This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.

COMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISIS

While the “red hot” condo market appears to have cooled over the past twelve months, the fact remains that the price of entry for home ownership is still expensive. Many Canadians delay their home ownership aspirations and elect to rent versus own. The ownership ratio topped 69% in 2011 according to Statistics Canada. This rate has dropped to 67.8% in 2016 and down to 66.3% as of 2018. This downward trend is in part caused by an increase in the cost of ownership due to higher prices, higher interest rates, and higher mortgage stress test levels.

While the Federal Government’s implementation of the “Mortgage Stress Test” was designed to supress the market, home ownership remains challenging. This applies equally to the many

SEPTEMBER 2019

Canada’s Apartment Rental Market: Facing a Major Crisis

Canada is facing a crisis: Limited new supply of apartment product and a record-low national vacancy rate of 2.4%. Vancouver leads all major markets in Canada with a vacancy rate of 0.8%. How should investors act in this real estate market? To answer this, we examine the current state of the rental market, the key factors impacting it, and then explore new strategies for navigating this environment.

Our Strategic PlaysNicola Wealth Real Estate follows trends carefully to identify when future opportunities may exist.

The rental shortage, specifically in the Vancouver and Victoria markets, is an obvious concern but also an opportunity. Currently, apartment rentals are a relatively safe asset class.

Here is what Nicola Wealth Real Estate has done over the past 18 months to help satisfy the demand:

The James at Harbour Towers in Victoria, BCIn 2016, we acquired Harbour Towers which at the time was an iconic 12 storey 196 room hotel with conference and amenity space. The building was originally constructed in 1968 as an apartment building but at a later date was converted to an operating hotel. Due to the age, the property was in dire need of a significant makeover.

We operated the hotel for two years while we completed the design and secured the permits for a complete restoration and conversion to essentially a new rental apartment building. The James Bay community and the City of Victoria were supportive of the complete revival as it would bring desperately needed new market rental housing to the area which has a near 0% vacancy rate. The building has been rebranded as “The James” and will comprise 220 units and include several attractive amenities for the tenants. The building will be completed and ready for occupancy in November 2019 and currently has 1,200 names registered on an early reservation list. The project is 100% owned by Nicola Wealth Real Estate.

The Rex in Abbotsford, BCAcquired in Q1 2018, construction commenced on a new multi-family project comprising over 222 suites spread over three buildings. The project will be completed in early 2020 and will add much needed new rental apartment inventory to this market. The asset is situated in Abbotsford, BC directly off the TransCanada Highway at the McCallum Road Interchange, adjacent to the Abbotsford Events Center and University of the Fraser Valley. This project is a 50/50 partnership with Primex Investments.

Fifth Street in Sidney, BCIn Q3 2018, we acquired the Fifth Street property totalling 0.87 acres with zoning that permits a new three storey purpose built rental building with 76 units plus underground parking. This project is expected to be complete by Spring 2020, again adding much needed inventory in the Sydney market which sits at near 0% vacancy. The project is a 50/50 partnership with Primex Investments.

Pandora & Cook in Victoria, BCIn Q2 2018, we acquired an older two-storey retail/residential heritage building.

The James at Harbour Towers in Victoria

Fifth Street in Sidney

Construction will commence in 2020 and once completed in spring 2022, the building will maintain the existing heritage façade while offering 92 rental units atop a two-level commercial podium. This project is a 50/50 partnership with Primex Investments.

i City of Vancouver, Creating and Protecting Market Rental Housing

The Rex in Abbotsford

Pandora & Cook in Victoria

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2.3

3.0 2.92.5

2.8 2.9 3.03.5 3.7

3.0

2.4

0

2

4

6

VACANCY RATE (%)CANADA (CENTRES OF 10,000+ POPULATION)

Source: CMHC, Rental Market Survey (October). Privately initiated apartment structures of three or more units.

Source(s): Statistics Canada, Census of Population, 1971 to 2016, and National Household Survey, 2011.

%

70

69

68

67

66

65

64

63

62

61

601971 1981 1991 2001 2011

YEAR 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2018

Rate (%) 60.30 61.80 62.10 62.40 62.60 63.60 65.80 68.40 69.00 67.80 66.30

CANADIAN HOME OWNERSHIP

By Mark Hannah, Managing Director, Real Estate

measures implemented by other levels of government as well.

