We predict 2021 will be a very active and positive year for the multi-family sector as investors continue to be drawn towards defensive real estate assets.
2020 started off strong as momentum and strong investor demand for multi-family assets from the second half of 2019 carried over into the first quarter (Q1) of 2020.
Between January 1 and March 30, 2020, 16 rental apartment properties transacted, accounting for more than $362 million in total sales value throughout Metro Vancouver. Of note, two of the 16 sales were large-scale concrete rental properties that accounted for a large percentage of the total sales volume in Q1, as both high net-worth private and large institutional buyers were attracted by strong market fundamentals and low interest rates.
As the COVID-19 pandemic reached British Columbia in mid-March, the strong sales activity that took place in the first quarter came to an abrupt halt as investors and owners alike took a pause in order to concentrate on taking care of their families, the safety of their employees, assisting and working with their tenants and the continued operation of their properties and businesses.
In order to curb the virus, governments implemented stay-at-home orders and international travel bans for the safety of residents. The lockdown led to a large number of businesses being forced to make layoffs with their revenues significantly compromised. To help support businesses and residents, the federal government committed nearly $400 billion in fiscal stimulus programs. These stimulus programs assisted many Canadian impacted by the pandemic with $2,000 stimulus checks on a monthly basis. These monthly checks and the later addition of rental subsidies assisted many tenants with the ability to pay their monthly rent during this very challenging time.
In order to gauge the impact of COVID-19 on the multi-family asset class, CBRE surveyed a cross-section of private and institutional owner and operators. Participants were asked to provide insights on their portfolio or buildings performance, level of vacancy and turnover and the percentage of total rent collection. The majority of landlords indicated that vacancy rates withing their portfolios or buildings had not been significantly impacted over the first five months of the pandemic. In addition, landlords had indicated that rent collection over the same time period consistently averaged in the 96 per cent range with no discerning downward trend from month to month.
As of Q3 2020, total multi-family sales across Metro Vancouver was close to $700 million and is expected to reach close to a billion dollars by year end. Although this estimated sales volume is off from the 2019 year-end sales figure, multi-family assets still remain the envy of all other asset classes, with possibly the only exception being the industrial asset class.
At this time last year, the Metro Vancouver vacancy rate was fluctuating in the range of 0.7 per cent to 1 per cent. As we move closer to the end of 2020 the market in general is experiencing higher than average vacancy rates due in part to the lack of students who would typically be renting suites throughout the province, in addition to the approximate 40,000 net new residents who would typically be arriving in the Lower Mainland seeking rental accommodation. On a positive note, the federal government recently announced plans to bring in more than 1.2 million immigrants over the next three years; which would be an increase of about 50,000 new residents each year into the Vancouver region. The aim is to compensate for the shortfall this year due to the pandemic. Increased migration into Metro Vancouver combined with the return of the student population in 2021 should absorb the excess vacancy that we’re currently experiencing and return the overall vacancy rate to normalized levels.
As the market started to get more active, the challenge coming into the third quarter for most asset classes was where the new cap rates would be and how property values would be affected. For the multi-family sector, however, there seems to be a little more clarity around these questions. While sellers did put a pause on bringing new listings to the market, the general uncertainty around selling their multi-family assets have now largely dissipated. Given the resiliency of multi-family properties thus far, price expectation for the most part has not differed from pre-pandemic levels. In fact, pricing is now even higher in some cases for certain properties. We expect the combined impact of favorable market conditions and historically low borrowing rates could be the catalyst in further compressing capitalization rates for multi-family properties in 2021.
– Lance Coulson is the executive vice-president of the national apartment/ investment properties group team, Vancouver, for CBRE.