The Canadian multi-family real estate market has experienced strong demand and yield for investors in recent years despite some challenging economic times that began with the global financial crisis in 2008 and persists until today with the COVID-19 pandemic.
During this period, acquisition volumes in the sector have consistently grown while cap rates have compressed to 10-year lows.
The market has been buoyed by low vacancy rates. According to Canada Mortgage and Housing Corporation, the national average multi-family vacancy rate earlier this year was 2.6 per cent which was well below averages in other commercial real estate assets.
The low vacancy rate has triggered growth in rental rates which earlier this year were up 2.9 per cent across the country.
The appeal for the multi-family market by investors is simple – consistent cash flows and resiliency, particularly in times of economic woes and recessions.
It’s an attractive market for those investors during times like these with population growth, both natural and through immigration, as well as a lack of supply and a growing popularity for rental units due to rising home ownership costs across Canada.
Here are some of the fundamental factors contributing to the multi-family real estate market’s long runway in Canada.
Multi-family can be described as the darling of real estate asset classes in the country. Total returns are very strong – second only to the industrial market.
For example, over the past five years, total returns for the multi-family market have been between eight per cent and 11 per cent – much better than the four to five per cent for retail and four to six per cent for office.
The multi-family market benefits from an increasing concern about housing affordability in Canada with the price of homes in some markets, particularly Toronto and Vancouver, becoming a barrier for many potential home buyers.
Low interest rates are a positive for the housing market but income levels have not kept pace with price growth and government regulations in recent years have made it more difficult for buyers to enter the market.
Those factors have pushed many potential buyers into the more affordable rental market and that has driven developers to build more new purpose-built rental projects.
The multi-family rental market has traditionally been boosted by population growth. In Canada, population grew by 1.1 per cent each year between 2009 and 2019 but naturally did fall back during the pandemic.
However, experts believe a growth rate of 0.9 per cent over the next four years will outpace other G7 nations with that increase coming primarily from immigration which has been the backbone of building the country for decades.
Lack of Supply
There’s no question that the rental universe in recent years has been characterized by a lack of supply and a lack of new purpose-built rental buildings. Most of Canada’s rental stock is old, having been built from the 1960s to the 1980s. Over the past three decades, the focus has been on building multi-family projects to be sold in the market. That’s created a gap in the rental market as rental rates and occupancy rates have risen. This has also created more opportunities for new development in the rental market in major centres across Canada.
While the new surge in development is a welcome relief for the market, we still have a situation where many major centres are struggling with an under supply of residential rental units.
For example, a simple calculation comparing the number of people in a city per rental unit demonstrates the lack of supply in some key Canadian cities. A high number indicates low supply.
Here are the numbers from some Canadian and American cities: Calgary 38, Montreal 7, Toronto 21, Edmonton 21, Vancouver 24, New York 7, Los Angeles 9 and Chicago 13.
For some major Canadian centres, those numbers just highlight the need for an expanded rental universe to keep up with demand – which is good news for investors in this solid real estate asset class.
Chris Chornohos has a passion for real estate and helping his clients reach their business goals by providing Real Estate Investors and Owners with the first class valuation and advisory services to close more deals. Chris is also an investor, builder and developer. Reach out to Chris today to help with your Real Estate needs.