by David Wallach
(AJNews) – I had an opportunity to discuss, Commercial Real Estate Financing, during and Post COVID-19, with Mr. Jeff Bowling Senior Vice President, Real Estate Lending at Canadian Western Bank. Excerpts from the conversation appear below.
David: On March 16 the Canadian business world almost came to as standstill, what was lenders response to the mandatory lock down?
Jeff: Canadian Western Bank (CWB) was among the first in Canadian financial services to proactively reach out to our business owner clients to understand the extent they were struggling with cash flow issues because of the impact of COVID-19. Under our #CWBhasyourback program, we delivered individualized advice and support for each client based on their individual circumstances and assisted in adapting their banking to allow more operations to be completed remotely.
David: How did the lending community support the mortgagors?
Jeff: We worked proactively and closely with our clients experiencing temporary financial difficulty to manage payment deferral options and support access to government programs on a case-by-case basis. At its peak, we provided payment deferrals to over 25% of our loan portfolio to help our clients manage through the economic turbulence. As payment deferral periods concluded, we have been successful in working with clients to resume normal payments. As of late November, the percentage of outstanding loans deferring payments has declined to approximately 1%, with three quarters of those clients paying the interest portion of their contractual payment.
Our teams continue to actively support our clients through government lending initiatives to provide businesses with relief through this period of market disruption. At October 31, 2020, we administered the advance of nearly $90 million of Canada Emergency Business Account loans, which are funded by the federal government. On October 31, 2020, we also funded approximately $130 million of loans, with partial federal government guarantees through Export Development Canada’s Business Credit Availability Program.
David: What did the lending community learn from the 2008-2010 economic downturn and put to work during the COVID-19 economic meltdown?
Jeff: I can’t speak to what other lenders learned during that time, but I can tell you that at CWB some of our strongest relationships were forged during our clients’ most challenging times. When other banks turned away or were too difficult to deal with, we were there for our clients. That’s part of the history of how our bank started 35 years ago and remained central to how we supported our clients through the 2008 downtown and today’s challenge.
David: As we are preparing to get vaccinated, are lenders now open for business, looking to finance real estate investments?
Jeff: From CWB’s perspective, we continued to prudently support our current borrowers through the economic turbulence this year and originate new lending that remained within our risk appetite. In fiscal 2020, our commercial mortgages increased 12% from fiscal 2019, with growth driven by strong new lending volumes with well-capitalized, high-quality borrowers. Real estate project loans contracted 13% with new growth more than offset by the impact of successful project completions and payouts. Projects underway prior to the economic impact of the COVID-19 pandemic continue to progress, although at a slower pace given physical distancing protocols. Reduced demand for condominiums and high land prices negatively impacted project starts, which have been further impacted by curtailed economic activity related to the COVID-19 pandemic.
David: Has properties criteria changed as result of what we have experienced, and still experiencing, in past 9 months?
Jeff: The pandemic has affected each asset class in different ways whether it is retail, office, industrial or multi family. For example, it is difficult to determine the long term impacts of “work from home” on the office market and related space requirements or the increase in on-line shopping on big box retail. Conversely, these same factors have positively impacted suburban multi family in larger markets.
David: Has Mortgagors criteria changed in past year?
Jeff: The fundamentals of lending really have not changed. Properties need to be looked at individually based on asset class, location, tenant mix, lease maturities, amongst other factors. The impact on individual asset classes certainly needs to be taken into consideration when evaluating the financing. Lending against an office building looks very different in Calgary or Edmonton than it did ten years ago given prevailing vacancy rates. Conversely, the suburban multi family market in other areas such as the GTA is seeing the positive impact from fewer people needing to be in the downtown core.
David: As a local bank with headquarter in Edmonton, are there any regions you are avoiding at this point?
Jeff: Our vision is to be the best full-service bank for business owners in Canada. We lend in all areas where we have a presence which allows us to understand the markets that we are doing business in. We continue to make progress on our strategic goal of 30% for our overall loan book for BC, AB, and ON respectively. We are focused on growing our brand and market share in Ontario, leveraged by our new full-service branch in Mississauga and growing wealth management business. On October 21, 2020, 28% of our loan portfolio was comprised of loans domiciled in Ontario and other provinces in Central and Eastern Canada, up significantly from 10% at the end of 2010.
David: Now please take out your crystal ball do you expect interest rates to go up, go down or stay where they are in 2021?
Jeff: Our forward-looking guidance has been developed on the assumption of no further Bank of Canada policy interest rate adjustments in fiscal 2021. This was driven by an underlying economic assumption of a continued gradual recovery of the Canadian economy, with no big peaks or valleys from GDP growth perspective. Certainly, interest rates being “lower for longer” is the current outlook.
David: Do you expect Cap Rates to go up, go down or stay steady?
Jeff: That is a difficult question. While the current low interest rate environment will assist in keeping cap rates low from a historical perspective, there may be a larger divergence depending on location but, perhaps to a larger degree, the asset class of a property given the current and emerging trend already mentioned.
David: Last question, do you expect Commercial Real Estate Investment activity to go up, go down or stay steady in 2021?
Jeff: We expect growth in our real estate loan portfolio to remain relatively consistent with our overall growth rate of loans, with the exception of real estate project loans. We continue to assess construction-related lending opportunities within targeted markets. Within the parameters of our established risk appetite, we will continue to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels and have a strong pipeline of new lending opportunities, particularly as the economy recovers and delayed construction re-commences.
David Wallach is President/Broker at Barclay Street Real Estate in Calgary.