Tag Archives: Vacancy Rates

Multi-family market a ‘safe haven’ for real-estate investors

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Volatile stock markets and minuscule returns from fixed income have investors looking at global real estate. But rather than single-family residential property, the hot ticket these days is multiple-family dwellings.

At a luncheon for financial analysts with the Edmonton CFA Society, Eric Bonnor, senior vice-president with Brookfield Asset Management in Toronto, quoted from the publication Emerging Trends in Real Estate 2012, a survey of 950 real estate executives by the accounting firm PricewaterhouseCoopers and the Urban Land Institute.

“Canadian real estate remains the most stable in North America,” Bonner said. “Canadian investors fed up with disappointing stocks and lowyielding bonds sit on lots of funds, looking for long-term cash flowing assets like real estate, and are having trouble placing the funds that they have. Investors condition themselves to accept lower domestic returns, or go outside the country and chase higher yields.”

The booklet lists Toronto and Vancouver as the most attractive real estate markets in Canada, being 24-hour destination points for businessmen and other visitors. Calgary is rated third and Edmonton fourth.

It is written that Edmonton and Calgary are oilsands markets, but Edmonton “quietly prospers in less of a see-saw mode, historically cushioned by the presence of the provincial government.” And the commercial tenancies differ, in that Edmonton features “more stable engineering companies and not so many wildcatters.”

The research adds that Edmonton has a tight industrial real estate market with low vacancy rates, that retail building is strong as people “earn big bucks in the oilsands country and spend in local malls and power centres, including one of the world’s largest in west Edmonton.” Homebuilders do well due to appetites from people with ample salaries. And local governments hike development assessments because “it’s good political optics versus raising property taxes.”

But there are problems with residential real estate in North America. The S&P Case-Shiller index shows house prices in 20 American cities are down 3.8 per cent in the 12 months ending Aug. 31, and have fallen 31 per cent since their 2006 peak. With three or four years of unsold inventory in the country, there are no signs of immediate reversal in prices. In Canada, there are concerns that a housing bubble in certain parts of the country could cause homes in those areas to fall 20 per cent in value.

To avoid the risk of buying additional residential homes, people are looking at investing in commercial and industrial properties. And presenters at the luncheon said multiple-family dwellings have become treasures, filled by people leaving their homes because they can’t keep up mortgage payments, plus those unable to afford buying a house in the first place.

Seamus Foran, a senior vice-president with Brookfield Asset Management, said the U.S. real estate market has $180 billion of known distressed assets, and that “the shining star for U.S. real estate today has been the multi-family market; as U.S. home ownership continues to decline, the multi-family market has been there to reap the benefits. However we need to be cautious as new development has started in this sector.”

He noted that in most U.S. apartment buildings, the turnover ratio of tenants on a year-to-year basis is at least 50 per cent, considerably higher than in Canada.

“There’s a reluctance to make a long-term commitment to buy residential houses (in the U.S.),” Foran said. “And the multi-family market really benefits from short-term leases, because it gives the owners opportunities to bring rents up, each time those leases fold.”

As for Canada, the Emerging Trends booklet says:

“The multi-family residential sector will stay tight as continuing immigrant flows sustain demand in the major cities. Even if job growth declines and homebuying cools, apartments should be ‘a safe haven.’ When people have less, they rent.

An increasing number of younger adults delay buying houses; they simply cannot afford them after recent price spikes. Aging demographics also favour more apartment demand; empty nesters and seniors move out of suburban homes into smaller, easier-to-maintain units with urban conveniences.”

In summary: “Investors can never get their hands on enough apartments. And everybody has the same idea. When you get some, hold onto them.”

Bonnor said the four ways of investing in real estate – direct, private, public and ‘other’ – differ in liquidity, diversification and fees.

Most retail investors looking at public investing do so through real estate investment trusts (REITs) or exchange-traded funds (ETFs), with “lots of liquidity, but very high volatility.”

Foran added that there are two factors in real estate investing unique to Canada versus the U.S. One is that based on size, either square footage or asset value, the vast majority of Canadian properties are owned by institutional owners – very well capitalized REITs, very well capitalized companies like Brookfield, or pension funds that have little to no debt on their portfolios. A second difference is that Canadian banks don’t have near the same levels of commercial real estate debt leverage.

David Glicksman, a partner with PwC, said that foreign investors in U.S. property should be aware of whether they have to file U.S. income tax returns, or whether it’s done through a firm or fund. They also need to know how to declare income or losses on their Canadian tax returns, if there are withholding taxes, if there are U.S. taxes on the sale of the investment, and whether you get a foreign tax credit in Canada.

Steve Williams, also with PwC, said that in 1980 the U.S. Congress implemented the Foreign Investment in Real Property Tax Act. It means that if a foreign investor owns U.S. real estate directly or through a U.S. company whose underlying asset is real estate, you should make U.S. tax plans for the sale of the investment.

http://www.edmontonjournal.com/business/Multi+family+market+safe+haven+real+estate+investors/5694740/story.html

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Commercial real estate trends point to pending slowdown, Cushman & Wakefield

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Commercial real estate trends in the third quarter suggest an improved U.S. economy is beginning to make itself felt in Canada while the domestic financial sector is downsizing, consulting firm Cushman & Wakefield said Friday.

