Low-rates, hungry investors push up GTA apartment values

Today’s environment of ultra-low interest rates and deep-pocketed investors (or their banks) have pushed greater Toronto area apartment building values ahead by 12% from 2011 averages, according to the recently released Multi-Family fourth-quarter report from commercial real estate firm Ashlar Urban.
The Toronto-based firm expects the market for mult-res to stay hot as long as interest rates remain at the rock bottom range that they are today.
“Our feeling is that it is primarily yield driven, that is what drives real estate,” said John Carter, a sales representative with Ashlar Urban. “As long as interest rates stay low, people like the stability of multi-family.”
Even the country’s greatest condo boom has not managed to dull the appeal of apartment buildings for investors. “It is interesting because that whole shadow rental market of new condo development has basically been servicing the demand for new rental,” he said.
Location is the advantage
Those gleaming new condos are in tough against existing multi-res towers, said Carter. “It is almost helping some areas because you can’t replace the location. Existing rental stock has an advantage just purely from a location standpoint and some people prefer dealing with a professional landlord versus dealing with the one-off guy who owns five units.”
Apartments are also a cheaper option, a major consideration for newcomers to the country and young people moving to the core. While market conditions pushed average rents for purpose-built units in the former City of Toronto up by 2.8% last year, they remained approximately 40% lower than condo rents, according to firm’s report.
There has been “a bit” of new apartment construction in the Toronto market, most notably Concert Realty Services Ltd.’s new building in the “primo” location of Bay and Dundas (the 29-storey Motion building, now open for occupancy).
“They are one of the only ones that are active in Toronto and we have discussed with them as well what it takes to make it work,” he said.
“They are really doing it without development risk, they are just doing it because that is the type of property that they want to own and they are a long term buyer.”
Other multi-res owners are taking more modest approaches to increase density within their existing portfolios, he added.
Big buyers setting the price
Much of the GTA’s price increase has been driven by aggressive, institutional buyers, said the Ashlar Urban sales rep.
“Basically REITs and institutions are paying a half point more than individuals are for the same stuff. The majority [are] Vancouver-based and a couple of foreign buyers are really setting the high water marks for values.”
Local buyers are buying single assets at lower prices and higher rates of return.
In its report, Ashlar Urban found that apartment prices rose on a price per unit basis from approximately $116,000 to $130,000 per unit. Prices paid were higher and returns were lower for portfolio sales with cap rates averaging almost a full percent below the market average.
The rest of the market excluding those portfolio transactions was at lower price per unit of $127,600 and higher returns with an average cap rate of 5.5%.
Highs were also set, with “a number” of transactions breaking through the $200,000 per unit and cap rates sinking to as low as 3.5%, the report said.
One such deal was 70-90 Heath Street West in the Yonge and St. Clair area which sold for $268,700 per door. Not surprisingly, the highest prices are being paid in the most affluent parts of the city, in situations where value-added opportunities exist.
U.S. monetary authorities set future path
Ashlar Urban expects the ultra-low rate environment to last at least another year. Just how long it lasts will be up to U.S., not Canadian, monetary authorities.
It is recommending investors obtain the longest-term CMHC loans, with shorter amortization to pay down debt more rapidly to minimize potential future risks if rates rise. Among its clients, the majority sought 10-year CMHC loans “to lock in one of the major cost variables in multi-family investing.”
Carter said that the expectation is for yield-hungry investors to continue to keep pushing prices northward as long as rates remain where they are now. 
The firm also noticed a “significant” decrease in the number of people migrating to Ontario from other countries—and leaving the province in search of jobs— factors which are contributing to the softening of the GTA housing market and are contained in a new report from the Canada Mortgage and Housing Corporation.
As of last September, net migration in Ontario had fallen by 20% year over year to below 60,000 new residents.
Report says numbers are a wake-up call
“This could be a wake-up call for residential developers who have been pressing the province and suburban municipalities to open up more GTA land for development, citing what would appear to be an outdated notion that the region gets about 100,000 new residents a year,” Ashlar Urban stated in its report.
“We feel that the reduction in migration should have little impact on vacancy rates in multi-residential properties. However, this situation could exacerbate the slowdown in new condominium development if it continues.”
Carter sees five major markets for multi-res buyers in Canada: Montreal, Toronto, Ottawa, Calgary and Vancouver.
“Vancouver is next to impossible to find product and if you can it is at very, very low cap rates. Calgary is about the same as Toronto but there is less product available so it makes for more competition,” he said.
“Ottawa is I think one of the best return markets over the next year. Compared to Toronto I think you can get a bit better yield. And Montreal as well is an area that a lot of groups are more aggressively pursuing. ”

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