One of the largest multifamily rental portfolios to come on the sale block in Calgary for more than a decade is being jointly marketed by two brokers in the city.
The portfolio is 99.2 per cent occupied and has 497 parking stalls. Units consist of 57 studios, 316 one-bedrooms and 152 two-bedrooms. It had a stabilized net operating income of $5.515 million in Q1 2019.
Eric Horvath, senior vice-president/partner/national investment services for Colliers in Calgary, said the portfolio provides potential investors with the opportunity to own a premier rental investment portfolio with exceptional cash flows in a tightening residential rental market.
A marketing brochure says investors could also achieve substantial rental income growth through the continuation of a renovation program, redevelopment and leveraging current market rents. Each property is in a premium location within its respective submarket.
Family-owned business selling portfolio
The portfolio has been privately owned by a multigenerational Calgary-based company. The majority of the portfolio was built by the current owner/operator’s father.
The reason for the dual listing by two commercial real estate firms is due to the relationships built with them through different elements of the ownership group.
No price has been attached to the listing.
On its website ExecSuite says: “ExecSuite is a family-owned business founded by Bob Stern in 1978. Traveling frequently between Calgary and Vancouver for business‚ Bob desired something more personal and functional than a hotel room. In establishing ExecSuite‚ he committed to offering travellers and families a comfortable‚ friendly home away from home.
“Today‚ sons Michael and Peter Stern build on that proud legacy with what has become Calgary’s leading furnished serviced apartment provider.
“Although much has changed in three decades‚ the brothers remain committed to their father’s founding principles: stylish‚ comfortable furnished serviced apartments in Calgary’s premiere communities with outstanding guest services‚ features and amenities.”
Horvath said the vendor’s hope is to sell the entire portfolio in one transaction.
“Having said that, we’ve been tasked with getting the vendor the most lucrative deal that would be available. That would be effectively price and terms. Whatever format that sort of materializes in is yet to be seen,” he said.
Furnished executive apartments
Historically, ExecSuite operated most of the portfolio as short- to mid-term executive furnished units. Part of that business practice was to offer best-in-class rental product. Horvath said the owner built the portfolio to resonate with that mandate and therefore location and quality were key.
“We look at this as truly a best-in-class portfolio in terms of fit and finish and location and construction method. Having said that, the short-term furnished business model changed, I would say in about 2014, with the downturn in the energy markets,” Horvath said.
“Much of the portfolio was reverted back to traditional rental stock, save and except the ExecSuite Tower which is located in Eau Claire. That one still operates, by and large, as furnished rental units.”
He said one of the key aspects of the portfolio’s appeal from a national perspective is economy of scale. It’s at the threshold which would enable an outside purchaser to seriously consider entering the Calgary marketplace.
Horvath said four properties – Eau Claire Manor, ExecSuite Tower, The Dana and The Dahlsen – have redevelopment potential of up to 390,000 square feet of building area.
“Not only can you buy them as operating assets, but you can also sort of land bank them for future development. From a developer’s perspective, that works well because they can buy a performing asset with the outlook to redevelop it at some point down in the future,” he said.
Potential for revenue growth
Horvath added there is also substantial revenue growth potential through the continuation of a renovation program and adjustment of rental rates to reflect current market rents. Approximately 55 per cent of units have been renovated or updated in the past 10 years.
With in-place rents averaging $1.79 per square foot and market rents averaging $2.06 per square foot, the portfolio provides investors with 15 per cent immediate potential revenue growth.
Each property is accessible via transit and major arterial roads, providing access to employment hubs and entertainment nodes, and accessibility to and within downtown Calgary.
The offering comes at a time when Calgary is experiencing strong market fundamentals.
CBRE’s 2018 multifamily market report cites Canada Mortgage and Housing Corporation data showing Calgary’s apartment vacancy rate decreased for the second consecutive year, from 6.3 per cent in October 2017 to 3.9 per cent in October 2018.
“Due to increasing demand, supply in the purpose-built rental market grew by 3.7 per cent year-over-year from 38,160 units in October 2017 to 39,567 units in October 2018. Despite this increase to inventory, demand outpaced supply,” said the report.
“After two consecutive years of decline, overall apartment rents increased in 2018 despite competition from condominium apartment rental units. The average rent is now $1,146; a 1.9 per cent increase from 2017.”
A national CBRE report on the multifamily market in mid-2019 said in major cities assets now regularly trade for cap rates below three per cent due to the belief there remains additional runway for further rent increases.
“The downward trend in cap rates shows no signs of stopping and should be further supported by an increase in access to cheap debt brought on by the recent shift to dovish stances by central banks around the globe,” said the report.
“Despite multifamily cap rates being the lowest in the country, the spread to benchmark bond yields is above the 10-year average and has not neared a point where it would be prohibitive for investors due to incremental upside in multifamily yields.
“The recent landslide in global bond markets will only intensify this dynamic further and should make investment in defensive multifamily real estate assets an enticing option for private and institutional capital alike.
“With fundamentals looking well-supported by economic and demographic tailwinds, a strong investment landscape and a sophisticated landlord community, the multifamily sector looks poised to maintain its standing as a sought-after investment vehicle for years to come.”