Real estate lenders will be erring on the side of caution this coming year as the current economic conditions, fueled by rising interest rates and inflation, are causing a shift in the market, according to CBRE’s 2022 Canadian Real Estate Lenders Report.
Vancouver remained one of the top two cities of interest for lenders in 2022, falling just behind Toronto. Going into 2023, lenders will continue to see Vancouver positively, but they will also manage their expectations as a result of the current economy, said Carmin Di Fiore, executive vice-president of CBRE's debt and structured finance team.
Despite headlines, the pandemic fostered a “benign or accommodating” economy, in the sense that there was a lot of money available, said Di Fiore.
“For lending there was a lot of money being put into the economy based on government policies. And now we're seeing a reversal of that. With the escalation of interest rates, I think what's going to happen now is that the days of easy money are dwindling.”
The report said that “Moderate Impact” is how 52 per cent of lenders expect growth projections to be affected in their 2023 underwriting.
Overall, the share of lenders looking to actively or very actively bid on real estate deals has declined to 48 per cent from the 90 per cent seen in 2021, said the report. While lenders may be more selective and erring on the side of caution, the report notes that the market will continue to offer liquidity.
“I think it's fair to say that what we'll see in the real estate sector is that overall asset leverage is going to come down. Lenders are not willing to be as aggressive. It's also a function of where the underlying interest rates are at, and that will have an impact on where values will pencil out,” he said.
The report said 93 per cent of lenders plan to expand their existing books and deploy new net capital into real estate in 2023, but it’s got to make sense in the current economy, said Di Fiore.
The office sector saw the most dramatic shift in lender preference, with 59 per cent expressing a decrease in interest. Class B office is the asset class over which nearly 95 per cent of lenders have expressed concern, a result of persistent low office attendance, the report said.
Canada-wide, industrial and multifamily asset classes remain in high demand with lenders hoping to increase their budgets with respect to these in the coming year, according to the report.
“Given what's going on in the economy, Vancouver will see the same effect, i.e. multifamily should be incredibly popular from a lender's perspective. And, again, given no new real supply, or very limited supply on the industrial space and the underlying economics of that sector, industrial is going to do very, very well in Vancouver as well,” Di Fiore said.