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Transcript
APRIL 2017 Debt Market Monitor National Debt Capital Markets Services Musings on longer-term inflation and interest rates After nearly exhausting the topic of a potential interest rate increase, the U.S. Federal Reserve surprised no one with its move to hike the fed funds rate by 0.25% at its March meeting. The focus of the markets is now on how many interest rate increases will occur during the remainder of 2017. The consensus view, including that of the Fed, is that another two or three hikes will occur. However, this generally held view of further interest rate increases in the short term may not reflect longer-term realities. With unemployment at less than 4.7%, inflation averaged 1.3% in 2016 and climbing above 2% in early 2017, and wage growth stumbling along; everything seems to be aligned for a normalization of interest rates – according to the data-dependent Fed. However, the U.S. is grappling with an aging population, excessive amounts of debt and declining spending powers of the middle class, and inflation – the main driver of higher rates. Therefore, corresponding interest rate increases may be a lot further off in the future than expected. Sure, there will be some cyclical spikes in inflation and interest rates; however, overall, one can reasonably argue that interest rates should remain low in order to avoid a recession. One of the primary contributors to interest-rate suppression is the strong American dollar, which has the effect of lowering import prices and reducing inflation. Conversely, a strong U.S. dollar makes exports become more expensive and, therefore, lowers demand. Inflation takes place when prices rise – you spend more money to buy goods and services or, alternately, there is too much money chasing too few goods and services. Central banks around the world have pulled out all the stops to increase inflation and to maintain it at a 2% level. They have applied every conceivable policy to move and hold inflation rates higher, all with very limited success. A 2014 Bloomberg survey of 67 economists showed that all predicted that inflation would be higher in six months. In fact, rates fell sharply. At the onset of the financial crisis in 2007, the Fed’s official target rate was 5.25%. Recently, the board of governors’ median forecast for the Fed funds rate over the longer term was only 3.5%. Across the advanced world, the most significant problems of the past several years have been centred on weak demand, oversupply, low inflation and resulting very-low interest rates. The simple fact that the Fed is poised to raise rates a bit more above zero does not, in itself, ease any of those burdens. Predictions on whether interest rates will be high or low a few years from now have little to do with what the Fed has done recently by raising rates. Movement of interest rates does have a lot to do with what happens with forces deep inside the economy that are poorly understood and extremely hard to forecast. Just because some people are old enough to remember high inflation and rates of the 1970s and 1980s does not mean that those rates are the norms to which the economy will inevitably revert. Fiscal Snapshot Indicative Commercial Mortgage Spreads* Over Government of Canada Bond Yields Bank of Canada Rate March 2017 One month ago One year ago BoC Rate Bank Prime Lending Conventional 5-Year 10-Year 0.75 0.75 0.75 2.70 2.70 2.70 March 2017 1.70 - 2.10 1.85 - 2.35 One year ago 1.85 - 2.20 1.95 - 2.30 5-Year 10-Year March 2017 0.90 – 1.10 0.90 – 1.10 One year ago 1.00 - 1.25 1.05 - 1.25 Insured Government of Canada Benchmark Bond Yields March 2017 One month ago One year ago 5-Year 10-Year Long 1.12 1.09 0.68 1.63 1.62 1.23 2.32 2.34 2.00 *Spreads are indicative of high quality real estate in major Canadian markets. N AT I O N A L D E B T C A P I TA L M A R K E T S S E R V I C E S Highlighted Transaction Asset Type Industrial Portfolio – multiple sites Location Major Canadian city Facility Details Freehold blanket senior facility in the amount of $18M Intelligent Debt Financing Solutions The Avison Young National Debt Capital Markets dedicated team is focused on providing innovative North American-wide debt and equity solutions to accomplish goals. We originate debt and equity for all types of real estate and all types of clients. Debt origination includes fixed and floating rate structures, permanent and construction financing, structured finance, bridge and mezzanine debt and insured agency financing - CMHC and Fannie Mae / Freddie Mac. Our years of combined debt/equity capital markets experience has created meaningful relationships that we can put to work for you. Please contact our National Debt Capital Markets team for more details related to debt financings or real estate transactions. Norm Arychuk, Broker* 416.673.4006 [email protected] Michael Ho, Mortgage Agent** 416.673.4012 [email protected] *Licence #: M09002260 Brokerage Licence #10637 **Licence: # M15000834 Brokerage Licence #10637 Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises over 2,200 real estate professionals in 77 offices providing value-added, client-centric investment sales, leasing, advisory, management, financing and debt placement services to owners and occupiers of all property types. NORTH AMERICAN CAPITAL MARKETS OFFICES Calgary | Edmonton | Mississauga | Montreal | Toronto | Vancouver | Boston | New York | Washington DC | Chicago | Raleigh-Durham | Nashville | Atlanta | South Florida | Houston | Phoenix | San Francisco | Los Angeles | Orange County | Mexico City EUROPEAN CAPITAL MARKETS OFFICES Coventry | London | Hamburg | Frankfurt | Munich | Dusseldorf avisonyoung.com ©2017 Avison Young Commercial Real Estate (Ontario) Inc. Avison Young Commercial Real Estate (Ontario) Inc., Brokerage 18 York Street, Suite 400 Mailbox # 4 Toronto, Ontario, Canada M5J 2T8 416.955.0000