Canada Multi-Housing MarketView Mid-Year

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Indexed to 1990 Canada Multi-Housing MarketView Mid-Year 2013 CBRE Global Research and Consulting VACANCY RATE 2.5% NET RENT $946.83/Month CONSTRUCTION ACTIVITY 2.1% AVERAGE CAP RATE 5.17% APARTMENT INVESTORS
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Indexed to 1990 Canada Multi-Housing MarketView Mid-Year 2013 CBRE Global Research and Consulting VACANCY RATE 2.5% NET RENT $946.83/Month CONSTRUCTION ACTIVITY 2.1% AVERAGE CAP RATE 5.17% APARTMENT INVESTORS CONTINUE BUYING SPREE Arrow indicates change from previous period Executive Summary Canada s multi-housing market remains exceptionally strong both on the rental side and also in terms of investment sales Apartment vacancy rates remain below historical averages in most markets Despite near 100% occupancy, apartment rent increases remain in line with inflation as rent controls and the growing condo-rental market act as dampeners Investors continue to show strong interest in multi-housing assets with first half investment volumes in line with 2012 s record numbers Vacancy rates are expected to remain low and sit at or below historical averages Pricing remains elevated particularly on the west, with cap rates at historical lows in Vancouver, Calgary, Edmonton and Toronto Coming off a record year, Canada s multi-housing investment market continues to surge ahead with demand and pricing at all time highs. National investment volumes remained robust through the first half of the year with sales coming in at $2.8 billion equalling last year s rapid pace. With no slowdown anticipated, full year 2013 investment volumes look set be very near 2012 levels. Demand for multi-housing assets continues to stem from exceptionally low vacancies that have been a hallmark of the Canadian market for some time. Strong demographics and a relatively robust labour market also continue to support this asset class. However, there are rising concerns over new supply in the form of for-sale condominiums that may end up in the rental universe in the in the next few years. In addition, there are concerns with the level of unemployment within the youth and young adult age group as unemployment rates amongst this key rental group remain above the national average. Chart 1: Affordability Gap Continues to Widen With the relative high cost of home ownership in many parts of the country, and a recent rise in financing costs, homeownership is once again becoming increasingly difficult, and is likely to provide fresh stimulus to the rental market. As such, apartment buildings continue to attract significant investor interest as evident by cap rates which declined further in the first half of 2013, albeit marginally. Across all property types, cap rate compression is showing signs of coming to an end as demonstrated by the modest declines seen in the last few quarters. Nationally pricing remains elevated by historic standards, but this is mainly due to the Vancouver, Calgary, Edmonton and Toronto markets where all four have cap rates that now sit at historic lows. Looking forward, market dynamics are unlikely to change as purpose built construction is expected to remain subdued and demand relatively high. However, the supply of for-sale condos are set to increase as completions are expected to rise in the next two years but not to any meaningful degree Mid 2013 National Avg. Home Price National Avg. 2-Bdrm Monthly Rent Personal Income Per Capita Source: CREA, CMHC, Conference Board of Canada Resale Home Price ($2002) Sales to Listings Ratio Annualized Change (%) Table #1: Market Statistics Metro Area Vacancy Rate Change (Y/Y) Rent*/Month 2013 YTD Sales Volume (CAD millions) Volume Change (Y/Y) Number of Transactions Per Suite (CAD 000s) Calgary 1.2% -130 bps $1078 $ % 37 $180.0 Edmonton 1.2% -150 bps $974 $ % 9 $144.7 Halifax 3.0 % -20 bps $900 $ % 3 $119.5 London 3.1% -60 bps $839 $ % 13 $83.3 Montreal 80 bps $704 $ % Ottawa 3.7% 160 bps $1,030 $ % 32 $125.6 Toronto 1.6% 10 bps $1,116 $1, % 107 $160.6 Vancouver 2.9% 30 bps $1,052 $ % 47 $217.9 Waterloo Region 3.4% 140 bps $884 $ % 27 $90.2 Winnipeg 1.9% 70 bps $ Canada 2.5% 10 bps $947 $2, % 386 $137.1 (CHMC), CBRE * Composite Chart 2: Economic Trends 2.5% 1.5% 0.5% Employment % Change GDP % Change *Forecast 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13* 4Q13* Source: Conference