Commercial Financing in 2024

The Evolving Financing Landscape: Looking Ahead to 2025

See the official article here: VARING MAGAZINE 2024

 

The past few years have been a rollercoaster for the finance world. From the onset of the Covid-19 pandemic, where lenders paused capital deployment, to the recovery phase, marked by fluctuating interest rates, the lending environment has been constantly shifting. Now, as 2024 draws to a close, attention is turning toward 2025, and the market is once again bracing for change.

Trends from 2024 and What They Mean for 2025

In 2024, the financial market experienced stabilization after a period of rapid interest rate hikes. With the Canada Prime Rate holding steady, though still higher than pre-Covid levels, lenders have adapted to the new normal. However, the cautious approach that defined lending in recent years remains, as borrowers face stricter requirements and reduced leverage.

Looking ahead to 2025, several key trends are expected to shape the lending environment:

• Moderation in Interest Rates: While rapid interest rate hikes are behind us, rates remain relatively high compared to the early 2020s. Lenders are still focused on de-risking portfolios, but signs of easing monetary policies could lead to more favorable conditions for borrowers.
• Cautious Optimism: Many lenders are poised to re-enter the market with increased capital, but the focus will be on creditworthiness, liquidity, and strong borrower profiles. This cautious optimism will drive competitive terms for those who meet the stringent lending criteria.
• A More Selective Market: Not all asset classes are treated equally. Apartment buildings and industrial properties remain attractive to lenders, while office and retail spaces are still viewed cautiously as they continue to adapt to changing demand patterns.

Commercial Mortgages & Business Financing: What’s Changing?

In 2024, commercial and business financing relied heavily on the cash flow of the underlying property or business. However, loan leverage was capped for many borrowers due to higher interest rates. Looking toward 2025, the lending environment for commercial properties is likely to evolve:

• Loan Leverage May Improve: As interest rates moderate, loan-to-value ratios could become more favorable, especially for well-capitalized borrowers. However, lenders will continue to perform sensitivity analyses to safeguard against future rate volatility.
• Owner-Occupied Property Advantage: Lenders remain open to offering higher loan-to-value ratios for owner-occupied commercial properties, provided borrowers have strong balance sheets and clear business plans.

Land & Construction Financing: Opportunities Amid Tightening

Land financing saw significant tightening in 2023 and 2024, with many lenders reducing leverage in response to perceived risks. This trend is likely to continue into 2025, but opportunities are emerging for those with the capital and experience to take advantage:

• Lower Leverage but Greater Opportunity: While leverage ratios are unlikely to return to pre-pandemic levels, the ongoing challenges in land financing create openings for well-positioned developers to acquire or partner on distressed assets.
• Construction Financing Remains Available: Despite the risk aversion of some lenders, there is still significant capital waiting to be deployed for construction projects. With construction costs stabilizing and more trades becoming available, 2025 may see a revival of paused developments.

What to Expect in 2025

• Easing Market Conditions: If interest rates ease further in 2025, more capital could flow back into the market, potentially loosening lending conditions.
• Increased Focus on Experience and Liquidity: Lenders will continue to prioritize experienced developers and businesses with strong liquidity. Well-prepared borrowers, particularly those with solid financial profiles and mortgage broker support, can expect more competitive terms.
• A Market Shift: As the economy stabilizes, there is likely to be renewed interest in financing for development projects, especially in growing asset classes such as industrial and multifamily properties.

The outlook for 2025 suggests a more balanced and opportunistic market for real estate financing. While caution remains, those who navigate these conditions effectively will find favorable terms and new opportunities as the year unfolds.