COVID-19 has altered the way business is conducted. But it has not stopped First National from lending. In fact, demand for commercial financing is at record levels, which is great news for originators like Samuel Lasanté, our Director, Commercial Financing in Québec. In this Pandemic Check Up recorded in late January 2021, Samuel discusses the current state of the Québec market and offers a reassuring view of the future.
How is the apartment market in Québec performing?
We continue to see a high level of interest in and demand for financing. In 2020, loan volumes here in Québec were at record levels and we funded a variety of high-value client projects. For example, late in the year, our team closed a $52 million financing to build a 102-unit co-living apartment complex in Montréal, the first of its kind for Québec. And we’re now in the underwriting phase on an $80 million, three property apartment construction project in Québec City. Speaking specifically for my team, the pipeline in Québec is also strong with 14 other transactions in various stages of progression.
These are large transactions. Can you provide a little more detail on each?
Sure, the Québec City project is for a new First National client who originally intended to use conventional financing but based on our analysis they decided instead to opt for a CMHC-insured loan with our assistance. The savings for them are very material over the next five years. I’m particularly proud to win this assignment as I used to work for this client before I joined First National a year ago. The project in Montréal is structured with a conventional construction loan at 75% leverage, which is very favourable given the non-standard co-living format. Once completed and partially leased up, the intent will be to convert to a long-term insured mortgage under CMHC’s co-living program.
Co-living is a unique concept but with so much focus on physical distancing, is it right for the times?
Surprisingly, we suspect that physical distancing may have increased demand for co-living as those forced to live alone during the pandemic may have preferred to be part of a living unit shared with others. That being said, physical distancing will hopefully not be a factor when this project comes to market two years from now. Moreover, as we’ve seen elsewhere in the world, co-living is very popular with young urban professionals and singles who like to socialize and who appreciate the value that comes from cost sharing and the built-in amenities such as large common areas.
Are you surprised by the market’s buoyancy?
Not really. Our clients are forward thinking. What’s happening today with rental and vacancy rates may have little bearing on what happens three to five years from now when a building opens for occupancy. And let’s keep in mind that in our major cities, there has long been inadequate supply of rental housing to meet demand and that undersupply remains.
What is happening currently with Québec apartment occupancy and rental rates?
It depends on the area, the product and the demographic. As a general observation, Québec is defying the trend found in places like Toronto. Rents in some parts of Montréal have gone up not down. This relates to the fact that a lot of new product has come to market and it’s renting at higher rates, on average, than some of the old stock. However, housing that caters to international students as well as to a more affluent crowd is feeling the effects of border closings. As well, and similar to Toronto, Montréal suburbs seem to be doing better than downtown areas due to the migration of residents outward in reaction to the pandemic.
Québec City and Montréal are two different cities. Is there a difference in market sentiment?
I would say there is a bit more optimism in Québec City given that there are not as many high-density areas such as the core downtown of Montréal where office and retail vacancies have negatively impacted demand for real estate during the pandemic.
Has anything surprised you about market performance since the pandemic began?
Yes. Before joining First National, I served several clients who own retail assets. They had no interest in apartments. With the downturn in retail accelerating because of COVID-19, they’ve started to look into redeveloping those assets to add residential apartment towers. I think it’s indicative of the fact that the pandemic is causing developers to think outside the box to create value. First National is here to help.
When you say developers are thinking differently, can you provide another example?
Sure. In the past, I had clients who were disinterested in CMHC’s Flex Financing construction program because it requires a certain percentage of units to be built with affordable rents. At the time, rental rates were rising and developers thought the cost of affordable rents outweighed the benefit. More recently, these same developers are rethinking their stand after recognizing that Flex allows them to save significant monies on their CMHC insurance premiums and secure guaranteed takeout financing before lease up. Pandemic economics have changed the calculus and caused developers to consider alternative ways to maximize their returns and lower their deal risks.
First National’s financing volumes have increased and demand is strong. How are you addressing this growth?
In two ways: by growing our talent and expanding our conventional product portfolio to address new asset classes.
Let’s take each in turn.
On the talent side, we’re really pleased to welcome Ridwan Abdur as an Analyst in Montréal. Ridwan is a high-energy professional who is perfectly suited to this role based on his prior experience with commercial real estate appraisals, cash flow models, property management and funding. He’s a problem solver with great organizational skills.
Hiring in a pandemic can’t have been easy.
Put it this way, it was different. We conducted all of our interviews over Microsoft Teams. To this day, I’ve never been in the same room as Ridwan, which is strange since we work so closely together. It’s just one of many adjustments we all have to make.
You mentioned a new conventional product. What does it do for you?
It’s a game changer in that it provides First National with the ability to be competitive in industrial and commercial property financing – as competitive as any of our large financial institution peers. First National has underwritten loans for these asset classes before, but it hasn’t been a focus area. That’s now going to change. For me personally, having come from a bank, this product gives me the opportunity to reconnect with my past clients, which I’ve started to do. Those I’ve spoken to so far are as excited about this new offering as I am.
How is the pandemic affecting you professionally?
Back in the spring, the first question that came to my mind was how am I going to develop and keep client relationships if I can never host face-to-face client meetings? It was disconcerting. But honestly, there have been more opportunities to communicate and stay in touch than I originally thought. I use the phone, I use the Internet and I just actively look for regular touch points. I think the pandemic forced me to behave differently, to change my routines and to really put a lot of effort into making every outreach opportunity value added.
Three final questions. First, has First National continued to lend or did it retreat like some other lenders due to the uncertainty brought on by the pandemic?
I’m very proud to say our financing appetite and funding capability has never wavered. We are always in the market and we have a great deal of liquidity. This speaks to the value of our deep and diverse funding sources and always reliable business model.
Second, what advice do you have for your clients right now?
If you are thinking about buying a property or financing a construction project several months from now, don’t wait…engage with First National now. The earlier the better. It means we can look deeply into all of the nuances of the transaction, share our knowledge and make recommendations that will maximize your returns and lower deal risks.
Third, any final thoughts?
The show must go on. We are here to make good things happen for our clients. Even though we’re physically distanced, we have the means to carry out our work in a responsive, efficient manner.
Samuel is safely, securely and productively working at home but you can reach him at Samuel.Lasante@firstnational.ca or any member of the First National commercial team at 1.866.298.0929.