Lenders Plan to Loan More Money For Real Estate Transactions in 2024

Lenders are signaling optimism in real estate as interest rate hikes appear to plateau and the amount of debt capital available to facilitate Canadian real estate transactions is expected to grow modestly in 2024.

According to CBRE’s new Canadian Real Estate Lenders’ Report, lenders plan to add 16% of net new capital into the real estate market in the coming year, and 79% of lenders say they plan to expand their outstanding real estate loan books in 2024.

Despite this focused growth in lending for real estate, for the first time in four years a small group of lenders have reported intentions to modestly trim their amount of capital available next year. Lenders unanimously see elevated interest rates as the top challenge facing the Canadian lending market in 2024.

The impact of interest rates on property cash flows and pricing has created uncertainty around property valuations, which ranks as the second greatest challenge expected by lenders next year.

Recession fears have faded and are currently not a top concern for lenders in 2024. Expectations appear to have shifted towards a “soft landing” for the economy, with only potentially moderate or minor impacts on underwriting.

In fact, 12% of lenders do not plan to factor any recession into their property underwriting for 2024. It should also be noted that less than one-third of lenders expressed concern with real estate market fundamentals.

CBRE’s Canadian Real Estate Lenders’ Report surveys domestic and foreign lenders to gauge commercial real estate lending sentiment and offers borrowers insights on what to expect as they look to access real estate financing.

“The challenging conditions in real estate are no longer news and the lending community is starting to look ahead to what comes next,” notes Carmin Di Fiore, Executive Vice President of CBRE's Debt and Structured Finance team.

“The continual escalation in cost of capital, valuation uncertainty and tightening credit have impinged on the industry’s performance and reduced real estate transactions. That said, the general tone in the market has improved slightly looking ahead to 2024.”

Here are six additional takeaways from CBRE’s new Lenders’ survey:

1. Office Sector Poses the Greatest Challenge

Lender sentiment on office assets continues to deteriorate, as 67% intend to cut their exposures next year and none have plans to increase their budgets for office in 2024.

Class B office in the suburbs and downtown core caused the greatest concern, with 94% of lenders expressing concern for each property type. Class A office assets also recorded the largest declines in lender sentiment year-over-year, in both the suburban and downtown segments.

2. Purpose-Built Rental in Greatest Demand

Purpose-built rental and industrial real estate remain the most desired asset classes among lenders, who have expressed strong intentions to increase budgets and expand exposures to both sectors in 2024.

Amid incentives offered by the federal government and some provincial governments for purpose-built rental development, lenders hope for increased multifamily development in Toronto, Vancouver, Montreal and Halifax.

Overall, lenders remain bullish on the industrial sector, with only a small minority expecting a market correction. But debt availability for industrial development is likely to be more nuanced next year as 55% of lenders reported low or no appetite to finance speculative industrial construction in 2024.

3. Toronto and Vancouver Are Tops

The top real estate markets for lender appetite remain Toronto, Vancouver, Montreal and Ottawa. Lender appetite for Hamilton and Waterloo Region increased, and Calgary also saw a notable improvement year-over-year in terms of the combined number of lenders with strong and moderate appetites for that market.

While Saskatoon and Winnipeg have the lowest level of lender appetite, the majority of lenders still operate and offer liquidity in those markets in some capacity.

4. Inflation Expected to Stay Sticky

More than half of lenders (51%) expect inflation to return to its current target of 2.0% by H1 2025, ahead of the Bank of Canada’s current projection for H2 2025. Lenders do not share a consensus on where the policy interest rate is expected to be by year-end 2024; 39% expect interest rate cuts of up to 75 bps from the current 5.00%.

5. Condo Financing Tightens

The slowdown in the housing market is having implications on the residential condominium sector and 78% of lenders active in the space have tightened lending conditions on development financing.

The most common adjustment by lenders continues to be requiring greater levels of up-front equity for condo construction projects. The next most common changes include 39% of active lenders requiring greater deposit requirements with shorter payment schedules and 22% requesting the sizes of projects be scaled back.

6. Financed Emissions a Growing Consideration

Environmental, Social and Governance (ESG) and its impacts on real estate lending in Canada continues to evolve, with 68% of lenders saying they expect a property’s carbon footprint to materially impact its ability to secure a mortgage with competitive terms within the next 1 to 5 years; a further 11% of lenders report it is already happening and having an impact today.