But industrial isn’t immune from a downturn
Industrial Availability Rate
% • Low availability and strong rent growth across the
country positions the industrial market well to “weather
9 the storm”. As of 2020 Q1, industrial availability was an
8 historically low 3.1%. Net asking rents increased by
12% year over year to nearly $9.00 per square foot.
7
Despite tight market conditions we expect weaker
6 demand to slow the pace of rent growth, particularly
5
for small bay product where tenants tend to be small
businesses and/or have a quasi-retail component.
4
3 • A lookback at availability rates and rent growth in prior
downturns reinforces a likely pullback in demand.
2
However, lower starting availability and massive growth
1 in ecommerce during the pandemic suggests that
0 demand for logistics and warehousing from both pure-
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 play and brick-and-mortar retailers will remain strong.
This will help mitigate any short-term deterioration in
fundamentals.
Industrial Net Rent
$/sf, 4-quarter MA, Peak To Peak • Longer term, deglobalization and the diversification and
re-shoring of supply chains, along with merchants
$7.00 carrying higher levels of inventory are also expected to
benefit demand. A balanced market is likely around 5%
to 7% availability. With the current development
$6.50 $6.32 $6.32
pipeline at just 1.3% of existing inventory, we would
have to see significant negative absorption to reach
GFC
vacancy levels of the GFC, let alone any significant
$6.00
market dislocation.
$5.47 $5.74 $5.51
$5.50
Early 2000s
$5.26
$5.00
1 5 9 13 17 21 25
Number of Quarters Peak to Peak
Source: CBRE Econometric AdvisorsBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 19
INDUSTRIAL
Logistics and warehousing activity bouncing back
Is the growth in ecommerce sustainable?
Commercial Trips By Properties
Compared To Pre-COVID-19 Levels, 5 Day MA As Of June 5th • Real time data capturing commercial traffic throughout
the downturn reinforces the strength of the industrial
120
market outlook. Logistics related activity has held up
Pre-COVID-19 Level very well and is bouncing back much quicker, especially
100 when servicing warehousing and grocery locations. The
frequency of daily commercial trips made to
80 warehousing locations now exceed pre-COVID levels.
Traffic surrounding industrial and retail locations has
60 been weaker but trending in a positive direction.
Victoria Day
40
Easter • Supply chains in British Columbia, Ontario and Quebec
are recovering swiftly with warehousing and grocery
20 commercial activity reaching or surpassing normal
Groce ry Industrial Retail Ware house Total levels (100) in recent weeks. This is especially true for
0 Quebec, where warehousing and grocery activities
19-Mar 31-Mar 12-Apr 24-Apr 6-Ma y 18-May 30-May were able to reach 61% and 8% above normal levels,
respectively. In Ontario, as the easing of lockdown
begins to take effect, the production and movement of
goods should gain further traction in the coming weeks.
Commercial Trips By Provinces
If the increases in ecommerce penetration are sustained
Compared To Pre-COVID-19 Levels, 14 Day High As Of June 5th
in a post-COVID world, logistics and warehousing will
Warehou se Quebec
be bigger drivers of industrial demand.
Warehou se Can ada
Warehou se Ontari o
Grocery Que bec
Grocery Briti sh Columbia
Warehou se Prai ries
Warehou se Br itish Co lumbia
Industri al Q uebec
Grocery Canada
Grocery Pr airie s
Grocery Ont ario Pre-COVID-19 Level
Retail Qu ebec
Industri al Bri tish Col umbi a
Retail Prairi es
Industri al Prairi es
Industri al Canada
Industri al O ntario
Retail Briti sh Colu mbia
Retail Canada
Retail On tario
0 50 100 150 200
Source: BGO Canada Research, GeotabBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 20
OFFICE
The biggest work from home experiment in history
Stigma has been broken
Working At Home Trend
% Of Full-time Employees Working At Home In The US • One of the biggest questions resulting from COVID-19
is with respect to future office demand. The bias
4.0 against remote work has been broken with the largest
3.5 WFH experiment ever undertaken. Throughout this
pandemic many firms have discovered that there has
3.0 been little negative impact to productivity and job
satisfaction. This view is far from unanimous, but it’s
2.5
clear that any prior stigma around remote work has
2.0 been lifted. Looking at data from the U.S., remote work
had been gaining momentum since 2005 and now
1.5
represents more than 3.0% of the labour force or 3.4
1.0 million Americans WFH. It’s estimated that roughly
7.0% of the labour force or 1.2 million Canadians WFH.
