Surging Canadian Multifamily Market Featured at Toronto Real Estate Forum 2019

Last month, the Metro Toronto Convention Centre was host to Canada’s largest annual national conference on commercial real estate investment and management issues, The Real Estate Forum. Running strong since 1992, this high-profile conference attracts over 2,500 senior level real estate executives from across Canada, the U.S. and other countries to network and stay abreast of the latest trends and developments in the industry. The implications of new technology, the state of the economy, relevant geo-political developments, and various factors affecting each asset class were explored and discussed by leading experts and executives. Marcus & Millichap’s very own Senior Managing Director of Investments, Aik Aliferis, moderated an expert panel on the current dynamics affecting the highly attractive multifamily sector.

The Canadian multifamily sector was prominent in the mix of topics driving conversation at the 2019 Toronto Real Estate Forum. The bulk of the opening day was dedicated to a series of workshops and networking opportunities entitled: “Leading Edge Strategies for Apartment Developers and Investors.”

Canadian Apartment Rental Market Panel Moderated by Marcus & Millichap’s Aik Aliferis

Building on these workshops, conversations fueled growing interest in multifamily opportunities throughout the conference, leading up to Aik’s panel entitled: “The Apartment Market Continues to be Very Buoyant: Solid Returns, Strong Demand, Record Low Vacancy Rates.” The panel consisted of some of the leading senior executives in this surging sector including: John Ballantyne, Senior Vice President, Asset Management, RioCan REIT; Philip Fraser, President & CEO, Killam Apartment REIT; Paula Gasparro, Vice President, Real Estate Finance, CMLS Capital; Alfred Hendry, Chief Executive Officer, Homestead Land Holdings Limited; and Mark Kenney, President & CEO of CAPREIT.

Aik Aliferis, Moderator at Toronto Real Estate Forum 2019
Aik Aliferis, Marcus & Millichap Senior Managing Director of Investments, Panel Moderator at Toronto Real Estate Forum 2019

Aik Aliferis kicked off the panel discussion, stating: “The apartment market continues to be very buoyant, with strong returns, solid demand and record low vacancy rates.” Aik summarized the overall current state of the sector, setting the stage for the expert panel to weigh in on some of the hottest topics both driving and hindering the market:

Aliferis, M&M’s senior managing director of investments, opened the session with an overview of the Canadian multifamily rental sector, which is comprised of about two million units. He said capitalization rates continue to go down, suite prices are going up, new construction is now viable and the 2019 transaction volume will exceed the 2018 numbers. – Renx.ca

The Canadian multifamily market is tightening across the country, powered by high levels of employment and immigration, coupled with barriers to home ownership, such as rising home prices and a new mortgage stress test introduced in 2018. Investor interest is very high in the sector, especially in areas where vacancy rates are extremely low:

Investor interest far outweighs supply in many markets resulting in an average cross-country cap rate of 4.4%. Rental demand has also led to a national vacancy rate decline from 3% to 2.4% in the past year. Consider that Vancouver, Toronto, Montreal and Ottawa are also well below 2%. – The Real Estate Forum

Even with an increase in new supply coming on the market through elevated levels of construction, demand for rental units in hotspots like the GTA is far outpacing supply. Paula Gasparro, of CMLS, gave a nod to the federal government’s national housing strategy to cut chronic homelessness by 50 per cent, but asserted that all three levels of government need to work better together to alleviate the pressure. She stated that provincial governments could help reduce construction costs by lowering the GST on building materials, and municipalities could work more efficiently to speed up entitlements.

This sentiment was echoed by John Ballantyne, of RioCan REIT, “To get something done in the city of Toronto is painful… You’re three to four years into the process just to get your entitlements.”

Another topic of significant interest for panel participants was the recent acquisition of 44 high-rise apartment buildings in the GTA by Startlight from Continuum:

Starlight Investments announced it has acquired Continuum REIT’s 44-building, multi-residential GTA portfolio for a purchase price of $1.735 billion. In total, the portfolio comprises 6,271 rental units located in and around the GTA. – Remi Network

Aik asked the panelists if they were surprised by the magnitude of this deal. Mark Kenny, from CAPREIT, responded, “I would characterize this portfolio today as absolute prime in terms of what the market is looking for… The suburbs of the GTA are where we’re seeing the most growth in terms of rent lifts, so this is very much indicative of that.”

Alf Hendry, of Homestead, pointed out, “When you look at the underlying yield with a cap rate of 3.5 per cent and a price per suite of $270,000, that’s what we saw all year in the marketplace in the Toronto and Hamilton area, so I’m not surprised.”

Demand Outpacing Supply in many Multifamily Markets Across Canada

In many multifamily markets across Canada, demand continues to outpace supply leading to a large deficit of available rental units:

The Toronto market had a deficit of 9,100 rental units. The deficits in Montreal and Vancouver were 6,800 units and 3,800 units, respectively. Calgary carried a small surplus of 300 units. These estimates represent the number of rental units (both purpose-built and condos rented out) required to balance the rental market… The market is deemed to be at equilibrium when the vacancy rate is 3%… Across much of Canada, strong rental demand has pushed vacancy rates well below that level. – RBC Economic Report September 2019

These very low vacancy rates are driving up prices for purpose-built rentals, resulting in a high return on investment for property owners and attracting further investment in the sector:

Marked by low vacancies nation-wide and rental rates at 10-year highs, the multifamily segment shows no sign of slowing down. Rental prices for purpose-built rentals have actually grown by 4.4 per cent annually across the country and by 5 per cent in Toronto. Vancouver’s rental prices beat out Toronto’s growth with a steady 7.1 per cent increase. That’s a high return on investment for property owners whose total annualized returns were reported at 9.8 per cent in the first quarter of 2019… The well-advertised rate of return on investment only increased the multifamily investment volume – the highest it’s reached for four years at $8.3 billion in 2018 – Toronto Storeys

These high rates of ROI, and increased investment volume are in turn spurring new construction of purpose-built apartment rental buildings, which is anticipated to bring several markets closer to equilibrium in the next decade, except in Toronto, where industry experts predict it will likely take several additional years for the market to come close to satisfying demand:

Things are moving along nicely in Montreal, Vancouver and Calgary, where strong apartment and condo construction levels will bring a wave of new rental units to market over the next 10 years… “But Toronto is a different story,” writes RBC senior economist Robert Hogue. “Despite purpose-built apartment construction rising four-fold since 2014, rental supply is unlikely to come close to demand in the coming years.” – Blog TO

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Marcus & Millichap at ICSC New York 2019
Marcus & Millichap at ICSC New York, 2019: Aik Aliferis, J.D. Parker, Nick Pantieras and Louis Lagios, Principal & CEO of Nike Equities

Marcus & Millichap, North America’s leading commercial real estate firm, specializes in investment sales, financing, research and advisory services, with over 80 offices and 2,000 sales and financing professionals across the United States and Canada. Our executives are continually networking at the most prolific commercial real estate events across North America to stay on the cutting edge of developments in this dynamic industry.  Contact Marcus & Millichap Canada to explore investment sales opportunities in the Canadian multifamily market or other asset classes of interest.

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