State of Lending: What Rising Rates Mean for Commercial Real Estate

Welcome to the CRE Podcast, 100% Canadian, 100% commercial real estate. Now here at your house, Aaron Cameron, and Adam Pauatic. Welcome to the commercial real estate podcast powered by First National. I am Aaron Cameron. He is Adam Pauatic. This is a sort of special episode where we are going to do a conversation about the state of lending. You know, we do these sort of infrequently, erratically almost. Yeah. Yeah. Interest rates are up 90 basis points, if you haven't heard, in a short order. And so that has some, I think interesting ramifications for the lending industry and commercial real estate industry at large that we just felt worth getting on here and talking to about. I mean, all fairness, I think we are planning an end of your state of lending. Which we'll probably do also. Yeah. I mean, there is a not usually enough change within a 30-day period we could do this monthly. Maybe people don't want to have it that often, but these episodes usually get well listened to, many people are interested in debt probably more so when interest rates are up 90 basis points and short order. And your underwriting is thrown out the window and you kind of got to start from scratch. Yeah. What do you think? Interest rates are up 90 or down 90, which makes people more interesting in lending. I think that if they're up 90 and I simply predicate that on some, George Presbylow's ski founder of the real estate forums told us a while ago, which is when things are rocky, they tend to get great attendance at the forum because people are trying to make sure they're not missing anything. Whereas when things are too good or they assume they're a genius. He didn't see the genius part. That's my add on. He never said that. I think that that's the reason why people would pay more attention is just biased towards negativity getting the radar up faster. Yeah. I think it's more like, tell me what to do. Tell me how I can navigate this environment versus shut up, give me more money. Yeah. An existential risk. And not this is. Current industries are an existential risk. They are not where they are right now. But I think that that idea gets a more immediate reaction from anybody than, hey, you're making money, but you can make a little more now. That being said, I bet if industries did drop a further 90, it would generate a lot of phone calls much as the going up 90 did. It's certainly a much more fun environment to participate in when industries are working in our favor. Oh, I thought you meant. Oh, no. No, no, no. No, no, no. No, it is interesting. That's why we're doing this podcast today, but it's not fun. Yeah. There's a bandwidth where everything kind of works and we're probably just, just a touch wide of that bandwidth right now. Okay, so let's just sort of establish where we are right, October 5th. And I'm going to just read out the numbers so that it's very clear. Exactly a year ago, Governor of Canada, five year bond was 90 basis points below where it is today, you know, even just April 6th. So six months ago, it was over 50 basis points below where it was today. And really, a lot of that has occurred just in the last three months July, August, September. We've seen a 60 basis point. We hear this a lot of the forums, the messaging being that just as news trace come down, it's going to like light a match to the powder keg of capital ready to go in commercial real state and you'll see transactions happen. But it seems we had a few false starts now in the last handful of months where you think it's trending down and then just hockey sticks back up. The most recent hockey stick being more dramatic than than the ones previous. Yeah. If you listen to the last episode that we did for state of lending, which was three or four months ago, kind of prior to this big sort of sell off. We talked about spreads quite a bit. And we talked about how conventional spreads rat effectively, the lowest they have been since sort of the crazy times of 0607 when it was, you know, the CNBS world was driving spreads down. There's so much liquidity. And we talked about why that was because there's lots of liquidity, a lot of capital debt capital chasing sort of the few top end opportunities out there. And then in the CMC space, it's the same thing. Spreads are as low as they've been in my career. And so then now rates are up, the index is up 60, 70 basis points or 100 basis points almost from a year ago. There's no adjustment of spreads to help, right? Like the spreads are already at the bottom, so it is to is what it is, right? Those rates are kind of fixed in or that delta, that growth is kind of fixed in. And I think it's small, soulless anyway to borrowers. They care about the all in interest rate. You know, he's great. The spreads are super low. But when the bonds are high, all in interest rates make it. Yeah. But there's just no help. The spreads are compressed to help at all. Overleaf valve. Yeah. Right. So it's not making too much noise about any relief there for the bonds. It's, so what does this mean? It means that if your project or financing kind of works today, there's no point in waiting. And that's not just a sales guy talking as I will say, the inverse of that is if your project doesn't