0.5 This pandemic is likely to accelerate the WFH trend
0.0 beyond COVID-19.
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Long-term risks to the downside
• Several prominent tech firms including Facebook,
Twitter and Shopify, have publicly stated that they are
allowing employees to WFH into 2021 and expect a
“Google Will Let Employees Work From Home Until The End Of 2020” significant percentage of their workforce to become
– Forbes remote over the long term. As the nature of knowledge
work evolves, the office of the future is likely not a
“Digital By Default: Shopify Is Letting Employees Work From Home Permanently” single location, but rather a network of spaces and
– Financial Post services that facilitate productivity and well-being. The
short-term outlook for demand is that as a return to the
“Facebook and Google Extend Working From Home To End Of Year” office occurs, the increase in space per in-office
- BBC employee to allow for physical distancing will be
roughly offset by an increase in WFH. The long-term
“Work From Home Forever? Big Tech Is Divided on That” implications of remote work are less clear, but the
– Bloomberg future demand for office space may decline.
Source: Federal Reserve Bank of St. Louis; IPUMS USABENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 21
OFFICE
Recession will be the primary driver of weakness
Depth of downturn and pace of recovery more
Office Using Employment uncertain than ever
Index: 2009 = 100, As Of May
• Fundamentals have benefited from the strength in
140 office-using employment growth since the GFC,
particularly in the tech sector. Office-using employment
has held up relatively well over the initial months of the
130
Professional, Scientific & pandemic, but a second wave of job losses could begin
Technical Services to impact white collar professions. As firms face
120
Finance, Insurance, Real revenue and cost pressures, they may look to eliminate
Estate & Leasing redundant or obsolete positions and invest in
110 automation. Long-term contractual lease obligations
will help mitigate any immediate cash flow impacts to
Public Administration office real estate, but it won’t be immune from
100
potential space rationalization.
90 • Despite headwinds, the tech sector growth story that
09 10 11 12 13 14 15 16 17 18 19 20 has driven demand in recent years is far from over. Big
tech is only getting bigger, and the foundation has been
laid with robust startup ecosystems in Canada’s largest
Office Net Asking Rents cities. The tech sector benefits more than any other
$PSF, 4-Quarter MA, Peak To Peak sector from agglomeration economies and Canada will
continue to remain a source of low-cost engineering
$18.00 talent.
$17.00
$16.42
• Outside Alberta, office fundamentals were strong
heading into the downturn. The downtown markets
$16.00 $15.53
$15.15
continued to thrive and demand for suburban office
GFC
space was escalating. The downtown markets in
$15.00 $14.46
$14.59 Vancouver and Toronto may not experience much of a
$14.73 $14.62
$14.00 decline in rents given historically low vacancies. Calgary
Early 2000s office rents had adjusted to the imbalances following
$13.00 the oil collapse in 2016, so they may not have much
$13.10 further to fall. All other markets could see a recovery in
$12.00 rents resembling the early 2000s. But if greater
1 5 9 13 17 21 25 29 33 37 41 45
structural shifts in demand begin to emerge, a
Number of Quarters Peak to Peak
prolonged recovery in rents could materialize.
