CANADA’S LEADING
September 2010
Apartment InvestmentT THE GOLD STANDARD FOR REAL ESTATE INTELLIGENCE
Rental goes upscale Buy the home, rent the land Tenants starting to defer homeownership
September 15, 2010 Metro Toronto Convention Centre
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The sky isn’t falling in Canada…yet
By Albert Warson
Relentless and increasingly troubling media reports of financial turbulence returning to the United States suggests that America will be dragged back into a double-dip recession.
Benjamin Tal
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his time could it overwhelm Canada’s banking system and other financial defences? Economists have recently started to draw that conclusion. As Benjamin Tal, senior economist, CIBC World Markets, puts it, the Canadian economy will be “very weak” over the last two quarters this year, along with the U.S. economy. Nevertheless, Canada will continue to outperform the U.S. – also the G7 countries – over the next three to five years, although Tal says “things can change very quickly. “The capacity to grow was very strong during the first half of 2010, because of consumer expectations for the near future. Now that the Bank of Canada is expected to raise interest rates by another 25 to 50 basis points, will that weaken consumers enough to slow down the economy?” Canada’s housing market, with its current tendency to rise and fall almost whimsically, is likely going to turn buyer enthu-
siasm and reluctance to buy off and on. Nonetheless, the Canadian housing market, for all of its fluttering, has been strong enough to buttress the economy, Tal says. Will the Canadian commodities market (western oil and gas, minerals and potash) save us from being ground back into an ongoing global recession? “No”, says Tal, “it [the commodities market] has been weakened because China is cooling off its economy, which will slow its much too swift expansion.” He expects that events in China over the next six months will have a greater impact on global economies. Despite Tal’s forecast of weaker results for the last two quarters of Canada’s overall economic activity, he notes that it is still more upbeat than for the rest of the western, industrialized world. CAIR
Canada’s Deficits Not as Alarming But Restraint is Coming
House Prices Overshooting ESTIMATED
Source: CIBC
Budget Balance, % of GDP
4 2 0l -2 -4 -6 -8 -10 -12 l
Forcast l
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Canada (Federal & Provincial) USA (Federal Only) l
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Albert Warson is a Toronto-based freelance writer/editor specializing in real estate development-related subjects.
DEVIATION OF AVERAGE HOUSE PRICES FROM FAIR VALUE Source: IMF, CREA, CIBC Calculations
in thousands
60 50 40 30 20 10 0 -10 -20
14%
l
l
l
l
l
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
2008
2009
2010
Canada’s economic recovery will falter
Where is that rebound? The Economist a bit July 15, 2010 bearish on Canada
June 17, 2010 Consumers, already burdened with debt and rising debt-service costs, will tend to stay out of an already cooling housing market, which will in turn slow the economy considerably in the second half of 2010. “Waning fiscal stimulus will also start to weigh on growth as early as Q4/2010.” Quarterly Economic Forecast TD Economics
The global economic recovery seems to be slowing, despite worldwide fiscal and monetary stimulus that was expected to bridge the economy to a sustainable recovery. But the impact of the stimulus is waning, and certain key economic sectors still await a rebound. Recovery in the world economy’s true core has yet to occur. Instead, we are now in a “midrebound softening that should be temporary, but it will test our collective nerves for a few months,” says Economic Development Council chief economist Peter Hall.
August 6, 2010 While Canada’s economy continues to outperform the U.S., the general outlook is becoming cautious. Growth slowed from the annualized 6.1 percent spurt in real GDP during the first quarter of 2010. Canada is also “exposed to diminishing external stimulus and a slowdown in its domestic drivers of growth. Consequently, the Economist Intelligence Unit has modestly revised downward the forecasts for this year’s growth.” Canadian Apartment Investment Report / SEPTEMBER 2010
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Contents The sky isn’t falling in Canada... yet 3 4 No mixed messages, please Renting the ground underfoot 5 Kuwait comes to Cambridge, Ontario 6 Renters are starting to defer homeownership – and may become permanent apartment tenants 7 Money, markets & Montreal 8 Living on borrowed time 10 CANADIAN APARTMENT INVESTMENT CONFERENCE TEAM Laura Aaron Maria Encarnacion Jean Pickering George Przybylowski Shruti Suppiah MERCHANDISE MART PROPERTIES, INC. Christopher G. Kennedy President MERCHANDISE MART PROPERTIES CANADA, INC. Steven Levy Senior Vice President ABOUT MMPI CANADA MMPI Canada produces and manages over 50 seminars, conferences, trade and consumer shows every year. We have events in Montreal, Quebec City, Ottawa, Toronto, Winnipeg, Edmonton, Calgary, Vancouver and Seattle. We touch many sectors including construction, design, craft, art, real estate, furniture, furnishings and others. Over the past 9 years, MMPI Canada has grown from 12 to over 50 staff with offices in Toronto and Vancouver. Our overall mission is to produce creative and profitable events.
