Licence Number 10170

Strategic Mortgage assists in financing income properties secured by commercial, industrial, residential and healthcare buildings together with CMHC insured projects for multi-family rental occupancy. The company is also active in the secondary market sale of mortgage assets on behalf of institutional clients.

Thursday, December 17, 2009

Commercial Real Estate Transactions Rebound

If recent statistics are to be believed there has been a significant closing of the bid-ask gap in commercial real estate. Purchasers waiting for a flood of distressed assets to hit the market following the recent financial crisis have been disappointed - transaction volumes dried up significantly in the September 2008-August 2009 period. Vendors were able to hold out for better pricing and, now that the worst seems to be behind us, transactions seem to be resuming at a much faster pace.

A major factor has been the gradual improvement in commercial mortgage funding, a trend which is expected to continue into 2010 as the traditional portfolio lenders (the life companies and pension funds) return to the table.

Cap rates have definitely risen but the impact has been more pronounced in secondary markets and for assets with less durable income streams or weaker tenant profiles. A recent offering of a Vancouver apartment building in a very desirable location has a 3.4% suggested cap label! The GTA has seen a resurgence in commercial real estate sales during Q4 2009 but cap rates still appear to be around 75-150 bps over the 2007 levels depending upon asset type and location.

Tuesday, December 15, 2009

Strategic Outlook

The Real Estate Forum held in Toronto at the beginning of December 2009 ended on a cautiously optimist note, at least for Canadian real estate markets. As a specialist in the commercial mortgage sector, I am struck by the sudden improvement in the availability of mortgage capital since the late summer and I anticipate a strong start in Q1 2010 as the Canadian life insurance companies roll out their programs after fairly lacklustre volumes in 2008-2009.

Interest rate spreads have been tightening over the past few months after peaking at 400-450 bps during the worst of the financial crisis in late 2008. On December 1, 2009, Brookfield announced the financing, via a mortgage bond, of the iconic First Canadian Place in Downtown Toronto. The $310 million loan was priced at 280 bps over the Government of Canada 5-year bond and was reportedly subscribed to by seven institutional investors. An unconfirmed report indicated that one lender had been prepared to take the entire issue but perhaps at a slightly wider spread. If true, this would mark an end to conventional wisdom that assumes all large (plus $75 million) deals require syndication.

Spreads for prime commercial real estate assets are sinking below 250 bps today and at least one major lender predicts that spreads will ease to 200 bps by Q3 2009. This bodes well for good quality real estate with lower loan to value mortgages (<65%) and strong tenant profiles. More challenging will be financing for real estate in secondary markets or with less predictable income.

CMHC insurance will continue to dominate as the preferred option for the financing of rental apartments. Although the interest rate spread between conventional and CMHC financing options will narrow throughout 2010, CMHC will remain attractive in financing both acquisitions and renewals. When seeking to maximize loan proceeds, borrowers will continue to view CMHC's underwriting approach as conservative - e.g. when discussing cap rates, repair and maintenance allowances, vacancy and the analysis of energy costs - but we expect that conventional underwriting will mirror, to a great extent, these underwriting positions.

2009 has turned out to be a pivotal year. We seem to have turned the corner on the pessimism and negativity of 2008 but there are still those experienced professionals who advocate caution and certainly the economy of the United States remains fragile.

The last decade has presented us with many unforeseeable challenges and shocks to the system. Cautious optimism is perhaps the prudent approach to 2010.