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Focus on British Columbia

  • First National Financial LP

First National is a leading non-bank commercial lender in British Columbia, home to some of Canada’s most sought-after real estate. With population swelling from in-migration and limited land available for development, the trends look promising for property values but challenging for affordability. In this interview with Russ Syme, First National’s Vancouver-based Assistant Vice President, Commercial Financing, we delve into these issues and learn more about First National’s appetite for, and approach to, commercial financing in the province.

Russ, how fast is the B.C. market growing?

The latest census suggested the population of British Columbia grew by 5.6% between 2011 and 2016 or by almost 248,000 people. That’s sixth tenths of one percent higher than the national average. We’re experiencing an even higher growth rate in communities such as Langford, Whistler, Surrey, Squamish, Sooke and Langley. I think this reflects the fact that B.C. is a wonderful place to live. It has long been a dream destination for Canadians from other parts of the country as well as newcomers to Canada who covet our lifestyle.

By all accounts however, demand has led to affordability issues.

Yes that’s correct. In West Van, for example, the population declined by 0.5% and some people attribute that reduction to lack of affordability. A recent story in the Vancouver Sun citing 2017 data from U.S. consultancy Demographia suggested that detached homes in Vancouver cost 11.8 times median incomes. Anything above three times is considered unaffordable. The flip side, and I see this with some of my friends in Vancouver, is the opportunity to take advantage of high prices by cashing out and moving to other communities in the interior or up island where values are lower on a relative basis.  This arbitrage trend is likely to continue.

B.C. is a big place. Is First National active everywhere?

Our focus is on large and mid-sized communities, so we are very active in Greater Vancouver, Greater Victoria and Kelowna, which together probably account for about 80% of our annual provincial commercial financing volumes. From a commercial real estate perspective, I would describe those markets as hot right now and in communities like Nanaimo, Courtney and Comox, we also see demand outstripping supply.  That’s not to say conditions are equal across the board. Vancouver was the first to recover from the 2008 recession and it shot ahead, followed by Victoria and then Kelowna. Kelowna’s economy is influenced by conditions in Alberta, but even so, it has done well over the past two years.

What’s happened to cap rates?

It’s fairly evident that cap rates pretty much across the board in the commercial world are lower in Vancouver than in any other city in Canada and that’s been the case for many years. As cap rates have dropped in other cities, they’ve continued to decline here. One thing we have noticed is that the historical difference in cap rates between Toronto and Vancouver were massive. That gap has narrowed, and it’s helped to change investor perceptions.


It used to be that Toronto investors would look at an apartment development in Vancouver and scratch their heads trying to figure out how in the world it could trade at a cap rate of 2.5 or 3. It seemed crazy. But now investors are seeing cap rates approaching that in Toronto, so it doesn’t seem quite so outrageous. It makes the Vancouver experience more understandable.

How have these trends manifested themselves in commercial asset values?

As you would expect, we’ve seen increases in prices across asset groups, particularly for condos and rental apartments as residents look for more affordable housing options, and particularly since in many communities, approved land for development is relatively scarce. The ocean and the mountains serve as natural barriers but there is also a massive agricultural land reserve in the Lower Mainland that is virtually off limits for development. In Vancouver, land scarcity is exacerbated by competition for land between condo and apartment developers.  And, as in the rest of Canada, the municipal approval process around zoning is fairly challenging. Then of course, the provincial economy is also performing well with a relative abundance of employment, which along with in migration, is a core driver of asset demand. The bottom line is that demand is outstripping supply for many asset classes and in the case of apartments, we need to get more supply coming on stream to keep up.

How many new apartments have come to market in recent years?

A recent CMHC report indicated that Vancouver added about 1,000 rental units in the past year and Victoria added about the same number. In contrast, Calgary and Edmonton each added about 2,000 or more. What’s interesting is that Vancouver’s apartment vacancy rate is less than 1% while the vacancy in Alberta is something like 7%.  So even though there is high demand for new product in B.C., and rental rates have increased, construction is not even keeping up with Alberta markets that are in recession-like conditions.

Isn’t there a new CMHC affordable housing product that might help to spur on rental apartment supply?

Yes, it was introduced in the spring of 2017 and it provides up to 95% loan to cost in most cases. So we’re seeing many of our for-profit developers, who never even considered an affordable rental project in past, taking a closer look as a result. While it’s not a panacea, we think this program provides a powerful incentive for apartment projects because it means the developer has limited equity exposure but gets very attractive returns on that equity.

Vancouver has always been known more for condo development than apartment development.

True but in recent times, the economic advantage of building condos versus apartments has started to shrink. There are plans to build about 20,000 new apartment units in Vancouver but it will take a number of years to see that happen, even though the need is now. And while we’re waiting for new product to come online, we’re seeing the existing stock of apartments getting older and less serviceable. It’s an interesting time in the market and a great time to be an apartment or condo developer and a commercial lender to those sectors.

What has all of this meant for First National’s origination volumes?

We saw a big jump a few years ago and volumes have been steadily increasing since then, which recently compelled us to add more talent to our B.C. team. The biggest reason is construction activity. B.C. is a very active lending market for condominium and increasingly for rental apartment construction. Condos and apartments provide opportunities for those who wish to stay in their community, say Vancouver, but who either can’t afford to buy a detached home or wish to downsize for retirement. We’ve put an increasing emphasis on condo and apartment construction financing to meet this demand. I’ve personally been involved in construction lending for about 20 years so it’s an area that we know well.

