Canadian Institutional Commercial Mortgage Market Report

2013 Canadian Institutional Commercial Mortgage Market Report

Prepared by

Cynthia Holmes PhD

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Publication DataThe Canadian Institutional Commercial Debt Market Report, Second Quarter 2009, released October 16th, 2009, followed by the Canadian Institutional Commercial Mortgage Market Report, 2011, released November 28th, 2011, followed by the Canadian Institutional Commercial Mortgage Market Report, 2013, released November 15th, 2013.

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0 2 | 2013 Canadian Institutional Commercial Mortgage Market Report

Cynthia Holmes is Assistant Professor of Finance at the Ted Rogers School of Management at Ryerson University where she teaches Real Estate Finance at the undergraduate and MBA level. She obtained her B.Sc. in Mathematics and Computer Science from McGill University, her MBA in Finance from Concordia University and her PhD in Real Estate Finance and Economics from the University of British Columbia. Prior to joining the Ryerson, she held academic positions at the Schulich School of Business at York University and at Florida State University. She has ten years of industry experience with Standard Life Assurance Company, including several years in the Mortgage Investment department.

Cynthia Holmes’ research interests are real estate finance and housing policy. In the real estate finance area, she conducts research about the default and prepayment risk of residential and commercial mortgages, the accurate measurement of real estate prices and the portfolio implications of the risk and return characteristics of real estate and mortgage assets. On the housing policy side, she investigates policy decisions regarding the condition and affordability of housing for low-income families. She has received research grants from the Real Estate Research Institute, Ryerson University, FSU and the Schulich School of Business. Her doctoral dissertation entitled Three Essays on Commercial Mortgages won the Real Estate Research Institute Doctoral Fellowship. Her work has been published in peer-reviewed academic journals and presented at many academic conferences.

About The Author Cynthia Homlmes PHD

Executive Summary 04

Introduction 05

Data Sources 06

Total Market Size 07

NHA MBS Multi-family 12

CMBS 14

Summary and Conclusion 15

Table 1: Commercial mortgage holdings by type of holder ($billions), as at May 2013 07

Table 2: Share and growth of institutional holdings 10

Table 3: Top Issuers for MBS Pools 965 and 966, January to July 2013 ($millions) 13

Table 4: CMBS Outstanding Balance, as at May 2013 14

Table 5: Details of Recent CMBS Issues 15

Figure 1: Market share by holder in 2011 and 2013 08

Figure 2: Commercial mortgage holdings from 1985 to 2013 ($billions) 09

Figure 3: Long-term trend in size of institutional commercial mortgage market – 1973 to 2013 11

Figure 4: Trend in size of institutional commercial mortgage market – 2000 to 2013 11

Figure 5: Outstanding Multi-family NHA MBS, by year 12

Contents

2013 Canadian Institutional Commercial Mortgage Market Report | 0 3

This value is up from $126.7 billion in 2011, representing a growth of 10% over the two years, or 4.9% annually.

In terms of market players, life insurance companies have continued the decline in their holdings seen over the past years. In fact, their holdings declined by 17% between 1992 and 2013. The institutions that have increased their holdings are chartered banks and credit unions, both of which have recently surpassed life insurance companies in commercial mortgage market share.

Commercial mortgage-backed securities (“CMBS”) represent a smaller proportion of the market, just $10 billion in 2013. No CMBS issuances occurred in 2008, 2009 or 2010, but there have been four small new issuances since then. However, issuance volumes are still far below the levels seen in 2004 to 2007.

National Housing Act Mortgage-backed Securities (“NHA MBS”) in the multi-family category are included in this report as well. This large and growing category of commercial mortgage holdings reached $19.7 billion in 2013. The large Canadian banks do participate in this market, but the most intensive users are firms such as Equitable Bank and People’s Trust.

Executive SummaryThe primary goal of the 2013 Canadian institutional commercial mortgage market report is to estimate the total size of the commercial mortgage market, and our finding is that the size was $139.5 billion as of May 2013. This information is important to industry participants for benchmarking, market monitoring and analysis.


