Market Commentary

Event Report - Apartment Symposium

Developers, lenders, brokers, service providers, builders and more gathered to discuss the apartment and student housing markets and the burgeoning opportunities in new construction.

Andrew Drexler, Assistant Vice President of Commercial Financing at First National sat on a financing panel. He shares key insights by highlighting points he agreed with and where his opinions differed.

Agreed: new construction is definitely happening, but…

It is true that there is a lot of construction happening right now, but I’m not sure that the high-end market is as deep as it is perceived to be. In areas like Toronto, high rises are expensive to build so rents have to be high. I caution people to really understand their markets and be honest about whether the market is deep enough to support that supply.

A typical high rise takes two to three years to build, and most owners start leasing six months prior to project completion. In these scenarios, the lender and developer take on a lot of risk (it’s not like a condo, where pre-sales mitigate much of the risk). Every member of the panel agreed that a good sensitivity analysis is crucial. It’s important to understand what will happen to all stakeholders if interest rates and cap rates fluctuate.

Most developers are looking to borrow as much as they can. Construction loans are based on costs and the value of the building. So there is a strong sensitivity to the variables. Right now, when there is uncertainty about future rates, lenders are becoming more cautious about the parameters that make up valuations. Most are anticipating change and are preparing accordingly.

Disagreed: not everyone should build

The moderator was very passionate about the opportunities in Canada and was encouraging everyone to build, similar to what’s been done in the U.S. I have long disagreed with this view.

Not everyone qualifies for new apartment construction. In Toronto, I’m seeing a lot of people who think that they can retrofit failed condo sites for an apartment project. It’s a misguided approach. Here’s why:

  • Density: Land prices are driven by density. Construction costs are pretty constant whether you’re building an apartment or a condo. However, apartments have more restrictions on size in relation to value, yet the land price is still high. It can turn out to be a losing proposition.
  • The Starting Point: condo developers will pay for the land first, and work backwards to see how much revenue they can get. Successful apartment builders start with the market first and determine what it can sustain in terms of rent. They evaluate land purchase price based on market feasibility. Hard to do when you’re trying to retrofit an apartment construction to an existing condo site. 

Condo developers have had a lucrative decade. It’s been fairly easy for them to get financing, and they’ve been able to dictate terms to a certain extent. Investor syndicates is one trend that’s arisen from this climate. Different investors get together and show up as the guarantor on the loans. 

It’s a great model for condos, but it doesn’t translate to apartment construction loans. So for people trying to retrofit, it’s essential that they find more than just investors. They need experienced developers that have built and ran rental buildings.

Disagreed: student housing cap rates and valuations

There was one panelist who boasted about his student housing property in a great location, which was generating great rental income. We talked at length about aggregations on a per unit basis. This owner didn’t care about per unit value. He was only focused on total revenue.

I take issue with that. Any real estate trades on cap rates (net operating income divided by purchase price = rate of return pre-debt). Cap rates have come down significantly across all asset classes because debt is readily available and cheap. In student housing in particular, cap rates have come down significantly, but the cost of debt for student rentals hasn’t come down in the same way that it has for apartment buildings.

The panelist/owner justified his position by saying that his “big rents” offset the low cap rates. However, I still feel that valuations for student housing are too aggressive. They need to come down because the financing environment isn’t as favourable, with respect to LTV and interest rates, as it is for apartment buildings. 

Balance returns with realities

There is no disputing that new apartment construction will deliver favourable returns during the next decade. But I can’t stress enough how important it is to balance potential returns with the realities of building an apartment from the ground up.

Understanding your strengths as well as your limitations is critical to maximizing the power of the right project. The right partners – developers, lenders, suppliers – can give you a greater or optimal level of expertise that you may not be able to cultivate on your own. 

by First National Financial LP 12. May 2015 12:57

Market Commentary - March 27, 2015


As I write this on Thursday afternoon, bonds have just completed a full  reversal of the rally last week.  5 and 10 year bonds have sold off and are now yielding 0.86% and 1.43%, just as they did two weeks ago.  This is evidence of a lesser known physics/finance crossover: what goes up, must come down.  

