Canadian Apartment Investment Report 2014

Annual 2014 / Issue 10

REALNET® Top 10 YTD* Apartment Transactions in the GTA, GCA and GVA Top Transaction Report by Market PP 08-09

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04

Wise Dollars Steady Growth

12

Old Stock New Opportunities

14

View from a Third-Generation Investor

UNRIVALED TALENT. UNMATCHED RESULTS. Ontario

Toronto

David Montressor*

416 815 2332 david.montressor@cbre.com

Local Knowledge National Reach

Waterloo Region

London

519 340 2317 martin.cote@cbre.com

519 286 2013 kevin.macdougall@cbre.com

Martin Cote*

Quebec

Montreal

Benoit Poulin

514 905 2142 benoit.poulin @cbre.com

Nico Zentil*

Manitoba

Alberta

Montreal

Winnipeg

514 906 0891 marc.hetu@cbre.com

204 943 5700 trevor.clay@cbre.com

Marc Hetu

Ottawa

Kevin W. MacDougall*

Trevor Clay

613 788 2708 nico.zentil@cbre.com

Calgary

Grant Potter

403 750 0528 grant.potter@cbre.com

CBRE’s National Apartment Group is comprised of 16 dedicated professionals in 10 offices across Canada with over $8.0 billion sold.

Alberta

Edmonton

Bradley Gingerich

780 917 4626 brad.gingerich@cbre.com

Edmonton

Edmonton

780 229 4689 cody.nelson@cbre.com

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Cody Nelson

British Columbia

Vancouver

David Ho

604 662 5168 david.ho@cbre.com

Paul Chaput

Edmonton

Bradyn Arth

780 917 4649 bradyn.arth@cbre.com

Nova Scotia

Vancouver

Halifax

604 662 5141 lance.coulson@cbre.com

902 492 2085 chris.carter@cbre.com

Lance Coulson

Chris Carter

Halifax

Robert Mussett

902 492 2065 robert.mussett@cbre.com

* Sales Representative This disclaimer shall apply to CBRE Limited, Real Estate Brokerage, and to all other divisions of the Corporation (“CBRE”). The information set out herein, including, without limitation, any projections, images, opinions, assumptions and estimates obtained from third parties (the “Information”) has not been verified by CBRE, and CBRE does not represent, warrant or guarantee the accuracy, correctness and completeness of the Information. CBRE does not accept or assume any responsibility or liability, direct or consequential, for the Information or the recipient’s reliance upon the Information. The recipient of the Information should take such steps as the recipient may deem necessary to verify the Information prior to placing any reliance upon the Information. The Information may change and any property described in the Information may be withdrawn from the market at any time without notice or obligation to the recipient from CBRE. CBRE and the CBRE logo are the service marks of CBRE Limited and/or its affiliated or related companies in other countries. All other marks displayed on this document are the property of their respective owners. All Rights Reserved.

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CONTENTS 03 Message from the 2014 Canadian Apartment Investment Conference Co-Chairs 04 Wise Dollars, Steady Growth

06 Immigration and Urbanization Increase Rentals

10 The Retrofit Opportunity

06 New Ways to Build New 08

REALNET Top 10 YTD Apartment Transactions in the GTA, GCA and GVA ®

*

A Message from the 2014 Canadian Apartment Investment Conference Co-Chairs

Many investors consider the multiresidential asset class to be a safe haven.

Like all markets, though, it has its quirks and unexpected turns.

Steven Gross, Managing Partner, Real Estate Investments Romspen Investment Corporation

Sandy Mandel, President, Sanford Mandel & Associates Inc.

Demographics have supported the rental industry over the past ten years, particularly with the echo-boom generation bolstering demand. As the millennials advance into the next phases of their lives, it remains to be seen what living choices they will make and if they will have the means or the inclination to rent apartments. Could a bigger opportunity come from the older-boomer/empty-nester generation? While a lifelong homeownership mentality will be a challenge, leading edge operators will have to figure out how to target their marketing and educate this rapidly growing cohort about the financial and lifestyle advantages of renting versus ownership.

