Cash-heavy Cold Lake, considered the number two oil sands community in Alberta, is poised to become a white-hot market for residential landlords this year. Pub and restaurant owners should also feel the heat.

The reason: Imperial Oil will not built the customary on-site accomodation for workers as it expands its giant Nabiye oil sands project. Nabiye, already the largest extraction facility in the province, will boost production by 40,000 barrels of oil per day, or about 2.5 per cent of Alberta’s total oil sands output. Instead of living at camps on site, hundreds of high-paid employees will be looking for rental housing, meals and entertainment in Cold Lake, the closest town to Imperial's facilities.

Cold Lake Mayor Craig Copeland says his community is more prepared for this expansion than it was for previous Imperial projects, but concedes accommodation will be stretched.

"It's the rental market in Cold Lake that will get really tight," said Copeland, noting that this will pose significant challenges for lower paid workers in some other industries and for renters on the bottom end of the Department of National Defence pay scales at CFB Cold Lake.

Copeland says some significant hotel expansions and upgrades will help when work kicks off in September, but he doesn't expect there will be any significant multi-family housing projects completed in the community before work on Nabiye starts.

That means investors with rental capacity in the city of 14,000 are now sitting in a good position to cash in on the next boom. The uptick in oil investment will further grease Cold Lake, which reached an agreement with the province last year that will pump $11 million annually into city coffers starting in 2012. Under that deal, tax revenue from the Cold Lake Weapons Range will be diverted to the fast-growing community, Copeland explained.

Building activity in Red Deer remained in bounce-back mode for 2011.

According to City of Red Deer figures, building-permit values in the central Alberta city were up about 70 per cent for the first 11 months of the year, with 2011 permits valued at $160.4 million, versus only $93.8 million for the same period in 2010.

Commercial and industrial values more than doubled those, while residential values were up by a more modest 10 per cent.

from Western Investor February 2012

With large investors buying apartment blocks, the rental vacancy falling and the oil-fired city economy booming, developers have started or built more than 1,800 new rental apartments in Edmonton in the past year. In a recent survey, Avison Young counted more than a dozen new rental buildings underway or complete from downtown to the suburbs, including two 16-storey downtown towers totalling about 500 units that will complete within months. In Leduc, an industrial suburb that serves the oil industry, a five building, 269-unit rental complex opened late last year. Other large rental buildings are underway in Fort Saskatchewan and St. Albert, despite multi-family-zoned land prices topping $910,000 per acre.

Meanwhile, real estate investment trusts and other large landlords have swooped into Alberta's capital to buy up larger rental buildings and portfolios, Avison Young confirms. While low-rise apartment buildings are selling for an average of $111,000 per door, prime concrete buildings are moving in the $130,000 "per door" range or higher, based on sales reported to Western Investor's popular Done Deals section.

Average capitalization rates on Edmonton apartments were in the 6.5 per cent to 6.75 per cent range last year, but "aggressive competition for new product" has pushed cap rates down to the 6 per cent amidst multiple bid situations early in 2012, Avison Young found. An example is a 94-suite rental building on 37th Avenue that recently sold for $186,170 per apartment with a cap rate of 6.1 per cent. 

Eager landlords are understandable. With oil flirting with US$100 per barrel, there has been a rush of workers into the city and its suburbs as resource projects expand. The unemployment rate is now below 5 per cent and Edmonton's economy is expected to grow 3.4 per cent this year and 4 per cent in 2013. The average rent for a two-bedroom Edmonton apartment is $1,036 per month, and rising in a city with no rent controls.

A shared ownership concept that has been used in B.C. for more than a decade to finance hotel development appears to be ending as investors face staggering losses in hotel-condos and fractional real estate plays. Now hotel developers are increasingly looking at mixed-use projects, especially full ownership strata residential, to get new projects off the ground.

“Every hotel condo investment [in B.C.] has lost money for the investor,” said real estate consultant Ozzie Jurock. “Every one.”

The evidence is in a frightening free fall in prices.

At Sun Peaks ski resort near Kamloops, hotel condos at the Sunset Lodge and Hearthstone Lodge that once sold for around $199,000 are now being offered at from $19,000 to $25,000 – with some selling for even less. The typical arrangement allow owners 56 days of use per year with the units potentially rented the rest of the time. The catch, and what has made them such a poor investment, is that monthly fees for owners can easily top $360 per month and the owner receives less than half of any rental income, with the rest going to management. In most cases, rental incomes don’t cover the management fees.

A Vancouver investor who bought a shared unit at the Penticton Lakeside Resort in the Okanagan for $140,000 three years ago estimates the unit has lost half its value. “We only used it for 12 days in the last two years,” said the buyer, who asked not to be named, “but the rentals have never covered our costs.”

At Whistler, hotel condos – known as Phase 2 units - are selling this year for less than they were in 1999, according to veteran Whistler realtor Mike Wintemute. Recent listings show one-bedroom Phase 2 suites at Whistler are now priced as low as $61,000.

