Hire the best you can afford. Where are the opportunities in the multi- family market in the next 12 to 24 months? We fo
British Columbia Multi-Family Investment Report Fall 2014
BC multi-family dollar volume pushes to new levels as investor demand resurges
A
$140-million portfolio sale and the City of Vancouver’s disposition of its remaining interest in the Olympic Village residential development for $91 million propelled the multifamily segment of the BC market to its strongest first-half performance (in terms of dollar volume) in more than five years. The sale of Boardwalk REIT’s BC apartment portfolio to the Realstar Group for $140 million represented the largest investment transaction in BC in the first half of 2014. The three multi-residential buildings included: Horizon Towers in Burnaby ($54 million), Surrey Village ($48 million) and Christie Point Apartments in Victoria ($38 million). The inability of Boardwalk REIT (along with most REITs and institutional and private investors) to further acquire scale in BC’s multi-residential market in the face of highly compressed cap rates allowed Boardwalk to recognize premium pricing for its BC assets and to redeploy capital to markets that generate higher returns for the REIT’s unit holders.
Market Trends
Multi-Family Investment Sales (> $5 million) January 1 to June 30 Number of Transactions
Total Dollar Volume
Average Price
2014
23
$396 million
$17.2 million
2013
17
$154 million
$9.1 million
2012
25
$386 million
$18.4 million
2011
20
$238 million
$11.9 million
2010
10
$158 million
$15.8 million
2009
10
$92 million
$9.2 million
Sources: Avison Young and RealNet Canada
Partnership.Performance.
With 23 transactions totalling $396 million in the first half of 2014, sales activity surpassed the first half of 2013 (17 deals/$154 million) and was on par with the first half of 2012 (25 deals/$386 million). While deal and dollar volume were both strong in the first half of 2014, stripping out the portfolio sale and the Olympic Village transaction reveals a more telling portrait of market activity. Fifteen of the remaining 19 transactions were for less than $10 million with seven of those around the $5-million mark. Only two of the 19 transactions were notable stand-alone deals, including the $18-million sale of Seaview Towers in Victoria and the $25.5-million disposition of the Parklea Apartments in North Vancouver.
Rental vacancy tightening across the province BC’s apartment vacancy rate declined by more than a full basis point to 2.4% in spring 2014 compared with 3.5% a year earlier, according to the Canada Mortgage and Housing Corp’s (CMHC) Spring 2014 Rental Market Report. All four of the province’s census metropolitan areas (CMAs) recorded lower apartment vacancy this spring compared with spring 2013. “All but six of the provinces’s 27 urban centres surveyed in the Spring Rental Market Survey recorded lower apartment vacancy rates compared to last spring,” according to the report. “Declines of three percentage points or more were reported in the Kelowna CMA, Nanaimo, Quesnel, Squamish, Terrace and Vernon. Mixed results were reported in the other six centres; two centres reported no statistically significant change, while vacancy rates were higher in Dawson Creek, Kamloops, Prince George and Summerland.” The apartment vacancy rate in the Vancouver CMA was 1.8% in April 2014, a sharp decline from 2.9% a year earlier. According to the CMHC report, one of several factor exerting downward pressure on vacancy rates is an increasing population fuelled by international migration. According to CMHC, downward pressures on apartment vacancy rates historically comes from several factors: “The purpose-built continued on page 2 I 1
vacancy rate can move lower as a result of a reduction in the supply of rental housing, whether it is purpose-built rental accommodation, or secondary rentals such as condominiums that are rented out, or secondary suites. Alternatively, an increase in demand for rental accommodation can exert downward pressure on vacancy rates. In spring 2014, the downward pressure on vacancy rates came from a combination of increased rental demand which outpaced additions to rental supply.” The pace of rent increases for one- and two-bedroom apartments in BC were 2% and 1.8%, respectively, from April 2013 to April 2014, according to CMHC.
Existing owners taking advantage of capital appreciation to achieve equity take-outs “CMHC-insured apartment loans are currently being funded as low as 2.35% for a five-year fixed term and 3.1% for a 10-year fixed term,” says James Paleologos, a senior associate with Realtech Capital Group. “These historically low interest rates are one of the major contributing factors to the record low cap rates in the multi-family sector. Many existing apartment owners are taking advantage of this capital appreciation, which their assets have accumulated over the past decade(s) with an equity take-out via secondary financing. This reduces their equity requirement on new acquisitions allowing them to stay competitive in the current market or improve/renovate their current asset to increase profitability. Second mortgage lenders will take most apartments down to a near flat debt coverage ratio at an interest rate of 5.5% to 8% depending on building location and borrower covenant.”
