Multifamily Outlook 2018 Page 1
Canada Multifamily From strength to strength The Canadian commercial real estate sector continues its steady upward performance amid a silently moving economic engine. Owners, developers, and investors are generally more optimistic about 2018 as compared to this year, but are also cautious of the larger implications from a potential external event or market correction in heated markets like Toronto or Vancouver, which both experienced shakeups in the past year from taxes on foreign buyers and some types of vacant properties. As the Canadian economy begins to cool down, after being red-hot for much of 2017, owners, developers, and investors have begun to rebalance their portfolios with the right deals. While we note that our investor base is looking to transact even more in 2018, they are mostly hindered by the unavailability of quality investment product. The Canadian commercial real estate market has seen an upswing in capital inflows annually and we expect 2018 to be no less different. Rising capital inflows have in-turn pressured prices upwards thereby ensuring that investors need to develop creative ideas to compete in the market. Selectivity is the name of the game as investors are looking at opportunities more from a value-add basis. With interest rates expected to rise in 2018, we will see some tightening in underwriting of commercial real estate loans as well. In our view for 2018, the appetite from institutional and private sources of capital will remain stable for the multifamily sector given historic sector performance and favourable demographics, to name a few factors. That said, urban construction and elevated asset pricing, selectivity and caution will remain the norm. Capital will favour high-growth markets, high-barrier-to-entry submarkets and the continued diversification of overall portfolio exposure across these geographies. 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Page 2
Toronto The Toronto multifamily market is witnessing a voracious demand from investors across the spectrum and is poised to match investment volumes as seen in FY2016. Demand will stay high for the best assets, as institutional capital and private investors continue to seek stable long-term plays. In Ontario, worries over new rent-control legislation have cooled many developers interest in building new rental units, despite rising demand. Rather than improving renters predicament, we think that rent controls will worsen it by further reducing supply and driving vacancy rates even lower. Vacancy in Ontario is currently at 2.1%, lower than 2016, and will likely be even lower when the new results come out for 2017. Demand for space far outstrips supply. With the slowdown in rental construction, and the inflation in the housing market, we expect the vacancy rate to continue to drop in 2018. Multifamily properties in Ontario have witnessed a massive increase in the price per suite of rental buildings in the past year. Even in Toronto, at nearly $200,000 per suite, the price per suite still remains below replacement cost. We expect these prices to stabilize in 2018. We are currently witnessing very limited vacancy, and rents are increasing tremendously on turnover. The government must offer incentives to construct new rental properties, in order to improve the size and quality of the rental pool, as the most recent rental legislation that extends guideline rental increases on all apartments, has reduced the appetite for developers to build. A shortage of available quality investment properties, combined with minimal vacancy rates, and a sizeable gap between average and asking rents is driving investors to accept low incoming yields, anticipating upside on turnover. I expect the multifamily sector to continue to strengthen in 2018 says Michael Betsalel, SVP-Multifamily, JLL Capital Markets. Page 3
Montreal Investment performance for multi-residential assets hit some of the highest returns since 2012, a reflection of investors confidence in current cap rates and the sector s general outlook. We note that demand is as strong as it has ever been and that there will continue to be a voracious appetite for multifamily assets throughout the GMA. Vacancy rates for the GMA currently stands at 3.9% and are expected to remain stable. Rental properties in Montreal are performing well as Quebecers have long looked on rentals favorably and are eager to move into units centrally located which fits the live/work/play lifestyle. Even though there has been a significant increase in new rental stock, rental demand will continue to be strong due to an increase in net migration. Downtown vacancy rates will be affected the most because of significant development activity both in purpose-built rentals and in new condominiums, the latter of which will rent on the secondary market. We expect price per door to continue to increase in desirable areas as cap rates remain low and continue to compress for quality assets. In our view, cap rate compression and higher rents will affect pricing in the multi-family sector, which still returns a good yield as compared to other major Canadian markets, such as Toronto and Vancouver. The development of purpose-built rentals continues to increase across the GMA and will likely affect the vacancy rate of older stock buildings. Demand remains high for strong quality assets in desirable areas. Cap rates continue to compress for A-class buildings resulting in high price-per-doors especially in student and transit oriented areas. Appetite for multi-family investments will remain strong going into 2018, says Mark Sinnett, EVP, JLL Canada. Page 4
