Finding an apartment in Toronto has been notoriously tough. On the flip side, owning one of those apartment buildings is akin to hitting the jackpot. CBRE just released their Canadian Multifamily Mid-Year Update report and it’s a market segment in real estate that is flourishing. Multifamily properties include mid-to-high rise buildings, condos, student housing, senior apartments and mixed-use buildings.
Marked by low vacancies nation-wide and rental rates at 10-year highs, the multifamily segment shows no sign of slowing down. Rental prices for purpose-built rentals have actually grown by 4.4 per cent annually across the country and by 5 per cent in Toronto. Vancouver’s rental prices beat out Toronto’s growth with a steady 7.1 per cent increase. That’s a high return on investment for property owners whose total annualized returns were reported at 9.8 per cent in the first quarter of 2019.
CBRE Vice Chairman Paul Morassutti noted that multifamily properties delivered the best cap rate of any other asset category in Canada at 4.41 per cent. Also known as the capitalization rate, the cap rate is a way of measuring return on investment by dividing the net income of the property by its original price or “capital cost.” Translation: property owners of multifamily developments are raking it in.
“The multifamily segment’s ability to generate consistent cash flows with low levels of volatility has always made apartment buildings an enticing option for investors, but the combined strength of tenant demand, rental growth, and investor interest is unprecedented,” Morassutti told REMI Network. “Demand drivers, including a growing population and high home ownership costs, coupled with a lack of meaningful rental supply, are fueling income growth at a pace that we have never seen in many Canadian markets.”
Cue the investors. The well-advertised rate of return on investment only increased the multifamily investment volume – the highest it’s reached for four years at $8.3 billion in 2018. With all this investment, however, it’s still unclear whether these multifamily buildings will address the affordable housing gap, especially within urban centres like Toronto and Vancouver. With fewer rental options available to residents of this city, the property owners can overprice the rents to coincide with short supply and high demand.
And the demand promises to keep increasing. With Canada’s population growth outpacing every other G7 nation, its urban centres will be particularly hit with an even more dire housing crisis. BlogTO also reported earlier this year that Toronto’s population is growing faster than any city in the U.S. and Canada.
Incomes have not yet caught up with rents or home prices. While purpose-built rental rates grew 32.9 per cent in the past decade, so have the costs of living within them. Over the last 10 years, home and condo prices increased by 74.8 per cent and 78.8 per cent, respectively. It’s especially hard for young people starting out in a big city as cost of living is exorbitantly high.
There’s also ultimately less choice about where to live in Canada since, relative to other global cities, rental inventories are so low. It’s even harder if you are a low-earner. Of the 795 neighbourhoods surveyed across Canada, the Canadian Centre for Policy Alternatives (CCPA) found that just 24 of them (3 per cent) – offer two-bedroom housing for residents who earn minimum wage. This is, in part, due to developers opting to invest in condos, rather than purpose-built rental units.
“Traditionally viewed as a stable, defensive asset class, the multifamily sector is now benefiting from market fundamentals that are arguably as good as they have ever been, and we don’t expect them to change in a material way, recession or not,” said Morassutti. “That’s great news for investors; for renters, not so much, as they will continue to experience higher rents and lower vacancy as supply remains constrained.”
Guess this is why so many Toronto folks are terrified of moving.