OSFI regulation benefits commercial sector

With no sign of residential lending restrictions loosening any time soon, demand for commercial real estate has become white-hot.

“On the commercial front, we’re seeing a lot more activity on buildings of more than 5 units,” said David Goncalves, a mortgage broker and partner of Mortgage Alliance Vine Group. “We’re seeing this upswing because people got squeezed out of buying residential properties because of the lending rule change, and as a result we’ve seen significant growth in the commercial sector.”

In particular, investment in Toronto’s mixed-use properties has surged in the last year and a half, but Goncalves noticed earlier signs and left the banking world five years ago to become a commercial mortgage broker. Vine Group has certainly capitalized on Toronto’s explosive growth, even securing financing for small and mid-sized real estate developers. But commercial brokers don’t necessarily have to think that big to take advantage of the fervent demand.

“A lot of lenders on the residential side have door policies,” Hugo Dos Reis, a partner at Vine Group, said of limits placed on residential investment properties. “Lenders don’t want to loan to holding companies, and if they do they charge a premium. Even the big banks are getting away from that as well, but what we’ve found is that a lot of people are looking at multi-residential commercial properties instead of buying, say, a triplex.

“The lending now is on the asset and the most important part of the deal: the cash flow. The client’s exposure in other properties is an advantage because we can articulate in our business case that we have an experienced real estate investor who’s invested in small to mid-sized commercial properties. As regulation gets tighter on the residential side—because residential financing isn’t designed for large portfolios—the banks are still lending, only it’s on the commercial side.”

Chartered banks aren’t the only lenders partial to lending on commercial properties; alternative and private lenders, too, are capitalizing on voracious appetite for commercial assets. According to Liam Sauro, associate vice president of Capital Markets Group, B-20 is to thank.

“In the short-term, the private lending market on both residential and commercial is growing as a result because people require more equity, or leverage, than a bank is willing to offer them, and that’s led to growth in institutional Tier 2 lending,” he said. “It’s also led to tertiary lender growth, and I don’t think it’s slowing down any time soon, especially so long as those rules are in place.”

In juxtaposing Canadian and American banking mentalities, Sauro believes strict residential lending criteri will persist.

“Those rules are part of what make up the whole mentality of the banking system here. In the U.S., they have a growth period and they look to loose regulation; in Canada, you have a period of can be perceived to be unsustainable growth and they look to tighten regulation because of fear of what could happen next.”