The company’s real estate vacancy report showed office buildings in suburban areas — favoured by U.S. and other multinationals — and which had stood vacant for years are now starting to fill up.

Meanwhile, demand remains high in downtown markets, Cushman & Wakefield said, adding trends in Toronto shed light on recent restructuring in the financial sector.

National average vacancy rates for suburban areas fell to 9.9 per cent, down from 10.4 per cent in the previous quarter.

Paul Morse, senior managing director of office leasing, said suburban spaces are usually favoured by foreign companies trying to gain a foothold in the Canadian market.

In the Toronto suburban market, the Canadian subsidiaries of IBM, American Express, Staples, HP and many other companies, have their headquarters, distribution terminals and other operations.

Starting in 2008, economic turmoil south of the border sapped strength from many U.S. companies that had already expanded into Canada or may have contemplated doing so, Morse said.

The result was a weak suburban commercial real estate market that lasted until this year.

This trend has finally begun to shift, he said. Economic momentum that took effect before August’s stock market turbulence helped stimulate activity once again.

“In the last quarter we’re seeing evidence of activity, where people are actually making decisions, feel confident with these decisions,” Morse said. “That’s the first bit good news we’ve seen in the suburban market in close to two years.”

Morse cited Target as an example of an American corporate giant dipping its toes in Canadian waters. The company has inked a deal to lease 200,000 square feet of office space in suburban Toronto, though it has not taken possession of the space yet.

The discount retailer has also committed to opening at least 150 stores across the country after its purchase of Zellers outlets from the Hudson’s Bay company.

Demand for downtown real estate remains strong, with the national central area vacancy rate slipping to 5.8 per cent from 6.4 per cent in the previous quarter.

Industries that focus on downtown areas are already feeling the squeeze as desirable office space is snapped up, Morse said, adding the demand is particularly high in Toronto.

The crunch may start to ease in the coming months, he said. as financial and professional service firms that were forced to restructure or downsize during the past few years have begun moving out of their downtown offices and freeing up some prime real estate.
Morse said some of the efforts to streamline office space have come as a result of steeply rising property taxes in the downtown core, an issue the country’s major banks have voiced complaints about for years.

Cushman & Wakefield expects 1.8 million square feet of space to free up in Toronto in the next two years.

Real estate vacancies are a lagging indicator of economic strength and generally reflect decisions taken some months before the results are issued.

Downtown real estate in Calgary was particularly strong during the third quarter as oil and gas companies snapped up what office space remains. The city’s vacancy rate tumbled to 6.4 per cent from 9.1 per cent in the second quarter.

http://www.winnipegfreepress.com/business/breakingnews/commercial-real-estate-trends-point-to-pending-slowdown-cushman–wakefield-129977983.html

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Long-craved goal of home ownership not for everyone, says financial consultant

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While most Canadians pursue their dream of home ownership, Neil Jain is basking in the financial flexibility of rental living.

The financial consultant with Money Life Skills says some people can get further ahead by investing surplus income in the stock or bond markets than sinking it into a purchased residence.

“If you’re smart, the difference you save between renting and owning a home you can invest that over the long term and make a lot more money and have a significant nest egg,” he said in an interview from Toronto.

Investing in the markets holds risks, but there shouldn’t be big fluctuations over a 20- to 30-year time horizon, he said.

Low vacancy rates show that many Canadians are opting for the cost certainty of rental living, he said. Government rent controls in many provinces limit annual increases. Ontario has set the 2011 rent increase, for example, at 0.7 per cent.

Far too many prospective buyers fail to look at the total cost of ownership and simply compare rent to mortgage, Jain said.

Home ownership includes property and land transfer taxes, fees for inspectors and lawyers, insurance, municipal welcome taxes, moving costs and real estate fees for sellers.

Condo owners are also on the hook for higher fees if the reserve set aside in new buildings fails to cover maintenance costs. But as a renter, Jain said he wasn’t affected when his unit’s owner saw fees for his Toronto condo soar by 80 per cent.

Jain acknowledges that home ownership is a lifestyle choice and a form of forced savings for those who wouldn’t otherwise invest.

“I can see how it makes sense for people with young families to own a home in the suburbs and have the space that they need, but trying to time the market so that you can make money on real estate is a tricky business to be in.”

While the affordability of homes may be forcing some potential buyers to shun the housing market, the dream is alive and well for many Canadians. Parents who have seen their property values skyrocket have long urged their children to follow their example.

And close to 70 per cent of Canadians have obliged, urged on by low mortgage rates and affordable prices in many parts of the country.

“Home ownership is something that everyone aspires to,” says Farhaneh Haque, regional manager and a mortgage specialist for TD Canada Trust.

For many Canadians, especially first-time buyers, it’s a question of timing, she said in an interview.

“There is a sense of pride and accomplishment in any ownership as opposed to not owning something, but it is a personal preference.”

The key is to carefully assess your personal financial situation to avoid compromising lifestyle to get into a home, she said. Factors to consider include career status, financial health and credit payment habits.

