Over 500 Canadian commercial property owners, developers and lenders gathered virtually on June 8 for the 17th annual Land and Development Conference presented by the Real Estate Forums Club. During the expert panel discussion Is the Financing of Land and Construction More Challenging in Today’s Markets, First National's Andrew Drexler, Assistant Vice President, Commercial Financing, offered several insights.
First National remains bullish on the Canadian real estate industry because of a major demand-supply imbalance across most asset classes that was in place before the pandemic and will return post pandemic.
When assessing risk and the desirability of lending, First National takes a balanced view between its positive long-term market outlook and short-term concerns over rising construction costs, labour shortages and the impact on cash flows of slower lease-ups related to COVID-19.
Regardless of the macroeconomic environment, First National analyzes each development project on its merits with special emphasis on location (it must be in the right target market), projected rental rates (they must be realistic) as well as the development experience and liquidity of the borrower.
The size of financings has gotten larger in recent times in asset classes including office and grocery-drug-store anchored retail, but risk has been mitigated because the borrowers are well-capitalized and pre-leasing has taken place.
Demand for industrial properties has never been stronger and there has never been as much liquidity available to developers wishing to finance new industrial assets as there is now.
As the leading lender in the multi-unit residential market, First National continues to see strong demand for apartment construction financings by large, well-capitalized borrowers and favours projects in growing communities, including those on transit nodes, where demand for units will be strong over the long run.
Despite extensive apartment construction activity in recent years, First National is not concerned with over-saturation because market drivers – including the lack of home ownership affordability, immigration and the sophistication of today’s renters– will ensure demand continues to outpace supply for years to come.
Although apartment sector fundamentals are favourable, it is still important to be realistic when projecting out-of-the ground cap rates in a rising cost environment to avoid situations where planned development cap rates are 4% to 5% and realized rates can be 3% to 4%.
It’s advisable to start an apartment project with a realistic pro forma rent calculation before agreeing on a price to acquire the land, since the ability to move rental rates upward to make deal economics work is no longer a certainty.
Since there is a dire need for affordable housing in large cities, governments should find a way to increase the supply of land for development and continue to support affordable housing construction so that Canadians who work in downtown centres can also live where they work.
Fast-tracking approvals for social and affordable housing developments is an important public policy objective as is subsidizing land costs and rents along with fast tracking pre-development approvals.
To meet the challenges of today’s markets, the best advice for developers is to find an experienced lending partner that offers sound advice, a range of financing solutions and a commitment to your long-term success.
Interested in learning more about why borrowing from First National is a better alternative, please contact your First National advisor today.