Property owners and developers gathered virtually on April 15, 2021 for the Vancouver Real Estate Forum in part to hear expert commentary during the Construction & Debt Financing breakout session. Here is some of what Jeremy Wedgbury, Senior Vice President, Commercial Mortgages had to say.
First National currently has more than $1.5 billion of insured and $1 billion of conventional construction loans in funding including $150 million in new developments for the Great Vancouver Area (“GVA”).
First National has been very active in construction lending over the past four years in response to significant demand for new multi-family units across Canada and this experience makes the company adept at not only funding projects but doing so creatively.
There are many different methods of funding construction in Canada and First National has the broadest array of programs in the market.
CMHC construction loans are a key product and First National is the apartment market’s largest provider of CMHC-insured loans.
First National often makes use of more than one CMHC program to structure loans to the advantage of its clients.
On a recent 300-unit apartment project in the GVA, First National combined two programs – CMHC’s Flex program and CMHC’s Co-Investment program – to provide the borrower with a construction loan-to-cost of 95% and a debt coverage ratio of 1x.
First National’s component of that loan floats during construction and is below prime, while the co-investment loan is fixed at the time of construction, is below market and comes with a 50-year amortization, making the entire structure very attractive to the borrower.
Construction loans are more complex to underwrite than term loans and for First National a big assessment focus is the borrower’s experience, liquidity and net worth but also whether the potential rents and expense ratios are realistic and will provide support for a profitable exit in the form of a term loan when the building is complete – which can be arranged before lease-up with the CMHC Flex program from First National.
The work of cost consultants is important to lenders and First National works with many consultants across the country but gains great confidence from builders who have deep experience with the construction trades.
Cost contingencies are an underwriting focus for First National, as are ceiling rates to ensure there is enough coverage even if interest rates start to rise over the period of construction – and with recent interest rate movements, it is safe to assume that ceiling rates will need to rise going forward.
Industrial property assets are sought after in the market, and will be for some time, and both construction and term loans for industrial are available on attractive terms – including interest-only and non-recourse – and with spreads as low as they were in 2006.
Demand for First National’s new Core Conventional product is strong, which is emblematic of the healthy state of the market.
The jury is out on certain office and retail properties – with the exception of assets such as grocery-anchored retail – but the right sponsors will get their debt allocations.
As bond rates fell precipitously in the early days of the pandemic, many multi-family property owners took advantage of low-cost financing with exceptional demand created for CMHC products – First National alone originated $7 billion of insured commercial loans in 2020.
CMHC changes including last spring’s equity takeout rules and recent large borrower reviews are leading more apartment owners to seek support from First National to ensure they can continue to secure additional insured debt.
In 2021, demand for debt from the multi-family sector – while lower than a year ago – is still significant enough that it is taking an average of three months to secure a new CMHC financing so First National’s response is to bridge clients so that projects can continue while CMHC approval is sought.
With the significant run-up in interest rates in the past three months, more First National clients are exploring the company’s Early Rate Lock program to hedge risk by fixing their rates three to six months in advance.
While there are some headwinds amassing on the interest rate front, the news overall is good: there is a wide range of debt financing options available with great all-in interest rates and when Canada’s borders re-open, there will be an additional driver of demand for all types of commercial real estate.
Learn more about borrowing for a construction loan by contacting your First National advisor today.