While volatility in the Canadian commercial mortgage space has begun to ease, the return of liquidity has been largely uneven, and many lenders are still finding themselves in heated competition for higher-quality deals.
In a sharp about-face from the trends seen during Q1, commercial mortgage spreads had a marked downturn over the course of the second quarter, CMLS Institutional Services said in the August 2020 edition of its Commercial Mortgage Commentary.
“While still remaining considerably higher than levels observed at the start of the year, spreads for higher quality assets saw a considerable decline to end the quarter slightly above 200bps,” the CMLS report said.
The environment of intensified competition, aggravated by the presence of COVID-19, is “putting sustained downward pressure on spreads,” CMLS said. “Lower quality assets have struggled to keep pace for the most part, but the quality gap shows signs of shrinking as markets continue to stabilize.”
This is stimulating a domino effect with a possibly longer-term impact than anticipated, the CMLS report cautioned.
“The decline in commercial mortgage spreads has lagged Canadian BBB corporate bonds, which are often a leading indicator for the commercial mortgage sector,” CMLS said. “The BBB index was more than 100bps below mortgages at the end of Q2, representing a significantly wider gap than the long-run average of ~50bps.”