CANADIAN ECONOMIC OUTLOOKAND MARKET FUNDAMENTALS20

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FIRST QUARTER UPDATE

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Copyright © 2020 by Morguard Investments Limited. All rights reserved. Any request for reproduction of this Research Report should be directed to: Keith Reading Director of Research 905-281-5345 kreading@morguard.com

FORWARD-LOOKING STATEMENTS DISCLAIMER

Statements contained herein that are not based on historical or current fact, including without limitation statements containing the words “anticipates,” “believes,” “may,” “continue,” “estimate,” “expects” and “will” and words of similar expression, constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and regionally; changes in business strategy; financing risk; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; liability and other claims asserted; and other factors. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Publisher does not assume the obligation to update or revise any forward-looking statements.

TABLE OF CONTENTS

FIRST QUARTER UPDATE

CANADIAN ECONOMIC OUTLOOKAND MARKET FUNDAMENTALS20

20

4 Q1 2020 UPDATE | 2020 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

BANK OF CANADA ACTED QUICKLYThe Bank of Canada (BofC) acted quickly in support of the Canadian economy and financial system during the first quarter in order to combat the effects of the COVID-19 pandemic. The virus has had a substantially negative impact on most sectors of the Canadian economy. The BofC has taken steps to try to ensure consumers and businesses have access to credit. In so doing, more companies are expected to be able to pay their employees and households can continue to purchase necessities and pay bills. Without access to credit the economic downturn would worsen, and the subsequent recovery would likely take longer. The BofC lowered interest rates three times during March to support economic activity and stabilize inflation. Initially, the bank’s overnight rate was dropped 50 bps on March 4th, followed by a further 50 bps drop on each of March 13th and March 27th as the near-term economic outlook worsened. In addition, the bank endeavoured to provide support to financial markets with measures to increase liquidity levels in certain core funding sectors. The acquisition of Government of Canada securities in the secondary market was implemented so that banks would continue to renew mortgages. A trio of other measures, the Bankers’ Acceptance Purchase Facility, the Provincial Money Market Purchase program and Commercial Paper Purchase Program, was implemented to further boost liquidity and access to credit. The BofC also addressed the need to increase liquidity for financial institutions, as part of its broader program of quick and decisive action implemented during the first quarter to combat the negative effects of the COVID-19 crisis on Canada’s economy and financial markets.

INFLATION RISK DROPPED SHARPLYNear-term inflation risk dropped significantly during the first quarter. Previously, moderate risk was a constant during 2019, due in part to the low oil prices and a relatively slow economic growth trend. By the end of the first quarter of 2020, economic activity effectively stalled with spreading of the COVID-19 virus. At the same time, oil prices plunged to rock bottom as supply increased significantly and demand dropped sharply. Even as a record cut in oil production was announced in April, demand was expected to remain weak. With few prospects of rent growth and historically low demand across most sectors of the economy over the near term, inflation pressure and associated risks were expected to remain very low until the global and Canadian economies stabilize.

EQUITY MARKETS TURNED SHARPLY NEGATIVEGlobal equity markets turned sharply negative during the first quarter due to the spread of the COVID-19 virus and resulting economic fallout. Major markets across the globe racked up significant losses over the three-month period. U.S. equities plunged by the greatest percentage in a single quarter dating back to 2008 while international markets delivered negative double-digits returns. The S&P 500, Nikkei 225, Dow Jones Industrial Average, the FTSE 100 and the DAX dropped by between 20.0% and 25.0% during the first quarter of the year. Closer to home, the S&P/TSX Composite posted a negative 21.6% return, which was the seventh worst quarterly performance in its history. Over 90.0% of companies contained in the index finished the quarter in negative territory, led by the energy, health care and discretionary consumer spending sectors. Energy companies were the hardest hit. The decision of OPEC and non-OPEC countries to flood the market with oil, resulted in another sharp price drop. Weakened global demand resulted in additional downward pricing pressure and reduced capital outlays and dividends. Oil sector job losses also began to mount. Over the near term, the COVID-19 crisis was expected to translate into further global equity market volatility, following the markedly negative performances of the first quarter.

