Three reasons Canada's apartment building owners are happy
Credit to Author: Evan Duggan| Date: Wed, 11 Sep 2019 19:04:11 +0000
Canada’s rental apartment building market is the strongest it’s ever been — especially from the perspective of apartment building owners.
Buildings are practically full across the country, rental rates are at or near 10-year highs in nearly every market, and average national rents have climbed 4.4 per cent annually over the last two years, according to a new report by commercial property brokerage house CBRE.
This rapid rise of rental rates is earning more money for building owners. Total annualized returns for the Canadian multifamily sector were 9.8 per cent as of the first quarter of this year, just behind the industrial sector.
Canada’s national average rental apartment vacancy rate ended 2018 at 2.4 per cent, below the 10-year average of 2.6, CBRE said in its national multifamily mid-year update.
Investors are lining up to get into the market in most cities. Multifamily investment volume reached record levels for four consecutive years, including an all-time high of $8.3 billion in 2018.
Apartments are traditionally viewed as stable and defensive assets to own, said CBRE Canada vice-chairman Paul Morassutti.
“(The asset class) never displays great amounts of volatility,” he told Postmedia last week. “Very rarely would you have declines in rental rates or net operating income. Typically, things would go up in a slow and steady fashion and it was always a favoured asset class for all those reasons.”
Paul Morassutti, is vice-chairman at commercial property brokerage house CBRE Canada.
Here are three other main drivers that Morassutti and his firm believe will continue to stoke demand for apartment buildings in Canada.
Canada’s population is expected to grow by nearly one per cent annually over the next four years, surpassing growth in all other G7 countries, the report said.
Much of this momentum is being fuelled by immigration, which accounted for 80.5 per cent of the country’s population growth last year. The government has a plan to welcome one million new immigrants between 2019 and 2021.
Much of that new population is settling in the Toronto, Montreal and Vancouver regions, with Toronto and Vancouver experiencing the sharpest annual apartment rental price growth of 5.0 per cent and 7.1 per cent, respectively, over the past four years.
Canada’s big cities are not building enough new rental apartments to keep up with demand, when compared to global peers, the report said.
The largest rental market in Canada is Montreal with just under 600,000 units. Toronto follows well behind with 313,000 units, and Vancouver trails with just 109,000 units. Units on the secondary market, including privately rented condos, do close the gap, but it’s clear that renters across the country need more options, or else rents will continue to climb.
While we are seeing increased construction of rental units more recently, the overall number remains relatively low, Morassutti said.
An expanding proportion of Canada’s big-city dwellers can’t afford to buy a home.
This factor, above all others, is probably having the greatest effect on stoking apartment rental prices, while spurring investors to buy buildings, Morassutti said.
“In Toronto, if you want to buy a detached house or semi-detached house, you need to have a household income of close to $200,000,” he said. “The average household income in Toronto I believe is something like $100,000.” (According to the last Canadian census, the average household in the Greater Toronto Area earned $87,993 after tax.)
That leaves residents with only a couple of choices. They can buy a condo, or they can rent.
“As affordability has become more of an issue, and it’s an issue that I don’t believe is going to go away in (Vancouver and Toronto), that will continue to underpin strong rental growth — especially when we really don’t have a lot of supply in purpose-built housing coming on stream,” Morassutti said.
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