While it has been a wild ride in the capital markets since we last spoke in 2019, and there are definitely market shifts in all current sectors of the real estate market that we are adapting to, there have not been any significant or material changes in the commercial lending industry since 2019. Of course, the bond and interest rate market has changed and we are now financing into a 4.5% commercial and a 3.4% CMHC insured interest rate market (5 year term), compared to a 3.1% and 2.2% market respectively back in 2019, respectively. But, lending guidelines and the supply of capital to our industry remain very positive.

 

Regulatory changes, including the implementation of the Basil III guidelines and capital requirements on the banking sector, and the continued refinement of CMHC lending and policy guidelines, have impacted the lending market but not at the cost of deploying an ever-increasing supply of capital to our market. Lenders are now much more focused on borrower liquidity, especially in the construction financing market.

 

 

In the current market in most Canadian cities, purpose built rental housing developers are fighting headwinds on multiple fronts. Construction costs and development timelines are always factors that combine to make it challenging to pencil a new rental project. Add to that the rental markets in most cities which show softening conditions, increased vacancy rates and peak rental rates which can now be viewed in the rear-view mirror. Slower absorption and extended full stabilization and rental achievement thresholds are increasing carrying costs for new projects which have yet to achieve long term occupancy levels where the developer can convert their floating rate construction financing to the long term fixed rate term mortgage.

 

CMHC underwriting guidelines, application processing times and their new Mortgage Insurance Premium structure for MLI Select projects also impose challenges which the developer must address. Oh...did I mention the new Building Code???  While the MLI Select program will continue to contribute to the development of new rental housing, I do see a number of projects that will simply not proceed as a result of the combination of the challenges noted here. The other factor we should address is the state of the condo market which makes it impossible to consider converting purpose built rental projects back to strata condominiums. But that issue is an entirely different conversation.

 

Great question regarding the status of land, land listings and land values in our market.  It is important to put the current market for development sites and land values into the context of where our market has come over the past 12 years. For more than a decade from 2013 to 2023, most markets in Canada were on an absolute tear with compounding property values, high absorption, strong development economics and an abundance of relatively cheap capital. These dynamics enabled both well and under-capitalized developers to enter the market and deliver successful projects. The dance continued for years until the music stopped in 2023. Development metrics and dynamics changed. Pivoting from strata condo to purpose built rental had and still has its challenges. Pre-sales, which drives the multi-residential development market, went into hibernation and under-capitalized developers holding land, often fully entitled or "shovel ready," could simply not hold on to sites where the projects could not proceed. We have seen and will continue to see more sites being brought to market where the sale is motivated by the Lender or where the developer simply cannot hold on any longer.

 

For these reasons, it is very difficult to price land in our market. Most of the appraisal work we are seeing on development sites end up adopting a land residual technique to determine value, in place of a market comparison approach. And the reason... a lack of any current sales comps and market metrics for land.

 

In spite of these current conditions, we have been successful in securing land financing for a number of our clients and there are a number of lenders, primarily our credit union friends, who will entertain land financing without questioning our sanity.

 

Starting off with commercial and industrial projects, lenders are very apprehensive to finance anything even remotely resembling a spec deal. Well anchored and predominantly pre-leased retail may be an exception, if you can find this type of project. As you know, the office market is just starting to recover. Spec built small bay industrial is overbuilt. Construction costs are also prohibitively high. However, financing for owner-occupied industrial product for well-capitalized businesses is still available at interest rates which are getting more and more competitive and attractive.

 

For the residential sector, we have already discussed the purpose built rental market. In the strata condominium/townhouse market, Victoria is facing a similar/scalable oversupplied situation on par with other major Canadian cities. Immigration and inter-provincial migration, combined with anemic consumer demand all contribute to slow absorption and a perceived oversupplied market. Affordability and the cost of new housing are the two major factors impacting our muli-res market. The construction lending market is healthy, but the overriding governor to access funding is pre-sales. For smaller projects of under 15-20 units, we are seeing some lenders step in for construction funding in the 75-80% loan to cost levels without any or nominal pre-sales, for well capitalized and experienced developers. The credit unions seem to own this market now and will require pre-sales in the 35-50% range where their residual loan balances at completion and application of the pre-sales proceeds reduce their exposure to 50% Loan to Value on the remaining unsold units.

 

Regarding interest rates, let me touch on both our bank prime rate on the short term end of the rate spectrum, and Government of Canada and CMB bond yields which impact the long term mortgage market.

