Cynthia Jagger, a principal with Goodman Commercial Inc., summed up the anomaly that is now the multi-family rental market in Metro Vancouver during her address this September to an annual apartment investment conference in Toronto.
“There are lots of sellers and lots of buyers,” said Jagger, who, with partner Mark Goodman, brokered 34 apartment buildings worth nearly $600 million in the first 10 months of 2021.
The eager sellers are mainly those who have owned rental apartments for decades, and are chaffing under provincial rent controls that restrict the income and control of their assets.
After nearly a year-long rent and eviction freeze due to COVID-19, B.C. landlords are now allowed to raise rents by just 1.5 per cent in 2022 for existing tenants, while the official inflation rate is north of 4 per cent, and standard expenses, such as property taxes, maintenance and utilities are soaring.
Landlords are also dissuaded from doing repairs under ‘renoviction’ legislation, though the average Metro apartment building is 64 years old. Insurance costs have skyrocketed, in some cases tripling over the past two years.
For many ‘mom-and-pop’ owners, incomes are insufficient to cover expenses, Goodman said. Some have grandfathered tenants still paying less than $700 per month when the average rent in Metro Vancouver is $2,573, the highest in Canada and up 11 per cent from a year ago, according to the October National Rent Report from Bullpen Research and Consulting.
Then there are tenant conflicts.
Scott McGregor, who heads the first compliance and enforcement unit for B.C.’s Residential Tenancy Branch estimates B.C.’s 168,000-unit rental universe generates an average of 20,000 hearings a year on landlord-tenant disputes, 83 per cent of them launched by tenants.
Yet, since the unit was formed two years ago, there have been only 10 investigations that resulted in a monetary penalty. In one, a tenant had dodged nearly $64,000 in rent payments over a 12-year period in multiple rentals. Another tenant had failed to pay $35,000 in rent during 28 months and 14 separate tenancies.
“Some landlords are so exhausted,” Goodman said.
Yet, demand remains high for apartment buildings, both older stock and the brand new purpose build rentals.
Buyers are attracted to Metro Vancouver because it has the lowest vacancy rates, highest rents and potential price appreciation in the country; and landlords can access the cheapest mortgage money in commercial real estate, because Canada Mortgage and Housing Corp. (CMHC) will insure the loans.
Also, CMHC now require owners taking equity out of their existing buildings to reinvest that equity back into housing through either the construction of new rental, acquisition of existing rental or the repair of rental properties, which has contributed to the volume of capital being placed in multi-family real estate.
“There are opposing forces on either side to sell or buy,” Goodman said. “This has created the most liquid and active market in Metro Vancouver history.”
The result was a record-smashing 94 apartment transactions across the Metro region in the first half of 2021, valued at $1.64 billion, with an average price per unit of $491,019, Jagger noted.
That six-month sales volume eclipsed the totals for virtually every year during the past decade.
“We are seeing a lot of new investors coming in, many who have never bought multi-family before,” Goodman said, One Vancouver client sold his software company for nine figures, he noted, and has been buying apartment buildings unconditionally as a safe place to store his money.
“A hedge against inflation has become a huge driver in the apartment market,” Goodman said.
But Goodman cautioned nascent local investors that being a multi-family landlord is not a passive-income play.
“It is a lot of work. It is a tough business and it is getting a tougher.”
However, a stupendous number of investors, right across B.C., want to get into the business, a trend not expected to slow in 2022.
“Unprecedented demand for B.C. multi-family assets in the first six months of 2021led to an astonishing 78 sales valued at more than $1.98 billion, obliterating the previous annual record of 85 sales valued at $1.51 billion set in 2018,” Avison Young noted in its BC Investment Mid-Year Review 2021. The review only tracked asset sales worth $5 million or more.
B.C. transactions through the first half of this year exceeded the total annual number of sales in both 2019 and 2020, the review found.
Institutional and real estate investment trusts (REITs) are active this year, accounting, respectively, for 15 per cent and 13 per cent of total apartment building sales in the province. This includes the $292.5 million multi-family portfolio sale in Vancouver to Crestpoint Real Estate Investments and InterRent Real Estate Investment Trust, and the purchase of portfolios in Vancouver, West Vancouver and Victoria by Starlight Investments.
Private buyers are the biggest players, but most deals of these were under $25 million. Exceptions this year included the $135 million transaction for a rental tower on Beach Avenue, Vancouver, and the purchase of a Richmond rental complex for $45.5 million, both sold by Goodman Commercial.
Rob Greer, a multi-family specialist and principal with Avison Young in Vancouver, said that institutional buyers and REITs are now acquiring assets in secondary B.C. markets such as Esquimalt, Langford, Kamloops and Kelowna. Prices are lower in the smaller cities, he noted, while yields are higher than in the Lower Mainland.
In November, Greer and the Avison Young rental apartment sales team sold a brand new, 193-unit, four-building rental apartment complex in Kelowna to Canadian Apartment Properties REIT for $63.3 million. This pencilled to $327,000 per door, lower than in Metro Vancouver, but the capitalization rate of 5 per cent is nearly twice as high.
Record demand for multi-family properties, meanwhile, has swamped financing applications from the majority of buyers who rely on CMHC mortgage insurance, which can provide loan rates that are 50 basis points to 75 basis points below the conventional mortgage rate.
Delays of up to 90 days for CMHC approval are not uncommon, which can skew closings. Buyers in this situation will often arrange a bridge loan from their lender until the CMHC-insured lending is in place, Goodman noted.
Current prices and momentum of residential land sales indicate that values of all types of housing will remain high, analysts say.
Of the five largest sales of residential land in Metro Vancouver in 2011, the per-acre price averaged nearly $9 million, according to Avison Young. An assembly of 0.44 acres along West 42nd Avenue in Vancouver this June sold for $24.7 million, the equal of nearly $50 million an acre. A 0.21-acre multi-family site in Strathcona, East Vancouver, sold September 15 for $3.35 million, the equivalent of nearly $15 million per acre. In the Fraser Valley, it is not uncommon for residential land to transact at up to $8 million an acre.
The BC Real Estate Association is forecasting that provincial housing sales will decline 15.4 per cent in 2022, compared to this year, but that average B.C. housing prices will increase a further 2.7 per cent to $938,900, with the Greater Vancouver composite home price rising 1.6 per cent to $1.2 million.