The Top Performing Commercial Real Estate Type? Multi-Family

The multi-family sector stands out from the pack as the top performing commercial real estate type in North America, says a report by Commercial Real Estate Services Canada (CBRE).

“With apartment buildings at near full occupancy in markets from coast to coast, rent growth has accelerated. Over the last two years, average rents for purpose-built rental units have grown by 4.4 per cent annually at the national level. This rapid rise of rental rates has resulted in strong investment returns for landlords,” said the report.

Avenue Living has seen average rents increase by 13.3% from December 2018 year over year – above the national level.

“Total annualized returns for the Canadian multi-family sector were 9.8 per cent as of Q1 2019, second only to the industrial sector, which has also benefited from a recent period of tremendous rent recalibration. While the multi-family sector’s ability to generate consistent cash flows and provide defensive positioning against economic cycle downturns has always made it an enticing option for investors, the current landscape is stronger than it has been at any other time in history.

“Performance drivers including a growing population, rising home ownership costs and lack of rental supply are becoming entrenched in many markets across the country, which means the appeal of multi-family assets is likely to increase.”

Immigration is fuelling that population growth in Canada, with newcomers being a key demographic in the multi-family market.

According to the most recent Statistics Canada data, the number of immigrants that came to Alberta in the third quarter of 2019 was 12,685, up from 10,398 in the third quarter of 2018. Saskatchewan also saw a hike to 5,510 from 4,227 the previous year. And in Manitoba, the number of immigrants jumped to 6,145 in the third quarter of 2019 from 3,890 for the third quarter of 2018.

Population is one of the key drivers of the multi-family market as Canada’s population rose by an average of 1.1 per cent annually from 2009 to 2018. CBRE said it is expected to grow by 0.9 per cent each of the next four years.

“The mortgage stress test, which the federal government put in place in early 2018, is still making it more difficult for some people to qualify for a mortgage, driving demand for comparatively affordable multi-family units,” said the CBRE report.

“On the other side of the coin sits supply of rental units. The primary reason for the low multi-family inventory levels in many Canadian cities is that high-rise developers in major markets have traditionally chosen, for a variety of reasons, to develop condominiums as opposed to purpose-built rental units. The high cost of land and other financial considerations have made rental projects comparatively less profitable in highly competitive marketplaces.”

With increased demand and limited supply, CBRE said rents are growing and escalating rapidly in some markets where the supply is low.

The strong market fundamentals have naturally attracted new capital to the sector. For example, national investment volumes for multi-family assets have escalated for four consecutive years, reaching an all-time high of $8.3 billion in 2018, and the appetite for buying rental assets remains high.

“With fundamentals looking well-supported by economic and demographic tailwinds, a strong investment landscape and a sophisticated landlord community, the multi-family sector looks poised to maintain its standing as a sought-after investment vehicle for years to come,” concluded the CBRE report.