Cap rates in the range of 2 to 3 per cent didn’t deter investors from acquiring approximately $450 million worth of Vancouver apartment buildings in the first quarter of this year. JLL reports differing dynamics in the five major Canadian markets it surveys, but with consistent demand from would-be purchasers of multifamily properties.
Multifamily transactions in Montreal, Toronto, Vancouver and Edmonton accounted for about 13 per cent of $9.2 billion of investment tracked in the recently released Capital Markets Insight – Q1 2017. No multifamily deals occurred in Calgary, which drew just $500 million in total investment versus $3.3 billion in Vancouver. However, JLL analysts suggest lack of supply factors into this inactivity.
“Large demand for multifamily assets exists from private investors looking for well-located existing product in the 20-40 unit size range,” the report states. “Large groups including pension funds, REITs and private equity funds are consistently looking for mid to high-rise concrete multifamily assets located in the downtown or beltline areas.”
Calgary’s 7 per cent vacancy rate and cap rates in the range of 4.5 to 5.5 per cent closely align with Edmonton’s 7.1 per vacancy rate and 4.25 to 5.25 cap rates. There, too, private investors are seeking somewhat elusive multifamily properties in good locations, while it’s reported that institutional players have pulled back on new purpose-built projects and are turning more attention to existing high-rise buildings with potential for rent growth.
Looking east, smaller and medium-sized deals are projected to dominate Toronto’s multifamily investment market, primarily because these are the properties most likely to come onto the market. “There is a strong demand for all classes of multifamily product as cap rate gaps narrow between product classes,” the report states.
Toronto’s average cap rate dropped to 3.84 per cent in the first quarter of 2017, while the overall vacancy rate remained at 1.3 per cent. Multifamily investment totalled $155 million or a little less than 10 per cent of $1.6 billion in deals during the quarter.
In Montreal, investors decisively favoured multifamily properties, amounting to $250 million in sales value or 45 per cent of total investment. A dearth of office, retail and industrial opportunities exacerbates the trend.
“We note the surplus of demand in the market amid a lack of good quality product. Even though cap rates remain compressed and are expected to compress further, any high-quality product will be heavily bid on,” the report observes. Cap rates in the range of 4.25 to 4.75 and a vacancy rate of 3.9 per cent have remained consistent since the third quarter of 2016.
Vancouver’s vacancy rate has been consistent at 0.7 per cent, while cap rates are deemed “at an all-time historical low”. Analysts expect North Vancouver, New Westminster and East Vancouver to accommodate many prospective renters now finding it more difficult to settle in the traditionally strong downtown rental markets.
“Sub-markets of Metro Vancouver are set to be big players for 2017 in terms of good investment opportunities,” they predict. “Savvy investors must look to these markets in order to benefit from this shift.”