What’s up with Canada’s commercial real estate and financing markets?

  • Jeremy Wedgbury, Executive Vice President

This spring, debt markets have looked favourably on commercial real estate, with a significant amount of capital available to finance attractive assets. Although volatile, interest rates in the bond market are range-bound, and in the multi-unit market, cap rates have moved slightly higher but remain best-in-class.

It is against this backdrop that I’m pleased to offer my spring commercial market commentary and an update on developments at First National.

A decade of growth for multis

First, the market. For the first time in over a decade, supply-side fundamentals in the rental apartment space have shifted, particularly in Toronto and Vancouver, where vacancies have risen, and rental rate competition has intensified.

Lower rental household formation, on the back of reduced levels of immigration, is having an impact, but it’s a mistake to generalize this, as trends vary by city, as do tenant attitudes, employment levels and property inventories.

In context, reported increases are against very low vacancy rates in prior years. The sky is not falling, but tenant inducements are increasing, not only on new builds but also for existing stock.

Our advice for landlords is straightforward. Those who take the time to know their tenants are far more likely to retain them, even in the face of incentives to move.  In addition to putting greater focus on tenant retention, many of our borrowers are also recalibrating their rental strategies.

Our advice for borrowers at this point in the cycle is to be cautious with the use of higher leverage and consider conservative rental growth projections and longer terms such as 10 years to protect against cash flow moderation or even deterioration. Five-year terms and interest-only structures, while appealing, expose balance sheets to risk. By critically analyzing long-range outlooks as part of our advisory services, we are here to support stability, and measured, risk-managed growth.

Construction of new apartments remains well financed, with First National leading the way. As it often takes years for new units to come to market, a continuation of construction activity is not surprising, and developers who engage are availing themselves of generous, time-bound tax incentives, more reasonable cost inputs and the MLI Select program for attractive LTCs.  That said, with vacancies rising, rental rates facing downward pressure and construction costs still elevated, construction is starting to slow. We expect this trend to continue.

The appetite for seniors’ housing remains strong, reflecting demographic trends. In the multi-unit space generally, private interests are now driving trading activity rather than institutions.

Strength in other sectors

Meantime, industrial and retail assets are in high demand across the country. Supply-side influences for these asset classes vary substantially, including in comparison to multi-unit residential properties.  Well-located, grocery-anchored and needs-based properties remain the favourite on the retail side.  For industrial, the market is generally stable with a return to healthier fundamentals.  While the sector no longer operates in the same hyper-tight, low-vacancy, rising rental-rate environment that it did following the pandemic, it remains a strong commercial asset class across the country.

For both retail and industrial properties, debt capital remains readily available, especially for well-located, tenanted assets.

News at First National

To answer the question posed in the headline of this article, one thing that is up this year is First National’s commercial mortgage book. With thanks to you and the spirited work of our advisory, credit and asset management teams, we have just surpassed $70 billion in commercial mortgages under administration. That’s a proud new milestone and comes just two years after we reached $50 billion.

Scale is important. It means we are more consistently active in more markets than our competitors. It gives us the strength, depth and breadth of experience to dig in, underwrite and fund opportunities with velocity. It also exposes us to more insights gleaned from interactions with trendsetting developers, property owners and investors, which increases the value, depth and currency of the advice we share.

Frankly, we covet growth, as it helps us fulfill our stated mandate of Better Lending for all borrowers and supports the development of our resources and the expansion of our team.

First National for Brokerage

Since 1988, First National has made its mark as a commercial lender. Much of our growth has come from participating in the insured segment of the multi-unit residential market, and we see significant opportunities ahead to advance our leadership there in future years.

However, there is also a significant need for Better Lending in the conventional financing arena. To address it, we have created First National for Brokerage, which leverages our credibility and connections with dozens of lending and capital institutions to provide competitive financing choices across all asset types, including multi-unit and much more.

There are many advantages to using First National for Brokerage, including the fact that we apply our advisory expertise, credit experience and underwriting knowledge to package and present your property, along with all supporting data, to qualified lenders who are best positioned to offer superior pricing and terms.  With the addition of brokerage services, we are now able to advise, service and help you fully meet your debt requirements across all commercial real estate asset classes.

First National’s intelligent capital matching solicitation system enables faster, better execution. We’ve now proven this on a variety of transactions and are ready to assist you when the need arises. Please reach out to me or a member of my team for more information.

From strength to strength

Considering recent funding commitments and inquiries, we expect to hit another new lending milestone later this year and will update you when we do.

In the meantime, we are ready, willing, and more than ever able to serve as your Better Lending partner across all property asset groups, with highly competitive insured and conventional solutions.

Thank you for your support.

Yours sincerely,

Jeremy Wedgbury
Executive Vice President

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