Over the past five years, the real-estate marketplace has shifted to favour purpose-built rental apartments. Vacancy rates are dropping, average rents are rising, cap rates are at all-time lows and buildings are selling for some of the highest prices ever seen. Developers and investors have been impressed by how well the sector has performed over the past decade, and many are looking to enter the market.
While apartment buildings benefit from a perfect storm of low supply, high demand and low interest rates, a developer or an investor cannot assume that they can just build a new apartment and expect the renters to come. Developers and investors require specialized knowledge of the marketplace to fully understand what prospective tenants want and what the market will provide. The best way for investors and developers to build the best building in the best market is to commission an impartial feasibility study from consultants who are experts in the field.
Questions must be answered
A feasibility study requires researchers to look at target markets in depth and identify the best properties to invest in. A lot is riding on their skill, as developers, builders, financiers and investors need to know the answer to key questions before construction starts. Such questions include: what is the depth of the market? What unit mix, amenities and features are appropriate for potential renters in that market? What are the highest rents that can be charged? Should certain lifestyle renters (such as family renters or student renters) be targeted?
Ultimately, an impartial feasibility study tells a potential investor whether they should build and what they should build. This way, a new building meets the target marketplace most efficiently, generating the highest rents for the lowest cost, improving net operating income and the ultimate value of the property.
Potential developers or investors should never conduct their own feasibility study on a property. Investors who conduct their own feasibility study are too close to the investigation, unobjective, or limited in their experience. It is too tempting to let wishful thinking drive conclusions, and a lack of experience thwarts an investor’s understanding of the nuance of the market.
An objective and thorough feasibility study is best achieved by industry experts who have no financial stake in the outcome of the project. These experts are able to take the long view and provide investors with the advice they need to hear, rather than the advice investors want to hear.
A well-chosen independent consultant will also be knowledgeable about the cities and towns that are most undersupplied in terms of the best quality rental apartments. This information is not always easy to come by as the uninitiated eye could be drawn by a large population size, rather than an area’s local household incomes, a city’s zoning bylaws or the presence of competing supply in the marketplace.
What makes a good feasibility study?
Independent consultants have access to resources that individual investors do not. In addition to long experience in the field, consultants can rely on an army of field surveyors who can visit as many of the comparable rental properties (and some condominium properties) as possible. These surveyors are trained to compare rental apartments in all details, from curb appeal to leasing forms.
They are able to thoroughly assess a project’s competition and identify the best market position for a new development. The consultant’s researchers will also review official census data, local bylaws and Canada Mortgage and Housing Corporation data to assess how suitable the local rental market is for new apartment construction.
Developers will receive a detailed report identifying the best site to build, the best height to build, the best mix of units, best size of units, best amenities to include and the appropriate rents to charge. Developers can count on the fact the data is objective, giving them confidence the rental market is really ready to absorb their investment.
As exciting as the purpose-built rental apartment market is, developers and investors do not have the experience to effectively invest their hard-earned money. Without an objective feasibility study, investors are entering the marketplace blind, and they will lose out on their return on their investment.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.