Source: BGO Canada Research, Macrobond, Statistics Canada, CBRE Econometric
AdvisorsBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 22
REAL ESTATE INVESTMENT
Framework for where values may be headed
Employment Recovery in Months Capital Growth Through Downturns
100 = Beginning of Downturn MSCI REALPAC Canada Property Index (Index, 100 = Peak)
105 105
GFC Early 80s Early 90s 1990s Recession
100 100
Early 2000s Slowdown
95 95 Global Financi al Crisis
90 The Great Lockdown
COVID-19: The 90
85 Great Lockdown 85
80 80
75 75
70 70
65 65
60 60
0 12 24 36 48 60 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Years to Recovery
• The GFC provides a reference point for what may transpire, given the • The economic recovery of the GFC lasted about 2½ years and over that time
magnitude and duration of the expected economic fallout of the Great period institutional private real estate values held up relatively well, declining
Lockdown. Buoyed by a well-regulated banking system, limited exposure to by 10.6%. The Canadian commercial real estate market did not possess the
sub-prime lending and strong global demand for natural resources, Canada excess leverage, overbuilding, and deterioration of underwriting standards
escaped the GFC relatively unscathed. Cumulative GDP declined by 4.4%, that was evident in the U.S. In addition, Canada’s larger trophy assets were
while employment only fell 2.2%. In contrast, peak to trough GDP decline concentrated among institutional owners who were well-capitalized and had
in the current recession is expected to double that of the GFC. Employment long term investment horizons. This ownership profile still holds true.
has already fallen by14.1% and unemployment reached an all-time high Looking ahead, with the GFC as a guidepost it would not be unreasonable to
of 13.7%. see value declines of 10% to 20% given the anticipated uneven and
prolonged economic recovery.
Source: BGO Canada Research, Statistics Canada
MSCI REALPAC Canada Property IndexBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 23
REAL ESTATE INVESTMENT
Value declines will vary by property type
Impacts will be different than the GFC
Canadian Property Price Index
Value Index (2008 = 100)
• Value declines in the GFC were driven by stress in the
Super Regional Malls capital markets and a subsequent increase in risk
180 80% premium for real estate. This crisis originated as a
Residential health crisis which became an economic one that is
160 60% slashing company revenues. Property value declines
Regional Malls
this time will primarily result from erosion in net
140 40% Industrial operating income rather than cap rate expansion. As
such, real estate operating excellence will be critical to
120 20% Downtown Office property yield maintenance. Optimizing the tenant
experience to help businesses get back up and running
Neighbourhood Retail with a focus on health and safety will maximize
100 0%
Community Centres
occupancy and minimize lease turnover.
80 -20%
Suburban Office
• Beneath the headline expectations on values, different
property types will be impacted to varying degrees.
60 -40% While there has been little change to date, the declines
00 02 04 06 08 10 12 14 16 18 20
in enclosed mall values is striking, especially in
comparison to the GFC where they were one of the
better performing sectors. If you measure from peak
3-Month Change in Capital Value valuations, super regional malls are now off 6% and
Shaded bars show peak to trough declines in GFC regional malls are off 12%. It is believed that Canadian
mall owners are collecting less than 60% of their rent
Industrial -13.4% 1.4% and retail bankruptcies are expected to mount,
particularly for discretionary retailers. The acceleration
Residential -3.6% 0.7%
of ecommerce during this pandemic will only
Suburban Office -8.4% -0.1% exacerbate the challenges faced by mall retailers.
Community Centres -4.9% -0.4%
• Neighbourhood shopping centres are expected to fare
better as necessity-based retailers should be more
Ne ighbourhood Retail -9.4% -0.7% resilient. But they will face challenges as these are
often accompanied by service-oriented, people-facing
Downtown Office -8.1% -0.8% businesses that have been forced to close and will be
Super Regional Malls -5.0% -3.6% the last to reopen. Industrial and multi-residential
sectors will outperform on a relative basis for reason’s
Regional Malls -7.5% -5.3% we’ve previously highlighted. But the biggest
uncertainty is how the office sector will perform given
its evolving risks.
