Lenders not immune to commercial property risks

Canada’s banks do not face the same immediate risks as those elsewhere. The bank sector is far more concentrated than in the US, limiting the chance that problems at small lenders will trigger a broader crisis of confidence. But the latest area of concern, commercial property, could still be the source of future problems. The Canada-wide downtown office vacancy rate jumped to 17.7% at the end of last year, from 10.2% before the pandemic, which is a slightly larger increase than in the US. Admittedly, Canadian office vacancy rates have not jumped by anywhere near as much as the 24%-point surge in the tech-centric San Francisco market. But the 11%-point rise in Toronto has still been substantial, surpassing that in even the beleaguered Manhattan market – although the vacancy rate remains a bit lower. (See Chart 1.) Office REITs have matched or even surpassed the weakness in the US, with one smaller Canadian REIT plunging by 40% earlier this month. All this raises the risk that lenders will have to increase the loan loss provisions on their commercial real estate portfolios, possibly triggering a broader tightening of credit conditions that could further weigh on the economic outlook.