NEW APARTMENT CONSTRUCTION REPORT HOW TO DEVELOP, BUILD, LEASE, FINANCE AND SELL NEW PURPOSE-BUILT RENTAL APARTMENTS IN CANADA
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INTRODUCTION AND WELCOME
t is with great pleasure that I introduce you the ROCK New Apartment Construction Report. This report looks at the apartment construction picture across the country and, quite frankly, we are excited about the future. As the CEO of ROCK Advisors Inc., I have seen much in my more than twenty-five years in the apartment industry. In all my years of brokerage and consulting, I have not seen any company produce a comprehensive guide to the Canadian apartment industry. In 2011, I resolved to create such reports, because there is a lot to be said about purpose-built apartments. This is our second report, after the release of the ROCK Apartment Report Ontario. I think new apartment construction represents the best real estate development opportunity across Canada. Interest WHERE ARE THE BEST rates are low. Institutional and long-term investors are PLACES TO BUILD NEW looking for investment-grade apartments, which are in short APARTMENTS IN CANADA? supply across the country. e’ve canvassed the capital markets, Historically, apartments institutional investors, REITs and have not had the volatility WHILE ONE CANNOT public companies. Based on their of real estate investments comments, we have ranked the following PREDICT THE FUTURE, cities as being the biggest opportunities for and apartments are the only new apartment construction. Micro and macro class that is not tied to the AND THERE WILL ALWAYS economics support what the industry is telling financial/economic cycle. BE CONCERNS ABOUT us. We rank the cities as follows: And yet, when compared 1. Toronto 4. Vancouver to America, new apartment WHERE THE ECONOMY 2. Calgary 5. Ottawa construction in Canada is in WILL GO, THERE WILL 3. Edmonton 6. Montreal its infancy. We estimate there ALWAYS BE A DEMAND That being said, we’ve seen significant are fifty merchant apartment construction in smaller centres, like London builders in the United States and FOR QUALITY PRODUCT and Halifax, showing there are opportunities less than a handful in Canada. WHERE CURRENTLY THERE from coast to coast to coast. Investors are running out of good IS VERY LITTLE. Canada, it’s time to start building new apartments to buy and upgrade. apartments! As part of our study, we set out to catalogue all the new buildings built in Canada since 2000. We estimate that there have been about 400 new buildings from coast to coast to coast, ranging from concrete high-rises in Vancouver to frame walk-ups in Iqaluit to a surprising number of mid-rises in Atlantic Canada. In the central business districts of Canadian cities, more and more people want to live closer to where they work. They want to have access to the amenities downtowns provide, and they’re dealing with a market that’s seen over three decades of constrained supply. The opportunities for new construction are clear. At ROCK, we are committed to providing our clients a full complement of services to facilitate new apartment construction. This includes identifying markets to build in, finding land to build on, researching what is feasible, locating joint venture partners, navigating financing, and assisting with the lease-up and disposition. We hope you find this report useful and our investment professionals at ROCK look forward to assisting you in meeting your goals.
Derek Lobo, CEO, ROCK Advisors Inc., firstname.lastname@example.org Solo Deo Gloria THE ROCK NEW APARTMENT CONSTRUCTION REPORT 1
TABLE OF CONTENTS INTRODUCTION 4
The Case for New Apartment Construction
Conducting Feasibility Studies
PROVINCIAL PROFILES 10 British Columbia 12 Alberta 14 Condos vs. Rentals 15 Saskatchewan/Manitoba/North 16 Greater Toronto Area 18 Southwestern Ontario
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24 Ottawa and Eastern Ontario 26 Quebec 28 Atlantic Canada
The ROCK New Apartment Construction Report is published by:
In partnership with:
32 Becoming a Merchant Builder 34 Editorial: The Place of Government 38 Financing New Construction 42 New Construction in Student Housing 46 Key Elements of a Successful Apartment Development
5100 South Service Rd., Unit 51 Burlington, ON L7L 6A5 Phone: 905-331-5700 Fax: 905-319-2528 E-mail: email@example.com
Copyright 2014 Requests for permission to reprint any portion of this publication should be sent to ROCK Advisors Inc. Brokerage.
