Former niche CRE investment is now big business

Commercial real estate is frequently influenced by changes in the wider business world and one big change is driving interest in a formerly niche asset class.

Data centres are now a cornerstone of business and $100 billion has flowed into the asset class in the last decade according to a new report from Cushman & Wakefield.

These centres include those operated by the technology behemoths who dominate in the cloud platforms, Amazon, Google, and Microsoft. These three companies have impacted data centre sizing tenfold. The 10-megawatt (MW) data center that was impressive 10 years ago now pales in comparison to 30-MW leases now signed with increasing regularity.

“The speed with which the industry is shifting makes the creation of a data center strategy a complex and daunting task,” said Dave Fanning, Executive Managing Director and Leader or Cushman & Wakefield’s Data Center Advisory Group. “Investors must be able to assess the long-term potential of a data centre to hold its value and how easily it can be upgraded. All involved require access to capital and a clear understanding of objectives.”

Vancouver challenging the leaders
Ten cities maintain their statuses among the top 10 for data centres – Northern Virginia, Silicon Valley, Dallas, Chicago, New York/New Jersey, Singapore, Amsterdam, Los Angeles, Seattle and London – but Vancouver is one of those named by the firm as a contender.

“The top markets provide the greatest number of options to the greatest number of perspectives,” said Kevin Imboden, Director of Research for Cushman & Wakefield’s Data Center Advisory Group. “While one size sometimes does fit all, for certain specializations it’s important to review and understand the factors most important to the specific requirement and aim accordingly. Combined with those markets that have been overlooked and underutilized, there is great potential for niche development and secondary markets across the globe.”

 

by Steve Randall on January 30 Jan 2020

The Top 5 Commercial Real Estate Trends of 2019 – CBRE

It’s safe to say that 2019 marked the end of an unprecedented decade for Canadian commercial real estate.

Backed by strong fundamentals, transaction volumes reached a 15-year high of $49.3 billion in 2018, as cap rates compressed to 10-year lows.

While most property types have performed well, industrial has exceeded all expectations, as e-commerce demand continues to grow.

Office construction continues at a record pace, while a rapidly growing population has boosted demand for rental space and multifamily investment returns.

Want to know more? We’ve rounded up the top 5 commercial real estate trends of 2019 to put things in perspective.

1. THE POWER OF LAST-MILE DELIVERY

Canadians can’t get enough of e-commerce, which has seen double-digit growth in recent years. The result? A drastic shift in supply chains and the industrial real estate market.

Companies looking to deliver “last-mile” goods to major metros require distribution facilities in close proximity to downtown cores.

That poses a problem in cities like Toronto and Vancouver, where there is a lack of available industrial space, and what property is available is commanding historically high rents.

Some developers have turned to the concept of multi-storey buildings, first pioneered by cities like Tokyo, to meet demand.

How limited is the supply of industrial space? The national availability rate dropped below 3.0% for the first time on record in the third quarter, with historic market fundamentals in Toronto, Vancouver and Montreal.

And while development activity is ramping up, with an astonishing 28.0 million sq. ft. in the national pipeline, it’s still not enough. Projects under construction account for just 1.5% of existing inventory.

As tenants struggle to find the space they need, investors have recorded strong returns. The sector saw investment volumes total $3.1 billion in the third quarter of 2019 alone, which would be even higher if more owners were selling.

2. APARTMENT RENTAL DEMAND HITS NEW HIGH

Millennials represent 27.0% of the Canadian population and are forming new households at a record rate. But with home ownership costs outpacing income levels, many are opting to rent not own.

That’s good news for multifamily investors. With apartment buildings at or near capacity across the country, rent growth continues to accelerate.

Average rents for purpose-built rental units have grown by 4.4% for the last two years at the national level. That number jumps to 5.0% and 7.1% in Toronto and Vancouver, respectively.

Strong fundamentals – including a growing population, rising home ownership costs and a lack of rental supply – mean this trend is here to stay for 2020 and beyond.

The Top 5 Commercial Real Estate Trends of 2019

3. RECORD-LOW OFFICE VACANCY RATES

Strong job growth has propelled the Canadian economy in recent years, with a whopping 81,000 net new jobs in August alone.

