Landlord investors learning to love big-city Alberta

Yield-seeking investors are piling into the multi-family apartment market in Edmonton and Calgary at a pace that has surprised some agents

By
Western Investor
September 4, 2019





Mayfair
From left, Jane Woertman, Paul Chaput and Bradley Gingerich of Institutional Property Advisors at the Mayfair on Jasper, a 238-unit Edmonton rental project expected to sell for around $100 million. | Rebecca Stasiuk/Marcus & Millichap


The multi-family rental sector is the glaring nova in the commercial real estate universe of big-city Alberta. Edmonton apartment buildings are outselling office, retail and industrial properties this year. In Calgary, the apartment vacancy rate has plummeted, rents are rising and landlords are seeing double-digit yields. 

Edmonton

There is perhaps no more telling statistic on the strength of the rental apartment market in Alberta’s capital than the investment pace being set through the first half of 2019.  As of June 1, 24 older walk-up apartments in Edmonton sold for a total of $120.7 million, up 144 per cent from a year ago in dollar volume and worth more than the total sales of office, retail and industrial property combined in the same period.

When sales of two highrise rental buildings are added, multi-family sales in the first half tallied $221.2 million, 10 times higher than office investments and dominating Edmonton’s commercial real estate scene. As well, multi-family sites account for 28 per cent of Edmonton land sales this year, the highest of any sector, with $54.5 million in sales, according to first-half data compiled by Nathan and Brian Gettel of Network Real Estate Intelligence in Edmonton. 

“Even the brokers were surprised. I don’t think they saw this coming,” said Nathan Gettel.

Gettel said the strength of Edmonton’s apartment rental sector is being driven by an influx of young workers, acquisitions by yield-hungry real estate investment trusts (REITs) and pension funds, and an improving Alberta economy. 

“The Conference Board of Canada is projecting Alberta to rebound in 2020, leading all provinces in economic growth at 2.7 per cent,” Gettel said. “Edmonton will benefit from that growth.”

An example of the action is Boardwalk REIT’s first-quarter purchase of a new 124-unit rental tower in southwest Edmonton for $35.8 million, the equivalent of $289,000 per door. Boardwalk expects the Insignia Tower – which was converted from a condo project – capitalization rates to be in the 4.5 per cent to 5 per cent range once it is fully rented. Rents start at $1,458 for a one-bedroom, 823-square-foot apartment.                        

“The rental market in Alberta continues to trend toward a level of balance with vacancy in our core Alberta markets continuing to improve. Incentives are decreasing on lease renewals, and fewer incentives are required to lease and fill vacant units,” said Rob Geremia, president of Boardwalk, one of Alberta’s largest landlords.

Edmonton multi-family specialist Bradley Gingerich, senior managing director, investments, Institutional Property Advisors (IPA), a subsidiary of California-based Marcus & Millichap, and IPA partner Paul Chaput contend it is large institutional buyers who will dominate the Edmonton and Calgary multi-family market over the next few years.

“Every [residential-weighted] REIT in Canada has eyes on Edmonton right now if they are not already here,” Gingerich said, adding, “All the money is coming from back east.”

These big players are looking for sizable projects and prefer new builds in central locations.

A prime example is the newly completed high-end Mayfair on Jasper, a 10-storey mixed-use building with 238 rental residential units and 24,901 square feet of commercial space near Edmonton’s sports and entertainment district. IPA has been conducting an open-bid process on the Mayfair sale that is now pending.

“It is a $100 million level deal,” Chaput said of the “pension-fund-quality” asset.

Calgary 

Calgary-based Mainstreet Equity Corp., however, contends the sweet spot in the Calgary market is mid-level, older apartment buildings, which Mainstreet has been snapping up since the recession hit five years ago.

Its buying spree has been impressive, as is the yield. 

In the fourth quarter of 2018 alone, Mainstreet spent $35.7 million buying seven Alberta apartment buildings, including five in Calgary. The per-door cost of Calgary apartment blocks, all low-level, mid-market properties, ranged from $126,700 to $162,500, the company reports. 

Rental revenues as of the third quarter of 2019 increased 18 per cent from the same period in 2018 to $34.7 million, alongside an 8 per cent increase in same-asset rental revenues to $29.5 million.

Overall vacancies for Mainstreet assets fell to 6.4 per cent, down from 10 per cent in Q3 2018, despite a record number of acquisitions in 2018 and 2019 that would typically drive up vacancy rates, according to Mainstreet founder and CEO Bob Dhillon. Mainstreet owns or manages more than 12,000 rental apartments, including 2,182 units in Calgary and 4,284 units in Edmonton.

Calgary’s overall apartment vacancy rate has fallen to 3.6 per cent, according to Canada Mortgage and Housing Corp., which has persuaded some office-building owners to convert offices – which are suffering a 24 per cent vacancy rate – into rental apartments, with at least two projects already open.


Frank O'Brien is the editor of Western Canada's biggest commercial real estate newspaper, Western Investor, as well as a contributing editor at West Coast Condominium, real estate contributor to Business in Vancouver and a regular media commentator on real estate investment.
Copyright © Western Investor

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