www.mmpicanada.com CANADIAN APARTMENT INVESTMENT REPORT MAGAZINE The magazine is published yearly, coinciding with the Canadian Apartment Investment Conference in Toronto in September. DESIGN gbc-design.com ©2010 MMPC Expositions ULC. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of MMPI Canada. TO ADVERTISE, CONTACT Frank Scalisi Director of Sponsorship and Advertising Sales Phone: 416-512-3815 Email: fscalisi@mmart.com CONFERENCES For more information on the Conferences, visit our website at
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4
Canadian Apartment Investment Report / SEPTEMBER 2010
No mixed messages, please What does an apartment building manager do, in a lowerDavid Horwood rent building populated mainly by workers who lose their jobs and run out of rent money? It seems obvious and even trite, but helping them to better manage their rent and food expenses is really the only pit stop on the path to eviction for non-payment.
J
ust ask David Horwood, Assistant Vice-President, The Effort Trust Company, Hamilton, Ont., a privately-owned, diversified real estate advisory enterprise managing more than 10,000 apartments in in the Hamilton, Niagara, and Kitchener-Waterloo regions. They are typically seven to 10 stories, each with 80 to 150 units in each of 130 buildings. They are also moderate to low rent apartments – about $900 for a two-bedroom apartment. At an average two persons per unit, Effort Trust’s tenant population is about 20,000. And of that number, how many have been affected by the loss of their industrial or low-tech office work, along with seniors and empty nester tenants on fixed pension incomes also facing rising costs? “Virtually all of them,” Horwood says. “Even tenants who still have jobs often have to deal with reduced hours at work. Tenants living on social assistance have more stable incomes, which eliminates some of the risk [of eviction for non-payment of rent].” Horwood argues there is no way around management’s enforcement of lease terms, although unfortunately nonpayment of rent leads to “disruptive social issues and behavior when managers must retake an apartment because tenants can’t pay the rents. “We have to help them prioritize their rent obligations, keeping shelter at the top of the list,” he says. Landlord and tenant legislation in Ontario makes it easy for tenants to defer rent payments much longer than for cable or cell phones services [which can be turned off immediately]. But well before it gets to that hand-
Ontario Evictions in thousands
60 50 40 30 20 10 0 2005-2006
2006-2007
2007-2008
Ontario Landlord and Tenant Board annual reports over the past three years (ending March 31), puts the subject into some perspective. There were 50,683 evictions of apartment tenants in Ontario for non-payment of rent during 2005-2006, then 55,719 evictions for the fiscal year 2006-2007 and 59,053 for 2007-2008. holding stage, property managers “need to be better organized, their paper work has to be in perfect shape, so there is no easy out opportunity for tenants to avoid paying their arrears. “We have to be perfect in how we go about seeking rental arrears. If we provide tenants with the opportunities, they might go three to six months, or even a year in arrears.” More specifically, he advises “screening [prospective] tenants up front, about their access to funds and ability to pay their rent. Make a better decision up front regarding criteria for the tenancies. “Work with the resident from the moment they are in arrears to ensure they understand their obligations, with certainty and clarity. If they get a mixed message from us they will take advantage of it. They have to take us much more seriously.” CAIR Albert Warson
Renting the ground underfoot
Mark Kenney
Mark Kenney is a man with a mission. Actually, two missions.
