90% of developers say regular loans for rental projects are no longer feasible

90% of Canada's developers say regular loans for rental housing projects are no longer feasible

Construction of the MC2 residential towers near SkyTrain Marine Drive Station in South Vancouver. The complex reached completion in 2016. (romakoma/Shutterstock)

Demand for rental housing in Canada, especially in markets such as Metro Vancouver and Greater Vancouver, has never been higher in generations, which has propelled rents across the country. But developers are struggling to get shovels into the ground to build the much-needed new additional rental housing supply.

Marketplace loans from banks and other private lenders are no longer a feasible source for the construction financing needed to achieve new secured purpose-built rental housing projects in Canada.

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In a bulletin this week, based on a survey of developers, Canada Mortgage and Housing Corporation (CMHC) indicates over 90% of respondents indicated traditional debt financing is no longer feasible for their rental projects, and two thirds mentioned that operating in the current financial market is increasingly challenging.

This is, of course, due to the Bank of Canada’s heightened policy interest rates, which has sent borrowing costs soaring. All of this is coupled with a 50% increase in construction costs for equipment, labour, and materials, and growing development fees imposed by municipal governments.

Secured purpose-built rental housing projects are generally more susceptible to the current construction financing challenges compared to market ownership condominiums. This is particularly problematic for the much-needed more affordable housing stock that Canada is currently in need of, especially in the most heated regional markets.

This means more developers building rental housing need to depend on government financing programs for lower cost borrowing, compared to what the market is able to provide.

According to the survey, over half of the respondents have made use of CMHC’s Mortgage Bonds program, which saw a 50% increase earlier this fall — an increase of $20 billion from $40 billion to $60 billion annually to provide low-cost, repayable construction financing for new multi-family, secured purpose-built rental housing. It is estimated the move will help catalyze up to 30,000 more rental homes per year.

Large-scale developers building 1,000 or more rental units are expected to be responsible for over 75% of the new rental housing amongst the survey respondents over the coming years. It is also noted that these large developers represent over 90% of the respondents who are using low-cost financing provided by governments.

With that said, 70% of developers, especially smaller developers with larger loads of debt, are likely to put their projects on hold, including 40% more likely to pause their new projects and 30% putting their new projects on the back burner.

Developers are also increasingly considering partnering with larger institutional investors — such as pension funds and REITs — and other private developers to reduce upfront costs and gather the financing needed to proceed with their projects.

To push their rental projects into the realm of financial viability, developers are also using lower quality materials, reducing the size of the units, and increasing rent prices.

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