Trend is likely to be temporary, commercial executive says, as market adjusts
Construction projects are increasingly being shelved in Canada’s commercial space as higher borrowing rates and economic uncertainty continue to grip the market, according to a leading figure in the sector.
Michel Durand (pictured), president and CEO of MCommercial, told Canadian Mortgage Professional that rate hikes had presented new qualifying challenges for buyers in recent times, meaning many builders were hitting pause or adjusting their construction plans.
“In the commercial space, we’re seeing a lot of construction projects and especially condo construction projects being put on the shelf,” he said.
“With the rise in interest rates, the purchasers of those units are having more trouble qualifying. So there’s an adjustment period that we’re in the middle of right now where the builders have to rejig and refigure, ‘Well, what do I bring to the market? I was hoping to sell these at $900 per square foot. Maybe I have to redo it, so I’m selling them at $800 per square foot.’”
To a lesser degree, multi-unit residential projects were also being impacted in the same way, Durand said, because the borrowing dynamics of the last five to seven years have changed and lenders are now less willing to contemplate as wide a range of projects.
“On the construction side, we’re seeing the lenders taking a step back. It’s hard to finance land. Some lenders have completely stopped financing loans, [and] some lenders have completely stopped doing new construction loans – unless they’re CMHC [Canada Mortgage and Housing Corporation]-insured,” Durand said.
When will the market begin to pick up pace?
That’s likely to be a temporary situation while the market adjusts, he said, with balance set to return next year as immigration ramps up and with construction slated to begin moving at a faster clip.
“It’s great for long-term fundamentals,” Drew Donaldson, founder and CEO at Donaldson Capital, told Canadian Mortgage Professional. https://t.co/eIeCHp8Ayf#mortgageinsights #mortgageindustry #immigration #housingmarket— Canadian Mortgage Professional Magazine (@CMPmagazine) January 6, 2023
“We’ve got to keep building as much, if not more, than ever,” he said. “Although a lot of projects have been put on hold, that equilibrium has got to come back during the course of the year and part of [that] is going to be suppliers adjusting their prices to the builders.”
The hectic market environment of the past two years has seen the costs charged by general contractors tick steadily higher – but with the number of forthcoming projects dwindling, those costs are likely to decline again, according to Durand.
“They’re finishing the projects that they started 18 and 12 months ago, and they’re looking ahead and there’s not that many projects in the books anymore,” he said. “So they will be adjusting their prices to get work.
“I think that’s going to happen over the next little bit – more or less the next 12 months. The market has to find an equilibrium again.”
CMHC’s MLI Select program still a hit
One program that continues to provide a ray of light in the commercial space is CMHC’s MLI Select product, providing incentives including longer amortization periods and lower premiums in exchange for commitments on affordability, accessibility, and energy efficiency made by multi-unit rental buyers.
Introduced in March last year, the program has been a “lifesaver” on the construction front, according to Durand.
“It is the driving force for most of the new multi-unit residential construction projects that are currently happening or just about to happen,” he said. “That program is the best way to get multi-unit residential projects off the ground right now – bar none.
“There are plenty of ways to skin that cat and finance a buildout of multi-unit residential, but the MLI program is the one that offers the best terms and conditions to builders, minimizing their equity injection to get the project done.”
Overall, however, Durand said that brokers need to remain cognizant of the challenges faced by lenders in the current market, and understand that conditions have changed significantly from the market frenzy of recent years.
“People, I think, are underestimating the challenge that lenders are going to have in general over the next 12 to 24 months,” he said. “So as brokers, we need to understand that, and not add pressure to the system.
“We need to help. Don’t try to jam a square peg in a round hole. You’re not going to be doing anybody any favours.”
What are your thoughts on how Canada’s commercial mortgage market is shaping up for 2023? Let us know in the comments section below.