O
ne is to at least double the 1,316 “land-lease” rental sites the Canadian Apartment Properties Real Estate Investment Trust (CAPREIT) added to its portfolio in mid-2007. The second is to concentrate more on upscale multi-res apartment acquisitions and less on merely affordable ones. CAPREIT has the stature – 28,807 apartments and townhouses across Canada, at recent count, and the financial resources to achieve both missions. Kenney, CAPREIT’s Chief Operating Officer, put it this way, “we’re moving out of the affordable market and into the quality [apartment] market [the REIT sold some affordable ones in Ontario and bought some quality apartments in B.C.].” “Luxury” in a CAPREIT context would be akin to two-bedroom apartments in Toronto renting for $1,500 to $4,500 a month. “An apartment investment is better protected if you buy quality assets,” says Kenney. “The market has improved and our strategy has shifted as well. We’re also willing to invest in old buildings at great locations, where often cities have grown up around them.” Land-lease apartment properties, a relatively unknown rental category, look and function like a house, on sites owned by the landlord, and are subject to
provincial landlord and tenant legislation. Tenants also pay less rent than they would ordinarily because the land cost is removed from the usual equation. Kenney says CAPREIT owns two such communities in Newcastle and Grand Bend, both in Ontario, with a combined 1,316 land-lease apartment properties on 71 acres, for which it paid $75 million. The acquisitions included an 18-hole golf course, two large swimming pools plus other facilities and services for tenants. In one respect these properties resemble condos and gated communities – tenants are responsible for their apartments and lawns and the REIT landlord takes care of everything else. The model appears to be working as occupancies at these two communities are said to hover at 99.5 percent. Tenants in these manufactured homes may buy them at some point during the 20-year lease term – with the land upon which they rest. What’s in it for CAPREIT unit holders? Lower capital and maintenance costs, few rent collection issues, lower energy costs, high stable occupancies and low resident turnover. There is a growing institutional interest in land-lease ownership, Kenney says, because “they’re a great source of cash flow, and a stable investment”. CAIR Albert Warson
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Canadian Apartment Investment Report / SEPTEMBER 2010
5
Kuwait comes to Cambridge, Ontario
Gregory Romundt
Investors have become more enthused about multi-res investment in Canada, with interest nearing that of landmark office buildings and sprawling suburban shopping malls.
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hey like apartment buildings’ stable property values and income streams – a break from the vagaries of the commercial markets. And as fundamental as grocery stores in strip malls, but on a vastly larger scale. Moreover, new or renovated rental apartment buildings only trickle on to Montreal and other large Canadian urban markets – certainly far too few to satisfy the demand. Multi-res as a desirable asset class has become so hot in Canada that Kuwait Financial House, a prominent Middle Eastern bank, did a $450 million partnership deal with Killam Properties Inc., a Halifax-based REIT, in June. Part of that arrangement involved the acquisition of 225 units in two new apartment buildings in Cambridge, (pop. 120,400 in 2006), about 100 kilometers southwest of Toronto. It seems word of the intrinsic value and alluring prices for apartment properties in Canada have spread widely. Gregory Romundt, President and CEO, Centurion
Property Associates, Richmond Hill, Ontario, a property and asset management company linked with privately held Centurion Apartment REIT, puts it this way: “Raising capital for apartment investment is a lot easier than it was two years ago. Investors are focusing on stability and yield. Capital preservation in is the forefront.” There is also an interest in syndication, but not of the single partner kind and poorly structured variety that sprang up over past two years,” Romundt says. The attraction to the Canadian apartment market has taken a personal turn for Romundt. Relatives in Singapore, whom he visited recently, asked him about investing in Canadian real estate during a recent vacation. “They wouldn’t have asked three years ago,” he added. “People are fed up with returns on the stock market and are switching to capital preservation and growth.” CAIR Albert Warson
The experienced lawyers you can count on From acquisitions, dispositions and financing, redevelopment and intensification, to tax and regulatory matters – Aird & Berlis LLP is actively engaged in all aspects of the rental housing industry. We have extensive expertise in the range of multifaceted legal issues that affect you. Rely on A&B to provide seamless, timely, cost-effective and practical solutions to any multi-residential property issue. For more information, please contact: Robert Doumani 416.865.3060 rdoumani@airdberlis.com
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6
Canadian Apartment Investment Report / SEPTEMBER 2010
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Conference
Schedule
Platinum Sponsors
Wednesday, September 15, 2010 Metro Toronto Convention Centre North Building
www.realestateforums.com Gold Sponsors
CANADIAN APARTMENT INVESTMENT CONFERENCE 7:15 a.m.
10:00 a.m.
REGISTRATION AND CONTINENTAL BREAKFAST
MORNING REFRESHMENTS
SESSION A3
Room: 104D
BUYING BEYOND THE BORDER: IS THIS THE RIGHT TIME TO MOVE INTO THE U.S.? Moderator: Craig Smith, President, Ashlar Urban Realty
8:00 a.m.
Room: 105
10:25 a.m.
Panel:
CONCURRENT SESSIONS WELCOME AND OPENING REMARKS SESSION A1
Room: 104A/B
Conference Co-Chairs: Mark Kenney, COO, CAPREIT Drew Koivu, Director, BMO Capital Markets Real Estate
ACCESSING DEBT & EQUITY FINANCING FROM PUBLIC & PRIVATE CAPITAL SOURCES: WHAT ARE THE BEST OPTIONS IN TODAY’S MARKET?
8:05 a.m.
