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Rental Market in Canada – Fall 2018

A Falling Vacancy Rate

Once per year, Canada Mortgage and Housing Corporation provides a comprehensive review of rental markets across Canada. The survey occurs during the first half of October. Results for this year were released on November 28.

For October 2018, the vacancy rate was 2.4%, which was a substantial drop from the 3.0% rate recorded a year earlier. The vacancy rate for 2018 is far below the average of 3.3% for the entire period shown in this chart. The reduction in vacancies resulted in more rapid rent increases, at 3.5% this year. Over the entire period shown, the average increase was 2.6%. This data shows that the situation has become increasingly challenging for Canada’s tenants.

 

 

Vacancy rates fell in 7 of the 10 provinces. Manitoba, BC, and Ontario saw small increases in their vacancy rates. These three provinces also saw the most rapid rent increases. The lowest vacancy rate is now in PEI, followed by BC and Ontario. The highest vacancy rates are in the three provinces where economies have been hurt by the plunge in oil prices (Saskatchewan, Newfoundland and Labrador, and Alberta). These provinces saw the weakest rent increases.

 

Interpretation

Since the data is collected only once per year, it is difficult to construct any models for analysis or forecasting of rental markets. The author’s experimentation over many years, for many different communities across Canada, has resulted in statistical models that have low “reliability”. But, those low-reliability results have been surprisingly consistent, and have led to a conclusion: the two most important drivers of changes for the vacancy rate are job creation during the past year (which allows more people to buy or rent housing) and total completions of housing during the past year.It is tempting to expect that completions of new-rental apartments would be important, but the author’s analysis has found that this is rarely the case.

On reflection, this makes sense:

  • The rental market is part of a complex housing system in which there are very large flows between ownership and renting, and between different forms of housing.
  • Expansion of the total stock of housing offers people more choice: even when people move into new home ownership dwellings, that move sets of a chain of other moves. Much of the time, that chain of moves includes someone moving out of a rental, which creates an opportunity for a new tenant.
  • Moreover, the tenure on a new dwelling is not fixed for all time. In particular, it is well known that many new condominium apartments are occupied as rentals. In addition, some low-rise dwellings (single-detached, semi-detached, and town homes) are ostensibly built for ownership but are made available as rentals.

It is also tempting to expect that changes in resale market activity will affect the rental market. But, once again while the statistical analysis produces unreliable results, over many repetitions it has been found that resale activity has little effect on vacancy rates. This also makes sense on reflection. Most of the time a resale transaction does not add to total demand for housing (the buyer usually moves out of a different dwelling) and it usually does not alter the total supply of housing (unless the new buyer adds or removes a basement apartment).

Employment Trends

Our impressions about the employment situation are largely based on data from Statistics Canada’s Labour Force Survey (“LFS”). This data indicates that during the year up to this September, employment in Canada expanded by 1.2%. This is slower than the rate of population growth (1.3%), and this therefore should be considered a mediocre result. Based on this data, we would expect that housing demand would be weak, and the drop in the vacancy rate this year would be a surprise.

However, the data from the LFS is derived from a sample survey and like all such surveys, it can produce errors. Statistics Canada has a second survey (Survey of Employment, Payrolls and Hours, or “SEPH”), which is based on data from employers, and is therefore likely to produce more-accurate data. This data receives much less attention because it is published almost two months after the LFS (the most recent data is for August). The two datasets usually tell similar stories. At present, however, SEPH shows growth of 1.8% (as of August) versus the 1.2% shown by the LFS (as of September).

Over the entire period shown in this chart, job growth averaged 1.5% per year. Strong job growth in both 2017 and 2018 helps to explain the drops in the vacancy rates that were seen in both years. Housing completions were at above average levels during 2017 and 2018 (the chart shows the figures for 12 month periods ending in September). These elevated volumes of new housing supply provided some relief for rental markets. Without this additional housing supply, the drops in the vacancy rates in 2017 and 2018 would have been even larger than they were.

