Canadian commercial property owners, developers and lenders gathered virtually on February 23, 2021 for the real estate industry’s first big conference of the year: the 20th annual RealCapital Forum. During the expert panel discussion "Understanding Valuations and Underwriting During COVID-19,” First National's Aaron Cameron, Assistant Vice President, Commercial Mortgages, offered the following insights.
CMHC has indicated that its underwriting approach to multi-family assets in 2021 will be stable, which is a positive for borrowers and CMHC-approved lenders like First National.
Urbanization is not dead, neither is office work. Although the pandemic created the opportunity to work remotely and led to some suburbanization, these are short-term developments only and are not determinants of First National’s long-term lending approach.
First National will lend in small towns to the right clients who are looking to build rental units because: small town rental stock is often 30 or 40 years old and needs to be replaced, there is not enough of it, vacancies are low, rental rates are increasing and these small municipalities welcome development.
Outside of industrial and apartment assets in some geographies, there is limited visibility on the direction of rental rates due to the pandemic’s impact on the economy, employment and population growth, making a conservative approach to forecasting important.
A challenge for lenders in this environment is to gain comfort with a borrower’s exit strategy in the case of a development project because it’s difficult to predict rental rates two to three years from now when a building is ready to be occupied and it’s time to term out a construction loan.
LTV underwriting criteria at this point in the cycle depend on the borrower’s experience, level of liquidity and the nature of the asset class – sponsorship remains key to First National’s assessment of risk and desire to lend.
On average, available leverage in the commercial market is down slightly although not in all cases as a result of aggressive practices by some lenders who are eager to deploy excess capital profitably and quickly. .
Leverage points for office and retail assets are lower, perhaps as low as 50% to 55% LTV in certain markets reflecting risk and the difficulty lenders have in forecasting cap rates and rents.
Owners of retail wishing to refinance or repurpose vacant properties will need to be able to demonstrate strong sponsorship, a feasible plan and will benefit if the land is well located for another purpose – but will find it challenging as many lenders have put down their pencils due to sectoral headwinds.
Some lenders are relying on their own expert approach to valuation because of the pandemic. When third-party appraisals are dated and do not account for current realities in rental and cap rates, lenders have taken to doing their own valuations – for better or worse.
For purchase/sale transactions, many comps that are available are no longer relevant as they relate to pre-pandemic deals, which adds another level of complexity to underwriting.
The pandemic has proven that it is possible for lenders like First National to use technology to grow and remain productive and efficient for borrowers.
To learn more about First National’s financing services and the state of the market in your area, please contact your advisor today.