Residential & BTR Project Finance: Why This Asset Class Still Gets Funded (Canada & North America)
- MJ Furey
- Dec 4
- 8 min read
Residential and Build‑to‑Rent (BTR) projects continue to secure capital in 2025 even after rate hikes, tighter underwriting, and construction cost inflation. Structural housing shortages, strong rent demand, and powerful policy and institutional tailwinds keep this asset class “financeable” when other product types stall.
For mid‑market sponsors, capital is still available, but the bar is higher. Lenders and priprojecvate credit are laser‑focused on five areas: absorption, pre‑leasing, cost overrun protection, equity (25–35%), and sponsor strength, with Canada adding a decisive sixth: CMHC program eligibility.
1. Structural Tailwinds: Why Lenders Still Like Residential & BTR
In both Canada and the U.S., the fundamental story is undersupply. CMHC estimates housing starts must rise to 430,000–480,000 units per year through 2035 to restore affordability, versus roughly 250,000 today. Canada faces a structural gap of approximately 2.6 million homes by 2035, and the National Housing Accord calls for 2.2 million new purpose‑built rental (PBR) units by 2030, around 38% of total new supply. In the U.S., the housing shortage is estimated at 4.3 million units, while home prices and mortgage costs have pushed ownership out of reach for large segments of the population.
BTR and PBR directly target this deficit. The result speaks clearly: institutional BTR in the U.S. has grown from approximately $10 billion in 2020 to $58 billion in 2024, with projections reaching $70 billion in 2025. In Canada, CMHC has become the backbone of rental construction finance, supporting 88% of new PBR apartment starts in 2024, up from just 5% in 2017.
Stabilized BTR communities offer attractive metrics for lenders, including high occupancy rates, longer tenancy, and competitive cap rates and IRRs, making them a desirable investment despite rising rates and tighter standards.
2. Canada’s PBR Boom: CMHC as De‑Facto “Senior Lender”
Canada’s rental construction story is now primarily a purpose‑built rental plus CMHC story. Purpose‑built rental starts have nearly quadrupled over the past decade. Apartments now account for 81.1% of all housing under construction (393,154 units as of Q3 2025), with rental unit starts projected to hit approximately 106,000 in 2025, a record high. The scale of government involvement is remarkable: CMHC programs (MLI Select, ACLP/RCFI) support 88% of new PBR apartment starts, and as of mid‑2025, the Apartment Construction Loan Program has committed $24.9 billion to over 63,500 rental homes, with total loan capacity rising above $55 billion.
Meanwhile, condo development has stalled. Toronto is on pace for its lowest annual housing starts in 30 years, with condo starts down 60% in H1 2025, and Vancouver condo starts are down 13.4% year‑over‑year. This divergence reinforces why BTR/PBR still finance: policy, capital, and product‑market fit are aligned, while pre‑sale‑dependent condo pipelines struggle against weak buyer sentiment and tighter lending criteria. For sponsors, this means BTR/PBR represents a materially more accessible financing pathway than ownership‑focused development in most Canadian markets.
3. Absorption Rate Modeling: Central to Loan Sizing
Absorption rate analysis is the single most critical input in construction financing underwriting. The absorption rate measures how quickly rental units are leased in a given market, expressed as square footage or units per month/quarter. For lenders, this metric determines the timeline from construction completion to stabilized occupancy—and therefore the probability of construction loan repayment.
Key Modelling Components:
Net Absorption Analysis: Lenders require analysis of net absorption (space leased minus space vacated) rather than gross absorption. A market may show strong gross leasing activity while simultaneously experiencing tenant departures, masking underlying weakness.
Competitive Supply Pipeline: The market study must identify all competing projects within a 10-mile radius, including units under construction. Sophisticated lenders will stress-test absorption assumptions against scenarios where competing projects deliver simultaneously.
Demand Drivers: Population growth, job creation, and household formation rates must support projected absorption. For BTR specifically, lenders examine family demographics and school district quality, as families with children represent a primary tenant cohort.
Historical Precedent: Comparable properties' actual lease-up performance provides the most defensible benchmark. Data services like CoStar and Metrostudy enable sponsors to document historical absorption in the target submarket.
4. Pre‑Sales vs. Pre‑Leasing: Why BTR Wins Over Condos
The De-Risking Premium
Pre-leasing represents tangible evidence of market demand. Unlike speculative projections, executed lease agreements demonstrate that actual renters are willing to pay projected rents for the proposed product. Lenders often require pre-leasing targets as a condition of financing—particularly for projects in unproven submarkets or by less experienced sponsors.