 

Looking Forward

The mortgage stress tests have resulted in reduced buying of new and existing homes. It takes some time for changes in purchases of new homes to translate in reduced housing starts (and even longer for housing completions to be affected). Increasingly, it appears that housing starts have peaked, and may have started to fall. The next chart illustrates that total housing starts were very strong during 2016 and 2017, but the trend has started to fall during 2018. A more detailed examination would show that housing starts have turned sharply for low-rise dwellings (single-detached, semi-detached, and town homes) but remain very strong for apartments. During 2019, starts for apartments will gradually reflect the reductions in sales that have occurred this year. This is explored in more detailed within the Housing Market Digest reports (for Canada and the regions) that can be found here: https://goo.gl/kJ6mcC

Following from these trends for housing starts, housing completions are expected to fall only slightly during the coming year, meaning that new housing supply will continue to provide some relief for the rental sector. However, housing completions are expected to fall considerably during 2020. As for employment, higher interest rates can be expected to gradually weigh on job creation during 2019 and 2020.

For 2019, a combination of continued high levels of housing completions and a slowdown of job creation should mean that there will be little change in the apartment vacancy rate (perhaps a drop to 2.3% from the 2.4% seen in 2018). The low vacancy rate can be expected to result in continued rapid rent increases, at a rate of at least 3%.

During 2020, the reduction of housing completions that will result from the mortgage stress tests will add to pressures in the rental sector. For 2020, the vacancy rate is expected to drop further (approaching 2.0%) and rent increases will quicken.

Government Policies at Cross Purposes

The federal government has announced plans to make major expenditures in support of affordable housing ($40 billion over 10 years). The federally-mandated mortgage stress tests, by reducing movements out of renting, will add to pressures within rental housing markets, and are operating at cross-purposes to the National Housing Strategy.

 

 

 

Disclaimer of Liability

This report has been compiled using data and sources that are believed to be reliable. Mortgage Professionals Canada Inc.
accepts no responsibility for any data or conclusions contained herein. Completed by Will Dunning, November 28, 2018.
Copyright: Mortgage Professionals Canada 2018

$70.8 million affordable housing investment for Ottawa

Middle-class families in Ottawa will benefit from 243 new rental units being built in the city with an investment from the federal government.

Two projects will be financed through the CMHC’s Rental Construction Financing initiative including $70.8 million for the construction of a twenty-seven storey building with 227 rental housing units. More than 200 will have rents lower than 30% of median household income in the area.

“The project represents a major step forward in sustainable design with ambitious design targets to reduce energy consumption by 50% and reduce carbon emissions by over 75% with an integrated geothermal system for the project,” said Neil Malhotra, Vice President, Claridge Homes who will build the 70 Gloucester development.

The other will be $3.9 million for a passive housing Centretown Citizens Ottawa Corporation project on Arlington Avenue. It will feature 16 rental housing units with rents well below 30% of median household income in the area.

“Through the National Housing Strategy, more middle class Canadians – and those working hard to join it – will find safe, accessible and affordable homes where their families can thrive and have the stability and opportunities they need to succeed. Our Government is committed to increasing the supply of rental units for Canadians through projects like the ones we are announcing today,” added Jean-Yves Duclos, the Minister responsible for Canada Mortgage and Housing Corporation.

 

by Steve Randall  Ι  24 Sep 2018

Commercial Real Estate Loan (CRE)

Commercial Real Estate Loan (CRE) is income-producing real estate that is used solely for business purposes, such as retail centers, office complexes, hotels, and apartments. Financing – including the acquisition, development, and construction of these properties – is typically accomplished through commercial real estate loans: mortgage loans secured by liens on commercial, rather than residential, property.

Just as with residential loans, banks and independent lenders are actively involved in making loans on the commercial real estate. Also, insurance companies, pension funds, private investors and other capital sources, make loans for the commercial real estate.

