How CBRE’s Debt Professionals Are Keeping the Market Moving
November 29, 2023 5 Minute Read
If you are an investor who is active in commercial real estate, high interest rates and increased lender scrutiny can make this a tricky time to do business.
That can be a difficult pill to swallow, but it is also a good time to optimize portfolios and take advantage of once-in-a-business-cycle opportunities.
“There are a lot of private investors and businesses that would like to buy commercial property right now,” says Joshua Sonshine, Senior Vice President with CBRE’s Debt & Structured Finance group. “That can be challenging in a slowing economy.”
“Having the relationships and experience to correctly frame your proposal to lenders is essential,” he adds. “This is how CBRE’s DSF group can help you stay in the game.”
It might seem counterintuitive that debt professionals actually get busier in challenging markets. But this when having a steward providing solid guidance, experience and relationships becomes even more critical.
Volatile Debt Capital
Debt capital is extremely volatile these days, notes Christos Panagiotakos, CBRE’s Ottawa-based Vice President with DSF.
“Terms and conditions vary greatly, asset types that lenders are interested in vary greatly, and timelines are inconsistent.”
The rapid and sizeable increase in the key overnight rate and government bond yields over the last two years has been a driving factor shaping lenders’ positions on their ongoing exposure in real estate, regardless of whether it’s insured or conventional.
“The higher the interest rates are, the less amount they can cover in terms of debt servicing,” Panagiotakos says. “Higher rates equal reduced loan amounts, so more equity is required. Ultimately this provides a lower leveraged return for investors.
“Many projects won’t get off the ground because they won’t be able to create the necessary returns to move a project forward. The same goes with acquisitions: they are sometimes not viable.”
Panagiotakos says the federal government’s recent decision to remove the GST component from the construction of multifamily projects has helped to offset both the additional interest, and the higher costs of development for that asset class.
And if provinces follow suit — like Ontario has said it will, doing away with its portion of the harmonized sales tax on purpose-built rental housing — it will make the prospects for multifamily construction even brighter.
Basel III Reforms Hit Hard
Unfortunately there haven’t been similar outcomes for the retail, office and industrial assets, Panagiotakos notes. “They’ve been left to the mercy of increasing bond yields.”
Those property types have also been adversely affected by Canada’s implementation of Basel III reforms. The reforms are designed to mitigate risk by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand.
“Canada initially held off but is into Basel III for this calendar year,” Panagiotakos says. “So with any conventional lending it will now cost more for tier-1 bank lenders to be able to put money out, because the new rules require those lenders to hold on to more liquidity.”
If a bank has to retain $1 million to have a loan on their book as a liquidity position; they’ll now have to keep a higher percentage of money on their books than before.
“This is really bad news for speculators with debt on the prospective projects as they will see an increase in the spreads for their borrowing requirements on top of the implicit increase that has occurred in bonds,” says Panagiotakos.
“Therefore to achieve the same returns they have to charge more.”
Changing Investment Calculus
The investment calculus has been altered greatly for investors, appraisers and lenders.
But debt professionals like Sonshine and Panagiotakos can help make sense of the shifting market. They can triangulate interests and offer access to the capital with the most favourable terms.
Suddenly, closed doors and enviable opportunities become crucial pivots and game changers for the next business cycle.
One of the biggest shifts in capital flows has been out of the office sector and into apartments and residential developments. And that’s a different kettle of fish from a lender perspective.
Canada Mortgage and Housing Corp. (CMHC) is available to finance these projects at some of the best rates and terms possible. But good things rarely come easily.
“CBRE can provide more control for our clients to make decisions on their financing when it comes to those critical milestones,” Panagiotakos says.
“Our professionals have an unparalleled understanding of the specific CMHC programs and policies, and our platform has been built around these professionals and their knowledge and experience.
“So we can deliver best-in-class CMHC executions for our clients.”
Another critical shift in capital flow is into the industrial asset class. With rising cap rates, a need has arisen for a more flexible approach to financing the acquisition and development of these assets.
“Our professionals bring a succinct understanding in underwriting and navigating industrial product, and in working with lenders and clients alike to create steady and secure returns for each party,” Sonshine says.
A Hub for Clients
Following years of cheap debt and declining interest rates, market players are going back to basics. Many are also looking to partner in ways they have not had to before, and there’s no shame in that.
“We try to be a hub for clients,” Sonshine says. “They can focus on their business while we provide advice, connections and direction on how to proceed with lenders.
“Let us turn that newfound stress around financing into a positive outcome and competitive advantage for your business.”
Your ability to take advantage of this inflection point in property markets likely depends on whether or not you can access capital.
“If you are an investor that has heard ‘No’ or are looking to make a strategic purchase or refinance,” Sonshine says, “CBRE’s Debt & Structured Finance team is here to help.”
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