How far will interest rates fall in 2024?

No consensus among commercial lenders on outlook for year

How far will interest rates fall in 2024?

Commercial lenders view interest rate cuts in 2024 as a certainty – but are split on the question of when they’ll fall and by how far, according to a new survey.

Crete Capital’s latest lender sentiment report, which polled British Columbia lenders on their performance last year and outlook for the year ahead, revealed that while 100% of survey respondents believed rates would drop in 2024, there was no unanimity on the extent of likely cuts.

Sixty-four per cent (64%) of those surveyed said they expected rates to fall by 75 basis points or less by the end of the year.

Joey Tai (pictured top), Crete Capital’s managing principal, told Canadian Mortgage Professional that the lack of consensus spoke to continuing uncertainty over the outlook for Canada’s economy – although the broad expectation of rate cuts at some point this year was good news for the commercial mortgage market.

“In the economic reports that we saw coming out from earlier in the year, we saw as high as 150 basis point [cuts] in 2024,” he said. “When we speak to the field, the majority of lenders thought that the rate cuts are going to be 75 basis points or less. So it seems like the field is going to see a more conservative sentiment on rate cuts than, say, economic reports that we’ve been reading.

“But everybody’s on the same page and we’re expecting rates to come down this year – which historically has always been good for transaction activity, for the commercial real estate market. Cheaper money spurs activity, and typically that stimulates the market.”

The report aggregated feedback, submitted anonymously, from top executives across BC’s commercial lending space including high-level banking directors, team leaders and senior management.

Lenders post subdued performance compared with prior year

Another key takeaway was that almost half of lenders missed volume expectations in 2023 with the market still roiled by high interest rates and related turbulence which weighed down on funding opportunities overall.

Seventy-three per cent (73%) of respondents, meanwhile, posted lower volumes last year compared to 2022, with almost a third of lenders having subsequently adjusted their budgets for 2024 and another third keeping their budgets unchanged.

“Budgets typically increase, but for this year, two thirds are either adjusting their targets down or keeping them the same, which was interesting,” Tai said. “They feel like these targets are going to be more reasonable and they can actually hit them because of the missed performance against expectations for 2023.”

How are lender priorities evolving in 2024?

The report also identified a shift in focus for lenders from market share growth in 2023 to quality this year. “That really means that their underwriting standards are going to remain tight and they’re going to be prudent on their lending standards,” Tai said. They also want to be paid for their risk – and what that means is there’s going to be a bit of a focus on profitability.”

Lenders are putting an emphasis on pricing, fees and interest that are commensurate with the type of risk they’re being asked to take for the facility, Tai said, whether on commercial mortgages for a piece of real estate or general business lending for an acquisition.

The report showed that 60% of lenders said profitability and return on capital were highlighted metrics in their 2024, something which may not have been the case the prior year.

Meanwhile, with fraud cases on the rise since the beginning of the COVID-19 pandemic, lenders are also prioritizing KYC (Know Your Client) diligence more than ever.

“We’re noticing that within the last couple of years, especially coming out of COVID, the number of cyber crimes and financial crimes has gone up,” Tai said. “It could be AI-related frauds or huge financial fraud – you get emails from an ‘employee’ or a ‘vendor’, asking you for a payment.

“So the KYC requirements are focused. They want to have more touch points, and they want to really understand the principals and the shareholders and the people behind the business.”

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