Real Assets Market Report - TD Bank, N.A. · Real Assets Market Report. September 30, 2018. Information shown in this document is that of Greystone as of Sep 30, 2018. As of Nov 1,

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Real Assets Market ReportSeptember 30, 2018

Information shown in this document is that of Greystone as of Sep 30, 2018. As of Nov 1, 2018, the acquisition of Greystone by The Toronto-Dominion Bank closed and Greystone now operates as TD Greystone Asset Management.

Table of ContentsINVESTMENT AND ECONOMIC OUTLOOK ................. 4

CANADIAN COMMERCIAL MORTGAGE MARKET ...... 6

CANADIAN COMMERCIAL REAL ESTATE MARKET .... 8

OFFICE ............................................................................. 8

RETAIL ............................................................................. 9

INDUSTRIAL .................................................................... 10

MULTI-UNIT RESIDENTIAL ............................................ 11

GLOBAL INFRASTRUCTURE MARKET ......................... 13

CONCLUSION ............................................................. 14

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Q3-2018 | Page 4

In August 2018, the economic recovery that began in June 2009 became the second longest in recorded history (it still trails the all-time record achieved between 1991 and 2001).1 While lengthy, the current recovery has also been one of the shallowest in history. As the cycle marches on, our outlook for continued earnings and economic growth has not changed materially. What is catching our attention is the relatively few headline risks on the horizon. The shortlist of risks includes contagion from any further emerging markets stress, a housing slowdown, Italian deficits and a full blown trade war between the U.S. and China. While not to be ignored, these risks appear minor when compared to the global risks navigated over the past decade. Corporate debt levels are also worth monitoring but are likely to remain a quiet issue until the next downturn.

Signposts pointing towards economic expansion are more widespread, headlined with nominal U.S. GDP growth tracking between 6-7% for Q3, following similar figures from Q2. Strong levels of U.S. nominal growth has driven strong sentiment for an economy that, in recent years, has been tuned towards lower real economic growth and lower inflation. Unemployment rates, financial conditions, strength in manufacturing, modest inflation, corporate profitability and fiscal stimulus remain as tailwinds for investors.

We believe that oil prices may return to view for Canadians following recent quarters of relative calm. We are monitoring a technical breakout towards higher Brent oil prices amid declining Iranian production and falling inventories in the U.S. and Saudi Arabia. Canada is unfortunately at risk of lagging further behind global energy producers, with a large price discount on Western Canadian Select crude, until delivery issues are alleviated.

We are seeing increasing capital flows into private real asset markets, as institutional investors increase their allocation to alternatives. Within private markets, the late stages of the economic cycle are presenting strong opportunity to deploy capital in high-quality assets. These high-quality assets tend to exhibit greater capital preservation over a full market cycle. Moreover, the income spreads being generated from real estate, private debt and infrastructure continue to be attractive versus public markets.

Investment and Economic Outlook

320 Bay StreetOffice | Toronto, ON

1 CNN Business: “Where the current economic boom ranks in American history.

Bay Adelaide CentreOffice | Toronto, ON

Greystone.ca/Mortgages

Q3-2018 | Page 6

With a resolution to NAFTA, which is now known as the United States-Mexico-Canada Agreement ("USMCA"), the uncertainty that the Bank of Canada ("BoC") had surrounding Canada’s economic prospects has attenuated. As a result, expectations are for the BoC to raise its overnight rate over the coming months.

Figure 1: BoC Overnight Rate (Forecast)

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Source: BMO Capital Markets..

Given the rising interest rate environment, exposure to floating rate mortgage opportunities should add value on a relative basis for mortgage investors. Floating rate mortgages are typically available on land, land servicing, construction and interim financing opportunities. These types of mortgages tend to be shorter term with maturities between one and three years. They also tend to have a duration close to zero, which is beneficial in a rising rate environment.

Figure 2: Difference Between the 10-year and two-year GoC bond yield (Term Spread)

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Source: Bank of Canada. As at September 2018.

Additionally, the flattening yield curve makes taking duration risk less attractive as investors are not being compensated for the additional risk associated with the longer end of the yield curve. That said, there are still opportunities in longer-term mortgages, particularly with maturities between five and seven years. These conventional term mortgages help diversify the mortgage portfolio and provide consistent and stable cash flows. All else being equal, investors are likely to benefit from a shorter duration position in the current interest rate environment.

Current commercial mortgage spreads for five-year and 10-year term opportunities are between 140–155 basis points (“bps”) and 150–165 bps, respectively (see Figure 3). Spreads for commercial mortgages have generally been stable over the last five months.

