Article
How Cautious Will Lenders Be in 2021? Depends on the Property Type
December 2, 2020 3 Minute Read
After a record decade–long run, commercial real estate transactions paused earlier this year as the global pandemic made its way to Canada.
As liquidity returned to the market in the summer, deals were subjected to stricter underwriting, with more intense scrutiny and detailed due diligence.
While lenders are heading into 2021 with caution, they’re still looking to do business and will make capital available to borrowers.
CBRE’s 2020 Canadian Real Estate Lenders’ Report surveyed domestic and foreign lenders, who represent over $200 billion in loans under management, and found that 57.1% of lenders intend to maintain their real estate lending at current levels, while 40.0% are actually planning to increase their allocations in 2021.
But this openness to new business does not apply equally to all asset classes. Some asset classes have taken a harder hit from COVID-19 and changing business and consumer behaviour. Lenders are keenly aware of this.
The three property types that are the most concerning to lenders are hotels, regional malls in secondary markets, and retail, specifically the entertainment & food services sector.
Hotels – 77% of lenders expressed concern, up 51.1% from 2019
Travel came to a halt as borders closed last spring, dealing a direct hit to the hotel industry. The national hotel occupancy rate fell to 20% in Q2 2020. Rates bounced back in Q3 to a national average of 33%, which is down from 69% a year ago.
Despite hotels being the property type with the highest level of concern, 74.3% of respondents to the CBRE survey see the disruption to this asset class being temporary. Once travel resumes, the hotel industry is expected to bounce back.
Regional Malls (Secondary Markets) – 74% of lenders expressed concern, up 15.6%
Social distancing measures have affected the way people shop and accelerated the adoption of e–commerce. This was a growing trend prior to the pandemic that most lenders expect will now be permanent.
Lenders agree that there will be an increase in the level of distressed retail sales in 2021. Over 17.0% indicate they are planning to exit secondary markets which compounds the challenges for this property type.
Retail (Entertainment & Food Services) – 69% of lenders expressed concern, up 29.4%
Public health measures aimed at controlling the spread of COVID-19 have had a major impact on this retail sub-type this year. A return to tighter restrictions in November means that restaurants are now only open for take–out in many cities, while gyms and cinemas have been forced to shutter until the order is lifted. Once restrictions ease, social distancing protocols will remain. This will limit the capacity and therefore sales at these establishments.
But, as Carmin Di Fiore, Executive Vice President of CBRE’s Debt and Structured Finance team, notes. “Where there is change, there is opportunity and lenders will be ready.”
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