MISSISSAUGA, ON, Jan. 18, 2016 /CNW/ - Western Canada's near-term commercial property market performance will show significant regional variations in 2016. While Vancouver is expected to outperform, both economically and from a commercial real estate sector standpoint, the energy sector correction will limit progress in Alberta with modest economic recovery expected in 2016.
"The oil slump is expected to have less of a negative impact on Western Canadian economic activity in 2016, which bodes well for the commercial property sector," said Keith Reading, Director of Research at Morguard. "In Calgary and Edmonton, conditions will soften in early 2016, with stabilization anticipated in the back half. On balance, real estate remains an attractive investment alternative for investors as low interest rates and a low Canadian dollar will foster continued healthy returns."
In the 2016 Economic Outlook and Market Fundamentals Research Report released today by Morguard Corporation (TSX: MRC), the company published a detailed analysis of 2016 real estate trends to watch in Canada. The full Report is available at www.morguard.com.
2016 Investment Market Highlights - Western Canada
- There will be a healthy supply of low-cost debt and equity funds available in 2016, which will support transaction volume that should range close to the long-term average of $7.5 billion.
- Property values will remain close to the peak for the region's highest quality assets, although averages will likely decline in Alberta.
- 2016 investment performance will be largely income-driven, as property values continue to flatten.
- Investors with existing commercial real estate portfolios in Western Canada will look to boost income levels in order to achieve overall performance upside by adjusting leasing strategies and enhancing services for new and existing tenants.
- The combination of new supply completions and weaker demand will present a significant challenge for Western Canada's prime office markets. Calgary, Edmonton, and Vancouver will see the delivery of the majority of new supply over the next three-to-five years, resulting in lower occupancy levels and the downward pressure on rents. Most of the 3.2 million SF of new supply scheduled for completion in 2016 is in downtown locations.
- Industrial property sector trends will remain broadly positive in most locales over the near term. Warehouse and distribution sector companies will account for much of the expansion activity, both in newly constructed and existing properties. Rental market conditions will support income stability and modest growth.
- In 2016, Western Canada's retail sector will soften to some extent, due to regional and national influences. In Alberta, for example, the ongoing oil slump and resulting economic slowdown will have a negative impact on the region's job market and consumer spending. Broader industry trends including: shrinking stores sizes, e-commerce, and store closures will also hamper performance. By contrast, British Columbia's economy will remain robust in 2016, which will produce generally strong performance. Further east, Manitoba and Saskatchewan will see modest progress.
- The long-term health of the multi-suite residential rental market will remain in place in most Western Canada CMAs, although Edmonton and Calgary could see further softening in early 2016. Imbalance will continue to be an issue for families seeking rental accommodation, as vacant units will be in short supply.
Vancouver is forecast to finish "top of the class" with regard to economic growth and commercial property market performance in 2016, having delivered solid results in 2015. The key to the recent and forecast strength is a relatively strong economy. Over all of 2016, the Vancouver CMA is expected to post growth in economic output of 3.5%. This will be the sixth expansion of more than 3.0% of the past seven years. The 2016 result will be driven by an increase in the production of goods and services output. This positively impacts rental market demand across the major asset classes in 2016, following a strong 2015. In turn, owners will be treated to healthy and stable income performance, which will also be an attraction for investors. As a result, the region's real estate investment market will continue to post positive results. Property yields will be the lowest in the nation, in keeping with the long-term trend. This will do little to deter investors from acquiring assets in a market that is expected to be an economic growth and commercial property market performance leader in 2016.
Momentum is expected to build for Victoria's economy and commercial property markets in 2016, after a period of muted activity levels over the past few years. The CMA's economic output is forecast to increase by 2.6% in 2016, after a tepid 1.4% lift in 2015. The stronger economic outlook is predicated in non-commercial services wholesale and retail sector growth. The provincial public sector surplus anticipated for 2016 will also boost economic output. The economic strengthening will translate positively into the region's commercial property sector. While new supply will remain an issue in the office leasing market, demand should begin to improve. Improved labour market trends will help drive retail spending. A low Canadian dollar should boost tourist traffic and, in turn retail spending. In the industrial sector, conditions will stabilize as large block vacancies remain an issue. Multi-suite residential rental conditions will reflect significant imbalance as occupancy levels range at or near the 98.0% mark. Rents will generally hold at current levels across the major asset classes, although the multi-suite residential rents will continue to rise slowly. The largely stable and healthy rental market outlook will continue to support the health of the region's investment market. In short, conditions in the regional economy and commercial property markets will improve over the near term, against a backdrop of increased momentum.
