Adapted from an interview conducted by Inge van den Berg as part of the PrivCap Spotlight Series.
As Canada’s real estate markets navigate elevated financing costs, subdued transaction activity and cautious investor sentiment, real estate debt is attracting renewed attention as an alternative to direct equity exposure. For investors, the opportunity lies not simply in generating income, but in understanding where risk sits within the capital structure, how borrowers navigate challenging market conditions and what distinguishes a resilient lending strategy from one exposed to the cycle.
For Adam Dean, Vice President and Portfolio Manager at CMLS Asset Management, these questions have shaped a career spanning more than a decade at one of Canada’s established mortgage lending platforms. His interest in real estate debt began in the aftermath of the 2008 financial crisis, when the challenge of providing responsible access to illiquid and opaque markets became a defining professional interest.
Today, as market conditions create both financing challenges and selective investment opportunities, Dean sees a compelling case for real estate debt — provided capital is deployed with discipline, supported by robust underwriting and structured to reflect the risks involved.
A Market Defined by Liquidity Constraints
Real estate is cyclical, Dean observes, and the current environment illustrates how quickly sentiment and capital availability can influence transaction activity.
Following the rise in interest rates beginning in early 2022, equity investors became more cautious, contributing to a prolonged slowdown in commercial real estate transactions. In major condominium markets such as Toronto and Vancouver, investors have also become less confident in the returns available from pre-sales and anticipated price appreciation.
The implications extend beyond valuations. When equity capital becomes more hesitant, otherwise viable projects and property owners can face financing constraints, creating demand for alternative sources of capital.
Dean believes this environment is particularly relevant for real estate debt investors. Lending from a senior or otherwise appropriately positioned place in the capital structure can provide a degree of downside protection relative to equity ownership. At the same time, current market conditions can allow lenders to negotiate attractive pricing for taking carefully assessed risks.
In Dean’s view, the opportunity is not simply to lend against distressed assets. It is to identify situations where market liquidity has weakened but the underlying borrower, property or business plan remains fundamentally sound.
That distinction is important. Rather than relying on a broad market recovery to resolve an overleveraged borrower’s difficulties, lenders can focus on capable, adequately capitalized sponsors that need temporary liquidity to execute their business plans. By combining sponsor expertise with conservative structuring and appropriate pricing, lenders may be able to achieve attractive risk-adjusted returns.
Finding Opportunity Beyond Conventional Lending
Dean identifies several areas where selective lending may offer compelling opportunities.
Urban condominium markets are one example, particularly where liquidity constraints are affecting development activity. Another is the financing of assets in sectors undergoing recovery or structural change, including seniors’ residences and office properties, as well as emerging segments such as data centres.
These opportunities, however, demand differentiated underwriting. A property’s sector classification or apparent discount is not enough to establish an attractive investment. The lender must understand the sponsor’s capabilities, the asset’s operating fundamentals, the capital required to execute the business plan and the realistic path to repayment.
For transitional assets, that final consideration is especially important. A lender may finance a property while its operations are being improved, with the expectation that stabilization will enable refinancing at a lower cost of capital. The investment case therefore depends not only on the asset’s current condition, but also on whether the proposed improvements and eventual refinancing are achievable.
This is where Dean sees a significant advantage in CMLS Asset Management’s position within the broader Nesto Group ecosystem, which includes CMLS Financial and Nesto.
An Integrated Platform Built on Market Intelligence
CMLS’s lending and origination activities provide access to a substantial flow of transactions across Canadian real estate markets. Dean describes the broader group as handling approximately $25 billion in annual transaction activity across commercial, multi-residential and residential lending channels. Within commercial lending, the business represented approximately $12 billion of activity in the preceding year, against an estimated $100 billion Canadian market.
For the asset management team, the significance extends beyond scale. The platform provides access to professionals working directly with borrowers, properties and transactions across the country, alongside a substantial internal dataset that can inform investment decisions.
This combination of market-level expertise and transaction data helps the team assess whether the return offered on a particular loan adequately compensates for its risk. It also provides insight into how borrowers execute business plans, which factors contribute to successful outcomes and where financing structures may become vulnerable.
Dean points to the connection between transitional lending and conventional mortgage financing as a practical illustration. A higher-yield loan may support improvements to a multi-residential property, with the eventual objective of refinancing through a CMHC-insured mortgage originated and serviced by CMLS.
Because the broader organization operates across both financing stages, the investment team can draw on experience with comparable transactions to assess the proposed exit strategy. The objective is to understand not only how a loan performs while outstanding, but also how the asset and borrower are likely to progress toward repayment.
