Canadian commercial property owners, developers and lenders gathered virtually on December 2 and 3, 2020 for Toronto Real Estate Forums’ signature year-end conference. During the expert panel discussion "How Much Risk Is Facing Capital And Debt Markets In 2021: Where Are Spreads, Cost, Availability And Sources Heading?” First National's Jeremy Wedgbury, Senior Vice President, Commercial Mortgages, offered the following insights.
2021 is expected to begin as 2020 ends – with a highly liquid mortgage market. After a brief pause in March and April when some lifecos and pension funds moved to the sidelines, the debt market snapped back by May and continues to be highly liquid. This is a far different scenario than what occurred during the financial crisis when banks adopted a risk-off stance.
First National is ready to grow. Although primarily a multi-residential lender, First National supports a broad spectrum of assets, has deep and diverse funding sources and all-in coupons remain very low to the advantage of borrowers. Spreads have snapped back to just slightly above pre-COVID levels.
Asset underwriting has changed materially, and this has fragmented the debt market. Lenders have adopted a siloed approach at the expense of retail and office assets which for some lenders are considered “no-fly zones.” As a result, it will take more structuring to get an office/retail asset deal approved and at higher prices than in past.
Lenders are far more interested in potential cashflow of properties than going-in cap rates. Lenders have intensified their scrutiny of discounted cash flow models two and three years out on each property they underwrite.
CMHC continues to be very important to the operation of the multifamily market. The national housing agency supports some 90% of the market and has experienced record application volumes in 2020. Consequently, it is taking longer for deal approvals. First National is helping with conventional bridge financing that can be shifted to CMHC term loans when available.
There are significant funds available for the right construction projects coast to coast. First National currently has some $2 billion committed to construction projects coast to coast and it is likely that construction activity will be strong for the foreseeable future.
Rental rate take-up on the most recent new builds that First National has funded have achieved or slightly exceeded projections. However, the demand drivers for luxury apartments have diminished as a result of pandemic restrictions/border closings.
The future will favour industrial construction as well as multifamily. There is a significant need for both asset types across Canada and First National will be there to support developers.
The general health and wellbeing of the commercial market generally continues to depend on government support and regulatory measures. As long as COVID-19 remains a threat, the capital markets and the economy as a whole will rely on fiscal and monetary stimulus. It is important to watch closely for changes to government support initiatives in the coming months and particularly the success of the small business support program.
Interested in learning more about First National’s financing services and the state of the market in your area? Please contact your advisor today.