Recent struggles in Calgary's commercial property market will continue through much of 2016, despite a stabilizing trend in the regional economy. The continued oil slump and new supply completions will erode office sector rental market fundamentals through at least the first half of the year. Additionally, the slowdown in the industrial leasing market of late will persist. In keeping with the 2015 performance, Calgary's retail leasing market will continue to outperform expectations, although a weak economy will present challenges. The multi-suite residential market will continue to soften. The generally weaker rental market performance in at least three of the four major asset classes will negatively impact investment results. For some, the downturn in overall performance will represent an opportunity to increase long-term investment exposure to this market. For others, it will represent a period of portfolio risk assessment. Regardless, 2016 will represent a period of weaker performance metrics for those who are active in Calgary's commercial property sector, even with improved regional economic performance over the period.
Edmonton's economic and commercial property markets will feel the ongoing effects of the region's oil sector correction in 2016. In the coming year, the Edmonton CMA will generate economic growth of roughly 1.8%. This outcome will represent a marked improvement over the slight economic contraction of 2015, but fall short of the annual average of 4.2% between 2012 and 2014. The 2016 slow economic growth performance will be due to the lingering effects of the global oil crisis, which is forecast to continue during at least the first half of 2016. For this reason, the CMA's commercial property sector will also be slow to rebound in the coming year. The combined effects of new supply and weak demand will erode office leasing fundamentals. In the industrial sector, leasing fundamentals will also be under pressure, given the strong presence of oil sector related businesses. Conditions in the retail rental market will stabilize, after a run of strong growth over the medium term. Multi-suite residential rental market conditions will also be eroded to some extent as well. Rental market conditions will impact investment performance. Income growth will be modest at best. Property values will likely stabilize. The net result will be weaker investment trends overall. Until the oil slump ends, Edmonton's economy and commercial property markets will register limited progress.
Stability will be the dominant theme for Regina's economy and industrial property market performance in 2016. Economic output is expected to increase by 2.4% in 2016, after a tepid 1.6% in 2015. Both results would represent a sharp downgrade from the 3.8% increase in output in 2014. Despite the slowing trend, this progress will translate positively into the region's industrial rental market, in driving positive space demand patterns. In 2015, demand for industrial space eased, resulting in rental market stabilization. In 2016, demand should improve slightly. This will support rental rate stability. Generally stable rental market conditions will factor into largely positive investment market conditions. Property values will also stabilize, along with overall investment trends. This is in keeping with the broader economic and industrial sector performance expected in 2016.
A modest uptick in Saskatoon's economic growth rate is expected in 2016, which will positively impact the CMA's retail property sector. After an uninspiring increase in economic output of just 1.7% in 2015, Saskatoon's economy is forecast to expand by 2.6% in 2016. Though down markedly from earlier in the decade, 2016 growth will produce job market progress and positive retail spending patterns. As a result, consumer spending will be a boon for the region's retailers and shopping centres. Occupancy therefore, will continue to range above the 95.0% mark, with average rents holding at the peak for the cycle. Once again, strong leasing fundamentals will drive investment performance. Retail assets will be popular with investors. Bidding competition will be brisk, given the market's long-term history of performance. In short, the forecast improvement in economic growth trends in 2016 will provide a solid foundation for retail property sector gains over the near term.
Winnipeg is on track for another period of economic progress and positive commercial property market performance in 2016. An eighth consecutive year of economic growth of better than 2.0% is forecast for the coming year, according to the latest Conference Board of Canada (CBOC) forecast. The 2.6% rise in economic output will help generate demand across the major property asset classes, was has been the case over the past few years. Consequently, the occupancy strength reported in 2015 will persist, with only slight increases or decreases likely. In turn, average rents will follow a similar path. Rental market conditions will continue to ensure owners achieve healthy income performance over 2016 as well. The healthy rental outlook will be a catalyst for investment market stability, with values holding at the peak for the cycle. In addition, the outlook for the sector will continue to attract investment funds to the region. Demand will surpass the supply of properties offered for sale and result in healthy bidding activity. In short, the near-term outlook for Winnipeg's economy and real estate market performance is broadly positive.
Morguard Corporation (TSX: MRC) is a major North American real estate and property management company. It has extensive retail, office, industrial, multi-suite residential and hotel holdings owned directly, or through its investment in Morguard REIT (TSX: MRT.UN) and Morguard North American Residential REIT (TSX: MRG.UN). Morguard also provides real estate management services to institutional and other investors. Morguard's combined real estate portfolio is valued at $15.5 billion.
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SOURCE Morguard Corporation
For further information: K. Rai Sahi, Chief Executive Officer, 905-281-3800; Keith Reading, Director, Research, 905-281-3800