Cap rates are holding steady at low levels as investors chase multifamily properties in major Canadian markets. Midyear results from CBRE and Colliers International also find almost every other property type, except premier office, is trading at higher cap rates.
“Sector fundamentals remain exceedingly strong with low vacancies and rising rents seen in most markets across the country,” reports David Montressor, executive vice president of CBRE’s national apartment group. “With a limited number of quality offerings reaching the market, several cities are reporting greater than normal demand from investors.”
Nationally, CBRE pegs the average cap rate for Class A high-rise properties at 3.96 per cent. Class B high-rise and Class A low-rise likewise register lower average cap rates than the national average for Class AA downtown office buildings, which is 4.81 per cent.
Within Canadian markets, cap rates in Vancouver, Toronto and Ottawa are lower than the national average for all four multifamily formats. Vancouver remains at the low end of the scale, with cap rates for Class A high-rise properties in the range of 2.5 to 3 per cent. Changing dynamics for new residential construction in British Columbia may also have an impact on demand for existing multifamily stock in the coming quarters.
“The residential real estate market has seen some cooling in some segments and markets, however there is still demand for product outside of luxury markets,” observes James Glen, Colliers’ vice president in Vancouver. “The big story is the rapid rise in construction costs and development levies, squeezing residual land values down. Many of the largest developers have amassed large land holdings over the years, and so are not immediately affected directly by softening.”
In Ottawa, Class A high-rise properties are trading at caps of 3.25 to 3.75 per cent with Toronto Class A high-rise properties in the 3 to 3.75 per cent range. Winnipeg, Calgary and Edmonton exhibit cap rates above the national average — although Winnipeg’s 5 to 6 per cent range also partly reflects that no high-rise Class A buildings sold in the second quarter.
“Despite an increasing vacancy rate, new supply is being added in the multifamily market, led by high-end rentals and student housing,” reports Ryan Behie, CBRE’s vice president and managing director in Winnipeg.
Halifax presents a similar scenario. “The multi residential market continues to see substantial development of new buildings in all areas of the City, with the downtown now being a focal point for high quality development,” says Mitch Wile, Colliers’ managing director in Halifax. “The new supply is being met with enthusiasm from the market as tenants are upgrading from older rental stock to modern buildings. The downtown is emerging as a new residential community — a virtuous circle by which the growing neighbourhood will support resident-oriented businesses (shops, services, restaurants, cafes, etc.) and the office market to an extent.”
Colliers analysts also speak enthusiastically about trends in Montreal, where cap rates were at 4 to 5 per cent for high-rise and 5.25 to 6 per cent for low-rise apartment buildings. Michael Colgan, managing director in Montreal, notes that the multifamily sector was the most active component of the investment market in the second quarter of 2018, although many of the deals were smaller transactions. The largest Montreal transaction was a 268-unit building that sold for $79.6 million or $297,200 per unit.