Canada’s multi-family apartment sector is the strongest it’s ever been. Across the country, apartment buildings are full, vacancy rates have dropped to record lows, and rental rates have climbed to all-time-highs. This is thanks to a variety of factors and fundamentals, including a steadily growing population, rising home ownership costs, and a shortage of affordable rental supply. This bodes well for those invested in Canada’s rental segment; investing in apartment buildings and other multi-family dwellings is a sound way generate consistent cash flow and stable appreciation, while avoiding the high level of volatility associated with other investment avenues.
Canada’s rental market is a reflection of several decades-worth of socioeconomic factors. In this article, I explore the factors that have driven the multi-family rental segment to what it is today.
The Financialization of Canadian Housing
In Canada, the multi-family rental segment includes supply that dates back as early as 1950. As a product of federal incentives, many apartment buildings were constructed in the 1950s, ’60s and ’70s, and are still in use today. Considering the fact that these decades-old buildings require considerable maintenance to keep up with the status quo, Canada’s supply of aging house requires significant investments to extend its useful life.
Enter: institutional investors. From an investor standpoint, these aging buildings are flush with immediate and potential value, thanks to a housing supply shortage that shows little evidence of relenting any time soon. This is where the process of financialization comes in.
Within the context of housing supply, financialization is defined by the transfer of ownership of a property from a non-financial operator to a financial vehicle, such as a REIT, private equity fund, institutional investor, or asset management firm. Following the moment of sale, the property is deemed a financial asset that is ultimately owned by investors. Particularly within the multi-family segment, financialization poses opportunities for new industry players to reshape and ultimately control what was already a pretty potent and lucrative sector. Investors can do this while working with existing supply, effectively ensuring low volatility and a high rate of return.
COVID-19 and rental supply shortages in the GTHA and Niagara
Many municipalities within Ontario’s Greater Golden Horseshoe area have been in the midst of housing supply shortages for quite some time. In the St. Catharines-Niagara region, vacancy rates are steadily declining year-over-year. In 2019, the vacancy rate for St. Catharines-Niagara sat at 2.1 percent. The same rate was observed in the Kitchener-Cambridge-Waterloo region. In Toronto, the rate is even lower, sitting at 1.5 percent.
Vacancy shortages are being fuelled by a series of factors, including a rising cost of land, a growing population fuelled by steady job creation and immigration, a shortage of skilled labour and trades within the land development industry, and barriers to new housing supply being faced at a bureaucratic level.
Though COVID-19 took down rental demand in the short term, that demand has indefinitely rebounded. And though cities and regions throughout the Greater Golden Horseshoe area are boasting new housing development projects, including plans for purpose-built rental constructions, rental demand is predicted to continue to fall short of supply. In Toronto, for example, an average of 26,800 units would have to be built a year to bring vacancy rates up to a healthy percentage of three percent, according to a 2019 report by RBC.
A business-minded approach to the multi-family segment
The financialization of Canadian housing is still in effect today, and in the aftermath of the coronavirus pandemic, experts predict that smaller-scale landlords putting rental properties up for sale will become an increasingly prevalent trend. In some cases, these older apartment buildings are considered to be “distressed assets,” meaning they have significantly depreciated in value and the current owner has opted to sell in lieu of performing the costly maintenance required to bring them up to spec. In other cases, smaller-scale landlords simply aren’t able unable to withstand tenants defaulting on rent during these unprecedented times.
Beyond the willingness of smaller-scale landlords to surrender their aging supply, institutional investors are ready to buy. In addition to large-scale acquisitions, institutional investors are interested in the multi-family apartments that were built decades ago, even if they have depressed in value—in part, due to the fact that supply in this segment is so sorely lacking.
With control of the Greater Golden Horseshoe area’s rental housing landscape continually falling into the hands of institutional investors, we are also seeing a shift in the quality and valuation of supply. This is because assets purchased by institutional investors are commonly upgraded and redistributed to a new crop of higher paying tenants. This leaves tenants who have been priced out of retrofitted rental properties—quite literally—out in the cold, resulting in a rental segment that is perpetually undersupplied. This trend is only predicted to prevail in the wake of COVID-19, with real estate markets throughout the GTHA and Niagara region already emerging strong and multi-family real estate continuing to be a preferred investment for pension and hedge funds, asset management firms, and REITs.
According to information released in conjunction with Ontario’s Housing Supply Action Plan, the Greater Golden Horseshoe area is expected to house 13.5 million people by 2041. This bodes well for those invested—or hoping to invest—in the Greater Golden Horseshoe’s multi-family rental segment, in which demand is strong and continues to climb.
Factors to consider when identifying a rental investment opportunity
Condition of the asset
Even if you’re dealing with a prospective retrofit, which you are planning on bringing up to industry standards after purchase, getting the property in question thoroughly inspected by a qualified professional sooner rather than later can mean getting the space up to spec and profitable sooner rather than later. When getting the property assessed, consider the extent of the repairs needed and how long those repairs will take to complete. This is particularly germane if you plan to rent out the property in any capacity. Leaving serious issues unaddressed can result in grave and time-consuming legal consequences if tenants become hurt or sick down the line. Moreover, the longer it takes to bring the property up to spec, the longer it will take to see a return on your investment.
Location of the asset
Successful investing has a lot to do with context. In real estate, that context has a lot to do with location. As a rule of thumb, when faced with an investment opportunity, consider the location first and the property itself second. While a property can be renovated and improved, the same can’t be said for an undesirable location.