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Volatility Normalization_CBRE November 2018

Interest rate hikes, plunging oil prices, unresolved U.S.-China trade tensions and an uncertain Brexit outcome are all factors lifting market volatility from its doldrums of the past face years. However, even as the stock market works through its fourth major rout this year, the CBOE Volatility Index has remained in line with its long-term historical norm this month. According to The New York Times, this period of volatility is likely to persist as the U.S. economy and financial markets become more vulnerable to risks including slowing global growth and higher domestic interests rates.

Back home, falling global oil prices and a wide discount to WTI crude has led to the worst pricing environment for Canadian oil in history. At the same time, the industry is at an impasse on how best to resolve the supply glut. Some producers are calling for mandated production cuts while refiners decry government intervention. Stalled pipeline projects continue to exacerbate the situation.

General Motor’s recently announced global restructuring plan signals a transformation in the auto industry towards electric and autonomous vehicles. While this industry shift has the potential to ripple across one of Canada’s key economic drivers, its impact will likely see some offset from increased capital expenditures. Auto manufacturers will need to repurpose and upgrade their facilities in order to adapt to shifting transportation demands. As well, the $14 billion in corporate tax cuts introduced by the federal government will be of particular benefit to Canadian manufacturers.

The prevailing risk-off mood of investors this month pushed Canadian bond yields down towards their September levels, igniting fresh concerns over the yield curve inverting and the economy being late in the cycle. During a recent presentation at the Toronto Real Estate Forum, two prominent economists called for an impending slowdown of the economy, through each argued for differing levels of its severity. Under either scenario, the need may weaken for the Bank of Canada’s projected interest rate increases in 2019.

Challenges may have risen in some sectors, but the Canadian tech industry continues to benefit from a strong and expanding tech employment base as reported in CBRE’s 2018 Scoring Canadian Tech Talent report. While Toronto still leads the country with top talent, significant growth has also been recorded across emerging markets from coast to coast.

 

Economic Highlights :

  • Retail sales grew 0.2% in September with increases in six of the 11 subsectors
  • Headline inflation rose 2.4% in October and the average Bank of Canada measures rose to 2.0%.
  • The share of highly indebted households in Canada fell to 13% in Q2 2018 from 18% last year.

 

 

 

Benchmark Yields

Viewpoints :


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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

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.

MAC Rally of Hope – Raising Money for Canadian Cancer Society

Our amazing team of riders have officially finished their 10,000 kms in 12 days! They started in St. John’s, NF on July 19th and finished in Vancouver, BC on the 31st, stopping in six cities on the way.

This is Mortgage Alliance’s 7th year riding across Canada to raise money for the Canadian Cancer Society. So far we have raised over $1,000,000 and expect to have raised $150-200 thousand this year alone!

Despite the gusty winds in Newfoundland, heavy fog in Sault St. Marie, tornado in Manitoba, or the down trench rain pour in Saskatchewan, the team pushed through to make it across the country safe and sound.

You can still support the cause by clicking HERE. Join us in fighting against cancer!

Here is our team halfway across the country at Swift Current – featured in the local newspaper.

 

We’d also like to thank all the sponsors, volunteers and the generous donors for all their help and support!

http://www.macrallyofhope.ca/

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.