FINANCIAL REPORT

60100140180220260300340380420460500540580620660

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4 =

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Global IndicesTrending of Global Price Return Indices

Euro D.J. Stoxx 50 France CAC 40 German DAXUK: FTSE 100 S&P/TSX Composite

Source: RBC Capital Markets

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04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

%

National InflationCPI Measures, % Change Over 1 Year Ago

Core CPI (CPIX) Total CPI Inflation Control TargetSource: Bank Of Canada, Statistics Canada

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2.0

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Mortgage SpreadsCommercial Mortgage Rates Vs. 5-Year GOC Bonds

5-Year Commercial Mortgage Rate 5-Year GoC Bond YieldSource: RBC Capital Markets, Bank of Canada

-1.0

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1.0

2.0

3.0

4.0

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%

Official Policy RatesInternational Monetary Conditions

US Federal Funds Rate Cdn Overnight Lending RateBank of Japan Policy Rate European Central Bank Target Rate

Source: Bank Of Canada, Federal Reserve Board, European Central Bank, Bank of Japan

2020 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS | Q1 2020 UPDATE 5

INVESTMENT MARKET RISK SPIKED Canadian commercial property investment market risk spiked during the first quarter of 2020, due primarily to the global spread of COVID-19. The spread of the virus during the quarter had a materially negative impact on investor confidence, given an increasingly uncertain global outlook. By the end of the quarter, the global economy had slipped into recession and equity markets moved into bear territory. In general, financial market volatility surged due to the spread of the virus and the abrupt slowdown in economic activity across the globe. At the same time, concerns related to credit market liquidity including short-term funding also spiked during the first quarter. However, to some extent, the Fed has eased funding concerns with various injections of liquidity. Corporate credit markets were also a source of concern for investors, with high levels of debt accentuating the effect of the economic weakening. In addition to concerns related to financial markets, investors prepared for weaker performance in their existing commercial property portfolios. The closure of all “non-essential” businesses due to COVID-19 was expected to erode rental income, despite the provision of government funds to help families and businesses pay their bills. In the retail sector, the threat of some stores closing permanently is increasing investor uncertainty. The uncertain road to recovery and how long the effects of COVID-19 would last were arguably the biggest concerns for investors during a period of heightened commercial property investment sector uncertainty in the first quarter.

INVESTMENT SALES ACTIVITY CONTINUED TO SLOWCanadian commercial investment property sales slowed during the first quarter, continuing the trend of the second half of 2019. The slower pace was initially a product of availability. That is, the reduced availability of properties for sale ensured the record pace of the past few years would be difficult to match. At the same time, the increased uncertainty in the retail industry over the past few years reduced the rate at which properties sold. As the first quarter progressed, it was clear that a broader based slowdown in investment sales activity was about to unfold. The spike in uncertainty related to the Coronavirus spread and plunge in economic activity resulted in a degree of hesitancy on the part of investors. In some cases, this has halted negotiations and will likely result in the continued reduction in closed transactions. Investors, as in past market downturns, are expected to wait and see how the global economic and financial backdrop plays out before acquiring properties. Conversely, those inclined to bring properties to the market have pulled back, preferring to let the period of uncertainty pass.

NEAR-TERM INVESTMENT MARKET CONDITIONS WILL DETERIORATE Canadian commercial investment property market conditions will deteriorate over the near term. The continued spread of COVID-19 and resulting global recession will drive investors to the sidelines awaiting a more stable backdrop. For some, the challenge of maintaining portfolio income performance will be emphasized. Before the end of the first quarter, tenants had already approached owners for rent relief. In some cases, there is the threat of permanent closure. The income levels of owners will be eroded to some degree over the near term, along with overall asset performance. Property values are forecast to decline, given the downward income trajectory and broader market uncertainty. Landlords with secure long-term leases in place will outperform. However, broader sector performance will be compromised. Portfolios with significant exposure to discretionary spending will be hard hit over the near term. Conversely, portfolios exposed to necessities business sectors like groceries and health care will see more stable overall performance. On balance, however, market conditions will soften over the near term until the global economic and financial uncertainty has abated.