On the ownership side, there’s no ignoring the industry’s growing number of institutional players. Yet the old-school and up-and-coming private investors

12 Old Stock, New Opportunities 14 View from a Third-Generation Investor

continue to be a force. While some private owners are more in tune than others when it comes to elevating their game, the institutionalization of this asset class has put pressure on all to keep pace.

On the investment side, as always, there is never enough product to acquire. Investors are looking at building, intensification or pure development sites, as a means toward growing best-in-class portfolios.

Others are exploring adding value by modernizing, repositioning or converting suites. Is consolidation on the horizon?

What will drive value next? If cap rates can only go so low, the focus will shift to operations and NOI. However, since much of the low hanging fruit has been harvested, many building owners have streamlined operations, retrofitted and upgraded building systems, implemented management best-practices and become savvy marketers. One has to ask where are the next opportunities?

One thing upon which we can all agree on is that multi-residential properties are small communities, intrinsically exciting and constantly changing as a result of dynamic internal and external factors. ¡­ Steven Gross and Sandy Mandel

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©2014 Informa Canada Inc. Disclaimer: The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of Informa Canada.

3

CAPREIT - The Marker

Wise dollars - steady growth

Tom Schwartz, President and CEO, CAPREIT Tom Schwartz is often asked what was the magic that created CAPREIT, one of the Canada’s most successful real estate investment trusts.

The company’s President and CEO speaks with a calm that baffles the sceptics, and a confidence that comes with 4

building a large company through years of strategic, low risk investments. Tom summarizes CAPREIT’s success this way: “We’ve got tremendous low cost of capital, tremendous economies of scale, and we can take advantage of those economies.”

A landlord committed to its tenants, CAPREIT is also environmentally progressive and finding new success thanks to its energy management programs. And, in a move that’s arousing much interest in the market, the company recently sponsored a REIT in Ireland.

CAPREIT originated during the recession, when Schwartz couldn’t get financing as a developer. “The original REITs all came out of that period,” he says. “We were all little guys at a time when the big companies all came down because of their very heavy debt loads, even though their real estate was the best in the world. We were the evolution, the newcomers with the much more conservative capital structure.”

Tom will never forget the lessons of that time. Today, a career based on carefully planned decisions allows him to calmly face what some see as challenges.

Competition from the condo market? The wide price gap has made apartments more obviously affordable and had a positive impact on CAPREIT. Predictions of another recession? “We generally benefit in a recession,” Schwartz says. “People stay in the rentals longer and don’t jump into home ownership.”

Nor is he too concerned about competition from pension funds. In his experience, while the players keep changing, multifamily has always been competitive and always will be. “Apartments are a great investment, an easy entry business. Five doctors can get together and buy an apartment building on a weekend.” ¡­ Michelle Morra-Carlisle

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Immigration and urbanization increase rentals

Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc.

New Ways to Build New

David Bloomstone, Director, TD Securities Inc. Let’s face it, the 40 to 50-year-old buildings in the traditional rental market now offer limited supply and bring major cap-ex to prospective investors. That is why for the first time in a long while, many large institutional pension funds are considering new construction of not only condos but purpose-built rental projects too.

David adds, of course there are other alternatives to 6

“Young people are gravitating to downtown cities now more than ten or fifteen years ago and immigration will continue to be a major demand driver for condos and apartments,” says Benjamin Tal, CIBC World Markets Deputy Chief Economist.

“We are more sensitive to the risk of higher interest rates than any other time in history, but they need to start rising, probably in May 2015,” said Tal. “The actual increase will be moderate and it will take time, so the impact will not be immediate.”

“Not only will the demand for condos and apartments continue to rise, but the propensity to rent will be higher than ever before.”

Meanwhile, Tal advises as the global economy improves, exports and investment can compensate for lackluster domestic spending and building activity. To encourage exports, however, the Bank of Canada must weaken the dollar by keeping interest rates low.