Q&A
Avison Young speaks with Erin Gibault, the managing partner of Headwater Projects, on how his firm has been able to grow in Vancouver’s pricey and supply-constrained multifamily investment market. What are the building characteristics you look for when considering a multi-family acquisition? First, it would be area/location. We want to buy in markets where we are familiar with the tenants we will be targeting. Second is the suite mix/layout. It is too expensive to fix up a building that lacks maximized use of space and functional floorplans with the inability to make it so due to restrictive layouts. Regarding building characteristics, we spend a lot of time costing out the outstanding capital expenditures. We see that as our competitive advantage in the marketplace as we’ve renovated almost a dozen buildings so we now have a good handle on what things will cost. How has your investment acumen held you in the Metro Vancouver market? Biggest accomplishments? We are a young local company and know this city and its residents best. We are confident we can provide a finished product that will be well received by tenants. Our goal is to build a company and portfolio that tenants want to be a part of. As we experienced during the economic downturn of 2008/09, Vancouver residential properties were resilient and while sales activity may have declined, values stayed strong. This showed the strength of the Vancouver market and gives us the confidence to continue investing here. Our biggest success has been identifying a strategy to grow a company buying properties with negligible first-year returns. How much of a role has proactive management played in your success?
The $8.1-million sale of 1137 Bute Street, located in Vancouver’s sought-after West End neighbourhood, in July 2014 (at a sub 3% cap rate) demonstrates the strong demand for well-located assets. Partnership.Performance.
Essential! We’d still be working on our first building without the proactive efforts of our team. It’s hard to ‘buy and hold’ in Vancouver and build a company at the same time. This is fundamental to our business. We need to understand the delta between current rates in a building needing improvement and what the market could allow after those are made. From there I 2
What lessons have you learned acquiring multi-family assets in Vancouver?
Where are the opportunities in the multifamily market in the next 12 to 24 months?
Rarely trust the vendors’ financial statements. They always underestimate the cost of running a building. Don’t cheap-out on renovations. You’ll only be going back to fix the missed items next year or the year after that. And don’t cut corners with your trades workers. Hire the best you can afford.
We focus on wood-frame buildings and as such, there will always be landlords looking to sell rather than incur the inevitable capital expenditures. For us, this is the opportunity. After recently touring the multi-family market in Calgary, Toronto and Seattle, you can see how under supplied our market is. Multi-family assets will always be a safe place to invest in this city.
Multi-Family Investment Sales (> $5 Million) january 1, 2014 to june 30, 2014 PROPERTY Erin Gibault, managing director of Vancouver-based Headwater Projects: “Multi-family assets will always be a safe place to invest in this city.”
we can determine what our construction budget would be, and determine a residual building value. We are constantly studying rental rates in various areas, and monitoring rental activity in the new projects in the areas we are targeting. What we do is difficult and very time consuming. It is essential to understand how a building can perform before you buy it. What are the characteristics of a desirable multi-family neighbourhood from an investment perspective? We renovate buildings with a specific tenant in mind. They are looking for ‘condo-style’ rental accommodation in their desired area and are willing to pay a premium to have the features and amenities those buildings can offer. Proximity to transit and neighbourhood amenities such as parks and good restaurants are also strong considerations. Smaller residential buildings are management-intensive and you need to have quick access in case of emergencies and showings. If you own several small buildings, it is beneficial to have them close together, especially for our maintenance people. So for us, that means looking at markets that are no more than a 30-minute drive from our downtown office. Partnership.Performance.
MUNICIPALITY
PRICE
VENDOR TYPE
BUYER TYPE
DATE
The Inverness 1325 Pendrell Street
Vancouver
$5,170,700
Private
Private
June 2014
Lilford Lodge 2394 Cornwall Avenue
Vancouver
$8,500,000
Private
Private
June 2014
New Westminster
$5,501,465
Private
Private
June 2014
Burnaby
$54,000,000
REIT
Institutional
May 2014
Surrey Village 9801 & 9305 King George Boulevard
Surrey
$48,000,000
REIT
Institutional
May 2014
Christie Point Apartments 2861 Craigowan Road
Victoria
$38,000,000
REIT
Institutional
May 2014
2280 Vine Street
Vancouver
$5,150,000
Private
Private
May 2014
Courtyard Estates 2929 - 2959 Tims Street
Vancouver
$10,300,000
Private
Public Co.
May 2014
Charlotte Manor 3065-3069 Clearbrook Road
Abbotsford
$5,550,000
Private
Public Co.
