Focus on Southwestern Ontario

  • First National Financial LP

For the almost 1.6 million residents who live here, Southwestern Ontario is a vibrant area that encompasses not only some of the most picturesque countryside in the Province, but a thriving economy that is home to many of the country’s leading technology, insurance, automotive and chemical companies. It’s also a market that First National knows well, having financed commercial property assets of all shapes and sizes here since the Company’s inception 30 years ago. Today, Jim Foote, Assistant Vice President, Commercial Financing is First National’s point person in the region and in this interview, we ask him to comment on the state of the market now and the outlook for 2018.

Jim, what communities do you serve?

There is no generally accepted definition of Southwestern Ontario, but to me the eastern demarcation line runs through Milton and the region encompasses Guelph, Brantford, Cambridge, Kitchener Waterloo, Woodstock, London, Sarnia and Windsor and every community in between.

Sounds diverse.

Every community here has its own quirks, its own set of economic drivers. And those differences make it imperative for us, as a lender, to have a local presence. It might be possible to serve some big cities with a shotgun approach, but here, you need rifle-like precision, you need to understand each town’s dynamics and know the local players to be successful.

What are the main employers in the centres you serve?

I’ll start with Guelph. This is a community that many people associate with agriculture, and that image is reinforced by the University of Guelph’s leadership in the fields of science and agriculture. But Guelph is also the Canadian headquarters of Com Dev, which is a world leader in satellite technology. Moving west, Kitchener Waterloo and Cambridge are the home towns of several leading life insurance companies, but ever since Blackberry, this region has also been known as a tech centre. Today, it’s the location of Google’s Canadian head office and leading software companies like Open Text that have clustered near the University of Waterloo, Canada’s top computer engineering school. In London, the University of Western Ontario is a big employer and the medical school is at the centre of a world-renowned hospital and medical research hub. Agri-business is also thriving with a variety of cash crops grown throughout the region.

Isn’t the southwest also a manufacturing hub?

I will answer that with a qualified yes. Cambridge and Woodstock both have their own Toyota plants.  Large employers in London include 3M and General Dynamics. In Brantford, SC Johnson and Sons is big and in Sarnia, chemical companies still rule. But over the past 20 years, the sector has scaled back as manufacturers relocated to the United States and Mexico. As a result, several communities had to reinvent themselves and have done a good job of it. To me, Brantford stands out. In the early part of the 20th century, it was the third largest manufacturing centre for exported goods in all of Canada. In the late 1980s, manufacturers started to disappear. But now, Brantford has transformed itself into a distribution hub, along the lines of what’s happened in Milton, by taking advantage of its highway access and proximity to the Golden Horseshoe and markets in the northeastern U.S.

Speaking of manufacturing, Windsor is a community that has experienced hard times.

It has, but with economic renewal in Detroit, we’ve seen a resurgence in Windsor too. In 2015, the unemployment rate in Windsor was over 10%. At last check, it was about 6.3%. Part of the reason is the local tool and die industry has benefitted from somewhat higher activity levels in the automotive sector.  FCA,  the Fiat/Chrysler assembly plant is the largest manufacturing employer in Canada with a workforce of over 6,000 and their production is fed by significant parts and sub-assembly manufacturing in the region. 

What’s the outlook for Southwestern Ontario?

From what I read and see, I would say the outlook is for steady growth in the economy, steady growth in the population base and steady growth in commercial real estate. When it comes to real estate, one of the reasons for growth is the addition of new public transportation options. Public transit, like the ION system recently constructed to connect Cambridge, Kitchener and Waterloo via light rail and buses will act as a catalyst for commercial and residential development. It’s a game changer.


What we find is that apartments and retail tend to build up around transit nodes. In fact, it’s part of Ontario’s master plan to increase intensification of development – to build up, rather than out – in our cities and public transit helps to make that happen.

Communities like Hamilton have noticed a significant increase in property values as Torontonians have moved west. Is this a driver of real estate values in your region?

For parts of it, yes although the development of our own tech sector has also led to a made-in-Waterloo price surge. The interesting dynamic for the future is the possibility of adding high-speed trains to connect us to downtown Toronto in an hour or less. The Province appears to be moving forward with its Ontario High-Speed Rail initiative. In fact, the environmental assessment process is scheduled to start this spring on a line from Union Station to London. If it happens, and the hope is that it will be in place by 2025, rapid transit will give a new definition to the term bedroom community.

What are the main types of commercial development First National finances in the region?

