Canada’s apartment owners, operators, developers and lenders gathered virtually on September 22 for the annual Canadian Apartment Investment Conference presented by the Real Estate Forums Club and sponsored by First National. During the expert panel discussion Land, Construction and Debt Financing: Pricing and Availability on the Horizon, First National's Adam Powadiuk, Assistant Vice President, Commercial Financing, offered key insights about interest rate spreads, lender risk assessments and market conditions in gateway and mid-market cities.
Interest rate spreads on conventional mortgages offered to best-in-class borrowers and properties are highly competitive and may be at their most competitive levels in 20 years.
CMHC-based spreads have returned to pre-pandemic levels after turbulence in 2020 and may have some room to move lower.
There is a significant amount – almost a wall – of capital available to the apartment sector and it’s debatable as to whether lenders are properly pricing risk in the rush to deploy funds.
Luxury apartments in large, gateway cities have experienced some pain due to migration of tenants to mid-market cities and this has manifested itself in higher vacancy, lower stabilized rents and more investment/underwriting scrutiny.
Apartment occupancy, rental rates and valuations in smaller, mid-sized markets have benefitted from a surge of people from large gateway cities due to the rise of remote work although it’s hard to tell how long these conditions will last as Canadians are recalled to their offices in major centres.
Investments in many apartment projects in smaller cities are being made by institutions with substantial balance sheets who are able to withstand the risk associated with a return to more normal population/migration trends.
With Canada’s borders reopening to immigration, the outlook for the apartment market, particularly in in the Greater Toronto Area is bullish and comparisons to the roaring 20s are being made by the development industry as the gap between tenant demand and property supply is monumental and will remain in place for years to come.
Developers on Canada’s West Coast have actively engaged with First National to discuss the many advantages of converting their condo projects to apartments, but such conversations have not been the norm in the Greater Toronto Area.
Low cap rates, particularly in Vancouver, have led lenders to offer lower loan amounts but as a counterpoint, apartments are blessed with amortizations unseen in other commercial asset classes – as long as 40 years for CMHC and 30 to 35 years for conventional mortgages – and conventional second mortgages behind CMHC loans can also address leverage needs at reasonable cost.
Joint ventures are valuable in the apartment development industry, particularly as they relate to seniors housing and student housing as the management techniques involved may look similar but are different and the learning curve can be costly without an experienced partner.
Conventional wisdom at the beginning of the pandemic was that apartment construction financing would grind to a halt but this did not happen and First National’s construction lending pipeline has only grown.
Interested in learning more about why borrowing from First National is a better alternative, please contact your First National advisor.