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Multifamily prospects solid as cash flows on the Prairies

Rising demand, little new supply keep markets moving
Strong in-migration has set Calgary’s multifamily rental market on a rolling boil.

Record levels of international immigration to the country’s major centres, and an increase in workers relocating to a resurgent Alberta are keeping Western Canada’s multifamily markets on the boil.

Vancouver has typically been the poster child for low vacancies, high rents and long-term stability, and that remained true this year as the Canada Mortgage and Housing Corp. delivered its annual rental market survey at the end of January.

While vacancies held the course in Vancouver at 0.9 per cent – the lowest among the major cities, and outdone in Western Canada only by Red Deer at 0.8 per cent – it wasn’t for lack of trying. An additional 1,749 purpose-built rental units were added to the market over the past year, but demand outstripped the ability of developers and government to keep up.

The result was a 9 per cent increase in rental rates to an average of $1,884 a month, led by a 10 per cent increase in one-bedroom rents to $1,786 a month.

But even if units are being built, developers speaking at the February breakfast meeting of commercial real estate association NAIOP in Vancouver said it remains tough to accelerate development given a host of factors.

“We have low interest rates, demand exceeds supply, supply can't keep up,” said Eric Carlson, founder and CEO of Anthem Properties Group, which has holdings in B.C., Alberta and California. “Capacity is constrained. Why is capacity constrained? Because there’s the approval process and because of the cost of capital.”

Pension funds, for example, have pulled back as part of their regular asset reallocation exercises,

“If you have a portfolio of purpose-built rentals, and you're trying to finance with pension funds from Toronto right now, you can't get the money because they don't have money to invest,” Carlson said. “Some do but not much, not nearly as much as they used to.”

This means financing timelines are longer, and the approvals timeline still requires years despite government intentions to make it easier to develop much-needed housing.

While the factors should ensure multifamily remains a solid investment, investors stop short of calling the current moment a generational buying opportunity.

“It’s the hardest time to buy multifamily just about anywhere,” said Shenoor Javadji, founder and president of Lotus Capital Corp.

While demand for housing is strong, and getting stronger as Ottawa sets aggressive immigration targets – the majority of new immigrants rent rather than buy, according to CMHC – there’s little to support investors trying to meet the overwhelming demand.

“When you look at over a million people coming in, that is the generational opportunity. But what falls behind it doesn't support it,” Javadji said. “You've got costs, you've got interest rates, you've got timing. All of those things are working against you.”

While government programs aim to help, programs such as the $500 million set aside to help non-profits purchase and renovate older rental properties and a $3 billion fund announced Feb. 13 to construct housing for middle-income earners don’t support private investors, which the province largely views with suspicion.

B.C. Premier David Eby said the province has identified 20 underutilized properties for up to 4,000 rental units. Eby hopes they’ll be completed within 12 to 18 months, compared to between three and five years rental projects currently take.

Governments elsewhere have similar ambitions, but rather than undertaking the projects themselves are working to remove roadblocks to new construction.

The City of Regina has been focused on taking advantage of opportunities under the federal Housing Accelerator Fund, aims to speed up approvals to get more affordable housing projects off the ground sooner.

On Feb. 7, the city’s executive committee passed amendments to its Housing Incentives Policy that aims to increase funds available for affordable housing and give developers options with respect to the kinds of units funded under the program.

“We know construction costs have gone up, we know interest rates have gone up,” Masters said. “We can be a partner in this, to actually help facilitate and cover some of those costs.”

By defraying the cost of new construction, the city hopes to keep rents across the city in check.

“We know we’ve had a very low rental vacancy rate when it comes to new housing units,” Masters said. “Getting more rental units into market is vitally important, I think, for rent to stay at a lower rate as opposed to having to increase it all the time based on demand and a short supply.”

According to CMHC, Regina gained just 176 new purpose-built rental units last year for a total of 13,998. The majority were one-bedroom units. But strong demand pushed vacancies down from 3.2 per cent a year ago to 1.4 per cent today. This pushed up the average monthly rent in the city 10 per cent to $1,200 a month.

Saskatoon has seen a smaller increase in rents of 9 per cent, but vacancy rates have not compressed as much thanks in part to the addition of 1,270 new rental units to the market. Starting at 3.5 per cent a year ago, they’ve fallen to two per cent over the past year. Rents average $1,257 a month.

Winnipeg is also in relatively good shape. While the city continues to benefit from immigration, rental construction has outstripped cities in Saskatchewan with the completion of 1,691 new units over the past year.

This has mitigated the impact of falling vacancies on rental rates, which increased just 5.5 per cent to $1,325 a month. Vacancies, meanwhile, fell from 2.2 per cent to 1.3 per cent.

“We’re seeing a level of rental development that we haven’t seen in a number of decades, essentially, and we’re starting to see the rental stock increase at a much faster pace, which is a good thing over the long run,” said Taylor Pardy, lead economist for the Prairies with CMHC. “But as of now, supply isn’t keeping up with the kind of demand that we’re seeing in the market, and it will likely take a few more years before we actually see things start to balance out.”

This is particularly true in Alberta, which saw some of the strongest rental rate growth in Canada last year.

“All of these markets have been experiencing strong population growth as a result of international migration, but Alberta is differentiated in the sense that it’s also seeing very strong interprovincial migration and so that’s really putting a lot of pressure on rental markets there,” Pardy said.

Population growth, and demand for housing is coming just as financing costs rise. That’s not only impacting developers, but keeping prospective homebuyers in rental units for longer.

“This might be putting some extra pressure on the rental market,” Pardy said.

By the same token, Calgary added 2,877 units to its purpose-built rental market last year, and has a further 9,000 units under construction.

The additions last year translated to a 6.2 per cent increase in the rental stock, an enviable amount given that between two and three per cent is normal.

But with development simply not keeping pace with demand, and construction jobs and other opportunities in Alberta luring workers from elsewhere, the tight conditions are likely to persist.

“The demand-side pressure is still outpacing the supply side,” Pardy said. “We’re seeing job growth, we’re seeing wage growth, so all these things are adding pressure.”

With files from John Cairns