multifamily investment market

Small deals drive multifamily investment market

Thursday, March 9, 2017

Canada-wide investment in multifamily properties is projected to dip in 2017, but with a few markets recording an upward trend. Analysts from CBRE also preface this forecast with last year’s higher-than-usual investment activity, totalling nearly $5.7 billion.

“Strong multifamily fundamentals and the prospect of a stable income stream propelled national apartment investment volume to near record levels in 2016,” CBRE’s newly released 2017 Real Estate Market Outlook observes. “As multifamily valuations reach new highs, investment discipline will be the main story in 2017, particularly for larger assets.”

Among identified trends, forecasters see pension funds and other institutional investors kicking off a construction boom. This responds to a growing demand for new purpose-built rental and the lack of existing institutional-grade product in the marketplace.

“Smaller and medium-sized deals will emerge as the most attractive segment of the multifamily investment market in 2017,” CBRE hypothesizes. “Montreal, Toronto and Vancouver saw the total proportion of deals above $25 million decrease by a combined 57 per cent year-over-year, from $2.3 billion in 2015 to $1 billion in 2016. This trend is more a function of available product than it is demand.”

The total value of deals registered in those markets also slipped from 2015 levels, but still ranged from $1.1 billion in Vancouver to just above $1.2 billion in Montreal. Vancouver recorded the lowest cap rates, at 3 to 3.5 per cent, and they are predicted to slide as low as 2.75 per cent this year. Both Toronto, with cap rates at 4 to 5 per cent, and Montreal, with cap rates in the range of 5 to 5.75 per cent, promised better income yields.

Calgary and Halifax figure most noticeably in the markets where an investment uptick is foreseen for 2017, although forecasters also see slight gains in Toronto, where investment is expected to hit $1.2 billion this year. Meanwhile, $200 million in projected deals in Halifax significantly surpasses the $106 million tally in 2016.

Analysts predict more trades across all property sectors in Calgary, perhaps signalling that market’s prolonged hardship is catching up with vendors. Multifamily sales are forecast at $275 million with cap rates in the range of 5 to 5.5 per cent.

Vacancy rates are projected to be much higher in Calgary (7.5 per cent) and Edmonton (7 per cent) than in most other surveyed markets. In Vancouver, the vacancy rate is forecast to remain below 1 per cent, while hovering below 2 per cent in Toronto.

Victoria, Hamilton and Waterloo Region are also tagged as markets to watch. “Core assets with upside potential, as well as Class A properties in secondary cities near gateway cities will garner most investor attention,” CBRE forecasts.

Substantial capital injections in seniors housing portfolios are foreseen as major players in this market sector sell off Class B product to fuel further investment in Class A holdings. New development with more focus on independent lifestyle elements is expected to attract more and younger residents, pulling down the average age of occupancy from its current level of 83 years.

“The seniors housing market continues to benefit from robust investment demand based on strong and improving fundamentals and the compelling long-term demographic outlook,” CBRE reports. “The seniors housing sector appears to be undergoing a re-rating by investors, who are becoming comfortable in bidding down the historic spread which has existed between seniors housing and apartment investment returns.”

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