Since the beginning of the year, I have had the opportunity to compare notes with clients, partners and First National advisors across Canada. Invariably, the state of, and outlook for, the multi-unit residential property (and financing) market is the first topic of every conversation.
With that in mind, I offer my own observations along with some related advice to help you navigate current realities outlined below.
A changing political dynamic but a steadfast conviction
Although January is only a few weeks old, we have already witnessed dramatic changes in the political dynamic in Washington and Ottawa. It is unclear how these changes will affect inflation, bond markets/interest rates, employment, migration/immigration or domestic housing market policies.
Despite this blanket of uncertainty, my first observation is actually the very same one that I made last year and 10 years before that: multi-unit is far and away the best asset to own for the simple reasons that Canadians need rental housing and there is not enough of it.
While other lenders may have different views, First National is all-in on this important asset class in 2025. You can rest assured that we will use our status as the largest CMHC-Approved Lender to the sector – with a mortgage book approaching $60 billion – to help you grow and succeed.
A reality check suggests cautious optimism
That said, we do think it’s important to acknowledge current realities. Here are five:
- After several years of growth, rental rates have stabilized and, in some cases, declined
- Vacancy rates are now pushing 3 to 4% in some markets, which is still low compared to other commercial asset classes, but elevated from the past couple of years
- While still providing great programs and incentives, CMHC has tightened its underwriting criteria to reflect its view of systemic risk
- Bond markets are volatile reflecting economic uncertainty, but also rangebound, meaning cap rates and mortgage coupons do not offer much, if any, positive leverage at the moment
- Demand for 5-year money continues to exceed the supply available through the Canada Mortgage Bond program
These are not insurmountable challenges and the first two may be short term in nature depending on immigration levels and the impact on rental unit demand. Statistics Canada research says that even with recent reductions in immigration targets, Canada’s population of 40.3 million could grow to 80.8 million in the next 50 years at the high end, or 45.2 million at the low end. Either way, the need for more rental housing is undiminished, which provides a reason for cautious optimism.
With respect to the current bond rate/cap rate dynamic, it seems logical to assume an expected resurgence in trading volumes will be delayed. This suggests taking a more cautious approach to property acquisitions for a quarter or two until we get more clarity.
All roads lead to collaboration
With those uncertainties in mind, I offer this advice:
- Take advantage of our intimate knowledge of CMHC’s programs and policies. As noted, these policies changed recently and are likely to continue to evolve in 2025 with the National Housing Agency doing due diligence on rental rate and lease-up projections, making it even more necessary to use our expertise to prepare well-reasoned and researched loan submissions.
- Remember that while we specialize in insured mortgages, we do have conventional funds available. Using a combination of First National financing sources, particularly for construction loans, we can provide options to get loan-to-cost levels up to 85% with corresponding leverage above CMHC in some markets.
- Consider 10-year money for your next insured financing. This eliminates the need to (and risk of) returning to the market in five years when insured programs and housing policies may look much different than they do today. Of course, if you do require 5-year funds, First National remains your go-to source.
- Protect your financing from bond market volatility by hedging your interest rate risk. First National’s Early Rate Lock program is well worth considering as two large clients did by hedging their loans in early January.
Whether you are working on an acquisition, preparing for a new construction project or getting ready to renew or refinance an existing loan, First National is ready to collaborate and here to help.
Better Lending in 2025
Earlier this month, over 130 First National advisors from across Canada gathered for our annual conference – this time in Collingwood. The express purpose was to discuss ways we can best serve you now, as the market pivots, and over the long term.
We came away with what I would call a number of growth imperatives, including further advancing the advisory and analytical capabilities of our team – which I think will be beneficial to you and my experienced colleagues – leveraging First National’s remarkable trove of local market data, and investigating new lending products/programs.
We will act on this agenda. But to live up to our Better Lending credo in 2025, our single biggest priority is to strengthen our connection with you. We will look for opportunities to do so proactively and frequently.
Thank you for doing business with First National. We look forward to doing more together this year.