INVESTMENT REPORT

0.0

5.0

10.0

15.0

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25.0

1-Year 3-Year 5-Year 10-Year

22.9

6.9

6.3 6.

9

1.7

1.2

0.9

0.9

12.7

6.6

5.2 7.

1

22.8

12.8

10.0 11

.3

6.7 6.8

6.8 9.

2%

Relative PerformanceComparing Annualized Returns To Dec 2019

S&P/TSX Index T-Bill FTSE Long BondTSX REIT Index RCPI/IPD Index

Source: © MSCI Real Estate; RBC CM; TSX Datalinx; SCM; PC Bond Analytics (Dec 2019)

0.02.04.06.08.0

10.012.014.016.018.0

1-Year 3-Year 5-Year 10-Year 15-Year

16.4

13.3

10.3

10.2

9.7

7.1 6.8

6.5

8.8 9.

9

1.8

3.8

5.2

9.2 9.7

11.4

10.6

9.6 10.1

10.0%

RCPI/IPD ReturnsAnnualized Returns By Property Type To Dec 2019

Industrial Office Retail Apartment

Source: RCPI; © MSCI Real Estate (Dec 2019)

0.05.0

10.015.020.025.030.035.040.045.050.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

$45.1

$14.6$13.0

$17.3$19.9

$24.0

$32.1

$21.7

$13.0

$19.5$23.6

$30.6$26.8$26.1$26.1

$34.7

$43.1

$49.3

$ B

illio

ns

Investment ActivityTotal Investment Volume

Domestic Foreign

Source: CBRE LimitedSource: CBRE Limited

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Yield Spreads Cap Rates vs. 10-Year GOC Bonds

GOC 10-Year Yield Office-CBD Retail-RegionalIndustrial-Multi Tenant Apartment-Suburban

Source: AltusInSite, Bank of Canada

6 Q1 2020 UPDATE | 2020 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

OFFICE LEASING MARKET SOFTENING FORECASTA material softening of Canadian office leasing conditions was projected over the near term, given the COVID-19 crisis-driven recession that looked to have unfolded at the end of the first quarter. Office space demand was expected to weaken significantly over the next few months as most sectors of the economy ground to a halt. Many businesses were expected to struggle to maintain operations and pay rent. Smaller companies with limited financial resources were viewed as the most vulnerable, in terms of meeting their financial obligations. Weaker office space demand was expected to drive national vacancy higher than the cycle-low of 10.4% reported at the end of the first quarter of 2020. Upward pressure on the average first-quarter vacancy rate of 9.4% was also forecast over the near term. This pressure would result in downward pressure on office rents. However, when the downward pressure materialized would depend on the duration of the economic downturn and to what degree office market fundamentals softened over the next few months. In short, the sharp slowdown in economic activity during the first quarter, which was expected to persist for several months, indicated a softening of office leasing fundamentals would unfold.

INDUSTRIAL LEASING MARKET STRENGTH PREVAILEDThe strength of Canada’s industrial leasing market continued to unfold during the first quarter, against a backdrop of significant deterioration in the near -term economic outlook. The national vacancy rate stood only slightly above the record-low of a year ago at the end of the first quarter. The 3.1% average was up just 10 bps year-over-year. Options for tenants wishing to expand or relocate remained very low through to the end of the first quarter, given a prolonged period of healthy demand and dwindling supply across much of the country. This dynamic had fueled new development activity over the past year, particularly in the larger-bay market segment. However, much of this space was also spoken for prior to, or shortly after, completion. Until recently, sustained upward pressure on already record-high average rents was reported. Warehouse, e-commerce and distribution sector demand outpaced supply, which boosted national occupancy by a further 1.3 million square feet in the first quarter of 2020 alone. This activity added to the stellar 25.5 million square feet of net absorption tallied over the 2019 calendar year. As the second quarter began, the global and Canadian economies looked to have transitioned into a recession. The spread of the COVID-19 virus had effectively halted much of the trade and business activity across the globe. As a result, the overall health of the Canadian industrial leasing market appeared to be in serious jeopardy, following a prolonged period of strength.

