With 2014 winding to a fast finish, First National’s Peter Cook and Robert Fleet answer some important questions about apartment financing in today’s competitive market. Read on for their thoughts on rates, trends and a glimpse at what they believe is in store for the apartment sector in 2015.
How much impact do global markets have on interest rates here in Canada?
U.S. and global economic news will significantly influence Canadian bond rates. In an increasingly global economy, the strengths and challenges abroad can have a large impact in Canada. If you look back on 2014, investors had a lot to digest. Ebola, ISIS, conflicts in Ukraine and the Middle East, as well as sparring between Russia and the West, have had a significant impact on interest rates. All of this bad news is positive for borrowers as bond rates continue their decline.
Where have interest rates gone in 2014?
In January of 2014 bond rates were at their highest point since July of 2011. Early in the first quarter bond rates declined sharply. During the second and third quarter this decline continued at a much slower pace. Early in the fourth quarter there has been another sharp decline in bond rates largely due to the instability of global markets. As of October 15th of this year the five year bond has dropped over 40 basis points and the ten year bond is down approximately 75 basis points.
What were apartment building sales in Canada like in 2014?
Sales have declined over 30 percent in 2014 compared to the previous year. The shortage of supply continues to contribute to a seller’s market. Prices continue to climb to record highs with the average per suite sale price exceeding 30 percent from the prior 12 months. Offers to purchase with no or few conditions are now the expected.
What recent trends have you noticed in the apartment market?
The number one trend is an increase in the number of applications for purpose built rental construction loans. There are many reasons for this:
- Increasing demand for high-end rentals
- cooling of the condo market
- extremely low cap rates
- shortage of rental supply
- low cost of borrowing for construction financing
- Aging rental stock requiring extensive capital improvements
Another trend we have noticed is many of our clients are taking advantage of the low rates and unlocking equity to make major capital improvements to their buildings. Landlords have also been borrowing to improve curb appeal, add amenities, green their buildings and modernize suites to increase rents.
Where are we heading in 2015?
We expect that 2015 will continue to be a seller’s market with strong demand for multi-family properties. We also anticipate that we will see even greater construction activity across Canada in the apartment sector. Landlords will continue to re-invest in their properties by taking advantage of the low rates.
The speculation by many experts these days seems to be rates will eventually increase over the next few years. This will happen if there is a firm economic recovery and we overcome the most recent global turmoil. However in our opinion we are not convinced these conditions will improve anytime soon. Borrowers should be grateful for extremely low interest rates currently available to refinance or acquire new properties.
Peter Cook (pcook@firstnational.ca, 416-593-2913) and Robert Fleet (robert.fleet@firstnational.ca, 905-301-3449) are Apartment Financing Specialists with First National Financial LP. Together they have originated over $3 billion of mortgages and their combined 32 years of experience with mortgage financing has led to frequent speaking engagements across the country.