MORE PUBLICATIONS FROM ROCK ROCK Advisors releases a number of publications every year,
giving you hard data and real analysis on many aspects of the purposebuilt rental apartment industry. These include:
• The ROCK Apartment Report (Ontario 2011-12) • The ROCK Student Housing Report (Coming 2014) • The ROCK Mid-Market Apartment Building Report (Future) For more information, visit our website at www.rockadvisors.ca 2 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
The ROCK Apartment Report and the ROCK New Apartment Construction Report are copyright ROCK Apartment Advisors Inc, Brokerage and DALA Group of Companies © 2014 For an electronic copy of this document, please see our website at www.rockadvisors.ca If you are interested in advertising in an upcoming ROCK Report, please call us at: (905) 331-5700 ext. 14
C E L E B R A T I N G
25 YEARS For twenty five years, & has been the leader in apartment development consulting and brokerage. We help with: Pre-Acquisition Assessment • Strategic Pricing Plan • New Apartment Construction Feasibility Studies • Strategic Marketing Plan with Project Supervision • New Construction Lease-Ups • Disposition • Due Diligence On Apartment Building Acquisition • Repositioning Market Surveys • Mystery shopping • Sales Training • Marketing Assessment of Underperforming Apartment Buildings • NOI Enhancement Programs
Strategic Pricing Plan
Design and Development
If you own land we can help you determine whether to develop or not, what to develop, or help you sell your property to interested developers.
From preliminary market review to land acquisition, we will work with development professionals to define the strategic objective and facilitate best practises with all professionals involved.
After our initial feasibility study, we work with the developer to create a by the unit pricing model that will be implemented to maximize revenue.
We stay involved in your development from feasibility study to land acquisition, to development and design, financing, pricing and ultimate disposition of the property via a forward sale or the sale of the stabilized asset, if required.
NEW CONSTRUCTION - FEASIBILIT Y STUDIES Our feasibility studies answer the following six questions: What should you build? Should you build? What rents could you charge? How deep is the market? Which amenities should be included to attract the best residents? How much money could you earn if you develop?
Please contact us for more information:
Please contact us at Derek A. Lobo & Associates (DALA):
T: 905-331-5700 x14 www.rockadvisors.ca youtube.com/user/rockdala
E: firstname.lastname@example.org T: (800)898-0347 x14 www.dala-inc.com
THE CASE FOR NEW APARTMENT CONSTRUCTION
CANADA: IT’S TIME TO BUILD NEW APARTMENTS
he purpose-built rental apartment sector in Canada has been a beacon of stability through these uncertain economic times. Over the past number of years, as other sectors have seen significant downturns, apartment owners have seen lower vacancies and higher rents, and apartment buildings are selling for the highest prices per-unit in history. New apartment construction is one of the soundest investments one can make in this time.
IF YOU WANT YOUR MONEY TO BE SAFE, BRING IT TO CANADA AND THEN INVEST IT IN THE SAFEST REAL ESTATE ASSET CLASS: APARTMENTS
There are a number of factors which are contributing to the sector’s current strength. In an uncertain world, people are looking for stability before yield. Canada is perceived as one of the more stable countries in the world. Apartments are perceived as one of the most stable real estate investments. Apartments are the only asset class not tied to the economic cycle. So, if you want your money to be safe, you bring it to Canada and then invest it in the safest real estate asset class, apartments. Moreover, political, economic and demographic changes that are already underway are making the outlook for purposebuilt rental apartment construction better than ever. The dream of a family owning a single detached house in the suburbs is not what it used to be, and purpose-built rental apartments in the centres of cities represents both a fashionable and affordable choice for more and more people. Condominium builders already know this, and have built many new buildings in Canada’s major centres. In Toronto and Vancouver, private individuals are buying condominiums for a capital gain and most intend to flip them once they take possession. These units typically do not carry themselves, but do create a significant shadow rental market.
What Drives Rental Apartment Development?
In Ontario and Quebec, construction of new apartments stalled in the mid 1970s as provincial governments imposed rent controls. This aged the average rental stock of most cities. In Ontario, even when rent controls loosened in the 1990s, construction was slow to restart, as the developers who had been involved in construction before rent control had largely left the business. After 2000, however, economic, demographic and social changes made conditions more favourable for purpose-built rental apartment living. The growth of the tech sector started to change the relationship individuals had between their home and their work. The rise of telecommuting and the desirability of a short commute to work pulled more workers away from the monotonous suburbs and into amenity-rich inner city neighbourhoods where single-family housing simply wasn’t feasible. Luxury condominiums helped to make high-rise living fashionable, which opened the door to a greater acceptance of rental housing.
