The Real Challenge Facing Commercial Lending: Rapidly Escalating Property Values

“If you asked most people today, they would not consider there to be any challenges whatsoever in the commercial lending market other than values being high,” says Alan Winer, President and co-founder of Harbour Mortgage Corp.

Harbour Mortgage is a national lender that currently manages $370 million in mortgages with a significant number of retail properties in their portfolio of loans. They provide bridge financing for construction, first and second mortgages, mezzanine loans as well as equity capital for developers and in 2011 the company completed $230 million in transactions.

With the influx of the U.S. retailers and a significant amount of development underway to accommodate the new arrivals are higher vacancy rates anticipated in the retail sector?

Not necessarily, explains Winer.

“I don’t believe that there is an oversupply in construction at all. I think developers have been exceptionally disciplined in building from what is there. They build to accommodate leases in place. There is not a lot of speculative building in the country. “

“The only place that there will probably be some absorption is the Zellers space that was not taken up by Target.”

Some mid-sized retailers are facing greater challenges now that they are sharing the market with foreign players. There is a sense amongst a growing number of property owners and managers that ‘only the strong survive’ and many mid-level retail tenants may be forced to fold up shop, explained Winer.

This type of purging of the weaker businesses is nothing new and that it is a phenomenon that is not specific to the retail sector particularly from a lending standpoint from Winer’s perspective. He considers fundamentals such as layout and location, the factors that make a space re-leasable, still carry the most weight as a financing consideration regardless of who occupies the space.

Location alone as a primary issue determining the viability of a retail space given the current state of the industry is a simplistic approach according to Winer. Retailers can redefine a location as well as re-configure their position in the market as a defense against greater competition.

“There are different ways to say location, location, location. We’ve seen the emergence of this over the last 15 years with big box retail, for instance. You can create a ‘location’ with the amassing of certain retailers.”

Although Winer feels very confident about the prospects for sustained growth, he acknowledges that the Achilles Heel in the commercial lending market is rapidly escalating property values.

“We are going through a point in time right now where value of real estate has gone up significantly on the commercial end and on the residential end. There are many people who are starting to get concerned about where we are at, and how high properties should be valued for lending purposes.”

There is also the question of the oversupply of condominiums in areas where prices are also unsustainably high such as in Toronto and Vancouver.

While Winer acknowledges the dangers that exist inherently with oversupply and currently high values, from a lending perspective, he believes the situation is well in hand. “Most people I know have very few default problems today. The market is holding up. We have zero defaults in our portfolio. That is a testament to the strength of what is going on today.”

The real challenge on the table between borrowers and lenders is the rapid escalation of property prices explained Winer. In the face of a potentially inflated market Harbour Mortgage’s approach is to default to prudent lending practices.

“It depends on the borrower, and on the asset class that you are in. We are most comfortable in retail. We take a look at, if we had to sell the property at the value we are lending at, how much are we going to lend? And we go to the point where we are comfortable, regardless of what the value of the asset is” said Winer.


Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more





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