In the 12 months prior, Canada added 471,000 net new jobs, compressing the unemployment rate by 30 basis points to just 5.7%.

These numbers are the backdrop for unprecedented demand for office space and historically tight office markets.

In 2019, Toronto and Vancouver continued their reign as the tightest downtown office markets in North America, with vacancy rates of just 2.3% and 2.4%, respectively.

Tenants are having to be creative with their space as they look to grow and expand, while owners are setting the terms of the leases in a landlord’s market.

As Toronto continues to attract record levels of talent, it seems unlikely that these conditions will change anytime soon.

4. “EXPERIENCES” NOT THINGS

While retail didn’t have the buzziest headlines in 2019, there is reason for optimism – and even excitement – in some areas of the sector.

Lifestyle and entertainment centres have been drawing investor attention, as owners and occupiers continue to reinvent and reimagine traditional spaces with “experiences” in mind.

From food halls to boutique fitness, consumers are drawn to stores that offer experiences they can’t find online.

Many online retailers have opened brick-and-mortar locations in the last year, a sign that shoppers are looking for a mix of in-person and online shopping.

Meanwhile, owners are continuing to combine their retail properties with other asset types from coworking spaces to community services.

5. MARKETS SHAPED BY TECH

Canada is attracting waves of tech talent, as global and domestic companies tap into the country’s tech ecosystem.

The result is record commercial and residential real estate demand and an office construction boom in several markets.

The tech industry has accounted for 17.1% of major-office leasing activity since the start of 2018, and there is 2.8 million sq. ft. of new build pre-leasing by tech firms in Toronto, Vancouver and Montreal.

The boom is putting pressure on already tight Toronto and Vancouver markets and will likely keep office vacancy rates in both cities low in the coming year.

Also benefitting are smaller cities that offer a lower cost of living and operating. Victoria, Hamilton, Oshawa, and Guelph are making major strides in growing their tech sectors and smaller markets are expected to continue to grow in 2020.

 

by CBRE, January 2020

Canadian CRE set to perform well overall in 2020

This year should be a good one for Canada’s commercial real estate sector with overall strong performance.

The 2020 Commercial Real Estate Sentiment Survey from Devencore and Transwestern Commercial Services surveyed brokers and analysts across 43 North American offices to gain insights for the Canadian and US markets in 2020.

South of the border, there is some concern regarding political outcomes, especially the presidential election; but overall expectation is positive driven by the e-commerce industry’s demand for industrial space.

There is also expectation that medical offices will help the office sector in the US to outperform the market.

Meanwhile, offices are expected to perform well in Canada with just over half of respondents predict leasing velocity and tenant prospects will pick up during 2020, with 86% expecting stronger rent growth over the year, especially in industries such as tech and the service sector.

“Similar to the U.S., Canadian commercial real estate markets also are expected to perform well in 2020, with mild concerns stemming from political and trade impacts as well as rising construction costs,” said Jean Laurin, President and CEO of Devencore. “Our economy is healthy and job growth is steady. With the exception of certain regions, major Canadian provinces like Ontario, British Columbia and Quebec all show robust conditions.”

For the industrial sector, Quebec and Ontario residents are renewing amid tight availability, while those in Alberta have more choice and are choosing quality. However, 64% of respondents expect overall industrial asking rents to rise due to limited availability in select markets.

Land costs are also expected to rise as the availability of prime sites continues to decrease. In this environment, the attraction for industrial investment by the capital markets remains high.

 

by Steve Randall  13 Jan 2020

Canadian commercial investment should begin looking further

Would-be investors in Canadian commercial real estate should begin considering markets beyond the usual hotspots of Toronto, Montreal, and Vancouver if recent trends south of the border are any indication.

The tech industry’s sustained hunger for Canadian offices is gradually depleting available urban office space. The examples set by some U.S. cities might provide a good answer to this quandary, according to the Computing Technology Industry Association (CompTIA).

“Something like a Charlotte, or a Kansas City, or an Austin,” CompTIA senior vice-president of research and market intelligence Tim Herbert told Postmedia in an interview.

“These cities [are] more affordable, [and] in some cases you can make an argument that there is a better quality of life.”

In its Cyberprovinces 2019 study, CompTIA noted that smaller cities can become more feasible investment options in the very near future. Last year alone, Canadian tech employment expanded by 61,000 new jobs, amounting to a 3.8% annual increase.

