Vancouver Commercial Real Estate Podcast

Listen in as Impact Commercial’s Alan Haigh discusses how the collapse of Silicon Valley Bank affects commercial real estate and interest rates in both Canada and the US. 

Who is Alan Haigh?

I’m a founding partner of Impact Commercial Group, which is a niche commercial mortgage brokerage focusing on BC and Western Canada. I have a great group around me and there’s great stuff happening at Impact Commercial these days.

Why do you need a commercial mortgage broker? 

I’ve been in the industry a long time. When I was first doing mortgages 25 years ago, everything was by hand. But the increased complexity, regulatory compliance and competition we have today mean you don’t have time to make any mistakes.

You have to be dialled in to be successful with commercial real estate. If you don’t align yourself with a great team, you won’t be successful.

Don’t try to diagnose yourself if you’re not a doctor. Work with a specialist and increase your odds of being successful. The fees are insignificant compared to the opportunities you might lose out on. Build your team with commercial real estate experts.

How did the collapses of Silicon Valley Bank and Signature Bank happen?

I’m not an economist so please don’t hold me to that degree of expertise. I’m more of a boots-on-the-ground guy. I absorb a lot of information and extrapolate to form my opinion.

What happened with Silicon Valley Bank (SVB) is a direct response to the central bank policy makers. We’ve always had a boom or bust mentality but banks need stability. They need to be able to forecast over the next 5-10 years, at a minimum. If you raise rates too quickly, these banks that require stability suffer. That’s what happened with Silicon Valley Bank and Signature Bank.

Should the rates have risen to this level? No one is arguing they shouldn’t be this high. But perhaps they should have been raised earlier and slower, as opposed to raising them so quickly over a short period of time.

Silicon Valley Bank took in all of these deposits and 88-94% of them were uninsured. The bank then invests that money. With SVB, they invested the money in long term bonds. But when rates rise, bond prices fall.

Once the depositors wanted their money back, SVB had to liquidate their long bonds, resulting in a $2 billion loss. They went to the market to raise that missing equity. But that spooked the market, which furthered the run.

So you have policy makers who raised rates too quickly, inefficient risk policy and lack of consumer confidence. That trifecta caused the collapses of both Silicon Valley Bank and Signature Bank.

How did the feds respond to these bank collapses? 

On a temporary basis, the feds did what they needed to do. They guaranteed the deposits of all banks, which stemmed the flow of redemption. That increased confidence in the market and allowed things to settle down. The bigger players swept in and took over the good assets of the collapsed banks, leaving the bad assets to the regulators.

But these bank collapses showed some cracks. It means the Federal Reserve won’t be able to raise rates as fast as they were. I think we’re at peak rates. The Fed won’t be able to raise rates significantly from here. Even if they raise another 25 or 50 basis points, it’s immaterial based on how far they’ve raised them.

In 2023 are interest rates staying the same or will we see a cut?

I have a few bets going! I think with the Bank of Canada we’re going to be in a hold period on interest rates. Inflation is dropping, which is a good sign. And the GDP is higher than what people were expecting, which speaks to our resilience.

I don’t see an interest rate cut for a few months. I think rates will be flat for the rest of 2023.

If any other cracks appear, I could see rates dropping in Q4. But I think we’ll remain steady for the next six months.

Will interest rates drop in 2024?

Inflation is coming down. The Bank of Canada predicts inflation will be down to 3% this year and return to 2%in 2024. But that depends on the economy. Everyone was expecting a recession but we are actually seeing resilience in the economy with that 0.5% increase in GDP. It’s tough for the bank to drop interest rates if we’re at 0.5%. So it’s steady as we go!

Canada is very robust. Our banking system is different from the US. We have the oligopoly of the main banks, strong regional banks, and well-managed and well-regulated credit unions. We have a more concentrated banking system than down south.

What challenges are you facing with commercial lending and financing given our current interest rates? How have your strategies had to change?

The changes we’ve seen have all been client-centric. Some clients have done amazingly well. We did a bunch of refinancing when interest rates were 3% which allowed clients to get some properties with their increased liquidity.

But we also had clients who were maybe too optimistic about the value of land without cash flow on it. We’re working with them to try and stem the blood loss.

If you know you want to be in a certain area and want to defend profitability, you have to own your space. No one wants to pay the higher interest rates but if you can wait it out for a few years and then lock in at a lower rate, you could be in a good position.

It’s a mixed bag. We deal with $1 million mortgages up to $80 million mortgages all across BC. So we’re very reflective of what’s happening in the province at the moment.

Have you seen a shift in where you find deals based on what’s happening with interest rates? 

The biggest shift has been away from land. Hard costs are high so land is tough right now. You’re looking at 8.25% interest on your financing.

From a geographic standpoint, the search for yield is there. There’s no shortage of liquidity and people are trying to go out to new areas to get deals.

Most of the newcomers to Canada head to the metropolitan areas. But then they start to head out to the secondary markets. We’re seeing a robust demand for retail in places like Nanaimo and the Campbell River.

We see density, wealth and investment going out into these secondary markets. And lenders are happy to follow people out there and support them!

Have you experienced an increase in deals since February 2023?

Absolutely! We’ve seen the massive increase in interest ratesand the increase in risk premium lenders were charging. But in the last month or two, that risk premium has come off by about 50%. That means lenders are getting hungry and more competitive. More people are coming back into the market.

A lot of the larger deals still aren’t happening; they need interest rates or prices to come down. But a lot of people who can make smaller deals want to deploy their money. We’re seeing a lot of activity in what I’m calling the “mushy middle.” Within the next three months, we expect a lot of strength in the commercial real estate market.

The 6 Pack: Getting to Know Impact Commercial Group founding partner, Alan Haigh

Favourite sport and team?

My favourite sport is hockey. I grew up cheering for the Philadelphia Flyers but I have to go with the Canucks as my favourite team.

Dream car? 

That’s easy! The James Bond Aston Martin. That’s always been my dream car; it’s a sentimental favourite.

What is something you’ve purchased recently for under $1500 that has had a positive impact on your life? 

A nice Valentine’s gift of roses for my wife. It was well-timed and well-received!

Post-covid in the workplace: Are you in a suit and tie or sweater and collared shirt? 

Definitely not the suit and tie! I did that for 20 years and we’re not there anymore. I’ll be in nice dress shoes, nice pants and a collared shirt. But never a tie!

What advice do you have for our listeners from a lending standpoint? 

It’s all about preparation and knowledge. I can’t stress enough how important it is to build your team in this competitive market. Find people you trust. There are more sharks in the commercial arena than the residential one.