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‘Fog of work from home’ shifting real estate lenders’ views on office properties

Real estate lenders drawing a bead on industrial and purpose-built rental properties
Despite being considered among the least desirable asset classes for real estate lenders, the Bentall Centre office space is viewed as good investment thanks to its amenity and ESG offerings. | Chung Chow, BIV

Part two of a two-part series examining the landscape facing real estate lenders going into 2024. The first part can be found here.

If lenders could draft a fantasy real estate portfolio, industrial properties and purpose-built rentals would be among their top picks.

Older Class B office properties, though, aren’t getting snapped up nearly as high in a fantasy draft.

“Something like the Bentall Centre [in downtown Vancouver] would be considered of high value, high desirability and if it was coming up for renewal, lenders would look at that on a positive base,” said Carmin Di Fiore, an executive vice-president at CBRE Canada.

“Where you're seeing the real issues … is in the B, B-minus and the C buildings. Older assets that don't have the type of amenities and the quality that you get in a Bentall setup are where lenders are going to sit there and say, ‘I'm not sure I want to be able to renew this’ or they’re saying, ‘We need significant reduction in the loan to get it to where we're comfortable with.’”

Shifting sentiments around office space and the “fog of work from home” mean this asset class is less popular compared with purpose-built rental or industrial properties, according to Di Fiore, who works in CBRE’s debt and structured finance team.

The hope is that local and federal incentives to build purpose-built rentals and multifamily housing will spur more development, according to a Nov. 27 report from CBRE Canada.

The majority of lenders surveyed in the firm’s new report said they intend to increase their budgets and expand exposures for purpose-built rental properties, while half the respondents said they will do so for industrial properties.

Fewer than half (42) per cent of lenders expect rent growth for industrial properties to return to historic levels within the next year, while 55 per cent of respondents reported low or no appetite to finance speculative construction in 2024.

Environmental, social and governance (ESG) strategies will also have an impact on lender activity in 2024.

Half of respondents said that they expect ESG to either significantly or moderately impact both debt availability and mortgage pricing. In addition, 23 per cent of lenders said they declined to bid on a real estate loan this past year due to the underlying asset’s ESG profile.

Sixty-eight per cent of lenders said they expect a property’s carbon footprint to impact the ability to secure a mortgage with competitive terms within the next one to five years, with 11 per cent of lenders reporting it is already happening and having an influence today.

“Banks and regulators are also picking up on this and basically are saying, ‘We're going to adjust capital requirements and what you're allowed to lend on based on your ESG performance,’” Di Fiore said.

“Now, having said that, we are slower off the mark compared to Europe but we're going to get there. Lenders think that in the next 36 months-plus it'll be far more significant in terms of how they evaluate loans or how they look at things.”

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