REALPAC / FPL Canadian Real Estate Sentiment Survey
Real property. Real leadership.REALPAC / FPLCanadian Real EstateSentiment SurveyQ42020
The REALPAC / FPL Canadian Real Estate Sentiment SurveyTable of ContentsTopline Findings3Data Collection3General Market Conditions5Asset Values8Debt Capital9Equity Capital10Participants11ExhibitsExhibit 1A:REALPAC/FPL Canadian Real Estate Sentiment Index5Exhibit 1B:Real Estate Roundtable Sentiment Index (U.S.)6Exhibit 2:Perspectives on Real Estate Market Conditions7Exhibit 3:Real Estate Asset Values8Exhibit 4:Availability of Debt Capital9Exhibit 5: Availability of Equity Capital10 2021, Ferguson Partners LLC. All rights reserved. No business or professional relationship is created inconnection with any provision of the content of this document (the “Content”). The Content is providedexclusively with the understanding that Ferguson Partners LLC is not engaged in rendering professionaladvice or services to you including, without limitation, tax, accounting, or legal advice. Nothing in theContent should be used in or construed as an offer to sell or solicitation of an offer to buy securities orother financial instruments or any advice or recommendation with respect to any securities or financialinstruments. Any alteration, modification, reproduction, redistribution, retransmission, redisplay or other useof any portion of the Content constitutes an infringement of our intellectual property and other proprietaryrights. However, permission is hereby granted to forward the Content in its entirety to a third party as longas 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 necessarilythe views of Ferguson Partners LLC or such participant’s employer.2
The REALPAC / FPL Canadian Real Estate Sentiment SurveyREALPAC (Real Property Association of Canada), FPL Advisory Group, and Ferguson Partners arepleased to announce the results from the fourth quarter 2020 REALPAC/FPL/Ferguson PartnersCanadian Real Estate Sentiment Survey. The survey is the industry’s most comprehensive measureof 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 andasset managers, financial services providers, and operators and related service providers. Thequarterly survey measures executives’ current and future outlook on three topics: (1) overallreal estate conditions, (2) access to capital markets, and (3) real estate asset pricing. Surveyrespondents represent the retail, office, industrial, hotel, multi-family, residential, and seniorresidential asset classes.Topline Findings Moving into 2021, uncertainty in the Canadian real estate market continues, as many remainhopeful that a vaccine is imminent. Transaction volume remains low, resulting in inconclusive asset valuations. Distressed transactionactivity has yet to emerge in Canada. Lenders remain active. There is an increased level of scrutiny during the due diligence process withmany less willing to engage in higher risk investments. Equity capital is available; however, investors are increasingly discerning when evaluatinginvestment track records and leverage ratios.Data CollectionData was collected during October 2020. In the report below, survey responses are supplemented byexcerpts from interviews conducted with senior executives from Canadian property developers andowners, institutional investors, asset managers, and other organizations.3
The REALPAC / FPL Canadian Real Estate Sentiment SurveyPlease direct all inquiries regarding this study to:Michelle RutledgeJeff HauswirthKris KolencVice ChairmanManager, Research & SustainabilityFerguson PartnersTD Bank Tower66 Wellington Street West,Suite 4020Toronto, Ontario M5K 1E7CanadaFerguson PartnersTD Bank Tower66 Wellington Street West,Suite 4020Toronto, Ontario M5K 1E7CanadaREALPAC77 King Street WestTD North TowerSuite 4030, PO Box 147Toronto, Ontario M5K 1H1Canadat 647.417.3157e mrutledge@fergusonpartners.comw fergusonpartners.comt 647.417.3155e jhauswirth@fergusonpartners.comw fergusonpartners.comt 416.642.2700 x238e kkolenc@realpac.caw realpac.caDirector – Canada4
The REALPAC / FPL Canadian Real Estate Sentiment SurveyGeneral Market ConditionsMoving into 2021, uncertainty in the Canadian real estate market continues, as many remain hopeful that avaccine is imminent.“Out of the gate, everything paused in April [2020]. Wewere surveying the damage. We saw a big surge back insummer with land transacting quite rapidly, and officeopportunities coming onto the market.”“The business environment mimicked the personalenvironment.”“[Now in October 2020], the fog has come back as peopletake a pause while looking at what the future holds.”“I would describe market conditions at a lower level in Q42020 versus 2019, but still stable and reasonable. There’shigh liquidity in the marketplace for mortgage debt, andrefinance opportunities are very solid. We are seeing fewertransactions as there are not as many sales. Refinancing orrepositioning financing and development financing are allquite strong.”