First National lends on a variety of property types elsewhere in Canada. Is that true in B.C. as well?

Yes, we lend on all commercial property types, including retail, seniors’ living, office and industrial and compete very well across all sectors. I’m personally very active in apartment and condo lending because I have a background in those areas. But by the same token, one of my colleagues is a former retail leasing agent so when a request for lending on retail properties comes in, she provides her expertise. Another colleague worked in industrial development, so when that type of property comes up, he provides his perspectives. Paul Steckler, our newest originator, has about 20 years of experience in construction lending, earned while working for a developer and in developing properties himself. So we have a great mix of talent at the ready to meet diverse demand.

Speaking of industrial developments, is there much activity?

There is some but not a lot because there just isn’t available land. When industrial properties are developed, the units sell almost like condos on a per square foot basis because the demand is so high and that’s reflected in valuations. 

What sort of retail do you finance?

Quite often we lend on retail space on the main floor of a condo development or on service-type that isn’t impacted by online shopping.

What about office properties in Vancouver? Have soaring prices affected that market as well?

Actually, average gross rent for downtown Class A office space in Vancouver is quite reasonable compared to other major North America cities like San Francisco, Boston, New York and Toronto. Unlike Toronto, relatively few companies have their head offices in Vancouver – which has led to less demand for office space and lower rents.  The biggest office tenants in Vancouver were, in past, large law firms and accounting or financial services companies.  That has changed in recent years.

How so?

Tech companies have become the major source of new tenants.  In fact, according to Colliers, the tech industry is now the largest industry in downtown Vancouver - with heavyweights such as Microsoft and Amazon having a significant presence.  Given the relatively small universe of downtown office space in Vancouver, about 24 million square feet versus Toronto’s 72 million square feet, and the desire for many tech companies to have more unique space than is typically found downtown, we expect much of the growth in the office market to be in close-in areas such as Mount Pleasant and East Vancouver.  We have clients who are developing in these areas and they indicate demand is outstripping supply.  This should lead to increased office rents in the next few years so long as residential affordability doesn’t cause tech firms to locate elsewhere.

You mentioned that construction lending is an area of focus, what about other types of lending?

First National does lots of CMHC lending in British Columbia, both construction and take out, but we’re also very active in providing bridge and conventional financing as well. There are many, many opportunities here across all types of financing. In the apartment sector for example, we provide construction financing and then move on to provide take-out financing during the lease-up process. It’s a natural fit and makes it easier for borrowers because they can work with just one lender from stem to stern, not several.

Is there a sweet spot for loan values?

Not really. In the past year, we’ve done deals ranging from a couple of million dollars to north of $100 million and everything in between. For construction loans, I would say the typical range is between $10 million and $50 million but we have done and are open to doing different amounts.

What do you look for in a borrower?

Experience. For a new borrower, we look for someone who has a demonstrated development track record, someone who has perhaps outgrown their current lender and needs a lender with more capital and more expertise to share.  As an example, we recently added a new condo developer who had a great deal of success in building projects of around 30 units each. Those projects were well received in the market and helped to increase his profile and cement his reputation. Based on those successes, he decided to scale up and planned a project with 75 units. His existing lenders were used to doing smaller projects, but couldn’t handle the size of the deal he proposed.

What did you offer this borrower?

After doing our due diligence, we proposed making a conventional loan with a 90% loan-to-cost structure…a leverage point that his existing lenders couldn’t do without using syndication. Most deals of this nature are structured at 75% or 80% loan to cost, so we were more aggressive but for good reason because we understood the market, we understood him, and his vision.

How did it turn out?

Since that first project, we’ve done several more developments together of various sizes and all have turned out exceptionally well.  

Is your ability to assume more risk the reason why borrowers choose First National?

In some circumstances we are willing to price higher risk into a deal if it makes sense for the borrower and First National. But what most borrowers tell us is that they choose First National because of our unmatched range of commercial lending products and the fact that our team is good at developing creative financing structures that solve their problems.  It really comes down to our relationship focus. We aren’t just here to do a deal. We’re here to provide information, guidance and honest advice. It’s the relationship that counts to us.

You mentioned being able to find solutions. Can you provide another example?

We were recently approached by the owner of a very large rental tower. He wanted to get CMHC takeout financing but couldn’t qualify, at least on paper, because the property had a minor environmental issue that he couldn’t remedy.  He was told by several other lenders that he wouldn’t qualify for takeout financing and shouldn’t bother applying to CMHC. We sat down with him and with his environmental consultant, had some discussions with CMHC’s local office to explain the situation and after getting our heads around the risk, we managed to get this deal done with CMHC and at the dollar amount he wanted.

Final question: what does First National find attractive about lending in B.C. now and for the future?

In a word, opportunity. This is a great place to live and with lots of demand for real estate, a great place to lend. There might come a time when affordability or lack of it becomes an insurmountable issue, but for today and for the foreseeable future, B.C. is a very attractive market for us.

You can reach Russ at or 800.567-8711.