The liquidation sales at Nordstrom stores across Canada will begin Tuesday.
Investment firms have become the biggest new buyers of U.S. homes — a trend that could make home ownership more difficult for average families.
The idea of big investors buying single-family homes to rent them out is “just in its infancy” in Canada, but is worth watching, according to the president of one of this country’s largest real estate firms. Some advocacy groups fear families can’t compete against money managers with billions in assets.
As interest rates rise and property prices fall across much of North America, deep-pocketed investors such as hedge funds, private equity giants and pension managers are hunting for stable assets to offset inflation and volatile stock markets, according to market observers.
In the first quarter of 2022, investors made up a record 28 per cent of U.S. single-family home sales, according to a report published in June by the Harvard Joint Center for Housing Studies, compared to less than 20 per cent a year earlier.
“Investors bought a larger share of America’s homes than ever before,” noted a separate report from the real estate firm Redfin.
The trend of money managers buying single-family homes to rent out is “a new phenomenon” for the Canadian market, said Christopher Alexander, president of ReMax Canada. He thinks the notion could catch on here as it has south of the border, especially given recent price declines.
“The lower you can buy as an investor, the higher the chance of selling high,” Alexander said in an interview.
“They are well capitalized, they are smart and they have the means to make an impact in the marketplace.”
As middle-class families increasingly struggle to buy homes, analysts say more capital from large firms is expected to enter the Canadian market, further straining supply and affordability for average people. A lack of hard data on the scale of these investments makes it harder for policymakers to respond to the emerging trend, affordable housing advocates said.
The scale of current institutional ownership over Canadian housing is unclear, but analysts believe it’s far lower than in the U.S. and generally a minor cause of the rapid rise in home prices this country has seen over the last decade.
The Canadian government does not have clear data on the footprint of large investors in the domestic housing market. Neither Statistics Canada nor the Canadian Mortgage Housing Corporation (CMHC), federal agencies which track the sector, could say how many homes are owned by investment firms.
“For the moment, Statistics Canada does not publish information on institutional investors, and the type of residential properties they own,” a spokesperson for the government organization told CBC News via email.
“CMHC does not collect the data that you are looking for,” a spokesperson echoed.
Nailing down purchases by institutional investors isn’t an easy task, said ReMax’s Alexander, especially as these firms often “don’t put all of their purchases in the same name or will register properties to different numbered companies or holding companies.”
“I just don’t know if we are set up to track a new phenomenon,” he said.
The subject is politically sensitive. Few other major property firms would comment on investor interest in the Canadian housing market.
The Canadian Real Estate Association, the trade body representing brokers, declined to comment. So did Royal LePage, a major brokerage. Two other property agencies, Century 21 and Keller Williams, didn’t respond to interview requests.
Getting a clear picture of the scale of institutional investments is the first step for determining how to respond to them, said Jennifer Barrett, a senior planner with the Canadian Urban Institute, a Toronto-based non-profit.
“I think the question of not knowing, onto itself, is an interesting piece to explore,” she said in an interview. “The federal government needs to address the financialization of housing.”
While the extent of institutional investment in Canada’s housing market isn’t clear, individuals who own more than one property hold 29 per cent of residences in B.C., 41 per cent in Nova Scotia and 31 per cent in Ontario, according to Statistics Canada figures released in April. These owners could be mom-and-pop landlords who own a couple of rental properties or larger investors who register homes under a single name.
Despite the lack of hard data, institutional investors recently made headlines in Canada.
Core Development Group, a Toronto-based real estate firm, drew anger last year when it announced plans to spend $1 billion buying single family homes in mid-sized Canadian cities. The company didn’t respond to requests for comment on the state of its investments.
Blackstone, which describes itself as the world’s largest alternative investment firm, with billions spent on single-family U.S. homes, opened a real estate office in Toronto in May to expand on its $14 billion in Canadian real estate assets.
“We expect to continue to be very active in the Canadian market, particularly in areas like logistics, high quality creative offices and life science offices, studios and multifamily residential,” a spokesperson for the company told CBC News via email.