The goal of this report is to document the total size of the disclosed institutional commercial mortgage market in Canada. Our estimate is that as of May 2013, this figure was $139.5 billion. In this report, we describe our data sources, break down the estimated size of the commercial mortgage market by type of commercial mortgage asset holder, conduct analysis about the trend in the commercial mortgage market size, and provide details about securitized commercial mortgages.

Introduction


The first type of commercial mortgage holders is financial institutions overseen by the Bank of Canada1. They report the non-residential mortgages held by chartered banks, trust and mortgage loan companies, credit unions (including caisses populaires), life insurance companies, and additional financial institutions categorized as “other”. In this context, a non-residential mortgage is defined as follows: “non-residential mortgages are all mortgages not classified as residential, such as those on hotels, stores, office buildings, garages, theatres, warehouses, industrial plants, institutional properties, farms, and vacant land”. Mortgages secured by multi-unit apartment buildings are not included in this report, since the Bank of Canada classifies them as residential. Therefore, this definition does not perfectly align with the definition of commercial properties typically used in industry. Unfortunately further disaggregation is not available, so for example, the amount of mortgages on farm properties cannot be removed and apartment buildings cannot be added.

The second data source is DBRS.com2 for information about securitized commercial mortgages. DBRS prepares a monthly surveillance report for commercial mortgage-backed securities (“CMBS”) primarily to monitor defaulting loans. However, they also provide information about the total market size for CMBS.

The third data source is a Statistics Canada report3 on the value of commercial mortgage assets held by trusteed pension funds. The Bank of Canada does not include trusteed pension funds in their report on Banking and Financial Statistics despite their high level of activity in the commercial mortgage sector, so this Statistics Canada data source is required. Unfortunately, this data source has several deficiencies. The primary issue is that residential and non-residential mortgages are not disaggregated. To compensate for this issue, an estimate of the ratio of residential to non-residential was prepared using an older, discontinued report from Statistics Canada based on a survey of pension fund holdings4. In that report, the ratio of commercial mortgages held to total mortgages held was 66% in 2008. This value of 66% was then applied to the current value of total mortgage holdings to estimate the commercial amount. Unfortunately, the most recent data available from this source was December 2012.

The final data source is Canada Mortgage and Housing Corporation (“CMHC”) for the amount of commercial mortgages held in National Housing Act Mortgage-Backed Securities (“NHA MBS”). CMHC classifies multi-family as a residential building with more than 4 units and allows multi-family structures to serve as security for pool type 965 and 966. Data is available on the Volumes by Issuer report available through the CMHC website5, with historical data reported in the Canadian Housing Observer6.

Data Sources

Four primary data sources were used to prepare the estimates provided in this report, one for each type of commercial mortgage lender.

1 Statistics Canada CANSIM Series v122656 to v122659 and v800015. 2 Monthly CMBS Surveillance Report – May 2013 from DBRS. Retrieved August 2, 2013 from http://www.dbrs.com/.3 Statistics Canada CANSIM Table 280-0002.4 Statistics Canada CANSIM Tables 280-0005. Retrieved June 7, 2011 from http://www5.statcan.gc.ca/cansim/a01?lang=eng.5 http://www.cmhc-schl.gc.ca/en/index.cfm.6 http://www.cmhc.ca/observer/.


The total size of the Canadian institutional commercial mortgage market has been determined as the sum across all types of commercial mortgage holders and is estimated to be equal to $139.5 billion dollars in 2013. Table 1 below breaks down the market total by holder, and shows the 2011 values as a reference point. The percentage increase over the two year period is also shown.

