Lending institutions remain bullish – but still cautious – about the province's commercial outlook
Lenders in British Columbia’s commercial market are increasing their budgets this year after a “robust” 2022 – although virtually all expect to enforce enhanced underwriting standards for the foreseeable future, according to a new survey.
In its 2023 Lender Sentiment Report, which aggregated anonymous input from over a dozen prominent executives at leading financial institutions, Vancouver-based Crete Capital revealed that lenders in the current market were placing a particular focus on quality credit by tightening their underwriting criteria, with the battle for market share as competitive as ever.
Seventy-three percent (73%) of respondents reported having increased their budget for 2023, with 92% meeting their 2022 budgets and a full 100% saying they anticipated underwriting standards to be higher this year.
Precisely what more stringent lending standards mean depends largely on the lender, Crete Capital said, from restrictions on credit conditions to stricter stress testing and cashflow coverage.
Joey Tai (pictured top), principal at the company, told Canadian Mortgage Professional that the report reflected the continued optimism of lenders on the commercial front, even if they were also taking a cautious approach amid strong economic headwinds of late.
“The interesting thing is they’re actually looking to put more capital out there in 2023,” he said. “So in other words, their budgets are going up the same or higher. That’s a testament to a healthy lender market or debt capital market.
“The caveat to that is although [nearly] 75% of our surveyed bankers are looking to put more capital out there, their targets are going up, their underwriting standards are going up as well a little bit, and they’re focusing on what they want to say is higher quality credit because of the macroeconomic situation, or the uncertainty that we’re heading into.”
What that likely means in practice is a larger pool of bankers and commercial creditors competing for the business of a smaller number of borrowers or potential clients, he added.
“So it’s going to be a lot more competitive, but they’re all chasing after that strong, cash-flowing, established business or developments groups, or desirable assets,” he explained. “So that’ll be interesting to see this year.”
What do stricter underwriting criteria entail?
Those tighter underwriting standards may mean that a higher level of coverage is required to secure a loan – for instance, 1.25 or 1.3, compared to the conventional covenant of 1.2 on commercial lending, Tai said.
A common thread among the surveyed lenders, he said, was an abundance of caution in their approach. “The main sort of general theme is that they’re going to be more prudent, they’re going to be more perspicacious in their approach to underwriting,” he said, “which is completely warranted, and it’s expected.”
Big Five Canadian banks, credit unions and more regional players were among the participants in Crete Capital’s survey, which also revealed an expectation among lenders that rates would remain fairly stable in 2023 before beginning to tick downwards next year.
Crete said that would probably see the cost of capital stabilize in the coming years, and noted that interest rate hedging such as rate swaps and debt laddering – taking a piece of debt and cutting it into several fixed terms to manage fixed-rate exposure on a granular level – would become increasingly prominent.
What to keep in mind about the commercial landscape amid rate questions
Still, the interest-rate trajectory for the year ahead remains uncertain, particularly with the banking crisis that’s engulfed the United States’ financial system in recent weeks having emerged just after the publication of the Crete Capital survey.
With that in mind, keeping risk under wraps will be a key component of commercial prospects for the coming months, according to Tai.
“As commercial capital advisors, we focus right now more on how to manage interest rate exposure and manage risk rather than try to predict where rates are going to go,” he said. “Economists have been wrong many times in the past, and I think they’ll continue to be wrong here and there.
“So rather than try to forecast and expose our clients, we focus on strategies and tools for mitigating that interest rate risk… It’s getting certainty, and providing our clients with that comfort to transact. These are big purchases and big investments, and they don’t want to be left exposed versus maybe a year or two ago [when] it wasn’t so much of a focus.”
What’s your outlook on the commercial front for the months ahead? Let us know in the comments section below.