High interest rates and stricter lending standards add pressure
Canadian commercial borrowers are likely to experience a credit crunch due to tightening underwriting practices, restricting their ability to refinance loans.
An estimated $203 billion in commercial mortgage debt is set to mature in the next three years, according to a new survey by Intellifi. This amounts to an average of $67 billion in debt coming due each year over the next three years, with around $36 billion tied to office properties – a struggling asset class.
"Office valuations, lender demand, and occupancy levels are likely to be lower than they have been for the past five years, making it more challenging for investors to obtain loan financing," the report noted.
Lenders' appetite for office mortgages has plunged since 2020 amid hybrid work trends. In a quarterly Intellifi sentiment survey for Q1 2024, no participants indicated medium or high interest in office lending, compared to 97% showing interest pre-pandemic.
"With $24 billion in office debt coming due in the short term, this asset class should provide some unique opportunities for those lenders willing to trade risk for increased yields," Intellifi said.
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In contrast, demand remains strong for multi-family, industrial and anchored retail assets. Unanchored retail has also seen a surprising resurgence.
Overall, Canadian commercial mortgage origination hit $86.4 billion in 2023, up 11.1% year over year, driven by a 57.4% surge in the insured mortgage market, which now accounts for 43% of total originations.
"With the housing market still in crisis, the Canadian Government is further fuelling the insured business, committing to another $1.5 billion in funding to support the construction of affordable housing," the report stated.
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