Anyway, you’re probably wondering why yields are 13-15bps higher since the weekend.    Much of the move happened on Thursday in response to comments made by Bank of Canada Governor Poloz at a press conference in London.  The Governor reiterated that the positive offsets from lower oil prices will take longer to emerge and that the global recovery remains fragile, so further rate cuts can’t be entirely ruled out.  However, it sounds like the bank will be more cautious in its use of the overnight rate to deliver additional stimulus going forward.   With US/CAD currently sitting around 1.25 and yields still well below levels seen prior to the surprise cut in January, the bank has room for some patience.  The net effect seems to have reduced the probability of another rate cut in April and/or June, and bonds have sold off as a result.  

In other news, oil climbed to its highest price in more than two weeks as Saudi Arabia and its allies started bombing Shiite rebels in Yemen. 

No scheduled Canadian economic data on Friday, but US Q4 GDP numbers are out at 8:30am and the Fed’s Yellen shares some wisdom at 3:45pm.  

Lastly, in sure sign of the apocalypse, the Leafs did not sell out earlier this week, setting the lowest recorded attendance since moving to the ACC 16 years ago.  

Have a good weekend,

Treasury Guy. 


Jason Ellis | Managing Director, Capital Markets 

by BlogAdm!n 27. March 2015 09:20

Market Commentary

Good Morning,

As of Thursday evening, interest rates were generally 13-15bps lower than at the end of last week with the majority of the rally coming on Wednesday following the US Federal Reserve policy statement. A day by day synopsis is below for your reading pleasure.

  • Monday: Bonds opened stronger and yields fell about 3bps as WTI (oil that is, black gold, Texas tea) made fresh multi-year lows.
  • Tuesday: Without any material news items, the market was in full spring break mode with choppy range bound trading. Yields ended about 1bp lower.
  • Wednesday: The day opened stronger on further declines in oil prices, but the real story was the Fed statement in the afternoon. The market expected the word 'patient' (as it relates to FED timing to move rates up) to be replaced by data dependent policy language and for reassurance of higher inflation in the coming months while still leaving a June rate hike on the table. It turns out that is pretty much exactly what happened, but the market decided the message was more dovish than expected and bonds rallied a further 9bps.
  • Thursday: US initial jobless claims were about the only thing keeping the market awake. Claims were broadly unchanged and inspired much apathy among traders. Yields end the day unchanged
  • Friday: I'll be skiing by the time you read this, but I can tell you that there is no economic data due out of the US, but Canadian CPI data came out this morning and may lead to buying or selling, but not in much volume as the market is truly quiet due to March break.

Lastly, I would be remiss if I didn't mention that today is the Vernal Equinox (that's "Spring" if you use small words, or "Ostara" if you count yourself among the Pagans). It may not feel like it yet, but winter has ended, and summer will come again.

Have a good weekend,

Treasury Guy

Jason Ellis
Managing Director, Capital Markets 

by First National Financial LP 20. March 2015 09:54

Financing Done Right - Case Study

Client Objective: blaze new trails in student housing

An accomplished business professional established a partnership with the owner of a flourishing plumbing company. The short-term goal was to complete a small student housing project, but the long-term goal was to blaze new trails in student housing.

First National Solution: provide the first seed loan and support the client in realizing his vision and potential

Recognizing the potential of the client's vision, the First National team convinced the internal credit team to fund the first $2 million loan despite the risks associated with a new, unproven partnership and the student-housing sector. Several subsequent deals followed. With First National's support and guidance, the client progressed his vision to a student-focused condo project, a game changing concept in student housing.

First National Approach: connecting with the client's vision

Understanding what the client was trying to achieve, the First National team was able to apply ingenuity to develop turnkey solutions that supported the client's growth and momentum. The relationship was and remains to be predicated on facilitating the client's growth, vision, innovation and entrepreneurialism. 