Current economic factors also benefit the market. A high level of household debt means limited growth in consumer spending and a significant lack of supply in new housing and the resale market. In this situation, the apartment and condo market plays an important stabilizing force that might be disrupted if interest rates rise.

buying old buildings. In another recent trend, investors that don’t necessarily have deep pockets are building on excess land on their existing sites, where the land is effectively free.

In the GTA, highrise concrete buildings with numerous amenities are successfully rivalling the condo market. David Bloomstone, Director of TD Securities Inc., is seeing this type of activity among his clients in high-end locations such as Forest Hill, for example, as well as in the downtown core. “But you can also build in the Ontario market at a cheaper cost and still make the numbers make sense,” he says, “in the secondary markets like Kitchener and London where they’re constructing low-rise ‘stick built’ types of buildings, or in some cases slightly higher-rise wood frame projects.”

It goes without saying that markets out West with strong employment and growth have taken off in recent years. In terms of purpose-built multiresidential construction, thousands of units are being built in Calgary and Edmonton. Canada’s East Coast is also experiencing a similar phenomenon

The circle means that we are likely to see “low interest rates for a long time.” ¡­ Tracey Arial

thanks to jobs created by the Irving Shipbuilding contract.

If developers have anything to worry about in the upcoming year, it’s likely either the possibility of an interest rate hike or rising construction costs. “Of course,” Bloomstone says, “higher interest rates come on the heels of improving the economy with inflation, which can help your rents at the end of the day.” ¡­ Michelle Morra-Carlisle

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Canadian Apartment Investment Report / September 2014

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REALNET速 Top 10 YTD* Apartment Transactions in the GTA, GCA and GVA Rank

Municipality

Address

Total Price

# of Units

Cap Rate

Purchaser

Broker(s)

1

Markham

7411 Yonge St.

$71,250,000

380

5.0%

Starlight Investments Ltd.

D Montressor, CBRE Limited

2

Toronto

295 Dufferin St.

$45,000,000

200

4.3%

Starlight Investments Ltd.

D Montressor, CBRE Limited

3

Milton

611 Farmstead Dr.

$38,500,000

104

4.3%

Regal Lifestyles

4

Toronto

230 Oak St.

$38,000,000

327

5

Aurora

145 Wellington St. W.

$34,750,000

204

5.6%

Akelius Fastigheter AB

D Lieberman, J Hittner, Avison Young

Starlight Investments Ltd.

D Montressor, CBRE Limited

Seasons Retirement Communities

6

Clarington

65 Clarington Blvd.

$26,575,000

112

7

York

230 Woolner Ave.

$21,850,000

260

8

Georgina

15 The Queensway S.

$19,127,323

97

9

Toronto

680 Roselawn Ave.

$17,250,000

64

10

Toronto

2663 Lake Shore Blvd. W.

$14,000,000

112

Municipality

Address

Total Price

# of Units

1

Calgary

120 2nd Ave. S.W.

$17,642,545

129

2

Calgary

1505 23rd Ave. S.W.

$5,900,000

11

Paragon Capital Corporation Ltd.

3

Canmore

110 Montane Rd.

$4,600,000

20

110 Montane Capital Corp.

4

Calgary

516 18th Ave. S.W.

$3,500,000

11

W. Chan Investments Ltd.

5

Calgary

203 6th Ave. N.E.

$2,480,000

14

Avanti Housing Inc.

6

Calgary

318 14th Ave. S.W.

$2,250,000

18

Mainstreet Equity Corp.

M Fleming, Michael Fleming Realty Corporation; B Dhillon, RE/MAX

7

Calgary

810 Drury Ave. N.E.

$1,900,000

11

Rainbow Motor Inn Macklin Ltd.

L Scarcelli, N Libzo, Sutton Group Canwest Vista; C Zaharko, Royal LePage Foothills

8

Calgary

1737 26th Ave. S.W.

$1,900,000

12

1807964 Alberta Ltd.

9

Calgary

4503 73rd St. N.W.

