Nuances across both the Canadian and US markets, with recent regulatory changes around bank capital standards offer investors a range of opportunities and different avenues in asset allocation strategy. While the light at the end of the tunnel may seem dimmer, the Canadian market, compared to our southern counterparts, offers a bounty of opportunities to investors who know where to look. 

US CRE Market:

Significant attention is placed on commercial real estate due to rates and looming regulatory changes. Proposed by federal banking regulators, these changes could raise the reserve capital that large banks set aside for commercial mortgages. The primary concern is that these higher capital charges might force banks to elevate mortgage rates.

Since the Federal Reserve increased short-term rates by 5.25% in 2022, many borrowers face refinancing challenges. Consequently, the delinquency rate of loans backed by commercial real estate has seen an increase to 4.4% in July. 

While still far away from the high of the pandemic, regulators should tread lightly to avert unnecessary hurdles in the future. Considering commercial banks are the backbone of the market in the US, with 40-50% of total outstanding commercial mortgages on their balance sheets, any regulatory changes could significantly sway the market.

Canadian CRE Market:

Across our own borders, Canada’s banking regulator is proposing shifts in the capital adequacy guidelines. These changes would require lenders and mortgage insurers to hold additional funds to mitigate risks from surging home loan rates. As a countermeasure, some of Canada’s leading banks have allowed customers to extend their home loan periods, which, while alleviating short-term pain, has raised concerns over increasing overall debt loads.

Negative amortization has become a focal point. With over 20% of the big six Canadian banks’ mortgage portfolios having a repayment span exceeding 30 years, regulators are keen to address this rising trend.

Opportunities in the Canadian Market:

These regulatory changes pave the way for strategic opportunities in the Canadian market. Given its banking regulator’s proactive stance in addressing potential market vulnerabilities, it offers a level of stability to investors. This proactiveness is an attractive proposition for long-term investments, especially in the commercial real estate sector and the option of extended loan periods provides a cushion for property owners. 

In Conclusion:

Both Canadian and US markets are undergoing shifts. But as history suggests, change often brings opportunity. Particularly in Canada, the commercial real estate sector is rife with prospects, as the regulatory landscape is swift to changing economic conditions.

At Votre Equipe Immobilier, we believe in harnessing these opportunities and guiding our clients through the intricacies of the market. If you’re considering investing or need insights into leveraging the current market dynamics, reach out for a consultation.