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Commercial Properties Skyrocket in Numbers 2015

According to Real Capital Analytics, $533 billion of commercial real estate changed hands last year, up 23% from a year earlier. The volume also was roughly 4% more than what had been projected as of November 2014.

The total was still well shy of the record $574.9 billion of deal volume that took place during the market’s peak year of 2007.

Foreign investors accounted for $91.1 billion, or 17.1% of the transaction volume last year, up from the 10% average in each of the previous four years. The foreign charge was led by the Canadians, who completed $24.6 billion of deals. Those investors include the Canada Pension Plan Investment Board and Caisse de depot et placement du Quebec (CDPQ). Ivanhoe Cambridge, an affiliate of CDPQ, purchased Manhattan’s Stuyvesant Town/Peter Cooper Village apartment property for $5.3 billion late last year.

Investors from Singapore took the second largest piece of the foreign investment pie, completing $14.8 billion of deals in 2015. Norway followed with $8.5 billion of deals, and Chinese investors completed $6.8 billion of deals.

Under normal circumstances, foreign investors would likely increase their activity going into 2016. After all, certain restrictions have been eased as a result of changes to the Foreign Investment in Real Property Tax Act. (These changes were implemented with the passage of the Protecting Americans from Tax Hikes Act of 2015.) For instance, foreign pension funds are no longer are subject to withholdings under the original act.

However, many foreign investors are likely getting pinched by the sharp drop in oil prices. According to analysis by Morgan Stanley, Norway, the United Arab Emirates and Qatar combined for $18.6 billion of U.S. deals, a substantial volume. Since each country is reliant almost exclusively on oil revenue, their ability to generate cash will decline with the drop in oil prices.

In fact, as oil prices were plunging last year, sovereign wealth funds were redeeming capital from investment vehicles (not necessarily tied to real estate) to which they had committed. Morgan Stanley found that some $100 billion of capital was redeemed from 11 asset managers by oil-dependent investors last year. That trend could continue this year if oil prices continue to decline, or stabilize at today’s lower prices.

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2016 Outlook – INTEREST RATES – OIL PRICES – CANADIAN DOLLAR

“It’s still a humdrum outlook for the Canadian economy,” says Avery Shenfeld, Managing Director and Chief Economist, CIBC World Markets, “but we can blame the tepid global economy for part of that. The bright spot is that 2016 should be a bit better than 2015, as we move past the steepest declines in oil sector capital spending. And we’ll get the first leg of some federal government infrastructure spending in the latter half of 2016, so the sectors of the economy that benefit from construction spending should be healthy.”

Shenfeld calls investors’ attention to six major factors in planning for this year.

1. The promising U.S. economy. “The brightest spot for Canadian exporters in 2016,” says Shenfeld, “is the big market to the south. The U.S. isn’t as affected by the sluggish pace in emerging markets, because its own domestic market is so critical.” Plus, Americans have been getting jobs so they have newfound income to spend. Shenfeld thinks the American consumer “will provide the engine to drive 2.3% real GDP growth in the U.S. in 2016, similar to the 2015 pace.”

For Canadian exporters, this is good news. Everything from autos to lumber to engineering services will benefit from a continuation of a relatively healthy U.S. economic expansion.

2. The lower Canadian dollar. The lower dollar, which is actually close to its historical norm, notes Shenfeld, is a major reason for the Bank of Canada’s positive outlook on recovery. It’s also a signal that it may hold our interest rates below those of the U.S., to prevent a return to a stronger Canadian dollar. “The evidence is that we need a currency at this level to boost exports,” says Shenfeld, “so we’re unlikely to see much of an appreciation for the year.”

3. Tourism. In addition to the Canadian services exporters who gain from a lower dollar, our tourism sector benefits. For winter sports enthusiasts, the lower dollar makes skiing in Western Canada an attractive alternative to resorts in the U.S. Similarly, for both Canadians and Americans, the Maritime provinces and Newfoundland offer a more reasonable summer vacation than destinations in New England.

