Posts

Debt & Structured Finance | Canada Research

Curve inversion draws CRE capital

Increasing evidence of a global economic slowdown in recent weeks has elevated the risk profile for Canada’s economy. Globally, Brexit negotiations are still gridlocked, the Eurozone economy falters and U.S.-China trade negotiations drag on. Domestically, household debt-to-income levels are the highest they have ever been, retail sales are slowing, oil sands producers are reevaluating projects due to pipeline delays and the likelihood for ratification of the CUSMA trade deal wanes as tariffs remain. These developments have sparked concern that a technical recession may emerge in Canada given weak expectation for Q1 2019 growth and a potential downward revision to Q4 2018’s already meager results.

Amid these growing headwinds, the Federal Reserve eliminated their expectations for an interest rate hike this year. The Fed acknowledged the need to avoid getting stuck in a deflationary environment like that which has plagued Japan for the last two decades. In turn, this dovish shift in tone triggered an inversion on another segment of the U.S. yield curve as investors sought the safety of bonds. Widely considered a reliable harbinger of a downturn within a few years, the spread between 10-year Treasury bond yields fell below its 3-month counterpart for the first time since just prior the Great Financial Crisis. The inversion also emerged in Canada and pulled down global bond yields. In fact, investors are even pricing in expectations for central banks to cut interest rates by the end of 2019 to keep the economy going. For the commercial real estate market, falling bond yields may translate to lower mortgage rates with wider cap rate spreads. The precipitous fall in bond yields has some lenders contemplating next steps.

Against this backdrop, commercial real estate has become an increasingly attractive investment vehicle. According to CBRE’s Global Investor Intentions Survey 2019, diversification is the primary driver for investors in the Americas showed the strongest interest for value-add property assets. However, the commercial real estate sector has attracted an abundance of capital over recent years and real estate funds are now challenged to deploy all that capital as the levels of dry power continue to rise. But even more capital is expected to come with the recent formation of several mega-sized real estate funds such as BCI and RBC’s CA $7 billion investment partnership, Brookfield’s recent closing of its US$15 billion BSREP III fund and Blackstone’s record-setting US$20 billion property fund on the horizon.

 

 

 

 

 

 

 

 

 

 

 

This disclaimer shall apply to CBRE Limited, Real Estate Brokerage, and to all other divisions of the Corporation; to include all employees and independent contractors (“CBRE”). All references to CBRE Limited herein shall be
deemed to include CBRE, Inc. The information set out herein, including, without limitation, any projections, images, opinions, assumptions and estimates obtained from third parties (the “Information”) has not been verified by
CBRE, and CBRE does not represent, warrant or guarantee the accuracy, correctness and completeness of the Information. CBRE does not accept or assume any responsibility or liability, direct or consequential, for the Information
or the recipient’s reliance upon the Information. The recipient of the Information should take such steps as the recipient may deem necessary to verify the Information prior to placing any reliance upon the Information. The
Information may change and any property described in the Information may be withdrawn from the market at any time without notice or obligation to the recipient from CBRE. CBRE and the CBRE logo are the service marks of
CBRE Limited and/or its affiliated or related companies in other countries. All other marks displayed on this document are the property of their respective owners.AllRights Reserved.

Image result for cbre

Commercial Mortgage Commentary – Customer Forward Thinking.

Making News

Economy

2018 started with confidence from the Bank of Canada’s (“BOC”) economic outlook for the year. However, the GDP growth forecast gradually declined as oil prices dropped and as tensions grew in international trade markets. As a result, we saw a reversal in the increasing trend of Government of Canada (“GOC”) bond yields at the end of 2018. 2019 begins with some uncertainty around the growth in the Canadian economy, the direction of GOC yields, and whether further increases in the overnight rate will occur in 2019..


.

GOC Yields

GOC bond yields ended generally flat in 2018 – the 3-year GOC
increased by 11 bps, 5-year increased by 1 bps, and the 10-year
GOC yield decreased by 9 bps.

.

Overnight Rate

There were three rate hikes in 2018 for the Bank of Canada (“BOC”) overnight target rate, which brought the rate to 1.75%, the
highest since Q4/08, but the Bank of Canada held the overnight
rate constant for their last two meetings.


Commercial Mortgage

Capital supply and competition for commercial mortgages remained strong throughout 2018 as spreads continued to absorb the increases in the GOC yields, holding commercial mortgage coupons relatively steady. During Q4/18, GOC bond yields fell in response to the deteriorating outlook from the BOC, reversing the upward trend in 2018. Corporate bond markets reacted as investors demanded higher spreads – roughly 50 bps higher for BBB-rated corporate bonds in Q4/18 alone.

Commercial mortgage spreads became a hot topic towards the end of Q4, as brokers and investors alike were looking for signs of change in the market. Commercial mortgage spreads eventually reacted with an increase in December by 10-15 bps, ending the 

year at 150-170 bps for top quality assets. The average 5-year conventional commercial mortgage coupon ended 2018 roughly flat at 3.60%. January 2019 has quickly seen another 15 bps increase in spreads, now in the range of 165-185 bps for top quality assets.

BBB-rated corporate bond investments tend to compete for the same capital as commercial mortgages, since BBB-rated corporate bonds provide a similar return on risk. As firms look to make portfolio investment decisions, the spread premium for commercial mortgages over BBB-rated corporate bonds can be an indication of where capital supply may shift or how commercial mortgage spreads may respond to changes in BBB-rated corporate spreads.

Recent increases in BBB-rated corporate bond spreads improved the relative attractiveness of this investment against commercial mortgages. The spread premium for commercial mortgages dropped from 85 to 25 bps year over year – significantly lower relative to the 67 bps long term average. Consequently, commercial mortgage funds may 

require higher spreads to compete for capital against their BBB-rated corporate bond counterparts.

