First National Financial LP

A mid-year update from Michael Williams

  • Michael C. Williams, Vice President - Commercial Real Estate Financing - Québec and Atlantic Canada

Sharing Québec market trends and business insight is a key part of our service mandate as your empowered lending team at First National. Today, it’s my pleasure to use my customary summer message to convey information and updates that I think are relevant as you prepare for the last half of 2023.

Business volumes and outlook

Notwithstanding the very real challenges created by higher interest rates, higher construction costs etc., multi-unit residential market fundamentals in Québec remain solid. 

Even as the pandemic trend of outward migration from city centres reverses with rental demand ramping up again, demand for rental housing in the outskirts of Greater Montréal (GMA) remains strong.  It is not uncommon to see our clients achieve actual rental rates above projection during new construction lease up in the outskirts of the GMA. Rental rates are up, absorption is positive (a further confidence boost for new construction) and this fall, we will see the normal influx of students returning to CEGEP/University, which will add to rental unit demand.  Despite strong rental demand, we are now seeing a slowdown in new construction financing requests as well as purchase and land transactions due to the (prolonged) higher interest rate environment and construction cost inflation.

As CBRE noted in its Q2 Cap Rate Report, most local transactions are being done through CMHC’s MLI Select Program. That report showed no change in multifamily cap rates in Québec City or Montréal’s low rise apartment sector and a modest rise from Q1 in Montréal’s Highrise A and B segments.  The attractive financing terms under MLI select have certainly helped keep cap rates from rising significantly in correlation with rising rates. However, with bond rates continuing to rise, I believe MLI Select can only help to a certain extent and there will be continued upward pressure on cap rates in the second half of the year.

First National’s experience through the first six months of the year – as described in more detail by my colleague Jeremy Wedgbury in his recent report to you – aligns with what we’re seeing in the market. We are on track to exceed record volumes we completed last year in the Québec market. We’re very pleased to have these opportunities to serve and assist our clients. 

We continue to operate on the assumption that mortgage fundings will be particularly robust later this year. That assumption is grounded in the reality that between March and June, we submitted a significant number of client applications to CMHC before it raised insurance premiums on June 19.  The volume of files submitted to CMHC in this short time frame far exceeded what we typically handled in previous years during same time frame. For working night and day to ensure every single file was completed on time, my sincere thanks to my First National colleagues for a job well done and to our loyal clients who trusted us to get the job done.

In fairness to CMHC it will take months, not weeks, for it to complete due diligence on all the detailed files received not just from First National’s offices across Canada but from other lenders. Patience will be required but I feel very good about the quality of the applications we created. In every case, the business cases for CMHC insurance we submitted were sound, concise and well presented, and properly reflected the clients we serve, which I truly believe will help ensure a smoother approval process.

As for CMHC’s decision to increase premiums, I would simply say that while no one likes paying more, the reality is that programs like MLI Select continue to be the very best option for financing multi-unit residential construction and unit preservation. 

Team news

To show our confidence in the future, and to bolster our knowledge and capacity to serve, I’m pleased to announce that Kayas Abedin, Nicholas Colizza and Admir Bikić have joined our team of analysts.

Kayas began his career in market research and comes to us from a big five Canadian bank. He is a graduate of Concordia University. Nicholas is also a Concordia graduate and also served at one of Canada’s largest banks in a similar analytical role. Admir began his career in wealth management and came to First National from a leading Québec mortgage brokerage. He is a graduate of UQAM’s School of Management.

Kayas, Nicholas and Admir already made their presence known as valued contributors on many of the files we submitted to CMHC this spring.  

A new challenge and a potential solution

As many of you may have heard, CMHC has started to enforce their policy of not allowing CMHC re-financings to be used to repay any private lender debt. CMHC has also recently re-iterated its position in not allowing proceeds from a CMHC re-financing to repay approved lender debt used for past capital expenditures.  This certainly poses some challenges for anticipated re-financings this fall under one of these two scenarios. This also poses challenges for those considering a purchase-renovation plan.  CMHC does offer an interesting purchase-plus improvements program which can be a possible solution. We would be more than happy to review any projects you might have that can fit well within this program.

Personal thoughts

This is my fifth anniversary at First National and I couldn’t be more pleased by the progress made or more excited about the potential for growth that I see ahead. The size of our team and share of the market have expanded well beyond our initial ambitions. While we are now serving many new clients and regions of Québec, we continue to enjoy long-term relationships, some of which date back to our earliest days in business. That is the true mark of success.

My sincere thanks to all clients, business partners and colleagues for making these five years incredibly enjoyable. I look forward to the next five years together.

On a final note, please remember that our mandate is to empower you. If you have questions, concerns or want a current perspective on the market from an independent source, please reach out to me or any member of our team.