Loan conditions are expected to be onerous for residential condominium developments again in 2025, following a year when many lenders pulled back on construction financing. Newly released results from CBRE Canada’s annual survey of Canadian lenders finds them generally readying to bid actively on commercial real estate deals in the coming months, but with somewhat less enthusiasm for development land and condo construction.
The survey draws insight from questions posed to 37 organizations — including domestic and foreign banks, credit unions, insurance companies, pension funds and private debt capital — that collectively have more than $200 billion in commercial real estate loans under management. Three quarters of respondents plan to originate more loans this year; a majority intends to increase allocations to purpose-built rental housing (both existing and new construction), single-family housing and data centres; and some quotient, ranging from 10 to 48 per cent, has a larger budget than last year for eight other asset classes.
“Lenders are feeling increasingly good about every asset class with the exception of the condo and land market,” Jessica Harland, a senior vice president with CBRE Capital, reiterated as she presented some of the survey findings earlier this week in conjunction with the RealCapital conference in Toronto. “What is really notable, is that many lenders express significant appetite for rental construction, but very few of them noted intentions to increase the exposure to the land loans needed for the underlying rental construction to happen.”
Nearly 60 per cent of survey respondents now categorize development land as an asset class with cause for concern, up from 35 per cent heading into 2024. More than 40 per cent also deem high-rise condo to be an asset of concern, up from about 10 per cent in the previous survey.
For 2025, 32 per cent of surveyed lenders intend to increase their loan budgets for high-rise condo, while 11 per cent say they’ll reduce condo loan volume. No lenders plan to increase their budgets for development land, but 26 per cent expect to shrink them. Meanwhile, deals for purpose-built rental projects are more eagerly sought, with 86 per cent of lenders looking to extend more financing for CMHC-insured construction loans and 74 per cent preparing to offer more funds for conventional construction loans.
The upward adjustment is partly reflective of last year’s experience when more than half of surveyed lenders exceeded their original 2024 targets for CMHC-insured deals. In contrast, 59 per cent of lenders fell below their targets for condo construction loans in 2024.
“This is particularly troubling given that high-rise condos are historically, in recent years, accounting for much of our housing supply,” observed Joshua Sonshine, senior vice president with CBRE Toronto.
When surveyed in the fall of 2023, 72 per cent of lenders gave notice that they’d be requiring more upfront equity on condo construction loans in 2024. For 2025, 52 per cent indicate they’ll ratchet that requirement up further. As well, 36 per cent of lenders say they’ll be looking for higher deposits and shorter payment schedules to secure the loan, and 68 per cent will want to see the pre-sale of 60 to 79 per cent of units. That latter condition is seen as a growing challenge for financing, given the year-over-year drop in sales levels in the new condo market.
Meanwhile, falling land values have lenders wary, with more than three quarters of survey respondents suggesting that development land poses an elevated or significantly elevated credit risk. To illustrate, Harland noted that land purchased at $200 per buildable square foot in 2021, carrying $100 per buildable square foot of debt, might now be worth about half of its original value.
“That puts the original land loan at risk so the lending community’s hesitation is not unwarranted. The risk that a lender may be caught holding the bag is there,” she said. “Land financing trends across Canada have been significantly influenced by higher interest rates, economic uncertainties and evolving government policies. Lenders are hesitant to mortgage development land due to factors like uncertainty of the underlying value, risk of non-completion of the project, zoning and permitting issues, cashflow or lack thereof, longer timelines and complexity of development plans.”
Vacillating development cost factors
Developers point to some factors that should help improve the economics of some kinds or new development and/or help cushion the blow of potential tariffs the Canadian government may be forced to impose on various building products imported from the United States in response to that country’s recent aggressiveness around tariffs. However, participants in an associated industry panel discussion remain largely focused on purpose-built rental projects in the current market. Indeed, the slowdown in condo production is seen as a major differentiator from 2018-19 when the U.S. government triggered a slate of retaliatory tariffs after it imposed a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminum imports.
“The construction environment in Canada was really different then. Condos were booming. Everything was going hard. You couldn’t find people to build,” recalled Ugo Bizzarri, managing partner and chief executive officer of Hazelview Investments. “Today is a little bit different. The condo market is dead. Trades are coming looking for work.”
Andrew Joyner, managing director, multifamily, with Tricon Residential also cited declining costs for trades, particularly for forming, which he characterized as the “single biggest line item of construction costs” along with ebbing interest rates on construction financing and expectations that land values will drop further. “When you put that soup together, we’re seeing the denominator of yield on cost calculations shift down,” he said.
“We’ve actually started getting in the ground in some development probably a little earlier than we normally would just to take advantage of the cost environment,” concurred Rob Kumer, chief executive officer of KingSett Capital. “That’s for sure a trend across the board and that goes to offset some of the threats of the tariffs.”
That tariff threat continues to be fluid due to less-than-consistent messaging from the U.S. about the start-date and comprehensiveness of its purported measures. Reflecting on the Canadian government’s initial list of CAD $30 billion worth of countermeasures, should they be necessary, Joyner hypothesized that multifamily developers would see most of the flow-through impact in new surcharges on appliances, equating to about a 0.25 per cent increase in total development costs.
“If Canada moves to a retaliatory tariff framework on steel and aluminum, we’re now talking closer to a 1 per cent increase in total development costs, and if we move to a retaliatory framework on all inputs from the U.S., we think that’s closer to 4 per cent of total development cost,” he added. “So, in an environment where getting new housing starts off the ground is hard, it’s not helpful.”
