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Lenders bullish on real estate but variant clouds outlook
November 30, 2021 5 Minute Read
ECONOMIC HIGHLIGHTS
- Employment rose by 31,200 jobs in October 2021 for the fifth consecutive month of job growth. The unemployment rate decreased 0.2% to 6.7%.
- Inflations rises to 4.7% in October 2021, reaching the highest levels since 2003.
- Retail sales rebounded in October 2021, rising 1.0% and more than offsetting the -0.6% decline in September.
The discovery of the Omicron coronavirus variant has been a stern reminder that the global economy is still facing a pandemic that is not yet fully under control. While it will likely be weeks before more definitive information emerges about the true nature of this new variant, financial markets and governments have already rushed into action based on the scant details currently available. Governments, including Canada, have started clamping down on travel. Stock markets fell around the globe and bond yields plunged as investors relocated into safe haven assets.
The implications on public health aside, the discovery of a potentially more infectious or vaccine-resistant virus puts the uneven economic recovery at risk. If this strain proves to be as dangerous as feared, it comes at a time when central banks are also trying to combat rising inflation. At some point central banks may have to choose between spurring growth with continued stimulus or keeping a lid on inflation with higher interest rates. So far, investors have slightly pushed out their bets on when interest rate hikes will happen by a month. Before news of the Omicron variant took over the headlines, market expectations were for as many as three interest rate hikes by the Federal Reserve next year, starting in June. At the time of writing, that first interest rate increase is expected in July with a second hike by the end of the year.
While this latest development adds some uncertainty to the outlook, CBRE’s 2021 Canadian Real Estate Lenders Report found that Canadian lenders were more optimistic about the real estate sector than at any point in the past two years according to a survey conducted about one month ago. Two-thirds of lenders surveyed planned to increase their portfolio allocations to real estate in 2022 and most intended to deploy 10 – 20% net new capital next year. The report also found a significant improvement in lender sentiment across the majority of property types compared to last year, with gains highest among retail asset classes. Environmental, Social and Governance considerations are also rapidly growing in importance with sustainability-linked mortgages emerging into the mainstream offering for commercial properties. While lending spreads may widen with the new uncertainty in the market, overall, lenders are supportive of the real estate sector with momentum building for a strong and well-capitalized 2022.
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