RETAIL INDUSTRY HEADWINDS INTENSIFIEDCanada’s retail industry headwinds strengthened in the first quarter of 2020, with the spread of the COVID-19 virus. The COVID-19 crisis resulted in the closure of a growing list of “non-essential” stores and shopping centres across the country. As a result, discretionary shopping activity was shifted to online platforms, while necessities shopping was rigourously controlled in order to stop the spread of the virus. Brick and mortar retail employees were laid off or terminated in record numbers. During the week of March 16th, 500,000 Canadians applied for Employment Insurance, the largest share of which was previously employed in the retail sector. Retail job losses were expected to continue in the second quarter, as more businesses faced the continued challenge of sharp declines in sales and, in some cases, be forced to close. The decimation of Canada’s retail sector as a result of the COVID-19 crisis during the late stages of the first quarter presented a range of challenges for the industry’s participants. Increased industry headwinds in the first quarter, as a result of the COVID-19 crisis, was expected to result in an unprecedented period of change in the retail sector.

LEASING REPORT

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Retail Vacancy RatesNational Trending Across Property Types

Super Regional Regional Community Centre Neighbourhood

Source: © MSCI Real Estate

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Industrial Demand & Supply National Historical & Forecast Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)Source: CBRE Limited; CBRE Econometric Advisors

-6-4-20246810121416

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Office Demand & Supply National Historical & Forecast Aggregates

Net Absorption (RS) New Construction (RS) Occupancy Rate (LS)Source: CBRE Limited; CBRE Econometric Advisors

0.0 1.0 2.0 3.0 4.0 5.0

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Halifax

Vancouver

Toronto

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Winnipeg

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CMA's Rental VacancyRates for Structures of 3 units+

20192020F

Source: CMHC, Housing Market Outlook Report (Jan 2020 release)

2020 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS | Q1 2020 UPDATE 7

GROWTH CYCLE CAME TO AN ABRUPT ENDCanada’s economic growth cycle came to an end in the final weeks of the first quarter due largely to the negative impacts of the spread of the COVID-19 virus. Canadian economic activity was brought to a virtual standstill in March. At the same time, oil prices dropped to rock bottom. The combined effect of the virus and the ongoing energy sector malaise effectively pushed the Canadian economy into recession as the first quarter came to an end. A further economic contraction of between 25.0% and 30.0% was anticipated for the second quarter of 2020. The abrupt reversal of Canadian economic fortune was spread across most sectors of the economy. There were exceptions to this rule, with businesses involved in the production, distribution and sales of household necessities either treading water or posting modest gains. Previously, projections called for Gross Domestic Product (GDP) to expand by between 1.6% and 1.8% on an annualized basis in 2020. However, as the COVID-19 crisis spread and economic activity stalled, annualized growth forecasts were downgraded into negative territory. By the second half of 2020, Canada’s economy was expected to begin to slowly expand, although not enough to offset first-half losses that began in the late stages of the first quarter.

JOB LOSSES SPIKED WITH MORE TO COMECanadian job losses as a result of the COVID-19 crisis outdistanced expectations by a significant margin during the late stages of the first quarter. The effective closure of certain sectors of the economy resulted in approximately 500,000 jobless claims in the week of March 16th alone and 1.0 million jobs lost during the quarter’s final month. At the same time, labour market participation plunged to a low dating back to 1983. In March, Angus Reid released results of a survey that indicated 44.0% of Canadian households reported lost work as a result of the COVID-19 crisis. Of the 44.0%, 66.0% said their employer was not paying them for lost hours while 20.0% said they are being paid, with the balance receiving a percentage of their full wages. The survey results indicated young workers between 18 and 24 accounted for the largest share of lost work, particularly those previously employed in the services sector. Geographically, of those surveyed, 50.0% of households in Alberta had experienced work or job loss due to the COVID-19 pandemic. The Conference Board of Canada (CBOC) forecasted a total of 2.8 million job losses due to the COVID-19 crisis, with full and limited service eating places hardest hit with a 444,000 decline. The CBOC’s forecast was announced during a period when overall job losses had already surpassed expectations by the end of the first quarter.