Board of Canada & Statistics Canada Second quarter data shows the Canadian economy continues to grow below trend with Q2 GDP coming in under expectations at 1.7% annualized. However, economic activity is expected to pick up in the second half of the year. This somewhat optimistic outlook is heavily reliant on the U.S. economy gaining steam in the latter stages of the year. Despite the somewhat lackluster domestic economy, most sectors continue to make gains, albeit modest with Canadian GDP forecast to be - 2.5% for both the third and fourth quarters. The potential tapering of the Federal Reserve s bond buying program has added an element of uncertainty, but not enough to derail what looks to be a period of modest growth through to the end of 2013 and into Chart 3: Canadian Resale Housing Market $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 Sales To Listings Ratio Average Resale Home Price Despite widespread speculation of house price declines, average prices at mid year were up 8.4% year-over-year (YoY) and 9.5% compared to year end 2012 with the national average at $382,373. The sale to listing ratio increased slightly to 54 percent, showing most local markets were balanced as of mid with the prospect of further improvement by year end. It is expected that the sales to listing ratio will remain within the percent band for the foreseeable future suggesting a balanced market and little or no softening in price. 2 Source: CREA Monthly Rental Rate Monthly Rental Rate Vacancy Rate (%) Vacancy Rate (%) Chart 4: Canadian Multi-Housing Vacancy Rate Chart 5: Vacancy Rate by Market Mid Source: Canada Mortgage Housing Corporation Ottawa Montreal Vancouver Toronto Edmonton Calgary 10-Yr Avg. While the demand for rental units remains relatively high, increased competition from condominium and other alternative rental stock has affected occupancy levels, albeit only at the margin. The national vacancy rate experienced a marginal increase of 20 bps since year end 2012 and 10 bps compared with mid-2012.,driving the national rate higher during the first six months of the year were Vancouver and Ottawa which experienced increases of 110 and 120 bps, respectively. However, the mid year national average vacancy rate sits exactly at the 10 year average of 2.5%. Alberta continues to register the lowest vacancy rates in the country, continuing a trend from mid year 2012 as Calgary and Edmonton both recorded vacancy rates of 1.2% and were down 130 and 150 bps, respectively over the year. The largest residential rental market in Canada, Toronto, remained relatively static with the mid year vacancy rate unchanged at 1.6%. Toronto s extremley low vacancy rate is testament both to the influx of new arrivals to the city and also the relative high cost of home ownership. By comparison, Ottawa and Montreal continue to register vacancy levels above the national average at 3.7% and respectively. 3 Chart 6: Rental Rate by Unit Type $1,200 Chart 7: Rental Rate* by Market $1,200 $800 $600 $400 $200 $800 $600 $400 $200 Bachelor One-Bdr Two-Bdr Three-Bdr Overall Avg. Vancouver Toronto Ottawa Calgary Edmonton Montreal *Composite Year End 2012 Canadian apartment rental rates increased by 1.5% for the first six months of the year to average $945 per month. On an annual basis rents were up 3.2% YoY. The six month increase was above the inflation rate, which came in at 0.3% since the beginning of the year end and 1.3% YoY. The largest increase in rental rates was seen in bachelor units, which increased 2.01% since the end of last year. At the other extreme, three-bedroom units experienced the smallest increase at 0.85% since year end 2012 while one and two bedrooms units registered increases of 1.8% and 1.6% respectively. Toronto and Vancouver continued to post the highest rents in the country with both markets showing composite rents just over $1,100 per month. Ottawa, Calgary and Edmonton were all at, or near, per month, while Montreal averaged $713 per month. For the first half of the year Montreal saw the biggest jump in rents, up 3.2%, but over the last twelve months Calgary was the growth leader with rents up 6.2%, nearly double the national average. However, over the past 10 years Edmonton has seen the greatest increase in rents, rising 53%, followed by Calgary at 40% and Vancouver at 30%. At the other extreme Toronto and Ottawa rents were just up 16% and 17% respectively while Montreal apartment rents were up 24%. 