First National Financial LP®

First National’s Damir Jesic on risk and return in Calgary’s commercial real estate market

  • Damir Jesic

On October 21, 2021, Damir Jesic, Assistant Vice President, Commercial Financing was featured on a special lenders’ panel hosted by the Calgary Real Estate Forum entitled “Construction & Debt Financing: How Are Lenders Viewing Calgary? Have They Assigned A Higher Level Of Risk To The Market?” Here is what Damir had to say in response.

As a lender with over $120 billion in assets, First National believes in the Calgary real estate market, has been consistent in underwriting mortgages over the years and has not experienced any elevation in risk in its conventional or insured portfolios during the pandemic.

Institutional investors are starting to return to Calgary, which is very encouraging and a sign of the emerging economic recovery.

Calgary industrial, multi-family and retail are sought-after assets in the current environment and there is a substantial amount of liquidity available for borrowers, except (currently) in the office sector, although First National has financed local office properties in the past including commercial-to-residential conversions.

Red-hot demand for industrial property assets in Calgary will likely continue for the foreseeable future, driven by growth in the distribution and telecommunications sectors, which has led to record low vacancy and cap rates and additional demand for First National’s new Core Conventional mortgage program.

The Core Conventional mortgage program is proving to be extremely popular with top-end borrowers who are choosing it over traditional lifeco and bank products because of price (currently 1.30-1.50 over the corresponding Government of Canada bond yield), flexibility in the choice of terms (1-20 years) and application (asset purchases, debt refinancing, construction takeout, interest-only/non-recourse) as well as amortization (up to 35 years).

Of the $700 million of Core Conventional mortgage fundings done a year-to-date basis nationally, $200 million was deployed in Calgary, a reflection of the popularity of the program particularly with industrial and multi-unit property owners.

First National traditionally originates about one third of CMHC’s multi-family insured loans annually including affordable and standard construction and is the competitive choice for borrowers because as a lender, it has immersed itself in understanding the national housing agency’s requirements and vets applications thoroughly to avoid rejection.

For a big city, Calgary has relatively few apartments compared to national averages although it is rapidly catching up with the development of purpose-built projects featuring lifestyle amenities.

The inner-city apartment market, which features the largest pipeline of new developments, also faces rising property taxes, insurance and construction costs and is currently viewed with caution by CMHC for these reasons as well as relatively high vacancies, which makes it necessary for First National to dig deep to find solutions for borrowers.

First National continues to use CMHC’s construction incentives such as Affordable Flex in Calgary and CMHC is interested in seeing more demand for the program but at the same time, the national housing agency is looking for owners to provide greater discounts in average rental rates to qualify which – coupled with rising construction costs – means the economics of Flex currently do not work in some cases.

Excess inventory of condos in the city has put pressure on apartment vacancies and while it will take time for those condos to lease up, higher energy prices and a recovering economy will help to restore strength to the multi-family rental space.

Over the past few months, apartment owners have started to report an improvement in occupancy rates and a decline in the use of inducements and incentives to attract new tenants and encourage renewal, which is a good sign.

For clients wishing to buy rental assets in Calgary who can’t wait 12 to 16 weeks for CMHC to approve a loan, First National offers a bridge-to-purchase program which allows borrowers to close on time and then take advantage of insured term loans when they are available.

Interest rates are likely to increase in the next year, a byproduct of the economic recovery.

Advising clients from the ground up is a critically important part of First National’s service in Calgary and whether borrowers are pursuing a construction or term loan, bringing forward as much detailed information as possible at the outset of the relationship will accelerate the origination/underwriting process and yield the best results.

Interested in knowing more about commercial property financing in Calgary and Canada’s other leading markets, please speak to your First National representative.