“Economic growth outlook is uneven. After an initialbounce back from the COVID-19 decline, growth will bemoderate. High-touch sectors like restaurants and travelwill take longer to recover. The second wave will continueto negatively impact the economy over the last few monthsof 2020, and likely through much of 2021. However, weenter the final quarter of 2020, a light at the end of thetunnel appears to be forming – either with a vaccineor acceptance that COVID will be around longer, andadjustments will be made.”“The next 12 months will see a tremendous number ofsmall businesses fold and the result will be much highervacancies, lower rents, and higher cap rates. Overall 2021and 2022 will be very difficult for commercial real estate;however, the downturn will be good for transactions in thelater part of 2021, and much of 2022.”“[There are] more unknowns today than at any given timein the last 20 years. With the exception of hospitality andretail, private markets are slower to react as players inthe market try to digest. [There’s a] slow realization thatpreviously unassailable sectors like office and residentialwill be impacted, but the extent is a question mark. Ifunemployment remains where it is for a period of time,and government support ebbs, it will have an impactacross the spectrum. The biggest factors in a recovery aretreatments/vaccines for COVID-19 as well as continuedgovernment support, and a subsequent stimulus/recoveryplan.”“We are noticing a discrepancy in REIT pricing versus theprivate market. Even among apartment and some industrialnames, which continue to see strong private demand.”“As a population, we need to return to our normal workactivity and patterns in a safe manner. This will havea dramatically positive impact on our economy, ourExhibit 1A:REALPAC/FPL Canadian Real Estate Sentiment 70605850434028302010Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 18‘19‘20Note: Data was not collected in Q4-19 and Q1-20 for the REALPAC/FPL Real Estate Sentiment Index.5
The REALPAC / FPL Canadian Real Estate Sentiment Surveymental health, and our general personal and family wellbeing. Clearly, there are exceptions for individuals thatare aged, have compromised health conditions or otherunique circumstances; and these situations need to bemanaged with safety, support, and compassion. For others,employers have gone to great expense to make workplacessafe. Further, people generally behave in their workenvironments. We are seeing the spread of the virus insocial settings - the places that people are least compliant,yet we are relaxing those restrictions and not focusing onthe benefits that a safe work-environment provides. Ifwe want to improve the economy, we need to get back towork, restrict our personal social gatherings, and commitpersonally to supporting the businesses that are part ofour lifestyle. Government support, while critical, cannotdo this alone. Kudos to the BC government and the BCpublic employees union for announcing and beginning theimplementation of a return to the workplace program.”“There remains a significant amount of uncertaintyregarding the next 12 months, as well as the lasting impactsof the pandemic. Companies that are able to adapt andpivot will be well-positioned in the medium- to long-term.Some asset classes may see significant and permanentdecreases in investment over the next few years as changesin consumer preference accelerate (malls, office space thatis not flexible, hotel).”“Ongoing restrictions and a voluntary transition to remoteworking will likely have a significant impact on officeoccupancy in the near-term as major employers mayactively look to offer employees more flexible work termsand 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 continueto drive online purchasing trends which could continue toimpact bricks and mortar retail. From a policy perspective,governments should transition to a more targeted approachto “flatten the curve” and enable as many businesses aspossible to continue to operate.”“The retail industry will not recover for a while. I believe2 years minimum and realistically 3 years, as there will belots of premises to backfill or redevelop. The consumer isthere, and the rebound was strong in many retail segmentsonce 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 disruptionsthat need to be resolved. The quantum and timing ofgovernment aid needs to be set forth as the uncertainty ofthat is causing further issues rather than being helpful.”“There is more and more discussion around time theft byemployees. 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).”Exhibit 1B:Real Estate Roundtable Sentiment Index 070616050444030272010Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 �18‘19‘20* 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 believeconditions are “much better” today than one year ago and will be “much better” one year from now. The REALPAC/FPL Canadian Real EstateSentiment Index and the Real Estate Roundtable Sentiment Index, organized by FPL Advisory Group, are created using the same surveymethodology, questions, and timing.