work today, be prepared for not to work for the foreseeable future. The list of reasons why we see bonds go down is relatively short and none of them seem immediately solvable. So it's whatever your conclusion is today in your, in your spreadsheets about acquisitions, about, uh, revise coming up, about debt maturing that might require paydowns, about construction projects launching all of it. I would assume that if it's the next few months, this is probably going to be your reality and you need to, you know, to plan accordingly, whether it's go, no go, whether that's figuring alternatives in your financing, it's probably that's time to get moving on a plan rather than just fingers crossed, hoping that bonds come off 40 beeps before Christmas. Here's the, the sentiment in the market. I was fortunate enough to be invited to the real capital planning session. So the real state forum conferences do these big planning sessions, but they just invited a bunch of people to kind of give snippets of what their thoughts are. And then the, the chair is kind of take all that in a formula to an agenda and handles. And some very, you know, a lot of previous gas, you know, very powerful people were on that call. And the sentiment, like almost completely across the board was higher for longer, was that rates are up and going to stay in this range. You know, then there's, you know, you can think of all the reasons why there's inflationary pressures. There's, you know, geopolitical pressures. There's lots of reasons why that rates should stay up or and or continue to arrive. Maybe a little bit. There's not a lot of good news in the future, right? Like rates are up because it's kind of a sort of a lot of uncertainty in the times and a lot of pressure pushing those rates up. And to day stamp that, because that conference is the start of the year, that would have been the messaging at the start of the year. No, that was, that was the conference. Because that, what that meeting was Friday for the February real cap conference. Yeah. So it was literally, yes, literally on Friday with all of these people that are all major players in real estate, some on the actually side, many on the debt side, but all over the place. And that was the sentiment across the board. So, and that was just feeding Adam's point that it doesn't appear, again, who knows, right? But it doesn't appear that there's a major relief coming as far as interest rates rallying. Well, as your belief in a trade deal being signed between the US and Canada, it was your belief that the war and air ran is going to get solved, I mean, those are all very questionable dates. Yeah. No, exactly. And then how does that impact sort of the supply chains and the pressure on inflation and everything else that's going on? So, like, let's just assume it stays the same, like, you know, higher for longer, it's flat. We are where we are today. The government of Canada bond is trading at sort of 3.6 percent, five year G.O.C.'s say at 3.6. Let's assume it just stays that way. Let's hope it stays that way, if not, it goes down. So what does that mean for the industry? Like, what are the impacts that it has? I bet it puts pause in a handful of construction projects. Well, this is the issue, right? Like, we were hearing the product didn't spec out before this happened. 50 beeps ago. Yeah. 50 beeps ago. And that's with a bunch of government incentives piled on in the last year trying to get them going again, and it has been some effective, you know, it does help the underwriting of course, but interest rates can wipe out all those benefits in a heartbeat. We're not really going to go there and talk about where rents are, but if we're sticking to apartments for a second, you know, we're seeing rents flat across the country still. There's little pockets of appreciation, but not really. This is apartment-specific. Yeah. I've seen incentives mostly across the board. Any of the high end, I'm not talking about luxury, but just rents that are at the top end of the market are seeing the most amount of pressure. The stuff that's sort of called it the 1960s era apartments, those are holding strong, but there's a lot of, you know, obviously for development, you're looking for a top end market like it's brand new product, and that's really struggling right now. So add in 50 basis points to your cost on the interest rate, sorry, and loan sizing, and now equity-rood requirement goes up in an environment where equity is tough to raise and expensive to raise. It's not a terribly pretty picture if you're thinking about future of supply on the apartment side. Quick tangent doesn't really hate really the lending, but I did talk to a friend of mine who's sort of active in the condo space and somewhat connected to the condo development at least in the GTA, and there is some optimism there that the foreign buyers tax that ends on January 1st, 2027, that that will be a nice sort of relief valve for a bunch of capital to come in to help drive some condos, because that foreign capital was really driving a lot of the investment in condo development. So hopefully that's true, and that plays out, because there's at least some development for new supply if condos can get going a little bit. And they're not as subject to interest rates, I