Key takeaways from Canadian Real Estate Forum's Land and Development Conference

  • First National Financial LP

Hundreds of development industry professionals gathered in Toronto on May 29, 2019 for the Land and Development Conference. During the panel discussion "Leveraging Options," Jeremy Wedgbury made the following key observations.    

Montréal is posed to be Canada's growth leader in commercial real estate development in 2019.

After years of underinvestment, Québec generally and Montréal specifically are on track for healthy development industry activity and First National has responded by investing in its local origination team.

Halifax should not be overlooked.

First National has more than doubled its business in Atlantic Canada over the past three years and it's not unusual to see high-quality new apartment buildings lease up in under 90 days.

Canada is not in a development bubble.

Market fundamentals including population growth provide strong support for continued development of quality assets and First National has a positive outlook for the year.

First National continues to have a healthy appetite for new construction loans.

First National has approximately $2 billion of construction financings currently underway in multi-unit, condominium, retail, industrial and self storage and remains open to new opportunities managed by experienced developers.

Apartment rental rates have grown much more rapidly than anyone predicted.

On the last 20 apartment construction projects financed by First National, realized rental rates were, on average, 10%-20% per square foot higher than originally forecast, reflecting strong demand drivers.

All three levels of government in Canada need to work together to develop policies that encourage developers to build multi-unit residential housing.

Despite a resurgence in apartment construction, there is still an acute shortfall of rental units and public policymakers need to find ways to stimulate supply and address affordability issues.

Bill 108 is a step in the right direction.

The Ontario government's recently introduced Bill 108, the "More Homes, More Choice Act", if passed, could provide developers of "cost-sensitive" rental projects with development charge relief and greater clarity/certainty in the approval process. 

It's vital for borrowers to work with an experienced lender to build appropriate contingencies into their development plans.

With construction cost inflation and other market variables in play, it's more important that ever to realistically assess all downside risks in every building project so that adequate funding is in place.

It's the lender's – not borrower's – job to manage interest rate risk.

First National makes it a priority to offer strategies and forward-hedge products that help commercial borrowers mitigate interest rate risk, including "exit rate" risk.

Cap rates are likely to remain flat in the near term.

After the substantial compression of the past few years across many asset classes, further declines in cap rates are unlikely at this point in the market cycle.