The smallest category of holder in the commercial mortgage market is pension funds, with holdings reduced to $8.6 billion in 2013. CMBS has $10.0 billion, as does the category called “Trusts and other institutions”. This latter category includes trusts, mortgage loan companies, and other financial institutions not categorized as a chartered bank, credit union, or life insurance company. The category of NHA MBS Multi-family includes those CMHC issued MBS that include multi-family residential. This is a relatively large category at $19.7 billion, with relatively high growth as well. The top three categories are chartered banks, credit unions, and life insurance companies7. The historical market leader was life insurance companies, and as recently as 2011 still had the highest market share.

Table 1: Commercial mortgage holdings by type of holder ($billions), as at May 2013

Total Market Size

Chartered Banks 28.4 35.6 25%

Credit Unions 23.7 29.2 23%

Life Insurance Companies 28.7 26.5 -8%

NHA MBS Multi-family 15.8 19.7 25%

Trusts and other Institutions 7.2 10.0 39%

CMBS 13.7 10.0 -27%

Pension Funds 9.2 8.6 -7%

TOTAL 126.7 139.5 10%

2011 2013 Change

Source: Statistics Canada, DBRS, CMHC

7 Note that caisses populaires are included with credit unions.


But over the past two years their holdings in commercial mortgages fell by 8%, while both caisses populaires and chartered banks increased their share substantially and overtook life insurance companies in holdings. Figure 1 displays this breakdown in pie chart format, where the loss in market share for life insurance companies is clearly displayed.

Figure 1: Market share by holder in 2011 and 2013

Chartered Banks

Life Insurance Companies

Trusts and other Institutions

Pension Funds

Credit Unions

NHA MBS Multi-family

CMBS

Chartered Banks

Life Insurance Companies

Trusts and other Institutions

Pension Funds

Credit Unions


CMBS

2011

2013


Figure 2 shows the long-term trend in holdings across these three types of institutions since 1985. Life insurance company holdings peaked in 1992 and have been essentially flat or declining since then. As shown in Table 2, the change in the commercial mortgage holdings for life insurance companies was 186% between 1985 and 1992, and -17% for 1992 since 2013. In contrast, the early 1990s began a long and sustained increase in the volume of commercial mortgage holdings by both chartered banks and credit unions. These two types of institutions have both continued their growth despite new entrants to the commercial mortgage market such as CMBS and NHA multi-family MBS. The commercial mortgage holdings of banks grew by 194% from 1985 to 1992, a rate of growth similar to that experienced by the life insurers. But while the life insurance companies saw a decline in their holding level between 1992 and 2013, the banks experienced an increase of 284% over that timeframe. Even more amazing is the growth level achieved by the credit unions over the same time period of 878%. As seen in Figure 2, credit unions started with a relatively low level of holdings and have experienced high growth.

Figure 2: Commercial mortgage holdings from 1985 to 2013 ($billions)


Chartered Banks Life Insurance CompaniesCredit Unions

$bill

ions

Source: Statistics Canada

Source: Statistics Canada

Table 2 also displays the proportion of the institutional commercial mortgage holdings held by each type of institution. In 1985 and 1992, the life insurers dominated the market, but by 2013 were surpassed by both banks and credit unions. In 2013, the life insurers had 29% of the institutional commercial mortgage holdings, down from 72% in 1992. Banks had increased their share from 21% in 1992 to 39% in 2013 and credit unions went from 7% to 32% over the same years.

Table 2: Share and growth of institutional holdings

Banks 18% 21% 39% 194% 284%

Credit Unions 19% 7% 32% -15% 878%

Life Insurers 63% 72% 29% 186% -17%

Total Institutions 100% 100% 100% 149% 105%

1985 1992 2013 1985 to 1992 1992 to 2013

Share of Institutional Holdings Growth in Holdings


Overall, the institutional lenders in the commercial mortgage market have collectively shown tremendous growth. Figure 3 displays the long-term trend in the size of the institutional commercial mortgage market size from 1973 until May 2013. The period from 1992 to 2000 is the period with the most significant decline. In contrast, the economic slowdown of 2008 to 2009 is barely perceptible on this chart of long-term trends. Figure 4 displays the same information over the timeframe 2000 to May 2013. At this level of detail, the flattening in the growth of the market in 2009 is clear, but the resumption in the growth in the market size begins in 2010 and continues to the most recent data available. These figures help to put the recent economic conditions in historical perspective.

