On December 2, 2021, Jeremy Wedgbury, First National’s Senior Vice President, Commercial Mortgages was featured on a special panel hosted by the Toronto Real Estate Forum entitled “How Much Risk Is Facing Capital and Debt Markets in 2022: Where Are Spreads, Cost, Availability and Sources Heading? Here is some of what Jeremy had to say in response.
There is a massive amount of capital available in the market today but a significant bifurcation in what lenders view as attractive places to deploy it and this is likely to continue in 2022.
The most attractive assets to lenders and where the most dollars are being invested now are multi-family and industrial properties.
Compared to the early months of the pandemic, mortgage spreads in these two asset classes have substantially tightened and are now below where they were even before March 2020.
After many conventional lenders moved to the sidelines at the outset of the pandemic, leaving the market to all-weather lenders like First National, those players returned in 2021 which heightened competition leading to today’s tight spread environment.
The availability of debt capital to construct multi-family and industrial facilities is at a peak as many lenders covet short-term construction financing opportunities because they are a good match for their cost of funds.
First National alone has a $3 billion construction book from coast to coast, comprised of both CMHC-insured and Core Conventional loans, within its $38 billion commercial mortgage portfolio.
With RCFI, Market, Flex and Co-Investment incentives, CMHC remains the preferred route to finance apartment projects, but the national housing agency is facing much stronger competition for construction deals from conventional lenders who are quick to underwrite.
Among the greatest risks facing Canadian developers is construction cost inflation, which poses a massive headwind for builders that is likely to persist next year.
First National is also looking closely at key regulatory risks for borrowers including emerging issues such as inclusionary zoning and perpetual challenges such as rent control.
The risk of socializing rental housing is also a concern, brought to the forefront by a recent non-binding referendum in Berlin where the majority of residents voted in favour of expropriating private rental stock in the city encompassing 226,000 units.
Lenders are being extra-vigilant in assessing credit risk for office and retail loan submissions, and the nature of the sponsorship has never been more critical, which means it will be tough for smaller, private and less experienced borrowers to finance their projects in 2022.
First National remains committed to the office sector – and has recently moved into a new national headquarters in downtown Toronto reflecting its belief in the need for dedicated office space devoted to culture building, training and growth – and is financing construction of retail strip centres.
Canada is beginning to see the arrival and availability of more creative debt structures including 35-year amortizations and mezzanine financing options – which is good news for commercial borrowers heading into 2022.
Interested in knowing more about commercial property financing in Canada from a market leader, please speak to your First National advisor.