Capital Debt Market Update - Winter 2021January 11, 2021
We didn’t publish a newsletter in the fall, in order to accurately review the lending environment after the inevitable “second wave” of COVID-19 in Canada. In the last newsletter in Summer 2020, we stated the capital markets were beginning to loosen up, and that inquiries for debt had began to increase. This statement holds true at the start of 2021, with many lenders back open for business, and a large portion of them looking to increase their loan book and real estate portfolio allocations this year. The strongest real estate classes remain to be industrial and multi-family, while there is still a strong demand for service-based retail properties.
In Western Canada, almost all lenders remain active in Alberta, however most remain cautious and deal- or borrowerdependent. Vancouver and Victoria remain strong on the list for appetite while Winnipeg has more of a moderate appetite from lenders.
Many Canadian economists continue to caution that a slight tightening could occur in early 2021 as a second wave of cases stalls economic momentum, and at the same time, the Bank of Canada remains committed to keeping interest rates near zero until 2023 and recently expanded quantitative easing to keep rates low across the yield curve. The desire is that even as the economy is expected to ramp up again in 2021, the Canada 5- and 10-year bond yields will remain low. Real estate debt in Canada has never been cheaper for borrowers thanks to this current low bond yield environment. Lending spreads surged during the early days of the pandemic but have since tightened significantly, though still remain elevated relative to early 2020 and late 2019. Today, lending spreads over the GOC bonds are moderately wider with lenders typically pricing loans approximately 25 bps higher than the prepandemic environment at 170–200 bps for 5-year terms and 200–250 bps for 10-year terms.
CMHC insured financing rates for multifamily rental buildings have remained flat in the last 2 quarters of 2020, and due to the lower Canadian Mortgage Bond (CMB) yields interest rates are extremely attractive starting at 1.20% for 5-years and 1.50% for 10-years.