Canadian Mortgage Debt Market – “It's déjà vu all over again” | |
As baseball great Yogi Berra famously said, “It's déjà vu all over again." While Berra was referring to a baseball situation, we are referring to the most recent US banking crisis. The 2008 Global Financial Crisis exposed the dangers and complexity of US banking in the subprime mortgage space. Fifteen years later, the Silicon Valley Bank (SVB) failure due to excessive exposure to low-yield long-term treasury bonds feels similar. The SVB failure on March 10th set off a new round of treasury and bank system scrutiny. This fear and uncertainty in the banking sector has seen Canadian five-year bond yields move from 3.59% on March 1st to 2.77% on March 22nd. 82 basis points in three weeks (see chart below). This sharp decline was followed by considerable yield fluctuations day-to-day, and the situation is ongoing. | |
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2023 began with rates headed North. In an effort to cool inflation, the Bank of Canada increased prime to 6.70% which continues to put pressure on land loans and construction loans. In January, higher bond yields made term debt harder or at least, lower leverage. The fall in bond yields in March has brought CMHC term debt back to the sweet spot. Yields in this range allow Citifund to arrange CMHC Select construction debt up to 95% loan-to-cost with a 50-year amortization. Ninety-five percent construction and term financing seemed to be over until the SVB bank situation has brought yields back to earth. Our office is actively using this bond window to optimize apartment financings. Rate hedge and escrow solutions are being arranged to mitigate interest rate risk during construction i.e. some clients are opting to fix rate during construction instead of floating.
While bonds are still highly variable, as of this week, CMHC insured 5-year debt is +/- 3.85% and 10-yr is lower at +/- 3.80%. Conventional debt, not CMHC insured, has a wider range depending on asset class but 5-year debt and 10-year debt is in the +/- 4.60% to 5.50% range today.
Only time will reveal how the latest bank crisis, coupled with historic inflation, will unfold. To quote Yogi Berra once again, "It ain't over 'til it's over."
Please see some recent examples of financings below. For any questions on the current market, please contact a Citifund broker.
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Willoughby Town Centre Block B
Langley, BC
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An 80% loan to cost construction financing was arranged by Citifund for the development of a two building mixed-use (retail, office and condo) project in the Willoughby neighbourhood of Langley, BC. 46% of the buildable area is retail and office space which the borrower is retaining. The blended interest rate for this capital stack was Prime +0.42%. | |
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Smith & Farrow
Coquitlam, BC
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CMHC MLI Flex Construction Financing | |
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Citifund is pleased to have arranged the CMHC insured construction financing plus a conventional second mortgage for the development of a 134-unit rental tower in the Burquitlam area of BC. This development was approved in partnership with the City of Coquitlam to develop this rental tower adjacent to the high-rise condo tower. | |
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Willow + Glen Townhome Complex
Langford, BC
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A construction loan of $38,668,000 (80% of Loan-to-Cost) was arranged on a ‘spec’ basis for this multiphase townhouse project. | |
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Sitka House
Port Moody, BC
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An 80% loan-to-cost construction financing was arranged for the development of a low-rise condo project in Port Moody, BC. The blended interest rate for the capital stack was Prime +1.02%. | |
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Lowe's Power Centre
Abbotsford, BC
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A 61% loan-to-value term financing was arranged for the acquisition of this power centre in Abbotsford, BC. The 5-year fixed rate was 5.23% with a 30-year amortization. | |
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Panorama Office Park Building 6 & 7
Surrey, BC
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Hybrid Construction and Term Loan | |
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Citifund is pleased to have arranged the $19,000,000 Hybrid Construction and Term Loan for Building 6 and 7 of Panorama Office Park in Surrey, BC. The unique structure allowed for a $7,000,000 Term Loan on the stabilized building and a $12,000,000 construction facility for the future building but on one single title. The borrower was able to lock rate on the income in place and float rate on the balance (versus having to wait until both assets were stabilized). | |
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Weston Place Multi-Family Development Site
West Vancouver, BC
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CMHC Select Construction Financing | |
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Citifund arranged a 65% loan-to-closing-cost land financing for the acquisition of a leasehold development site in West Vancouver, BC. The 99-year prepaid ground lease is with the District of West Vancouver. Citifund was able to structure the financing for the leasehold site at an attractive rate of Prime +1.25% or Banker's Acceptance + 250 bps. | |
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Newport Village - Phase 3
Courtenay, BC
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CMHC MLI Select Construction Financing | |
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Citifund arranged an 82% loan-to-cost CMHC insured construction financing under the Select program for the development of a 6-storey rental apartment building in Courtenay, BC. The 18-month construction term was set at Prime - 0.05%. | |
Citifund arranged a 64% loan-to-value land refinancing for a condo development site in the Newton neighbourhood of Surrey, BC. The proposed development will consist of a multi-family project with two 6-storey buildings and one 4-storey building. The project will deliver a total of 222 residential strata units. | |
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565 Toronto Residences
Victoria, BC
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CMHC MLI Select Construction Financing | |
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An 80% loan-to-cost CMHC insured construction financing under the Select program for the development of a 4-storey rental apartment building within the James Bay area of Victoria, BC. The 16-month construction term was set at P+0.25%. This new CMHC financing program permitted the borrower to convert the construction loan into standard CMHC term loan with a 50-year amortization upon construction completion. | |
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"Walker House II" Future Mixed-Use Development Site
Delta, BC
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Citifund arranged a 60% loan-to-purchase price land financing for the acquisition of a future development site in Delta, BC, with a strip mall producing nominal holding income. The site is to be developed into a mixed-use high-rise tower and a low-rise rental building. Citifund was able to structure the financing at an attractive rate of Prime+1.40% or Banker's Acceptance + 250 bps. | |
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Future Townhouse Development Site
Langley, BC
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This Langley development site was refinanced at 58% loan-to-value. The equity takeout allowed the developer to extract capital for a new development. | |
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Low-Rise Rental Apartment
Kelowna, BC
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CMHC-Insured Term Mortgage | |
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Citifund arranged the CMHC-insured term financing for this recently built 14-unit apartment in Kelowna, BC. The equity takeout refinancing allowed the developer to repatriate capital for a new development. | | | | |