4. Interest rates. The Bank of Canada’s only tool is “a blunt instrument,” says Shenfeld. “You’re not going to raise interest rates to cool Toronto and Vancouver housing prices … and then chill the whole economy in the process.” If anything, the burden on the Bank of Canada is to keep interest rates low, to provide off-setting momentum and to fill the hole left by the retreat of capital spending in energy and mining.

The U.S. Federal Reserve has raised interest rates, which could push up Canadian five- and ten-year rates marginally. “But if you’re thinking: When will we get back to the day I earn 5% on a GIC?” says Shenfeld, “The answer is: not soon, and certainly not in 2016.” The economy is showing that it needs low interest rates to achieve even modest economic growth. Not just in Canada, but globally.”

5. Oil prices. Some signs indicate oil prices are too low to be sustainable; U.S. drilling is cooling down, putting downward pressure on supply in 2016. But Shenfeld argues that American shale oil has now jumped ahead of the Canadian oil sands in the queue, so it will be the first to come back onto production as prices rise. One day, the world will need an expanded supply of our more expensive oil. “But that is not likely to be a story for 2016, or perhaps not even in 2017,” says Shenfeld.

6. Emerging markets. Emerging markets, including the BRIC (Brazil, Russia, India, China) countries, had a difficult 2015, although overall long-term growth possibilities are higher than those of established economies. “The growth engines of China are shifting away from industrialization and construction to the service and consumer sector, which doesn’t help to drive our raw material exports,” adds Shenfeld. “China was the world’s largest consumer of base metals when it seemed like they were building a new city every week, but those days are fading fast.”

Opportunities and Challenges

A well-balanced, diversified portfolio always makes sense, particularly so in an uncertain world, says Shenfeld. “Canadian equities have had a rough year in 2015,” he adds, “but we see some upside in the non-energy, non-materials part of the Canadian equity market. It’s been collectively undervalued because there have been question marks in global investors’ minds about Canada. Some see us as another Saudi Arabia with the whole economy resting on oil, and that’s a long way from accurate.”

“In fixed income markets,” says Shenfeld, “long-term bond yields may start to creep higher because they are moving up in the U.S. So we lean toward somewhat shorter-term bonds to avoid the capital depreciation, or price depreciation, that you get at the long end if rates rise.” He recommends talking to your Investment Advisor about fixed income alternatives in 2016, given that yields on government bonds and GICs are so low.

Shenfeld is still cautious on gold. “You need either a material inflation escalation or a plunging U.S. dollar to really get the price of gold moving,” he says, “and we’re not seeing either.”

Shenfeld cautions Canadians not to be totally out of any asset class, nor restricted by a single geography. “Canadians should think of their retirement and travel plans and consider whether they have enough money in countries where they might one day spend a considerable portion of their year. If you’re planning to spend your winters in Florida when you retire, but have no U.S. dollar assets, you’re actually betting that the Canadian dollar will appreciate,” he says. “You can hedge that risk by having some of your portfolio in U.S. currency.”

It’s always a good practice to connect with us early in the year to discuss your financial goals – consider putting a reminder in your calendar for the beginning of the year. As always, if you have any questions about your accounts or any of the information contained in this newsletter, please contact us.

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State of the Commercial Retail Market with Keith Watters

Keith Watters has been in the commercial mortgage business for many years. As an experienced agent, he is a great asset to the Mortgage Alliance Commercial team. Over the years Keith has been faced with almost every challenge possible when helping clients obtain financing.  As a mortgage broker, he gets to see all the action from the center field – both from the lender side and the retail side of the business. So when the Canadian Mortgage Professionals interviewed him about the state of the commercial retail market, here is what he had to say:

Q: What’s the state of the commercial retail market right now?

A: There’s lots available. As long as the interest rates stay low, the market will still be going. That’s what’s driving this whole market now – the low cost of borrowing.

Q: How should a lender decide whether to make a deal on a retail property?