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Demographically, families are getting smaller, with some couples choosing to have no children at all, or choosing to wait longer before having children. The baby boomers, who were largely behind the surge in single-family suburban housing, have seen their children move away, and their own needs change. As seniors take an increasing share of the population, they need less space, and fewer stairs. This is also driving them out of their suburban homes into high-rise rental living. Immigration is enhancing this trend. It is likely we will see more immigration in the future, and this group has traditionally been more likely to live in multi-family buildings in larger urban centres, building the market of potential tenants.
Is the Condo Market a threat?
In the 1990s and up to the early part of IN EVERY CITY this century, low interest rates helped ACROSS CANADA, feed a growing housing market that THERE ARE pulled prospective renters away from OPPORTUNITIES apartments. With a condominium TO BUILD NEW boom occurring in major centres APARTMENTS across Canada, one would think that all that new construction would be a drain on the purpose-built apartment market, but this has not been the case. Indeed, without the condominium market making highrise living fashionable, there would not be as much interest in highrise apartment living as there is now. Further, neighbourhoods with new condominium construction are gentrifying, turning previously run-down areas into desirable places to live, full of the amenities that apartment and condominium dwellers enjoy. Also, the imposition of rent control in Ontario in the mid-1970s held back the construction of new apartment supply, aging the local stock (buildings built after 1991 in Ontario are exempt from rent controls). Almost all new construction that comes on the market these days is priced at or near the top of the market, showing that demand for new apartments far exceeds supply. These buildings always get full.
Condominium Developers Should Build Purpose-Built Rental Apartments Now
Condominium developers already have the skills to build an apartment building. Indeed, as many as half of their units are sold to investors who flip or rent these units out. These rental units produce steady sales for the condominium builder. Without planning it, most condominium developers are producing rental stock. Why not take the next step and build purpose-built rental apartment buildings? Condominium developers should become merchant apartment builders. To become an apartment builder, all condominium developers need to learn is how to lease and manage properties.
THE CASE FOR NEW APARTMENT CONSTRUCTION The Time to Build New Apartments is Now
In every major urban centre across Canada, the apartment market is heating up. Older buildings have been bought for repositioning at a rapid rate, and many of the deals are fetching the highest prices per unit in Canadian history. In many centres, the market is so heated because supply has been repressed for over two decades while the population has grown. There is a lot of latent demand that simply cannot be served by the stock that’s available now. New construction is easily absorbed into the market, and as this construction is literally decades ahead of its competition, new units tend to come in at the high end of the market. Competition at the high end of the market has raised expectations among prospective tenants regarding the quality of the amenities all apartment buildings should offer. There is plenty of opportunity to get an excellent return on new apartment investment, but only those developers who enter the marketplace armed with a good understanding of the marketplace will get the best return on their investments. In this report, we will detail some of the factors investors in new apartment construction need to consider before making a successful entry into the marketplace. We will examine the major regions across Canada, identifying hotspots, and showing where investors have already succeeded in building strong markets full of new construction. This is the knowledge developers will need if they wish to make a strong entry into the apartment marketplace, but it is rare to have all of this knowledge in one place. ROCK Advisors is here to guide developers in navigating the long but rewarding path of bringing new apartment construction to market.
THE CONDOMINIUM MARKET PROVIDES NEW APARTMENT SUPPLY
he Canadian condominium market is experiencing a construction boom over the last number of years. Estimates indicate that, in some buildings, as many as 60% of these buildings’ pre-sales have gone to investors who intend to flip the units, or rent them out. This activity has produced a large shadow rental market within the condominium buildings going up across Canada. This activity has been fuelled by a slow start to purpose-built rental apartment construction, which currently represents less than 10% of total apartment starts, according to statistics by Canada Mortgage and Housing Corporation. Thus, rented condominium units represent the largest source of new apartment supply, and these units are commanding high rents. A CMHC study in Vancouver noted that condo rentals earned as much as $200 more per month in rents than purposebuilt stock, largely because condo rentals are usually in welllocated newer buildings offering higher-end finishes and more amenities. The shadow condo rental market is also heating up. The shadow condo rental market is an incubator for the longterm luxury renter. Condominium developers themselves may be leaving money on the table selling their units to investors, instead of renting out the units themselves. The demand is available for their supply; they only need the will to supply it.
