Canadian Mortgage Debt Market Update: What are the odds?

In the 1977 Star Wars film, C3PO calculates the odds of the Millennium Falcon surviving a flight through an asteroid field. The swashbuckling Captain Han Solo responds: “Never tell me the odds!”. While the Canadian commercial real estate market isn’t an asteroid field, there are a lot of odds makers in the debt market today. As we approached the 2023 Christmas break, consensus among mortgage treasury departments was that Prime (7.20%) would fall by 1.50% in 2024 with various predictions as to when. Inflation was settling nicely and the desired ‘soft landing’ was in sight. As predicted, the fixed-rate bond yields fell off (see red arrow in Chart One below). 2024 was looking good.

Today, Canadian inflation is off track, not slowing as much as hoped, and the soft landing mood has shifted. Prime rate reductions are still expected but on a smaller scale. The US inflation data is also stronger than expected and therefore the treasury community consensus is less optimistic – the general expectation in Canada is now a 0.75% rate reduction in Prime in 2024. These shifts in mood are quickly built into the bond yield pricing. In December 2023 the 5-year bond yield was 3.20%. Today it is 3.60%. The 40 basis point increase is material and dampening the expected economic rebound.

Will Prime come down as expected in 2024? And when? Will long-term commercial rates fall materially from current ones (5-yr conventional rates are +/-5.40% today and CMHC-insured 5-yr rates are +/-4.30%)? Will Joe Biden or Donald Trump win the US election? “Never tell me the odds!”.

Despite all these questions and the uncertainty, many Citifund files are moving forward as planned (see a selection of recent examples below). Condo projects at the right price and in the right locations are selling well and moving forward with 85% loan-to-cost leverage with land at appraised value. CMHC-insured construction and term loans are advancing despite the rate environment. The current market scenarios are driving more variety in pricing options. For example, we are structuring CMHC construction loans in three separate ways: Fixed Rate construction product (the full loan is fixed on construction start), Swap (a hybrid of floating and fixed), and traditional Floating Rate (for clients expecting better bond yields in 2025/26). 

For any questions about the debt market and structures available, please contact a Citifund broker.

WALKER HOUSE

Delta, BC

Construction Financing

$136,300,000

 Funded: November 2023

Citifund is pleased to have arranged the 82% LTC construction financing on this mixed-use condo development in Delta. The project includes a condo tower with commercial space plus a rental apartment building. The financing allowed for a land advance while the borrower achieved the presale requirement.

RIVA 4

Richmond, BC

CMHC MLI Select Takeout Financing

$89,710,000

 Funded: September 2023

Citifund is pleased to have arranged the CMHC insured construction takeout financing under the MLI Select program for Riva 4, a new 167-unit rental apartment building.

UNITY

Langley, BC

Construction Financing

$78,558,000

 Funded: February 2024

Citifund arranged a $78,558,000 construction loan (85% of Loan to Cost with land at appraised value) for this mixed-use condo project. The loan structure allowed for limited cash equity with excellent pricing.

THE RILEY

Vancouver, BC

CHMC MLI Select Takeout Financing

$66,200,000

 Funded: January 2024

Citifund arranged a 90% loan to cost CMHC insured takeout mortgage under the MLI Select program for the recently constructed 6-storey mixed-use rental apartment building in Vancouver. 

COLWOOD CORNERS

Colwood, BC

CMHC MLI Select Takeout Financing

$58,660,000

 Funded: October 2023

Citifund is pleased to have arranged the CMHC insured construction takeout financing under the MLI Select program for this two air space parcel residential project.

THE LYDIA

Vancouver, BC

CMHC MLI Select Construction Financing

$43,311,000

 Funded: January 2024

Citifund arranged for an 84% loan to cost CMHC insured construction loan under the MLI Select program for the development of a 6-storey mixed-use rental apartment building in Vancouver, BC. The 18-month construction term was set at Prime less 0.30%. This construction financing facilitated zero cash equity and only land appraisal surplus.

PANORAMA VILLAGE

Surrey, BC

Acquisition Bridge Financing

$42,000,000

 Funded: December 2023

Citifund is pleased to have arranged a 58% loan-to-purchase price bridge financing for the acquisition of a 10-acre open-air retail centre in Surrey, BC. The flexible structure included attractive pricing at Prime +0.75%.

YORKSON VILLAGE

Langley, BC

Term Financing

$16,200,000

 Funded: October 2023

Citifund arranged interest only two-year term financing for the newly built retail centre in Langley, BC. The subject property is fully leased with a strong tenant mix. The client elected to take the two-year rate option and interest only structure to be able to refinance in 2025 when bond pricing is forecast to be lower and the lease income stabilized.