The REALPAC / FPL Canadian Real Estate Sentiment Survey“Technology is an enabler; real estate as a whole is goingthrough a transformation period. We need great talent atthe table to envision what that’s going to look like. Bigplatforms are looking at changing the fundamental coststructure. What will it look like 10 years from now?”“Retail immediately took a dive [as COVID-19 numbersrose and lockdowns were implemented] with office stillhaving a lot of question marks.”“We are seeing slow but thoughtful leasing velocity. Thebiggest impact in the office space is from a valuationperspective. 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 biggestimpact 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 mortgagepayments catch up to people.”“We expect contraction in the housing market, andcontinued rent compression.”“COVID-19 is putting huge pressure on landlords andretailers. [We’re all] worried about what the banks will doin this situation.”“It is difficult to make sweeping comments about theoverall market, as certain segments like multi-family andindustrial 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 multiresidential and warehouse sectors are almost unaffected.”“We are entering the first stage of a 12-24 montheconomic recession. Some sectors will outperform, butmost will experience moderate to significant corrections.All levels of government will play a key role on the lengthand depth of these recessionary conditions. Ultimately,government policies/programs will have significantimplications impacting the real estate markets.”“It’s a tail of two markets if you’re looking at industrialand office. Office is full of uncertainly and has had fewtransactions. Industrial is a very strong market, withhistorically low vacancy rates and lease rates acrossCanada. Rental rates on industrial are approaching officerates, if not passing them. For manufacturing, there is astrong consumer demand for products. It’s hard to findquality space. Everyone is talking about the Amazons ofthe world with Canadian Tire and Walmart increasingwarehouse space. Companies will be deciding if work fromhome actually increases their employees’ productivity,which will influence the office sector. Regardless of howthe vaccines roll out, office will still be a necessity, and Ibelieve that there will be a desire to go back into office anda fear of missing out on promotions if employees don’t getface time. Small retailers like Queen Street and downtownOakville have lots of vacancies. Power centres are beingnegatively affected. Big shopping centres are doing better.A lot of retail is repositioning into other uses.”Exhibit 2: Perspectives on Real Estate Market Conditions (% of respondents)One Year From Now vs. TodayToday vs. One Year Ago100MuchbetterSomewhatbetterAbout 20U.S.81822118243Q3-20Q4-20Canada19202Q4-20U.S.7
The REALPAC / FPL Canadian Real Estate Sentiment SurveyAsset ValuesTransaction volume remains low, resulting in inconclusive asset valuations. Distressed transaction activity has yet toemerge in Canada.“We took the view that, i) office would be impacted byslower leasing, ii) retail would see value hit, iii) multifamily would hold, and iv) industrial is up, non-stop, andthe hottest asset class.”Q1 was super strong, while Q2 and Q3 have really sloweddown. The user side is doing very well because interestrates are so low. Cap rates haven’t increased and a lot ofthat is due to the low interest rates.”“Although it’s a bit harder to put a pin in valuationsbecause of the level of transactions, property values areholding. Cap rates are holding and debt costs are lower,so investors continue to be attracted to the space. I thinkit’s a reflection of the amount of private capital in themarketplace and those still actively seeking investmentsin the commercial space.”“At a macro level, rent rolls are being suppressedbecause businesses are uncertain. With that being said,if your rent is questionable, that’s going to have animpact on your asset value and it will spread a lot ofcold water on transactions. Within retail, the pandemicis driving the impact. The bricks and mortar contestagainst online will continue. Tenants are in trouble asthe pandemic accelerates asset devaluation in retail. Onthe commercial side, I think that it is a temporary issue.I see the watermark on operating expenses showing upright now. There’s not a lot of movement in assets sothere’s not a lot of transactions to show if this is a truedownturn. Depending on a company’s capital structure,organizations might get aggressive on devaluing assetsto give themselves a bit of head room for the next coupleyears, but that’s more aggressive tax planning. There’sdevaluation because of rent, and the watermark onoperating expenses. This is where technology comes inand delivers. In a building that is not run efficiently,technology will offer operating costs on a fixed basiscausing NOI to go up.”“There is a bifurcation in real estate values. Residentialand industrial are still doing well while retail and, to alesser extent, office is struggling. This will not change asthere are some systemic changes taking place in the use ofreal estate.”“The question regarding asset values is so broad, it’sdifficult to say. It differs across asset classes. Retail andoffice, plus seniors and nursing, are down, but multifamily is relatively unchanged so far and industrial, withits COVID-19 resilient tenants, may be higher.”“Industrial is up. Transaction volume is down. Officehasn’t done much, again there’s not enough transactionvolume. No distressed sales out there yet that I’ve seen.Exhibit 3: Real Estate Asset Values (% of respondents)One Year From Now vs. TodayToday vs. One Year Ago100MuchhigherSomewhathigherAbout -20U.S.0162Q3-2065Q4-20Q4-20CanadaU.S.