WHO IS RENTING LUXURY APARTMENTS?
tatistics by Canada Mortgage and Housing Corporation and other sources indicate that most high-end renters fall into one of four demographic groups:
YOUNG PROFESSIONALS – SINGLES OR COUPLES People under the age of thirty-five, who have found good jobs (especially in the high-tech and biotech sectors), have large disposable incomes and favour vibrant city living to the quieter suburban life. Space is not a priority; instead, they demand easy access to amenities and short commutes, and are willing to rent rather than own a mortgage. EMPTY NESTERS Families who have raised children who have grown up and left home often find they have more space than they need, and a heavier mortgage burden than they would like. Downsizing is an attractive option, especially if they choose to live part time in sunnier climes, renting two units rather than owning a larger house. As seniors get older, accessibility issues become more important, and they’re attracted to properties with fewer stairs to climb. CHOICE RENTERS This group is generally older than the young urban professionals, but have decided to avoid suburban home ownership in favour of the diversity of amenities in the urban core. They have large disposable incomes that they are willing to spend on luxury features and services. RENTERS BY NEED This group covers individuals for whom home ownership isn’t physically or economically feasible. This may include individuals whose work requires them to change cities on short notice. This may also include students who don’t expect to stay in their apartment for more than a few months or a few years, but they have enough disposable income to choose higher quality accommodations close to where they work or go to class.
“ROCK has a good team of people who are
focused on Student Housing and New Apartment Construction. They were the 1st brokers active in this sector and if you want to explore student and new construction opportunities, they are the people to talk to.
Greg Romundt – President, CEO, Trustee, Centurion Apartment REIT
THE ROCK NEW APARTMENT CONSTRUCTION REPORT 5
CONDUCTING FEASIBILITY STUDIES
MARKET RESEARCH MATTERS - CALL BEFORE YOU DIG
ecause the rental apartment sector operates differently than the build-to sell sector, it is important that developers, builders, financiers and investors conduct feasibility studies before initiating new rental apartment construction projects. Specialized knowledge is required to understand what customers want and what the markets will provide. The best way for investors or developers to learn what they need to know before moving ahead on their projects is to commission an apartment construction feasibility study from consultants who are experts in the industry.
The Challenges You Face
New apartment construction is an expensive and risky proposition, so developers and investors need to have the best information available before making a decision on whether to build a new project. DOING A FEASIBILITY They need to know that the STUDY IS LIKE BEING proposed building is a good fit in YOUR OWN DOCTOR. the marketplace and that its units YOU SHOULD GET A will be absorbed by the market once SECOND OPINION. built. Will the rents realized be high enough and will the units be rented quickly enough and stay full long enough to provide investors with the best return? Like their name suggests, feasibility studies help determine whether the goals of your project are feasible.
The Questions That Must Be Answered
Developers, builders, financiers and investors must answer key questions through the project planning process, including: • What depth-of-market or demand exists? How many new rental units can be absorbed into the rental market? What unit mix, amenities, and features are appropriate for prospective renters in the local market? What are the highest rents that can be charged? Feasibility studies will also identify the most appropriate target renters such as lifestyle renters, family renters, or student renters depending on the demographic or economic conditions of the market. • Should you build? It’s a yes or a no answer, based on your feasibility study. The recommendation is made based on the
“ROCK Advisors provides a range of services for
developers who want to understand the apartment development business. I attended a developers‘ trip to Dallas to tour new apartment construction and it was extremely insightful. They are a professional organization and a leading brokerage firm in this space.
Gord Bontje President, Laebon Developments Ltd. 6 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
“Our experiences with ROCK have been
extremely positive. We are moving forward very aggressively on the knowledge they have given us. I highly recommend them to anyone considering developing apartments.
