theANNUAL National 2024 - Realty Check

Realty Check

Foreword

Without doubt, 2022 was a year of rapid change which closed the books on a, decades long upcycle in multifamily investing; as a result, 2023 became a period of re-evaluation, price discovery and focus on operations rather than deal flow. Fortunately, uncertainty over the economy, doubling of interest rates and long waits for CMHC approvals were partially offset by income growth stemming from continued healthy fundamentals underpinned by double digit rental rate increases. However, in the absence of seller price capitulation, the net effect was that strength of the residential rental was not enough to offset the near-term economic risk and increased cost of capital.

There’s a much greater range of considerations feeding into decision making when compared to the past decade. Considerable uncertainty was derived from sticky inflation that began 2023 at 5.9%, (just off 2021’s decades high 8.1%) ebbed to a 3.1% low, ending 2023 at 3.4%. Aggressive increases in overnight rates certainly had it intended effect, but the economy was far from being without risk. Bond markets were equally active, beginning 2023 at 3.0% (5 Year bond rate) and ending at 3.2%. However, bonds moved constantly throughout the year, reaching with an inter day low of 2.6% and high of 4.5%. All this occurred against an environment where the S&P was up 17% and the Nasdaq increased 42%, causing even private capital to rethink real estate in the short term.

Rental Fundamentals are strong and improving; driven by a combination of population growth and escalating home ownership costs. With over 500,000 new permanent and temporary Ontarians in 2023 alone, immigration and international students placed extraordinary demand pressure on the apartment sector. The effects are further compounded by increasing housing, construction costs which were up more than inflation in 2023 and 75% higher than the 2017 average, keeping aspirational tenants in place for longer than ever before. Turnover rates have been dropping consistently province wide, settling at 10.8% (8.3% GTA) in 2023, a 16% drop from 2022. A byproduct of demand side pressure and low turnover is that vacancy is near zero and average asking rents were up 12% in 2023

Said simply, low cap value add investors require turnover to maximize impact. With more tenants remaining in place for longer periods turnover has dramatically decreased, particularly in the GTA. We are now witnessing greater scrutiny of the income effects of repositioning, which led to an overall increase to average cap rates along with wider opportunity driven cap rate ranges within markets. There is no longer a

one size fits all approach to value; turnover, rent mark to market, existing debt structure and willingness to offer secondary debt were all factors in the deals inked in 2023. Significantly, existing beneficial mortgages and VTB’s were crucial for buyer engagement and value retention.

Pervasive uncertainty within the general investment community severely impacted trade volume, especially in the mid to large value transaction category. There were just 49 transactions province wide comprised of more than 50 suites totaling $1.6B, 55% less than 2022 and 67% less than 2021. An even clearer picture emerges above $50m where just 7 transactions closed totaling $621M, of which only three were constructed prior to 2017. The GTA had the most significant value correction, cap rates were up 69 bps whereas SWO witnessed a 9bps increase. The quantum of increase does not accurately reflect the overall market as many deals had beneficial assumable debt (rate and leverage) allowing buyers to push value beyond what they could if they had to source a new mortgage at market rates.

Despite fewer completed transactions the past two years, new market dynamics are coming into focus with cap rates increasing between 75 and 125 bps. Values are down from the peak; however, the impact of cap rate increases has been attenuated by strong income growth.

Potential sellers have retained a great deal of discipline over the past 18 months, but there is always a requirement for liquidity, be it the end of a fund, redemption support, intergenerational transfer or good old fashioned profit taking. Given the lack of recent volume and shift in focus from pension funds and many REITs towards recycling vintage for new purpose built rental, there is surely a backlog of committed sellers who are waiting for the right moment to launch.

Many investors, on their own account or through asset managers, have dry powder and want to return to the market after a protracted period on the sidelines while the market finds it new equilibrium. There has also been a realignment of demand, with pension funds & some REITs continuing to shift focus to new purpose built rental. That demand has attracted a new tranche of merchant builders including some disenchanted developers who are choosing to cash out, allowing the recycling of capital for future projects.

From where we stand today it seems that rates may start to recede throughout the latter half of the year and that bond rates settle into a band that finally helps bridge the gap between buyer and seller. That may well be the sign the market is waiting for to re-engage.

Michael Betsalel Executive Vice President, National Practice Lead JLL Capital Markets, Multifamily Investment

Earl Kufner Executive Vice President JLL Capital Markets, Multifamily Investment

Location: Saint-Laurent, Montreal $41,500,000

Suites: 262

per Suite: $158,397 253 MONTÉE SANCHE

Location: Boisbriand, Montreal $6,850,000

Suites: 40 Price per Suite: $171,250 105 MILTON STREET

Location: Le Plateau-Mont-Royal, Montreal $21,800,000

Suites: 112 Price per Suite: $194,643

Location: Ville-Marie, Montreal $16,800,000

Suites: 84 Price per Suite: $200,000

Realty Check Québec

5114 RIVARD STREET Price

Location: Le Plateau-Mont-Royal, Montreal $5,610,000

Suites: 24

Price per Suite: $233,750

10 VERMONT AVENUE Price

Location: Pointe-Claire, Montreal $65,500,000

Suites: 220

Price per Suite: $297,727

11530 NOTRE-DAME STREET EAST Price

Location: Rivière-des-Prairies-Pointeaux-Trembles, Montreal $15,200,000

Suites: 48

Price per Suite: $316,667

5460-5470 BESSBOROUGH AVENUE Price

Location: Côte-des-Neiges-Notre-Dame-deGrâce, Montreal $11,850,000

Suites: 34

Price per Suite: $348,529

Realty Check Ontario (GTA)

Location: North York

Suites: 54

per Suite: $282,870

Location: Brampton

Suites: 605

Scarborough

Location: Brantford

Suites: 55

per Suite: $204,545

115

Location: Cambridge $3,700,000

Location: Kitchener $10,601,000 Suites: 39

per Suite: $271,821

2B ARLINGTON AVENUE Price

Location: St. Catharines $7,900,000

Suites: 40

per Suite: $197,500

141 LINNWOOD AVENUE Price

Location: Cambridge $7,350,000

Suites: 32

per Suite: $229,687

295 DALE CRESCENT

Location: Waterloo $19,850,000

Suites: 101

per Suite: $195,535

Realty Check Alberta

Location: Edmonton

122

per Suite: $177,869

254

Edmonton $31,500,000

163

130

Location: Calgary $34,010,000

Suites: 179

$190,000

10125 84 AVENUE

Location: Edmonton $7,168,242

Suites: 36

per Suite: $199,118

Location: Calgary $53,880,000

Suites: 263

per Suite: $204,867

Location: Calgary $40,000,000

Suites: 125

per Suite: $320,000

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