Let’s take a look at commercial real estate loans: how they differ from residential loans, their characteristics and what lenders look for.

Individuals vs. Entities

While residential mortgages are typically made to individual borrowers, commercial real estate loans are often made to business entities (e.g., corporations, developers, partnerships, funds, and trusts). These entities are often formed for the specific purpose of owning commercial real estate.

An entity may not have a financial track record or any credit history, in which case the lender may require the principals or owners of the entity to guarantee the loan. This provides the lender with an individual (or group of individuals) with a credit history and/or financial track record – and from whom they can recover in the event of loan default. If this type of guaranty is not required by the lender, and the property is the only means of recovery in the event of loan default, the loan is called a non-recourse loan, meaning that the lender has no recourse against anyone or anything other than the property.

Loan Repayment Schedules

A residential mortgage is a type of amortized loan in which the debt is repaid in regular installments over a period of time. The most popular residential mortgage product is the 30-year fixed-rate mortgage.

Residential buyers have other options, as well, including 25-year and 15-year mortgages. Longer amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan, while shorter amortization periods generally entail larger monthly payments and lower total interest costs. Residential loans are amortized over the life of the loan so that the loan is fully repaid at the end of the loan term. A borrower with a $200,000 30-year fixed-rate mortgage at 5%, for example, would make 360 monthly payments of $1,073.64, after which the loan would be fully repaid.

Unlike residential loans, the terms of commercial loans typically range from five years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a term of seven years with an amortization period of 30 years. In this situation, the investor would make payments for seven years of an amount based on the loan being paid off over 30 years, followed by one final “balloon” payment of the entire remaining balance on the loan. For example, an investor with a $1 million commercial loan at 7% would make monthly payments of $6,653.02 for seven years, followed by a final balloon payment of $918,127.64 that would pay off the loan in full.

The length of the loan term and the amortization period will affect the rate the lender charges. Depending on the investor’s credit strength, these terms may be negotiable. In general, the longer the loan repayment schedule, the higher the interest rate.

Loan-to-Value Ratios

Another way that commercial and residential loans differ is in the loan-to-value ratio (LTV): a figure that measures the value of a loan against the value of the property. A lender calculates LTV by dividing the amount of the loan by the lesser of the property’s appraised value or purchase price. For example, the LTV for a $90,000 loan on a $100,000 property would be 90% ($90,000 ÷ $100,000 = 0.9, or 90%).

For both commercial and residential loans, borrowers with lower LTVs will qualify for more favorable financing rates than those with higher LTVs. The reason: They have more equity (or stake) in the property, which equals less risk in the eyes of the lender.

Commercial loan LTVs, in contrast, generally fall into the 65% to 80% range. While some loans may be made at higher LTVs, they are less common. The specific LTV often depends on the loan category. For example, a maximum LTV of 65% may be allowed for raw land, while an LTV of up to 80% might be acceptable for a multifamily construction. There are also private mortgages available for commercial lending.

Debt-Service Coverage Ratio

Commercial lenders also look at the debt-service coverage ratio (DSCR), which compares a property’s annual net operating income (NOI) to its annual mortgage debt service (including principal and interest), measuring the property’s ability to service its debt. It is calculated by dividing the NOI by the annual debt service. For example, a property with $140,000 in NOI and $100,000 in annual mortgage debt service would have a DSCR of 1.40 ($140,000 ÷ $100,000 = 1.4). The ratio helps lenders determine the maximum loan size based on the cash flow generated by the property.

A DSCR of less than 1 indicates a negative cash flow. For example, a DSCR of .92 means that there is only enough NOI to cover 92% of annual debt service. In general, commercial lenders look for DSCRs of at least 1.25 to ensure adequate cash flow. A lower DSCR may be acceptable for loans with shorter amortization periods and/or properties with stable cash flows. Higher ratios may be required for properties with volatile cash flows – for example, hotels, which lack the long-term (and therefore, more predictable) tenant leases commonly to other types of the commercial real estate.

