Canada office market overview The national office market has witnessed vast variations across Institutions behind the majority of fourth quarter leasing geographies and markets, ending the year much the way it began. activity (>20,000 s.f.) The Greater Toronto Area (GTA) and Metro Vancouver markets remained in the drivers’ seat, both posting consistent positive absorption throughout the year, with Toronto in particular finishing Institutions off the year with a strong fourth quarter. Montreal’s steady 3% 3% economic and employment growth translated into 550,937 square 3% Technology feet of positive net absorption for the year. At the other end of the spectrum is Calgary which posted negative net absorption in all Professional and four quarters for a total of negative 4,004,131 square feet. 6% 17% business services Edmonton and Ottawa-Gatineau also lagged with negative net FIRE 7% absorption in three of the last four quarters. Collectively, the Creative national office market experienced a strong rebound in the fourth 14% quarter with 774,768 square feet of positive net absorption. The 8% Retail performance in the fourth quarter wasn’t enough to offset the first Healthcare and Life three quarters as the year and the year ended with 297,964 10% Sciences square feet of negative net absorption. However, without 14% Manufacturing Calgary’s absorption the national office market would have posted over four million square feet of net absorption in 2016 bringing it 14% Energy and utilities above the long term average of 3.5 million square feet ( 2007- Engineering 2016). Other Positive net absorption across several office markets Source: JLL Research in 2016 (s.f.) Leasing Activity GTA Downtown office markets were again the most active, fueled by the urbanization trend and better transit-accessibility. The fight for Vancouver and retention of talent is a key priority among companies, particularly in the technology sector, and as the millennial Montreal generation continues to cluster near central business districts, downtown office markets will remain the hot spot for leasing Halifax activity. Winnipeg Although there were no ‘blockbuster’ deals completed in the fourth quarter, a handful of leases in the 100,000 square foot range were Netabsorption(s.f.) Quebec City inked in the GTA and Montreal office markets. AMD renewed Ottawa-Gatineau 108,000 square feet at 1 Commerce Valley Dr. E, YellowPages secured 150,000 square feet at Le Nordelec in Montreal, and Edmonton Scotia Bank renewed 139,220 square feet at 1002 Sherbrooke W., also in Montreal. Institutions accounted for approximately 17 Calgary percent of leasing activity in the fourth quarter followed by Technology companies (14%) and Professional and business -6,000,000 -3,000,000 0 3,000,000 services (14%). Source: JLL Research JLL | Canada | Office Market Overview | Fourth Quarter 2016 1 Canada office market overview cont. Few large blocks in Downtown Vancouver and Toronto Construction peaks in 2016 but can demand keep up? In downtown Toronto and Vancouver, robust demand and a The current construction cycle reached its peak in 2016 with over limited development pipeline have caused the number of available 8.6 million square feet completed, of which 2.4 million were added large blocks to diminish rapidly. In downtown Toronto, the number in the fourth quarter. Three significant office towers opened their of large blocks (>100,000 s.f.) available has fallen from seventeen door to tenants in the fourth quarter – One York and the Globe over the last twelve months, to the current seven while in and Mail Centre (Downtown Toronto), and Edmonton Tower Vancouver only two blocks were available for lease at the end of (Edmonton) where the City of Edmonton will occupy nearly the quarter. With continued strong demand and no new large 400,000 square feet. All three towers were nearly 100 percent office developments announced in 2016, this number is expected leased on completion and as such will not add significant vacant to contract further. For the suburban market, the silver lining will space to the inventory. There is still over 12 million square feet in lie in properties who can offer large contiguous blocks of space the construction pipeline across Canada including Brookfield with excellent transit-accessibility and modern amenities. Whether Place East (1.4 m.s.f.) in Calgary, EY Tower (900,848 s.f.) in this will create significant activity remains to be seen - but it is Toronto and Stantec Tower (578,000 s.f.) in Edmonton. highly likely that companies will increasingly consider a dual option and house some of their operations in suburban markets Canada total construction completions by year (s.f.) until new product is made available downtown. 