Check out the latest news, insights, and opportunities from First National Financial LP. https://www.linkedin.com/company/first-national-financial-lp

by BlogAdm!n 17. March 2015 10:20

Market Commentary - March 13, 2015

Good Morning, We're back. Apologies in advance for the briefness of this note, but the 5-year CMB issue is literally minutes away from pricing and things will get really busy around here. Once in a while I still do real treasury stuff like yelling "BUY" and "SELL" into phones like Charlie Sheen in Wall Street.

Anyway, other than the CMB issue, the other big news this morning was the Canadian Employment data. Overall, employment fell by 1,000 jobs (slightly better than consensus of down 5,000 and certainly better than a 'whisper' number as bad as 20,000). The details of the report as it relates to full time/part time and Public/Private jobs were mixed. The unemployment rate moved two ticks higher to 6.8%. Not surprisingly, Alberta was a weak spot shedding 14,000 jobs. Bottom line is that job figures were weak, but not as bad as feared. The bond market is relatively unchanged since the numbers were released.

Speaking of bonds, they had a pretty strong week. Yields have fallen about 8-9 basis points after rising more than 20 basis points last week.

Have a good weekend,
Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 13. March 2015 12:59

Pierre Leroux, Directeur Régionale, Hypothèques Commerciales donne une comparaison entre les marches de Montréal, Trois-Rivières, Sherbrooke & Québec

by First National Financial LP 9. March 2015 08:52

Market Commentary - March 4, 2015

Good Afternoon. At 10:00 this morning the Bank of Canada announced that it was leaving the overnight target rate unchanged at 0.75%. This was largely the expected outcome, however, the policy statement was decidedly less 'dovish' than expected. The bank cited balanced risks around inflation and financial stability suggesting no bias for policy ahead. In fact, rather than less 'dovish', one might even say the statement was more 'hawkish'. The bank went on to say that the "anticipated rotation into stronger growth in non-energy exports and investment is well underway" and the prevailing conditions since the January rate cut should "mitigate the negative effects of the oil price shock".

Bonds predictably sold off on the news and yields are up about 10bps across the curve on the day. 5 and 10yr GoC benchmarks now yielding 0.92% and 1.51% respectively. Since the close last Friday, yields are about 20 basis points higher.

The implied probability of a cut at the April 15th meeting has fallen to about 20%. In fact, some economists are now discussing the possibility of a "one and done" scenario and are suggesting no future rate cuts at all. Time will tell.

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 4. March 2015 13:25

Market Commentary - February 27, 2015


Good Morning, The big news this week was the sharp reappraisal of near term rate expectations in Canada. The odds of a 25bp cut by the Bank of Canada next Wednesday have fallen from almost 80% to around 30%. Comments made by BoC Governor Poloz on Tuesday were the primary driver for the shift in expectations. Specifically, the Governor re-iterated that the cut in January was an "insurance" move and that it buys time to see how the economy responds. The market has largely interpreted the comments as an indication of patience by the bank.

IMC successfully priced their $325 million CMBS issue on Wednesday. The transaction was met by strong investor demand in Canada and the US. The A-1 certificates (5.5 year 'AAA') priced at the tighter end of guidance and were oversubscribed. The result is good news for lenders and borrowers alike and reflects continued confidence in the ongoing development of the Canadian CMBS market. First National continues to offer 10 year CMBS loans nationally on all asset types including retail, office, industrial, multifamily, self storage and hotels.

In economic news, Canadian CPI was released on Thursday morning and both the month over month and year over year numbers were slightly higher than expected which contributed to early selling in bonds. (remember, if inflation is firmer than expected, the market may anticipate a more 'hawkish' central bank going forward). 5 and 10 year Canada bonds ended about 3bps higher on the day but are still 5-7bps lower on the week.

In corporate earnings news, Canadian banks continue to make GOBS of money. Small wonder. I have to put $1,000 in my savings account for 20 years before I earn the $2 they charge me to withdraw it.

