What does the future hold for the rental apartment market in 2020? We predict that certain trends from 2019 will carry through to the new year.
For the first half of 2019, multi-family sales activity throughout Metro Vancouver and Greater Victoria lagged, affected by several governmental policies implemented in 2017-18. Following this period of adjustment, sales activity surged noticeably in the latter part of 2019.
Between August 1 and November 1, more than $400 million in transactions and nearly 1,400 rental units traded in Metro Vancouver, accounting for nearly 60 per cent of 2019 sales to date in the region. Most notably, two prized concrete highrise towers and several large-scale low-rise complexes have traded to both local and national investors during this period. This is a true testament to the underlying strength and desirability of the multi-family asset class as investors across Canada continue to seek product in B.C.’s rental market.
With more clarity established, and interest rates projected to hold at investment-friendly levels, we expect this momentum and sustained demand to carry through into 2020.
With the Metro Vancouver vacancy rate fluctuating in the range of 0.7 per cent to 1 per cent, according to Canada Mortgage and Housing Corp. (CMHC), the shortage of rental housing is well documented.
With the Lower Mainland projected to welcome 40,000 net new residents annually to 2041, and the number of renter households to grow by 9,400 per year in the medium term, rent demand will intensify.
With supportive government initiatives, accretive returns and a weakened condo market, private developers are increasingly shifting their efforts and capital towards purpose-built rental apartment buildings. As reported by Urban Analytics, about 6,800 new rental units are currently planned across Metro Vancouver and the Fraser Valley.
We are likely to see construction starts of rental apartments versus condos to become more balanced, and there will be ample amenities within these new purpose-built rental developments.
CMHC reports that Metro Vancouver has seen a cumulative 18.5 per cent increase in average rents between 2016 and 2018, in line with a 21 per cent increase across Canada in the same period. RBC Economics estimates that 11,300 rental units are required in a two-year period – which exceeds the current pace of construction – just to achieve a 3 per cent vacancy in Vancouver. Average rents will continue to trend upwards.
As local and institutional investors look to achieve economies of scale, the inventory of existing, under-construction and planned rental products of scale will become more appealing investment opportunities. We anticipate more partnerships between local rental developers and institutional capital, such as real estate investment trusts.
With a lack of development land in core areas and growing appetite for multi-family assets in prime locations, we anticipate Metro Vancouver capitalization rates for quality assets to remain in the sub-three per cent range. For assets that are larger-scale with high equity requirements, assets that require a substantial amount of capital upgrades or assets that are currently under-achieving in terms of rental income, we anticipate capitalization rates may experience a slight uptick.
One of the major drivers keeping cap rates at lower levels is the interest rate. If the Bank of Canada holds or decreases the interest rate, cap rates for multi-family assets will remain relatively lower compared to all other asset classes.
Real estate investment firms across the region have shifted away from low initial-yields on existing apartments for the most part, and the notion of overpaying for apartments as land-holds has all but diminished.
In 2020 we anticipate investors will continuously modify their buying criteria to better align with their investment strategies. For example, if buyers are trying to gain a certain return, they may not buy a building that needs an amount of work, or that has a lower cap rate.
There are solid reasons for optimism about the multi-family market into 2020. The desire to live and work in Vancouver and the emergence of its tech sector will keep the investment market competitive. Investors, both locally and nationally, believe in the strong economic fundamentals in both Metro Vancouver and Greater Victoria.
Combining the effects of population and employment growth, a residential market that looks to be rebounding, the low interest rate environment, and the various firms looking to dedicate capital towards rental development and investment, we expect the positive momentum to carry through into 2020.
Lance Coulson is executive vice-president, national apartments group (B.C.) at CBRE Ltd., capital markets, based in Vancouver. He can be contacted at firstname.lastname@example.org