The new supply of “affordable” rental housing has not kept pace with demand. Victoria, Vancouver, and Toronto are the three tightest vacancy markets according to the Canada Mortgage and Housing Corporation (CMHC).

For example, a one bedroom apartment in downtown Vancouver rents for $1,800 to $2,200 per month (not including utilities or parking) and a two bedroom rents for $2,500 to $3,000 per month.

COMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISISCOMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISIS

Historical CMHC data shows a 42% increase in Greater Vancouver average rental rates in the last 10 years and a 20% increase in the last three years alone. This increase is better explained when vacancy is placed in context: Vancouver’s vacancy rate has been below 2.0% for almost 30 years.

The primary culprit in the lack of new supply for both Vancouver and Victoria is high land prices. From a developer’s standpoint, high land prices make it difficult for rental apartment housing to be profitable making it more enticing for developers to build condos to sell. As shown in the chart (left), residential land prices were on a steep rise between 2010 & 2019. However, in the past year, government

interventions have cooled the residential condo market in Vancouver thereby reducing the price per buildable square foot.

Higher land prices effectively lead to a require-ment for higher rents and lower cap rates. The inverse relationship between multi-family units and cap rates since 2009 is shown in the adjacent graph:

Government Intervention or Lack ThereofWhile Governments at all levels (Federal, Pro- vincial and Municipal) pay lip service to their desire to make significant change, they are clearly not aligned to incent developers to build more “market” or “affordable” apartment rental housing. There are only a handful of rental in-centive programs for multi-family development projects provided by the City of Vancouveri:

Short-Term Incentive for Rental (STIR) – A time limited program which ran until December 2011 to incent multi-family development during the 2009 recession. This program led to construction of approximately 1,000 affordable units.

Rental 100 Policy (active) – This policy encourages projects where 100% of the residential rental housing units are secured for 60 years or life of the building. Eligible incentives include development cost levy waiver, parking requirement reductions, relaxation of unit size to 320 sf, additional density and faster rezoning process.

Moderate Income Rental Housing Pilot (active) – This policy encourages develop-ment proposals for new buildings where 100% of the residential floor area is secured rental housing and at least 20% of the residential floor area is made available to moderate income households defined as earning $30,000 to $80,000 per year.

These have produced approximately 8,700 units over the last few years. This indicates that the incentives that the City of Vancouver currently provides are absolutely necessary in terms of motivating the delivery of new rental housing. More incentives may be needed to bolster supply, especially when the financial margins provided by these programs appear to be very slim.

Issues and Potential SolutionsThe issue we face is meeting the demand of future employment growth in Vancouver. With several new office towers under construction in downtown Vancouver, many of these new buildings are pre-leased to tenants who are expanding and adding new employees. It is estimated that another 25,000 jobs are being created with this office expansion. If we see a slowdown in new condo construction and minimal new rental apartment inventory added, where are these workers going to live?

While government cannot be expected to control land prices, it contributes in several other areas including: quicker and more efficient approval processes, higher density, smaller units, government grants and low interest rate con- struction financing to name a few. One example of such an incentive is shown by the City of Winnipeg tax abatement program which provides property tax relief over a given time to incent new developments in the city. Provincial and Municipal governments could contribute in this area, as well.

In addition to lack of financial incentives, the long rezoning and permit app-lication process is a major issue faced by many developers because it creates uncertainty risk and additional holding costs for developers. Currently, the shortest process time is for Rental 100 Policy applications. This takes approx-imately 20 months from application submission to public hearing, compared to an average of six to ten months for most other major Canadian cities. By fast tracking this process, municipal governments could provide cost saving incentives to the developers.

Currently, GST is a deterrent to developing new apartment rental inventory. The Federal Government could encourage developers to build and add new apartment rental buildings by eliminating the GST on new buildings.

Another significant issue resulting from low supply and contributing to higher rental costs are “renovictions.” This has received a substantial amount of negative press. Landlords evict tenants from older affordable housing and undertake significant upgrades to achieve substantially higher rents because currently, landlords are restricted to annual increases of 2.5% in 2019 and then 2.6% in 2020. This policy implemented by the BC Provincial Government has discouraged developers from building new apartment rental product. While the policy’s purpose was to protect the renters, an adverse effect has been to discourage new supply.

