First National Financial LP

Jeremy Wedgbury’s key takeaways from Tuesday’s RealCapital Forum on valuation and underwriting

  • First National Financial LP

Canadian commercial property owners, developers and lenders gathered virtually on March 1, 2022 for the real estate industry’s first big conference of the year: the 21st annual RealCapital Forum. During the expert panel discussion “Understanding Valuation and Underwriting Today,” First National's Jeremy Wedgbury, Senior Vice President, Commercial Mortgages, offered expert observations on several asset classes.    

With a $39 billion+ book, First National actively lends in all commercial asset classes with a particular focus on multi-family residential and industrial properties.

The dramatic rise in industrial property valuations last year was similar to what occurred in the multi-family residential space five years ago with significant increases in rental rates for new builds and existing properties and cap rates trading on the basis of projected future income, all of which adds complexity to underwriting.

It’s too early to say if the industrial market has gotten ahead of itself, but it does appear that exceptional demand for industrial assets and industrial space will continue, driven by shifts in the economy.

In some cases, landlord-owners are projecting up to 100% increases in industrial rental rates on future tenant rollover, which in Toronto is translating into proforma rental rates of $12 or more per square foot.

In underwriting an industrial property, First National seeks to understand when each underlying tenant lease was signed as part of our due diligence – and finds comfort when a realistic opportunity to improve rental rates is on the horizon.

While it is likely that demand for industrial will remain strong in the future, there will be winners and losers in terms of Internal Rate of Return over the long run depending on asset management.

The state of Canada’s office market is bifurcated with a bearish outlook for suburban properties –where recent asset sales have faced significant headwinds – and a recovering outlook for new downtown office properties where rents are likely to increase over time with a recovery from COVID-19.

Developers of new builds are paying much more attention to the E in ESG by incorporating high energy efficiency standards as a means of realizing lower operating costs over time and while ESG is an important consideration for pension fund investors, a focus on ESG has not resulted in a general pricing advantage for borrowers.

The most significant news for the multi-family residential property sector is the introduction, this month, of MLI Select, which is CMHC’s new program to incent the creation and preservation of energy efficient, affordable and accessible apartment buildings.

Having funded a record $6.3 billion of insured commercial financings in 2021, First National sees great economic advantages ahead to clients who use MLI Select to achieve their ESG objectives in the form of insurance premium discounts, higher loan-to-cost, and longer amortizations.

Because loans are assumable, First National is active but cautious in underwriting retail property asset mortgages and pays strict attention to the quality and experience of sponsors.

While certain segments – including enclosed malls – remain challenged, and there may be a threat of deflation in rental rates in some cases, cap rates in retail generally have not moved as much as anticipated. 

First National has had great success with technology workarounds during the pandemic, and in particular, its CRM software has been critical to service and growth.

Interested in learning more about how First National underwrites the industry’s broadest range of commercial mortgages, please contact your First National advisor today.