Canada’s multifamily market is the most robust it has ever been, with low vacancies from coast to coast and rental rates at or near 10-year highs in almost every city, according to CBRE’s new Canadian Multifamily Mid-Year Update.
The national average multifamily vacancy rate ended 2018 at 2.4 per cent, below the 10-year average of 2.6 per cent. Meanwhile, average rents for purpose-built rental units have grown by 4.4 per cent annually at the national level, and by 5.0 per cent in Toronto and 7.1 per cent in Vancouver.
This rapid rise of rental rates has resulted in outsized investment returns for owners of apartment buildings. Total annualized returns for the Canadian multifamily sector were 9.8 per cent as of Q1 2019, just behind the red-hot industrial sector.
Hefty returns have enticed investors, with multifamily investment volume reaching record levels for four consecutive years, including an all-time high of $8.3 billion in 2018. The multifamily sector also has the lowest average national cap rate of any other asset class in Canada, at 4.41 per cent.
“The multifamily segment’s ability to generate consistent cash flows with low levels of volatility has always made apartment buildings an enticing option for investors, but the combined strength of tenant demand, rental growth, and investor interest is unprecedented,” says CBRE Canada Vice Chairman Paul Morassutti. “Demand drivers, including a growing population and high home ownership costs, coupled with a lack of meaningful rental supply, are fueling income growth at a pace that we have never seen in many Canadian markets.”
Population growth fuelling Canada’s multifamily market
Canada’s population growth is outpacing all other G7 nations. Over 80 per cent of Canada’s population increase comes from immigration, with most newcomers renting before they can purchase a home. The federal government plans to admit one million new immigrants by 2021, which will support rental demand regardless of economic dynamics.
Soaring home ownership costs are also driving rental demand. Vancouver’s benchmark home price as of Q2 2019 was $998,700, while in Toronto it sat just shy of $800,000. Incomes have not kept pace, having risen 30.7 per cent in the past decade, or 2.7 per cent per year. Purpose-built rental rates grew 32.9 per cent in the same period, but home and condo prices increased 74.8 per cent and 78.8 per cent . It requires an annual household income of $115,200 to afford the average Toronto condo; for a semi-detached home, it’s $177,600, and for a single detached home, $211,300. At these prices, just 24 per cent of Toronto households can afford to buy a condo, while only 10per cent and 8per cent of households can afford semi- or fully detached homes.
Relative to other global cities, rental inventories in major Canadian markets are limited. High-rise developers in recent decades have chosen mainly to develop condos versus purpose-built rental units. The high cost of land and other financial considerations have generally made rental projects less profitable. In Calgary, Edmonton, Ottawa and Kitchener-Waterloo, over 50 per cent of all high-rise units under construction are condos. In Toronto, 89 per cent of high-rise units under construction are condos, while in Vancouver it’s 76 per cent.
“Traditionally viewed as a stable, defensive asset class, the multifamily sector is now benefiting from market fundamentals that are arguably as good as they have ever been, and we don’t expect them to change in a material way, recession or not,” said Morassutti. “That’s great news for investors; for renters, not so much, as they will continue to experience higher rents and lower vacancy as supply remains constrained.”