Source: CMHC, Rental Market Survey. Privately initiated apartment structures of three or more units. Canada: Centres of 10,000+ population.

VACANCY RATES (%) SELECTED CMAs AND CANADA

VIC

TORI

A

1.2 1.0

5.3

1110

9876543210

VAN

COU

VER

EDM

ON

TON

CALG

ARY

SASK

ATO

ON

REG

INA

WIN

NIP

EG

TORO

NTO

OTT

AWA

MO

NTR

EAL

QU

EBEC

3.0

8.37.7

2.9

1.1 1.61.9

3.3

HA

LIFA

X

CAN

AD

A

1.62.4

OCT. 2017

OCT. 2018

HIGH DENSITY RESIDENTIAL LAND TRANSACTIONS – PRICE ($/SF BLD.) & AREA (AC).

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

$200

$150

$150

$50

$0

AVG

. $/S

F BL

D.

$213 •

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1,600

1,400

1,200

1,000

800

600

400

200

0

MONTH OF OCTOBER

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

AVER

AG

E RE

NT

($)

VANCOUVER HISTORICAL AVERAGE RENTS CMHC RENTAL MARKET SURVEY

2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

MONTH OF OCTOBER

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

VACA

NCY

RAT

E (%

)

VANCOUVER HISTORICAL VACANCY RATES CMHC RENTAL MARKET SURVEY

AltusAnalytics

AVG

. PRI

CE P

ER U

NIT

APARTMENT – AVG. PRICE/UNIT VS CAP RATE GREATER VANCOUVER

AltusAnalytics

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

AVG

. CA

P RA

TE

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

$350K

$300K

$250K

$200K

$150K

$100K

$50K

$0K

AVG. CAP RATE AVG. PRICE PER UNITMEASURE NAMES:

GREATER VANCOUVER AREA – TRAILING 12 MONTH AVERAGE 2010 TO Q1 2019

measures implemented by other levels of government as well.

The new supply of “affordable” rental housing has not kept pace with demand. Victoria, Vancouver, and Toronto are the three tightest vacancy markets according to the Canada Mortgage and Housing Corporation (CMHC).

For example, a one bedroom apartment in downtown Vancouver rents for $1,800 to $2,200 per month (not including utilities or parking) and a two bedroom rents for $2,500 to $3,000 per month.

COMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISISCOMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISIS

Historical CMHC data shows a 42% increase in Greater Vancouver average rental rates in the last 10 years and a 20% increase in the last three years alone. This increase is better explained when vacancy is placed in context: Vancouver’s vacancy rate has been below 2.0% for almost 30 years.

The primary culprit in the lack of new supply for both Vancouver and Victoria is high land prices. From a developer’s standpoint, high land prices make it difficult for rental apartment housing to be profitable making it more enticing for developers to build condos to sell. As shown in the chart (left), residential land prices were on a steep rise between 2010 & 2019. However, in the past year, government

interventions have cooled the residential condo market in Vancouver thereby reducing the price per buildable square foot.

Higher land prices effectively lead to a require-ment for higher rents and lower cap rates. The inverse relationship between multi-family units and cap rates since 2009 is shown in the adjacent graph:

Government Intervention or Lack ThereofWhile Governments at all levels (Federal, Pro- vincial and Municipal) pay lip service to their desire to make significant change, they are clearly not aligned to incent developers to build more “market” or “affordable” apartment rental housing. There are only a handful of rental in-centive programs for multi-family development projects provided by the City of Vancouveri:

Short-Term Incentive for Rental (STIR) – A time limited program which ran until December 2011 to incent multi-family development during the 2009 recession. This program led to construction of approximately 1,000 affordable units.

Rental 100 Policy (active) – This policy encourages projects where 100% of the residential rental housing units are secured for 60 years or life of the building. Eligible incentives include development cost levy waiver, parking requirement reductions, relaxation of unit size to 320 sf, additional density and faster rezoning process.

