It’s a pretty good time to invest in the oft-neglected apartment industry, according to ROCK Advisors Inc., CEO Derek Lobo. “Job growth, low vacancy, income growth, population growth. It just doesn’t get better for apartments.”
Lobo’s firm has just published its first-ever state of the nation report on the apartment industry for Ontario – with a national report to follow. The 72-page ROCK Apartment report ranks the largest 34 centers in the Province in terms of their apartment markets based on economic performance, job growth, the state of the current apartment market, trends in vacancies, rents, cap rates and supply.
The top markets? The area of Vaughan/King/Richmond Hill heads the list, followed by Markham and Ottawa. At the bottom are the southern Ontario cities of St. Catharines, Windsor and Niagara Falls. Four cities in northern Ontario (Sudbury, North Bay, Sault Ste. Marie and Thunder Bay) were cited as overlooked places to invest. “Investors are leaving money on the table by not tapping into the northern centers that are growing now. These well-established towns have sizable apartment markets, and times have gotten better in the commodities industry,” the report stated.
Lobo said that he decided to commission the study and make the detail widely available (and free) because the apartment industry has long been neglected and can only benefit from increased exposure. “The apartment business is the orphan of real estate,” said the CEO of the Burlington, Ontario-based apartment brokerage firm. “Housing prices are analyzed every which way by the real estate boards and CMHC, etc.”
The reality is that apartment industry has been neglected because it wasn’t a very exciting investment play. “Apartments have had 25 years of rent controls and rents were capped. But now because of vacancy de-control and changes to the legislation, apartments now to a large extent are in the free market. That makes it interesting. That allows for arbitrages to happen for people who have knowledge.”
The end of four decades of provincial regulation for the apartment industry comes as it has emerged from the economic downtown in surprisingly strong shape, with lower vacancies, higher average rents, low cap rates and favourable economic and political trends.
Apartments are getting noticed too. The report notes that nine REITs – Timbercreek, Boardwalk, Killam, Skyline , CAPREIT , Interrent , Mainstreet, Centurian and TransGlobe – all have “large regional and national portfolios. The industry remains very fragmented, however. The 25,000 apartment buildings of six units or more in Ontario have 13,000 owners, Lobo said. “There is a huge, diverse group of people” owning the provincial apartment stock.
The report argues that conditions have changed so much that it is now cheaper to build apartments than buy them, especially in markets such as Toronto, which can be characterized as having some of ”the oldest and most run-down rental stock on the continent.” In the middle of a condo building boom (16,000 units slated for the GTA in 2011) demand exists for high-risk space in Toronto and other major cities. With more than two decades of tough rent controls forcing traditional apartment developers out of the game and new apartments exempt from rent limits, the industry is ripe for new entrants.
Lobo contends that condo developers are the logical players in the newly emerging apartment market. They simply have to change their focus from selling units to renting them and, once their buildings are fully leased, can sell them to one of the new and numbers apartment investors. “It makes more sense to build than to buy if you know how to build which most people don’t and if you are prepared to take development risks which again most don’t,” he said.
Lobo expects to publish an Ontario report annually. Currently, his firm is in development of the Rock New Apartment Construction Report slated to come out in February. “In that we are going to study every province across Canada, identify what new buildings have been built and where the opportunities are.”
As well, in April Lobo’s firm is organizing a tour to take 100 developers to Dallas to see new apartment construction in partnership with the largest apartment developer in the U.S.
Those interested in the ROCK Apartment report can obtain copies at industry conferences or by visiting the firm’s website: Rock Apartment Advisors .