Real estate lending holds promise for 2022, particularly for borrowers with multifamily and/or grocery-anchored retail acquisitions in mind. More than two-thirds of Canadian lenders participating in CBRE’s recent annual survey indicated plans to increase allocations to real estate, equating to an estimated 10 to 20 per cent boost in availability of capital compared to 2021.
“The survey results represent a significant shift in lender sentiment from caution to opportunity and real estate lenders are ready to support businesses and investors looking to finance real estate transactions,” maintains Carmin Di Fiore, executive vice president with CBRE’s debt and structured finance team.
The survey was conducted in October and early November of 2021 and draws findings from 30 finance companies that collectively have more than $200 billion in loans under management. It generally shows improved lender confidence in 14 of 17 identified asset sub-classes, while regional malls in secondary markets and Class B office buildings, both downtown and in the suburbs, now inspire more consternation than they did in the fall of 2020.
Those three categories currently carry the most pessimistic outlook in lenders’ views. Hotels aren’t exactly inspiring zeal, with more than 65 per cent of respondents indicating concerns, but they have improved standing from 2020 and a small percentage of lenders reports plans to increase budget allocations to the asset class in 2022.
Meanwhile, experiential retail, which was also ranked in the bottom three asset classes last year, has made the most notable gains in lenders’ estimation. Slightly more than 30 per cent of respondents labelled it a cause for concern this fall versus nearly 70 per cent in the fourth quarter of 2020. Regional malls in central business districts, retail power centres and value-add retail are also considered in a markedly more optimistic light than 12 months ago. Overall, the survey found the most upbeat perspective on retail since 2018.
“Last year, the vast majority of lenders saw the disruption in retail as a sign of a permanent structural shift, but this year, lenders are now evenly split on whether it is permanent or temporary,” the report notes. “In order for lenders to proceed with a retail deal, it appears that NOI (net operating income) durability is paramount. The top two most important factors for securing a retail loan were the credit worthiness of the tenant(s) and the existence of a food or necessity-based anchor.”
Looking to the most favoured asset classes, lenders express little to no concern about multifamily apartment buildings or grocery-anchored retail. For industrial, the miniscule uptick in concern compared to 2020 might relate to the highly competitive market.
In 2021, 34 per cent of surveyed lenders were under their envisioned budget for industrial loans. They recorded the next largest shortfall on multifamily, with 15 per cent failing to meet their budgets. At the same time, 48 per cent of lenders reported they surpassed their envisioned allocation to multifamily in 2021, 28 per cent were over budget on industrial loans, and 75 per cent of respondents have plans to increase allocations to both those asset classes next year.
Ambitions to expand real estate lending in 2022 occur in the context of 2021’s record-setting investment volume and expectations for a competitive deal environment heading into the new year. In response, survey respondents expect to employ a range of tactics, with refinancing within their existing loan portfolio emerging as the most popular option.
“Over the latter half of 2021, 60 per cent of lenders reported experiencing a moderate increase in competition for real estate deals, while a further 27 per cent found the increase in competition to be material. This momentum is expected to continue into 2022, where lenders expect Canadian domestic banks, insurance companies and pension funds to be the most aggressive in securing deals next year. Normal levels of competitiveness are expected from foreign banks and trust companies,” the report affirms.
In addition to the 70 per cent of lenders expecting to expand real estate lending through refinancing, 59 per cent plan to pursue a wider array of borrowers; 41 per cent promise more competitive rates; 37 per cent are targeting additional property markets and/or more geographic locales; and 22 per cent are looking at alternative property types such as student housing, life science facilities, data centres and other non-conventional asset classes.