Based on the low spread premium for commercial mortgages compared to the long-term average, a further widening in commercial mortgage spreads is possible.


Senior Unsecured Debt

In Q4/18, senior unsecured debt issuance reached $1 billion,up from $375 million in Q3/18. Total issuance for the year was driven largely by the nearly $2 billion raised by Choice Properties REIT in Q1/18. 

Overall spreads on BBB-rated senior unsecured debt rose sharply from 145 bps at the end of Q3/18 to 194 bps by the end of Q4/18. With the increase, spreads surpassed those of conventional commercial mortgages. With the current premium for unsecured debt, REITs and REOCs may consider more conventional mortgage financing.


CMHC

CMHC-insured mortgages offer an attractive return for lenders looking to earn additional yield, while maintaining an indirect

guarantee from the Government of Canada. As most insured mortgages are originated with the purpose of securitization into the National Housing Act (“NHA”) Mortgage-Backed Security program run by CMHC, lenders tend to quote spreads based on Canada Mortgage Bond (“CMB”) spreads. Given this, it is no surprise with the increases in CMB spreads seen in Q4/18, that CMHC-insured spreads also increased.

Through Q4/18, the 5-year and 10-year CMB spreads increased from 29 bps to 42 bps and from 38 bps to 55 bps, respectively. Spreads on CMHC-insured mortgages followed suit with a 10 – 15 bps increase to 90 – 115 bps over GOC on 5-year terms and 100 – 125 bps on 10-year terms.


Quarterly Lenders Sentiment Survey and
Annual Commercial Mortgage Survey

The CMLS Mortgage Analytics Group conducts market surveys to enhance market knowledge and transparency on areas such as size, segment analysis, and trends in the Canadian commercial mortgage market. Since inception in 2010, the surveys have grown to cover over 90% of the commercial mortgage market.

 

February 2019

 

Commercial Mortgage Commentary – CMLS Mortgage Analytics Group

Making News

Overnight Rate
In late October, the Bank of Canada (“BOC”) announced the third 25 bps rate hike this year, which brought the overnight target rate to 1.75%. The increase comes after continued strength in economic figures and the negotiation of the “new NAFTA” trade deal with Mexico and the U.S. This pushed the prime rate of major Canadian banks to 3.95%.


GOC Yields
Spread premiums between the Government of Canada (“GOC”) 3, 5, and 10-year term bond yields remain extremely tight. Through Q3/18, the premium between 3-year and 10-year tightened by 4 bps, while the premium between 5-year and 10-year remained unchanged.

Investments
In Q3/18, Telus sold its Vancouver headquarters, Telus Garden, to a partnership of investors represented by Regina-based Greystone Managed Investments for an undisclosed amount. The property was built as a joint-venture by Telus and Westbank Corp. for $750 million and consists of an office tower and residential building in Downtown Vancouver. Telus is expected to generate approximately $170 million in profit on the sale.


Commercial Mortgages

Lenders and borrowers have maintained balanced supply and demand for the 5th straight month with commercial mortgage spreads staying flat. 5-year deals are pricing 145 bps to 160 bps over GOC bonds for top quality assets, while 10-year spreads are pricing at a 10 bps premium for similar risk. The liquidity premium of commercial mortgage spreads over BBBrated corporate bonds remained generally unchanged since our last report with the premium down slightly from 64 bps to 62 bps as a result of a slight increase in corporate spreads. This moves the liquidity premium away from the long-term average of 70 bps.


CMBS

The CMBS market continues to be challenged by unattractive profitability due to tightening commercial mortgage spreads relative to CMBS bonds. Recent weighted average breakeven mortgage spread for new CMBS issuance was approximately 225 bps and with current spreads around 190 bps, the prospects of profitability falls short by 35 bps. Until the commercial mortgage spreads move past the CMBS breakeven point, new issuance activity is expected to be thin.

Senior Unsecured Debt

In Q3/18, senior unsecured debt issuance slowed to $625 million, down from $1.65 billion in Q2/18. However, cumulative 2018 issuance is up 27% on a YTD basis and makes up 86% of the total issuance in 2017. Since our last report, Crombie REIT issued a $75 million, 2.9- year note with a 170 bps spread. Overall, spreads on BBB-rated unsecured debt decreased through Q3/18 to 145 bps. For now, spreads on unsecured REIT debt continue to receive cheaper investor dollars compared to conventional commercial mortgages with a difference of only 10 bps at the end of Q3/18.

CMHC

Spreads on multi-family CMHC-insured loans remained stable since our last report with spreads ranging between 80 bps and 105 bps over GOC on 5-year terms and between 85 bps and 110 bps over GOC on 10-year terms. This is partly due to the relatively unchanged spreads on CMHC-backed Canada Mortgage Bonds (“CMB”). 5-year CMB spreads only decreased 3 bps to 28 bps and the 10-year CMB spreads remained flat between July and September.


High Yield

In Q3/18 the British Columbia Securities Commission (BCSC) announced it will not be renewing the exemption that previously allowed Mortgage Investment Corporations (MICs) to operate in BC without engaging in the onerous registration process with the BCSC. The impact of this announcement will be felt in the local industry as many small MICs will now have to endure registration costs.

ABOUT CMLS MORTGAGE ANALYTICS GROUP
The CMLS Mortgage Analytics Group (“MAG”) is a division of CMLS and the leading provider of independent mortgage valuation, risk ratings, market research and software to the commercial mortgage industry in Canada. Our clients include some of the largest institutional asset managers and insurance companies with assets under management ranging from single digit billions to over $100 billion.

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.

Click Here for the source of this article.

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.

Click Here for the source of the article

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.