“We continue to have no intention of investing in the single-family housing market in Canada.”
Blackstone owns approximately 0.02 per cent of single-family homes in the U.S., according to company data, accounting for roughly 25,000 units.
“Given our ownership levels, we have virtually no ability to impact market rent trends,” Blackstone said in March in an online question and answer session responding to criticism. “Rents are going up because there is significantly less supply of housing across the globe than demand for it.”
Private equity investors in the U.S. started buying up single-family homes following the 2008 subprime mortgage crisis and ensuing recession, said Barrett of the Canadian Urban Institute. But the trend did not catch on to nearly the same degree in Canada.
Since then, corporate landlords have acquired an estimated 350,000 homes, according to testimony heard by the U.S. House financial services committee on June 28 probing affordability challenges and private equity.
By 2030, investors could control as much as 40 per cent of the U.S. rental home market, according to data cited by PERE, an industry journal.
Aside from fears about deep-pocketed financiers out-competing regular people to buy homes, tenants renting from big investors have faced a slew of problems, said Madeline Bankson, a researcher with the Private Equity Stakeholder Project, a U.S.-based advocacy group.
Poor maintenance, broken air conditioners in the sweltering U.S. south, a lack of garbage collection, mould, exorbitant charges for late payments, and no one to respond when things break, are among the problems tenants in houses owned by large investors have reported to advocates.
“The model is: increase revenues, decrease costs,” Bankson said.
Unlike average people who usually require a mortgage to purchase a home, equity investors typically buy with cash, meaning they are more insulated from rising interest rates than individuals. Blackstone, for instance, boasts $941 billion US under management.
ReMax’s Christopher Alexander, who closely tracks Canada’s market, worries a “perfect storm” could be on the horizon post-2024, as population growth continues and supply chain challenges hit plans for new construction.
The rising U.S. dollar compared to Canada’s currency also makes Canadian housing more attractive for foreign equity investors, Alexander said.
“They see we have tight supply and no real solution to it through building; we can’t keep pace, and they see a good climate for long-term appreciation,” he said.
“Investors aren’t thinking about raising their families there; it’s much more mathematical and numbers focused. If you are buying a home to live in, it’s emotional.”
The upscale department store chain has a store at the Rideau Centre mall as well as a Nordstrom Rack location at the Ottawa Train Yards shopping centre
The liquidation sales at Nordstrom stores across Canada will begin Tuesday.
A spokesperson for Nordstrom confirmed the impending sales period Monday in an email to The Canadian Press, just after the Ontario Superior Court of Justice gave the U.S. retailer’s Canadian branch permission to start selling off its merchandise.
The upscale department store chain that primarily sells designer apparel, shoes and accessories has six Canadian stores and seven discount Nordstrom Rack locations, including its Rideau Centre location and a Nordstrom Rack at the Ottawa Train Yards shopping centre, which sells merchandise at discounted prices.
When Nordstrom announced the move in early March, it said it expected the Canadian stores to close by late June and 2,500 workers to lose their jobs.
The company initiated the exit from the market because chief executive Erik Nordstrom said, “despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”
Nordstrom opened its first Canadian store in Calgary in 2014, followed by the Ottawa store at the Rideau Centre, which occupied the second and third levels of a former Sears location.
The Rideau Centre store has an alterations and tailoring shop and an energy drinks bar. Merchandise ranges from brand name to designer apparel, housewares, furnishings and beauty products, including brands such as Geox shoes, Gucci, Adidas and Adidas by Stella McCartney.
Later on came Nordstrom Rack, which made its Canadian debut in 2018 at Vaughan Mills, a mall north of Toronto. At the time, Nordstrom said as many as 15 more Rack locations could follow.
Nordstrom promised each Rack store would deliver savings of up to 70 per cent on apparel, accessories, home, beauty and travel items from 38 of the top 50 brands sold in its Canadian department stores.
Nordstrom had trouble with profitability because of its selection of products and the COVID-19 pandemic, said Tamara Szames, executive director and industry adviser of Canadian retail at the NPD Group research firm, a day after Nordstrom announced its exit.