Figure 3: Mortgage Spreads

135

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is P

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Source: CMLS Financial. September 2018.

Canadian Commercial Mortgage Market

One YorkOffice | Toronto, ON

FCC TowerOffice | Regina, SK

Greystone.ca/RealEstate

Q3-2018 | Page 8

Office

The national downtown office vacancy was 10.6% as at Q3-2018, which is a 58 bps decline from the beginning of 2018 (see Figure 4). There continues to be a divergence between the suburban and downtown office markets, as reflected in vacancy figures (see Figure 4). Factors such as access to talent, availability of amenities and shorter commute times have contributed to tenants’ preferences for well-located downtown office spaces.

Figure 4: Vacancy Rates by City

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Downtown Suburbs

Source: CBRE Limited. Sep 30, 2018.

Positive net absorption (demand) was observed in nine of the 10 major office markets, with the strongest leasing activity taking place in Ottawa. The demand for office space in Canada is largely driven by job growth in the technology sector, which comprises approximately 30% of all tenants actively seeking office space (see Figure 5). The lower cost of labour for well-educated talent, the tendency of technology employees to cluster and favourable immigration policies in Canada have provided a compelling rationale for technology companies to locate in markets like Toronto, Montreal, Ottawa, and Vancouver.

Figure 5: Tech Talent Growth (2012-17) in North America

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Tech Jobs Created (LHS) Growth in Tech Labour Pool (RHS)

Source: CBRE Limited. Sep 30, 2018.

In Canada, there is currently 19.5 million square feet of office space under development. More than half of the construction pipeline is attributed to Toronto and Vancouver (see Figure 6). BMO Capital Markets predicts that the upcoming supply should be absorbed without significant pressure on vacancy or rental rates given the strong demand for space.

Figure 6: Total Construction

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Construction Construction as % of Inventory

Source: CBRE Limited. Sep 30, 2018.

Canadian Commercial Real Estate Market

777 Bay StreetOffice | Toronto, ON

Q3-2018 | Page 9

In the first half of 2018, the national retail vacancy rate was 6.8%, which represents a 53 bps increase from December 2017 (see Figure 7). Following the bankruptcy and departure of Sears Canada, landlords continue to reposition vacated spaces.

Figure 7: Vacancy

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Source: CBRE Limited. As at Sep 30, 2018..

Although e-commerce changes the landscape of traditional brick-and-mortar stores, mall sales productivity (sales per square foot) in Canada continues to grow year-over-year.2 Core sales productivity (excluding oil and gas) is dominated by electronics and luxury retailers given greater dollars spent per shopping trip. In addition, electronics year-over-year sales growth led all retail categories in the first half of 2018.3 Apple stores in particular are steadily being recognized as an anchor tenant in some super regional malls. This is a contrast to the traditional department anchor store model. Apple’s focus on experiential retail offerings drive foot traffic and its efficient store size, relative to larger department stores, equate to higher sales productivity (see Figure 8). Average sales productivity in Canadian malls is $770.4

Figure 8: Highest Core Sales Productivity by Retailer in North America

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Apple Tiffany &Co.

lululemonathletica

BirksGroup

KateSpade &

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Average Sales per Sq Ft Average Sales per Sq Ft Growth

Source: eMarketer Retail. As at September 2018.

Modest new supply of 4.1 million square feet is expected to round out the year. This is well below the 10-year average, and will be the lowest supply delivered in the past five years (see Figure 9). A majority of new supply is in construction of mixed use developments in Toronto, Montreal and Vancouver.

Figure 9: New Supply

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New Supply Projected 10 year Average

Source: CBRE Limited. As at Sep 30, 2018.

We believe strategically located destination retail formats (i.e. transit oriented, super regional, high street, mixed use) with tenants focused on experiential offerings will be an integral theme to insulate brick-and-mortar retail from the disruption of e-commerce.

Canadian Commercial Real Estate Market

Retail

Deerfoot CityRetail | Calgary, AB

2 ICSC, December 2017.3 Statistics Canada, June 2018.4 Sales productivity for non-anchor tenants in Canadian malls. ICSC. 2017.

Q3-2018 | Page 10

Industrial product continues to be a highly sought after property type by users and investors. After declining for the ninth consecutive quarter, the national availability rate has now reached an all-time historic low of 2.5%, representing a 59 bps decline from the previous quarter (see Figure 10).

Figure 10: Availability Rate

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Source: CBRE Limited. As at Sep 30, 2018.