Hasan Al-Shawa, President & CEO, Shawa Enterprises Canada Corp. Eddy Burello, Partner, Deloitte & Touche LLP Kevan Gorrie, Director, Industrial & Residential REM, Oxford Properties Group Inc. Stephen Vecchitto, Principal, Advenir
SESSION A4
ECONOMIC OUTLOOK & POPULATION TRENDS FOR 2011 AND BEYOND
Room: 103
THE BUSINESS CASE FOR A GREENER APARTMENT BUILDING: HOW WILL IT IMPACT YOUR INVESTMENT & WHAT WILL IT COST?
Moderator: Ugo Bizzarri, CFO and Vice President, Acquisitions, Timbercreek Asset Management Inc. Benjamin Tal, Deputy Chief Economist, CIBC World Markets
Panel: Michael Carragher, Vice President, Mortgage Investments, Firm Capital Corporation
8:35 a.m. CROSS COUNTRY CHECK-UP: WHAT’S DRIVING THE MULTI-UNIT MARKETS ACROSS THE COUNTRY?
Paula Gasparro, Manager, Business Development – Ontario, Canada Mortgage and Housing Corporation Frank Malone, Vice President, Commercial Mortgage Group, TD Business Banking Joseph Mazzocco, Vice President, Acquisitions & Analysis, KingSett Capital Jeremy Wedgbury, Managing Director, Commercial Mortgages, First National Financial LP
Peter Norman, Senior Director & General Manager, Altus Group Economic Consulting
9:05 a.m. EXECUTIVE PANEL: RAISING CAPITAL, USING LEVERAGE, ISSUING IPOS, AND CREATING PARTNERSHIPS AND SYNDICATION IN THE CURRENT MARKET
Moderator: Mark Kenney, COO, CAPREIT Executive Panel:
SESSION A2
Room: 104C
WHO LIVES IN YOUR BUILDING? THE EFFECT OF TENANT DEMOGRAPHICS ON YOUR BOTTOM LINE
Carol Hrabi, Vice President, Development, Concert Properties Inc. Adam Krehm, Principal, O’Shanter Development Company Ltd. Andrew Pride, Vice President, Minto Green Team, Minto Group Inc. Martin Zegray, Senior Vice President, Realstar Management Partnership
CONCURRENT SESSIONS
Steve Ramphos, Co-Founder & President, District Realty Corporation
SESSION B1
Panel:
MAXIMIZE YOUR ROI BY MANAGING YOUR ENERGY COSTS, CREATING A STRATEGY FOR UTILITY PURCHASING, AND IMPROVING YOUR BUILDING PERFORMANCE
Kevin Green, CEO, Greenwin Property Management
Derek Dermott, Managing Director, BMO Capital Markets Real Estate Inc.
Michele Sexsmith, Vice President & Practice Leader – Retail, Real Estate & Restaurants, Environics Analytics
Blair Tamblyn, President & CEO, Timbercreek Asset Management Inc.
Panel: Steven Gross, Vice President, Investment Management, Bentall LP
Moderator:
Robert Herman, President, Robinwood Management Corporation Ltd.
Tyler Seaman, Vice President, Investments, Oxford Properties Group
Christopher Potter, Partner - Tax Services, PricewaterhouseCoopers LLP
11:25 a.m.
Jason Castellan, CEO, Skyline Apartment REIT
Gregory Romundt, President & CEO, Centurion Apartment REIT
Moderator:
Room: 103
Moderator: Jeff Hutchison, COO and Vice President, Asset Management, Timbercreek Asset Management Speakers: Constantine Eliadis, Director, Program Services, GreenSaver Ian MacLellan, Vice President, Marketing, The Energy Shop
PROGRAM SCHEDULE Room: 104C
SESSION B2
ASSET PRICING STRATEGIES AND YIELD REQUIREMENTS ACROSS INVESTOR PROFILES
WEDNESDAY, SEPTEMBER 15
12:30 p.m.
SESSION C3
LUNCHEON
Room 104A/B
DEFERRED CAPEX AND THE ACQUISITION PROCESS: THE EFFECT OF REQUIRED MAINTENANCE ON THE VIABILITY AND PRICE OF INVESTMENT
LUNCHEON REFRESHMENTS Moderator: Colin Catherwood, Vice President, Brookfield Financial Real Estate Group
Moderator: Drew Koivu, Director, BMO Capital Markets Real Estate
Panel: Ken Ages, Vice President, Paramount Properties Brian Kimmel, Director, Real Estate Finance, First National Financial LP
CO-CHAIR REMARKS
Room: 105
Mark Kenney, Chief Operating Officer, CAPREIT Drew Koivu, Director, BMO Capital Markets Real Estate
Michael Mackenzie, COO, Conundrum Capital Corporation
Chris Milne, Vice President, Real Estate Lending, Scotiabank
Room: 104D
SESSION B3
IMPROVING TENANT QUALITY AND NOI: REDUCING TENANT DEFAULTS AND BAD DEBT
1:30 p.m.
