Vancouver Commercial Real Estate Podcast

Providing real-time insight into today's commercial real estate industry.

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October 4, 2023
VCREP #111: Navigating the Current Commercial Real Estate Landscape with Jon Switzer

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In this week’s episode, hosts Cory and Melisa are joined by a past-guest and fan-favourite, Jon Switzer, friend of the show over at Impact Commercial.

Jon's deep involvement in the industry provides a unique perspective on the current market trends and movements. As a hands-on expert, Jon shares invaluable insights into the commercial real estate landscape, offering listeners a comprehensive view of the present and a glimpse into the future. Tune in for an informative conversation that promises to shed light on the ever-evolving world of commercial real estate.

Lets go!

Impact Commercial’s Jon Switzer joins us to discuss the current commercial real estate landscape. How are high interest rates impacting the market? Where are interest rates going in 2024? And what’s the best deal in the commercial market right now?

Who is Jon Switzer?

I’ve been with Impact Commercial since 2017. Before that I was in the financial capital market on the cash management side. I transitioned into mortgages and enjoyed applying some of those learnings from cash management in the mortgage space.

What is going on with the commercial real estate market and interest rates?

I wish I knew what was going on. My colleagues and I were not expecting bond yields to run this far and this fast. Bond yields set the price of other instruments in the market, including commercial mortgages.

I thought bond yields would be lower by now based on historical data. But at least I’m in good company with other economists who are surprised by this market too.

Interest rates are higher than what we’ve been used to since the global financial crisis in 2008 and the early tech bubble. We’re at the highest in about 16-17 years but nowhere near where we were in the 80’s. We’re at 6-7% for a 1-5 year commercial mortgage for the average borrower.

How do bond yields correlate with interest rates?

The federal government bond yields are considered a risk-free rate of return. Every other financial instrument is priced off of that. It’s a cascade effect of the premium increasing because of the risk increasing.

Commercial and residential mortgages slap an additional premium onto those rates because you’re now dealing with individual homeowners and business owners.

Fixed rates are derived from the government bond yield. Variable rates are derived from the prime rate, which is correlated to the central bank overnight rate. Right now, they’re both running parallel and are very important.

If the Bank of Canada overnight rate is 5%, how much of a spread will we see in the prime rate from the major Canadian banks?

The spread between the overnight rate and the prime rate hasn’t changed in a very long time. It’s 220 basis points or 2.2%. So if the Bank of Canada overnight rate is 5%, the bank prime rate is 7.2%. All the banks are the same and they all move in lockstep with the Bank of Canada.

How do commercial lending rates compare to the prime rate?

There’s usually a spread for the average commercial borrower over that prime rate. The lowest I’ve seen for a non-institutional borrower is prime plus a quarter, so 7.45% based on a prime rate of 7.2%. The average spread might be prime plus 1%.

In contrast to residential mortgages, where you used to see a discount off prime, the gap has closed quite a bit since covid between residential and commercial rates.

Where do rates go from here?

From what I’m reading, the bond yields are pricing in another quarter point hike but they don’t know when. I’m hearing it could be October 2023 or Q1 of next year. The bond market believes that will be the top and we’ll plateau there for quite a while.

What has to happen for rates to come down?

For fixed rates, it could happen at any time. I’m surprised bond yields have been this stubborn. But they trade on a second by second basis. The bond market can price in the next cut 12-18 months ahead of when the Central Bank makes a move.

I’m hoping the bond yields peak anytime now and gradually start getting lower so we can see more accommodative fixed rates.

Are you seeing a surprising amount of deals based on where interest rates are?

We’re seeing unsurprisingly strong deal flow. It’s not surprising because when rates are this high, people buy in cash. And there’s a lot of cash in places like Vancouver and Toronto.

If interest rates are at 7% and cap rates are at 4%, you need to have a lot of capital to make the purchase work. You’d have to put down almost 60% to get a conventional first mortgage. That’s very low risk for a lender. The money will keep flowing for anyone who has that kind of capital.

Are there a lot of opportunities for buyers?

I think we’ll see well-capitalized buyers get more and more active. Vulnerable groups are in pain and the institutional buyers are waiting for those last few groups to exit the market.

The sophisticated buyers are waiting to enter the market once we hit that tipping point. But they’re not waiting long. They don’t want to miss the leg up when interest rates start to come down.

Where are interest rates going in 2024?

A year from now, we should be in rate cutting territory, and possibly much sooner. It wasn’t that long ego that top economists thought we’d see the first cut this year. But that changed in a matter of months – or even a matter of weeks – as the bond market telegraphed a different story.

I think it could come down hard and fast. Do they start with 25 basis points and then build momentum or start with 50? I think the end result will be the overnight rate coming down more than most people expect.

Are you seeing more deals in certain markets?

It depends on the type of buyers. Owner-users are propping up the market in the major centres right now. That’s where the strongest activity is. They can make the numbers work based on the cash flow of their business. There may not be a huge difference between leasing and buying for them.

We’re seeing more investment activity in tertiary markets, like the Kootenays, Northern BC, etc. But activity has slowed and there is more softness in some markets, like Kelowna.

Construction is hard right now. It’s hard to make the numbers work. With condos, you don’t know if buyers can secure mortgages. For rentals, it’s difficult to make a profitable project work without the CMHC.

The 6 Pack: Getting to Know Managing Partner at Impact Commercial, Jon Switzer

Will the Canucks make the playoffs this year?

I’m always going to be a Canucks fan but I just don’t have time to follow them closely. But I know enough to not bet any money on them making the playoffs. I would be ecstatic if they did though!

Favourite drink?

I’ve gotten into tequila lately. The $50-60 bottles are good enough that you can sip them or enjoy them with soda and lime.

Favourite TV show or movie?

The Bear was awesome. Now we have to wait a while for season three but I can’t wait.

What have you purchased for under $1500 that has had a positive impact on your life?

I’ve been with my iPhone for a very long time and I’m in dire need of an update. So it’ll be a new iPhone!

What advice would you give a commercial investor right now?

The best opportunities come when the market is fearful. When everyone is scared off, that’s the time to start snatching things up.

Would you prefer a secluded cabin or a luxury penthouse vacation?

I’m not a fan of heights so I’m going cabin in the woods!

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Vancouver Commercial Real Estate Podcast

For all the curious minds interested in commercial real estate investing, grab a coffee and pull up a chair because we have exclusive stories and tips from commercial real estate brokers, investors, developers, economists, urban planners, and everyone in-between. From the successes and failures to the motivations and lessons learned, the Vancouver Commercial Real Estate Podcast is your insight into commercial real estate in Vancouver, Victoria, Kelowna, and beyond.

What's the best real estate market to invest in? What are the commercial real estate asset classes and property types? Hosted by Cory Wright, founder of William Wright Commercial, and co-hosts Adam and Matt Scalena of the Vancouver Real Estate Podcast, our podcast opens the door to real estate investing for everyone from beginner investors to experienced real estate professionals. New episodes are released every Tuesday. Follow the Vancouver Commercial Real Estate Podcast on Apple Podcasts, Spotify, Google Podcasts, or your favourite streaming platforms.

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This communication is not intended to cause or induce breach of an existing agency agreement. E&OE: All information contained herein is from sources deemed reliable, and have no reason to doubt its accuracy; however, no guarantee or responsibility is assumed thereof, and it shall not form any part of future contracts. Properties are submitted subject to errors and omissions and all information should be carefully verified. All measurements quoted herein are approximate.