guess, because if it's all investment buyers, if you're selling to end users, all of a sudden their mortgages are much more expensive. So the interest rate environment does have an impact on any condo development that has end user objectives. So are you calling the next condo cycle? No, I'm just saying, I'm just trying to be positive, you're always mad at me for being the negative guy. You're the optimist. I'm just trying to look for, because there isn't, I mean, not as we're going to keep talking about all the different impacts of the interest rate environment. And if it is sort of higher for longer, and it stays where it is today, there's not a lot of things to pull that are positive out of that, particularly in the face of everything else is going on. And we were talking about development, costs are not going to offer any relief. Well, they've already offered a lot of relief. How much more room is there to go? Is that the rush? Yeah. Yeah. So you can't build it for much cheaper. It doesn't feel like there's going to be any more there. Land prices are down, maybe they keep going down, but how much more down can they go? And rents are flat. And rents are flat. And math still doesn't make sense. So what about the announcement of ramping up immigration again, the car he's been making noise about? It has to be good for rents. Yeah, for sure it does, but he's not going to do what he did what the previous government did and make it a million. Like, I think he's going to open up. up by another 10% or something, right? Like it's not a, I don't think it's going to be this huge flood of people. I don't know. I think we didn't we learn that that's a terrible idea. Yeah. Just like four or five years ago, like we're still dealing with the ramifications of that, right? He was just a little learners, but the message probably to get across, yes. Right. Yeah. That's not add whatever was 5% of our population in a 12-month span. So the longer term, we say longer term, what do we mean? We mean thinking past six months. That's a tough tough. I don't know, man. When do you see the next building boom on the premise side? Well, what do you need to happen? Cost to come down even further, interest rates to come back down, raise or rents, rents to go up. I mean, the problem with rents going up is that the issue isn't affordability issue, right? It's just a, it's just a percentage of income, right? We're just got to at a high percentage of income. Okay, question for you then. If we're identifying rents in interest rates, the two drivers to change the equation, which ones likely to happen sooner than the other? Well, it's got to be interest rates, right? Like, some major shock occurs and they need to spur the economy on quickly, which will drive GDP growth and theory, which drives incomes, right? So income growth happens as a result of sort of a healthy economy. It's kind of the other way around, whereas interest rates kind of are the front end of, I think, right? I mean, this is, there's no, nothing in history seems to repeat itself at this point. Everything's cyclical, right? And so we're in the middle of a cycle, but the cycles are always caused and a result of something you never could have imagined. Yes. Yeah, once in a century, things that happen every two or three years. Yeah, exactly. Yeah, exactly. So I guess we'll, we'll leave that one for now. Is that, or are the thoughts you have on uninterester rates other than, boy, it'd be nice if they were 50 beeps lower? I mean, let's talk conventionally. Let's go to commercial. When we were on that, real capital call, you know, obviously there's apartments and we'll talk some more about some of the challenges in the apartment space and why. But the commercial assets seem to still have some juice in them. Retail still has some positive fundamentals, industrial, you know, as much as there's sort of challenges with North American trade and the supply chains, they're still leasing. They seem to be stable, you know, they're still healthy, right? The fundamentals still work. It's off peak, but it's still. Yeah, right. And then office, I mean, though, it's actually curiously the strongest, I think in some sense, right? It's of percentage growth year. Yeah. I mean, retail and office are the two strongest growth categories, right? It's everything cyclical. So as in Sheds, it's no beds, no Sheds would be the new challenge. And the work from home, and you continue to hear about employers pushing more in office attendance, right? It's just happening. And so that's just driving demand for the best office space. I think there's still some stress in the sort of the suburbs, but higher interest rates certainly impact all of those asset classes and it certainly causes some challenges. But I just feel like the fundamentals were stronger. The players in those spaces are typically much more institutional, much more longer horizons and their investment strategies or much more capitalized to be able to move around. So I just don't feel like there's nearly as much stress. I think a really important part of this and whether you're talking conventional versus CMHC insured for apartments or you're talking commercial assets versus apartments that typically insured by through CMHC conventional lending is much, much more conservative. And