A: the lenders I work with usually lend just on real estate. But then they look at the applicant, the retail outlet, as the guarantor. They tend to be real estate lenders rather than business lenders. But in the same breath, they have to make sure that retail outlet has the background experience and the cash flow to service the debt. That’s why they go back, usually, to a three-year history to see how [the business] is performing. If it’s a retail outlet, most lenders will lend on 65% of the value, and they’ll lend on “How would that property rent if it were vacant?”

Q: With retail being a tough market even in good years, how are lenders’ attitudes toward that business right now?

A: Lenders aren’t backing away. Right now in this market, we have too much money chasing not enough deals, so lenders are, at least in the Canadian market, tending to be fairly aggressive – as long as there’s real estate value there and the applicant has good cash flow.

Q: What do you think is the biggest challenge facing the commercial market over the next year?

A: I think availability. There’s a lot of money chasing good commercial deals. As soon as a good commercial plaza comes on the market, it’s just like residential housing – there’s multiple offers.

 

Article Reference: http://www.mortgagebrokernews.ca/contents/e-magazine.aspx?id=191044

Related: http://macommercial.ca/2015/03/10/oldest-rookie-joins-macc/

Lenders Have Become Less Conservative

Interest rates are yet again at an all-time low, with credit unions like Meridian offering residential mortgage rates of as low as 1.49 per cent. Rates are even more attractive on the commercial side of mortgages. We can officially say the spring market is underway.

In a recent interview with the Canadian Mortgage Professionals (CMP), Mike Lee, head of Mortgage Alliance Commercial in B.C., stated that “interest rates are really pretty spectacular.”

“One of the asset classes that has become really spectacular is multi-family apartment buildings because, as an example, I just got quoted from a lender for an apartment building loan, CMHC insured, over $1 million, they’re quoting 1.75 per cent for a five-year [rate at press time]. It fluctuates daily, though,” Lee says. “A five-year term at 1.75 per cent is ridiculously low; it’s like free money. Some are even offering ten-year terms at 2.43 per cent. That’s insane.”

This has also peaked the interest of property owners to refinance, which in turn provides ample opportunity for brokers.

“Lately a lot of what I’ve been doing is refinancing anybody who has an apartment building because who knows when these rates will come around again,” Lee says. “When you’re talking multi-million dollar loan amounts, that sort of difference is always worth exploring because the monthly amount means huge savings. Even if there is a penalty to pay out it may only take a couple of years to justify [incurring the penalty]; it depends on the situation.”

With rates hitting record lows, take advantage of the opportunity. You can contact us with any questions you may have at (416)499-5454 ext 102 and we would be more than happy to help you with your financing needs.

You can read the full article by clicking here.

A Beacon Shines in the Commercial Mortgage Brokerage Industry

We are proud to announce that our very own Michel Durand has been nominated once again this year as the Best Commercial Mortgage Broker of the Year!!

Michel, is the President and principal broker of Mortgage Alliance Commercial Canada (MACC), as well as Co-Founder of Multi-Prêts Commercial (MPC). Both entities service commercial mortgage brokerage needs for clients across Canada. Michel has been in the commercial mortgage lending arena for over 25 years, 12 of which were with major Canadian financial institutions.

Michel’s vast experience in the commercial mortgage sector, and his dedication to improving the reputation of the brokerage industry provides him with a unique and clear perspective on the challenges as well as the opportunities that both borrowers and lenders face in today’s economic environment. He works tirelessly at keeping all participants in the commercial mortgage field informed of the current issues affecting borrowers as well as lenders in the industry to ensure that each is able to take advantage of the current market trends.

The Gala Awards Ceremony is sponsored by the Canadian Mortgage Professionals (CMP). The CMP recognizes and celebrates excellence across the entire spectrum of mortgage brokering. This annual black-tie gala is the event highlight of the year that attracts the biggest names in the business throughout Canada.

Should you have any commercial mortgage needs or simply wish to discuss a project, don’t hesitate to reach out to Michel or any of the team members at Mortgage Alliance Commercial Canada.