Moderate Income Rental Housing Pilot (active) – This policy encourages develop-ment proposals for new buildings where 100% of the residential floor area is secured rental housing and at least 20% of the residential floor area is made available to moderate income households defined as earning $30,000 to $80,000 per year.

These have produced approximately 8,700 units over the last few years. This indicates that the incentives that the City of Vancouver currently provides are absolutely necessary in terms of motivating the delivery of new rental housing. More incentives may be needed to bolster supply, especially when the financial margins provided by these programs appear to be very slim.

Issues and Potential SolutionsThe issue we face is meeting the demand of future employment growth in Vancouver. With several new office towers under construction in downtown Vancouver, many of these new buildings are pre-leased to tenants who are expanding and adding new employees. It is estimated that another 25,000 jobs are being created with this office expansion. If we see a slowdown in new condo construction and minimal new rental apartment inventory added, where are these workers going to live?

While government cannot be expected to control land prices, it contributes in several other areas including: quicker and more efficient approval processes, higher density, smaller units, government grants and low interest rate con- struction financing to name a few. One example of such an incentive is shown by the City of Winnipeg tax abatement program which provides property tax relief over a given time to incent new developments in the city. Provincial and Municipal governments could contribute in this area, as well.

In addition to lack of financial incentives, the long rezoning and permit app-lication process is a major issue faced by many developers because it creates uncertainty risk and additional holding costs for developers. Currently, the shortest process time is for Rental 100 Policy applications. This takes approx-imately 20 months from application submission to public hearing, compared to an average of six to ten months for most other major Canadian cities. By fast tracking this process, municipal governments could provide cost saving incentives to the developers.

Currently, GST is a deterrent to developing new apartment rental inventory. The Federal Government could encourage developers to build and add new apartment rental buildings by eliminating the GST on new buildings.

Another significant issue resulting from low supply and contributing to higher rental costs are “renovictions.” This has received a substantial amount of negative press. Landlords evict tenants from older affordable housing and undertake significant upgrades to achieve substantially higher rents because currently, landlords are restricted to annual increases of 2.5% in 2019 and then 2.6% in 2020. This policy implemented by the BC Provincial Government has discouraged developers from building new apartment rental product. While the policy’s purpose was to protect the renters, an adverse effect has been to discourage new supply.

Source: CMHC, Rental Market Survey. Privately initiated apartment structures of three or more units. Canada: Centres of 10,000+ population.

VACANCY RATES (%) SELECTED CMAs AND CANADA

VIC

TORI

A

1.2 1.0

5.3

1110

9876543210

VAN

COU

VER

EDM

ON

TON

CALG

ARY

SASK

ATO

ON

REG

INA

WIN

NIP

EG

TORO

NTO

OTT

AWA

MO

NTR

EAL

QU

EBEC

3.0

8.37.7

2.9

1.1 1.61.9

3.3

HA

LIFA

X

CAN

AD

A

1.62.4

OCT. 2017

OCT. 2018

HIGH DENSITY RESIDENTIAL LAND TRANSACTIONS – PRICE ($/SF BLD.) & AREA (AC).

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

$200

$150

$150

$50

$0

AVG

. $/S

F BL

D.

$213 •

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1,600

1,400

1,200

1,000

800

600

400

200

0

MONTH OF OCTOBER

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

AVER

AG

E RE

NT

($)

VANCOUVER HISTORICAL AVERAGE RENTS CMHC RENTAL MARKET SURVEY

2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

MONTH OF OCTOBER

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

VACA

NCY

RAT

E (%

)

VANCOUVER HISTORICAL VACANCY RATES CMHC RENTAL MARKET SURVEY

AltusAnalytics

AVG

. PRI

CE P

ER U

NIT

APARTMENT – AVG. PRICE/UNIT VS CAP RATE GREATER VANCOUVER

AltusAnalytics

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

AVG

. CA

P RA

TE

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

$350K

$300K

$250K

$200K

$150K

$100K

$50K

$0K

AVG. CAP RATE AVG. PRICE PER UNITMEASURE NAMES:

GREATER VANCOUVER AREA – TRAILING 12 MONTH AVERAGE 2010 TO Q1 2019

This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.