so the structure, the capital stack of conventional loans or of commercial assets, you just don't have nearly as much debt on those assets. Like a lot of institutions keep themselves at 60, 65% levered. Even if they're really aggressive conventional lenders, don't typically go above 70, 75%. So you always have a buffer of 25, 30% of equity in the deal. And debt service coverage ratio. Higher debt service coverage. Yeah, cash flow is better. So any stress in the system, whether it be on the rental side or the interest rate side or whatever the cost may be this forming part of your economics, there's just flexibility. That's juice in the deal or in the in the asset to be able to absorb some of these sort of these shocks. So yeah, interest rates going up, suck no matter who you are or what asset class. But there's I think it's salvaged a little bit by just the way that the capital stack is created. In the industrial asset class, of course, it's a be different in retail and office because they have higher cap rates. But industrial asset class will probably gain back close again to a very minimal positive leverage finance scenario. You're going to invest. We were there probably two years ago and then the gap wide note a bit, but we're probably back there again, where if you're putting debt in place, it's not going to be well, 3.6% government of Canada bond. Five year, the best assets deserving a 120 covers. So you're at 4.8% like the best interest rate you could get for the best asset class for the strongest borrower, 120 spread, 120 spread. Yeah, sorry. Yeah, sorry. So juice equals 120 is kind of where the market is at the for the again, the very, very, very top end. So you're at 4.8%. So if you're cap rates five, very, very little and that 120 is hard to come by. I think it's more like 150, 160. Yeah, it's for the bulk of the market. For the bulk of the market, right? So you're really talking about five and a quarter interest rate. Yeah. And if you're a believer that your cap rate should be above interest rates, like I am. That's only modern thinking though. It's only a generation ago where negative leverage was standard, which is why when you run into more seasoned investors, maybe you know, towards the end of their careers, the idea is get rid of debt. Whereas we're from a generation where generally it's to a point more debt is better, manage debt is better for your returns. So I'm disagreeing a little bit with you. Oh, that's good. We can't always agree that would be boring. Yeah. And you know, we're pulling on that same thought, you know, the CMHC space or apartments, which are typically CMC insured. Canada mortgage bond is not much different than the government of Canada bond. Like it's trade I think 20 basis points wide or something like that. So it's 3.8% in your, your best pressure, what 40. So you're at a four and a quarter for your interest rate. Well, you're also dealing with a lower cap rate. Yeah. Well, exactly, it works you with the fine. Yeah. Where should the cap rate be? And so, you know, we're not going to go down that rabbit hole of interest rates and cap rates, but you know, interest rates are up 80, 90 basis points. So in theory, cap rates are up some level at some point. Well, given the repetitive at all, I got to think that some people that were engaged in getting properties of contract are probably repracing with their vendors right now. Well, for sure. You'd have to. You'd have to. Yeah. Right. Back to that, we were talking about the conventional capital stack. Do they think about the insured capital stack? By virtue of that MLI select program and its virtues, a lot of the apartment market is just higher leverage, right? Like you could get up to 95% loaned of value in a 110 cover and a lot of people did, right? A lot of, you know, everybody in the industry did, you know, save it except maybe for a few. We're really just taking advantage of that and maxing it out. So there's no wiggle room. Okay. Yeah. And those 110 covers were on it. If you're ever underwritten a CMHC deal, they stabilize the cash flow based on these sort of average metrics. So it's not even reflective of true cash flow on the property. If you're building a function slightly differently, you could easily get offside. And of course, it is net of the premium. So the premium, yeah. So like the day you fund a mortgage, it's a 107 cover. And if you are off at all on your underwriting on your, the assumptions you were making on your underwriting versus your actuals, like a lot of the buildings are operating at effectively a one oh at 95% with very little equity in. And so if you had those assets and you did that deal five years ago, rents are up modestly. So there's a little bit of savings. I don't think expenses are down. If anything expenses have kept up with rental growth, right? We were seeing expense increases all across the board because everything's getting more expensive, right? Like we've just been talking about the inflationary environment that we're in. So maybe your debt service coverage has improved slightly from when you financed in 2022. And now your loans coming due. What interest rate did you have in 2022? It was March 2022 when history started really taking off. Like the trough created by COVID was 2021. And it was March 