Risk Management Starts Before Loan-to-Value
For Dean, sophisticated data and institutional scale are valuable only when combined with disciplined investment judgment.
CMLS Asset Management’s approach begins with understanding the individual transaction, the surrounding market and the borrower’s ability to service the debt. The team also draws on the broader organization’s underwriting and servicing capabilities to evaluate the risks associated with each loan.
One of the central principles is straightforward: the firm must be willing to walk away when the expected return does not adequately compensate for the risk or when investor capital cannot be appropriately protected.
This discipline is particularly important when equity returns come under pressure. Although loan-to-value (LTV) ratios remain a fundamental measure of downside protection, Dean cautions against treating them as a complete assessment of credit quality.
CMLS Mortgage Fund’s portfolio has a weighted-average LTV of approximately 60%. However, Dean emphasizes that LTV primarily addresses the lender’s position if a property must ultimately be sold to recover the outstanding debt. Effective underwriting must also examine what could prevent a default from occurring in the first place.
That requires assessing the property’s income, its capacity to service debt, the borrower’s financial resources and any additional funding commitments necessary to complete a project.
As Dean puts it, underwriting is a series of small decisions. In challenged loans, problems can often be traced to one or two individual decisions made earlier in the process. Consistent performance therefore depends on getting those decisions right, transaction by transaction.
Matching Investment Structures to Risk
A further principle underpinning CMLS Asset Management’s approach is that investment products must reflect the underlying strategy, risk profile and liquidity requirements.
CMLS Mortgage Fund, the firm’s flagship vehicle, is designed to provide relatively consistent income and returns above investment-grade corporate bonds, without relying on a particular phase of the real estate cycle. Dean cites a track record of approximately 16 years and returns over the preceding decade of roughly 325 basis points above an investment-grade corporate bond portfolio.
The fund combines residential and commercial real estate debt, with multi-residential lending representing the majority of its commercial exposure. Its portfolio comprises more than 250 loans, providing granular exposure across borrowers and assets. Returns in the 5%–7% range, paid monthly, were also discussed in the interview.
Liquidity is an important part of the structure. The fund permits monthly subscriptions and redemptions, and its portfolio is constructed with relatively short-duration loans that mature or repay over time. This turnover helps support investor liquidity, although the fund is not as liquid as a publicly traded corporate bond portfolio.
Dean stresses that redemption terms should correspond to the liquidity of the underlying investments. Private assets should not be presented as inherently low-volatility simply because their valuations are updated less frequently.
Alongside its flagship fund, CMLS Asset Management is developing a closed-end opportunity fund intended to target more time-sensitive lending opportunities arising from current market dislocations. The distinction is deliberate: investments dependent on market conditions and specific business-plan outcomes require a different structure from a vehicle designed to provide ongoing income and periodic liquidity.
Data, Technology and the Next Phase of Underwriting
CMLS’s data capabilities are also informing efforts to modernize underwriting processes. Dean cites the example of financing seniors’ residences undergoing operational changes, where the borrower intends to refinance through CMHC-insured debt after acquiring the assets and installing a new management team.
Given the sector’s challenges following the pandemic, assessing the likelihood of that refinancing requires a detailed understanding of how the assets will be evaluated and how their cash flows must perform.
The broader organization’s CMHC-insured lending activity provides historical transaction data that can help the team assess comparable underwriting assumptions and evaluate potential exit financing. CMLS Asset Management is beginning to explore how these data can support greater automation, particularly in more standardized lending processes.
The longer-term opportunity is to combine institutional experience with technology in ways that improve the consistency and efficiency of credit assessment, while recognizing that more complex, higher-yield transactions still require substantial judgment.
Looking Ahead: Selectivity Over Sentiment
As institutional and high-net-worth investors continue to assess their allocations to private markets, Dean believes real estate debt merits careful consideration, particularly where capital preservation and income generation are priorities.
But the investment case ultimately depends on more than market conditions or headline yields. It requires rigorous due diligence, a clear understanding of the underlying collateral and borrower, credible repayment pathways, and an investment structure aligned with the risks being assumed.
For Dean, that is the enduring appeal of real estate debt: its structural protections relative to real estate equity, combined with the potential to generate attractive income when capital is deployed selectively.
In a market where liquidity is constrained and sentiment remains uneven, the strongest opportunities may belong to investors who can distinguish temporary financing needs from fundamental weakness — and who have the institutional expertise, data and discipline to act accordingly.
To watch the full interview, click here.