$1,900,000

17

Vista Group Inc.

10

Calgary

1537 14th Ave. S.W.

$1,826,000

15

Alston Properties Ltd.

Municipality

Address

Total Price

# of Units

Cap Rate

1

North Vancouver

151 East Keith Rd.

$25,500,000

88

3.4%

2

Vancouver

6347 West Blvd.

$11,000,000

22

3

Vancouver

1009 West 10th Ave.

$11,000,000

41

4

Abbotsford

2929 Tims St.

$10,300,000

108

5

Vancouver

1075 Nelson St.

$9,000,000

24

6

Vancouver

555 East 6th Ave.

$8,880,000

7

Vancouver

2394 Cornwall Ave.

$8,500,000

20

8

Vancouver

1137 Bute St.

$8,100,000

33

9

North Vancouver

170 West 4th St.

$7,000,000

36

10

Vancouver

2182 West 39th Ave.

$6,873,500

21

Rank

Rank

5.9%

An individual(s) acting in his/ her own capacity

L Wallace, RE/MAX Unique Inc.

Housing York Inc. 3.3%

O'Shanter Development Company Ltd.

D Bloomstone, J Ziegel, I Saksznajder, TD Securities

Royal York Shores (2663) Inc.

Cap Rate

Purchaser

Broker(s)

1159646 Alberta Ltd.

4.0%

P Dave, RE/MAX Complete Commercial

Purchaser

Broker(s)

Starlight Apartments

D Goodman, M Goodman, HQ Real Estate Services

West Boulevard Property Ltd.

C Anderson, A Fergusson, Cushman & Wakefield Ltd.

0992980 B.C. Ltd.

D Schulz, MacDonald Commercial

Mainstreet Equity Corp.

Wall Financial Corp.

D Taylor, Colliers International Property Consultants Inc.

G & M Enterprises Ltd. M.A. Cedar Place Properties Ltd.

J Tang, B Harding, T Harding, NAI Commercial

1004905 B.C. Ltd.

C Wieser, R Greer, M Hannah, Avison Young

4.2%

Eduardo Holdings Ltd.

P McEvay, B Goold, RE/MAX Bill Goold

3.7%

AP Yew Investment Ltd.

B Goold, P McEvay, J Blair, RE/MAX Bill Goold Realty

2.7%

* Year to Date (YTD) January 1, 2014 - August 25, 2014

8

Canadian Apartment Investment Report / September 2014

Top 10 GTA Apartment Transactions - YTD 2014

Top 10 GCA Apartment Transactions - YTD 2014

Source: RealNet Canada Inc.

Top 10 GVA Apartment Transactions - YTD 2014

Source: RealNet Canada Inc.

Source: RealNet Canada Inc.

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9

The Retrofit Opportunity

Sarah Gray, Project Principal, Halsall Associates (a Parsons Brinkerhoff company) Recent safety concerns have put garage, balcony, elevator and generator upgrades on the must-do list says Halsall Project Principal Sarah Gray.

of code and local property standards?

What are the should-do’s in terms of maintenance when putting together a capital plan?”

Owners like to focus on interior upgrades, window replacement and energy-use reduction, but Gray often begins her inspections by documenting visible deterioration – such as loose concrete on garage ceilings – that may lead to public safety risks. Engineers also recommend opening up interior plaster and drywall to determine whether structural walls are made of concrete block or steel studs behind a brick veneer. The latter construction was popular in the 70s and 80s, but it can hide interior leaks and possible water damage, says Gray.

“We want to make sure that water hasn’t been getting into the wall and corroding the studs.”

The engineering consultant helps the owners of older buildings create multi-year plans for upgrades, repairs and maintenance.

After identifying the structure of the building, Gray inspects elevators, generators, roofs and balcony railings to flag potential safety concerns and any needed repairs. She advises that too often landlords avoid maintaining these areas.

“What are the major concerns?

