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Economy on track for 'very strong' bounce in late 2021 | RENX – Real Estate News EXchange

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IMAGE: Benjamin Tal, the deputy chief economist at CIBC World Markets. (Courtesy CIBC)

Benjamin Tal, the deputy chief economist at CIBC World Markets. (Courtesy CIBC)

“We are not out of the woods yet.” However, the end of the pandemic appears to be in sight, the commercial real estate industry has more data about potential lingering fallouts and when the recovery begins, it is likely to be strong and fast.

Those were key takeaways from Tuesday’s opening presentations at the virtual RealCapital conference, where CBRE’s Paul Morassutti and CIBC World Markets’ deputy chief economist Benjamin Tal provided overviews of the industry and economy.

Tal broke his analysis down into three time periods: The immediate economic impact, the second half of 2021 and the potential for longer-term economic “scarring.” The first two he summed up in short order.

“I believe we are already in the midst of a double-dip recession. The economy as we talk is basically shrinking by one or two per cent in Canada. This is the short term. It’s not great,” he said.

However, “I believe the recovery will be very strong. The second quarter, the spring, will be a transition period and then I am talking about a very strong second half.”

Tal predicted GDP growth of up to six or seven per cent in the second half of 2021. Because relatively few economic sectors have been affected by the pandemic — although those impacted have been hit deeply — he said a recovery can happen very quickly.

Pandemic’s economic impact deep but narrow

The hardest-hit sectors are mainly service-oriented. On the jobs front, those affected have largely been the lowest wage earners, meaning people with higher disposable incomes are banking money for better times ahead.

“The good news is the service industry is very quick to recover,” Tal noted, laying out the basis for his optimism long-term economic “scarring” will be minimal. “This is all about cash.

“For every dollar decline in wages, the Canadian government injected seven dollars into the economy. This is very important. This is the first recession ever where income actually went up. And it went up in a very significant way.”

That bubble of excess savings is about $90 billion and growing, he said.

“You increase your savings. You don’t want to do that, but you are forced to because you cannot spend. So your money is there, your income is there, but you are not spending,” he continued. “(People) are dying to go to a restaurant, but they are not willing to die to do so. So, they are waiting.”

Inflationary concerns

One significant concern is a huge injection of spending into the economy could trigger inflation and higher interest rates.

“Inflation expectations are starting to rise,” he said. “I cannot talk about the economy rebounding by four, five or six per cent without saying that some inflationary pressures will be there.”

Tal called inflation “the No. 1 issue that will impact your business over the next three to four years” but said both the U.S. Fed and the Bank of Canada view it as a short-term issue.

“They are telling you ‘We are going to tolerate that inflation. We are going to allow that inflation to overshoot because we view it as a blip, we view it as a very short-term story’,” Tal said. He believes both central banks will employ strategies to control potential inflation on a longer-term basis.

When consumers do start spending that excess cash, Tal and Morassutti see changes coming to some current trends which affect CRE.

Housing: Sales to stay strong, rents to stabilize

IMAGE: CBRE's Paul Morassutti. (Courtesy CBRE)

CBRE’s Paul Morassutti. (Courtesy CBRE)

On the housing front, where sales have remained strong despite the pandemic, they both expect rents to also quickly firm up.

“It is true that multifamily fundamentals in Toronto have weakened,” said Morassutti, the vice-chairman of valuation and advisory at CBRE.

“Rents are down and vacancy is up, mainly due to a glut of small condos being added to the long-term rental supply and the disruption to immigration and foreign students. For the most part, we view this as temporary.”

Tal said Canada is underestimating population growth because it is not counting residents repatriating from countries such as Hong Kong, nor is it tracking foreign students whose visas expired but have been allowed to stay under revised government regulations.

“I expect the supply factor in the multiresidential sector will ease and therefore I see some improvement and stabilization in rent,” Tal said. “We are starting to see it right now, also in vacancies.”

Home sales have benefited from the stratified economic impact. A significant group is “not touched financially by this crisis,” mainly in demographics which can afford to purchase homes.

“They are in position to take advantage of low interest rates and that is exactly what they are doing. And that is why the housing market is doing so strongly.”

Higher office vacancy “not cataclysmic”

While the work-from-home situation will continue to some degree, Morassutti said once things return to normal many employees will return to offices, creating shifts in both housing and office trends.

“The future is not binary, it is not one or the other, it is both. It is flexibility,” he said. “The issue is what would, say, a 10 per cent reduction in demand have on long-term vacancy? After all, the retail sector has been completely upended by the movement of just 10 to 15 per cent of sales to online platforms.”

In all of its office projections, Morassutti said CBRE sees vacancy rising. A 10 per cent reduction in office space demand could translate to a vacancy increase of up to 400 basis points, he said.

“Is the office sector becoming the retail sector? The answer is no. Here In Toronto, the real issue over the next few years is new supply. And this shouldn’t come as a surprise since too much new supply coming at the wrong time has always been the office sector’s Achilles heel,” he explained.

“I would also note that we added almost five million square feet of supply in Toronto in 2008 in the midst of the global financial crisis and another six million square feet beginning in 2013 and quite frankly, the market outperformed virtually all vacancy forecasts both times.

“Is it concerning? Yes, of course it’s concerning, but it is not cataclysmic.”

Vancouver and Toronto still have North America’s lowest office vacancy rates, with Ottawa and Montreal also in the top five.

Retail, industrial outlooks

The outlook is similar for hard-hit sectors of retail.

“We would reiterate the view we have held for some time,” Morassutti said.

