Federal Banking Regulator Takes Closer Look at Commercial Real Estate
Federal Banking Regulator Takes Closer Look at Commercial Real Estate
Office of Superintendent of Financial Institutions Says Lower Quality Office Buildings Pose More Risk
Commercial real estate has drawn a red flag from the agency that regulates Canada’s financial industries, particularly the office sector.
The Office of the Superintendent of Financial Institutions said corporate credit and commercial real estate — particularly the construction, development and office sectors — continue to face stress and a high degree of uncertainty.
“While market-based and core funding liquidity sources are available, prior downturns and stress events have demonstrated that these conditions can change quickly,” the agency said in its annual risk outlook for the fiscal year 2024-2025
The independent federal government agency reporting to the Minister of Finance added that “wholesale credit risk, including risk from commercial real estate lending as well as corporate and commercial debt, remains a significant exposure for financial institutions. Economic uncertainties and changes in these markets are impacting the risk environment. Current interest rate levels have produced challenging refinancing conditions for some commercial and corporate borrowers, and the conditions could negatively affect wholesale credit markets in the coming year.”
It added that higher interest rates, inflation, and lower demand have put commercial real estate “markets under pressure. We expect these challenges to extend into 2024 and 2025.”
While new office construction has hit its lowest level since 2011, CBRE reported last month that the national downtown vacancy rate reached 19.5% as more supply was added to the market.
The Office of the Superintendent of Financial Institutions pointed to the office sub-segment of the commercial real estate market as facing additional changes as companies adopt hybrid work environments, leading to rising vacancies and declining asset values.
“Lower quality office buildings face more acute risks while higher quality older properties have also experienced pressure from reduced demand for office space,” the agency noted.
It added that other aspects of commercial real estate, including the construction market and industrial sector, face challenges from reduced demand.
The Bank of Canada has also said it is monitoring commercial real estate closely. Now the Office of the Superintendent of Financial Institutions plans to monitor lending activities to assess borrower and portfolio vulnerabilities, account management and underwriting practices and loan loss provisioning.
The regulator also monitors the residential housing market and notes that 76% of the mortgages that were outstanding as of February 2024 will be up for renewal by the end of 2026.
“Canadian homeowners who will renew their mortgages during this time period could potentially face a payment shock. This payment shock will be most significant for homeowners who took out mortgages when interest rates were lower in 2020 to 2022,” said the regulator.
Source CoStar. Click here to read a full story.
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