This week’s top stories focus entirely on Western Canada’s multi-family and rental markets, from Vancouver to Edmonton. In Vancouver, rents continue to rise as demand continues its steep upward slant to rapidly outpace supply. In the Prairies, apartment vacancies remain much higher, but savvy investors are snapping up multi-family assets in anticipation of growing demand.
Here is Western Investor’s pick of the top commercial real estate stories published this week.
Nearly $3 billion of Metro Vancouver purpose-built rental properties exchanged hands last year, finds report.
Close to $3 billion worth of purpose-built rental properties changed hands in Greater Vancouver last year, according to the numbers crunched by the Goodman team at HQ Commercial.
The sum represents a 37 per cent increase from last year, even though the number of properties changing hands totalled 155, just five more than in 2017. The average price per suite increased 23 per cent, to $530,401.
“The real story behind the stats is all about the dirt,” Mark Goodman said. “The rarity of land throughout Metro Vancouver, coupled with investment growth in the condo and rental sphere, continues to drive our markets.”
While strong demand for rental accommodation allowed investors to enjoy good cash flow in the past, the motivation today is increasingly about redevelopment opportunities. Supply can’t keep up with demand, and an aging stock suited to redevelopment in rental-friendly municipalities means many properties’ land values have risen – in some cases, Goodman said, “almost beyond recognition.”
Deals in the West End, for example, broke the billion-dollar mark as 21 buildings comprising a total of 1,373 suites sold.
The strong activity put paid to mid-year analyses that saw a slowing market for multi-family properties.
Avison Young, which tracks sales $5 million and greater, felt that political uncertainty in the run-up to last October’s civic elections would combine with government efforts to cool real estate markets and rising interest rates to cool deal activity and pricing.
“The likely pause in the market will allow for potentially better pricing to be achieved on properties than what has been available recently,” Avison Young opined in its mid-year multi-family report. “Purchasers will gain more certainty and a greater understanding of what pricing the market can support.”
While this wasn’t the case in Greater Vancouver, political uncertainty remains.
Goodman reports that some investors are shying from investing in purpose-built rental properties as a result. However, with no new land being created and the development environment still fraught with hurdles and delays, short supplies and strong tenant demand seem poised to buoy opportunities for investors.
Councillor Jean Swanson says rents will keep rising unless vacancy control and rent freezes are implemented.
We've all heard Vancouver house prices described as "bubbly" – but are rents about to do the same thing?
Rental prices are expected to go up by an average of 7 per cent in 2018, despite the provincial rent control caps now in force, according to a Rentals.ca forecast issued January 21.
That’s the third-steepest predicted rise in the country, after Toronto (where rents are forecast to increase 11 per cent) and Ottawa (9 per cent), said the national report.
Local housing experts interviewed by the rental website for its annual forecast said that it’s going to become increasingly difficult to find an affordable rental apartment in Vancouver. This is despite new measures that tie the annual rental increase for a sitting tenant to inflation, which is 2.5 per cent in 2019.
“The dynamic is shifting away from ‘bubbly’ house prices to ‘bubbly’ rental rates,” wrote report author Ben Myers, president of Bullpen Research & Consulting Inc.
“With expanded rent control implemented in 2017, tenants are incentivized to stay in their current home. This is not ideal, as some people may choose not to take a job in another part of the city because of higher rents. As fewer units are turned over, there is less supply, and rental rates [on any newly advertised units] increase further.”
City of Vancouver councillor Colleen Hardwick told the rental listing website that Vancouver’s ultra-tight rental market is having a serious social impact. “Seniors are being forced out of their homes. There are rental evictions; aggressive buyouts.” She said that rising interest rates, housing price stabilization, flipping properties, and newer rentals replacing older buildings are the key issues to watch in 2019.
Councillor Jean Swanson said she was also worried about affordability. “The issue is scarcity; the vacancy rate is low,” she said. “Owners are buying out buildings at inflated prices, and without vacancy control they are buying out the tenants… the older the building, the more vulnerable the tenants.“
Swanson believes that vacancy control, which would prevent landlords from raising rents between tenants, along with a rent freeze that would prevent yearly increases, would solve the problem.
The idea of vacancy control has seen a major backlash from the development community. The Urban Development Institute has claimed it would be the “death knell” of purpose-built rental supply and would do more harm than good.
Some could call this purchase spree of Calgary and Edmonton assets 'counterintuitive'.
One of Canada’s largest residential landlords is on an acquisition binge and its counterintuitive call on the Alberta economy is paying dividends.
As others ran for cover, Mainstreet Equity Corp. continued to buy apartment buildings through 2018 and the decision paid off.
“Mainstreet managed to not only survive but thrive in 2018, producing our best annual results since the recession began in 2014. This included a return to double-digit growth across all of our key real estate metrics. NOI [net operating income] grew 12 per cent compared with 2017 while FFO [funds from operation] per share grew 18 per cent and rental revenues increased 11 per cent,” the company reported.
Mainstreet’s same-asset vacancy rate dropped to 6.3 per cent in Q4 2018 compared with 9.6 per cent in Q4 2017, while same-asset revenues increased 5.2 per cent to $27 million, up from $25.7 million in Q4 2017.
And this was accomplished despite rising interest rates – the company’s biggest operating expense – and the introduction of Alberta’s carbon tax and higher property taxes.
The buying spree has been impressive. In the fourth quarter of 2018 alone, Mainstreet spent $35.7 million buying seven 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.
Mainstreet owns or manages more than 12,000 rental apartments, 55 per cent of them in Alberta, including 2,182 units in Calgary and 4,284 units in Edmonton.
Sydney moves down to third place in Demographia rankings as Australian home prices drop; Hong Kong remains least affordable.
The widely reported annual Demographia Housing Affordability Survey has been released January 21 – and despite Vancouver’s real estate market slowdown, the city has moved back up in the rankings of the world’s least-affordable housing markets.
Having been ranked in third place for three years running (after Hong Kong and Sydney, Australia), Vancouver has the dubious honour of displacing Sydney to return to second place in the 2019 chart. Hong Kong remains top of the list for the ninth year in a row.
The report ranks 309 cities in eight countries using a method called the median multiple, which is calculated by comparing the city’s median home price (in 2018’s third quarter) with the median local household income. The countries in the survey are Canada, the U.S., China (Hong Kong only), Singapore, Australia, New Zealand, the U.K. and Ireland.
Vancouver is deemed to have a median multiple of 12.6, which is the same as in 2018, and means that the median Vancouver home price is 12.6 times the city’s median household income. Hong Kong’s median multiple is slightly up from last year, now at 20.9, and Sydney’s has dropped to 11.7 from 12.9 last year.
The report authors wrote, “Vancouver has experienced significant housing affordability deterioration among major markets, with its median multiple deteriorating from 5.3 to 12.6 [since the first survey in 2004], equivalent to 7.3 years of pre-tax median household income.”
The report acknowledged Vancouver’s recent price slowdown, but said this had not improved affordability, as most of the price drops have been at the high end of the market. “While a British Columbia foreign buyer tax has been associated with a moderation of house prices in Vancouver, reductions have been concentrated in higher cost houses, with middle market housing affordability having continued some deterioration.”