“The sector is heavily bifurcated with secondary assets bearing a disproportionate share of the operational pain. Some retail assets have fared quite well, notably grocery-anchored centres where you have a strong concentration of essential retailers.”

Retail, particularly hospitality and entertainment, will be a key benefactor once the pandemic eases.

“Many Canadians are sitting on tons of cash and there is a lot of pent-up demand. There are good-news stories in the retail sector.”

Industrial remains a good-news story and Morassutti said the growth potential is wider than just e-commerce, distribution and warehousing.

“For anything logistics- or warehouse-related, we think there is ample runway,” he noted. “But the entirety of the industrial investible universe is not just logistics or distribution centres. A lot of it is manufacturing, a lot of it is small-bay, multi-tenant. A lot of it has nothing to do with the e-comm tailwind that everyone points to.”

This dovetails with an expected expansion of the life sciences sector, which is increasingly seeking office, R&D and manufacturing space.

“We fully expect this sector to follow a similar trajectory that we have witnessed in the U.S., albeit on a smaller scale,” he said.

Challenges remain, but outlook “looks good”

Over the mid- to long-term, Morassutti said challenges remain, but CBRE remains bullish on real estate.

“In a world where there is $18 trillion of negative-yielding debt, the yield provided by real estate looks good,” he said.

“In our opinion, geopolitical stability will be rewarded, transparency will be rewarded, stable banking systems, thoughtful immigration policies and economic growth will be rewarded, resiliency will be rewarded.

“The fastest-growing city in North America is Toronto and many other Canadian cities are on that list. Canadian employment growth is expect to double the G7 average over the next few years.

“So taking all of that into account, we think Canada stacks up very well.”

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Economy

Canadian dollar moves to extend weekly win streak as oil rebounds

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Canadian dollar

The Canadian dollar strengthened against its U.S. counterpart on Friday and was on track for its seventh straight weekly gain as oil prices rose and domestic data added to evidence of robust economic growth in the first quarter.

Canadian factory sales rose 3.5% in March from February, led by the motor vehicle, petroleum and coal, and food product industries, while wholesale trade was up 2.8%, Statistics Canada said.

The price of oil, one of Canada‘s major exports, reversed some of the previous day’s sharp losses as stock markets strengthened, though gains were capped by the coronavirus situation in major oil consumer India and the restart of a fuel pipeline in the United States.

U.S. crude prices rose 1.2% to $64.61 a barrel, while the Canadian dollar was trading 0.6% higher at 1.2093 to the greenback, or 82.69 U.S. cents, moving back in reach of Wednesday’s 6-year peak at 1.2042.

For the week, the loonie was on track to gain 0.3%. It has climbed more than 5% since the start of the year, the biggest gain among G10 currencies, supported by surging commodity prices and a shift last month to a more hawkish stance by the Bank of Canada.

Still, BoC Governor Tiff Macklem said on Thursday if the currency continues to rise, it could create headwinds for exports and business investment as well as affecting monetary policy.

The U.S. dollar fell against a basket of major currencies, pressured by a recovery in risk appetite across markets after Federal Reserve officials helped calm concerns about a quick policy tightening in response to accelerating U.S. inflation.

Canadian government bond yields were lower across much of a flatter curve, with the 10-year down 2 basis points at 1.549%. On Thursday, it touched its highest intraday in eight weeks at 1.624%.

 

(Reporting by Fergal Smith; Editing by Nick Zieminski)

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Economy

Toronto Stock Exchange rises 1.21% to 19,366.69

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Toronto Stock Exchange

* The Toronto Stock Exchange‘s TSX rises 1.21 percent to 19,366.69

* Leading the index were SNC-Lavalin Group Inc <SNC.TO​>, up 16.0%, Village Farms International Inc​, up 9.8%, and Denison Mines Corp​, higher by 9.4%.

* Lagging shares were Aurora Cannabis Inc​​, down 7.2%, Centerra Gold Inc​, down 3.8%, and Canadian National Railway Co​, lower by 3.7%.

* On the TSX 194 issues rose and 35 fell as a 5.5-to-1 ratio favored advancers. There were 25 new highs and no new lows, with total volume of 225.7 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Manulife Financial Corp and Cenovus Energy Inc.

* The TSX’s energy group rose 3.32 points, or 2.7%, while the financials sector climbed 4.80 points, or 1.3%.

* West Texas Intermediate crude futures rose 2.65%, or $1.69, to $65.51 a barrel. Brent crude  rose 2.68%, or $1.8, to $68.85 [O/R]

* The TSX is up 11.1% for the year.

This summary was machine generated May 14 at 21:03 GMT.

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Economy

U.S., Mexico, Canada to hold ‘robust’ talks on trade deal

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The United States, Mexico and Canada will next week hold their first formal talks on their continental trade deal, with particular focus on labor and environmental obligations, the U.S. government said on Friday.

Trade ministers from the three nations are set to meet virtually on Monday and Tuesday to discuss the U.S.-Mexico-Canada (USMCA) deal, which took effect in July 2020.

“The ministers will receive updates about work already underway to advance cooperation … and will hold robust discussions about USMCA’s landmark labor and environmental obligations,” the office of U.S. Trade Representative Katherine Tai said in a statement.

The United States is also reviewing tariffs which may be leading to inflation in the country, economic adviser Cecilia Rouse told reporters at the White House on Friday, a move that could affect hundreds of billions of dollars in trade.

The United States, testing provisions in the new deal aimed at strengthening Mexican unions, this week asked Mexico to investigate alleged abuses at a General Motors Co factory.

(Reporting by David Ljunggren; Editing by Hugh Lawson and Jonathan Oatis)

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