First National Financial LP

A mid-year business update with Jeremy Wedgbury

  • First National Financial LP

In the first six months of 2021, demand for First National’s commercial property mortgages continued at a blistering pace across Canada. As a lending market leader, First National responded by investing in capacity and the creation of a new conventional term product. The results, as Jeremy Wedgbury, Senior Vice President, Commercial Mortgages describes below, were excellent and reflect a combination of market drivers that are expected to continue for the balance of the year.

Jeremy, how has First National performed so far this year?

Looking at the key numbers through June 30th, total Mortgages Under Administration rose to a record $121.5 billion on the strength of a 56% increase in total mortgage originations. In the second quarter alone, First National wrote $10.3 billion of new mortgages, while total mortgage renewals increased 8% to $2.7 billion.

Those numbers include residential mortgages. What about commercial?

Our commercial team put up record-setting numbers. Commercial Mortgages Under Administration finished the second quarter higher than they’ve ever been at $37 billion, almost 12% more than a year ago. Originations including renewals over the first six months of 2021 amounted to $5.6 billion, and in the second quarter were almost 34% higher than last year.  Recall that 2020’s second quarter represented the effective start of the pandemic from an origination perspective and we haven’t looked back since. The market has been very buoyant. 

What’s driving demand?

Low interest rates but also the fact that for years, the supply of multi-residential units failed to keep pace with marketplace demand. Forces such as immigration, housing affordability or lack thereof and baby boomers downsizing from homes to rental created a significant market imbalance. Developers who were traditionally wedded to the condo market are recognizing the long-term value of owning rental assets and are buying in, which is great. As Canada’s leading apartment property lender, First National has stepped up to finance growth. The industrial property space is also red hot right now and we are bullish on this market. In Q2 alone, we signed up $200 million of industrial property mortgages for our Core Conventional program.

What’s going on in the industrial space?

There is a boom caused by growth in sectors such as distribution and telecommunications without a commensurate increase in suitable industrial space to lease. CBRE recently reported that the current industrial development pipeline remains extraordinarily low, accounting for 1.4% of existing property inventory. At the current pace of construction, some cities may run out of new industrial space to lease in six to nine months.

Do you see these drivers continuing?

Yes, and with Canada’s borders expected to reopen soon, we expect to see a new tranche of demand for apartments from newcomers to Canada and foreign students and this will add to domestic activity. The gap in purpose-built industrial is not going away any time soon either. We also believe that with the reopening of the economy, a return to the office is imminent for many Canadians which will have a positive impact on office vacancy rates. Same for retail. One lingering question is interest rates.

What about interest rates?

The Bank of Canada and the US Federal Reserve are both on the record suggesting that the above-average Consumer Price Index inflation North America experienced in the second quarter – the highest in about a decade – is temporary not structural. If they are right, they won’t be pushed into an early round of interest rate increases and can stick to their original plan of raising rates next year. That said, there was a recent rally in bond yields driven by fears of the spread of the Delta variant of COVID-19, demonstrating current market variability.  Whatever the future holds, smart borrowers look at their options and we point them to First National’s Early Rate Lock program which is available opportunistically as a rate hedge.

First National is well known as a CMHC-approved lender. How come you’re seeing this level of success in the conventional space?

We’ve put significant focus on developing business for our new Core Conventional term loan product, which we introduced late last year in response to requests from our largest borrowers. To be frank, I am astonished by the market’s quick reaction. Although this is a new product, it has already been tested in competitive bids and come out ahead. Based on term sheets issued in the second quarter, we expect to fund somewhere in the neighbourhood of $350 million of Core Conventional loans in the third quarter. This product gives First National a competitive advantage in what might be called the institutional end of the market that was historically dominated by lifeco lenders. More importantly, it provides our clients with another option that might be more suited to their property investment strategy and time horizon than an insured loan.

Why would a borrower choose your Core Conventional loan over other alternatives?

First and foremost because it is a competitively priced program for top-end borrowers and comes with the First National brand of service and support. Beyond that it offers a great deal of flexibility. A borrower can use it to term out a construction project, refinance existing debt, for an equity take out or for an acquisition and the terms available are one to 20 years with amortizations up to 35 years. In cases of more modest leverage, we can also offer interest only and/or non-recourse loans. Guarantee structures are also advantageous as is the approval turnaround time.

What about demand for construction loans?

Construction loans are a mainstay of our business. In the second quarter, we added to our existing construction book of approximately 77 loans valued at almost $3 billion with 13 new deals for $372 million. Roughly half of our new commitments are insured and half conventional. These are mainly construction loans to build apartments and condominiums from coast to coast. Once again, we experienced significant demand for our CMHC Flex program but also strong activity for bridge financing.

While on the topic, what’s happening with construction cost inflation?

Inflation has been a challenge over the past few years and the pandemic made it worse because of supply chain and construction site disruptions. The dramatic increase in price of wood was a blow to many construction budgets. At least as far as wood is concerned, we hear anecdotally that prices are coming back to more reasonable levels. As far as coping strategies are concerned, we serve experienced borrowers who have the knowledge to manage or mitigate cost inflation risks whatever the source. Because of our own experience, we also recognize a good construction budget when we see one and of course we look closely at contingencies to ensure there is sufficient room to deal with over-runs. Exit-term loan strategies are also critical and we provide advice here as well as funding.

Looking at your own internal business agenda, what’s top of mind right now?

The growth of our team to keep pace with the growth in our market and market share. We are now focused on a return to the office in a flexible manner which takes the advantages of practices learned during the past year’s virtual experiment and combines those with the tangible benefits of collaboration and creativity so that we can maintain the strong client culture that has sustained First National for over 32 years.  First National as a whole has hired over 400 new people in the past year across the country. On the commercial side, we’ve recruited 30 new people including experienced originators and analysts. We have a really great team today and one of my personal mandates is to ensure there is a strong career development focus. We want our people to advance and to stay with our company for decades. I’m very proud of the fact that many members of our team have been with First National for 10, 15, 20 and 25 years. This level of experience makes a meaningful difference to our client offering.

Final thoughts?

It’s been a great year so far and we are ready for more growth.  With economic forecasts pointing upward, it’s a great time to be in the commercial property market and a great time to borrow whether it’s on an insured or conventional basis.