Finally, don't forget your RRSP contributions, because just like Yogi Berra said, "a nickel ain't worth a dime anymore".

Treasury Guy

Jason Ellis
Managing Director, Capital Markets

by First National Financial LP 27. February 2015 10:41

Market Commentary - February 20, 2015

Good Morning,

Canada Housing Trust disappointed lenders on Wednesday when the 10 year CMB deal was announced as a $1.5 billion transaction (down from the typical $2.0 billion).  As a result, the available funding allocated to participating lenders was cut to the lowest level EVER (or at least that I can recall, and I’m not always sure what day it is, so don’t quote me).  Indications from the dealer syndicate were that the investors just weren’t putting their hands up and they had difficulty selling the bonds.  One explanation is that given the extraordinarily low rate environment some investors are reaching for yield by rolling down the credit curve a bit…buying provincials and corporates (which continue to fly off the shelves) in search of a few extra basis points.  Sound investing?  Time will tell.  On the plus side, by cutting the issue size rather than forcing the deal through, the new issue spread held in well.  In fact, the bond was priced 3.5bps tighter to the GoC benchmark than when it was first launched in November.  The bad news is that some lenders may view their 10yr CMB funding as more scarce going forward.  This could put some upward pressure on CMHC insured spreads.   Sorry…just sayin’. 

Also of note in the commercial mortgage space is the announcement of the next IMC CMBS transaction.  IMC is on the road with syndicate lead RBC marketing the  $325 million issue this week.  The transaction will be a typical senior/subordinate sequential pay pass-through structure and features $208 million AAA 5.5 year and $73 million AAA 10 year classes.  Indicative spreads are flat to +5bps to the last Canadian CMBS transaction in November, which is encouraging given the context of the market overall.  More on this transaction as it develops.

In broader news this week, oil dipped below $50 and the TSX ended a 6 day winning streak on Wednesday.  Oil prices succumbed to a huge jump in US oil inventories.  The Saudi’s aren’t helping matters either…they’re putting the proverbial hose in the market’s mouth by increasing production even further.  Also on Wednesday, soft US economic data and surprisingly DOVISH Fed minutes offered some support to bonds after a bit of a sell-off on Tuesday.  (For those of you who have forgotten, a ‘dovish’ central bank is less concerned about inflation and more concerned about economic growth.  If the market interprets FED or Bank of Canada comments as ‘dovish’ they will BUY bonds and yields will fall in support of accommodative monetary policy.  A central bank that is concerned about inflation getting too high will be said to be ‘Hawkish’). 

In up to the minute news, Canadian retail sales figures reported this morning fell at the fastest pace in more than four years.  Sales fell 2.0% in December compared to a projected decrease of only 0.4%.  The report suggests consumer confidence may be deteriorating along with oil prices.  The weakness is negative for the C$ and supportive for fixed income.  In fact, the news has given legs to the bond rally and yields have fallen as much as 8bps across the curve in early trading today. 

Lots of other stuff happened this week too, but those are highlights and probably just enough to impress your friends in the buffet line at Mandarin this weekend.

Kung Hei Fat Choy,
Treasury Guy

by First National Financial LP 20. February 2015 09:56

Financing done right - The case study - February 18, 2015

Supporting start-up entrepreneur

Client Objective: build and grow new real estate business
An experienced real estate executive wanted to strike out on his own and start a new business but needed help structuring the business, establishing legacy and building equity.

First National Solution: business building, capital structuring, equity partnering
A custom deal on every level, First National experts provided advice on structuring the new venture so that it was financeable and guided the client on the selection and management of an institutional equity partner. Since incorporating the business almost 10 years ago, the client has developed more than 30 properties.

The First National Approach: clients for life
First National has been a part of the client's business evolution, from inception to growth, and continues to provide expertise and guidance that goes beyond simply financing. Working together in partnership, First National and the client have pursued and achieved aggressive growth, surpassing what is usually possible in seniors housing in Canada. 

by First National Financial LP 18. February 2015 11:32