APARTMENT INVESTMENTS CONSISTENTLY DELIVER RESULTS
REMI - Barbara Carss
Multifamily assets were consistent performers again last year for institutional investors represented in the MSCI/REALPAC Canada Property Index. Newly released 2024 results peg the average total return for residential properties at 3.7 per cent across 54 participating portfolios — surpassing the index-wide average total return of 3.21 per cent.
The multifamily category registered positive capital growth, albeit at a modest 0.1 per cent, while the total index — encompassing 2,225 individual assets collectively valued at CAD $165.4 billion — sustained a 1.63 per cent drop in value from 2023. Multifamily also came out of the year with the lowest average cap rate, at 4.2 per cent, and continued a long string of years as the second-best performer among the major property classes.
"Multifamily also came out of the year with the lowest average cap rate, at 4.2 per cent, and continued a long string of years as the second-best performer among the major property classes."
Retail was on top, posting a total average return of 6.5 per cent. Industrial was slotted third with a total average return of 3.4 per cent, while office bottomed out the chart with a flat return. All four asset categories showed improved performance over 2023, largely attributable to income return.
Index participants include pension plans, insurance companies and open-ended property funds. As a group, these investors largely channelled their spending into residential properties last year, including about $367 million in standing multifamily assets and about $1.672 billion on “other” assets, primarily comprised of development land. On the flipside, investors divested a net of $756.6 million in industrial properties and $97.8 million worth of retail properties in 2024.
“Speaking with clients, the consensus is that most of that other (category) will go to residential, but until you get (development) permits in place, you can’t actually reclassify that land as residential,” Peter Koitsopoulos, a vice president with the index producer, MSCI, reported as he presented the 2024 investment results to a gathering in Toronto last week.
The year’s favoured investment is in keeping with the ongoing shift within investors’ portfolios and gaining weight of multifamily assets. As of December 2024, multifamily accounted for 19 per cent of the capital value in the index, up from about 8 per cent 10 years earlier. Industrial likewise climbed from 10 per cent to a 23.7 per cent share of capital value in the same period, while retail and industrial slipped correspondingly.
Comparing investment levels from before and after the COVID-19 pandemic, MSCI’s chief economist, Jim Costello, noted that deal volume in 2024 was relatively on par with the five-year average just prior to 2020.
“Before, it was around $34 billion per year. Now, in 2024, the market was $31 billion so it’s kind of in line,” he said. “There’s been a change in the composition of what people are buying. Apartments and industrial, that’s really where the market has shifted to. This changes how institutional investors have to think about the market.”
Other MSCI analysis of transaction data suggests that multifamily investors have strong expectations for income growth. That sentiment is gleaned from a comparative examination of sales prices versus cap rates to derive an indicator of how investors are pricing expected growth into their purchasing decisions. Costello theorizes that those expectations partly explain why cap rates have not risen in step with interest rates, but, rather, the spread between cap rates and the 10-year bond rate has narrowed.
“Most of the money moving in so far is private investment. They don’t have the fiduciary challenges of the big managers. It’s their own money,” he said. “If you’re embedded in a market and you see an opportunity, you’re going to move faster than institutions because you don’t have a board to report to. You don’t have the same kind of reputational risk of being at the bottom of the index because you bought at the wrong time.”
Meanwhile, industry insiders participating in an associated panel discussion sketched out some of their companies’ multifamily development initiatives. Oxford Properties, Salthill Capital Corporation and LaSalle Investment Management all have intensification opportunities at retail mall sites.
Michael Fraidakis, chief investment officer for LaSalle’s Canadian portfolio, reported his company and its development partners are at an earlier stage of the process for potential projects at Vaughan Mills, just north of Toronto’s boundary, and at Guildwood Town Centre in Surrey, British Columbia, which is the fastest growing municipality in that province.
“I think development will come back,” he maintained. “The numbers have not pencilled out for some time, but, like other developers, we’re doing the work to get there so that we can be in position when the time is right to pull the trigger.”
GTA APARTMENT MARKET 2024
The Apartment Group
Well 2024 has come and gone and what can we say about the multi family space? The raw numbers reveal that 2024 was much the same of 2023. In 2024 there were 57 deals compared to 53 deals the year prior. In terms of deal volume over 6,200 suites changed hands for a total of around $2.1BB in 2024. In 2023, over 3,100 suites were sold for a total of around $1.0BB. The higher sales in dollar volume in 2024 is a direct result of some larger deals being completed in 2024 over 2023. For example, in 2024 there were 12 deals sold over $70MM totaling $1.5BB and in 2023 only 2 sales transacted over $70MM for a total of $150MM. If adjusted for this volume between 2023 and 2024 would be flat.