Fractional units, where hotel suites are usually sold in one-eighth to one-quarter shares, have also floundered. The most recent and highest profile collapse is the luxury Parkside Resort and Spa in Victoria where one-eighth fractional shares were being sold from $115,000 to $121,000 last January. By November 2011, Parkside was in receivership with more than $61 million in unsold inventory, according to court filings by Victoria-based developer Aviawest Resort Group.

As Jurock explains, the problem with fractionals during a downturn is that up to eight owners will be all trying to sell the same unit at the same time.

“No one will build hotel condos or fractionals anymore,” predicts Zack Bhaista, vice-president of Mayfair Hotels and Resorts of Vancouver, which has just broken ground on the Crystal Blu Hotel on Vancouver's Robson Street. “Anybody who bought a [shared ownership] hotel unit in the last 10 years has lost a tremendous amount of money,” he said.

Bhaista said the end of shared ownership as a financing avenue will make it tough for hotel developers in a province where the average hotel is half vacant most of the time. “It is next to impossible to get financing for a hotel in B.C.,” he said.

Mayfair’s Crystal Blu, like Vancouver’s new Shangri-La, Fairmont and the Rosewood at Georgia, show perhaps the only solution for B.C. hotel developers, he said: include full ownership strata units. “The profit you make on the condos pays for the hotel; that is the only way to make it work," Bhaista said.

Betsy MacDonald, a partner in North Vancouver-based hotel consultancy HVS International, said the industry rule of thumb is that a hotel room must make $1 per night for every $1,000 it takes to build or buy. “If the hotel costs $125,000 per [room], the room has to rent for $125 per night on average and you need 60 per cent to 70 per cent occupancy to break even,” she explained. Across B.C., the average daily rate for a hotel room is $119 and the average occupancy rate is around 42 per cent, according to the most recent HVS survey.

Calgary-based Resorts of the Canadian Rockies has purchased the Kicking Horse Mountain Resort near Golden, B.C. from Dutch-based Ballast Nedam.  While the purchase price was not disclosed, Western Investor sources say it was close to $28 million.

"We are proud to be joining the RCR family of resorts. I'm confident there will be strong synergies across all resorts and opportunities for continued growth" said Steve Paccagnan, who will remain president of Kicking Horse Mountain Resort under the new ownership. 

It remains business as usual at Kicking Horse Mountain Resort, and all existing ski packages, passes and joint agreements will continue to be honoured, according to Paccagnan.

About 400 homes have been built and sold at Kicking Horse since the development opened.

Resorts of the Canadian Rockies Inc. is one of the largest private ski resort owner/operators in North America, now owning six ski resorts across Canada, including three on the B.C. side of the Rockies. In addition to the ski resorts, Resorts of the Canadian Rockies Inc. also owns and operates a number of accommodation properties, golf courses, and a central reservation agency.

Kicking Horse Mountain Resort is the first, four-season resort to open in the Rockies in over 25 years.The resort recently obtained Provincial approval of a 40-year Master Plan which calls for a world class, destination mountain resort with an expanded controlled recreation area, 20,000 bed units, an 18-hole signature golf course, a multi-use trail system with two proposed lifts and 4,188 acres of skiable terrain. The 2011-12 Season introduced a new Learning Centre to accommodate families and beginner skiers, a new partnership with Brewster Travel Canada, WestJet Airlines, and Budget Rent A Car combined with a new Central Reservations powered by VacationRoost.

Calgary-based Mainstreet Equities Corp. one of Canada's largest landlords, is seeking more investments in Metro Vancouver, including Surrey which company president and CEO Bob Dhillon claims is understocked and undervalued in the apartment rental market. "Surrey has the lowest inventory in Canada," he said. Dhillon claims that Mainstreet now controls 30 per cent of the apartment rental stock in Surrey, B.C.'s second largest and fastest growing city. 

Mainstreet, which specializes in buying mid-market apartment buildings with low-cost financing through Canada Mortgage and Housing Corp., renovating them and then raising the rents, has a total portfolio of 7,797 apartments with an appraised value of $916 million. Most of its holdings are in Edmonton and Calgary. The publicly-listed company (MEQ-T) was rated a "buy" this week by GMP Securities, which said the appraisal implies a share value of $35. Mainstreet was  trading this week at $21.62 per share. GMP adds that Mainstreet''s overall vacancy rate for its apartments is 8.1 per cent, down from 11.3 per cent a year ago. According to Dhillon, Mainstreet's net operating income in 2011 has climbed 23 per cent from a year earlier, to $41 million. He also said vacancies are actually closer to 6 per cent, because some Edmonton suites were being renovated but are now rented.

Dhillon suggested Mainstreet has a $500 million war chest to fuel any buying spree, "We are hungry," he said. Dhillon also suggested that the U.S. Sunbelt could be Mainstreet's first major hunting ground outside of Western Canada. "Five years from now we will look back [at the US housing market] and consider it the bargain of a lifetime," he said, "The time to buy there is now."