Source: Bank of Canada


Figure 3: Long-term trend in size of institutional commercial mortgage market – 1973 to 2013

Figure 4: Trend in size of institutional commercial mortgage market – 2000 to 2013



$bill

ions

$bill

ions

CMHC reports that the remaining principal balance of all NHA mortgage-backed securities is over $404 billion. However, the majority of this is classified as “homeowner”, meaning that the underlying security is a single home or a multi-family residential unit with two to four units. On the other hand, pool type 966 is specifically designated for mortgages on multi-family structures with more than four units that are open to prepayment. Pool type 965 can include both single family and multi-family structures and must be closed to prepayment. For the purposes of this report, an estimate of the proportion of the multi-family structure versus single family was performed by examining the information circulars for all the pool 965 issuances in the first half of 20138. Of the 56 issuances, 55 of them were 100% multi-family structures, and one small issuance was 75% multi-family. When measured in dollar amounts, 99.98% of the total issuances in pool 965 in the first half of 2013 were multi-family. Therefore for the purpose of estimation in this report, we have assumed that 100% of pool 965 and pool 966 types can be considered multi-family commercial mortgages.


8 MBS information circulars are available at http://www.cmhc-schl.gc.ca/en/hoficlincl/mobase/inci/index.cfm. Note that the pool numbers were not avail-able for issuances earlier than 2013.

9 Note that there were several years of issuances taking place before 2006, but CMHC reports start only in 2006. Also note that this is end-of-year data and that 2012 has not yet been released by CMHC even though data from January to June 2013 is available.

Figure 5 below shows the high growth that has taken place in the volume of outstanding multi-family NHA MBS9. By 2013, this category of commercial mortgage holder has grown to include about 14% of the total market.

Source: CMHC

Figure 5: Outstanding Multi-family NHA MBS, by year


$bill

ions

Table 3 shows the volume of multi-family MBS in pools 965 and 966 by name of issuer. The four largest issuers for this period from January to July 2013 were Equitable Bank, Peoples Trust Company, First National and Home Trust Company. Note that none of the large banks were among the top issuers. The bank with the highest volume is the Royal Bank, with $2.0 billion of multi-family MBS issued through Royal Bank of Canada and $1.7 billion through RBC Dominion Securities. The Toronto-Dominion Bank also has a large volume, with $1 billion through TD Securities and $164 million through Toronto-Dominion Bank. The other large banks have small volumes or none at all.

Table 3: Top Issuers for MBS Pools 965 and 966, January to July 2013 ($millions)