COMPASS • CANADA’S APARTMENT RENTAL MARKET: FACING A MAJOR CRISIS

While the “red hot” condo market appears to have cooled over the past twelve months, the fact remains that the price of entry for home ownership is still expensive. Many Canadians delay their home ownership aspirations and elect to rent versus own. The ownership ratio topped 69% in 2011 according to Statistics Canada. This rate has dropped to 67.8% in 2016 and down to 66.3% as of 2018. This downward trend is in part caused by an increase in the cost of ownership due to higher prices, higher interest rates, and higher mortgage stress test levels.

While the Federal Government’s implementation of the “Mortgage Stress Test” was designed to supress the market, home ownership remains challenging. This applies equally to the many

SEPTEMBER 2019

Canada’s Apartment Rental Market: Facing a Major Crisis

Canada is facing a crisis: Limited new supply of apartment product and a record-low national vacancy rate of 2.4%. Vancouver leads all major markets in Canada with a vacancy rate of 0.8%. How should investors act in this real estate market? To answer this, we examine the current state of the rental market, the key factors impacting it, and then explore new strategies for navigating this environment.

Our Strategic PlaysNicola Wealth Real Estate follows trends carefully to identify when future opportunities may exist.

The rental shortage, specifically in the Vancouver and Victoria markets, is an obvious concern but also an opportunity. Currently, apartment rentals are a relatively safe asset class.

Here is what Nicola Wealth Real Estate has done over the past 18 months to help satisfy the demand:

The James at Harbour Towers in Victoria, BCIn 2016, we acquired Harbour Towers which at the time was an iconic 12 storey 196 room hotel with conference and amenity space. The building was originally constructed in 1968 as an apartment building but at a later date was converted to an operating hotel. Due to the age, the property was in dire need of a significant makeover.

We operated the hotel for two years while we completed the design and secured the permits for a complete restoration and conversion to essentially a new rental apartment building. The James Bay community and the City of Victoria were supportive of the complete revival as it would bring desperately needed new market rental housing to the area which has a near 0% vacancy rate. The building has been rebranded as “The James” and will comprise 220 units and include several attractive amenities for the tenants. The building will be completed and ready for occupancy in November 2019 and currently has 1,200 names registered on an early reservation list. The project is 100% owned by Nicola Wealth Real Estate.

The Rex in Abbotsford, BCAcquired in Q1 2018, construction commenced on a new multi-family project comprising over 222 suites spread over three buildings. The project will be completed in early 2020 and will add much needed new rental apartment inventory to this market. The asset is situated in Abbotsford, BC directly off the TransCanada Highway at the McCallum Road Interchange, adjacent to the Abbotsford Events Center and University of the Fraser Valley. This project is a 50/50 partnership with Primex Investments.

Fifth Street in Sidney, BCIn Q3 2018, we acquired the Fifth Street property totalling 0.87 acres with zoning that permits a new three storey purpose built rental building with 76 units plus underground parking. This project is expected to be complete by Spring 2020, again adding much needed inventory in the Sydney market which sits at near 0% vacancy. The project is a 50/50 partnership with Primex Investments.

Pandora & Cook in Victoria, BCIn Q2 2018, we acquired an older two-storey retail/residential heritage building.

The James at Harbour Towers in Victoria

Fifth Street in Sidney

Construction will commence in 2020 and once completed in spring 2022, the building will maintain the existing heritage façade while offering 92 rental units atop a two-level commercial podium. This project is a 50/50 partnership with Primex Investments.

i City of Vancouver, Creating and Protecting Market Rental Housing

The Rex in Abbotsford

Pandora & Cook in Victoria

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2.3

3.0 2.92.5

2.8 2.9 3.03.5 3.7

3.0

2.4

0

2

4

6

VACANCY RATE (%)CANADA (CENTRES OF 10,000+ POPULATION)

Source: CMHC, Rental Market Survey (October). Privately initiated apartment structures of three or more units.

Source(s): Statistics Canada, Census of Population, 1971 to 2016, and National Household Survey, 2011.

%

70

69

68

67

66

65

64

63

62

61

601971 1981 1991 2001 2011

YEAR 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2018

Rate (%) 60.30 61.80 62.10 62.40 62.60 63.60 65.80 68.40 69.00 67.80 66.30

CANADIAN HOME OWNERSHIP

By Mark Hannah, Managing Director, Real Estate