What are the must-dos in terms

“I would say that rental property owners often defer fixing garages and balconies

10

because these things are just not sexy,” says the Toronto-based engineer. “Repairs claims are really disruptive to residents; and owners don’t get immediately visible returns after these types of jobs are done.”

Gray encourages property owners to consider basic structural necessities as opportunities and claims that investments in these can really pay off. Using a building with balconies as an example, she proposes that railings that must be retrofitted to conform to height and gap restrictions can benefit from upgrading the look at the same time. In this instance, not only is the landlord conforming to regulations, in modernizing the building too they can anticipate attracting better tenants.

“If you’re going to make a balcony conform, that gives you an opportunity to add some curb appeal.”

Balconies that are safe combined with bright tidy garages make tenants feel good. Happy Tenants = Happy Landlord! ¡­ Tracey Arial

Canadian Apartment Investment Report / September 2014

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Old stock new Opportunities

Robert Geremia, President, Boardwalk REIT After 30 years of strictly buying and refurbishing buildings, Boardwalk Real Estate Investment Trust has only recently begun to build and develop properties. The company saw an opportunity in some of its multi-family

projects that were built in the mid to late 70s and had a lot of extra density.

resulting in better returns for us as well,” Geremia says.

“One in particular that we selected was in Calgary, where we were able to open up some ground between two of our buildings and put a building in between,” says Boardwalk’s President, Roberto Geremia. The company even partnered with the government of Alberta to provide affordable housing within the new building.

With experience, a real estate company can also recognize opportunity in challenges. Sometimes the market presents obstacles for REITS that, like Boardwalk, classify themselves as “fixed income” and must compete against yield return types of investments.

Meanwhile, giving new life to old buildings remains an exciting prospect, especially in Canada where so many apartment buildings were built 40+ years ago. As the condominium market accommodates new needs for renters, rental units are following suit. Party rooms in older buildings, for example, are now being retrofitted into gyms.

“The condo upper scale development is actually forcing us to provide more common area amenities which are

“In a fixed income kind of market, you’re not really trading on the underlying asset value of the portfolio in general,” Geremia says, adding that in REITs in general, the actual share price of trading is well above the implied private market net asset value of the company. “We’ve taken advantage of that,” he says.

“We’ve sold some of our projects to the private market — which will pay much more than the public market — and are currently buying back our stock.” ¡­ Michelle Morra-Carlisle

Boardwalk REIT

12

Canadian Apartment Investment Report / September 2014

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View from a third-generation investor Multi-family real estate has no shortage of buyers.

Even low cap rates are apparently no deterrent to pension fund, private equity and private investors.

Unlike office, retail and industrial properties that mostly appeal to institutions, multi-family has long attracted private buyers.

Mark Zolty, Managing Director, Brass Enterprises

Mark Zolty is a third-generation real estate investor who learned from his father and grandfather. In his teens he saw multi-family (then called “apartments”) as a

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more personal, mom-and-pop type of business, but says it became “a lot more about trading cash flows than actually buying buildings.” Today Mark is Managing Director of Brass Enterprises and works primarily in secondary U.S. cities in Texas and Southern Florida mostly suburban settings.

There, tenant needs are very different from those in Canada. “Properties need to be a lot more highly amenitized,” he says. “Where people live is much more of a lifestyle rather than just a place to put their furniture in and sleep.”

He considers that environment a stark contrast to Canadian development, which is largely about condos. “I don’t think [Canadian] municipalities are focused on multi-family but on how to get the quick development dollars,” he says. “But as soon as you have a change in development policy you’re going to see a big change in how people live in apartments.”

Is a third-gen investor better equipped to handle risk? Zolty thinks so. Members of his family have seen various cycles and learned from each other’s experiences. “A lot of the newer players in the multi-family space haven’t seen the worst of times,” he says. “We have!”

Robert Doumani rdoumani@airdberlis.com · 416.865.3060

¡­ Michelle Morra-Carlisle

Tom Halinski thalinski@airdberlis.com · 416.865.7767

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Canadian Apartment Investment Report / September 2014

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