We’re active in all forms. In fact, I would say we have a broader business mix than you might find in other parts of the country just because of the diversity of our markets. That said, we do a lot of construction and we lend on purpose-built rental apartments, condominiums, seniors’ lifestyle residences and convenience-type retail in urban locations. We also finance industrial properties, both purpose-built and repurposed and office properties are also in the mix. Demand for capital is about as diverse as you can find.

How have cap rates performed across the different asset classes?

For quality properties, we’ve seen cap rate compression in all asset classes over the past few years.

For example, quality high rise residential values trade at cap rates below 4.5% in Kitchener Waterloo and Guelph,  while retail trades at 5.5%,  Office tends to trade a bit higher at 6 to -7% depending on quality of the asset.

Generally, you will find a bit more yield the farther you drive south on Highway 401 within each major centre. That said, cap rates tend to increase slightly and will vary significantly if the quality of the property is inferior or the location is more rural.   It’s important to appreciate the supply and demand dynamics in each of the cities as there are differences and strategic reasons to consider for the various assets.

You mentioned financing apartments. What’s driving demand in that sector?

Affordability. Although we don’t have Toronto-type house prices, by local standards, housing affordability is challenging for many young workers. Because of under supply, apartment vacancy rates are low and that is encouraging new builds using First National’s conventional and CMHC financing options.

Is developable land readily available in the region for new construction?

We don’t have physical constraints to development like Vancouver has with the ocean and the mountains or Toronto has with the Greenbelt, so on a relative basis, there is a good supply of land. But as I said, the trend is toward intensification, so we are seeing a preference for development within existing communities and close to transit nodes. That has lead to increases in price per acre for most types of development land.

What about growth in condo construction?

Condo living, and to some degree apartment living, is about lifestyle. Some people want to unshackle themselves from owning and caring for a detached home by replacing it with a luxury rental or condo. I know that’s a driver of construction in large cities, but it also happens in small ones as well.

Can you provide an example?

We recently financed a really creative development in a community of less than 30,000 people. It includes a variety of luxury amenities in a waterfront setting. Without naming names, this developer has pioneered a concept that has really caught on, not only with local residents but with Torontonians who have relocated to be close to our local wine region, boating on Lake Erie and the national park at Point Pelee, which are huge attractions in the summer. The proximity to the United States by car and ferry and easy access to two airports that offer flights to Florida make this development the ideal jumping off point for snowbirds. 

Why did this developer choose First National?

They outgrew their previous lender and needed more capital to finance additional phases of their development. We provided CMHC-takeout financing for phase one and with that, they were able to embark on phase two of their development using First National’s conventional financing.

Why did you choose to work with a developer who was engaged in what you describe as a “pioneering concept” that was off the beaten path?

There is plenty of research and on-the-ground tire-kicking that goes into a decision like this, when there is no similar precedent for development in the area. Being the first mover in any industry, including development, is tough. As a result, we pored over his business plans, feasibility studies and rental reports as well as his track record on other, albeit unrelated, development projects. But we also relied on our own experience, our own instincts. Our gut told us this would be a great success and it is.

Doesn’t intense research of this nature slow you down?

Actually, one of the great advantages we have is the ability to do due diligence in a compressed timeframe. We’ve found a way to leverage our local knowledge and connect it in a very efficient manner to our centralized underwriting and servicing teams to ensure funding happens when our borrowers need it, whether they’re seeking $2 million or $25 million. This level of responsiveness is partly a matter of business processes, but also reflects a can-do attitude that resides in all parts of First National.

“Can do” is not a term normally associated with a lender.

True but we don’t follow a traditional playbook here. We apply strict underwriting criteria but to use a golf analogy, we don’t stop when a shot is off the fairway. We look for creative solutions to get the ball back in play and our ability to offer conventional and CMHC financing means we have a number of ways to overcome challenges that might stop other lenders.

Has this made a difference to your growth?

Absolutely. The combination of our local presence, ability to harness different forms of financing, and the expertise resident in our underwriting team have given us an edge as a non-bank lender. We don’t have a big, shiny First National office tower advertising our name around the community, but what we do have is a willingness to listen, to investigate, and to fund good borrowers/projects.   

Final thoughts?

To those who think that the world ends at the outskirts of Toronto, I can definitely attest to the fact that there is life west of Milton. In my 20 plus years of working in the region, I have found it to be a vibrant market for commercial real estate investment and development and I think that will continue for the long haul.

To learn more about First National and our commercial lending activities in Southwestern Ontario, Jim can be reached at or (519) 630-1394.