Commercial market: Which asset classes are thriving in 2023?

Specific sectors remain in high demand in the current environment

Commercial market: Which asset classes are thriving in 2023?

As the commercial lending space continues to navigate choppy waters in 2023, asset classes seeing the highest demand continue to be industrial and multi-family, with accretive M&A opportunities also hugely popular.

That’s according to a new report on this year’s outlook for commercial lenders in British Columbia published by Crete Capital, which surveyed directors and senior management responsible for deal teams and lenders in the field at leading financial institutions.

The firm’s principal, Joey Tai (pictured), told Canadian Mortgage Professional that the continued prominence of the industrial market on the overall commercial front was unsurprising, given how strongly that space has performed in recent times.

“The industrial market has been such a stable and desirable asset class for the last decade, and I think rightfully so if you look at the macroeconomics of the industrial sector, especially in the major markets in Canada,” he said.

“You have vacancy rates in BC of sub-1%, and [in] the major markets, it’s super-thin – the absorption rates are very high.”

That’s compounded by the fact that industrial supply remains extremely tight, something that Tai said had been confirmed by Crete’s conversations with commercial realtors, investors and developers during the past several months.

“It’s very hard to find land sites. It’s very hard to find properties to occupy,” he said. “And so generally, it’s just a very defensible sector. Especially in the industrial sector, it’s driven by domestic local businesses that are driving up the demand and absorbing the property and the product.”

Multifamily supply still hard to find

On the multifamily side, those supply issues are also glaring. Indeed, a recent report by commercial real estate giant CBRE indicated that with housing affordability now at its lowest level for more than 30 years, renting has emerged as the only viable option for many Canadian families – meaning demand for multifamily rental is likely to skyrocket.

A common theme across each in-demand asset class in 2023, Tai said, is the fact that commercial banks “love steady operating businesses” – partly because of the opportunity for cross-selling and generating various revenue streams from those connections.

“There could be lending opportunities but also deposit opportunities to help the ratios,” he pointed out. “We’ve seen capital ratios increase earlier this year, or recently regulations [requiring] more capital to be held as a percentage of lending.

So balance sheets are also an opportunity to collect deposits but also lend to, so that’s something that’s very sought after.“

As the report reveals, lenders remain bullish on the commercial side, with the vast majority indicating increased budgets for 2023 with a stronger push for higher quality credit.

“Virtually all the banks are putting term sheets out there and they’re putting out very competitive terms and conditions,” Tai said, “to the point where they’re squeezing the margins to try and win the business, something that we always see, but particularly for good-quality borrowers.

“Maybe it’s because it’s Q1, Q2 and it’s early in the year and they’re looking to fill their budgets, but it is quite competitive, so it aligns with what we’re seeing in the field.”

Rate optimism prevails among leading lenders

The survey showed that lenders in the BC market overwhelmingly expect current high interest rates to fall in the next year, with 90% of respondents indicating their belief that rates will come down in 2024.

While it remains to be seen whether rate cuts are actually pushed forward by the recent turmoil in the US financial system, Tai said the near-unanimity of lenders on prospects for interest rates was a noteworthy takeaway from the report.

“It’s very interesting how a lot of them are aligned,” he said. “They’re in sync in their belief that rates are stabilizing in the 2023 year. “This was done back in January and December – they thought, ‘OK, there’s going to be one hike, maybe two, and then it holds for the rest of 2023. And then we’ll look to de-escalate in 2024.’”

Which asset classes are you expecting to see the strongest performance throughout this year? Let us know in the comments section below – and for more great content from Canadian Mortgage Professional, be sure to subscribe to our free daily newsletter here.