Commercial Mortgage Rebound Continues
There has been endless focus on Canada’s residential mortgage rebound following the credit crisis. Nowadays, however, commercial lending is where the growth is at.
Canada’s commercial mortgage market continues to expand, with more than $30 billion in loan originations in 2013. That’s according to Jones Lang LaSalle (JLL) in a recent report entitled Commercial Property Financing Renaissance.
JLL, a real estate services firm, says the increased originations include a doubling in Commercial Mortgage Backed Securities (CMBS) volumes to nearly $1.6 billion last year. That compares to approximately $5 billion before the financial crisis.
With increased volumes and liquidity comes increased lender competition, and that’s shifting the pendulum in the borrower’s favour.
Here’s a look at who funds the commercial market these days:
New commercial lending options have been popping up steadily, and not just from Canadian lenders.
“We are tracking nine U.S.-based lending groups, and several other European and Asian funds, that have expressed a strong desire to lend in Canada, oftentimes on a non-recourse basis with loan-to-values (LTVs) of up to 75 percent, both on five- and ten-year terms,” said the report’s authors, Amar Nijjar and Chad Gemmell.
“These lenders, on a case-by-case basis, are willing to stretch amortizations to 30 years and also do interest-only loans.”
“Over the last 18 months, strong competition amongst the lenders has resulted in credit spreads compressing to as low as 160 bps at present for conservatively underwritten first mortgages on institutional quality real estate with strong borrower and guarantor covenants,” states JLL.
- Prior to 2007, commercial mortgage financing intensified, driving credit spreads to an all-time low of 90-120 bps
- The credit crisis changed all that, widening spreads dramatically to 300-375 bps by spring 2009
- Commercial mortgage lenders saw their most profitable years from 2009-2010 as funding costs from most financial institutions dropped significantly in 2008, while spreads remained at historic highs
But the downward pressure on spreads could well be offset next year if/when government bond yields rise as economists anticipate (a big “if,” of course).
“The two metrics to keep an eye on are the rate of inflation and rate of unemployment,” the authors say. “The trigger for a…spike in bond yields will be a three percent inflation rate and a six percent unemployment rate.”
Other findings in the report:
- CMHC’s insured multi-family financings typically come in at a ~100 bps discount, versus uninsured products of the same calibre. However, strong demand and recent limits on new NHA Mortgage-backed Securities issuances suggest that “this is the only sector of commercial real estate finance that will see a relatively higher pressure on mortgage coupons.” JLL adds, “We also expect further regulatory changes restricting available capital to this sector.”
- MICs and other private lending sources are targeting 600-900 bps (over GoCs) as their lending spreads, with LTVs up to 90% on the high end. That’s coupled with the most lenient debt coverage ratio (DCRs) in the business, as low as 1.10x — versus banks in the 1.35x range.