Apartment panelists at the RealREIT conference in Toronto Sept. 5, 2019 were, left to right: Dean Wilkinson of CIBC Capital Markets, Lisa Russell of Boardwalk REIT, Jonathan Fleischer of CAPREIT, Brad Cutsey of InterRent REIT, Todd Cook of Northview Apartment REIT, and moderator David Bloomstone of TD Securities. (Steve McLean RENX)

Fundamentals for the apartment sector have never been stronger, with low vacancies across Canada and increasing interest from institutional investors and real estate investment trusts.

TD Securities director of investment banking David Bloomstone moderated a session on apartments with five executives at the Sept. 5 RealREIT conference at the Metro Toronto Convention Centre.

He said there’s been $1.93 billion in multiresidential sales volume — involving properties worth more than $20 million, in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal — so far this year.

CIBC Capital Markets executive director of institutional equity research Dean Wilkinson said REITs are performing well on the Toronto Stock Exchange (TSX). Real estate comprises 3.5 per cent of the TSX but has accounted for close to one-third of the equity issuances this year, he added.

Real estate is trading at a 10 to 15 per cent premium over net asset value and, while multifamily has traditionally been seen as a defensive investment, valuations are near historical highs. Wilkinson doesn’t think that will change and believes there’s still room to grow.

InterRent and Boardwalk

Ottawa-based InterRent REIT (IIP-UN-T) owns and manages more than 9,000 apartment suites in 15 cities in Ontario and Quebec.

President Brad Cutsey said he doesn’t care as much about immediate yield or cap rate as he does location when buying an apartment property. The REIT looks for properties where it can add value through its operating platform to increase net operating income through increasing revenues, lowering expenses or both.

Cutsey said InterRent is focusing on delivering good experiences for tenants and it wants to embrace more technology to become more efficient and improve revenues.

Calgary-based Boardwalk REIT (BEI-UN-T) owns more than 30,000 apartment suites in four provinces. Senior vice-president of corporate development Lisa Russell said there was a very strong rental market in Alberta from 2000 to 2015.

However, the turbulence of the last four years has resulted in both incentives and increased vacancies.

They’re both going down now, according to Russell.

CAPREIT

Toronto-based CAPREIT (CAR-UN-T) owns 58,000 suites in major cities in Canada as well as in the Netherlands and Ireland as a major shareholder in European Residential REIT (ERE-UN-X) and a minority shareholder in Irish Residential Properties REIT (RSHPF).

Executive vice-president of operations Jonathan Fleischer said the REIT is seeing “substantially better financial returns” in Europe than Canada.

He explained that capitalization rates are around three per cent and financing is around 2.5 per cent in Canada, while cap rates in Europe range from three to 4.5 per cent and borrowing costs are less than one per cent.

CAPREIT also has the capacity to create approximately 10,000 additional suites on land it already owns.

“We’re looking at increased development costs, so what we’re doing is putting the entitlements in place, which takes a very long time of five to seven years,” Fleischer explained.

“We feel that there’s huge value in just getting zoning, and then we’ll decide what to do with those sites at the appropriate point, whether it be a joint venture, a sale or an actual development.”

Fleischer said CAPREIT is focused on technology, process improvements and finding better ways to do things. It’s also putting a big push on environmental, social and governance benchmarks and hopes to submit an application to join GRESB next year.

Joint ventures

Joint ventures have become more popular in recent years, especially as retail property managers are considering what to do with excess land and density on their sites.

“Anybody on the commercial side considering getting into multires would be very well served to go with a platform that understands the business,” said Fleischer.

Cutsey said InterRent is excited about the joint ventures it has formed to date and looks forward to learning from them.

Projects involving the REITs represented by the panelists were highlighted during the session:

* Boardwalk entered its first 50-50 joint venture with RioCan REIT (REI-UN-T) in 2016, on the Brio development in Calgary. The project has 10,000 square feet of commercial retail space and two residential towers with 162 rental units;

* Boardwalk and Redwood Properties are in a 50-50 partnership in a project at 45 Railroad St. in Brampton, Ont., with 10,000 square feet of commercial space and two residential towers containing 365 rental units;

* Boardwalk and RioCan are doing a 50-50 joint venture on a Mississauga project. They have submitted plans for rezoning to allow 12,000 square feet of retail and two towers with 470 residential units;

* CAPREIT has a one-third interest in the King High Line project in Liberty Village with First Capital Realty. It has 160,000 square feet of commercial retail space and three residential buildings with 506 suites;

* InterRent (25 per cent), Brookfield (50 per cent) and CLV Group (25 per cent) have joint ventured on a project in Burlington involving three parcels of land, acquired for $65 million.

Hot apartment markets

Bloomstone said the Quebec apartment market is attractive right now because of very good fundamentals, especially in Montreal.

Cutsey said InterRent has been bullish on Montreal since acquiring its first property there in 2012. The rental market in Montreal is about double the size of Toronto’s, and the city has benefited from affordability issues in Toronto and Vancouver.

Cutsey pointed out that 35,000 students move to Montreal every year and many of them are staying.

While Boardwalk remains “very bullish” on Alberta, where Russell said rents are averaging $1.35 per square foot, it wants to become more geographically diversified over the long term. There’s no firm timeline for that, according to Russell.

Calgary-headquartered Northview Apartment REIT (NVU-UN-T) owns 27,000 multifamily units and 1.1 million square feet of commercial space. President and chief executive officer Todd Cook said the REIT has a strong presence in Kitchener-Waterloo and London and wants to upgrade its portfolios there.

He likes Ontario because of its growing population and the fact that it’s stabilizing some of the more volatile Western Canada markets where it owns properties.

Cook said Northview will focus on investing in its team to provide good customer service, which can spur rental growth. It will also become more involved with providing more affordable housing through new development.

CAPREIT’s manufactured housing communities

CAPREIT has undergone a rapid expansion from 6,500 pads in manufactured housing communities to 11,669 sites in 72 communities across the country. Fleischer said it loves the business because of low capital expenditures, less intensive management and good financing.

“We rent our pads to people and you can bring your own home and pay us a monthly rent and we provide certain services,” said Fleischer.

Manufactured housing communities also present development opportunities.

“We develop the pads, we put a home on it and then we rent to people in those communities where renting is the preferable option,” said Fleischer.

Cap rates are in the range of five to six per cent, depending on whether you’re buying a large portfolio or just one community at a time, according to Fleischer.

“We would get into this in a more meaningful way, but the deal flow really doesn’t exist,” he said.