Source: MSCI REALPAC Canada Property IndexBENTALLGREENOAK CANADA PERSPECTIVE | JUNE 2020 24
REAL ESTATE INVESTMENT
Flight to quality will differentiate asset performance
Lower for longer
Central Bank Policy Rates
%, As Of May 2020 • The impact on valuations will also be bifurcated by
quality of asset – specifically, with respect to building
6 vintage and functionality as well as the quality of the
rent roll in terms of tenant credit and lease maturity
Canada US
5 profile. Even within sectors facing headwinds there will
be winners and losers. For example, exacerbated by the
4 pandemic, the bar for health, safety, and wellness has
been raised across all occupiers. As a result, the
3 demand for new-generation office buildings with
superior air-circulating systems and digital connectivity
2 will be higher.
1 • Broader macro trends are supportive for real estate
values. Short-term interest rates are expected to
0 remain low with monetary policy to remain
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 accommodative for the foreseeable future. Long-term
interest rates should also remain low driven by a shift
to “risk-off” sentiments, strong demand from excess
savings, and deflationary forces resulting from a
Institutional Quality Cap Rates vs. GoC 10YR Bond Yields
recessionary climate. While commercial lending spreads
10% 10%
remain above long-term averages, lower risk-free rates
Spread have resulted in an all-in mortgage rate that is
9% 9%
historically low and comparable to pre-COVID pricing.
8% Cap Rate 8%
7% 7% • Investors’ search for yield as sentiment shifts to “risk-
on” will benefit income-producing assets such as real
6% 6%
estate. This should continue to create adequate
5% 5% availability for both debt and equity capital. These
4% 4% factors should help mitigate cap rate expansion and
may even lead to cap rate compression for best-in-class
3% 3%
assets.
2% 2%
1% 1%
0% 0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: BGO Canada Research, Macrobond, Bank of Canada, Altus GroupBENTALLGREENOAK U.S. PERSPECTIVE | JUNE 2020 25 For institutional use only. About BentallGreenOak BentallGreenOak is a leading, global real estate investment management advisor and a globally-recognized provider of real estate services. BentallGreenOak serves the interests of more than 750 institutional clients with approximately $48 billion USD of assets under management (as of March 31, 2020) and expertise in the asset management of office, retail, industrial and multi-residential property across the globe. BentallGreenOak has offices in 24 cities across twelve countries with deep, local knowledge, experience, and extensive networks in the regions where we invest in and manage real estate assets on behalf of our clients. BentallGreenOak is a part of SLC Management, which is the institutional alternatives and traditional asset management business of Sun Life. The assets under management shown above include real estate equity and mortgage investments managed by the BentallGreenOak group of companies and their affiliates. For more information, please visit www.bentallgreenoak.com Phil Stone Principal, Head of Canadian Research (416) 681-7955 phil.stone@bentallgreenoak.com Tom Vo Vice President, Research & Analytics (416) 681-2728 tom.vo@bentallgreenoak.com Doug Poutasse Managing Director, Head of North American Research & Strategy (617) 790-0851 douglas.poutasse@bentallgreenoak.com This document is intended for institutional investors only. It is not for retail use or distribution to individual investors. The information in this document is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this document. Although BentallGreenOak has taken reasonable care that the information is accurate at the time of publication, such information is provided "as is" for only informational purposes as of the date of publication, and no representation or warranty (including liability towards third parties), expressed or implied, is made (or accepted) as to its accuracy or completeness or fitness for any purpose by BentallGreenOak or its affiliates. Under no circumstances will BentallGreenOak or its affiliates be liable for any direct, indirect, incidental, special or consequential loss or damage caused by reliance on this information or for the risks inherent in the financial markets. Information regarding the past performance of an investment is not necessarily indicative of the future performance of that or any other investment.
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