10,000,000 Vacancy continues to rise Forecast The Canadian office market has seen a consistent rise in vacancy 8,000,000 rates and the fourth quarter was no exception. Total vacancy climbed to 12.1 percent, a 20 basis point increase from the 6,000,000 previous quarter and a 500 basis point increase from the cyclical Squarefeet low reached in Q3 2012 (7.1%). Nationally, the sustained rise has 4,000,000 been driven primarily by a sizeable amount of new supply added 2,000,000 during the last phase of the current construction cycle. In addition as the Calgary and Edmonton office markets continue to feel the 0 effects of a weakened economy in Alberta, their vacancy rates 2013 2014 2015 2016 F2017 F2018 have reached 20.9 and 15.2 percent respectively, further Source: JLL Research contributing to the rise in the national vacancy rate. Cautious and optimistic will define 2017 The outlook for 2017 remains optimistic although we will see Downtown vacancy rates across office markets strong variations across the country. Toronto and Vancouver are expected to remain in the drivers’ seat with demand outpacing supply. Montreal ended the year with improving market Vancouver 8.3% conditions, which are expected to flow into 2017, fueled by businesses pursuit for talent, particularly tech talent in urban Calgary 21.1% locations. Conversely, we remain cautious on Calgary and Edmonton 17.2% Edmonton and both markets will continue to grapple with a Montreal 9.8% combination of negative economic growth and oversupply. Despite Calgary’s office market sentiment has bottomed, an Total Vacancy (%) Vacancy Total Ottawa 8.7% estimated one million square feet of “ghost space” (unoccupied GTA 6.9% but not marketed) office space in addition to new inventory will keep any market improvements in check for some time. Source: JLL Research JLL | Canada | Office Market Overview | Fourth Quarter 2016 2 Canada economic overview The national labour market posted gains in 2016 as employment In 2016, British Columbia recorded the fastest employment growth increased by 1.2 percent on a yearly basis and the workforce rate among the provinces for a second consecutive year, up 3.1 bulked up by 214,100 net new jobs, the strongest results for percent. The gains were across industries and we foresee more annual job growth since 2012. Canada beat economists’ demand for office space ahead as employment in the province expectations in December by adding 53,700 jobs. On a yearly has been trending upward since spring 2015. Quebec posted basis, employment increased by 2.0 percent in the service sector, employment gains of 2.2 percent followed by Ontario, up 1.2 while it declined by 1.6 percent in the goods-producing sector. percent. As expected in Alberta, employment fell by 0.8 percent The goods-producing sector was hardest hit by a decline in the on a yearly basis due to a slowdown in the economy. Apart from natural resources sector (oil and gas extraction, mining, quarrying Alberta, we note that the growth in employment is across and forestry), down 8.3 percent on a yearly basis. The mixed story industries and with unemployment rates decreasing further across is expected to produce an annual GDP of 1.8 to 2.0 percent for provinces, we expect the demand for office space to increase 2016. Office demand increased across several markets as ahead. employment in the information, culture and recreation industry rose by 6.5 percent on a yearly basis. We have noticed an upward Canada posted a trade surplus of $526 million in November, its trend in this industry and expect it to continue further in 2017. first in more than two years, as exports jumped and imports posted a modest gain. Exports rose 4.3 percent, mostly due to an Demand for office space expected to increase across increase in sales of metal and non-metallic mineral products and record exports to countries other than the United States. Exports service sectors (Jan-Dec +2.6%) to countries other than the U.S. increased 9.5 percent to hit a record $12 billion, beating the previous record set in December 2011. Imports increased by 0.7 percent in November as Canada 5,000 brought in more energy products. 4,000 Federal measures to tighten mortgage eligibility rules, soft income 3,000 growth and the upswing in interest rates after the US presidential election suggest that the housing sector might provide less 2,000 support to the economy in coming quarters. Housing starts in Employment (‘000) Employment 1,000 Canada decreased to a seasonally adjusted annualized rate of 183,989 units in November 2016 (compared to 212,271 units in 0 2015) from a downwardly revised 192,297 units in October and Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec below market expectations of 191,200. Urban starts decreased in Business, building and other support services Ontario, Quebec and in Atlantic Canada, but increased in British Columbia and in the Prairies.