Forget the glittering downtown office towers and the fancy shopping malls. When it comes to making money in commercial real estate today the best bet in most Canadian cities is simply buying or building rental apartment buildings.
Across Canada in the second quarter of this year, the multi-family market – what rental apartment buildings are known as in real estate lingo – was the top-performing asset in commercial real estate in terms of investment action, according to Altus Group.
Unlike industrial, offices or retail, the multi-family sector is open to everyone from mom-and-pop investors to giant real estate investment trusts and other well-heeled institutional players.
Also, unlike other commercial avenues, the road to riches in the apartment rental sector is characterized by extremely cheap financing with mortgage insurance secured by the federal government offering lending rates lower than a first-time home buyer or an office developer could ever hope for.
Various governments also help apartment investors out by making it increasingly difficult for tenants to escape renting and buy a home.
When the federal mortgage stress test was introduced last year, it drove an estimated 20 per cent of potential homebuyers right out of home ownership, because they had to qualify at five-year mortgage rates in excess of 5.4 per cent.
Meanwhile, someone buying an apartment building can secure 10-year loans at about half that rate with mortgage insured by Canada Mortgage and Housing Corp.
There are rent controls in some jurisdictions, but generally landlords of residential tenants face lower risks than other commercial investors who can face months, not days, to fill a vacant space if a tenant moves out.
Today, renters account for at least 30 per cent of Canadian households.
In some western cities, multi-family is by far the dominant real estate play. During the second half of this year, investments in apartment buildings in Edmonton outstripped office, industrial and retail sectors combined in both the number of transactions and dollar volume. In Calgary, office building owners are converting office towers to residential apartments where the vacancy rate is lower and the yields are higher.
Until this year, due to a policy-induced residential downturn, multi-family properties and land were the leading commercial investment in Vancouver, yet landlords remain protected by the highest rents and lowest vacancy rates in the country.
When it comes to commercial real estate in Canada, the lowly apartment tenant represents perhaps the most important person in the industry.