Alexander Libfeld, President, Tribute Homes
advantages and disadvantages of the market the developer hopes to build into. Will the proposed project provide a good return on investment? Can such a return be provided if the developer’s initial concept is modified? Or is it better to wait, or look elsewhere? Properly conducted feasibility studies will make a recommendation based on the data acquired and provide a detailed explanation of the reasoning behind the recommendations. The data that is analyzed will be collected in the field and from official sources. • What should you build? KNOWING WHICH What provides the best CITIES AND TOWNS ARE and highest use for the MOST RIPE FOR NEW proposed project? What RENTAL APARTMENTS, best meets local demand AND KNOWING and what will result in a WHAT UNIT MIX, SIZES, successful absorption of AMENITIES, AND RENTS the new rental stock with ARE APPROPRIATE, COMES the highest rent-per-square THROUGH AMORTIZED foot? A feasibility study’s KNOWLEDGE AND recommendations should EXPERIENCE include unit mix, unit sizes, unit features, building amenities, building services, achievable rents (for each unit type), parking fees, utilities, storage fees, curb appeal, landscaping, signage, marketing, leasing, and staff hiring and retention. Recommendations should also include a timeline to help synchronize marketing and leasing with the construction schedule. • What rents can you achieve? What is possible for each unit type, given the size of the project? Rent recommendations can be used to prepare unit-by-unit rent grids for the project that help the developer or builder maximize rent revenues and manage leasing during the lease-up stage. Recommendations are also used to generate income/expense analyses that compare potential revenues with construction costs to help determine if the project is feasible.
CONDUCTING FEASIBILITY STUDIES Objectivity Matters
The biggest challenge for a developer or an investor in conducting a feasibility study comes if they try to do it themselves. Doing so can put the investor too close to the investigation, reducing objectivity, or limiting their experience. It is too easy for senior participants in a project to bring their own biases or wishful thinking to their analysis, while junior participants don’t have the knowledge or experience in the rental apartment sector to do a thorough and insightful job of preparing such studies. Objectivity is best achieved by industry experts from outside the project who don’t have a stake in the project and can take the objective, long view and provide the most thorough and independent advice possible.
Knowing Where to Build and What to Build Means Knowing the Market
When developing new apartment units, it’s important to know which cities and towns are undersupplied in terms of high quality rental apartments to be sure that they are ready for new apartment construction. Such cities and towns show strong demand for rental apartments and strong average rents. The best areas are defined not only in terms of total population size, but also in terms of local average household incomes. Knowing which cities and towns are most ripe for new rental apartments, and knowing what unit mix, sizes, amenities, and rents are appropriate, is knowledge that only comes through a thorough and objective feasibility study.
How to Conduct Feasibility Studies
A developer or an investor may commission a feasibility study from a consultant who will then use field surveyors to visit as many comparable rental properties (and some condominium properties) as possible in the local market. Such surveyors are trained to compare rental properties in all details, from curb appeal to leasing forms in order to thoroughly assess the project’s competition and to identify the best market position the new development can occupy. The analysis includes the best unit mix, unit sizes, amenities and appropriate rents. The consultant will also review official census and CMHC data to assess the suitability of the local rental market for new apartment construction, assessing a variety of new construction indicators. The findings of an objective feasibility study conducted by experts in the field will give developers and investors confidence that the rental market is ready to absorb their new construction, and that the rents achieved will provide a good return for their investment.
“A lender initially introduced us to ROCK,
recommending that they do a feasibility study for us. The report was very useful for us as developers, and helped us facilitate financing for our project.
Bruce McDonald, President, Macro Investment
FURTHER QUESTIONS In addition to the questions described in the previous article, a feasibility study should ask and answer the following questions: CONSTRUCTION What is the ideal number of units to build for leasing and management? What is the best unit mix? What are the best unit sizes? What amenities should you include? What finishes should you include? INCOME AND EXPENSE How to project rental revenue and rental revenue growth? What other ancillary income exists? What are the expected vacancies and delinquencies? What are the expected operating costs for a new rental building? FINANCING Have you lined up financing for the project? Where you can get such financing? What financing and mortgage insurance does Canadian Mortgage and Housing Corporation (CMHC) provide for new apartment projects. LEASING PLANS Do you have a plan for the lease-up of the new rental apartment property? How soon should leasing start? What are the best techniques for successfully leasing newly constructed apartments in the shortest time while achieving the highest rents? What is the best way to select and hire leasing staff? How should leasing staff be motivated to perform? MARKETING What should be included in a marketing plan? When should marketing start—before, during, or after construction? What type of marketing works best for newly constructed rental apartments? How can the internet and social media be used effectively? How can an effective web presence be created and maintained? FINAL DISPOSITION Is it better to build and sell the property for immediate profit, or build and hold the property for long-term revenue flow? Who is buying apartments today?