2022. All of a sudden, we started seeing those jumps up. I mean, from a very low yield at the time. But yeah, by the end of the year, of course, five years forward, you know, a December pool coming up, you would be looking at loans that were done in the back half of 2022. Your interest rates would have been elevated from the lows of COVID, but still look quite a bit lower than they are today. Yeah. So I took a look and there was $30 billion of five year Canada mortgage bonds issued in 2022. So there are $30 billion of loans maturing that will have interest rates like on average, around 3%, 2 and a half to 3%. I don't know how many of those were analyzed. But a major chunk of them were analyzed. So it's also launched in March of 2022. Right. So there's going to be a lot of loans coming to maturity that I think are negative cash flowing. Yeah. It will require a paydown and will require a paydown. There's nobody likes to hear, especially if you know, generally speaking in a vacuum, the assumption of the real estate is you buy it and you finance it in five years later, you can refi take it a little more. It helps here. Yeah. Well, this one was the last time that this occurred. One was the last time that there would be a large portion of loans coming mature and it's negative. The equity needs to be injected to keep the loan going. Yeah. I can't remember my career where this was a said overwhelming theme. It was probably in the early 90s. So what was that 40 years ago, 35 years ago? Yeah. Right. So what's the good news on interest rates? Because there are good news in it. I don't know. You have a heavily bond oriented portfolio. And so you're benefiting. I don't know. If I could live with some sunshine, is it, I mean, we are looking at much loans now that are required. Some level of buydown is the amounts tend to not be catastrophic. Yes, rents are off of where they were two years ago, but they are up for where they were five years ago. So you do have some relief on the rent side. If we were still peaking at rents, we were two years ago. Maybe it's actually all go away, but there is usually some NOI growth, even in the face of increasing expenses and rents with it recently. That helps a little bit. And the amounts for most borrowers should not be catastrophic. At the edges, probably borrowers that can't handle the paydown of any kind, maybe they got to sell their asset, but they can probably sell get out clean, which is not a great outcome. But none of these are, in my mind, the horror shows of the early 90s. No, I don't know. I think there will be some some challenges, but I don't think it's catastrophic. I mean, if rates go up another 50 to 100 basis points, then maybe we start having a different tone, like it is a more major impact. And I think all the sort of major own our operators. Wait, I think about it. Owner operators are real estate that have a healthy portfolio with lots of rolling debt. Let's say they've got 10 plus assets and so they've got different cycles of their assets. It's not ideal, but I think you just absorb any shock you feel on some assets with the strength and the performance of other assets that you might have locked into 10 years back in 2020. And so you still got runway from other good healthy sort of secure lending. Well, on that topic, I mean, right now five years, the runaway favorite term mostly predicated on the fact that the interest rate difference between a five and a 10 is probably 50 basis for now. By the way, the curve has steepened. So that's even wider. But I am seeing like some, you know, family offices groups like that who prioritize capital preservation over, you know, IRR or maxing IRR. They still, of course, still they care about it. It's just the idea of if you get unlucky, I mean, you're projecting bond yields out five or 10 years. I mean, luck starts to be a huge factor. You know, you have a very, all the bright minds sitting around the computers, you're probably not going to get it right where they're going to be five or 10 years from now, but just the idea of the 10 years of NOI growth and 10 years of principal reduction. And then you mature into an unlucky, unfavorable industry environment is a way easier problem to solve than if you only been paying down your mortgage for five years and growing right for. Yeah, that's a good question. I wonder if you had taken a 10 year in 2022 versus someone that took a five year and saved the 430 basis points back in 2022. Now, I'm maturing into an environment that's 200 basis points higher. Likely, you should have taken the 10 year. Yes. Yeah. Well, I mean, that was the salvation too for all the 2020, 2021 loans that would have matured into a much higher industry environment. The vast majority of loans we did then were 10 years away, so cheap. So that does save what would have been probably significant. We'll have another episode in 2029 and 2030 when those loans are looking to do with all the interest rates of one one and a quarter percent. But by then, we would have had a big cycle and with a rallied and we would have had interest rates going to be way back down by then, right? The economy will be booming. We're building towers left right and center. It'll be fine. Everything's going to be fine, guys. I love the prediction. I'm going to make a note