Overall, the tech workforce grew by as much as 249,000 new employees since 2010.

Herbert added that demand for Canada’s office spaces is “not just limited to technology companies, who are starting to take office space or build new headquarters, but a range of different company types are attracting tech talent.”

Data from Avison Young showed that the Canadian office market has seen the positive absorption of 9 million square feet (MSF) in the year ending June 30, 2019. This has massively outstripped the nearly 6 MSF absorption during the immediately preceding 12-month period.

The sustained popularity of the industry and the resulting demand upon Canada’s commercial real estate is impelled by the strength of its long-term employment prospects. In 2018, tech earnings clocked in an average of $78,070 – fully 51% higher than the average reading of $51,794 in the private sector.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage.

 

 

by Ephraim Vecina | 24 Oct 2019

Why CRE investors should consider niche assets

Investors in commercial real estate should consider more than the mainstream asset classes and go niche.

That’s the takeaway from a new report from global real estate firm Cushman & Wakefield that highlights the benefits of investing in niche assets.

These assets include cold storage, data centers, medical offices, student housing, and senior housing.

The report says that transactions in niche assets have exploded in recent years and are now similar to retail and industrial. And changes in how we live and the aging population is set to drive volumes higher.

Niche assets have also outperformed the overall CRE benchmark in the two most recent recessions, suggesting that this could provide defensive exposure in future downturns.

Investors also gain exposure to secular drivers such as changes in demographics, affordable housing challenges, technology, and consumer behavior.

Complex operations
The report notes that institutional activity in niche assets could have room to expand from its current uneven pattern, which would “support pricing and liquidity in a virtuous cycle.”

However, it’s suggested that investors might be better buying an experienced operator in a niche or partnering with one, as niche asset strategies are “often operationally complex.”

By Steve Randall | last updated on the 22 Oct 2019

CMHC FINANCING

Toronto needs to double rental supply to meet future demand

A new report from RBC Economics focuses on the rental housing deficit which is set to intensify in the coming years, especially in Toronto and Vancouver.

The report says that supply of new rental homes will need to pick up pace to meet future demand; in Toronto the pace must double. In the meantime, lack of supply is leading to “uncomfortable highs” for rents – which means those hoping to save up to buy a home are squeezed even further while high home prices have “crushed some homeownership dreams.”

RBC says that big cities must increase rental supply to have any hope of tackling affordability issues.

It notes that there are some positive signs in some cities, such as Montreal and Vancouver where has new waves of supply underway; and in Calgary where there are elevated rental vacancies.

But in Toronto, the report says supply will not come close to demand in the coming years and calls for specific targets and incentives to address the issue.

Deficit needs action
RBC Economics’ estimates of the supply needed to balance out supply and demand in the major markets as of late 2018 are: a deficit of 9,100 rental units in Toronto, Montreal had a 6,800-unit deficit and Vancouver 3,800 units.  Calgary carried a small surplus of 300 units.

This will be exacerbated by the estimated increase in renter-households of 22,000 in Toronto and 9,400 in Vancouver over the medium term, with Montreal averaging 8,200 per year on average.

The report estimates that Toronto will need 28,600 new rental units on average over a two year timeframe with 11,600 in Montreal, 11,300 in Vancouver and 4,150 in Calgary.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage.

By Steve Randall |  last updated on the 26 Sep 2019

 

Seven-building acquisition attests to Montreal’s rental strength

Late last week, Greybrook Realty Partners and Marlin Spring announced the acquisition of a Montreal portfolio comprised of seven apartment buildings with a total of 324 rental units.

Said properties are situated close to restaurants, shops, hospitals, grocery stores, two metro stations, the Université de Montréal, and hospitals like the Jewish General Hospital.

Greybrook Realty and Marlin Spring stated that they will also be in charge of renovating suites and improving the common areas across all the buildings.

“The close of this acquisition brings the total number of units within our value-add portfolio to 774. With asking rents currently below comparable products in the area, we believe an opportunity exists to improve both the product offering and revenue through execution of a value-add program,” Greybrook Realty executive director Jared Berlin said.

