Shifting Dynamics in a Maturing Cycle

With the Bank of Canada bumping its lending rate for the third time in January, we are clearly in the midst of
a rising interest rate environment, but that doesn’t mean rates will rise as quickly as they once fell. Economic
headwinds like the new stress-test rules for homebuyers and rising mortgage rates are putting added pressure on
debt-ridden Canadians. This, along with the looming NAFTA renegotiation threat, suggests the central bank will
move cautiously.

While traditional office-using sectors are expected to experience slower growth as we approach 2019, the tech
sector will remain a demand leader in markets where technology has a sizable presence. Continued growth will
support strong investment fundamentals, particularly where technology is a key driver.

Industrial markets are poised to reap another year of strong sales activity driven by the ongoing evolution of the
retail sector and a low interest rate environment.

Demand for smaller multi-residential properties in some markets has begun to cool as prospective buyers weigh
expected returns against higher mortgage rates and rising long run bond rates. Ontario has seen some softening,
supported in part by the added burden of rent controls introduced in 2017.

As ten-year Government of Canada bond yields rise, investors are likely to seek out stronger returns by focusing
on asset classes and secondary markets where above-average returns can be achieved.

A key sector to watch? We see fundamentals strengthening across suburban premium-class office product and a
narrowing of the cap rate spread between suburban and downtown premium office properties.

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