Richard Weldon, Vice President, CDW Engineering
CONCURRENT SESSIONS
Bill Zigomanis, Vice President, Investments, Boardwalk REIT
SESSION C1
Room: 104D SESSION C4
Moderator: Brent Merrill, President & CEO, MetCap Living Management Inc.
REGULATIONS, RULES AND RISK MITIGATION: TACTICS FOR CANADIAN BUILDING OPERATORS Moderator:
Panel: Dan Acre, Vice President, Ontario, COGIR Management Corporation
Gloria Salomon, CEO, Preston Group / Gonte Construction Limited
David Horwood, Assistant Vice President, The Effort Trust Company
Panel:
John Lago, President, Conundrum Residential Group
Dan McCabe, Vice President, Magical Pest Control Inc.
Kristin Ley, Associate, Cohen Highley LLP
SESSION B4
Panel: David Bloomstone, Vice President & Director, Commercial Brokerage, Realty Group, TD Securities
Room: 104 A/B
CROSS-CANADA INVESTMENT: WHO’S BUYING, BUILDING, OR SELLING – AND WHERE? Moderator:
Room: 103
MARKETING STRATEGIES: WHAT ARE YOU DOING TO BRING IN THE BEST POSSIBLE TENANT AND HOW ARE YOU MAXIMIZING REVENUES?
Mike Chopowick, Manager of Policy, FRPO Ted Manziaris, President, Turtle Island Recycling Heather Waese, President, SPAR Paralegal Professional Corporation
SESSION C2
Room: 104C
LAND AVAILABILITY AND PRICING: HOW CAN RENTAL DEVELOPERS COMPETE WITH CONDO BUILDERS?
Greg Speirs, Vice President, Acquisitions, Realstar Management Partnership
Moderator:
Panel:
Robert Doumani, Partner, Aird & Berlis LLP
Aik Aliferis, Principal, Primecorp Commercial Realty Inc.
Panel:
Brian Bastable, Vice President, Brookfield Financial
Alf Hendry, CEO, Homestead Land Holdings Limited
Germain Villeneuve, Senior Vice President, CB Richard Ellis Quebec Ltd.
Derek Lobo, CEO, DALA Group of Companies/ROCK Apartment Advisors
Tim Sommer, Vice President, Investment Sales, Capital Market Group, Cushman & Wakefield Ltd.
Phil Milroy, President, Westcorp Properties Inc.
ANY QUESTIONS? Call (416) 512-3807 or visit www.realestateforums.com and select “Canadian Apartment Investment”
Speakers: Bonnie Hoy, Marketing Consultant, Bonnie Hoy & Associates Trish MacPherson, Vice President, Sales & Marketing, CAPREIT
3:45 p.m. NETWORKING RECEPTION
EDUCATION CREDITS Attendance at CAIC will qualify for: • Mandatory Continuing Education credits from RECO. Six credits have been awarded for the program provided that the necessary criteria are met. For specific criteria information visit www.realestateforums.com. • Continuing Professional Development credits from: • Certified General Accountants of Ontario • Institute of Chartered Accountants of Ontario • Appraisal Institute of Canada • Real Estate Institute of Canada (REIC)
Over...
CANADIAN APARTMENT INVESTMENT CONFERENCE 2:45 p.m. ROUNDTABLE DISCUSSIONS
ROOM: 105
Tap into the minds of leading industry members, gain insight into proven strategies and share experiences with other industry members in an informal discussion of the dynamics of key market trends. Spend 30 minutes each in two of the following interactive and informal discussion groups that will be held concurrently.
FINANCE & ACCOUNTING
OPPORTUNITIES IN SMALLER MARKETS
STRATEGIES FOR INCREASING THE VALUE OF YOUR BUILDING
TABLE 1: THE LENDER’S VIEW
TABLE 4: LONDON, KITCHENER/ WATERLOO, AND OTHER ONTARIO CENTRES
TABLE 6: FINANCIAL & BUSINESS MANAGEMENT STRATEGIES FOR PROPERTY MANAGERS
Jeremy Wedgbury, Managing Director, Commercial Mortgages, First National Financial LP
Evan Kirsh, Executive Vice President, Real Estate, Revera Inc.
Marvin Sadowski, Executive Vice President, Sterling Karamar Property Management
TABLE 2: THE BORROWER’S VIEW Kevan Gorrie, Director, Industrial & Residential REM, Oxford Properties Group Inc.