Typical Pre-Leasing Requirements:
Construction Loan Funding: Many lenders require 10–20% pre-leasing before initial funding, with milestone requirements (e.g., 50% pre-leased before final draw).
Permanent Financing Conversion: Construction-to-permanent loans typically require 85–90% occupancy before conversion to permanent financing terms.
Interest Rate Pricing: Higher pre-leasing levels may unlock more favorable pricing, as the lender's risk decreases with demonstrated market acceptance.
Strategies for Achieving Pre-Leasing Targets
Early Marketing Launch: Begin marketing 6–9 months before delivery. High-quality renderings, virtual tours, and model home experiences drive early commitments.
Lease-Up Incentives: Concessions (one month free, reduced security deposits) accelerate early leasing. Build these costs into the development budget.
Corporate Partnerships: Engage local employers for employee housing programs. A single corporate agreement can secure multiple units.
Professional Leasing Team: Experienced BTR operators with established leasing infrastructure can significantly accelerate absorption versus in-house teams.
5. Cost Overrun & Contingency Reserves: The New Non‑Negotiable
Lenders have become uncompromising on hard cost contingency and interest reserves. The standard ranges reflect project complexity: simple residential projects typically receive 5–7% of hard costs as contingency, standard mid‑rise multifamily receives 7–10%, complex or large projects receive 10–15%, and heavy renovations or conversions may see 10–20%. In Canada specifically, many construction loans in 2025 now expect 10–15% contingency as standard given recent volatility in materials and labor availability.
CMHC has also formalized this protection. When traditional bonding is waived, the program requires alternative security (typically irrevocable letters of credit or collateral) equal to at least 10% of hard costs. Interest reserve is sized using a straightforward formula (50% of the loan amount times the interest rate divided by 12, then multiplied by the number of construction months) which approximates the average outstanding balance during the progressive draw schedule. In practice, lenders increasingly prefer to see a margin above the “textbook” reserve calculation, often disclosed as a separate “interest reserve contingency” line item in the development pro forma.
Mid‑market sponsors should present contingency as line‑item granularity in sources and uses: hard costs, soft costs, and interest reserve, each with clear logic links to recent cost volatility and comparable project overruns. Sponsors should also explicitly outline how overruns will be funded - whether through sponsor equity top‑ups, subordinated mezzanine capital, or guarantees. This transparency signals lender confidence and reduces friction during the underwriting process.
6. Equity Expectations: 25–35% Is the New Normal
Sponsors are encountering a materially higher cash equity bar. Conventional senior lenders now target 70–75% loan‑to‑cost or loan‑to‑value, up meaningfully from 80–85% in the prior market cycle, implying 25–30% equity contributions. Some banks are requiring 35% or more equity on ground‑up construction, particularly for less experienced sponsors or secondary markets. In Canada, most private and conventional bank lenders will advance up to 75% of construction cost, leaving 25% equity to sponsors.
Land Equity Contribution
Sponsors who own land outright can often use it as equity toward the required contribution. If land has been held for more than 12 months, lenders typically allow the appraised market value (rather than original cost) to count toward equity requirements. This can significantly reduce the cash outlay required from sponsors.
Example: For a $50M total project cost requiring 25% equity ($12.5M), a sponsor with $8M in land equity would need only $4.5M in additional cash equity. This structure is particularly advantageous for sponsors who acquired land during more favourable market conditions.
7. Private Credit Stepping into Senior Positions
The Structural Shift in Construction Lending
The most significant development in construction finance over the past decade has been the emergence of private credit as a primary source of senior debt. Private credit assets under management reached $1.7 trillion globally by 2025 and are projected to exceed $5 trillion by 2029. This capital is increasingly deployed in real estate, particularly in construction and transitional financing where traditional banks have retreated.
Regulatory pressures (including Basel III capital requirements, Dodd-Frank provisions, and the fallout from regional bank failures in 2023) have made banks increasingly cautious about construction lending. The result: private credit lenders now account for approximately 40% of new commercial real estate loan originations, with construction and bridge loans representing a growing share of this activity.
