It's now been a couple of months since my last state-of-the-business/market report. In keeping with our belief in regular dialogue, I’m pleased to offer this next installment.

The first quarter of 2024 was the most active opening period in First National’s history as a commercial lender. Earlier this week, we announced the results of this activity. Commercial mortgage originations, including renewals, amounted to $3.0 billion, pushing our mortgages under administration to $50.7 billion at March 31st.

In some respects, this growth was decoupled from present-day market realities. By that, I mean we can trace this past quarter’s fundings to demand for CMHC-insured programs unleashed last June prior to an increase in premium rates for the agency’s multi-unit housing products. As CMHC worked through its application backlog to release its decisions in late 2023, we moved quickly to successfully meet client funding schedules in the first quarter. 

As a sign of the immense popularity of programs such as MLI Select, and the sheer volume of applications submitted, we expect the related funding flow to continue over the next two quarters.

A muted market 

The quarter’s growth in originations masked current conditions in the market, which could be described as muted due to the ongoing impact of higher interest rates. Compared to a year ago, trading activity in the multi-unit sector is subdued as buyers and sellers wait for the Bank of Canada to satisfy itself that economic indicators support a change in monetary policy. 

Like you, we followed the Bank’s latest announcement on April 10 closely and while we don’t speculate on interest rates, it’s certainly possible that the Bank will act sooner than later given Canadian trends in inflation and employment. A key concern among economists, however, is how far the Bank can go absent similar action by the U.S. Federal Reserve which is contending with a higher growth American economy. However, even a 25-basis point reduction in the overnight rate could be sufficient to change psychology and end the current market stasis. Time will tell. 

One positive outcome of the fight against inflation and the normalization of global supply chains is that construction costs are not growing as they were during the early years of the pandemic. This, along with the prospect of lower interest rates and the removal of the GST (and in some cases provincial sales taxes) on rental construction, may soon get those shovels back in the ground. The federal government’s recent budget contains additional incentives of interest. 

Cap rate movements and leasing reveal the long-term asset class of choice 

Understandably, cap rates have moved up in all asset classes, especially in the office sector. However, and not surprising to us, multi-unit cap rates were the last to increase and those increases have been smaller than for any other real estate type. This supports our long-standing belief in the durability and attractiveness of the multi-unit sector as an investment and development destination. 

Beyond cap rates, we’ve observed that apartment leasing continues at a torrid pace. While rents are not rising as quickly as they were, it’s evident that demand for units – due to population growth – far exceeds supply. With rapid lease ups at still attractive rents, the fundamentals that make multi-unit an investable asset class are firmly intact.

Interest rate hedging

Bond yields have trended higher since the beginning of the year, but the fact is continued daily movements present an opportunity to hedge. For that reason, First National continues to offer the market’s most flexible interest rate hedging options on qualifying projects. I believe our Early Rate Lock and Mid-Range Hedging programs are always worth considering given volatility.   

Better lending made manifest

First National prides itself on creating the industry’s most thorough, well-researched and effective underwriting packages for clients – packages based on our unique understanding of CMHC’s expectations and standards across numerous program options. 

This knowledge and our approach are not commodities. They form part of what we call our Better Lending edge.

While I believe our approach rests on the strongest of foundations – in the form of an empowered team of over 200 commercial lending and servicing specialists coast to coast – we are not content to rest on our laurels. Understanding that this is a competitive market and that we have an obligation to you and ourselves to be industry standard setters, I am pleased to say we continue to add resources in the form of talent and technology. 

The value we can create by doing so goes beyond interest rates but still manifests itself in equally tangible advantages for borrowers: money-saving and risk-mitigating strategies and advice, broader short, long-term and construction financing choices, high application approval rates (such as those earned over the past year), dependable funding commitments, and origination-to-repayment servicing that is responsive and reliable.

As you prepare for the next phase of the market cycle, I encourage you to consider these advantages and the value we can create together as long-term partners. 

On behalf of your First National advisor, thank you for your support. We look forward to doing great things together in the years to come.