TABLE 5: WESTERN CANADA Ronald Dick, President & Director, Canada Student Residence Corporation
TABLE 7: IS THERE FUNDING AVAILABLE FOR YOUR GREEN RETROFITS? Constantine Eliadis, Director, Program Services, GreenSaver
TABLE 3: HST, SIFT, IFRS, ETC. TABLE 8: INTERNET MARKETING TECHNIQUES FOR LANDLORDS AND PROPERTY MANAGERS
Christopher Potter, Partner, Tax Services, PricewaterhouseCoopers LLP
Jason Leonard, Director of Business Development, Landlord Web Solutions
Lanyard Sponsor
Biographies Sponsor
Key Supporting Association
Afternoor Refreshments Sponsor
Supporting Associations
Supporting Sponsor
Corporate Sponsors
10-048
Portfolio Sponsors
Peter Norman
Renters are starting to defer homeownership – and may become permanent apartment tenants Once upon a time owning a home was an ambition shared by most Canadians. Renting an apartment suggested that you can’t afford a house, and/or that you’re not smart enough to realize a house is a good investment. Or worse, you have an incurable transient nature and can’t put down roots.
Change in Rents, Canada (CPI Component) Source: Altus Clayton, based on data from Statistics Canada, Consumer Price Index
Annual Percent Change
6% 5 4 3 2 1 0
4.0
5.3
4.1
3.4
2.7
2.2
1.7
1.5
1.3
1.1
1.0
1.0
1.1
1.6
1.9
1.5
1.0
0.8
1.0
1.6
1.8
1.5
1.3
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Jan-July
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hat’s changing, at least for now. “It’s an Interesting time for multires. It could be a turning point in Canada’s demographic and economic environment.” How? “Rental demand is growing again after having been relatively flat, compared to the national surge in home ownership, over the past 10 years. “Ownership is now a stable market, rather than a growing one,” says Peter Norman, senior director and general manager, Altus Group Economic Consulting. “There is a lot less focus on ownership these days, certainly among first time, younger buyers, who aren’t as focused on ownership as their peers, particularly over the past 10 years. We’re seeing a shift back to rental in the demand cycle, although that may also be due to lower household growth as well,” says Norman. Another reason is the uncertainty of how the stubborn U.S. housing crisis will play out, and how it will affect Canadian attitudes towards housing, he says, not to mention “all kinds of factors influencing choices of whether to rent or continued on page 9
CB Richard Ellis Limited National Apartment Group Canada’s leading Multi-Residential Real Estate Group. Please visit our website at www.cbre.ca/nag-canada or contact us to learn more about how we can help you. Vancouver :: David Ho 604 662 5168 david.ho@cbre.com Calgary :: Grant Potter 403 750 0528 grant.potter@cbre.com ::
Harvey Russell 403 750 0525 harvey.russell@cbre.com
Edmonton :: Paul Gemmel 780 917 4630 paul.gemmel@cbre.com ::
Bradley Gingerich 780 917 4626 brad.gingerich@cbre.com
::
Ray Townsend 780 917 4628 ray.townsend@cbre.com
VANCOUVER
CALGARY
EDMONTON
WINNIPEG
Winnipeg :: Derrick Chartier 204 985 1369 derrick.chartier@cbre.com
Montreal :: Germain Villeneuve 514 849 0469 germain.villeneuve@cbre.com
::
::
Benoit Poulin, MBA 514 905 2142 benoit.poulin@cbre.com
::
Marc Hetu 514 906 0891 marc.hetu@cbre.com
Trevor Clay 204 985 1365 trevor.clay@cbre.com
Waterloo Region :: Nick Holzinger* 519 744 4900 ext 227 nick.holzinger@cbre.com London :: Kevin W. MacDougall* 519 673 6444 x240 kevin.macdougall@cbre.com
Halifax :: Chris Carter 902 492 2085 chris.carter@cbre.com ::
Toronto :: David Montressor* 416 815 2332 david.montressor@cbre.com
LONDON
KITCHENER
TORONTO
Bob Mussett 902 492 2077 bob.mussett@cbre.com * Sales Representative CB Richard Ellis Limited, Real Estate Brokerage
OTTAWA
MONTREAL
SAINT JOHN
HALIFAX
Canadian Apartment Investment Report / SEPTEMBER 2010
7
COVER STORY
Money, Markets and Montreal When Oxford Properties Group, Toronto, decided to diversify into multi-res apartment properties three years ago, it went on an acquisition spree which topped itself in July with the purchase of that rarest of all development species in Canada – a distinctive high-rise apartment tower that looks more like a condo.
