Commercial Mortgage Lending Survey
In these global slow growth periods commercial real estate investment and lending has become a preferred option. Predictability of income is key. Domestic investors and international capital continues to favor Canada as a haven of political and economic stability. As a consequence, investment grade real estate has performed exceedingly well in Canada. According to CBRE’s 2016 Canadian Real Estate Lenders’ Report, Canada is poised to set a new single year record for investment real estate sales volume in 2016.
Lender preferences identified
Domestic and Canadian Banks, Credit Unions, Life Co’s and Pension Funds, as well as private Debt lenders were surveyed by CBRE. Some interesting trends and shifts are emerging:
-While 58% of lenders surveyed intend to increase their allocation to commercial real estate lending in 2017, an increasing number are satisfied with their current exposure.
-In 2015 there was no clear preference, but in 2016 there is an increasing preference for fixed rate vs. floating rate lending.
-There is a clear preference for lending in Tier 1 markets. Increased Loan-to-Value ratios are available in those markets, for high quality transactions.
-Secondary market lending increasingly requires a 15 to 20 bps rate premium.
-Vancouver and Toronto accounted for 61% of investment activity in 2016, however only 68% of lenders are keen to lend in Vancouver next year, vs. 80% in 2016.
-Ontario is the clearly the preferred lending market for 2017. Hamiliton, Kitchener/Waterloo, London, and Ottawa were identified as likely to benefit from increased lender activity. Not surprisingly 84% of lenders surveyed expressed a strong desire to lend in Toronto.
Asset Class is the key determinant
The key determinant of lender activity however, is asset class. According to the CBRE report, it is the driving consideration for lending activity for 71% of surveyed lenders. Industrial and multi-family properties are the clear favored property types. Lenders are poised to increase their allocations in these asset classes. In fact industrial real estate was the only asset class that had increased allocations by lenders, year over year.
Of less interest to lenders are office buildings (where there has been a run-up in values in major centres), and retail properties (which are increasingly being affected by shift in consumer preferences due to technology). Condo construction financing has also fallen out of favor. Only 5% of surveyed lenders looking to expand this book of business in 2017.