Turbulence is continuing in the commercial space – but understanding the challenges facing lenders can help brokers succeed in 2025, says CEO
It’s no secret that the commercial mortgage market has been under strain in recent years, with interest rate volatility and other challenges at play since the pandemic. But the sector is far from on its knees – and brokers can chisel out success in the space by keeping a close eye on how lenders are viewing the market.
That’s according to Michel Durand (pictured top), chief executive officer at the MCommercial brokerage, who told Canadian Mortgage Professional that despite difficult times at present in the commercial space, brokers with the right approach can still flourish.
“The business will continue. It’s just going to be a lot more of a struggle,” he said. “I think it’s important for brokers especially to understand the lenders’ needs. The more brokers understand the lenders’ challenges, the more the broker is going to set the right expectation with the borrower and provide the right information and level of service to the lenders.”
Many commercial lenders are still handling the impact of loans that have gone sour in the past 18 months, a rare bout of turbulence after a relatively smooth previous decade.
That bumpiness is likely to continue into 2025, Durand said, something brokers need to keep in mind when submitting deals or dealing with clients in the commercial space. “The good brokers tend to the lenders’ needs today,” he said.
“We need to recognize that, more than ever, the lenders are going through challenges. We have to help them get through those [issues] so that we can properly serve our borrowers.”
The Bank of Canada’s recent rate cuts have stabilized the housing market, preventing a severe downturn, but are unlikely to reignite past market highs, according to Carl Gomez, CoStar Group’s chief economist.https://t.co/9ksHFIPLPA?#InterestRates #EconomicOutlook #Inflation
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 25, 2024
Where does opportunity lie in the commercial market?
The woes of the office market, whose future has been shrouded in uncertainty since the pandemic-era work-from-home revolution, aren’t likely to clear anytime soon. Prospects there have been darkened by continuing lack of clarity about what the new workspace will look like – and whether companies will begin to start bringing their employees back to the office, or continue to allow fully remote or hybrid arrangements.
Potential in the industrial and multi-unit asset classes, meanwhile, is still there – but moderating. That’s because market rent is finally stabilizing and the need for space isn’t as acute as it was two years ago, according to Durand, with plenty of space still continuing to come online.
Is MLI Select still offering a ray of light for the commercial market?
The MLI Select program, an insurance product offered by Canada Mortgage and Housing Corporation (CMHC) providing incentives such as longer amortization periods and lower premiums in exchange for sustainability commitments by multi-unit rental builders, was viewed in the immediate aftermath of the pandemic as an outstanding option for builders to mitigate some of the challenges that came with higher interest rates.
The offering has been experiencing its own “growing pains”, though, during the past 12 months, Durand said.
That’s because CMHC has adjusted some of its qualifying criteria and conditions, tweaking the appeal of the benefits in part to address the prospect of borrowers taking on more risk at lower premiums. Changes introduced in mid-November mean borrowers may have to temporarily cough up more equity to secure financing.
“CMHC is managing the risk on the transaction, having the borrower put in more equity during construction and then relaxing those conditions once the construction is complete and the building is adequately rented,” Durand said, “so they still get full advantage of the best rate, terms and conditions. But CMHC is managing the construction risk much more conservatively than it has in the past.”
One bright spot to counteract that is CMHC’s extension of more favourable terms in its traditional MLI program, the standard multi-unit residential offering that now has more flexibility thanks to higher amortization periods on new construction (50 years, up from the previous 40).
That means some borrowers will gravitate towards the standard MLI program, which is not geared toward affordable housing, to get approved – namely, “those who just want to build with less of an accent on affordability and more on provided units to the market,” Durand said.
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