Amidst everything that’s been happening in the world over the past year, Ontario’s multi-family real estate segment has proved to be something of an outlier. The province’s rental segment, in particular, has experienced rapid market growth, as more people are turning to renting over homeownership than ever before. As such, purpose-built rental units have become one of the safest and most lucrative asset classes for investors to settle their funds. This extends to include decades-old rental stock, which accounts for a sizeable share of apartment inventory throughout Canada. Rising demand for these particular property types has stemmed bidding wars amongst sophisticated institutional investors for rental stock. Competition is steepened further by historically low stock in the segment.
Ontario is home to several of Canada’s most competitive housing markets and institutional investors play a big role. This article speaks to why there is high buyer and investor demand in hot Ontario submarkets, including Niagara, Sudbury, Hamilton, and Sault Ste. Marie.
- Despite restrictions on travel and immigration engendered by the ongoing pandemic, institutional investment firms are still collecting rents at a rate north of 90 percent. This number speaks to the strength and resilience of the segment.
- Multi-family residential assets have been dubbed one of the best real estate opportunities going into 2021. This owes to low volatility, positive and consistent ROI, and favourable financing options associated with multi-family assets. As such, institutional investors are in steep competition for rental stock.
- As of November 2020, Sudbury had the most competitive real estate market in Canada. Niagara’s market rang in at the seventh most competitive. Both cities had sales-to-new-listing-ratios exceeding 100 percent.
- The SNLRs in Hamilton and Sault Ste. Marie also suggested a seller’s market; 88 percent and 94 percent respectively.
- Niagara and Sudbury also have some of the lowest vacancy rates in all of Ontario, at 2.1 percent and 2.3 percent, respectively. In both cases, this is a result of a significant shortage of rental supply.
Why are institutional investors competing for rental stock?
According to PwC Canada’s Emerging Trends in Real Estate 2021 report, multi-family residential assets (including moderate-income and workforce apartments), are amongst the best real estate opportunities going into 2021. Let’s get into a few of the reasons why this is true.
Low volatility and positive ROI
One of the factors drawing investors to multi-family real estate is the low volatility associated with the segment. The fact that most multi-family rentals tend to operate on one-year leases allows for yearly rent appreciation, in keeping with fluctuating market conditions and inflation. This is compared to other investments, such as stocks, and other asset types, such as hotels, offices, and industrial spaces, which tend to operate on lease times of upwards of five years. Additionally, the multifamily sector has the lowest average national cap rate of any other asset class in Canada, which typically indicates lower risk. In the GTA, the average cap rate for multi-family assets is 3.41 percent year-to-date.
Alongside low volatility, the ROI potential for multi-family assets is typically higher than other property types. In 2019, total annualized returns for the Canadian multi-family sector were 9.8 percent. When considering the average total annualized returns for commercial property investments (generally between 6 percent and 12 percent), multi-family investments ring in on the higher end of that average.
Favourable conditions for financing
While multi-family assets are costly to acquire, they also tend to yield consistent income through monthly rent collection. This is not lost on financing bodies. Banks are more likely to approve a loan for a multi-family asset acquisition because they generate strong and consistent cash flow, making them less prone to foreclosure. Additionally, as of December 2020, the central bank set Canada’s mortgage rate was set at a record low of 0.99 percent, making it much more feasible to make large investments through financing.
Ontario’s most competitive submarkets: by the numbers
- As of October 2020, the sales-to-new-listing-ratio (SNLR) was 100 percent, suggesting a seller’s market. (Source)
- In November 2020, the SNLR had increased 117 percent, making Sudbury’s real estate market the most competitive in all of Canada. (Source)
- Sudbury is home to three post-secondary institutions—including Laurentian University, College Boreal and Cambrian College—that have more than 10,000 students. This plays into the high demand for rental units. (Source)
- Sudbury has a vacancy rate of 2.1 percent. This rate translates into 21 out of 1,000 apartments being available to rent. (Source)
- Housing supply levels in the city have been on a steady decline since early 2015. (Source)
To learn more about the economy and real estate market in Sudbury, take a look at our recent article about the benefits of investing in Sudbury’s budding rental segment, via the Crescendo Equity blog.
- As of October 2020, the sales-to-new-listing-ratio in Niagara Falls was 105 percent, suggesting a seller’s market. That’s up from 75 percent in 2019. (Source)
- As of October 2020, the sales-to-new-listing-ratio in St. Catharines was 112 percent, suggesting a seller’s market. That’s up from 112 percent in 2019. (Source)
- In November 2020, the SNLR had increased 106 percent, making Niagara’s real estate market the seventh most competitive in Canada. (Source)
- Niagara has a vacancy rate of 2.3 percent. (Source)
- Niagara is in the midst of a significant rental shortage, particularly in the multifamily segment. This shortage has been deepening for over three years. (Source)
To learn more about the economy and real estate market in Niagara, take a look at our recent article about the benefits of investing in the Niagara region’s budding rental segment, via the Crescendo Equity blog.
- As of October 2020, the sales-to-new-listing-ratio was 88 percent, suggesting a seller’s market. That’s up from 72 percent in 2019. (Source)
- Hamilton is home to three post-secondary institutions—including McMaster University, Redeemer University, and Mohawk College—which plays into the high demand for rental units. In September, both McMaster University and Redeemer University reported their highest first-year enrolment numbers ever. (Source)
- As demand for rental apartments continues to grow in Hamilton, rents are appreciating in Hamilton by as much as 2.3 percent month-over-month and 8 percent year-over-year. (Source)
To learn more about the economy and real estate in Hamilton, take a look at our recent article about the top rental sub-markets to invest in in Ontario, via the Crescendo Equity blog.
Sault Ste. Marie
- As of October 2020, the sales-to-new-listing-ratio was 94 percent, suggesting a seller’s market. That’s up from 81 percent in 2019. (Source)
- Rental demand in Sault Ste. Marie is driven by its affordable cost of living, as well as growth in sectors such as alternative energy, natural resources and forestry, manufacturing, and mining—all of which bolster the economy and aid in job creation. (Source)
- As demand for rental apartments continues to grow in Sault Ste. Marie, average rents in the city have increased from $849 in October 2019 to $1,063 as of February 2020. (Source)
To learn more about investing in Sault Ste. Marie, take a look at our recent article about the drivers of Sault Ste. Marie’s economy and real estate market, via the Crescendo Equity blog.