Comparing Private Credit to Traditional Bank Financing
Factor | Traditional Bank | Private Credit |
Closing Timeline | 60–90+ days | 14–45 days |
Execution Certainty | Subject to committee/market shifts | High certainty once terms agreed |
Interest Rates | SOFR + 225–350 bps | SOFR + 350–550 bps |
Leverage (LTC) | 60–70% | 70–80% |
Flexibility | Rigid structures, covenant-heavy | Negotiable, relationship-driven |
Borrower Profile | Strict credit/experience requirements | Deal-focused, flexible on profile |
When Private Credit Makes Sense
Private credit's higher cost is often justified in scenarios where execution risk or timing are paramount:
Time-Sensitive Acquisitions: Land or portfolio acquisitions with compressed timelines where bank financing cannot close in time.
Bridge-to-Stabilization: Projects requiring construction financing with flexibility to extend through lease-up.
Higher Leverage Needs: Sponsors seeking 75–80% LTC that banks are unwilling to provide.
Complex Structures: Projects with subordinate debt, preferred equity, or other capital stack elements.
Borrower Profile Issues: Sponsors with credit history blemishes, limited track record, or foreign national ownership.
8. Canadian Rate Environment: A Quiet Tailwind
Canada’s monetary easing cycle in 2025 has quietly improved real estate feasibility, even as capital requirements remain discipline‑driven. The Bank of Canada’s policy rate has fallen to approximately 2.25% as of October 2025. Best 5‑year fixed mortgage rates sit around 3.74%, with variable rates at 3.45%. Construction loans are expected to price in the 5–6% range in 2025, down from 6–7% in 2023.
The financial benefit is meaningful. Lower interest expense improves debt service coverage ratios and yield‑on‑cost metrics, offsetting some of the drag from materially higher hard costs and land pricing that have characterized the construction market since 2022. Lenders still underwrite conservatively and demand the equity and contingency reserves described above, but a lower rate base gives well‑structured BTR and PBR deals incrementally more room to clear today’s coverage thresholds. For sponsors modelling 2025 construction starts, this rate environment is a genuine advantage relative to the 6–7% construction rate pricing of 2023–2024, though the net carry‑through to project feasibility depends on local cost conditions and the specific equity structure deployed.
9. Sponsor Track Record & Underwriting Metrics
With abundant capital demand but tightened credit discipline, who is borrowing matters almost as much as what is being built. Completion and repayment guarantees remain full recourse during construction; conversion to non‑recourse usually follows stabilization and achievement of target debt service coverage ratios.
Navigating the Current Market
The 2025 financing environment rewards preparation, realistic assumptions, and strong fundamentals. Key considerations:
Start Early: Begin lender discussions 6+ months before anticipated closing. Capital markets are competitive, and thorough due diligence takes time.
Build Relationships: Lender relationships are assets. Regular communication (even outside of active deals) positions sponsors favourably when opportunities arise.
Consider Hybrid Structures: A senior bank loan paired with mezzanine or preferred equity from a private credit source can optimize overall cost of capital while achieving desired leverage.
Stress Test Assumptions: Lenders will model adverse scenarios. Sponsors should anticipate questions about interest rate increases, construction delays, and lease-up challenges.
Practical Takeaways for Mid‑Market Sponsors
Residential and BTR development remains fundable in the current market, but financing success requires understanding lender perspectives on absorption, pre-leasing, reserves, equity, and the evolving role of private credit. The structural tailwinds supporting rental housing demand are real: housing affordability has reached generational lows, homeownership rates are declining, and purpose-built rental communities address a genuine market need.
For mid-market sponsors, the path to financing lies in comprehensive preparation, realistic underwriting, and flexibility in capital sources. The sponsors who will succeed are those who present well-documented opportunities that acknowledge (rather than ignore) the risks inherent in development, while demonstrating the market fundamentals, execution capability, and capital commitment that give lenders confidence.
The capital is available. The question is whether your project and your team can meet the standard.
About Amimar International Inc.
Amimar International Inc. is a Canadian boutique advisory firm specializing in project finance consulting and private credit advisory services. Based in Montreal and Toronto, we serve middle-market clients with projects ranging from $5M–$200M across real estate, hospitality, power & energy, industrial infrastructure, and waste-to-energy/recycling financing. With 25+ years of operational knowledge and over $4.8 billion in transactional advisory, we provide end-to-end support including project development consulting, commercial due diligence, market feasibility, risk assessment and capital optimizing. Contact us today to get started.