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Canadian CMBS and FMB Office Loan Performance Remains Strong Despite Sluggish Market Fundamentals

DBRS Morningstar’s commentary highlights the strengths and challenges of Canadian CMBS and FMB office loans in the two largest markets (Calgary and the Greater Toronto Area (GTA)) more than 16 months after the onset of the Coronavirus Disease (COVID-19) pandemic. Pre-pandemic, the GTA was experiencing a very active office market, with millions of square feet of office space under construction and much more in the pipeline, but Calgary was already struggling with very high vacancy rates due to significant merger and acquisition activity in the energy sector brought on by a multi-year collapse in the price of oil.

Key highlights include the following:
-- Currently, the GTA CMBS loans are all in good standing, and in Calgary only the three smallest loans are specially serviced (representing just 1% of the total loans). Those three loans will mature within the next two years.

-- The office landscape will certainly be different when companies return to offices. Even if a hybrid work policy becomes more common, some jobs need a collaborative environment and therefore the new office space model will not necessarily mean a smaller space. A hybrid workplace (whereby employees have a more flexible schedule by splitting working from home and the office) will be part of the return to the office landscape. Since numerous employees will share their work hours between home and the office, office space will be organized differently, but it does not mean that overall workspace will be reduced. The new office will provide space for meeting as well as dedicated quiet space and facilitate networking.

-- A new sector is on the rise in Calgary: technology. While several tech giants have recently settled in Calgary, this boost is not strong enough to bring the city back to its energy era. The city has started to work on new initiatives to transform empty office space into usable space for residential and hospitality activities. Calgary will certainly need the effort of all the stakeholders—governments, businesses, landlords, tenants, and developers—to return it to its golden years.

“Those two markets were experiencing different economic situations at the onset of the pandemic, and it is difficult to forecast what shape the office space will take after the pandemic. Canada is still under many restrictions that prevent a lot of businesses from reopening or working at full speed. However, the real estate market is run by a small number of well-capitalized firms and the financial help provided by the federal government has certainly helped to overcome the hurdle. The economic news is optimistic, and the unemployment rate is falling. It will take some time, but we will emerge from the tunnel,” said Catherine Leonard, Business Analyst, CPMS, Morningstar Canada.