The multi-family sector is playing a larger role in Canadian commercial real estate transactions, and Montreal is surpassing Toronto for deal volume.
Multi-family accounted for nearly 16 per cent of investment activity in 2018, and it’s higher so far this year, according to panel moderator Matthew Boukall, Altus Group’s vice-president of product management and data solutions.
Billions of dollars have flowed into real estate investment trusts over the past few years, and multi-family has been a big driver of that activity.
Montreal multi-family activity
Montreal-based Marc Hetu, CBRE vice-president and co-leader of its national apartment group, said “REITS have been by far the most active” investors in Montreal.
Institutional investors have also been active, while private investors have always been responsible for a huge percentage of investment volume for older and smaller stock. This has created a very well-balanced market.
Sanaa Benzakour is the co-owner and vice-president of PMML, a multi-family real estate and mortgage agency that she said “dominates” the mid-market apartment sector in Quebec with 140 buildings currently for sale under contract. Its commercial mortgage division has 150 files in financing at the moment.
Benzakour said small to medium-sized buyers are entering the mid-market or continuing to buy in it, and the majority of them are local.
“For buildings under 50 units, 99 per cent of the buyers are Quebecers. For 50 units and up, 70 per cent are Quebecers, 29 per cent are Canadians and one per cent are foreign buyers. A lot of foreign buyers are buying through REITs.”
Montreal has always been a big rental market, and demand downtown is prompting more multi-family development in the suburbs — particularly near transit lines and emerging employment centres.
Benzakour said Montreal isn’t a speculative market, but “a very sustainable growth-oriented market” that’s very accessible. She noted rents are going up by eight per cent annually in greater Montreal.
Hetu said the momentum in Montreal began with the election of a Liberal government in 2014, which resulted in the construction of such major infrastructure projects as the new Champlain Bridge and Turcot Interchange.
This, and the city’s emergence as a technology hub, has helped propel Montreal’s gross domestic product to grow by 3.7 per cent in 2017 and 2.8 per cent in 2018, according to Hetu.
David Bloomstone, director of investment banking for the real estate group and head of the multi-unit residential property brokerage at TD Securities, said: “Montreal has been so underserviced for so long that investors finally realized the opportunities.”
Bloomstone credited Swedish-formed Akelius for entering the Montreal market and buying smaller buildings and spending money to reposition them.
That, and higher cap rates than in Toronto, has spawned “a renaissance of investment appetite” in Montreal over the past few years.
Smaller assets in Montreal are often purchased by small private investors and cap rates mean something to them because they need to finance their assets, said Hetu.
“With a few exceptions, like Akelius, we don’t have the large players that will take large portfolios of low-rise urban buildings.”
Boukall highlighted two of the biggest recent multi-family transactions in Montreal.
The three-building, 261-unit Le Saint-Laurent Apartments sold for $84.2 million.
Investor interest in Quebec City multi-family
Hetu said things are also on the upswing in the province’s capital.
“Quebec City has always been identified by national investors as a target market because it’s a stable market with non-existent unemployment, vacancy rates that are always lower than Montreal, and strong and steady GDP growth.
“In addition, Quebec City has some of the most talented developers that build fantastic product — often superior to what’s found in Montreal — and through their ability and the marketing of those projects in 2018 and 2019, investors have said to lenders that it’s a market they like.
“But they’re still discounting it compared to Montreal.”
Ontario multi-family activity
Boukall pointed out two major multi-family transactions in Ontario this year.
JLL executive VP Michael Betsalel said the dynamic of who’s buying in Ontario has changed. Institutional investors are now playing a bigger role, while private capital is challenged to acquire due to escalating values.
“We’ve seen a massive push towards asset management groups that have both institutional and foreign capital that are competing in every major mandate with the usual subjects,” added Betsalel.
Betsalel said there are tremendous opportunities for rent increases when buying buildings below replacement value, and he believes that pricing will stay where it’s at in the short term.
Bloomstone said “there’s tremendous runway still left in multi-res” since condominium units rent for between $3.50 and four dollars per square foot while apartment units rent for about two dollars per square foot.
Low vacancy rates and increasing rents have made investors aggressive on pricing, said Bloomstone, who noted companies including Timbercreek and Starlight Investments are aiming for long-term growth when they renovate and reposition apartment acquisitions.
Western Canada multi-family activity
There’s not as much multi-family transaction activity in Alberta. Boukall noted two of the larger deals that have taken place over the past year.
The 158-unit Treo at Sherwood in Calgary was built in 2016 and sold for $39 million to Killam in late 2018. The 125-unit Insignia Tower in Edmonton, which was originally intended to be a condo and was built this year, was purchased for $35.6 million by Boardwalk REIT (BEI-UN-T) in April.
Several buildings in Calgary and Edmonton that were originally intended to be condos have been converted to apartments after they didn’t meet sales thresholds before and during construction, according to Paul Chaput, the senior VP of investments for Marcus & Millichap’s Institutional Property Advisors division.
“Alberta has maintained very strong values and has done quite well even in the face of a really tough go for the energy sector,” said Chaput, who acknowledged vacancies have crept up in Calgary and Edmonton over the past few years while new supply has been added.
Chaput noted a flight to quality is taking place from Winnipeg all the way to Vancouver Island, with the exception of Vancouver.
Vancouver multi-family activity
Boukall talked about the $39-million sale of the 98-unit The Point in the Vancouver suburb of Langley to CAPREIT (CAR-UN-T) this summer, as well as the $14.2-million sale of the 42-unit Penelope Apartments in Vancouver, which was originally on the market for $21 million.
Chaput said older existing apartment stock is being acquired just to realize land values of approximately $1,000 per square foot. He noted investors needing yield will go to Vancouver’s suburbs, pay a premium for properties, and turn a cap rate of two into four in short order.
“There are going to be ebbs and flows, but there will be long-term tremendous demand from tenants in Vancouver” that will continue to drive the market, said Chaput. “There’s very tight vacancies and tenants don’t have a lot of options.”
Secondary market multi-family activity
Chaput said there’s enough multi-family supply in Edmonton and Calgary to satisfy institutional investors and REITs, while secondary and tertiary markets in Alberta and Saskatchewan are resource-based — “and that’s not a fun place to be.”
Major investors are sticking to Calgary, Edmonton, Regina and Saskatoon, he noted.
There’s been transaction activity in British Columbia’s Okanagan region and on Vancouver Island by investor groups, according to Chaput.
Activity is picking up in Ontario’s secondary markets, where Betsalel said there are usually larger units and investors can get “more bang for your buck” on a price-per-square-foot basis.
Hamilton, Kitchener-Waterloo, Brantford, Newmarket, St. Catharines, Burlington, Oshawa and London are all seeing increased interest.
New apartment construction
“There’s a true demand for new construction” in Montreal, said Benzakour, who noted 49 per cent of new housing starts last year in Quebec were for multi-family buildings, up from 24 per cent in 2014.
“New construction has doubled investment volumes because our stock was old and a lot of it wasn’t attractive to institutional players,” said Hetu.