L
Tyler Seaman
e Mille Neuf is a 198-unit, 20-storey genuinely luxurious apartment building in downtown Montreal, the city which can legitimately bill itself as Canada’s largest and tightest rental apartment market. Tyler Seaman, Oxford’s vice-president, investments, notes: “Our total apartment portfolio is about 20,000 units, including our properties in other countries. They range from mid-market townhouses and low-rise apartments to high-end luxury sites and include multi-family properties across North America, in Germany and in Argentina.”
Two factors favoured that transaction.
Germain Villeneuve
• the property was acquired by Oxford, which will never have to grovel to lenders to finance its acquisitions – not with parent Ontario Municipal Employees’ Retirement System (OMERS) $50 billion piggy bank, and its inclination to indulge Oxford’s ambitions. Money isn’t an issue. • Oxford certainly knows its way around a real estate transaction, including multi-res. Before it acquired Le Mille Neuf, its apartment portfolio had expanded to 2,000 units, in Toronto, Montreal, Gatineau, Quebec City, and Halifax. Seaman acknowledged financing isn’t a challenge for Oxford, but when warranted, partnerships are included in its financing mix. “We will also use leverage, unlike most pension funds,” he says. Money is still cheap, with interest rates so low they seem almost irrelevant in real estate acquisitions. How does Le Mille Neuf fit into Montreal’s multi-res supply? Germain Villeneuve, Senior Vice President, CB Richard Ellis, Montreal, describes it as “condo quality, appealing to young professionals, with a relatively small number of units [for an Oxford building], and likely a record investment in the Montreal apartment rental building market”. It also stands out in a city dotted with mainly 40 to 60 year-old rental buildings, he says, and where rents are lower overall, than apartment markets in Halifax, Ottawa, Toronto, Calgary and Vancouver.
8
Canadian Apartment Investment Report / SEPTEMBER 2010
Cover photo and this page: Oxford Properties Group recently acquired Le Mille Neuf, a 198-unit, 20-storey new luxurious residential building in downtown Montreal – one of the most expensive rental apartment towers in Canada. “There weren’t a lot of apartment buildings constructed during the 1990s recession,” he says, “and what has been built over the past 10 years was mostly seniors’ housing.” When multi-res apartment properties and portfolios become available for sale they don’t idle on the market very long, with interest among institutional investors and private buyers buoyed as a result of their strong growth potential, steady cash flows and low-cost financing. Most private buyers finance these acquisitions through banks, and given the nature of the asset, financial risk usually isn’t a concern. Tenants get a good deal as well, typically paying about $950 in rent for a two-bedroom apartment in downtown Montreal, and heated by the landlord. Who is selling? Villeneuve says they are “institutional players from outside Quebec whom we’ve been seeing for the past 10 years”. And the buyers? “Mainly Toronto-based REITs, insurance companies and pension funds, as well as high net-worth private investors looking for a safe alternative to the stock market.” Another source of sellers are private owners who have become old and tired and want to cash out and retire, leaving apartment properties to their children. That doesn’t always work because the younger generation may prefer to follow their own professional or business interests. Even with competent property managers, owners need to be available much of the time. There aren’t a lot of foreign investors panting for this asset class, mainly because domestic and local investors get first dibs and close on properties faster. These also tend to be all cash deals, which Villeneuve says “can’t be duplicated anywhere”. Cap rates? Villeneuve says they are “holding steady, although they did rise slightly during the financial crisis in 2008 and early 2009. “However, the stability of CMHC financing and low interest rates have made it very easy to finance apartment buildings. “That has kept their values high, which in turn has kept cap rates low – from 6.25 to 6.75 percent for a concrete-constructed building, and 6.75 to 7.25 percent for wood frame construction,” he adds. It’s still a great time to buy in Quebec, says Villeneuve, because of increasing rental rates and rising property values. The city’s universities attract thousands of students every year, who are usually obliged to sign 12month annual leases to be able to live in what is called the “student ghetto”. Montreal has always attracted immigrants (the latest from post-earthquake Haiti) especially Francophones, who usually have to wait for five to 10 years before they can afford to contemplate home ownership. CAIR Albert Warson
Renters are starting to defer homeownership – and may become permanent apartment tenants continued from page 7
Private Rental Apartments Completions, Source: Altus Clayton, Canada Units in thousands.
