Canada’s multifamily apartment market may be entering a period of change, albeit minor, according to new research by CBRE Limited. For much of the last 40 years, demand for rental housing has been remarkably consistent, while on the supply side, new construction has been minimal. Recent data shows multifamily starts were up 52.2 per cent in 2014 from the five-year average, with Canada’s six largest metros leading the way, totaling 10,872 of the 15,581 units nationally. While a small number relative to existing stock, the construction resurgence of purpose-built rental buildings is a new feature to a largely stable market. Demand for multifamily assets has never been stronger from all buyer groups, pushing prices to the point where new development begins to make financial sense. While only in its infancy, this trend is certainly one to watch.
Canadian multifamily vacancy rates have remained incredibly low and stable over the past ten years, maintaining a range between 2.1 per cent and 3.2 per cent. The vacancy metric has remained much less volatile than other economic indicators, including GDP and employment, lending strength to the theory that constant immigration and population growth are providing multifamily rental owners with a steady source of demand, regardless of economic conditions. The annual change in vacancy has not exceeded 100 basis points (bps) in the past decade and has averaged just10 bps.
In particular, the last few years have seen vacancy rates shift less than 20 bps from one year to the next. The low vacancy rate reflects a lack of purpose-built rental supply which has left little choice for renters. Going forward, it will be interesting to see the impact of the current construction cycle, both purpose-built and condominium, and if it will create a material change in multifamily fundamentals.
Average resale home prices climbed 2.8 per cent in 2014, reaching an all-time high of $401,000. Over the past 10 years prices have increased 72.1 per cent, a significant gain that makes home ownership increasingly difficult and continues to drive prospective homeowners to the rental and condominium markets. This significant increase in Canadian home prices has continued despite multiple efforts by both the finance department and the Bank of Canada to temper the market. The mid-January cut in the overnight rate, however, will only serve to push residential real estate prices higher. The for-sale market was viewed to be relatively balanced with a sale-to-listing ratio of 0.50 at year-end meaning it was neither a buyers nor sellers’ market.
With a continued rise in home prices, affordability for many remains a key concern, even with lower interest rates. It is the inability of many Canadians to purchase that is keeping the demand for rental real estate as strong as it is. Affordability issues are most pronounced in cities such as Vancouver and Toronto, but all of Canada is characterized by relatively high home prices, particularly when compared to most of the U.S. On the other hand, incomes and apartment rents continue to rise largely in lock-step. Should interest rates rise, and if prices don’t see a corresponding decrease, demand for rental real estate is almost certain to be further heightened.
Despite Montreal’s population being a third smaller than Toronto’s, Canada’s largest apartment market remains Montreal by a considerable margin. At year-end Montreal had 534,000 units, which is 73.3 per cent larger than Toronto, and nearly five times the size of Vancouver. Montreal has long been a renters market as demonstrated by the CMHC data. Adjusting for population, Calgary has an exceptionally small purpose-built rental market.
In Canada’s six largest markets, purpose-built rental starts in 2014 were 28.7 per cent higher compared to the previous year. Calgary led the way, up 174.1 per cent (increasing by 416 units to 655), followed by Toronto, up 157.4 per cent (increasing by 1,100 units to 1,799). Montreal also saw a substantial increase in starts, rising 49.9 per cent or 1,163 units to total 3,492. Ottawa and Vancouver followed with 20.0 per cent and 6.8 per cent increases, respectively. Edmonton was the only market of the big six that experienced a fall in starts, down 25.9 per cent. Not only was construction up on a year-over-year basis, but comparing 2014 to the five-year annual average, recent starts activity was up markedly, particularly in cities such as Vancouver, Calgary and Ottawa, nearly double from their respective five-year averages.
Condominium starts continued to comprise the majority of multifamily development, with the proportions of condominium versus rental in each city remaining roughly the same as a year ago, although there were some slight changes. The proportion of condominiums to rental decreased marginally in Toronto, Montreal, Vancouver, Ottawa and Edmonton while largely holding steady in Calgary. Across these six markets, rental starts comprised 20.9 per cent of total multifamily construction in 2014, compared to 16.2 per cent in 2013. The upward trend in rental construction can be attributed to several factors including strong fundamentals, consistently rising rents, pricing on completion, exceptionally low interest rates and a general trend towards downtown living.
Multifamily cap rates across most Canadian markets held steady during 2014, with only a slight bias lower in markets such as Toronto, Ottawa and Montreal. Looking over the longer term, however, a marked trend towards lower cap rates can be seen across all markets. With the exception of Vancouver, most Canadian multifamily markets have seen cap rates fall in excess of 100 bps over the last five years, with Halifax in particular down almost 200 bps.
Multifamily investment volume for 2014 came in at $3.7 billion; $500 million below 2013 volumes, but broadly in line with levels seen in the 2007 and 2013. The back half of the year was modestly more active with $2.0 billion in sales, versus $1.7 billion in the first six months of the year. Propelling sales higher in the latter half of the year were Toronto, Montreal, Ottawa and Calgary, all with sales activity up relative to the second half of 2013.
Despite record low interest rates and an abundance of investment capital seeking multifamily real estate, cap rates were little changed for both the latter half of 2014 and the full year. At year end, marginally higher cap rates in Alberta were more than offset by lower cap rates in Southwestern Ontario, Toronto, Ottawa and Montreal. Vancouver and Toronto continue to be the priciest markets in the country with cap rates as low as 3.5 per cent.