“You would hear a lot of Canadian saying that the assortment wasn’t the same in Canada that it was in the U.S.,” she said.
She noticed Nordstrom started to shift its product mix away from some luxury brands around 2018 and saw it as a sign that the retailer was struggling to maintain its original vision and integrity.
The pandemic made matters worse because many stores were forced to temporarily close their doors to quell the virus and shoppers were less likely to need some of the items Nordstrom sells like dressy apparel because events had been cancelled.
Despite stores reopening and many sectors rebounding, Szames said the apparel business is the only industry NPD Group tracks that has yet to recover from the health crisis.
“The consumer has really been holding back in terms of spendâ¦within that industry.”
At a hearing at Osgoode Hall in Toronto, lawyer Jeremy Dacks, who represented Nordstrom, said the company has “worked hard to achieve a consensual path forward” with landlords, suppliers and a court-appointed monitor to find an orderly way to wind down the business.
The monitor, Alvarez & Marsal Canada, suggested five potential third-party liquidators and Nordstrom was approached by another five. The company decided to go with a joint venture comprised of Hilco Merchant Retail Solutions ULC and Gordon Brothers Canada, which were involved in the liquidation of Target, Sears and Forever 21 in Canada, Dacks said.
They will oversee the sale of merchandise, furniture, fixtures and equipment, but not goods from third parties, which removed products this past weekend, Dacks said. He added that all sales will be final and no returns will be allowed.
Lawyers for Nordstrom landlords Cadillac Fairview, Ivanhoe Cambridge, Oxford Properties Ltd. and First Capital Realty testified Monday that they were pleased with how “smoothly” and “organized” the process has gone so far.
In approving Dacks’ liquidation request, Chief Justice Geoffrey Morawetz agreed, saying Nordstrom is facing a “difficult time, but this process is unfolding in a very cooperative manner.”
Nordstrom required court approval to begin the liquidation because it is winding down its Canadian operations under the Companies’ Creditors Arrangement Act, which helps insolvent businesses restructure or end operations in an orderly fashion.
With files from Joanne Laucius
Canadian financial institutions’ regulator moved to reassure investors as the country’s riskiest bank debt joined a global selloff after the value of some Credit Suisse Group AG bonds was wiped out in the bank’s takeover by UBS Group AG.
Canada’s “capital regime preserves creditor hierarchy which helps to maintain financial stability,” the Office of the Superintendent of Financial Institutions said in statement on its website.
Prices of Canadian limited recourse capital notes, known as LRCNs, fell between 2 cents and 5 cents on the dollar Monday before OSFI’s announcement, according to people familiar with the matter who asked not to be named. That has widened the spread on the notes by over 60 basis points compared with Friday’s levels, the people said. Specific levels vary depending on the security.
The bonds are another form of so-called additional tier 1 securities, issued by financial institutions and designed to act as a shock absorber in the system. They can be converted to equity to bolster a bank’s capital if it runs into trouble.
Over the weekend, Swiss regulators triggered a complete writedown of 16 billion francs (US$17.2 billion) of Credit Suisse’s AT1 bonds as part of the rescue plan for the venerable bank. While it wasn’t a surprise that the bonds were likely to take a loss, some investors in the instruments were shocked to be wiped out when Credit Suisse’s shareholders were not.
Under Canada’s capital regime “additional tier 1 and tier 2 capital instruments to be converted into common shares in a manner that respects the hierarchy of claims in liquidation,” said OSFI, referring to a situation in which a bank would reach non-viability status. “Such a conversion ensures that additional tier 1 and tier 2 holders are entitled to a more favorable economic outcome than existing common shareholders who would be the first to suffer losses.”
“Our view is that we don’t expect LRCNs would be wiped out before common equity,” said Furaz Ahmad, a Toronto-based corporate debt strategist at BMO Capital Markets. “OSFI has said that they would convert to common equity, since that is more consistent with traditional insolvency norms and respects the expectations of all stakeholders.”