Recent TD polls shed some light on the home buying views of Canadians.

Some 45 per cent of those surveyed said they will buy their first home independently, including 57 per cent men and 33 per cent woman. And one-third plan to buy a home with a rental unit to pay their mortgage faster or help them live more comfortably and boost savings.

More than 60 per cent of young, urban Canadians said affordability drove them to look for or buy a condo. But 65 per cent wished they had the money instead for a single house.

Many of those polled said they viewed a condo purchase as a stepping store to their ultimate home-ownership goal. Nearly 50 per cent said they planned to stay put for less than six years.

Many first-time buyers enter the market by purchasing a condo downtown and then move to spacious homes in suburbia following the arrival of children.

Moving quickly may not be the best strategy because of costs. And homeowners shouldn’t count on higher selling prices to help them move up the real estate ladder, said Jain.

Toronto’s real estate market didn’t fully recover from the 1989-1990 crash until 2007, when accounting for inflation, he noted.

“That’s a long period of time to wait to recover your investment so housing has much longer cycles than the stock market, so if you are on the wrong side of the cycle then it can be a long, long time before you recover you’re money.”

http://www.winnipegfreepress.com/business/breakingnews/125167559.html

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Realtors suggests answers to rental unit shortage

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Coming from WinnipegREALTORS’ recent 6-page discussion paper, “Manitoba needs to move away from the current rent control regime if it wants to improve vacancy rates and better prepare for future immigrant-driven growth.” In line with this, the said report paper also mentions about numerous quoted studies that show controls discourage construction of rental units.

Even if there is an urge to eliminate control, the people behind the report suggests a short-term compromise to applied but this is softer form of controls that temporarily exempt newly vacated rental units to allow market rents to climb to more realistic levels. That would reduce the gap between market rates and the price developers have to charge for newly constructed units. But a tough persuasion is anticipated to be done to get the government in the new plan.

Family Services and Consumer Affairs Minister Gord Mackintosh contradicts many of the points cited in the Realtors’ paper.

“We’ve just received an outside independent expert analysis that showed rent regulation was not the culprit for low vacancy rates,” he said.

Mackintosh stressed that more apartments are on-going with their construction in the province today than at any time since Manitoba started keeping such records in the 1980s. In Saskatchewan, where there are no rent controls, the vacancy rate is about as low as it is in Manitoba.

The group behind the discussion paper, anticipated variety of opinions and claim that a compromise solution isn’t impossible

“There is no silver bullet and there will be no overnight success here. It’s going to take awhile — months, maybe even years. But we have a problem here and we have to start somewhere.”

They are hoping to meet officials concern to work out appropriate solutions.

“Hopefully some of the solutions we put forward in the discussion paper will be considered,” he said. “Doing more of the same is not an option.”

Two other key recommendations are the introduction of a provincial portable shelter allowance to help low-income earners cope with rising rental rates and new property tax credits to encourage investors to built more moderate to low-income rental units.

Manitoba Housing and Community Development representative Minister Kerri Irvin-Ross said the province is already working to set up a broad working group to discuss the rental housing shortage. It will include landlords, housing advocates, tenants and other public and private sector players.

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Manitoba’s market performance in the early quarter of 2010

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As is typical each year in most commercial real estate circles, the past three months have generally been characterized by the conclusion of 2009 business while preparing for 2010 initiatives. The latter part of January and most of February are often called “white board weeks” as landlords, tenants, property managers, brokers and investor plan for 2010 acquisitions, dispositions, new stores, upcoming renewals, and the like. But before doing that look at  some of the  market observations in the early quarter of 2010.

  • Several larger investors have suggested they are back in “buy” mode and are sitting on uncommitted capital. This signifies that the current supply of good-quality offerings is unlikely to keep pace with overall demand moving forward into 2010, which should intensify competition and pricing even further in Manitoba and across Canada.
  • Apartments remain the most sought-after asset class in Winnipeg, as overall vacancy rates remain near one per cent and condominium conversion opportunities are being capitalized on by local specialists. A combination of TIF announcements by both local and provincial governments as well as a move by Canada Mortgage and Housing Corporation (CMHC) to increase minimum down payment on new home and condo purchases would influence this sector in 2010.
  • Moving into 2010 it is expected that new investors and existing landlords will step up their focus on the “quality” of a property’s rental income as opposed to the “quantity” of same.
  • Buying respectable investment real estate remains a very competitive business in Winnipeg, suggesting buyers should work diligently to understand the fundamentals of the property they are considering by using professional advisors and high-quality underwriting information.
  • With the yield in 10 year government of Canada bonds hovering around 3.4 per cent, the allure to real estate is obvious after the impact of taxes and inflation on fixed income investments. Typical investments in commercial real estate can comfortably generate levered yields of upwards of nine per cent.
  • Leasing fundamentals in Winnipeg appear to be holding across the office, retail and industrial sectors, but the market will be monitoring potential tenant failures to ascertain those business that have exhausted all sources of case waiting for the economy to rebound. While economic growth in Winnipeg was among the strongest in the country last year, this market is by no means immune to the global impact of the 2008 and 2009 recession.

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