As the world approaches the end of year two of the COVID-19 pandemic, Canada’s commercial real estate markets appear to be weathering the storm well. Similar to what we saw during the global financial crisis in 2008, the initial shock of the pandemic in early 2020 saw CRE market activity all but freeze as lenders and investors entered crisis mode.
Pens went down and attention turned to portfolio management, work-from-home logistics and deployment of government relief programs. However, a better understanding of the pandemic along with rising vaccination rates has led to optimism quickly returning to CRE markets.
With light at the end of the COVID-19 tunnel and improving property level fundamentals, sentiment toward Canadian CRE is generally positive. Investment activity is strong—amazingly enough, currently on track for its most active year on record. Lenders have returned in force, and there is abundant debt available for CRE investors and developers, albeit with heightened selectivity for assets more susceptible to adverse pandemic-related impacts.
So, what does all this mean for borrowers? Mostly good news. With business confidence retuning and the economy poised for rebound, virtually all CRE lenders are back to lending—some with a vengeance to make up for lost loan production during 2020. Liquidity among lenders is high, which has driven credit spreads below pre-pandemic levels for most asset classes.
Industrial and multifamily properties are most in favour with lenders. Credit spreads on these “beds and sheds” are approaching historic lows, occasionally touching 125 bps over five-year Government of Canada bonds for top-tier assets in major markets. High liquidity for insured multifamily mortgages has CMHC pricing likewise near historic lows for borrowers willing to wait 14 to 20 weeks for their insurance applications to be processed.
Lenders have warmed to necessities-based retail, ideally with food or drug anchor tenants. However, retail properties with heightened exposure to e-commerce, social distancing requirements or discretionary goods like fashion remain more challenging to finance.
A foggy outlook on the office sector means lender appetite is patchy at best, particularly for lower quality or suburban properties, which are expected to underperform while the dust settles on the emerging work-from-home economy.
Geographically, Alberta has been low on many lenders’ dance cards for several years, as the province has struggled with low resource prices. However, energy’s recent rally could see that negative sentiment start to improve soon.
Finally, on the economic front it’s all eyes on inflation, which could see mortgage coupons rise with interest rates and a corresponding reduction in the leverage capacity for properties with long-term leases unable to keep pace with CPI.
As Canada emerges from the late stages of the pandemic, we take a look at the key themes that are trending across CRE’s four primary segments, or “food groups”.
Office
Industrial
Retail
Multifamily