“With the success of our existing Montreal portfolio, supported by the City of Montreal’s strong rental market fundamentals, we believe these assets are a natural fit in our growing Quebec Multi-family Portfolio” Marlin Spring CFO Elliot Kazarnovsky added.

In recent years, strong population growth – especially immigration – has spurred sustained growth in Montreal’s rental housing market.

Figures from IPA’s Midyear Canadian Multifamily Investment Forecast Report indicated that by the end of June 2019, the city’s average rent increased 4.1% year-over-year, up to $797 per month. Average prices grew by 6% year-over-year, up to $154,400 per unit.

 

by Ephraim Vecina | 23 Sep 2019

Lesser known available CMHC options for Apartment Building Owners

CMHC stands for the Canada Mortgage and Housing Corporation, which is a crown corporation of the government of Canada. Although apartment owners are usually familiar with the benefits of CMHC loan insurance and CMHC loan terms, there are many other CMHC financing options that are not well known and may be beneficial to apartment owners.
CMHC and Commercial Property
CMHC does not directly insure loans for commercial property such as office building or retail centers. However, CMHC does permit up to 30% of a multi-residential property to be used for commercial uses such as a gift shop, office space, etc. If the area of the commercial space is less than 30% of gross floor area or lesser than 30% of the total lending value, then the revenue generated from that commercial space can be included into the total revenue of the property. However, if the commercial space is greater than 30% of the total property area, then the income cannot be added to the total revenue of the property.
CMHC Top-up
Apartment owners may want to increase their loan amount at a minimal cost. The CMHC permits existing CMHC insured loans to be refinanced up to a 65% loan to property value ratio with a premium of 1.75% that is paid only on the new money.
CMHC Mortgage Financing
CMHC will insure second mortgages until the term renewal of the existing first mortgage, which doesn’t necessarily have to be a CMHC insured loan. Then, at term renewal, the two mortgages are combined into one new CMHC. This is beneficial in a rising interest rate environment because a CMHC insured the second mortgage provides a way to increase the loan amount during an existing loan term rather than waiting for the maturity of the first mortgage.
CMHC also insures loans for capital improvements to a maximum of 85% of property value.
CMHC also permits floating rate term loans for terms of at least 5 years. These situations would be beneficial when rates are decreasing or early repayment is anticipated.
Overall, many CMHC financing options are overlooked and not understood very well by apartment investors, so it is important to learn all of the different options available and see which ones can be beneficial.
By: Daniela Peeva |  June 2019

Rental Market in Canada – Fall 2018

A Falling Vacancy Rate

Once per year, Canada Mortgage and Housing Corporation provides a comprehensive review of rental markets across Canada. The survey occurs during the first half of October. Results for this year were released on November 28.

For October 2018, the vacancy rate was 2.4%, which was a substantial drop from the 3.0% rate recorded a year earlier. The vacancy rate for 2018 is far below the average of 3.3% for the entire period shown in this chart. The reduction in vacancies resulted in more rapid rent increases, at 3.5% this year. Over the entire period shown, the average increase was 2.6%. This data shows that the situation has become increasingly challenging for Canada’s tenants.

 

 

Vacancy rates fell in 7 of the 10 provinces. Manitoba, BC, and Ontario saw small increases in their vacancy rates. These three provinces also saw the most rapid rent increases. The lowest vacancy rate is now in PEI, followed by BC and Ontario. The highest vacancy rates are in the three provinces where economies have been hurt by the plunge in oil prices (Saskatchewan, Newfoundland and Labrador, and Alberta). These provinces saw the weakest rent increases.

 

Interpretation

Since the data is collected only once per year, it is difficult to construct any models for analysis or forecasting of rental markets. The author’s experimentation over many years, for many different communities across Canada, has resulted in statistical models that have low “reliability”. But, those low-reliability results have been surprisingly consistent, and have led to a conclusion: the two most important drivers of changes for the vacancy rate are job creation during the past year (which allows more people to buy or rent housing) and total completions of housing during the past year.It is tempting to expect that completions of new-rental apartments would be important, but the author’s analysis has found that this is rarely the case.

