Canadian property markets are healthier than their U.S. counterparts, according to Moody's Investors Service.
"In general the Canadian real estate across city and property types are really quite good," said Sally Gordon, vice president and senior analyst at Moody's. "I would suspect that the lending environment tends to be somewhat more disciplined so that overbuilding doesn't occur as readily."
The rating agency analyzed individual Canadian property markets across four property types: multifamily, retail, office and industrial. The scoring system is based on a model that Moody's uses to analyze U.S. CMBS properties, though with slight modifications.
Moody's scoring system is color-coded - red, yellow or green - to determine the degree of stress in each of the markets. Red means imminent stress due to supply-and-demand imbalances or rising vacancy rates. Yellow refers to markets that are rather imbalanced and need close monitoring. Green, on the other hand, indicates markets that are expected to have the least amount of stress in the near term.
The result bodes well for Canadian CMBS: Moody's found no Canadian market that is red at this point. This is in direct contrast to the U.S. where 14% of office collateral is red.
Furthermore, no more than 25% of any Canadian asset class is yellow (representing the retail sector), a showing that equals the best performing sector in the U.S., multifamily.
Also, the average score, which is based on a scale ranging from 0 to 100, across all Canadian property types is 83, which beats the U.S. with an average score of 75.
Moody's said that the results of the study confirms conventional wisdom that Canada lags the U.S. in the real estate cycle - a lag which some market sources estimate to be roughly two to three years.
Canada thus remains in a stronger phase, allowing the different sectors to withstand a slight economic downturn.
"The Canadian real estate market in general is fairly restrained," said Gordon, "which means that even if the economy softens further, the well-being of the Canadian real estate market is such that it could absorb a bit of weakness without threatening rent levels extremely. It's like having a built-in cushion or insurance policy against a soft economy."