Lenders Signal Confidence in Canadian Real Estate

CBRE’s 2015 Lenders’ Survey reveals both optimism and areas of concern for commercial real estate borrowers

Toronto – December 2, 2015 At a time when the strength of the Canadian housing market is being called into question, a new survey of the Canadian lending community indicates confidence in commercial real estate. CBRE Limited’s 2015 Lenders’ Report found that lenders will increase the availability of debt for commercial real estate purposes in 2016; however, lending will be targeted towards specific cities and there are concerns around certain property types.

Over $24.0 billion of Canadian commercial real estate is expected to trade hands in 2015, due in part to the availability of historically cheap debt. Mortgage financing is vital for Canadian private buyers who account for nearly half of all transactions completed this year. Large pension funds and institutions are less dependent on financing as they are able to access multiple sources and forms of capital.   

“Favourable debt terms are spurring greater interest in investing in commercial real estate. If you go to the source and follow the money, you have a good idea of what to expect in the year ahead,” said Carmin Di Fiore, Executive Vice President of CBRE’s Debt and Structured Finance Group. “Economic volatility and a possible U.S. interest rate hike make Canadian lender sentiment even more critical as we head into 2016.”

CBRE’s Lenders’ Survey found that 73% of lenders are looking to increase their allocation to Canad​ian commercial real estate next year. Despite slower economic growth in Canada and abroad, 77% of lenders are not focused on macroeconomic factors. Commercial property in this country has a solid track record and a majority of lenders are choosing to focus on property quality, potential loan spreads and the leverage a borrower is carrying when deciding upon loan eligibility.

​ 2016 Lender Targets​ ​​​
​ Target Markets​​
 (% respondents with a strong desire to lend here)
​Target Prop​​erty Types​
(% respondents increasing t​heir budget per asset class)​
​ 1. Greater Vancouver Area - 80% ​1. Apartments - 60%
​ 2. Greater Toronto Area - 77% ​2. Retail - 47%
​ 3. Ottawa-Gatineau - 46% ​3. Industrial - 43%
​ 4. Greater Montreal Area - 37% ​4. Seniors Housing - 40%
​ 5. Victoria - 17% ​5. (Tie) Office CBD & High-rise residential condos - 30%

While available capital for commercial real estate is expected to grow, lender interest is not uniform across the country and demand varies between property types. Nearly 80% of respondents expressed strong interest in lending on properties located in Vancouver and Toronto, while Ottawa-Gatineau was the third most targeted market as investor sentiment was buoyed by local infrastructure spending and the recent change in government. In terms of specific types of commercial property, 60% of lenders indicated a desire to increase their budget for apartment buildings, followed by retail properties at 47% and industrial and seniors housing at 43% and 40%, respectively.

Di Fiore explained: “The Canadian retail landscape has had a challenging year, but lenders remain confident due to the solid financial backing of REITs and pension fund landlords. The industrial market will be hotly contested in 2016 as an improving U.S. economy and favourable exchange rates are expected to boost industrial property fundamentals.”

Lenders are cognizant of certain risks in the marketplace, including potential interest rate hikes. Suburban Class B office space was listed as a concern for 17% of lenders, followed by high-rise condos at 13% and downtown Class B office at 11%. Lenders believe that risk premium will increase in 2016, which would cause the spread over Bank of Canada bonds to increase. Debt will be marginally more expensive in this case; however, the expected 10-20 basis points (bps) spread on traditional lending terms should be manageable for all parties involved.

“The lending community is signaling confidence in Canadian commercial real estate, but it is difficult to generalize when talking about the market as a whole. The survey results show that location will matter more than ever in 2016. Vancouver and Toronto are certainly favoured markets, while property type and property fundamentals will also be important determinants of loan underwriting. Overall, lenders look set to provide adequate liquidity that will help fuel the commercial real estate investment market,” said Di Fiore. 

About CBRE Limited

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

In Canada, CBRE Limited employs approximately 2,079 people in 23 locations from coast to coast. Please visit our website at www.cbre.ca.