The executive roundtable at CAIC 2019 in Toronto: moderators Paula Gasparro of CMLS Financial, and James Wilson of Realstar Management, panelists Daniel Drimmer of Starlight Investments, Ugo Bizzarri of Timbercreek Asset Management, Philip Fraser of Killam Apartment REIT, Anne Morash of GWL Realty Advisors Inc., and Adrian Rocca of Fitzrovia Real Estate.
(RENX Steve McLean)

Government regulations are slowing the supply of much-needed new purpose-built rental apartments, and tighter rent controls could exacerbate the problem, according to a panel of senior executives which closed the Sept. 4 Canadian Apartment Investment Conference at the Metro Toronto Convention Centre.

Starlight Investments president and chief executive officer Daniel Drimmer said his company is interested in developing more affordable housing, but that would require government policy changes to incentivize it. Those could include bonus density, waiving development charges and tax breaks, according to the leader of a firm that has $11 billion of assets under management in Canada and the United States, comprised of 36,000 multifamily units and 6.2 million square feet of commercial space.

Drimmer believes rent controls already in place in some Canadian jurisdictions are working, because they incentivize investors to purchase older buildings and renovate them.

However, rent regulations recently introduced in New York and Berlin to protect tenants concern Timbercreek Asset Management senior managing director, chief investment officer and global head of direct and debt investments Ugo Bizzarri. He fears similar legislation could be introduced in Canada.

Timbercreek has $10 billion of assets under management and has offices in North America, Europe and Hong Kong.

“The government is looking to build more and I think rent controls do the exact opposite of what we need,” said Bizzarri. “They hinder supply and, frankly, our whole industry needs more supply.”

Affordable housing issue

There’s no denying a housing affordability issue exists in several Canadian cities.

GWL Realty Advisors senior vice-president of multiresidential Anne Morash cited a study by the Canadian Centre for Policy Alternatives.

It conducted an inventory of 800 communities and found only 24 sites in which a minimum-wage worker could comfortably afford to rent an average-priced one-bedroom apartment.

GWL Realty Advisors has 39.7 million square feet of assets under management valued at $14.2 billion. The residential sector accounts for 23 per cent of that.

Morash said cities aren’t encouraging multifamily rental housing, noting almost one-third of the land in Toronto is zoned for single-family dwellings.

“There’s still a belief that home ownership is better than renting because it’s a way to accrue wealth and it’s also a way to stabilize communities. The lack of purpose-built rentals has allowed condos owned by investors to fill that gap.

“From a policy point of view, there’s an opportunity for municipalities to save the best sites and best places for high-quality rental housing and to zone them specifically for multifamily, as British Columbia has done.”

Morash is also concerned Airbnb and similar companies in the secondary rental market negatively impact affordable rental housing because they affect both supply and rents.

She cited a study by McGill University that said up to 31,000 units across Canada had been pulled out of the mainstream rental market in favour of the secondary market.

Bizzarri said the Federation of Rental-Housing Providers of Ontario does a great job of promoting the industry to the provincial government. However, he believes the real estate industry should be more involved in municipal politics.

Bizzarri said governments could also help by instituting policies to cut development time, noting it takes three to five years to get density approved and another 12 to 24 months for site plan approvals. He’d like to see density approvals within a year.

Renter demographic has changed

Killam Apartment REIT (KMP-UN-T) president and CEO Philip Fraser said increased immigration has been the biggest factor in reducing vacancy rates. Killam has a $2.7-billion portfolio of apartments and manufactured home community properties in Atlantic Canada, Ontario and Alberta.

Bizzarri said the renter demographic has almost tripled in size over 20 years and it’s no longer largely made up of university students and immigrants. Many younger people can’t afford to buy a house as quickly as before, and seniors are selling their houses and want to rent in quality buildings.

Starlight often purchases older properties and then renovates, which Drimmer said is attractive to renters who want a nicer product.

A lot of older stock is generally well-located near schools and public transit, and has larger suites, he added.

There’s a “dramatic demand” for renovated units, even though the rents are higher. Drimmer said people will pay more if they’re getting the right product and service in return.

Favoured apartment investment markets

Fitzrovia Capital CEO Adrian Rocca said his company has a core urban strategy focused on Toronto. He also likes fringe urban locations with direct transit links to downtown Toronto, such as Vaughan and Mississauga.

“We’re focusing on markets where we believe our cost of capital is most effective,” said Rocca. “The value-add space is a logical extension to our existing development business.”

Starlight is very focused on investing in Vancouver, Montreal and Toronto, as well as bedroom communities within a one-hour drive.

“We’d like to maintain our velocity and growth profile in continuing to buy apartments in Canada, especially in our target markets,” said Drimmer. “My fear is a lack of product available to buy.

“It’s getting harder and harder to find product to buy here in Canada.”

With the population increase and job growth in Southern Ontario, Fraser said it’s the best apartment market in Canada. Killam likes cities just outside the Greater Toronto Area (GTA), including Kitchener-Waterloo and Cambridge.

Killam also looks at land and properties with a retail component where apartments can be built. Fraser believes the trend to more mixed-use developments will continue.

Timbercreek is focused on Vancouver, Montreal and Toronto, and will also look at opportunities in Calgary, Edmonton and Halifax. Bizzarri said it may do more development in 2020 to intensify properties it already owns.

GWL Realty Advisors has properties in Canada’s seven largest markets and has identified Kitchener-Waterloo, Hamilton, Guelph and Victoria as good secondary markets.

Morash said the company is partial to cities that attract immigrants and 20- to 39-year-olds, have a diverse economic base and good public transit.

“We like markets and economies that have a thick job market. That really implies a market where highly trained people can come and job-hop. That opens up opportunities for other people and also creates a support system of professionals that make that market more economically stable.”

Morash doesn’t expect GWLRA’s strategy to change in 2020, noting it is pursuing projects in six of its seven major markets.

“We’re actively pursuing assets that are for sale and we also have a very robust development program,” she said. “In the GTA alone, we have $1 billion worth of development that’s starting in earnest or has started in earnest.”

Economic outlook

Looking forward over the next 12 to 18 months, Morash is “bullish” about GWL Realty Advisors’ prospects.

Three of the other panelists weren’t quite as optimistic.

“Collectively as a market, everyone’s cautious going into next year,” said Rocca, who believes Canada could easily be pulled into recession.

“We as a group are looking at more defensive locations. We are overcapitalizing our deals and pulling back on some of the debt load to make sure we can manage a bit of a slowdown.”

Bizzarri thinks Canada is heading for slower growth and a small recession within 18 months: “We’ve been in the longest expansion in history and it can’t go on forever.”

Drimmer believes there will be a significant global economy slowdown in the next 12 to 18 months. However, he believes Canadian apartments have a good risk profile and secure cashflow to weather an economic downturn.