buy�. The lingering shadow of the recession is another reason for such indecision. And yet, national apartment rental vacancy rates were up to just over 3 percent at year end 2009, compared to 2.3 percent in 2008. “The recession interrupted rental demand and people who would ordinarily rent apartments were living together, which kept demand lower,� Norman explains. The softness in the market, he continued, was evident in the average rent increases of a mere 1.3 percent during 2008-2009 – the lowest in five years. “That short term softness is not prompting more supply.�
30 25 20 15 10 5 0
based on data from CMHC
Centres with 50,000 persons population or greater
20.3
25.4
4.4
9.5
16.6
6.3
4.0 4.6
16.4
12.8 8.1
18.8
14.8 15.6
6.2 15.3
15.3
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
09 10 Jan-Jun
22.9
15.1
12.0
5.7
5.2
15.8
16.2
Norman listed cities across Canada, which, based on market surveys and analysis, suggest a mix of rental market performance:
Norman cited a number of statistics on rental household formation in Canada: • Of the approximately 4.9 million households in Ontario, 1.4 million of them are rental units (28 percent) • Of the 3.4 million households in Quebec, 1.3 million are rental units (40 percent) for province, • Purpose-built new rental housing is operating at a much higher level than in the 1990s, when it was as low 2 percent; and only 4,000 rental units built in 1998, out of 200,000 houses for sale across Canada • Over the past 10 years it has increased to 15,000-16,000 apartment units annually, across Canada, down from 19,000 in 2009, but is still more or less keeping up at that those elevated levels • Rents are softer these days and vacancies are higher; but there is a bit more construction with more people getting into rental apartments.
Markets considered to be in recession: Windsor, Abbotsford, BC, Victoria, Kitchener, St. Catharines, Calgary and London (rental income is declining or only rising modestly). Apartment rental markets that came through the recession and are in recovery: Montreal, Winnipeg, Kingston, Toronto and Regina. Expanding markets: Thunder Bay, St. John’s, Nfld., St. John, N.B. Saguenay, Quebec, Halifax, Gatineau and Quebec City. Hyper-supply, vacancy rates rising, but more supply than demand, and still some room for growth in rents: Trois Rivieres, Edmonton, Sherbrooke, Vancouver, Saskatoon and Sudbury. CAIR Albert Warson
is on a Roll
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Canadian Apartment Investment Report / SEPTEMBER 2010
9
Living on borrowed time We are on the brink of a cycle when unseen and vital building systems installed in the late 1940s to 1960s (and earlier) have long outlived their 20 to 30-year life cycle. There are roofs to be repaired or replaced, boilers to be fixed, and extensive work to be done on underground parking garages weakened by winter salt and other corrosives.
W
hat do owners do about those enormously expensive fixes? Drew Koivu, Director, BMO Capital Markets Real Estate, says “often nothing, and for as long they [safely] can. Many major systems could turn into safety issues, or at the very least affect tenant comfort levels” if they are put off much longer.” But that’s changing, as domestic and foreign institutional investors loaded with cash are snapping up betterquality portfolios whenever they become available. That old saying about location and real estate includes rental apartments. Koivu says buildings of almost any kind of shape in poor locations are hard to sell – especially a poorly maintained building. Poor location or not, there are something like 130,000 rental apartment buildings (more elegantly known as the mulit-res asset class) in Canada – most of them built between
®
CMHC & Conventional Mortgages for: Multi-Family Rental Properties Commercial Properties Construction Projects Seniors’ Housing Projects Michael Lombard 416-304-2078
michaell@peoplestrust.com
Suite 1801-130 Adelaide St. West Toronto ON M5H 3P5 www.peoplestrust.com
10
Canadian Apartment Investment Report / SEPTEMBER 2010
Drew Koivu
the Second World War, and the early 1970s, when provincial rent controls reduced their construction to a trickle. Capital repair costs would run into the billions of dollars if the long-overdue repairs to all the older buildings magically started at the same time. That shouldn’t be confused with the usual painting and fresh carpeting in suites emptied by departing tenants. Owners may opt to keep putting these repairs off, partly because the deterioration may not get worse, says Koivu. Moreover; institutional-type apartment owners who have been busily acquiring multi-res portfolios are too astute to let things slide for too long; not only to preserve a building’s value but to justify higher rents for incoming tenants. If apartment buildings have become obsolete and may pose a danger to tenants, who is making sure they’re safe? Koivu says “city inspectors make sure the buildings are up to building code standards, so there aren’t any risks to tenants.” In financial terms, he says apartment owners prepared to invest in the value-add factor of physical improvement can “turn a 6 cap into an 8 cap and below market rents to at – or above-market rents.” Or put this way: “If one building is in bad shape and another building next to it is in good shape, the latter one will command say $110,000 a door [a suite] and the one in bad shape will take $15,000 a door – just to fix and sell for less.” CAIR Albert Warson
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