The number of purpose-built apartment transactions, and the size of those deals, has been trending downward.

While a series of interest rate hikes over the past two years are responsible for some of the slowdown, other factors are also at play in Canada's apartment market.

SVN Rock Advisors Inc., Brokerage president and broker of record Derek Lobo moderated, and was an active participant in, a panel discussion that looked at deal flows and trends across the country at the Sept. 13 Canadian Apartment Investment Conference at the Metro Toronto Convention Centre.

“If you've got a long-term vision for the business, and you need to have a long-term vision for the business, everybody expects apartments to come back,” Lobo said.

British Columbia

“Dollar volume has decreased 60 per cent, transactions have dropped 58 per cent and values have dropped anywhere from 15 to 25 per cent throughout Metro Vancouver,” Goodman Commercial principal Mark Goodman said. “That's translated into cap rates rising 75 to 125 basis points.

“We are still seeing activity in the market, but buyers and investors are gravitating toward smaller properties.”

Goodman said the biggest challenge for Vancouver brokers in recent years had been competing to land the listing for an apartment building.

That has shifted and his company is now turning away 75 per cent of the groups who approach with properties for sale because their pricing expectations are unrealistically high.

For the listings Goodman is taking on, he’s adamant that offerings are priced from the start and that the price should be reduced if there’s no activity after a few weeks.

If sellers aren’t forced to dispose of their properties, they’re content to hold onto them while smart buyers are willing to bide their time until the right opportunity comes along.

“On turnover, they're able to get the rents up, at times, over 100 per cent,” said Goodman.

“The smart money is out there hitting 15 brokers and putting in 15 offers and, if they land one, they're getting a good deal relative to what's happened over the last few years.”

Goodman said purchasers need 65 per cent down payments to achieve their debt coverage ratios. 

“It's really changed the type of players who are entering the market right now, and typically they have a long-term vision,” Goodman said.

There are rent controls in B.C., which limits investment appeal and re-investment in apartment opportunities.

Just 12 per cent of apartment transactions last year involved institutional money. 

“I have advocated that institutional money and REITs are probably the best option for us to create a healthy environment,” Goodman said.

“They're accountable, they're professional, they're well-capitalized and they play by the rules.”

Municipal government policies are discouraging apartment development, according to Goodman.

While higher rental rate projections offer some potential optimism for developers, Goodman said many smaller companies are either putting projects on hold or selling their sites; larger groups are able to better withstand current market conditions.

Prairie provinces

Population growth has outpaced multifamily supply by about 40 per cent in Alberta in recent months, so demand is very strong, according to Franca Cerqueti, vice-president and managing director of Western Canada real estate finance for CMLS Financial.

Institutional buyers are on the sidelines while private investors are interested in the Prairie market because unit prices are lower than in Vancouver and Toronto.

“Private buyers right now feel like they’re in a leadership position to acquire without competing against institutional money,” Cerqueti observed.

“They want value-add opportunities to fulfill their vision and they're willing to be longer-term investors willing to buy in at various price points.” 

Capitalization rates have been higher in the Prairies and Cerqueti doesn’t anticipate either a large upside or compression happening because deals have been pencilling well.

There are no rent controls in Alberta or Saskatchewan. 

Cerqueti said CMLS has a huge portfolio of development financing deals on the Prairies. Some developers that may be challenged by increasing interest rates are looking to sell their projects or find partners, she added.

“Everyone's worried about costs all the time,” Cerqueti said, “but I think when you can have much more influence over revenue, they should be putting much more effort into that part of the equation.”

Ontario

“If you go back two years, you could finance an apartment acquisition for just over one per cent (interest),” Colliers VP Dayma Itamunoala said. “Now it's five per cent with a lower LTV (loan-to-value ratio), so it's been pretty painful.”

Many big buyers moved to the sidelines a year ago and “bite-sized transactions are doing better” in the Greater Toronto Area (GTA).

Itamunoala said there were five apartment building transactions valued at more than $50 million in the GTA during the past 12 months compared to 22 in the previous 12 months.

Itamunoala’s group has been involved with 15 apartment building transactions this year. Six were off-market deals and he said they’re performing better.

Itamunoala said there haven’t been fire sales of apartment buildings in Ontario, so buyers aren’t finding the great deals they expected. 

“It's hard to buy in good times because you're competing against 10 other offers,” Itamunoala explained. “It's just as hard to buy in bad times because it's hard to make the deals pencil, but great buyers are buying.”

“You're never going to catch the bottom of the market,” Lobo added. “There’s no blood in the streets, but there’s a better deal to be had today than 12 months ago.”

The fundamentals of the Ontario apartment market, where Itamunoala said cap rates have been going down for five years, remain strong. 

“In the near term we’ll have some challenges,” he said, “but five years out, I think we're going to be in a great spot.”

Lobo expects rental growth to continue to be strong.

“From the outside looking in, you're thinking rents are so high that any pro forma can work,” said Itamunoala regarding new apartment development. 

“But in reality, costs are still going up. They’re slower than they were, but it's hard to make the numbers work.”

“Most developers in Toronto can't make the numbers work,” said Lobo. “But I think the further out you go from Toronto, it starts making sense.”

Quebec

Asset values haven’t changed much in Montreal because many are small buildings with fewer than 20 apartments and only 25 per cent have more than 50 units, said Thierry Samlal, executive VP and chartered real estate broker for PMML. 

The price for those buildings with fewer than 20 units has increased by $6,000 per door and cap rates have decompressed a bit, as apartments that are selling have been renovated and had value added.

The average price for a concrete apartment building in Montreal is $225,000 per unit. These buildings are of interest to private buyers who are now entering the city because institutional investors have been quiet.
  
Samlal said a lot of equity in Quebec was refinanced in 2021 and 2022 and isn’t back on the market yet.

Once interest rates hit four per cent, the number of listings went up and the number of transactions went down along with financing, Samlal added. 

“We need a comfortable difference of about half-a-per cent between the cap rate and the interest rate for things to pick back up again,” said Samlal.

“We have a difference between buyers’ expectations and sellers willing to sell, but we have an inventory problem which is still pushing the market towards a sellers' market.”

Samlal thinks open bids, without firm deadline dates, make the most sense in Quebec when it comes to offering apartment buildings to the market.

Samlal said most Quebec developers are looking for partners for their projects these days to lessen their risks.

Transit-oriented development is very strong in Montreal and the provincial government is investing in social housing, according to Samlal.

Lobo said municipal, provincial and federal programs need to line up better to get more needed social housing built.