RESALE HOUSING MARKET EXHIBITED SIGNS OF SOFTENINGCanada’s resale housing market exhibited early signs of softening as the first quarter of 2020 came to an end. The Toronto Region Real Estate Board showed sales increased 49.0% year-over-year in the first half of March whereas a 16.0% drop was reported for the second half of the month, according to a recent RBC Economics briefing. The briefing indicated Vancouver’s resale market followed a similar path to Toronto’s during March. In Calgary, March sales decreased 11.0% year-over-year, due to the combined impact of COVID-19 and the resulting plunge in oil prices. Activity levels were expected to continue to decline over the near term, given the imminent recession, unprecedented job losses and COVID-19 restrictions on activities traditionally carried out during the sales process. The negative market momentum was expected to have an adverse impact on property values, particularly in resource-driven regions like Alberta. Like much of the Canadian economy, the resale housing market looked to have entered a softening phase at the end of the first quarter.

ECONOMIC REPORT

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Employment Growth (LS) Unemployment Rate (RS)Source: Statistics Canada

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%

Economic Growth Real GDP Growth - Historical & Forecast

Canada United States WorldSource: Conference Board Of Canada (April 2020); International Monetary Fund (April 2020)

$25.0$27.5$30.0$32.5$35.0$37.5$40.0$42.5$45.0$47.5$50.0$52.5$55.0

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Retail SalesMonth-Over-Month Trending

Month/Month % Change (LS) Monthly Level (RS)Source: Statistics Canada

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Housing MarketMonthly Trends

Housing Starts (LS) 5-Year Mortgage Rate (RS)Source: Statistics Canada, CMHC

8 Q1 2020 UPDATE | 2020 CANADIAN ECONOMIC OUTLOOK & MARKET FUNDAMENTALS

INVESTMENT MARKET TRANSACTIONS | Q1 2020

OFFICE

Property Date Price SF PSF Purchaser City234 Laurier Ave W (50%) Mar-20 $92.0 M 452,000 $407 Crestpoint Ottawa2345 Yonge St Mar-20 $70.0 M 140,000 $1,000 RioCan/Streamliner TorontoStampede Station/Transalta Feb-20 $85.2 M 497,713 $171 Crestpoint CalgaryErindale Corporate Ctr Feb-20 $90.6 M 342,606 $264 Adgar/Montez Toronto4576 Yonge St Feb-20 $24.0 M 97,237 $247 Davpart Inc. TorontoRailway Street Corporate Ctr. Jan-20 $27.5 M 141,336 $195 Ayrshire Group CalgaryWorld Trade Centre of Montreal Jan-20 $276.0 M 562,579 $491 Allied REIT Montreal1611 Cremazie Blvd E Jan-20 $41.0 M 214,189 $191 Galion Equity Montreal1100-1150 Rene-Levesque W Jan-20 $225.0 M 565,170 $398 Groupes Mach & Petra Montreal

INDUSTRIAL

Property Date Price SF PSF Purchaser CityManulife Montreal Portfolio Feb-20 $75.2 M 660,086 $114 Pure Ind. REIT Montreal

Cochrane Bus. Pk. Portfolio Feb-20 $45.2 M 228,718 $197 Summit Ind. REIT Toronto6064 Spur/ 8335 Meadow Ave Feb-20 $51.0 M 279,900 $182 A2Z Capital Vancouver1995 Markham Rd Jan-20 $33.1 M 240,776 $137 Dream REIT Toronto5900 Fourteenth Ave Jan-20 $39.8 M 184,561 $216 Summit Ind. REIT Toronto10 Smed Lane SE Jan-20 $88.0 M 752,804 $117 Northam Realty Adv. Calgary

