Optimism was in the air at Informa’s RealCAPITAL conference in Toronto this week.

Robust commercial real estate development, investment and lending pipelines are anticipated in 2024 as the Canadian market recovers from the effects of high interest rates.

More than 700 attendees gathered to hear about the current state of the lending market, including multi-family assets, and where it may be headed in 2024.

Panelists were cautiously optimistic about the anticipated downward direction of interest rates, and even hopeful about deal pipelines.

“There’s a lot of debt capital,” said Moray Tawse, First National’s senior executive vice-president and co-founder.

Partnerships Key to Success

Throughout the day-long event, panelists reiterated that debt is available, but to existing partners and clients. No lender is looking to develop debt relationships outside of favourable existing clients with strong balance sheets and assets with durable cash flow. Richard Bailie, Manulife’s senior managing director of Canadian real estate finance, stressed that loan-to-value does not pay mortgages.

Across the panels, speakers emphasized the need to focus on property cash flows and sponsors with strong balance sheets. Lenders cautioned that U.S. and other out-of-market investors need to develop strong joint-venture relationships with Canadian partners who understand the unique elements of the country’s lending environment in order to be successful. 

Ken McKinnon, Institutional Mortgage Capital’s senior managing director and equity partner, agreed.

“Borrowers who aren’t established in the market right now will have trouble cracking the market,” he said.

Housing First

The Canada Mortgage and Housing Corporation pumped an additional $20 billion into the housing market in 2024 as the federal government mandates the creation of more housing of all kinds.

However, Tawse stressed that CMHC is equally focused on balance sheets to ensure that projects are completed and that no project is stalled by a partner lacking adequate reserves. The challenge lies in securitized-bond sales which, Tawse says, are challenging when they hit the open market. Of the $7 billion of securitized bonds that came on the open market in January, only $3 billion was purchased, with the remainder being picked up by the federal government. Traditional bond buyers don’t like or understand them, said Tawse. 

Little Excitement for Office Assets

While no one could muster any excitement for new office investment or development, the optimism in the market for other property types across the regions is strong. Industrial lease rates appear to have creased in the GTA, but rental growth is stronger in Calgary and Montreal.

Housing demand remains strong across Canada. Audience members were shocked that U.S. markets are oversupplied.

“We can’t imagine [developers of] multi-family assets offering concessions in Canada,” said Caroline Rauhala, portfolio manager for the Alberta Investment Management Corporation.

Slow Shift to Lower Interest Rates 

Panelists agreed that the widely anticipated shift to lower interest rates will proceed slowly over the course of 2024 and into 2025.

Panelists foresee the Bank of Canada’s key overnight rate dropping to about 3%, but taking roughly 12 to18 months to get there. The rate comedown will be slower than the rise, but the Canadian market has stabilized, and market participants are looking forward to increased lending activity in 2024.

Ultimately, market stabilization has led to the more robust pipelines that began to formulate in mid-to-late 2023 and are active today.

With files from Sarah Quinn

Photo: Sarah Quinn