In the past two decades, the only direction that the Greater Toronto Area’s apartment market has been going is up. This trend in high GTA apartment values is expected to continue into 2014.
In 2013, the average price per suite was $144,770, which reflects an annual increase of 15 per cent in the past 20 years. Add to that equity returns internally of around 10 per cent, and that is an increase of 25 per cent per annum. This is impressive indeed.
A survey of 15 deals that occurred in 2013, tracking the last time the buildings were purchased, shows that of those deals, the average holding period for the investment was around 10 years. Looking at the equity invested at the first sale and comparing it with the equity pulled out at the final sale, the average return of investment per annum was 55 per cent. While this does not account for capital work done to the building to increase rents, the point is taken that the returns are very strong.
There were some record-breaking deals in 2013. It appears that owners who were fence sitters a few years back are now selling. This could be a result of market timing, or due to many owners being older and no others in the family want to carry on in the business.
There were 137 deals completed in the GTA (buildings with more than six suites) in 2013. This is the second-highest amount in the last 20 years, and much higher number than the 79 deals done in 2009 and 123 in 2012.
There were 9,700 suites sold in 2013, and the average building size was 70 suites. This is 57 per cent higher than reported in 2009, which was the peak of the economic downturn. In 2012, 7,430 suites were sold and the average deal size was 60 suites.
There was a record $1.4 billion worth of deals transacted in 2013. This is 33 per cent higher than 2012 and 73 per cent higher than in 2009. The 2013 record is not only a result of the higher volume of deals, but also a result of rising values.
As mentioned, the average price per suite in 2013 was $144,770, which is up 14 per cent from the previous year. In fact, prices have risen by 39 per cent in the past five years, or 7.5 per cent per year. Inflation for that period was under 1 per cent per annum. Along with the previous trends, cap rates set a record benchmark low in the GTA, sitting at 5.05 per cent in 2013, which a decline of 5 per cent from the previous year. The last time cap rates increased year-over-year was between 2002 and 2003, more than a decade ago.
The value increases are not only a result of the imbalance of supply and demand (low supply and high demand), but also because of falling interest rates that are still at 30-year lows. And over the past decade, owners have improved the bottom line by renovating units on turnover and getting higher rents. They have also been applying guideline increases to existing rents as a result of a tight rental market, and reducing expenses through energy efficiency tools.
The outlook for 2014 is more of the same. If the pace that has been set in the last three months is any barometer for 2014, it will be another record-setting year.
Lorenzo Digianfelice, AACI, is broker of record at Commercial Focus Realty Inc. and the head of the Apartment Group, which has sold over $3 billion of real estate. He can be reached at [email protected].