There are grounds for optimism in 2024, according to a prominent CEO in the space
After a gruelling few years for Canada’s commercial mortgage market, the outlook for 2024 is one of “cautious optimism” according to a leading executive in the space.
Michel Durand (pictured), president and chief executive officer at the MCommercial brokerage, told Canadian Mortgage Professional that the Bank of Canada’s decision to hold interest rates steady in each of its last three announcements had helped lift some of the unease that’s pervaded the commercial space in recent times.
That rate hold – and the expectation that rates will begin to fall at some point in 2024 – has given lenders greater confidence that the commercial landscape will be smoother down the line than the last bumpy few years, according to Durand.
“The uncertainty of what the Bank of Canada’s going to do has almost disappeared from the market – and it’s the uncertainty in the market that keeps the lenders’ heads down,” he said. “If they know that interest rates are going to rise, they know how to handle that. If they know that interest rates are low or going lower, they know how to handle that.
“If it’s uncertain, they just put their pens down. And what we’ve found since the Bank held its rate is that the banks now know where to be when they’re approving, whether that’s more conservative or more aggressive. At least now they’re more confident of where they’re going.”
That means the market is likely to grow in the coming 12 months, especially on the construction side – but there are still challenges ahead, Durand emphasized, as renewals on commercial properties come due with the likelihood that those will take place at significantly higher rates than before.
“Every lender is going to suffer that same pain with the renewals of the loans that they have on their books,” he said. “So the lenders are going to have their hands full with dealing with renewals that are offside, and determining whether or not they want to keep them in support or just tell them to leave.”
Which asset classes are expected to be 2024’s top performers?
Still, a large amount of new transactions is likely to take place in the coming year, Durand added, particularly with the pace of home construction requiring a rapid uptick to meet the needs of homebuyers and new Canadians.
“The market needs new housing desperately, and there are plenty of projects that are ready to go,” he said. “So I’m cautiously optimistic because although we understand that lenders are going to have challenges managing their own portfolio, there are also going to be huge opportunities in the market on good new construction deals.”
Canada's mortgage and housing markets may see an upturn in 2024, but the recovery is expected to be gradual, according to Drew Donaldson, founder and CEO of Donaldson Capital.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 10, 2024
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Alexander Durand, head underwriter and commercial mortgage agent at MCommercial, told CMP that purpose-built housing and industrial properties were set to witness a strong performance in Canada in 2024, particularly in larger cities such as Toronto, Vancouver, Montreal, and Halifax.
Smaller cities might see a more difficult time on that front in 2024, he cautioned. “The larger cities probably will have a bit of an easier time with some of the announcements made by the federal government on changes coming to [incentive] programs,” he said. “It’s going to be difficult for smaller cities because we’re not quite sure how the incentives and changes are going to impact them.
“As for industrial, it should be pretty much the same: there’s some talk of it cooling down a little bit, but that cooldown has just been vacancies going up from 1% to 2%. So it’s still in a very good spot, and we’re expecting it to continue for at least the next four months.”
ESG set to play significant role in Canadian commercial market
A trend that’s expected to play a big role in the commercial lending space in the coming years is the growing prominence of ESG (environmental, societal and corporate governance). Borrowers with a strong commitment to those principles, according to Alexander Durand, are likely to be viewed increasingly favourably by lenders.
“A lot of lenders are starting to consider that in their underwriting,” he said. “Some of them are changing their processes to offer better pricing, better conditions for sustainable buildings, and requests that are currently focusing on sustainability or have projects to improve [it].
“So ESG is going to be more and more prominent this year, and over the next five years we should see a lot more policies come in. Some lenders have also shown that they’ve started refusing files just because there weren’t any in certain asset classes that are there.
“That should definitely be kept in the back of your minds, and you should start looking at how you can include that in your projects.”