 

Back in 2019, the chartered bank prime rate sat at 3.95%. Through Covid, this rate dropped to 2.45% from 2020 until late 2022 and into 2023. By October of 2023 this rate had shot up to 7.20%. Rates then started to moderate and by October of 2024 prime was moving its way down through 6.45% and to where it has now settled at 4.70%. I believe the Bank of Canada has room to lower interest rates further over the next 12 months, subject to Canada's underlying core inflation rate. While the Bank of Canada has stepped out of sync of late with the US with some of the recent rate cuts, Canada does not have a "made-in-Canada" interest rate policy and will need to be mindful of the impact divergent interest rate adjustments have on our dollar.

 

When considering the impact our prime rate has on the development industry, the annual cost of borrowing per $1.0 Million of construction financing for a P+1.0% borrower was $49,500 back in 2019. That cost dropped to $34,500 through the Covid years from 2020 to 2023.  Then everything went crazy in 2023 when this same borrowing cost hit $82,000. With Canadian Chartered Bank prime now sitting at 4.20%, borrowing costs have moderated to $57,000...which is the kind of trend line we like to see, but there is still room for improvement. Interest carrying costs as one of the components of total construction costs remain well above 2019 levels.

 

Looking at term interest rates (5 year) over the past 6 years we have seen the yield on the benchmark 5 year Government of Canada bottom out at 0.44% in late 2020 and climb steadily to 4.24% in October of 2023. The good news is these bond yields have backed off to 2.73% as of last Friday. What these bond yields mean to long term interest rates depends on the spread or margin commercial mortgage lenders want to earn above an equivalent term Government of Canada Bond or the Canada Mortgage Bond for CMHC insured mortgages. Life companies and pension funds are typically the most aggressive when competing for larger highly rated commercial mortgages, with current spreads being quoted as low as 1.25% or 125 basis points over the equivalent term GOC bond. Credit Unions are very active in the commercial term mortgage market although their spread requirements are typically in the 200 basis point range. With Current 5 year bond yields at 2.73%, 5 year commercial mortgages are being priced between 4.0% to 4.75%, depending on the size and rating of the mortgage. Again, CMHC insured 5 year term interest rates are now being priced at 3.60%, representing a relatively narrow spread of 40 some basis points between CMHC insured and conventional mortgage rates.

 

This is a question I get asked all the time by clients who are active in the apartment market, asking 'will we ever see interest rates down to the level we saw, and enjoyed, in late 2020?' For reference, we placed a 10 year term CMHC insured mortgage on a prime apartment building and fixed the interest rate on November 2 of 2020 at 1.59% at a spread of 55 basis points over the 10 year CMB which was yielding around 1.00%.  We hit that window perfectly and have never seen CMB yields, or GOC bond yields at those historically low levels since. The Lender spreads are still the same, but the equivalent term bond yields are now in the range of 2.75%. My answer to this question of longing for the good old days of 1.6% long term CMHC rates ...is no, we won't see those rates again. However, I do counsel my clients and note that current CMHC insured 5 year term rates at 3.60% are not all that bad from a long term lending/borrowing perspective.

 

There are risks borrowers may be facing with mortgage maturities coming up in 2026, as interest rate rollover risks remain elevated. In Q1 of 2021, average 5 year commercial mortgage interest rates were being fixed in the range of 2.60 to 3.0%. Comparable CMHC insured mortgages were priced at 1.75% to 2.00%. If current bond yields remain the same into Q1 of 2026, these same Borrowers will be renewing into a 4.00% to 4.75% 5 year term rate market on their conventional commercial mortgages and a 3.60% interest rate market for CMHC insured renewals.  The potential impact of renewing mortgages into a higher rate environment on debt service coverage and net cash flows may lead to some interesting conversations between lenders and borrowers. De-leveraging for clients with strong balance sheets will likely be more common.

 

Interest rates will absolutely impact the ability to secure adequate financing or leverage for real estate development and investment. I look at a version of a Leverage Index to show the impact interest rates have on financing income-producing real estate assets. For example, given a fixed amount of stabilized net operating income for a commercial or multi-family rental property, how much debt will that income support at various interest rates given a constant debt service coverage ratio (1.20 times) with a 5 year term and a 25 year amortization?