Earlier Monday, European authorities sought to restore investor confidence in banks’ AT1s by publicly stating that they should only face losses after shareholders are fully written down. AT1s from UBS Group and Deutsche Bank AG fell by more than 10 cents earlier on Monday.
Last week, oil prices booked their worst week since the start of the year, dropping off a cliff on renewed fears about the global economy after the collapse of two big U.S. banks and the near-collapse of Credit Suisse. While most price forecasts for the short term have been bullish because of pro-bullish oil fundamentals, now things are beginning to change. Tight supply, cited by virtually all forecasters as the main reason for oil price rise predictions, is giving way to fears of an economic slowdown that would dent demand and push prices lower.
Goldman Sachs has already revised its oil price forecast for the rest of the year. Previously expecting Brent to hit $100 in the second half, now the investment bank expects the international benchmark to only rise to $94 per barrel in the coming 12 months. For 2024, Goldman analysts see Brent crude at $97 per barrel.
“Oil prices have plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows,” Goldman said in a note last week, as quoted by Bloomberg. “Historically, after such scarring events, positioning and prices recover only gradually, especially long-dated prices.”
Indeed, as far as events go, this one left a serious scar. Brent crude went from over $80 per barrel to less than $75 per barrel, and West Texas Intermediate slipped down close to $65 per barrel. And this happened while authoritative forecasters such as the IEA and OPEC recently said they expect stronger demand growth than supply growth.
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According to a recent CNBC report, 41 percent of Americans are preparing for a recession and with a good reason. Despite seemingly endless media debates about whether the world’s largest economy is in a recession already, about to enter a recession, or will manage to avoid a recession, forecasts are not looking optimistic.
“What you’re really seeing is a significant tightening of financial conditions. What the markets are saying is this increases risks of a recession and rightfully so,” Jim Caron, head of macro strategy for global fixed income at Morgan Stanley Investment Management, told CNBC earlier this month.
“Equities are down. Bond yields are down. I think another question is: it looks like we’re pricing in three rate cuts, does that happen? You can’t rule it out,” Caron said.
Reuters’s market analyst John Kemp went further in January when he forecast that one way or another, there will be a global recession, and debates are basically pointless.
Citing the cyclical nature of economic growth, Kemp foresaw two likely scenarios: one, in which recession begins earlier in the year as a natural consequence of events from the last couple of years, and another, in which central bank-pumped growth leads to even higher inflation, which then leads to a slowdown amid lower consumption.
Whichever scenario pans out, if any, it will lead to lower oil demand as recessions normally do. And lower demand will naturally depress oil prices, albeit temporarily. Because lower prices tend to stimulate demand, even amid a recession.
But there is one important detail here. The recession forecasts focus on the UK, the EU, the U.S., and Canada, as well as Australia. There is zero talk about a recession in China or India. Because China and India are going to grow this year, and as they grow, they will consume more oil. Meanwhile, the supply of crude is not going anywhere much further, it seems.
Be that as it may, just because oil demand from China and India, but most notably China, is seen higher this year, it does not mean higher oil prices are all but guaranteed. That’s because China’s economy is very export-oriented, and when consumer countries are in a recession or anything resembling it, these exports will suffer.
Forecasts for Chinese oil demand are still at record highs this year. OPEC said it expected demand from the world’s biggest importer to add more than 700,000 bpd this year for a total of 15.56 million bpd. The IEA, for its part, forecast that demand growth from China will push the oil market into a deficit in the second half of the year. Yet if a recession here or there dampens demand for everything coming out of China, all bets are off.
Because of oil’s fundamentals, all price forecasts are for higher prices towards the end of the year. But the basis for these forecasts came before the bank failures and the bailout of Credit Suisse.
Perhaps the baking panic will let go soon enough, and everything, including oil demand outlooks, will return to normal. Or perhaps the banking panic is a harbinger of worse things to come—things that will affect demand for everything, from crude oil to iPhones. Collectively known as a recession, these things may well prompt some very different oil price forecasts later in the year.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
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