Q2 2025 Commercial Mortgage Market Update

In the United States, the Federal Reserve kept its target range steady at 4.25–4.50%, citing robust labor markets as justification for its patience. This stance prompted colorful commentary from President Donald Trump, who dubbed Federal Reserve Chairman Jerome Powell “Too Late.” Currency markets weathered renewed tariff rhetoric with minimal volatility, but traders anticipated only a modest easing cycle for either central bank by year-end. In summary, borrowing costs have stabilized but are not yet declining. For credit desks, the takeaway is clear: the cost of funds has plateaued, and lenders are embedding this “higher for longer” reality into their pricing.

CMHC Changes and Premium Increases

On July 3, 2025, the Canada Mortgage and Housing Corporation (CMHC) introduced significant updates to its MLI Market and MLI Select Programs, effective July 14, 2025, for applications submitted on or after that date.

Rental Achievement Holdback

The MLI Market Program has eliminated the automatic rental achievement holdback for construction financing, allowing loans up to 85% of the loan-to-cost ratio (or loan-to-value, whichever is lower), subject to debt service coverage (DSC) restrictions. However, the MLI Select Program will retain its subjective rental achievement holdback requirements.

CMHC Premium Change

The CMHC premium structure has now changed drastically with base premiums, additional premiums for amortization greater than 25 years and EGI met/ EGI not met now being harmonized between the MLI Market and MLI Select programs. MLI Select will now apply a discount of 10%/20%/30% on the total premiums based on the points tier achieved of 50/70/100 points. There are now two premium schedules, Standard Housing (multi-family) and All Other Shelter Types (single room occupancy, student housing, retirement homes and supportive housing). The MLI Market Premiums for Standard Housing remains unchanged. There are substantial premium increases for MLI Market All Other Shelter Types and MLI Select, especially with higher leverage. Please see CMHC Updated Premiums Schedule here.

For a more in-depth look into the changes and a comparison with the previous premium schedule, please see here.

CMHC Update

Multifamily capital markets remain active, with refinancing dominating lender pipelines. In Q1 2025, CMHC guaranteed $54 billion in new securities, a year-over-year increase, though the agency faces pressure to reduce its market presence. Underwriters have responded by tightening point-scoring criteria, intensifying spot audits, and enforcing use-of-funds regulations more stringently. MLI Select construction applications have declined, particularly for lower-unit-count projects, following last quarter’s clarified restrictions on rental achievement holdbacks. For projects such as 4-plexes, 5-plexes, and laneway builds, CMHC now mandates that units be self-contained with access to a shared mechanical room or individually metered with separate mechanical rooms.

Lenders Prioritize Income Producing Assets

CBRE’s spring lender survey revealed that 76% of Canadian lenders plan to increase origination volumes in 2025, but nearly all are channeling capital toward income-producing assets with reliable cash flows. Industrial properties lead the pack, with high-demand logistics facilities in core markets securing five-year terms at spreads of approximately 135-150 basis points over the Government of Canada curve. Grocery-anchored retail centers follow closely. Office properties remain an outlier: only well-leased Class-A towers in Toronto, Montréal, or Vancouver, backed by experienced sponsors, attract institutional-grade term sheets, often with shorter amortizations and stricter covenants.

Demand for top-tier industrial, retail, and conventional multifamily properties has driven lending spreads lower this quarter, with five-year terms as tight as 135 basis points for best-in-class assets.

Toronto Condo Market in Freefall

Condominium construction financing has been hit hardest, with no immediate relief in sight. Urbanation reported nearly 24,000 completed but unsold units across the Greater Toronto Area (GTA), representing a five-year supply and the highest backlog since 1993. New starts plummeted to 497 units in Q1, down 79% year-over-year and 88% below the 10-year average, prompting lenders to overhaul their strategies.

Construction loans now require at least 70% hard presales with mortgage pre-approvals, larger equity contributions, and interest reserves extending through prolonged stabilization periods. Mezzanine financing, carrying double-digit coupons, is bridging gaps but demands robust presale evidence. This sharp decline in new launches may allow absorption to stabilize by 2027, and several stalled projects have shifted to purpose-built rentals, where CMHC takeout’s remain accessible. Land financing is virtually nonexistent, with land values continuing to decline and condo unit prices stabilizing below $1,000 per square foot in the GTA. Lenders are open to extending existing land loans, but only with significant paydowns to align with current loan-to-value ratios.

As mentioned in our last update, condominium inventory financing remains constrained, reflecting the growing unsold unit supply in the GTA and Vancouver. Trust companies and mortgage investment corporations are active, but leverage has dropped to 55–65%, spreads have widened, and funds are increasingly tied to verified sales milestones or committed lease-ups. Borrowers demonstrating active marketing campaigns, rent-to-own programs, or institutional bulk-sale agreements secure the most favorable terms available.

2025 Outlook

The second quarter reflected recalibration rather than retreat. Lending spreads held steady, capital remained abundant for stable cash-flow assets, and CMHC continued to support the rental pipeline, albeit with stricter oversight. A modest easing cycle later in 2025 could improve borrower margins, but the market is no longer banking on this outcome. Sponsors presenting prudent leverage, clear execution plans, and resilient income streams will find eager lenders through the latter half of 2025.

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