Cap Rates have remained flat between 2023 and 2024 at around 4%; however in 2024 price per suite was around $350,000 and a year earlier they were around $320,000. As mentioned above there were more sales over $70MM in 2024 than 2023. As well, many of these sales were for new builds or much younger more stabilized buildings and this pushed up the average price per suite. Adjusted for this fact, the price per suite too between 2023 and 2024 would have remained flat.
Compare the above to the peak of the market back in 2019. Then there were 108 deals completed, $2.7BB in sales volume and over 9,600 suites sold. The cap rate was around 3.25% at that time. There has been a more than 40% decline in market activity since interest rates moved up.
The above said, the fundamentals in the multi family space remain stronger than ever. Rents in the last year according to Canada Mortgage and Housing Corporation (CMHC) indicate the rents increased on average 2.7% which is slightly higher than the 2.5% Provincial Guideline. Rental increase slowed last year but that was coming off of an historic 10% rise the year before. Over the past 4 years the average rental increase was around 4.5% per year. Average rents in 2024 were $1,875 per month as compared to $1,825 per month in 2023.
The slowing pace of rental increases are due to vacancies moving from 1.4% in 2023 to 2.5% in 2024. Higher vacancy can be attributed to the addition of 9,000 new rental units to the supply while at the same time a reduction in demand due to lower immigration levels and the high rental levels making more people staying at home or doubling and tripling up in existing units.
The condo rental market added 34,000 units in 2024. Vacancy there remained flat over the past 24 months at around 0.65%. The average rents in condos average $2,760 in 2024 up from $2,725 a year earlier.
Recently rents have begun to soften, but we conclude that this is a short term situation and rents will move up. Apartment starts in 2024 were 10,000 lower than the previous year which means less new product will be coming on stream over the next few years. This too my push vacancies lower and rents higher.
CANADIAN BUILDING CONSTRUCTION IS UP
StatsCan
Overall, investment in building construction rose 1.9% (+$408.1 million) to $21.8 billion in December, with gains recorded across all components. The residential sector grew 2.2% to $15.1 billion while the non-residential sector was up 1.3% to $6.7 billion. Year over year, investment in building construction grew 4.7% in December. On a constant dollar basis (2017=100), investment in building construction increased 1.5% from the previous month to $13.0 billion in December and was up 1.6% year over year.
Investment in residential building construction was up 2.2% (+$323.9 million) to $15.1 billion in December. Single family home investment edged up 0.8% (+$60.7 million) to $7.3 billion in December, marking its fifth consecutive monthly increase. Investment in multi-unit construction rose 3.5% (+$263.2 million) to $7.7 billion in December, rebounding from two significant and consecutive monthly declines.
Investment in non-residential construction increased 1.3% (+$84.1 million) to $6.7 billion in December. Monthly increases were recorded in eight provinces and one territory, with Ontario (+$54.3 million) leading the growth and marking its 10th straight monthly increase. The industrial component was up 1.8% (+$26.2 million) to $1.5 billion in December. Quebec (+$15.9 million) led the growth, followed by six other provinces and two territories.
Commercial construction investment edged up 0.6% (+$20.2 million) to $3.3 billion in December. Gains in Ontario (+$24.9 million) were tempered by decreases in Alberta (-$10.6 million) and British Columbia (-$3.3 million).
Year over year, investment in building construction rose 5.8% to $253.8 billion in 2024. On a constant dollar basis (2017=100), the total value of investment in building construction increased 2.4% to $154.1 billion for the year. Despite these gains, the total value of investment in building construction in constant dollars remained below the record high level reached in 2021 ($171.9 billion).
THE APARTMENT GROUP
Together the team has completed over 1,500 transactions and has sold over $8.0 billion in apartments and development land. Put us to work for you and see the results. NO ONE has sold more buildings than our group. Experience, knowledge and professionalism will insure you get the right deal or the highest price if you are selling.
The Apartment Group is a dedicated team of professionals specializing in the sale of multi-residential investment properties. With over 40 years of combined experience, the team brings together their strengths including strong negotiation and sales skills along with highly technical market analysis and appraisal methods.
We are a boutique Brokerage but have the capabilities of the larger houses without the overhead. We have: an internal database of over 10,500 active apartment and land Buyers; a list of all apartment building owners in the Greater Toronto Area; our web site gets over 50,000 hits a month; we highlight properties for sale through our newsletter which reaches 10,000 investors monthly.
MITCHELL CHANG
President & Owner,
Salesperson
Direct: 416-219-0436
mchang@cfrealty.ca
LORENZO DIGIANFELICE, AACI
Broker of Record, Owner
Direct 416-417-9098
ldigianfelice@cfrealty.ca
JAKE RINGWALD
Salesperson
Direct 416-996-7713
jringwald@cfrealty.ca
