LORI MCLEOD
Globe and Mail Update
TORONTO - Canada's $15-billion a year commercial mortgage lending industry has gone from a period of excess supply into a relative drought - one that could leave the market $3-billion to $4-billion short of what borrowers are seeking in 2008.
“We're going to have a problem this year,” Reiner Plessl, director at RBC Dominion Securities Inc.'s real estate group, told attendees at a Queen's University seminar in Toronto.
Borrowers who do manage to find a loan that suits their purposes should grab it as quickly and as early in the year as possible, as there's a good chance banks will run out of funds allocated for commercial mortgages around August, Mr. Plessl said.
The primary issue is fallout from the global credit crisis, which has put a halt to one of the industry's key sources of financing, commercial mortgage backed securities (CMBS).
A form of bond comprised of commercial mortgage loans that are packaged and sold to investors, CMBS issuance went from $200-million in 1998 to $4.8-billion in 2006.
That came to an abrupt halt late last year, when defaults on subprime mortgages in the U.S. spilled over to cause a deep freeze on investor demand for asset-backed debt products.
This sellers' market could provide a lucrative opportunity for lenders including life insurance companies, pension funds and offshore capital groups.
Richard Baillie, director of commercial mortgages at Sun Life Financial, said he's actually discouraging new business right now. In a panel discussion, Mr. Baillie said his company will try to stay on the sidelines and then take advantage of better opportunities in the second half of the year when competitors' funding lines have dried up.
Mortgage loans will be more cautiously doled out, and many lower-quality borrowers are likely to be out of luck, said Don Ross, vice-president at mortgage and equipment financing firm MCAP Financial Corp.
However, some new players could emerge down the road to pick up the slack left by the CMBS market, and they'll likely be from the U.S., Mr. Ross said.
While the size, shape and make-up of such funds has yet to be determined, in order to woo skittish investors their characteristics will almost certainly include transparency, identifiable assets, strong disclosure, and stable, predictable returns, he said.
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