Tight rental markets open opportunities for would-be landlords in urban Alberta and Manitoba

BY DAVE HUSDAL, CALGARY
GEOFF KIRBYSON, WINNIPEG

When Vancouver-based Bucci Developments opened the sales centre for its NEXT condominium project in Calgary this spring, half of the 162 suites sold out within weeks, encouraging Bucci to fast-track construction of the low-rise building. Homes were selling at a pace of one per day, according to NEXT marketing manager Shane Styles.

Big reasons for the fast sales are likely price and location: some buyers see the project as an ideal investment in a city where it is hard to get into one of the best landlord markets in the country. Prices for stud io apartments at NEXT started at just $166,707 and even one-bedroom suites are priced below average resale condos in the surrounding Bridgeland neighbourhood in southeast Calgary. Styles said about 30 per cent of the NEXT buyers were investors.

The Calgary Real Estate Board says the average condo price in the city this July was $286,445. "We priced to compete with re-sales," Styles confirmed.

Canada Mortgage and Housing Corp. (CMHC) is predicting Calgary multi-family housing starts will decline in 2011 by about 5.2 per cent to 3,300.

"The reduction in multi-family starts in 2011 will be mainly due to the apartment segment," according to the CMHC, which says the total inventory of new and unsold condominium apartments in the city is 614 units, down from the peak of 710 in August of last year.

Calgary's rental apartment vacancy rate is 3.6 per cent, but some say it is even tighter in some markets, particularly in the northwest, where new transit links and the University of Calgary keep the rental market hot.

Investors can expect to pay from $123,000 to $135,000 per door for rental apartment buildings, but don't expect to find many listed. This is why some investors are turning to condominiums as a way to get into the rental market. The vacancy rate for condominiums is around 5 per cent and typical rents for a two-bedroom condo are north of $1,100 per month.

CMHC is predicting even higher rents in Calgary next year, saying: "The rise will help landlords and property owners offset some of the increase in maintenance and utility costs associated with maintaining a rental property. In 2012, the average two-bedroom rent is forecast to reach $1,120 per month."

Investors such as Canmore-based Wade Graham, whose Higher Ground Real Estate Investments Inc. is active in the Calgary residential rental market, see opportunities in Alberta's largest city.

"Right now there are properties out there that are fantastic [investments] in the multi-family realm as well as the single-family realm," Graham said.

Depending on location and specific properties, Graham says investors who do their homework can earn capitalization rates in the 6 per cent to 7 per cent range fairly easily.

Real estate investment analyst Ozzie Jurock advises smaller investors in apartment buildings to scout for B properties because of the stiff competition from big players, such as Calgary-based Boardwalk REIT, for higher-valued buildings.

He said would-be landlords should also look at re-sale condos in the downtown, southeast or northwest because of improved transit and higher rental demand.

"The equity trajectory should be positive over the next four years and you should have no problem renting them out," Jurock said.

The situation in Edmonton is even rosier for residential investors. Edmonton landlords are poised to see a bump in their cash flows this year and into 2012, according to CMHC.

"While rental starts should increase modestly this year, the new supply will not keep pace with the expected rise in demand," CMHC predicted in its latest housing forecast for the Alberta capital.

"By the fall of 2012, the average two-bedroom apartment rent [in Edmonton] will hit an all-time high of $1,060 per month," it said.

It is clear that figure is not far away at this point. According to CMHC data, Edmonton's average two-bedroom rent jumped to $1,029 per month in April, only $11 per month behind the traditionally more expensive Calgary.

Edmonton's average two-bedroom rent has increased $35 per month, or about 3.5 per cent in the past year.

The rent hikes happened in a city where vacancy also fell to 4.7 per cent, and oilpatch-related businesses such as welding and fabrications shops were picking up steam. Higher employment levels and increasing oilpatch activity will undoubtedly provide a boost to the Edmonton rental sector.

While rents are heading up in Edmonton, CMHC is predicting multi-family housing starts for the capital region will decline slightly this year to 3,750, before bouncing up to 4,100 in 2012.

Colliers International is upbeat about the Edmonton market, noting capitalization rates of 6.5 per cent to 7 per cent in some cases. The real estate giant says demand for apartment buildings is strong.

"Demand continues to outstrip supply as buyers try to add assets to their portfolios at historically low interest rates. Alberta's unemployment rate continues to lead the nation and quality product continues to trade at a premium, most notably, product built post 2000," Colliers concluded.

The Realtors Association of Edmonton is also offering data that suggest that the interest in potential rental properties is growing.

While Edmonton's average residential price jumped only 1.1 per cent from June to July 2011, the average condo price was up about 4.3 per cent in the same month. Its year-over-year gain wasn't quite so spectacular: the average condo price was up 2 per cent from August 2010.

Manitoba

If you want to rent an apartment in Winnipeg or Brandon, good luck. If you want to buy an apartment building, you need even better luck.

The vacancy rate in Manitoba's two biggest cities is realistically near zero. In Winnipeg, it has ranged between 0.7 and 0.9 of 1 per cent thus far this year and it hasn't been much better in Brandon, at 1.3 per cent. These levels essentially reflect turnover.

But don't expect a flurry of building activity in either city to help meet the demand.

Don White, executive vice-president of Colliers International in Winnipeg, said that whatever apartment units do come on line will not be enough to support population growth in the city of more than 700,000.

"It will be calculated and relatively slow to come on stream. The construction costs that exist in the market are still very prohibitive to the rental rates you can charge," he said.

Based on the few recent sales, low-rise walk-up apartment buildings in Winnipeg sell from $85,000 per suite, with capitalization rates in the 5 per cent range. Larger concrete buildings demand around $135,000 per suite.

The average two-bedroom apartment rental rate in Winnipeg is approximately $850 per month.

Sandy Trudel, the economic development officer for the City of Brandon, said that a healthy market typically has a 3 per cent vacancy rate. Over the past 15 years, however, Brandon has not been able to surpass 1.8 per cent.

Demand has been driven by a number of factors, including new immigrants coming to town to work at Maple Leaf Foods.

Mike Melnyk of Century 21 Commercial in Brandon said well-priced apartment buildings sell "with two or three phone calls." Recent prices are from $75,000 to $80,000 "per door" for older walk-up buildings, he added.

from Western Investor September 2011