B.C. and Alberta have proportionately more apartment transactions and more new apartment construction than Ontario and Quebec. The reason, SVN Rock Advisors Inc., Brokerage CEO Derek Lobo said, is 45 years of rent controls in the latter two provinces which have deterred development and contributed to affordable housing shortages.
“The industry collapsed because of rent controls and, now that it’s experiencing reinvigoration, it’s the bigger players with deeper pockets that are coming to the market,” Lobo said during the recent Affordable Housing and New Apartment Development conference in Toronto, which was billed as the first significant in-person commercial real estate event in Canada since the pandemic struck.
“But at the end of the day, I think there’s a significant opportunity to build small apartments. That’s historically what we’ve built and hopefully that will return.”
That regional disparity is evidenced in transaction activity, which might surprise those not closely involved with the sector.
Looking at on “new construction” trades – buildings built since 2000 – Lobo said Edmonton had 45 apartment transactions valued at $3 million or more from 2007 to 2021. Montreal is next with 25, followed by Vancouver with 23, Toronto with 16, Halifax with 15, Quebec City and Langford, B.C., with 14, Calgary and Ottawa with nine, and Granby, Que., Dieppe, N.B., London, Ont., and Spruce Grove, Alta., with seven.
During that same time frame across Canada, there have been 100 apartment transactions of less than $10 million, 83 of $10 million-$20 million, 60 of $20 million-$30 million, 46 of $30 million-$40 million, 30 of $40 million-$50 million, 14 of $50 million-$60 million, nine of $60 million-$70 million, five of $70 million-$80 million, and 11 of $100 million or more.
Small apartment buildings dominate market
The majority of apartment buildings in Canada are relatively small and Lobo said about 18,000 of the 25,000 in Ontario have fewer than 50 units.
London has had more apartment construction activity than any city in Canada, but just seven transactions as developers are holding on to their properties. The same is the case in Toronto, where large institutions are responsible for much of the recent apartment development.
Lobo estimates there are about 250 apartments being built and about 750 being planned across Canada. The average transaction price has been steadily increasing in this century and Lobo has noticed more interest in building apartments in secondary and tertiary markets since the pandemic started.
“The apartment sector is a strong sector,” said Lobo. “It’s recession-proof, it’s virus-proof, but it’s not government-proof.
“We really have to think about legislation that can happen in the future that can hurt our industry. One of the problems we have in our industry is that we don’t have a national association of apartment builders. Almost every large group has some representation in Ottawa, but there is no apartment-building group.”
Lobo also said he’d be interested in being part of a group to lobby for apartment developers federally, provincially and municipally.
What’s being built
SVN Rock Advisors, which organized the event, is a Burlington-based commercial real estate and consulting company with an exclusive focus on the apartment sector.
Before building an apartment, Lobo said developers should do a feasibility study to find out: if they should build; what they should build; how much rent they can charge; the depth of the market; how much money they can make if they build and sell; and how to minimize the tax paid on disposition.
Four-storey, wood-framed apartments with surface parking pencil out at the highest yield, according to Lobo.
He’s seeing more five- and six-storey apartments made with cold-rolled steel and hollow cores, which take about 15 months to build.
He said they work well as part of a campus, particularly in smaller markets, where you can build four 60-unit buildings in phases instead of one 240-unit building – because there’s less risk and you don’t have to build them all if they’re slow to lease up.
Many eight- to 15-storey pre-cast apartments are being built in Southwestern Ontario, said Lobo, who has seen fewer 20-plus-storey concrete apartments built in the past two years.
Infill and intensification opportunities
Lobo said many “tower-in-the-park” apartments were built in Canada in the 1950s and ‘60s, and they offer opportunities for infill and intensification. Adding a new apartment building with modern amenities to an existing site will also increase the value of the original apartment because they can share the new facilities.
“There may be opportunities for developers to work with longtime apartment owners, many of whom are now in the second and third generation and are wealthy families that don’t develop anymore and could work with a partner,” said Lobo.
Locations, unit design and size, amenities and a good property management platform drive rents, with amenities being more critical in downtown areas than in suburban areas, according to Lobo.
SVN Rock Advisors had no shopping centre clients 20 years ago. That group now comprises its largest percentage of clients, because owners are looking to redevelop sites since many of them have three quarters of their space dedicated to parking.
For retail owners looking to create a mixed-use community by adding apartment buildings, Lobo cautioned a good retail area isn’t necessarily a good apartment area, and vice versa.
“You may need to give up some of your prime retail space for a good rental entrance,” Lobo added. “In the rental business, the arrival experience is what your residents need to have to pay top rents.”
No concerns about apartment overbuilding
Lobo said there’s demand for new apartments and room to construct them, without concerns about overbuilding in most Canadian cities.
With some office buildings hit hard by COVID-19 and experiencing increased vacancy rates, Lobo said there’s a possibility of converting them to apartments.
“You need to price in the risk, but the reward can certainly be there . . . maybe office buildings are going to become cheaper in certain areas in certain cities.”
Now isn’t the time to be in the build-to-rent single-family rental business in Canada because the housing market is so hot, Lobo said.
However, there’s a definable, scalable and increasingly institutional business in the United States where developers build houses in subdivisions and then rent them. The model also provides the owner with the flexibility to sell individual houses.
EDITOR’S NOTE: This article was updated after being published to add additional context about the apartment building transactions quoted in the opening paragraphs. The data includes “new construction” trades for buildings constructed since 2000.