B-20 proves a boon for commercial sector

by Neil Sharma31 Mar 2019

While B-20 substantially cooled Canada’s residential real estate market, it’s proven a boon for the commercial sector.

“On the commercial front, we’re seeing a lot more activity on buildings of more than 5 units,” said David Goncalves, a mortgage broker and partner of Mortgage Alliance Vine Group. “We’re seeing this upswing because people got squeezed out of buying residential properties because of the lending rule change, and as a result we’ve seen significant growth in the commercial sector.”

In Toronto, mixed-use developments have exploded in popularity among investors, and Vine Group has capitalized on the growth by securing financing for small and mid-sized real estate developers. While residential lending practices have changed to become more restrictive, commercial underwriting practices have become more liberal.

“A lot of lenders on the residential side have door policies,” Hugo Dos Reis, a partner at Vine Group, said of limits placed on residential investment properties. “Lenders don’t want to loan to holding companies, and if they do they charge a premium. Even the big banks are getting away from that as well, but what we’ve found is that a lot of people are looking at multi-residential commercial properties instead of buying, say, a triplex.

“The lending now is on the asset and the most important part of the deal: cash flow. The client’s exposure in other properties is an advantage because we can articulate in our business case that we have an experienced real estate investor who’s invested in small to mid-sized commercial properties. As regulation gets tighter on the residential side—because residential financing isn’t designed for large portfolios—the banks are still lending, only it’s on the commercial side.”

Big Six banks are not the only lenders partial to commercial lending. According to Liam Sauro, associate vice president of Capital Markets Group, B-20 has allowed alternative and private lenders to grow their commercial mortgage originations, as well.

“In the short-term, the private lending market on both residential and commercial is growing as a result because people require more equity, or leverage, than a bank is willing to offer them, and that’s led to growth in institutional Tier 2 lending,” he said. “It’s also led to tertiary lender growth, and I don’t think it’s slowing down any time soon, especially so long as those rules are in place.”

There’s also every reason to believe that lenders’ favourable disposition towards commercial holdings will persist, added Sauro.

“Those rules are part of what make up the whole mentality of the banking system here. In the U.S., they have a growth period and they look to loose regulation; in Canada, you have a period of can be perceived to be unsustainable growth and they look to tighten regulation because of fear of what could happen next.”

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