3 Vancouver Calgary Edmonton London Waterloo Toronto Ottawa Montreal Halifax National Price Per Suite Capitalization Rate Volume # of Transactions Chart 8: Multi-Housing Trade Activity $6,000 $5,000 $4,000 $3,000 $2,000 # of Trades Sales Volume Source: CBRE Limited, RealNet Canada Inc., and RealTrack Inc. Chart 9: Multi-Housing Capitalization Rates 7.0% 6.0% 5.0% Average High Rise Class B Cap Rate At mid year, there were 386 multi-housing transactions totaling $2.8 billion across Canada. The number of transactions were down relative to the first half of 2012, however, volumes remained largely in check. Approximately two-thirds of total investment volumes were in Toronto and Vancouver where trading volumes totaled $1.6 billion and $380 million respectively, with a combined total of 407 transactions between the two cities. Notable large deals in the first half of the year include the Maple Leaf Quay sale in Toronto for $150.5 million to Coal Harbour Properties and a Montreal senior housing sale to Revera for $106.5 million. multi-housing investment still remains dominated by private investors with this key group accounting for 72.4% of total investment volume, year-to-date (YTD) while REIT/REOCs were a distant second at 14.7% with the remainder split between foreign investors and private equity groups. Capitalization rates continued to decline to new historical lows with the mid year national multi-housing cap rate falling to 5.17%. While Vancouver and Toronto were already at record lows, it was Ottawa and Montreal that drove the national rate to an all-time low with these two markets seeing cap rates falling 25 and 13 bps respectively in the first half of the year. With increasing long-term interest rates, cap rate compression has likely run its course and future investment gains will be made on income and not capital appreciation. Putting the recent past into context, since 2008, the national multihousing cap rate has decreased 153 bps, with rates down 73 bps in 2012 and 5 bps in Source: CBRE Limited 4 Chart 10: Price-Per-Suite $250,000 $200,000 $150,000 $100,000 $50,000 Year End 2012 During the first half of the year the national average price per unit rose 15.4% to average $141,000 per suite. Of Canada s nine major markets, Edmonton experienced the largest increase in the first half of the year at 35.5% followed by Montreal and Halifax increasing 19.1% and 15.4% respectively. The majority of markets experienced an increase in the price per unit with the exception of London and the Waterloo Region which registered modest declines. With Edmonton s recent surge, British Columbia and Alberta are now home to three of the country s four most expensive multi-housing real estate markets with only Toronto outside Canada s two most western provinces. 4 Source: CBRE Limited, RealNet Canada Inc., and RealTrack Inc. Table 2: Select Multi-Housing Transactions Canada-Wide Purchaser Property Name/Address Price Size (Units) Price Per Suite Coal Harbour Properties Ltd. Maple Leaf Quay/370 Queens Quay W, Toronto, ON $150,500, $299,801 Rivera Inc Hymus Blvd., Point-Claire, QC $106,500, $212,574 CHC Student Housing Luxe Inc. 333 King Street North, Waterloo, ON $56,025, $98,636 CAPREIT Apartments Inc. 135 Lynnview Road SE, Calgary, AB $47,340, $180,000 Starlight Apartments Inc. Sheridan Twins, Mississauga, ON $44,400, $133,736 Interrent International Properties Inc Bell Street, Ottawa, ON $38,625, $86,993 Interrent International Properties Inc. 7460, 7461 Kingsley and 5550 Trent Ave., Ottawa, ON $34,990, $106,676 Housing York Inc. 145 Essex Avenue, Richmond Hill, ON $34,770, $248,359 Baybridge Senior Housing 866 Sheppard Avenue West, North York, ON $31,410, $301,094 Shermerob Investments Ltd West 3 rd Avenue, Vancouver, BC $15,200, $286,792 Chart 11: Multi-Housing Inventory Breakdown CONTACTS Montreal: 39.5% Toronto: 25.4% Vancouver: 8.7% Ottawa: 5% Edmonton: 4.8% Calgary: 2.8% Other: 13.7% 39.5% For more information about this Canada Multi-Housing MarketView, please contact: Canada Research Ross J. Moore Director of Research, Canada CBRE Limited t: e: Roelof van Dijk Research Manager, Canada CBRE Limited t: e: 25.4% 13.7% 8.7% 5.0% 4.8% 2.8% Follow us on TWITTER Global Research and Consulting This report was prepared by the CBRE Canada Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. 5
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