Part one of a two-part series examining the landscape facing real estate lenders going into 2024. The second part to be released Friday, Dec. 1.
One might think amid high interest rates and fears of a recession that real estate lenders would be pulling back on the amount of capital they are loaning out.
Instead, lenders across Canada are optimistic about 2024, with 79 per cent saying they plan to loan more money to facilitate transactions next year, according to a Nov. 27 report from real estate services firm CBRE Canada.
Respondents also say they plan to inject 16 per cent of net new capital into the market in the coming year.
“In contrast to what's going on south of the border, where the dynamics down there are driven by different factors and what look to be pretty negative ones, generally in Canada there seems to be a better flow of capital and a little bit more optimism in the marketplace,” said Carmin Di Fiore, an executive vice-president at CBRE Canada, in an interview.
Lenders ranked Toronto and Vancouver as Canada’s No. 1 and No. 2 real estate markets, respectively. Those rankings in CBRE’s annual survey remain unchanged from a year ago.
Montreal and Ottawa rank third and fourth, respectively.
While most respondents expressed hope for 2024, for the first time in four years a “small group of lenders” intend to modestly decrease the amount of capital they loan out, CBRE’s report said.
The top challenge in 2024 for lenders will be elevated interest rates, with uncertainty around property values coming second. Though these challenges are not new, the lending community is looking ahead at what impacts higher rates will have and what comes next in the new year, according to Di Fiore.
“When you see that precipitous climb in interest rates, it creates all kinds of issues through the credit markets, in terms of how assets are valued, how loan exposures are measured, and how cash flows in those properties are there to support the debt at the current level and at the refinance levels,” said Di Fiore, who works in CBRE’s debt and structured finance team.
“We haven't seen this since the `80s and it's been pretty precipitous, and not everybody can adjust accordingly to deal with it.”
Overall, lender expectations have shifted towards the Bank of Canada achieving a soft landing with minor or moderate economic impacts to growth projections. In addition, 12 per cent of survey respondents are not planning to factor in a recession when looking ahead to the new year.
CBRE’s report is based on a survey of domestic and foreign lenders across 30 companies and was conducted in the fall of this year.