Capital Debt Market Update - Summer 2021
Resetting
After living in an unprecedented period where the economy was in disarray, people had to adapt to not only one but a series of lockdowns, uncertainty regarding health and wellness coupled with the impact arsing from government financial support, acceptance and resolve as to what the future holds for the commercial real estate market seems to present some degree of certainty. Transactions are occurring in all sectors and the availability of debt remains strong.
The housing market in Alberta reached levels of activity not seen for decades. Anticipated inflationary pressures may be a driver behind purchase decisions in both the commercial and residential markets. This has clearly been evident in the commodity markets as the impact of Covid shutdowns in manufacturing caused run ups in pricing and shortages of products. Oil prices have been rising however that is more a supply chain reaction.
Inflation rates posted for April at 3.4% and May at 3.6% are the highest seen since May of 2011. Projections are that averaged inflation rates through 2021 should be at 3.0% and down to 2.4% average for 2022. The Bank of Canada’s current position is to hold off on any movement in Prime until such time that the inflation rate can be sustained at the 2.0% level. The expectation is that this should be achieved in the second half of 2022, which may result in a possible hike towards the latter part of that year and into 2023.
The substantial increase in GOC Bond rates which began in the Spring of 2021 coincided with the quantitative easing strategy by the Bank of Canada. In the fall of 2020 up to $6 billion of bonds were being purchased each week. In our Spring report we made mention that by April of 2021 this was to be reduced to $4 billion and anticipated to fall to $3 billion by the fall. The July 14th interest rate announcement has reduced purchases to $2 billion per week, well ahead of that suggested timeline.
Interestingly the GOC bond rates have shown an approximate decrease of 20% since that statement. While Bond Rates were generally in the range of 95bps to100bps through April until the beginning of June, where sub-90bps rates were noted. The July Bank of Canada announcement resulted in the 5 Year rate dropping below 80bps. It will be of interest to see if the reduced purchasing strategy will place further downward pressures on bond rates. Through the early part of 2021 the variance between 5 Year and 10 Year bonds was maintained at approximately 60bps. At the date of this report the variance has reduced to between 35bps to 40bps. The supply of 10 year debt is limited but can be obtained for better quality assets.