to fact check that when we do that episode. It's going to be totally fine. We do want to talk about conventional, but maybe it was a little more on the CMHC world right now on our last episode of state lending. We talked about the upcoming energy efficiency change. It's now October 5th. We are five days past the deadline for that change. For anybody who didn't tune into the last one. Well, that was a mistake. The gist of it is that CMHC select construction was largely made possible through people qualifying via the energy efficiency category of points. There being three categories, energy efficiency, accessibility and affordability and the requirements around energy efficiency took a significant jump up as of September 30th. This drove a lot of applications to come in before that date. You know, everybody is looking to do a construction loan. In the next handful of months, we would have submitted around that to qualify under the legacy standard, which was an easier, more cost-effective way of accessing it. We're now post September 30th, brave new world with much more string energy efficiency. It also, you know, the other category course being affordability. It looks like the standard there where we are using 2019 rents will remain in place for the sort of foreseeable future. So I don't know where we end up with select in the next six, seven months on the construction side. I did actually, I was on a debt panel at the Canadian Department of Investment Conference back in September and we had Carolyn Sanfeson from CMHC on. She's a great panelist, a couple of their lenders as well. And the messaging there did come up about this affordability, and the indication there is that we are likely to see affordability level state of 2019 levels. This does make energy efficiency as a part of a select strategy difficult to pencil out. Even if we ignore the fact that it illustrates her up, which we're, you know, is causing headwinds, even when we were kind of underwriting this stuff back when it illustrates her a little lower, it does make this category much tougher to make work. I suspect that market the CMHC market program will be the beneficiary of a lot of that business. You do pay a higher premium. Of course, you do borrow that cost, but you get a 50 year AM versus a 40. So the loan amounts are, they're different, but not catastrophically. So I see that program probably, you know, sucking up most of that business now is debt, but that is a big change. And 85% versus. Yeah. Yeah, I mean, I'm interested where they are right now. Yeah, I know we get 95, but I think that select will see a whole lot less select going forward sitting here on October 5th. There's an overarching theme here, though. If you combine what Adam just said with CMHC's most recent financial reports and the announcement that they had to borrow or receive a billion dollars of support from the federal government because their mortgage insurance capital adequacy test was so poor as a result of such high leverage and such low debt service coverage across their portfolio. So not that they had it an excessive claim to suck it up, but just I think we've talked before. I've said this. I think a numerous times off he was is in the middle or has finished an audit of CMHC and has discovered, declared identified major risk because the MLI select program was a resounding success and thank goodness it was, but it put the overall insurance portfolio as it relates to the multi lender or the multi-unit residential way over what is deemed biosphere as a healthy portfolio. And again, if you remember, we talked before. MLI select was launched and expected to earn 15% of CMHC's borrowing. It ballooned quickly to 80, 85%. And remember, everything is a 95% loan to value 110 cover. And of course, it make perfect sense that those social outcomes that you just referred to were absorbed because you could maximize your leverage and get such great financing options and the face of COVID and all the other sort of issues that we talked about at length before. It was a savior for the apartment industry. Thousands, if not hundreds, of thousands of units have been built as a result of MLI select so that you can't you can't fault it, but it did put CMHC's insurance portfolio in a sort of unhealthy leverage position, right? So it would only be natural then for CMC to go, "Oh geez, okay, we probably find ways to decrease our exposure to a program that we only have really intended on being 15% of our business, not 85% or 90%. So the energy efficiency changes that just occurred. Premium is going up to ice. Premium is going up twice. And then the announcement that they're going to retain the 2019 affordability measurement versus reset it because if they reset it to new numbers like 2023, of course, the level of affordability, threshold would go up, which would allow more assets to qualify for affordability, which means more loans that would be applied for for MLI select and slightly higher leverage. And so I think the idea is that if you keep the affordability at 2019, you're limiting some maximum. And to be fair, you know, CMHC's are government entity. It's no secret. We still have an affordability challenge crisis in Canada. The federal government announcing that they're allowing or they're increasing what