The supply and demand imbalance for industrial product is evident across Canada (see Figure 11). In fact, Q3 saw record high absorption (demand), which was driven by distribution, logistics and e-commerce tenants.5 This demand represented four times the amount of new supply over the quarter.

Figure 11: Supply and Demand

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Absorption New Supply

Source: CBRE Limited. As at Sep 30 ,2018.

Limited supply, land constraints and a modest development pipeline has allowed greater pricing power for landlords, specifically in Toronto and Vancouver. This enables landlords to renew leases at above-average market rents, thereby driving rental growth within these cities (see Figure 12). Not only have rents been rising, construction costs and development charges in the Greater Toronto Area have been rising at about 5.6% per annum since 2013.6 These costs are expected to rise further, which may impact future construction activity. This supply and demand imbalance has led tenants to remain in existing properties rather than relocate to new space, and also contemplate current and future space requirements.7

Figure 12: Average Net Rent

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Average Net Rent (LHS)

Growth (RHS)

Source: CBRE Limited. As at Sep 30, 2018.

GTAA LandsIndustrial | Mississauga, ON

Canadian Commercial Real Estate Market

Industrial

5 Sales productivity for non-anchor tenants in Canadian malls. ICSC. 2017.6 Altus, JLL, RealNet, BMO Capital Markets Research.7 CBRE Limited. As at Sep 30, 2018.

Q3-2018 | Page 11

Housing affordability, immigration, and employment trends contribute to a strong multi-unit residential market in Canada. However, surging home prices in densely populated markets have created difficult affordability conditions. In fact, Toronto’s housing market was measured as one of the most unaffordable by the RBC Housing Affordability Measure. Based on median figures, this measure calculates the share of income a household requires to cover ownership costs (e.g. mortgage interest and principal payments, utilities, property taxes, etc.) (see Figure 13). Furthermore, expected interest rate hikes will place upward pressure on mortgage rates, contributing to higher ownership cost requirements for current and potential home owners.

Figure 13: Housing Affordability

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Affordability MeasureAverage Affordability Measure Since '85

Source: RBC Economic Research Q2-2018.

Preliminary estimates by Statistics Canada show that Canada’s population sits at 37.1 million as of July 2018, up half a million from a year earlier. This represents a 1.4% increase year-over-year, which is the fastest growth in nearly three decades and the highest amongst G7 countries (see Figure 14).

Figure 14: Population Growth

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Source: Statistics Canada. July 2018.

Approximately 80% of Canada’s recent population growth is attributed to international immigration, a proportion that continues to grow (see Figure 15). While Alberta tends to lag in immigration when its economy is affected by low oil prices, Ontario continues to see the largest international immigration as a percentage of population.8 International immigration is expected to benefit the Canadian economy as younger immigrants offset an aging workforce, which has caused headwinds for regions like Atlantic Canada.9

Figure 15: International Immigration Share of Population Growth

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1994 1998 2002 2006 2010 2014 2018YTD

%

Share

Source: National Bank of Canada & Statistics Canada. 2018.

We believe that purpose built rentals will benefit from strong population growth while providing long-term solutions to the housing affordability issues felt across Canada.

8515-8532 Jasper AvenueMulti-unit Residential | Edmonton, AB

Canadian Commercial Real Estate Market

Multi-unit Residential

8 CIBC Capital Markets. October 2018. Statistics Canada.9 Ibid.

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Social Circle Solar FarmGeorgia, USA

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Q3-2018 | Page 13

Increasing Interest in Infrastructure AssetsFor the first time, alternative assets surpassed fixed income as a percentage of institutional portfolios.10 Among real assets, infrastructure investments offer access to essential societal assets with long-term contracted cash flows, but also encounter a diverse mix of risks that must be managed by investors.

The Importance of a Global ApproachGeopolitical risk is the risk that political instability or a change in a country’s policies can impact the returns of an investment. This risk increases with the time horizon of an investment and is typically managed by selecting countries with stable political and economic regimes.

In recent years, the shifting political environment across developed economies has increased the need for prudent management of geopolitical risk. Infrastructure assets often have an investment horizon of 20+ years, guaranteeing investments will outlive any current regime.

A number of recent events have highlighted this risk and the need for investors to diversify investments across multiple geographies, taking a global approach to the asset class in order to mitigate these risks.

