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The Monthly Mortgage Commentary - Extended Runway For Apartments

An Extended Runway For Apartments

Following last month's rise in market optimism, some investors were further emboldened in November as phase one of the pivotal U.S.-China trade deal reportedly remained on track. According to the Bank of Canada, almost US$1 trillion of global economic output could be written off due to the trade war and the world is closely monitoring the progress of these trade negotiations. Yield curves have steepened and stock markets yet again set new records on the hope this deal will finally dispel some of the fog hanging over the global economy. With the U.S. yield curve no longer inverted, recession fears somewhat dissipated and the ensuing stock market rally was then further fueled by investors feeling left behind.

The Economist, however, cautions that a recession could still be on the horizon given its historical lag of 12 to 18 months following an inversion flag. Also cited was a concern that the Federal Reserve may dismiss the flag and under-respond the next time. For the time being, the Federal Reserve looks to be on a holding pattern, satisfied with the latest round of interest rate cuts. The Bank of Canada is also expected to continue to hold from making any cuts this year, but is monitoring for signs of a broad-based slowdown.

As the year draws to a close, the banks are starting to publish their outlooks for the future and, so for, the expectation is for muted growth in traditional portfolios. Goldman Sachs  projects riskier assets to perform well in 2020, though top-end return will likely have a ceiling given overeaching global risks. Morgan Stanley expects, lower returns this next decade compared to the prior two decades due to weaker economic growth, soft inflation and low bond yields.

As a result, commercial real estate, with it comparatively higher yield  and greater stability, has been in great demand. In Canada, apartment propcrtic arc particularly sought-after, so much so that Continuum REIT canceled its plans to IPO and instead will go private in a $1.7 billion deal. Despite the IPO having been more than three times over-subscribed, Starlight Investments submittcd an even more competitive offer that value the portfolio at an implied capitalization rate of approximately 3.5% - 3.6% according to market analyst . Other comparable Canadian apartment REITs trade at higher implied cap rate , suggesting there may be further upside for the Canadian apartment sector.


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