Q1 2025 Commercial Mortgage Market Update

Update on Bond Yields

Bond yields have fallen significantly, following the two 0.25% cuts this quarter and amid growing concerns of a recession. The general expectation is that the Bank of Canada may hold off on any further cuts in April, given indications that tariffs could exacerbate the inflation seen in January and February’s CPI data. This could put the Bank of Canada in a difficult position as the economy continues to weaken. A widely circulated chart of OECD countries’ Real GDP Per Capita Growth over the past decade shows Canada near the bottom, with a growth rate of just 1.4% (ahead of only Luxemberg). This is a troubling statistic when compared to the United States, which has seen a remarkable 18.2% growth during the same period.

Lending spreads for income producing properties have narrowed this past quarter, driven by strong demand from lenders for high-quality industrial, retail, and conventional multi-family properties – spreads in the 130 Bps for 5-year terms are achievable for top-tier properties. Lenders are also starting to reenter the office market, offering competitive pricing and terms for well-tenanted office buildings in prime locations.

CMHC Trying to Reduce Market Share

At the RealCapital conference in Toronto in late February, CMHC’s CEO, Coleen Volk, made a noteworthy statement to the audience. She revealed that CMHC is currently insuring nearly 90% of rental construction in Canada, with plans to reduce that figure to around 50%, hoping that the conventional market will take up the difference. This isn’t unexpected, given their recent changes that have limited the effectiveness of the MLI Select Program, particularly the adjustments to rental achievement holdbacks that we covered in previous articles.

Another CMHC policy change in the past quarter has significantly impacted what many refer to as the “Missing Middle.” Previously, CMHC allowed rental construction financing, primarily through the MLI Select Program, for contiguous lots or parcels as long as there were at least 5 units. For instance, two detached triplexes side by side could qualify for the program, either for term or construction financing. However, in mid-February, CMHC announced a change stating that, effective immediately, the minimum allowable unit count would be 5 units in a single connected building spanning one or more lots, with the added requirement that the dwellings must share similar characteristics. This change appears to have also limited the construction of laneway housing alongside an existing apartment building from qualifying for the MLI Select construction program.

In the past week, an unconfirmed rumor has also been circulating that another significant change is coming to the MLI Select Program regarding energy efficiency. This change is expected is the next two months and aligns with the broader trend of deleveraging.

Toronto Condo Market in a Depression

Not to glaze over condos, but there is little to report given the limited number of new starts or launches in the past quarter. Conditions continuing to worsen in most major Canadian metropolitan areas and we have observed fewer lenders interested in lending in the space, even with pre-sales. With the flurry of assignment sales and pre-construction buyers eager to offload units, closing risk is the topic of discussion amongst lenders and credit committees. The only exception to this trend appears to be ender user market whereby developers are building larger luxury units in desirable locations in Toronto and Vancouver – these projects have seen uptick in demand from both buyers, and lenders.

In past reports we’ve discussed the rise in condo inventory financing, with specialty commercial mortgage lenders offering attractive terms and reasonable leverage for developers looking to repatriate their equity and redirect capital to more lucrative opportunities. With the volume of condo completions in late 2024 and those scheduled for 2025, coupled with the sluggish pace of re-sales, the liquidity for this type of financing is drying up. We’ve observed spreads widen and leverage generally decrease for inventory loans.

As a chaotic quarter wraps up, the remainder of 2025 looms, with few signs pointing to certainty in the near future. With the Liberals and Conservatives polling at a near-equal level (Note: at the time of writing this), the country is hoping that whoever takes the reins can help reverse the lost decade of growth this generation has experienced. Shifting focus back to the commercial real estate market, lenders are returning to basics, emphasizing fundamentals over projections. Properties must be well-located and meet all traditional criteria—not only to secure favorable pricing but also to get any deal approved at all.