On reflection, this makes sense:

  • The rental market is part of a complex housing system in which there are very large flows between ownership and renting, and between different forms of housing.
  • Expansion of the total stock of housing offers people more choice: even when people move into new home ownership dwellings, that move sets of a chain of other moves. Much of the time, that chain of moves includes someone moving out of a rental, which creates an opportunity for a new tenant.
  • Moreover, the tenure on a new dwelling is not fixed for all time. In particular, it is well known that many new condominium apartments are occupied as rentals. In addition, some low-rise dwellings (single-detached, semi-detached, and town homes) are ostensibly built for ownership but are made available as rentals.

It is also tempting to expect that changes in resale market activity will affect the rental market. But, once again while the statistical analysis produces unreliable results, over many repetitions it has been found that resale activity has little effect on vacancy rates. This also makes sense on reflection. Most of the time a resale transaction does not add to total demand for housing (the buyer usually moves out of a different dwelling) and it usually does not alter the total supply of housing (unless the new buyer adds or removes a basement apartment).

Employment Trends

Our impressions about the employment situation are largely based on data from Statistics Canada’s Labour Force Survey (“LFS”). This data indicates that during the year up to this September, employment in Canada expanded by 1.2%. This is slower than the rate of population growth (1.3%), and this therefore should be considered a mediocre result. Based on this data, we would expect that housing demand would be weak, and the drop in the vacancy rate this year would be a surprise.

However, the data from the LFS is derived from a sample survey and like all such surveys, it can produce errors. Statistics Canada has a second survey (Survey of Employment, Payrolls and Hours, or “SEPH”), which is based on data from employers, and is therefore likely to produce more-accurate data. This data receives much less attention because it is published almost two months after the LFS (the most recent data is for August). The two datasets usually tell similar stories. At present, however, SEPH shows growth of 1.8% (as of August) versus the 1.2% shown by the LFS (as of September).

Over the entire period shown in this chart, job growth averaged 1.5% per year. Strong job growth in both 2017 and 2018 helps to explain the drops in the vacancy rates that were seen in both years. Housing completions were at above average levels during 2017 and 2018 (the chart shows the figures for 12 month periods ending in September). These elevated volumes of new housing supply provided some relief for rental markets. Without this additional housing supply, the drops in the vacancy rates in 2017 and 2018 would have been even larger than they were.

 

Looking Forward

The mortgage stress tests have resulted in reduced buying of new and existing homes. It takes some time for changes in purchases of new homes to translate in reduced housing starts (and even longer for housing completions to be affected). Increasingly, it appears that housing starts have peaked, and may have started to fall. The next chart illustrates that total housing starts were very strong during 2016 and 2017, but the trend has started to fall during 2018. A more detailed examination would show that housing starts have turned sharply for low-rise dwellings (single-detached, semi-detached, and town homes) but remain very strong for apartments. During 2019, starts for apartments will gradually reflect the reductions in sales that have occurred this year. This is explored in more detailed within the Housing Market Digest reports (for Canada and the regions) that can be found here: https://goo.gl/kJ6mcC

Following from these trends for housing starts, housing completions are expected to fall only slightly during the coming year, meaning that new housing supply will continue to provide some relief for the rental sector. However, housing completions are expected to fall considerably during 2020. As for employment, higher interest rates can be expected to gradually weigh on job creation during 2019 and 2020.

For 2019, a combination of continued high levels of housing completions and a slowdown of job creation should mean that there will be little change in the apartment vacancy rate (perhaps a drop to 2.3% from the 2.4% seen in 2018). The low vacancy rate can be expected to result in continued rapid rent increases, at a rate of at least 3%.

During 2020, the reduction of housing completions that will result from the mortgage stress tests will add to pressures in the rental sector. For 2020, the vacancy rate is expected to drop further (approaching 2.0%) and rent increases will quicken.

Government Policies at Cross Purposes

The federal government has announced plans to make major expenditures in support of affordable housing ($40 billion over 10 years). The federally-mandated mortgage stress tests, by reducing movements out of renting, will add to pressures within rental housing markets, and are operating at cross-purposes to the National Housing Strategy.

 

 

 

Disclaimer of Liability

This report has been compiled using data and sources that are believed to be reliable. Mortgage Professionals Canada Inc.
accepts no responsibility for any data or conclusions contained herein. Completed by Will Dunning, November 28, 2018.
Copyright: Mortgage Professionals Canada 2018