 

If we take a commercial property that generates $1,000,000 of annual net operating income using the equation inputs noted above, that property would have supported $14.5 million in mortgage debt back in October of 2019 when interest rates were 3.10%. In mid 2020, that mortgage amount would have been close to $16.0 million. By 2023, maximum leverage would have tumbled to $10.9 Million. Today, with commercial interest rates in the 4.5% range, the maximum leverage would be $12.5 million. Put another way, over time, a commercial property owner could secure between $10.90 to $16.00 of financing for every $1.00 of property stabilized net operating income. The same Leverage Index or multiplier goes off the charts when we look at the ability of a developer to borrow funds for purpose built rental apartments using the CMHC MLI Select program. Using only a 1.10 time debt service coverage ratio and a maximum amortization of 50 years, that same $1.0 Million of stabilized NOI could have serviced $27.8 million in debt in 2019, $31.7 Million in debt in 2020 and now $22.00 Million based on current (Q4/25) interest rates.

 

Interest rates have a profound impact on the amount of equity a developer or investor needs to invest in a property over time, whether it be for a new project being built or an existing property being acquired.

 

I see the lending market for the next 12 to 24 months to be stable, if not improving. Lenders, and their treasury departments continue to have a strong appetite for mortgages in both the construction and term sectors. Life companies and pension funds will continue to lead the market in terms of spreads and end mortgage rates, especially for larger "trophy" property financing. Construction financing will be readily available provided pre-sale requirements are met. I believe there is a great chance that both short term and long term interest rates will continue to moderate or decline, but not anywhere close to where we saw the bottom of the rate market in 2020.  Residential mortgage rates are coming down nicely, providing some of the much needed incentives for purchasers who are waiting on the sidelines to finally invest. In turn, this incentive will help reduce the current inventory of completed and unsold condominiums and townhomes. The pre-sale market should respond favourably as well. C

