Now that 2015 has ended and we begin 2016, we can wonder what lies ahead for this year. Before we take a look at the possibilities, let us review what 2015 produced. A review of the preceding year allows us to look for trends that occurred throughout the year which may hold true in 2016 or create other possibilities.
From the financing capital perspective, 2015 continued to represent record low interest rates, lots of new financings and many refinancing transactions. Financing capital was available for all asset classes and there was high demand to finance the mainstream assets of retail, office and apartment buildings.
Lender credit spreads remained competitive for good quality assets leading to mortgage coupon rates for these assets below the 4.00% range for five year term conventional mortgages.
The majority of conventional mortgage financing saw primarily five year mortgage terms with some sporadic availability for ten years and longer. CMHC insured five year and ten year terms continued to dominate the market for apartment building financing with mortgage coupon rates continuing at record low rates.
The Bank of Canada started the year with the expectation that it may look at increasing the overnight bank rate, but after considering mid year Canadian economic conditions instead opted to reduce it mid way through the year.
Oil prices dropped drastically leading to a slowdown of economic activity and high employment losses throughout Alberta. As the year closed out the once ever steady optimism about the resilience of the Canadian economy started to wane.
By the end of 2015 there was considerable concern and scepticism in the finance markets.
So what does 2016 forecast? Initial feedback continues to point to the concern and scepticism with increased nervousness. Concern continues to dominate discussions about the state and activity of the Canadian economy.
Oil prices continue to hover around the thirty dollar a barrel range, only acting to heighten the uncertainty in the Alberta economy. Alberta real estate fundamentals are being challenged which has lead to increases in vacancy rates over all asset classes, drops in rental rates per square foot for office and industrial assets and to increases in incentives provided by property owners of apartment buildings to rent their units.
While capitalization rates have remained stable, this may be the year where they begin to adjust and we see some deflation in rents across all assets. This phenomenon is not only affecting the Alberta market, but is starting to trickle into additional markets across the country.
What does it mean for lenders?
So what will this mean for lenders when underwriting a property this year? With the heightened uncertainty it will make it difficult to stretch mortgage underwriting parameters that have traditionally allowed both lenders and borrowers to maximize the lending value and the mortgage proceeds for a property. This will ultimately lead to a lower probability of maximizing the equity proceeds a borrower may be able to withdraw from their property when refinancing the property. Lending values may become more conservative which will reduce the value of the property during a refinance.
While there may still be an abundance of capital available for financing of the asset classes, there will be a heightened focus on assets located in major markets and the quality of the covenant being provided as mortgage security. In short, there will be a flight to quality.
This does not mean that financing will not be available, it simply means that it will be more selective. Increased selectiveness could eventually lead to widening of credit spreads thereby affecting the mortgage coupon rates leading to increased pressure for them to rise. Only time will tell.
Of course all or none of this may happen. As a property owner, the most prudent thing you could do to mitigate all the risk and uncertainty would be to keep in touch with your lender to be educated on market changes. It is simply a prudent thing to do.