EuropeOver the past three years France has been a leader in the low-carbon transition, adding significant renewables and hosting the UN climate talks that led to the 2015 Paris Agreement. Last year 8 gigawatts ("GW") of renewable transactions were recorded by Inframation News, up from just 1.5 GW in 2015. However, French President Emmanuel Macron has raised concerns that the renewable industry will slow with watering down of policies. One policy in jeopardy is the plan to reduce the share of nuclear power in the country’s energy mix from 75% to 50% given remarks from the Finance minister in late June that “nuclear is here to stay”. Nicholas Hulot, the former French environment minister suddenly resigned in August after “an accumulation of disappointments” on France’s environmental challenges, further highlighting the government’s change in stance.

North AmericaEarlier this year the Canadian federal government stepped in to purchase the Trans Mountain Pipeline for $4.5 billion from Kinder Morgan. The Trans Mountain Pipeline was constructed in 1953, connecting the Alberta oilsands and the

North American West Coast. In 2016, the Canadian government granted approval for an expansion in capacity from 300,000 barrels per day to 890,000. The purchase came after two years of political challenges as the B.C. provincial NDP and Green parties took power in 2017 and opposed the expansion. Kinder Morgan set a May 31 deadline in early 2018 to resolve the “unquantifiable risks” from B.C.’s increased opposition, which led to the deal with the federal government.

Global DiversificationThese examples of political opposition or changes to policy can have a direct impact on infrastructure investment returns. Global diversification offers an opportunity to mitigate these risks and, as the asset class matures, the opportunity to diversify globally has increased. Since 2004, the opportunity to diversify across geographies has expanded substantially with transactions going from being concentrated in Europe (76% in 2004) to being more diversified in 2017 with 19% across North America, 17% in Asia/Australia, and 13% in Latin America (see Figure 16).

Figure 16: Deal Activity by Geography

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Source: Inframation News.

Global Infrastructure Market

Ballycadden Wind FarmCounty Wexford, Ireland

10 PIAC Asset Report.

Q3-2018 | Page 14

Within the commercial real estate and mortgage markets, there continues to be strong demand for core income producing properties with high-quality tenants in strategically located urban areas. Properties with these characteristics tend to have greater ability to preserve capital over the long term, particularly during the late stages of the economic cycle.

Geopolitical risk continues to be top of mind for infrastructure investors as recent events have highlighted political and policy uncertainty in developed economies, highlighting the need for a globally diversified approach to managing risk within the asset class.

Conclusion Greystone Managed Investments Inc.

Greystone Managed Investments Inc. is an institutional money manager with multi-asset solutions proudly serving its clients since 1988. Headquartered in Regina, with additional offices in Toronto, Winnipeg and Hong Kong, Greystone manages over C$35 billion1 on behalf of institutional clients.Greystone has in-house expertise in the following areas:

MULTI-ASSET ALTERNATIVES

• Balanced

• Balanced Plus

• Target Date Plus

• Alternative Plus2

• Real Estate

• Infrastructure

PRIVATE DEBT• Mortgages

FIXED INCOME PUBLIC EQUITIES

• LDI

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• Sector

• Canadian & U.S.

• International

• Global

• China

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1 As at Sep 30, 2018.2 The Greystone Alternative Plus Solution is an integrated open-ended alternatives mandate where a client invests in the Greystone Infrastructure Fund (Canada) LP, the Greystone Mortgage Fund and the Greystone Real Estate Fund Inc. or the Greystone Real Estate LP Fund. Greystone holistically manages the underlying cash flows and liquidity of the allocation as well as the asset mix between the underlying strategies.

For employees shown, titles are as of Oct 31, 2018 prior to the acquisition of Greystone by The Toronto Dominion Bank. As of Nov 1, 2018 the acquisition of Greystone by The Toronto-Dominion Bank was completed and Greystone now operates as TD Greystone Asset Management. Titles of employees shown are the employees’ Greystone titles and not necessarily the employees’ title as part of TD Greystone Asset Management.

Greystone claims compliance with the Global Investment Performance Standards (GIPS®). A GIPS® compliant presentation is available upon request. Greystone has been independently verified for the period January 1, 2000 to December 31, 2017. The verification report(s) is/are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS® standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS® standards. Verification does not ensure the accuracy of any specific composite.

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This report is for informational purposes only. It is not meant as investment advice and is not an offer, solicitation or recommendation to purchase or sell any security. There is no assurance that any predictions or projections will actually occur. Past performance is not necessarily indicative of future results. Commentary reflects the opinions of Greystone Managed Investments Inc. as of the date of the document. This document was developed from sources believed to be reliable, but is not guaranteed to be accurate or complete.

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Headquartered in Regina, with additional offices in Winnipeg, Toronto and Hong Kong, Greystone Managed Investments Inc. is a Canadian-based institutional asset manager, providing investment management services to its broad client base since 1988.