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• 2018
  • October, 2018: Reed Kipp of Devon Properties talks about Victoria's rental housing industry
  • November, 2018: Business Development Bank of Canada's Chris Boissevain talks about interest rates
  • December, 2018: Aryze Development's Luke Mari and Ryan Goodman talk about real-estate development
• 2019
  • February, 2019: Phung Horwood's My Phung talks about real-estate appraisals
  • March, 2019: Luke Mills of Megson Fitzpatrick Insurance talks about the insurance industry
  • April, 2019: Greg Damant of Cascadia Architects talks about architecture in Victoria
  • May, 2019: Real-estate development with Robert Fung of The Salient Group
  • June, 2019: Rental housing industry Q&A with David Hutniak of LandlordBC
  • July 2019: Harris Green redevelopment Q&A with Mark Chemij of Starlight Investments
  • August 2019: Land remediation Q&A with Harm Gross of NEXT Environmental
  • September 2019: Business banking Q&A with Raj Wirk of Coast Capital Savings
  • October, 2019: Real-estate development Q&A with Mike Miller of Abstract Developments
  • November, 2019: Real-estate development Q&A with Byron Chard of Chard Development
  • December, 2019: Interest rate and commercial mortgage brokerage Q&A with Dave Ganong of Canada ICI Capital
• 2020
  • January, 2020: Real-estate development costs Q&A with Doug Foord of Invictus Commercial Investment Corp.
  • February, 2020: Private lending and the mortgage industry Q&A with Len Shorkey of Shorkey Mortgage Corp.
  • March, 2020: Strata insurance premiums Q&A with Luke Mills of Megson FitzPatrick Insurance
  • April, 2020: Rental housing and COVID-19 Q&A with David Hutniak of LandlordBC
  • June, 2020: COVID-19's impact on Victoria's real-estate Q&A with Jordan Milne of GMC Projects
  • July, 2020: Multi-unit residential and commercial building fire safety services Q&A with Tim Lindsay of the Vancouver Island Fire Protection Association
  • August, 2020: Royal Beach Q&A with Georgia Desjardins of Seacliff Properties, developer of the 134-acre Colwood project
  • September, 2020: Victoria real-estate development Q&A with Sam Ganong of Curate Developments
  • October, 2020: Real-estate development Q&A with developer Dan Cox of Cox Developments
  • November, 2020: CRD affordable housing and CRD parks services Q&A with Stephen Henderson of the CRD
  • December, 2020: Real-estate values, wine and housing market Q&A with Johnathon Sipos of Cielo Properties
• 2021
  • January, 2021: Mass timber construction, the Mayfair District and junior hockey Q&A with Edward Geric of Mike Geric Construction
  • February, 2021: Excavating industry, sewage treatment pipe and COVID economy Q&A with Trevor Mann of Don Mann Excavating
  • March, 2021: Victoria industrial sector investment opportunities Q&A with Brent Sawchyn of PC Urban Properties
  • April, 2021: Northern Junk, Capital Iron lands and Victoria real-estate development Q&A with Jon Stovell of Reliance Properties
  • May, 2021: Victoria housing delivery and affordability Q&A with Adam Cooper of Abstract Developments
  • June, 2021: Institutional investment in Victoria's rental housing market Q&A with Alex Messina of Nicola Wealth
  • October, 2021: Mortgage products, interest rates and inflation Q&A with Gagan Lalli of CMLS Financial
  • November, 2021: Future of Tillicum Centre, real-estate trends, and industry outlook with Jordan Carlson of Anthem Properties
  • December, 2021: Commercial real-estate market recap and a look to the future with Jason Kiselbach of CBRE Vancouver
• 2022
  • February, 2022: Downtown Victoria's largest rental development, and more, with Andrew Browne of Starlight Developments
  • March, 2022: Alberta developer shifting gears to build in Victoria, with Namrita Rattan of Aquila Pacific
  • April, 2022: Post-COVID Victoria office market and development outlook, with Robert Jawl of Jawl Properties
  • May, 2022: Residential housing market and supply, with Island Realm Real Estate's Tony Zarsadias
  • June, 2022: Meeting community and municipal expectations of new housing with Chris Bradley of TLA Developments
  • July, 2022: Changing mortgage rates and the 2022 lending environment with Peter Fast of ICI Capital
  • August, 2022: Victoria's changing rental housing market with Renee St. Germaine of Devon Properties
  • September, 2022: Delivering 'missing middle' housing to Victoria's West Shore with Kyle Ryan of Formwell Homes
  • October, 2022: Lending for developers and businesses in current economic times with Glen Welin of Roynat Capital
  • November, 2022: Real-estate development in Greater Victoria with Denciti's David A. Fawley
  • December, 2022: Victoria real-estate market recap and 2023 insights with Jason Kiselbach and Paul Morassutti of CBRE
• 2023
  • January, 2023: 'Parking-free' missing middle housing development in Victoria with Julian West of Urban Thrive
  • February, 2023: Victoria's 2023 market outlook and success in the real-estate industry with Ross Marshall of CBRE
  • April, 2023: Citified's Mike Kozakowski on BC's new housing policies and overcoming supply roadblocks
  • May, 2023: Royal Beach's Georgia Desjardins on the project's future homes, parks, a ferry to Victoria, and more
  • July, 2023: Victoria's housing market history and an outlook with Deane Strongitharm of CitySpaces Consulting
  • August, 2023: 'Missing middle' housing, clean streets and the City of Victoria's future with councillor Matt Dell
  • September, 2023: GMC Projects' CEO Jordan Milne discusses Victoria's housing prices and the Capital's rental market
  • October, 2023: Astria Properties' David Basche chats light industrial development in Victoria, and the R-E market
  • November, 2023: Government policies impacting Victoria's housing supply with Casey Edge of Victoria Residential Builder Assoc.
• 2024
  • January, 2024: Provincial housing measures and their impacts with Langford-JDF MLA Ravi Parmar
  • February, 2024: Real-estate appraisals with Scott Humphreys of D.R. Coell & Associates
  • May, 2024: Downtown Victoria street issues, crime and disorder with Councillor Stephen Hammond
  • June, 2024: Interest rates, lending opportunities and what's in-store for borrowers with Impact Commercial's Alan Haigh
  • August, 2024: Abstract Developments' Adam Cooper talks housing market, missing middle homes and build code changes
  • October, 2024: Matthew Davis of PCRE talks future of Colwood's mega-project Royal Bay with market insights
  • November, 2024: Ovis Group's Sébastien Leboeuf discusses the company's projects in Victoria, and its rise to big-time development
• 2025
  • January, 2025: Saanich Mayor Dean Murdock hints at new ice rink, faster housing approvals, speaks to shelter services
  • March, 2025: Edward Geric of Mike Geric Construction chats tariffs and housing starts in the Capital
  • May, 2025: Claire Flewelling-Wyatt of Pemberton Holmes discusses Greater Victoria's rental industry
  • June, 2025: Niall Paltiel of Island View Land Mgmt. on Victoria's real-estate development industry

Q&A on Victoria's development industry with Niall Paltiel of Island View Land Mgmt.