According to an update released by CBRE in September of last year, Canada’s multi-family segment is flourishing. Moreover, experts say it shows no signs of slowing down, even if faced with an economic downturn. And while the low volatility of multi-family offerings (including mid-to-high rise buildings, condos, student housing, senior apartments, mixed-use building, and market rentals), have always been enticing from an investment standpoint, today’s steepening tenant demand and rapid market rental growth have rendered the multi-family segment hotter than ever.
The strength of the multi-family segment has persisted in spite of the harrowing effects of COVID-19. Though transactions in the multi-family asset class largely came to a halt in the spring, (in keeping with the real estate industry on the whole), deal volumes picked back up in summer and have been gaining momentum since.
This article explains the market fundamentals that make multifamily real estate assets in Ontario a smart investment opportunity. It also explores some numbers that speak to the strength of multi-family assets in Canada and throughout Ontario.
Multifamily real estate in Ontario: quick facts
- It is estimated that Ontario will register a shortage of 200,000 rental units over the course of the next decade.
- More people are turning to renting over homeownership. As such, homeownership rates in Ontario peaked in 2011 and have been declining ever since.
- Rental demand mainly owes to two demographics, millennials and Baby Boomers, both of which value the mobility and flexibility associated with renting, particularly in these uncertain times.
- From an investment standpoint, multi-family properties provide consistent income, steady value appreciation, low volatility, and are more likely to be approved by a bank for a loan than a home.
- Canada’s mortgage rate has been set at a record low of 0.99 percent, which is beneficial for anyone hoping to purchase property. Low mortgage rates are expected to persist until 2023.
Supply shortfalls and growing demand
Ontario is in the midst of a rental supply shortage. What’s more, the shortage is expected to skyrocket in the years to come, according to a rental market report released by the Federation of Rental-Housing Providers of Ontario in June. The FRPO estimates that the province will register a shortage of 200,000 rental units over the course of the next decade, and markets across the province are already feeling the crunch.
For instance, Niagara is experiencing a deepening housing crisis, due to a lack of stock in the market, and Sudbury’s housing supply levels are sitting at the lowest level in 30 years. Low supply corresponds to record low vacancies in many Ontario cities, with London sitting at 1.7 percent, Sudbury and Kitchener-Waterloo sitting at 2.1 percent, Niagara sitting at 2.3 percent, Brantford sitting at 2.4 percent, and Windsor sitting at 2.6 percent.
Meanwhile, demand across the province the most robust it’s ever been. In Sault Ste. Marie, for example, approximately 25 to 30 percent of future housing demand is projected to be for rental units. In other markets, rising demand owes to growth in sectors such as tech in Quinte and London, mining in Sudbury and Timmins, and education in Hamilton, London, and Kitchener-Waterloo. Moreover, Sudbury, Timmins, and Sault Ste. Marie are amongst the cities participating in the recent Rural and Northern Immigration Pilot, which is expected to attract an influx of skilled immigrants in need of affordable housing and market rentals.
Renting over homeownership
In large part, Ontario’s rental supply shortage is due to the fact that more people are turning to renting over owning than ever before. According to a 2017 report prepared for the FRPO by Urbanation, homeownership rates in Ontario peaked in 2011 and have been declining ever since.
Renting represents the most common form of housing for the millennial generation. This owes to a few factors, such as tight mortgage qualification rules and steadily rising median home prices. When affordability isn’t a factor, lifestyle preferences come into play. Many millennials value mobility and flexibility over the benefits of owning property.
Baby Boomers also account for the rising demand in the rental segment. Not unlike millennials, today’s Baby Boomers value the flexibility renting provides. Additionally, this ageing demographic places value on the amenities often associated with multi-family living.
Favourable options for financing
From an investment standpoint, multi-family properties provide consistent income and steady value appreciation. And though multi-family assets are costly to acquire, they are more likely to be approved by a bank for a loan than the average home. This is due to the fact that multi-family real estate tends to render strong cash flow (usually monthly and usually consistently), meaning that the likelihood of a foreclosure on an apartment building is not as high as a single-family rental, for example.
There have also been a few recent developments that bode well for the multi-family market. Effective December 4, 2020, Canada’s mortgage rate was set at a record low of 0.99 percent. The central bank has stated that low rates will persist until 2023. This will have a very significant impact on the overall long-term cost of purchasing properties through financing. This is in conjunction with large-scale asset purchases (such as commercial paper, bankers’ acceptances, corporate bonds, and federal and provincial government debt) by the Bank of Canada, which helps to raise the price of the bonds and lowers their return, or yield. And lower yields make it cheaper to access credit to spend and invest.
Positive returns on investment
Finally, multi-family assets tend to pose a more positive ROI than other commercial investments—and other investments in general. This is because of the low volatility associated with multi-family real estate. Unlike other investments, such as stocks, and other asset types, such as hotels, offices, and industrial spaces, the multi-family segment is able to quickly adapt to fluctuating market conditions and inflation. To be more specific, one-year leases allow for yearly rent appreciation, should the market conditions change. That’s compared to the leases of five years or more associated with other types of commercial real estate.
Making sense of multifamily real estate in Ontario: by the numbers
- Total annualized returns for the Canadian multi-family sector were 9.8 percent in 2019. This was as a result of the rapid rise of rental rates, owing to steep demand and low vacancy rates across the province. (Source)
- The multifamily sector has the lowest average national cap rate of any other asset class in Canada. In the GTA, the average cap rate is 3.41 percent, which is 19 basis points lower than the same time last year. (Source)
- The average price per suite was $276,085, which is an 8.1 percent increase year-over-year. (Source)
- Sales volumes for multi-family offerings are 251 million, which is a 65.9 percent increase from the year prior. (Source)
- There are 13,358 purpose-built rental suites under construction in the GTA. That’s a year-over-year increase of 21 percent. (Source)
For further details on the multifamily real estate offerings in cities throughout Ontario, take a look at Crescendo Equity’s recent article, which outlines the top rental sub-markets to invest in Ontario in 2020.