Bank of Nova Scotia 5

Caisse Centrale Desj. du Québec 18

Cdn. Imperial Bank of Commerce 18

CIBC Mortgages Inc. 26

Equitable Bank 4,935

First National 2,799

Home Trust Company 2,223

Industrial Alliance Ins & FinSrv 10

Laurentian Bank of Canada 1

Manufacturers Life Ins. Co. 148

MCAN Mortgage Corporation 43

Merrill Lynch Canada Inc. 174

National Bank Financial Inc. 382

National Bank of Canada 687

Pacific & Western Bank of Can 41

Peoples Trust Company 3,387

RBC Dominion Securities 1,717

Royal Bank of Canada 2,004

TD Securities 1,085

Toronto-Dominion Bank 164

Equitable Bank 4,935

Peoples Trust Company 3,387

First National 2,799

Home Trust Company 2,223

Royal Bank of Canada 2,004

RBC Dominion Securities 1,717

TD Securities 1,085

National Bank of Canada 687

National Bank Financial Inc. 382

Merrill Lynch Canada Inc. 174

Toronto-Dominion Bank 164

Manufacturers Life Ins. Co. 148

MCAN Mortgage Corporation 43

Pacific & Western Bank of Can 41

CIBC Mortgages Inc. 26

Caisse Centrale Desj. du Québec 18

Cdn. Imperial Bank of Commerce 18

Industrial Alliance Ins & FinSrv 10

Bank of Nova Scotia 5

Laurentian Bank of Canada 1

Sorted by Institution Name Sorted by Volume

Source: CMHC


The volume of outstanding CMBS is reported in Table 4 by year of issuance. The oldest remaining CMBS units still outstanding were issued in 1998. All the issuances for 1999, 2000 and 2001 have been retired, meaning that the term of the mortgages has ended. Note that there were no CMBS issuances in Canada in 2008, 2009 and 2010. However, there have been a total of four transactions since then, which are detailed in Table 5.

CMBS

The first issue shown in Table 5 was done in January 2011 and consisted of 16 commercial mortgage loans totaling $206 million. These were secured by retail properties, diversified by location with 40% in Ontario, 28% in Quebec and 16% in Alberta. The weighted average coupon was 5.4%, the weighted average loan-to-value ratio was 66.7% and the weighted average debt service coverage ratio was 1.4. The issuer was Institutional Mortgage Capital (IMC). IMC was the issuer for three of these four recent CMBS issues, with one issued in 2011, one in 2012 and one in 2013. Their other issues included a larger number of loans and were in the $240 to $250 million range. CMLS issued a CMBS in 2012 for $248.5 million. Their issue had the lowest weighted average coupon of the most recent issues, at 3.6%. The issue had 25 loans, mostly diversified by type and location, but weighted heavily in retail.

Although there have been these four issues since 2011, this sector is still far below the issuance levels seen in the period from 2004 to 2007.

Table 4: CMBS Outstanding Balance, as at May 2013

1998 9,968,028

1999 Vintage retired



2002 41,534,814

2003 460,785,162

2004 1,252,048,139

2005 2,023,713,092

2006 2,698,243,616

2007 2,545,331,130

2008 No issuance

2009 No issuance

2010 No issuance

2011 199,456,795

2012 481,820,474

2013 249,029,016

TOTAL 9,961,930,266

Vintage Amount in CAD

Source: DBRS


The total size of the Canadian institutional commercial mortgage market in 2013 is estimated to be $139.5 billion. This estimate is based on the best available data, but the information sources do have some deficiencies. The two largest deficiencies are first, this estimate excludes mortgages on multi-residential properties held by financial institutions directly, and second, the proportion of the mortgage holdings held by pension funds that are commercial mortgages is not available, so this report makes an estimate based on the 2008 proportions.

Despite these deficiencies, this report offers the best available estimate of the institutional commercial mortgage market size. The previous report in 2011 estimated the market size to be $126.7 billion, so industry participants can note that the annualized growth was 4.9%, and can compare their own growth levels to this benchmark.

This report has also provided details on market share by type of industry participant, and offered details about commercial mortgage-backed securities and NHA multi-family mortgage-backed securities.

Summary and Conclusion

Table 5: Details of Recent CMBS Issues

1 Jan. 2011 IMC 16 206.0 5.4 66.7 1.4

2 July 2012 IMC 31 240.2 4.8 64.3 1.4

3 Oct. 2012 CMLS 25 248.5 3.6 60.6 1.7

4 Feb. 2013 IMC 38 250.4 4.5 57.3 1.8

1 100 0 0 0 0 40 28 16 16

2 0 15 32 5 48 30 19 22 29

3 48 30 9 13 0 32 24 27 17

4 0 29 10 5 56 27 31 21 21

Issue Number

Issue Number

Date

Retail Office Apt. Ind. Other ON QC AB Other

Seller

Number of Loans

Property Type Concentration Geographic Concentration

Amount ($m)

Weighted Average Coupon

Weighted Average

LTV

Weighted Average DSCR

Source: DBRS


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Canadian Institutional Commercial Mortgage Market Report

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