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Growth-minded lenders tighten terms of new debt as costs rise

Multifamily, industrial lending poised to grow in 2023
Vancouver ranks as the top market in Western Canada for lenders in 2023, according to a new survey by CBRE Ltd.

Virtually all lenders say they want to grow their real estate loan portfolios in 2023, but just a few key sectors are the focus as borrowers eye rising interest rates and development plans stall.

According to a national lender survey undertaken by CBRE Ltd. this fall and released Nov. 28, 93 per cent of lenders expect to grow their loan portfolios in 2023.

“Relative to last year, however, the pressure to put out more money has been dialled back,” Carmen Di Fiore, executive vice-president, debt and structured finance with CBRE, said in an online presentation of the report’s findings this week.

A year ago, 67 per cent of lenders expected to increase their allocations to real estate, while this year just 21 per cent intend to do so. The survey spoke to 29 companies managing more than $200 billion in loans.

Vancouver is the top market for investment in Western Canada, with 82 per cent of lenders voicing strong or moderate interest in lending here. Victoria ranks second at 45 per cent while Winnipeg is in third with 37 per cent of lenders expressing strong or moderate interest.

The focus for lenders is the tech sector, especially data centres and life sciences, two smaller segments of the market in Canada where lenders feel under-allocated. CBRE’s lender survey indicates 56 per cent of lenders want to grow their business in these areas.

But in terms of volume and potential, much of it anchored by the sector’s fundamental stability, are multifamily properties.

With high homeownership costs making rental a more attractive option, and rents general rising in step with household income, lenders feel confident lending on these investments. It ranks as the sector of lowest concern among lenders.

“With the winds of a recession circulating, lenders will lean on the multifamily sector for growth next year,” Di Fiore said, noting that 54 per cent expect to increase exposure to the sector in 2023.

Logistics and warehousing is close behind, maintaining a solid position in terms of perceived risk among lenders. Approximately 36 per cent of lenders anticipate increasing their exposure to the sector in 2023.

Tech, multifamily and industrial lending is not expected to be pared back, according to responses to the CBRE survey, unlike for every other asset type.

Hardest hit by the retrenchment as recessionary influences hit is Class B office space, the top-ranked sector for lender concern.

This is driving retrenchment among lenders, 59 per cent of whom plan to reduce exposure to the office sector. The skittishness is on par with the depths of the pandemic, as questions about the death of the office made the rounds. With the latest office development cycle ending and the persistence of hybrid work arrangements becoming clearer, lenders have become more cautious.

“The path to renewed debt availability for office will progress as follows: firstly, increased office attendance is needed,” Di Fiore said, adding that vacancies will also need to come down.

“Short of developing a fully pre-leased, credit-tenant office deal, the chances are very slim lenders will entertain any new construction requests,” he said.

A significant slide in confidence also hit land deals.

“Last year, only 17% had concerns, this year almost 52 per cent of lenders are raising their eyebrows when dealing with land financing requests,” Di Fiore said.

The old saw, “Buy land, they’re not making any more of it,” has shifted for lenders, Di Fiore said.

“This year, lenders are responding, ‘Don’t buy land, because we’re not lending as much on it,’” he said, with survey results indicating 28% of lenders are looking at reducing exposure.

This is noted in not only greater concern in single-family building sites but also condos, despite a generally more favourable outlook for high-density development sites.

While demand for housing is strong, supported by higher anticipated immigration under new federal targets, construction cost inflation and interest rates are having a significant impact on proformas.

“The condo market could see a slowdown based on the changing arithmetic,” Di Fiore said.

CBRE’s survey indicated 39 per cent of lenders will want to see greater deposits while 28 per cent want to see presale assignments curtailed to ensure the stability of presale contracts.

“A tightening in underwriting is on the way,” he said. “The single biggest change coming is that 67 per cent of lenders will require greater equity in projects going forward.”

But industrial deals appear to be largely immune to the skittishness, thanks to strong demand for logistics and warehouse space and few opportunities for developers, investors or occupiers.

“The parade towards industrial will continue,” he noted. “Lenders have no designs on lightening exposure.”