The REALPAC / FPL Canadian Real Estate Sentiment SurveyDebt CapitalLenders remain active. There is an increased level of scrutiny during the due diligence process with many lesswilling to engage in higher risk investments.“Everybody put a pause on issuing debt. The safest [assetclass for placing debt] seems to be multi-family. It’sdifficult to access mezzanine debt or anything aggressive.”“We’ve been in the market three to four times for differentdebt capital.”“Competition among lenders is high as everyone is lookingfor assets. I would say that the sector has shrunk in thatlenders are weary of certain asset classes (retail and officein particular). If you have the same volume target but youdon’t want to lend on retail or office, then the competitionincreases for multi-family and industrial.”“The dichotomy among the lending community isstaggering. Rates change so quickly.”“Low interest rates are a major positive, helping lower ourcosts, while revenues decline.”“We prefer Tier 1 and Tier 2 banks. Tier 1 banks aremost cautious while Tier 2 banks are more willing tohave a conversation. Alternative lenders see this as anopportunity.”“The debt side is doing great compared to last year withregards to refinance. Anyone looking to buy or lend isdoing a lot more due diligence.”“I think that most of the lenders in the debt space arefinding success in doing business. We’ve got our secondhighest volume on record so it’s reasonable.”Exhibit 4: Availability of Debt Capital (% of respondents)One Year From Now vs. TodayToday vs. One Year AgoMuchbetterSomewhatbetterAbout 20 Q4-20Canada25221700Q3-20 Q4-20U.S.12429224Q3-20 Q4-20Canada50382502910152Q3-20 Q4-20U.S.9
The REALPAC / FPL Canadian Real Estate Sentiment SurveyEquity CapitalEquity capital is available; however, investors are increasingly discerning when evaluating investment track records andleverage ratios.“Equity is minimal.”“People are looking for anywhere where they can find adecent level of risk adjusted return. There is a lot of capitalmoving into the space in private markets in general,whether it’s equity or debt.”“[Equity capital is] not as bad as we thought it wouldbe. Alignment between objectives with investors is veryimportant. We would not go on a road show right now.”“We have had groups express interest. Investors arelooking for a history of being conservative with debt. Thereare more conversations around risk mitigation versus trackrecords.”Exhibit 5: Availability of Equity Capital (% of respondents)One Year From Now vs. TodayToday vs. One Year AgoMuchbetterSomewhatbetterAbout 5295043110301018Q3-20 Q4-20Canada01007550472525010100412Q3-20 6Q3-20 Q4-20Canada04Q3-20 Q4-20U.S.
The REALPAC / FPL Canadian Real Estate Sentiment SurveyParticipants(Please note that this is only a partial list. Not all survey participants elected to be listed.)ACM Advisors Ltd.Ishbel BuchanCrestpoint Real Estate Investments Ltd.Colin MacKellarLincluden Investment Mgmt. Ltd.Derek WarrenAdgar Canada Inc.Chris TambakisCrombie REITDonald ClowMIYA Consulting, Inc.Kevin MiyauchiAlberta Investment ManagementCorporationMicheal Dal BelloCrown Realty PartnersLes MillerMorguard Investments LimitedPamela McLeanKeith ReadingAlberta Teachers Retirement FundTino ArgimonAvison Young (Canada) Inc.Mark RoseBentallGreenOakPaul MouchakkaaBrookfield Asset Management Inc.Ash LawrenceBTB Real Estate Investment TrustMathieu BolteCanada ICI Capital CorporationDale KleinCanada Life Assurance CompanyJim AndersonCanada Post CorporationTom McCullochCanadian Mortgage Capital CorporationRobert GoodallCanderel Management (West) Inc.Richard DiamondCT Real Estate Investment TrustLesley GibsonDell Corporation Realty Ltd.Michael DellDorsay Development CorporationGeoffrey GrayhurstNova Scotia Pension ServicesCorporationChris TaylorRaymond James BankDaniel SimunacEpic Investment ServicesCraig ColemanRealstar Group, Inc.Wayne SquibbGreg SpeirsFengate Asset ManagementJaime McKennaRealtech Capital Group Inc.James McPhersonForgestone Capital Mgmt. LPTrevor BlakelyRioCan Real Estate Investment TrustEdward SonshineGeoffrey L. Moore Realty, Inc.Geoffrey MooreRYCOM CorporationCasey WitkowiczGranite REITKevan GorrieTeresa NetoSkyline Group of CompaniesMike BonneveldInvestment ManagementCorporation of OntarioBrian WhibbsTD Asset Management Inc.Jeff TrippVancity Community Investment BankCaroline RauhalaIvanhoé Cambridge Inc.Nathalie PalladitcheffCanFirst Capital ManagementAllan PerezPaul BraunKingSett Capital Inc.Anna KennedyCMLS Financial Ltd.David FranklinKircher Research Associates Ltd.Hermann KircherColliers International Group Inc.Scott AddisonRoelof van Dijk11
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