The third quarter of 2013 saw apartment prices hitting record levels, coming in at over $153,000 per suite. While no one quarter can establish a definitive trend, because of the low trading volumes and the occasional sale of extraordinary properties, this price level can give food for thought. Greater Toronto Area (GTA) apartment values year-to-date average about $145,000 per suite, meaning 2013 is pointing to a record year for the sector.
In 2012, third quarter numbers indicated an average price per suite of around $136,000 — or 12.5 per cent less than 2013. However, the 2012 numbers are 75 per cent higher than the same period five years ago.
Cap rates in the third quarter of 2013 averaged 4.76 per cent, which is also a new benchmark level for apartments. Average cap rates for the GTA year-to-date average around 5.1 per cent. Cap rates in the same quarter in 2012 were 5.12 per cent. Five years ago, average cap rates were 6.43 per cent, and as such, today’s rates have declined by 26 per cent over the period.
Sales volume highest on record
So far in the GTA, year-to-date sales volume is just over $1.1 billion. This is higher than the $995 million reported for all of 2012 and is the highest level on record. The number of transactions per quarter has remained relatively stable for the third quarter of 2013 at approximately 30 deals. The average size per deal over the past five years has also remained stable at approximately 65 suites.
One of the larger deals during the quarter was the sale of five buildings in Toronto and Mississauga from CAPREIT to Starlight Apartments. The portfolio included a total of 604 suites for a price tag of $94.25 million, or $156,000 per suite.
Starlight Apartments also purchased a 155-suite apartment building in Mississauga from Skyline Real Estate Holdings Inc. for $27.7 million, or $178,000 per suite. Over the past few years, the larger players have been trading amongst themselves in an attempt to balance out their portfolios locally, provincially and nationally. This trend will likely continue.
Homestead Land Holdings Ltd. purchased two apartment buildings in Burlington from a private individual. The two buildings have a total of 211 suites and the sale price was about $31 million, or $149,000 per suite.
The lowest cap rate deal during the quarter involved a sale in Scarborough at 2323 Eglinton Avenue East. It sold for $9.1 million, or $121,000 per suite. This building had previously sold in April 2009 under power of sale for $5.85 million. The purchaser had substantially updated the building in the last few years, but it had reportedly been on the market for quite some time prior to the ultimate sale. The cap rate for this transaction was around 4.4 per cent. A new entrant into the apartment market purchased the property.
While new benchmarks were hit in the third quarter of 2013, there seems to be a more cautious approach on the part of buyers moving into the new quarter. In the third quarter of 2013, Commercial Focus Realty Inc. sold almost $18 million worth of real estate, and currently have about $25 million worth on the market. While sales are occurring and demand is strong, there is now more final negotiations going on at the 11th hour, most dealing with financing.
With the decline of cap rates across the board, loan-to-value ratios have also dropped, which means buyers need more equity today to purchase. At the same time, lenders are being ultra conservative on valuations and underwriting, further compounding the problem.
In addition, there is the movement in interest rates. From late 2011 until early 2013, 10-year bond yields have been under two per cent. Since April 2013, this rate has jumped up almost by one per cent. This is having an impact on the market. How long interest rates will remain at current levels is hard to say, as is whether they will go higher.
Lorenzo DiGianfelice, AACI, is broker of record with Commercial Focus Realty Inc. and team leader of The Apartment Group, which deals exclusively with the sale of multi-residential product and has sold over $3 billion globally.