May 2023 Commercial Mortgage Report
Some key takeaways to note:
- Healthy increase in origination and assets outstanding in 2022. Not surprisingly, continued trends in the market toward lending secured by multifamily and industrial properties over retail and office. Greater liquidity makes for attractive investment opportunities in the former two, opportunities for value in the right retail deal profiles, whereas still too much uncertainty in office to pursue.
- An interesting analysis covering lender concerns regarding maturities in a higher rate environment. The table on page 4 (see document below) really shows the benefit of amortizing loan structures (something much more prevalent in the conservative Canadian market relative to the US). The example reflects a 42% relative increase in interest rate but with the benefit of amortization leads to only a 14% increase in monthly debt service costs. This is 2.6% annually, well-covered by increases in market rental rates over the prior five year period. A reminder that we access more transitional loan structures in the Fund, but we look to the probability for widespread distress to determine whether it can then cause material increases in delinquency in the market and spillover to asset values and general liquidity. When 85% of Canadian origination volumes are either conventional or CMHC-insured (and nearly all amortizing), it bodes well for higher rate stress and related contagion to be constrained.
- Well-functioning, liquid market in early 2023 for unsecured debt issuances by Canadian REITs. Credit spread differentiation between higher and lower rated issuers is pronounced, and the variance in retail issuers drives home the wide range of portfolios in that space – issuers with necessity-based tenants, limited enclosed mall exposure and a defined redevelopment/value-add strategy (e.g. residential densification) are attracting better pricing.
For more information review the report here.
(2023, May). May 2023 Commercial Mortgage Report. Intellifi. https://www.intellifi.ca/insig...