they deemed to be affordable doesn't sound right, right? Like I just don't think it would pass the headline smell test, right? You know what I mean? So the Arab person would step in. Yeah, go hold on a second. Do we really want across the global mail that, you know, CMHC Deem's affordability isn't a big deal, right? Yeah. As I mentioned earlier, I did sit on that, well, I moderated the panel, which is an easier job to speak in the panel. Wait, but you don't actually come with any creative things to say. Yeah, I just shoot some segues and you're a professional question asker. Yeah, not answer question asker. It worked. Oh, well, you know, there was some takeaways, maybe and you know, I'd love to hear your views on whether you think these are valid, but this is kind of the summary of the big debt panel that we had. The condo rental conversion is happening, but not at the scale that we thought it would. The condo to rental conversion pivot from developers is not as seamless as you would hope or think. Is that what you're experiencing? You're in speaking. I was for you speak with condo developers to looking to do this. Absolutely. The land financing is difficult. What land finance? Yeah, true. Yeah. A lot of land values are under water, especially if you bought that 21, 20. Land is worth whatever one somebody will pay for it. So if no one will buy your land, it's worth zero. Yeah. The biggest construction risk to track, and this has been interest rates. This would have been construction costs. It would have been rents identified. Number one was rents. The rent is the most difficult one to manage out of that list. Yeah, probably. Okay. We talked with CMHC Select Evolution. We just covered it. You know, Evolution is one word. When a conventional construction makes sense. When you're speaking in borrowers now, how many of them want to look at conventional options versus a lot of them? Yeah. But is it just out of frustration? Yeah. Yeah. But are they getting a better response in the conventional market? Or is it? It never makes sense to me. The flexibility. What I hear is I want the flexibility that the CMHC restriction, CMHC program is great. If I'm 100% committed to one direction and one direction only, but conventional offers flexibility. Lenders are not weakening underwriting to wind deals. They're only just fighting on spread. I disagree with that. We do. I see a lot of crap out there. CMHC exit risk needs to be stress tested. Yeah, that's so hard, because what do you stress tested in what direction? Is it outcomes that are multiple years away? Yeah. Rates could go up. Rates could go down. Rents could be triple what they are to. I mean, who knows? Like it's the lending 101. I think we've had this conversation before. Lending 101 is you have to assume everything is flat. I can't assume rents will go up. I can't assume rents will go down. I can't assume rates are up. You just have to assume everything is flat. Yes. It's the only true thing I know, right? That's what that service coverage is for. Yeah, exactly. Debt yield discipline. They should have 100 beeps difference between cap rate and finance rate. We talked about that earlier. I would say a lot of deals are not hitting that metric of 100. I haven't seen that in years. CMHC term liquidity means strong. CMHC liquidity. Yeah. I mean, oh, geez. Yeah, there's so much money. Like, we haven't talked about that really, but the September bond closed. It was 460 million per allocation. Really, really quickly. Remember that NHM BS program, right? Everybody puts their hand up and gets allocation. So every lender that put their hand up for the September five year bond got 460 million. So if there was 10 people that put their hand up, that was 4.6 billion, but there were like 18 people that put their hand up. So there's so much money going around. I think the bond closed at 13 and a half billion, which includes single family. So we'll get into the math, but lots and lots and lots of money going around for CVC financing, which again is why spreads are so tight. And this was the kind of closing comment about long term outlook, bullish or not. So the reason it was deemed bullish is lower construction costs, more available capital, better adjusted lane construction expectations, government focus on housing, long term demographics. Do you agree that is bullish based on all of those that those can overcome some of the headwinds we're talking about collectively, maybe, but yeah, I'm bred to be a pessimist. So I don't know. Or maybe if you listed the counter argument, I mean, these are all true statements. Yeah, 100%. Yeah. So that was the panel and a nutshell. It was there was a 45 minute version done, but at least that's the quick and dirty state of lending. Yeah, I mean, we probably should come back for some time to talk about this again. Yeah, I feel like we're in a rapid period of change. Yeah, there's a lot going on right now. Yeah, but thanks everybody for sticking out with Aaron and me. No guest today, but I enjoyed doing these. I hope everybody listening enjoyed it too. Thank you for listening to the CRE podcast. The information from this broadcast is not to be relied upon as financial investing professional accounting or legal advice. 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