RETAIL

Property Date Price SF PSF Purchaser City261 & 263 Queen St E Mar-20 $30.5 M 80,292 $380 Soneil Investments TorontoMayfield Common (50%) Jan-20 $56.0 M 447,588 $250 RioCan REIT EdmontonFirst Capital Montreal Jan-20 $48.4 M 226,317 $234 Skyline Retail REIT Montreal

MULTI-SUITE RESIDENTIAL

Property Date Price # Units /Unit Purchaser City1230 Nelson St Mar-20 $51.0 M 107 $476,636 Mayfair Properties Vancouver31-35 St. Dennis Dr Feb-20 $80.0 M 331 $241,692 Starlight Investments Toronto205 & 207 Morningside Ave Feb-20 $56.3 M 214 $262,850 Starlight Investments TorontoLes berges du Canal Feb-20 $60.0 M 168 $357,143 Globe Property Mgt. Montreal2801 Jane St Feb-20 $64.0 M 234 $273,504 Starlight Investments TorontoMayfair on Jasper Jan-20 $100.0 M 238 $420,168 Centurion Apt. REIT Edmonton2777 Kipling Ave Jan-20 $93.0 M 325 $286,154 Q Residential TorontoEQ8 Phase 3 & 4 Jan-20 $105.0 M 300 $350,000 Manulife Financial MontrealBalmoral Park Apartments Jan-20 $19.6 M 44 $445,455 Mayfair Properties VancouverThe Carrington Jan-20 $19.5 M 79 $246,835 CAPREIT Calgary* share sale

ACKNOWLEDGEMENTS & CITED RESEARCH RESOURCES

In the course of compiling the statistical information and commenting on real estate markets,

national, regionally and across Canadian metropolitan areas, we acknowledge the assistance

and feedback from the following parties in completing this report:

The Altus Group, Avison Young, Bank of Canada, Bank of Japan, BMO Economics, BMO Nesbitt Burns,

British Bankers’ Association, Brunsdon Martin & Associates, CBRE Econometric Advisors, CBRE Limited,

CIBC World Markets, Canada Newswire, Canadian Mortgage and Housing Corporation (CMHC), Canadian

Mortgage Loans Services Limited, The Canadian Real Estate Association (CREA), Colliers International,

Conference Board of Canada, Cushman & Wakefield, Developers and Chains e-news, Economy.com,

European Central Bank, The Federal Reserve Board, Frank Russell Canada (RCPI), The Globe and Mail,

ICR Commercial Real Estate, International Council of Shopping Centres (ICSC), Insite-Altus Research,

International Monetary Fund, jlr Land Title Solutions, The Johnson Report (Winnipeg), Jones Lang LaSalle,

Monday Report on Retailers, MSCI, The Network, Ottawa Business Journal, PC Bond Analytics,

PricewaterhouseCoopers, RBC Capital Markets, RBC Economics, Real Capital Analytics, RealNet Canada Inc.,

RealTrack Inc., Rogers Media, Statistics Canada, Scotia Capital, TD Economics, Toronto Star, Torto Wheaton

Research, Urban Land Institute, United States Department of the Treasury, York Communications

With a strategic focus on high-quality assets and diversification, we realize the potential of

real estate through consistent investment performance. Our primary business strategy is to

generate stable and increasing cash flow and asset value by improving the performance of

the real estate investment portfolio and by acquiring and developing real estate properties in

sound economic markets.

We have developed a broad and efficient real estate platform in North America to manage our

own real estate portfolio, as well as invest and manage real estate on behalf of institutional

clients. Today, our owned and managed Real Estate Portfolio is valued at more than $15 billion.

TO CONTACT US, VISIT MORGUARD.COM

MORGUARD’S CORE STRENGTH IS REAL ESTATE OWNERSHIP, MANAGEMENT AND INVESTMENT.

55 City Centre Drive

Suite 800

Mississauga, ON

L5B 1M3

905-281-3800

MORGUARD.COM