April 2014
Burnaby
$5,835,000
Private
Private
April 2014
Olympic Village Interest in 67 units
Vancouver
$91,000,000
Government
Private
April 2014
555 East 6th Avenue
Vancouver
$8,880,000
Private
Private
April 2014
Victoria
$18,187,500
Private
Private
April 2014
Maryon Manor 1035 Howie Avenue
Coquitlam
$5,800,000
Private
Private
April 2014
2358 Cornwall Avenue
Vancouver
$5,025,000
Private
Private
April 2014
North Vancouver
$7,800,000
Private
Private
April 2014
Mountview Apartments 2182 West 39th Avenue
Vancouver
$6,873,500
Private
Private
March 2014
Vallejo Court 1009 West 10th Avenue
Vancouver
$11,000,000
Private
Private
March 2014
Parklea Apartments 151 East Keith Road
North Vancouver
$25,500,000
Private
Private
March 2014
Acadia Court 1075 Nelson Street
Vancouver
$9,000,000
Private
Public Co.
February 2014
Victoria
$7,826,000
Private
Private
January 2014
The Black Knight 170 West 4th Street
North Vancouver
$7,000,000
Private
Private
January 2014
Carlton House 1540 Burnaby Street
Vancouver
$6,300,000
Private
Private
January 2014
Ladrillo Apartments 221 West Seventh Street Horizon Towers 4960 & 5050 Sanders Street
Mountain Ash Manor 4505 Grange Street
Seaview Towers 450 Dallas Road
Four Cedars & Sundance Court 141 & 147 East 21st Street
Nottingham Court Apartments 1635 Cook Street
Total Deals/Investment
23
$396,199,165 I 3
Potential purchasers of multi-family assets need to have a plan beyond buy and hold to make financing work Demand from local and international buyers remained exceptionally strong with many older, smaller buildings trading hands despite highly compressed cap rates and continued near-record pricing. Buyers often purchase buildings with the intention of performing major upgrades in an effort to achieve higher rents and boost the property value. Current yields do not make sense otherwise. The market is so competitive that in order to make sense of the pricing, purchasers need to have a plan beyond buy and hold. Supply remains tight despite the construction of new rental product in Vancouver thanks to city incentive programs. It remains very difficult for institutional and private investors to buy quality, well-located rental apartment buildings in Metro Vancouver.
SNAPSHOT OF BC VACANCY RATES Area
April 2014
April 2013
% Change
Vancouver CMA
1.8%
2.9%
-1.1%
Abbotsford CMA
3.7%
4.7%
-1.0%
Chilliwack
3.8%
4.5%
-0.7%
Victoria CMA
2.7%
3.4%
-0.7%
Nanaimo
5.3%
8.3%
-3.0%
1.5%
4.8%
-3.3%
Kelowna CMA
Source: CMHC; CMA: census metropolitan area
Multi-Family Team
Eleven of 23 transactions occurred in Vancouver while eight were located in the suburban markets. Victoria remained popular with investors who purchased three apartment buildings in the provincial capital. One transaction in the Fraser Valley – a former hot spot for investors in 2011/2012 – rounded out the deals in the first half.
Robert Greer, Principal 604.647.5084
[email protected]
Supply of multi-family buildings to remain tight moving forward as small holdings remain primary assets available
Alex Messina, Associate 604.646.8391
[email protected]
Multi-family properties of institutional quality and scale will remain in very short supply with no significant portfolio sales anticipated in the next 12 months. Mid-sized buildings located in core Metro Vancouver markets (those typically priced in excess of $10 million) will remain elusive as such assets are typically held in privately-managed portfolios and family trusts, which would likely defer any decision to sell due to the difficulty and cost necessary to replace them as well as the tax implications resulting from a disposition. Demand is expected to remain strong with pricing not anticipated to moderate in 2015. Further cap compression is highly unlikely with transactions for quality, well-located properties already trading at sub 3%. Supply will remain the primary constraint to deal and dollar volumes moving forward as investors continue to seek to acquire multi-family assets in Metro Vancouver.
2015 Market Outlook pricing
vacancy rate
sales
new listings
cap rates
Mark Hannah, Principal 604.647.5065
[email protected]
Chris Wieser, Vice-President 604.647.5089
[email protected] For more information please contact: Michael Keenan, Principal & Managing Director, Vancouver Direct Line: 604.647.5081
[email protected] Andrew Petrozzi, Vice-President, Research (BC) Direct Line: 604.646.8392
[email protected]
Avison Young Commercial Real Estate (B.C.) Inc. #2100-1055 W. Georgia Street Box 11109 Royal Centre Vancouver, BC V6E 3P3, Canada
• Vacancy to rise as new rental product is delivered to the market • Vancouver rent increases will be moderate as supply improves • Sales volume in 2015 expected to be lower than in 2014 • A number of purpose-built rental projects will proceed as developers continue to utilize city incentive programs • Capitalization rates will remain low for quality, well-located institutional-grade properties
avisonyoung.com © 2014 Avison Young (Canada) Inc. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young Commercial Real Estate (B.C.) Inc.