Vancouver Currently the strongest multifamily market in the country, Vancouver is witnessing an unwavering insatiable investor appetite. In terms of vacancy rates, almost all submarkets in Metro Vancouver are below 1.00% with some submarkets being as low as 0.2%. Secondary markets are also experiencing very tight vacancy rates with some being reported at 0.00% vacancy. Factors contributing to such low vacancy rates are high cost of home ownership, tenants moving away from the city markets due to rents being so high seeking more affordable rental rates, in migration of new residents, and a lack of supply. Vacancy rates will remain tight in 2018 but several new rental developments under construction will alleviate some of the pressure from the rental market, but not to the extent that vacancy rates will rise. We foresee that costs per door in certain regions will continue to go up, but not dramatically. We are already at very aggressive door costs and cap rates. Some areas will stabilize slightly and we will wait to see if the interest rate hikes will put an upward pressure on cap rates. We are already seeing them stabilize in certain markets. Investment volumes in 2018 should rise as demand for existing and new product remains high. It s an exciting time in Metro Vancouver and the entire province and I foresee a strong and positive outlook moving into 2018 and beyond, says James Blair, VP - Multifamily, JLL Capital Markets. His sentiment is echoed by David Venance, VP Multifamily, JLL Capital Markets, who says The multifamily sector will remain strong in B.C. given the very low vacancy rates and continued upward pressure on rental rates due to continued increase cost of home ownership. There is extreme demand by income producing tenants seeking centrally located apartment rentals, and therefore we'll see continued demand amongst investors for this asset class. To sum it up, Patrick McEvay, VP - Multifamily, JLL Capital Markets, adds that demand for multifamily will remain strong throughout 2018, but I expect a return to a more balanced market with cap rates stabilizing. Page 5
Edmonton The Alberta market improved in 2017 however the overall vacancy rate for the City of Edmonton remained essentially unchanged at 7.0%, showing signs that the market is steadying after three consecutive years of vacancy increases. Since oil prices began their descent in 2014, vacancy rates across Alberta increased and in 2016 the vacancy rate in Edmonton reached the highest level since 1996 at 7.1%. Market conditions are now showing signs of improvement in Edmonton with increases in job growth and international immigration. The incentives being offered by landlords have tapered off as a result. The vacancy rate will continue to be positively impacted primarily by economic growth which will be sparked by the price of oil and the approvals of Keystone and Kinder Morgan Pipelines. International immigration will also play a role. As we move through 2018 we expect to see the vacancy rate decline and incentives will be largely nonexistent by the end of 2018. In 2017 the average price per door fell as the Net Operating Income of many properties declined, a direct result of weakening market fundamentals lowering rents and increasing vacancy. Cap Rate rates to date have been unchanged. Difficulty for some to obtain adequate financing may slow investment volume in 2018 but demand will remain strong for this asset class. Interest rates and tighter lending controls on homeowner mortgages will have a determining factor in lowering vacancy rates as renters remain as tenants, holding off on the purchase of a home. While higher interest rates may be considered a positive for landlords, they will have a negative effect on cap rates thereby lowering property values. To date, we have not seen an adjustment in cap rates. We can expect an increase in cap rates going forward but interest rates will be the key to where they settle. Multifamily will continue to be a reliable asset class for investors in 2018. As interest rates increase and mortgage requirements change, rental market fundamentals should improve, says Samuel Dean, Senior Sales Associate, JLL Capital Markets, Multifamily, Alberta Page 6
Calgary The Calgary market continues to see steady demand for multifamily assets from both private and institutional capital. Vacancy in the current market decreased 0.7% year-over-year to 6.3% in 2017, and we foresee the vacancy rate continuing to decrease in 2018. The demand from tenants for rental apartments has increased, outpacing the amount of new rental supply. The recent improvement in Oil Prices should encourage immigration while improving the unemployment rate. Affordability concerns for single family housing due to higher interest rates and tighter lending controls will also contribute to a decreasing vacancy rate in 2018. The cost per door for multifamily assets decreased on average in Calgary and across Alberta as weaker market fundamentals since the Oil Price shock has negatively affected the bottom lines of Landlords. So far, cap rates for multifamily assets have remained steady. The only exception may be in the concrete high-rise submarket as demand from investors still outweighs the supply of available assets for purchase. There continues to be a lack of multifamily product available in Calgary as vendors are keeping a watchful eye on interest rates, oil prices, and the overall Alberta economy. Calgary s multifamily market will continue to command interest from private and institutional investors and we expect to start to see more groups who cannot compete in the low cap rate environments in Toronto and Vancouver to look at Calgary as an alternative, Paul Gemmel, Executive Vice President, JLL Capital Markets, Multifamily, Alberta
Gaurav Mathur Research Manager, Capital Markets +1 416 238 4455 Gaurav.Mathur@am.jll.com About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.