Economic and population growth will push apartment rents higher in all three major Western Canada markets, Vancouver, Edmonton and Calgary, during the coming year.
However, the three cities start at different baselines and face different challenges, according to speakers at this week’s Western Canada Apartment Investment Conference in Edmonton.
The Vancouver market had a 1.2 per cent vacancy rate in established rental properties in the first quarter of 2022, said Zonda Urban principal, advisory, Michael Ferreira. When projects just starting to come on the market for lease-up are added, the rate moved up to 4.2 per cent.
Rents across the board worked out to $3.78 per square foot, said the market analyst. However, in downtown Vancouver rents are now up to $5.25 or $5.45 per square foot and even $6.
Office workers and students returning to the market are expected to further drive up demand.
Ferreira said in the University of British Columbia area the vacancy rate was 30 per cent in 2021 and is now under one per cent.
Vancouver transactions likely to dip
Mark Goodman, principal at Goodman Commercial Inc., said building transactions in Vancouver had a banner year in 2021, partly because of the pent-up demand caused by a pause at the beginning of the COVID-19 pandemic.
There were 161 sales in Metro Vancouver representing $2.6 billion, he said. Goodman predicted there will be a decrease in transactions and dollar volume in the next year.
The investment market is finding value-added players aren’t as prevalent because it’s harder to create value and get turnover in light of new legislation.
“You need to have a bit more patience now investing in Vancouver real estate.”
There are still family-based companies, REITS and pension funds active in the market, but no foreign buyers, he said. Increasing mortgage rates are causing a bit of a pause in the market.
Lack of supply remains an issue
Shenoor Jadavji, founder and president of Vancouver-based Lotus Capital Corp., suggested apartment supply will be a major factor for the city as 40,000 students and up to 52,000 new people come into the market.
Vancouver developers say slow approvals and bureaucracy at the municipal level are a major challenge in getting projects off the ground.
“We have three projects on the way that are all at the city or municipality level. They’ve been there for four or five years,” said Jadavji.
Meanwhile construction costs and the cost of borrowing have increased.
Mike Bucci, vice-president of Bucci Developments, says the cost of land is another issue in Vancouver.
“If you look at how much equity and capital you need to hit 1,000 units in the market, it’s staggering. I’m paying $70 million for a half-acre multifamily site whereas with the same amount of capital (Albertans) can set up your own empire.”
Different situation in Calgary, Edmonton
Calgary and Edmonton aren’t struggling with delays in municipal approvals and land costs. However, inflation, supply chain issues, rising borrowing rates and a shortage of skilled construction labour all apply to the Alberta cities as they do across the country.
Real estate analysts do, however, expect rental rates to increase as the province attracts business and population. The affordability of Calgary and Edmonton, compared to Vancouver or Toronto, are also drivers in the market.
“In Vancouver, an average person pays 75 per cent of their income on accommodation,” said Jadavji. “In Alberta, it’s 20 to 30 per cent.”
Calgary experienced a drop in vacancy rates between 2021 and Q1 2022, said Ferreira. The rates are running at 2.9 per cent for stabilized properties and 5.7 per cent when new projects are factored in.
Zonda Urban figures show average rent per unit for concrete properties at $2,076 or $2.41 per square foot and $1,725, or $2.36 per square foot for wood-frame buildings.
Ferreira says Calgary has had plenty of new product coming into the market but it has been steadily absorbed.
“As a result, we don’t see the market as oversupplied and we can’t foresee it as oversupplied.”
Ferreira said downtown renters in Calgary are generally young urban professionals who have been savvy about taking advantage of rental incentives during recent slow years. However, the number of incentives and their value is on the decline, he said.
Transaction activity roundup
Tyler Herder, sales associate, capital markets, multifamily for JLL, called the Calgary market healthy and improving for investors.
In 2021, Calgary saw 49 transactions for a total of $342 million, according to JLL figures. More than 85 per cent of those transactions were walk-up buildings.
Herder said Calgary is seeing more private capital coming to the city from Vancouver and Toronto.
Edmonton began 2022 with a four per cent vacancy rate on established properties, said Ferreira.
Average rent in concrete properties was $1,547 or $2.09 per square foot and $1,517 or $1.77 per square foot in wood-frame buildings. Ferreira said rents are starting to creep up in Edmonton.
Bradley Gingerich, senior managing director, investors for Marcus & Millichap’s Institutional Property Advisors division, said 2021 was a banner year for transactions, thanks largely to dominant player Avenue Living Asset Management Ltd.
“Roughly 70 per cent of Edmonton sales last year were Avenue Living. In July, they accounted for $268 million. Really they were the big story coming out of COVID.”
Avenue bought more than 1,500 residential rental units in the Edmonton area.
Gingerich said Edmonton needs rising rents to retain its property values. He said top-end properties are searching for $2.85 per square foot.
Kevin McKee, CEO of Pangman Development, added that Edmonton also has to come to grips with rising property taxes which are affecting the multiresidential space.