Special Report on Commercial Lending


Traditional Lenders Returning to Commercial Real Estate

ATB Financial

While lower gas prices and continued softness in the forestry sectors and hog and beef industries continue to hamper Alberta's economy, the commercial real estate market in the province has held up well overall.

Like most provinces, Alberta is seeing increased vacancies and lower rents in their CRE market. At present no subsector is under stress; however, there are concerns regarding the Office market in both Edmonton and Calgary. Vacancies in the Office market in Edmonton are now over 7% and close to 9% in Calgary with both expected to see further increases as a result of increased supply and softer demand due to lay-offs and consolidations. The balance of the subsectors, while seeing some erosion, are generally considered to be stable overall with most experiencing vacancies under 6% and no further deterioration is expected.

From a financing perspective, up until mid 2008 commercial real estate was a preferred asset class to lend to and Alberta was the province to lend in. With the credit markets seizing up and the drop in gas prices, all of that changed such that the field of potential lenders had all but dried up and largely consisted of the local players, one of which was ATB Financial.

The implications of this to borrowers were significant. Lending values, which traditionally were in the 75% range fell to 65%. Spreads, which generally ranged from 150 to 250 bps over Government of Canada bonds rose to 350 to 450 bps. Where non-recourse lending was a growing trend, very few deals are now done without recourse. Suffice to say where Alberta was previously a borrower's market due to significant competition, over the past 12 to 14 months it has largely been a lender's market.

The past couple of months have seen some thawing in this market such that we are starting to see some of the traditional lenders (life insurance companies, pension funds) return with the main impact appearing to be some compression in spreads (250 to 300 bps range) and the return of some 10-year money. Lending values continue to remain at 65% for larger deals, however we are seeing some movement to 70% for smaller transactions. Likely we will see a return to a more traditional 70 to 75% lending value once cap rates and the economy stabilize.

Overall, ATB Financial remains bullish on commercial real estate and we continue to believe there are still good opportunities to grow a quality book in this market.

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