Interest Rates and Fees

Interest rates on commercial loans are generally higher than on residential loans. Also, commercial real estate loans usually involve fees that add to the overall cost of the loan, including appraisal, environmental report, legal, loan application, loan origination and/or survey fees. Some costs must be paid up front before the loan is approved (or rejected), while others apply annually. For example, a loan may have a one-time loan origination fee of 1%, due at the time of closing, and an annual fee of one-quarter of one percent (0.25%) until the loan is fully paid. A $1 million loan, for example, might require a 1% loan origination fee equal to $10,000 to be paid up front, with a 0.25% fee of $2,500 paid annually (in addition to interest).

Prepayment

A commercial real estate loan may have restrictions on prepayment, designed to preserve the lender’s anticipated yield on a loan. If the investors settle a debt before the loan’s maturity date, they will likely have to pay prepayment penalties. There are four primary types of “exit” penalties for paying off a loan early:

  • Prepayment Penalty. This is the most basic prepayment penalty, calculated by multiplying the current outstanding balance by a specified prepayment penalty.
  • Interest Guarantee. The lender is entitled to a specified amount of interest, even if the loan is paid off early. For example, a loan may have a 10% interest rate guaranteed for 60 months, with a 5% exit fee after that.
  • Lockout. The borrower cannot pay off the loan before a specified period, such as a 5-year lockout.
  • Defeasance. A substitution of collateral. Instead of paying cash to the lender, the borrower exchanges new collateral (usually Treasury securities) for the original loan collateral. High penalties can be attached to this method of paying off a loan.

Prepayment terms are identified in the loan documents and can be negotiated along with other loan terms in commercial real estate loans. Options should be understood ahead of time and evaluated before paying off a loan early.

The Bottom Line

With commercial real estate, it is usually an investor (often a business entity) that purchases the property, leases out space and collects rent from the businesses that operate within the property: The investment is intended to be an income-producing property.

When evaluating commercial real estate loans, lenders consider the loan’s collateral; the creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns; and financial ratios, such as the loan-to-value ratio and the debt-service coverage ratio.

By: Daniela Peeva |  June 26, 2017

$ 143,850,000 secured in construction financing !

post-november

Mortgage Alliance Commercial is pleased to announce that it has secured $143,850,000 in construction & project financing to support the development of Unionville Gardens Condo & Townhomes Project. Multiple lenders participated in this financing masterpiece.

Unionville Gardens has 379 condo units and 72 townhouses. This project is spearheaded by a visionary real estate developer, Wyview Group who brings to Canada a reputation for delivering quality and craftsmanship to all his endeavors.

The project is a resounding success and is currently 95% sold out with a delivery anticipated to begin as of spring of 2019.
macc-commercial-logo-2
Contact us today!
416-499-5454 ext 259 / info@macommercial.ca

Global Economy Outlook

Just when you thought it was safe to get back into the pool….

Wednesday’s post-Fed minutes equity rally reversed sharply on Thursday as investors focused again on the outlook for the global economy.  ECB (European Central Bank) chief Mario Draghi added fuel to this week’s fire with a warning about the troubled euro zone.  Toss in Ebola, ISIS, and Hong Kong protests and there is a lot for markets to think about.  Hopefully, with the long weekend in Canada and the US (Columbus Day), markets will have plenty of time figure it all out before Tuesday.

The good news for mortgage borrowers is that bond rates are back down to recent lows thanks to the general dovish tone of the FED.   Unfortunately, credit spreads are under pressure given the recent blood bath in equities, but Canada Mortgage Bonds did outperform the rest of the credit spectrum, so we’ve got that going for us.

Fun Thanksgiving fact: Benjamin Franklin preferred the Turkey over the Bald Eagle (“a bird of bad moral character”) as the American national bird.