THE ROCK NEW APARTMENT CONSTRUCTION REPORT 7
A FIELD GUIDE TO SOURCING APARTMENT LAND
he first step to building a new apartment development is to or a municipal lawyer to contact the city and ask for a rezoning. He or acquire the land that it is to sit on. These days, this process she would then have to decide whether to sell off the excess density is both easier and more complicated. As cities throughout to a developer or try to develop the property themselves. They may Canada embark on intensifying their urban cores, land which was decide to do a joint venture with a developer in order to realize the full deemed surplus to development can now be a gold mine for the value of their new asset. If the property owner is not comfortable with owners occupying it. The Greater Toronto Area alone expects to doing a joint venture, then they may want to just sell off the land. Another approach a property owner might take is to get a add as many as 100,000 new residents per year, and have sought to increase residential densities along major transportation corridors developer involved earlier, doing a deal subject to rezoning, and then letting the developer handle the rezoning negotiations at his cost. This and nodes such as subway and commuter train stations. Land for new development can come in many forms other than often leads to better results, as a developer is usually experienced in the farmer’s field at the edge of town, or the abandoned industrial dealing with city planners and understanding what is feasible for a building at the edge of downtown. For subdivision builders, that particular plot of land. left-over plot unsuited to new housing could become the site of a high-rise apartment and a new Experience Key to Successful Negotiations IT’S FAIR TO SAY revenue stream. In cities, where bylaws permit, In any municipal development, there is a lot of THAT CONDOS owners of shopping malls and high-rise apartments negotiation between the city and various stakeholders SHOULD GO ON could subdivide their underused parking lots or (including the property owner, and owners of nearby THE “A” PIECE surrounding land to build additional units. We properties). Developers who have a lot of experience OF LAND, AND think it’s fair to say that condos should go on the in building within a city have an advantage in these APARTMENTS “A” piece of land, and apartments should be built negotiations, as they have a track record that municipal SHOULD BE BUILT on the slightly quirkier, good “B” or “C” sites. officials can look at in determining what is feasible. ON THE SLIGHTLY Municipal officials know that if a developer has come QUIRKIER SITES. to them with a strong track record, they are more likely to The Long, Bureaucratic Process build what they are planning to build. A single property Even though cities have started to encourage increasing densities along major corridors, there are several steps owner with no development experience asking for a severance is less landowners and developers must take in order to realize a plot’s likely to have a clear vision of what to build or how to build it and is potential. The first obstacle is that the landowner and the developer more likely to sell the severed land to a developer who may or may are not always one in the same. While property owners may not like what was negotiated between the property owner and the realize they have excess density they can profit from, they may be city, thus requiring further negotiations when the developer comes experienced only in managing their shopping centre or apartment back to the city to change what was agreed to. building and they may not have the necessary experience to navigate the complicated rezoning procedures, or the task of building on the Knowing What to Build Helps freed up land. A developer may have a strong concept of what to You Understand What to Buy build on a property, and the experience to make the project happen, The best way for a developer to get the best value for any land he but he or she still has to find the land upon which to build, and must or she buys is to have a strong idea of what he or she wants to build get in touch with the owner in order to buy it. on that land before he or she buys it. Only by carefully analyzing Finding the right property on which to build, or finding the the local market can he understand what type of development will developer to build on it, often requires a third party who knows generate the best investment. It may be that a less expensive plot can how to negotiate the complicated process of changing by-laws, be purchased elsewhere which will generate similar returns. conducing feasibility studies, and gathering the right builders. It This is particularly important, since new apartment developers is a rare landowner who has all the expertise he or she needs to are already in competition with new condominium developers, develop his or her excess density from the ground up. A successful who are already scouring Canadian cities looking for excess development often has multiple partners. density on which to develop. Land costs have already increased in the past few years, but a developer or a property owner who has a clear idea of what to build and where, who has pulled Building Partnerships There are many ways to realize the intrinsic value of excess land together the best data or who has been introduced to the best depending on who the owner is and their development expertise. A development partner, has the potential to reap considerable landowner could retain a consultant such as a planner or an architect rewards for land which would otherwise lie fallow.
APARTMENT LAND ACQUISITION If you are looking to buy land for apartment development or are looking to sell land, please contact ROCK Advisors Inc. We can help you! P: (905) 331-5700 • F: (905) 319-2528 • W: www.rockadvisors.ca 8 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
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VANCOUVER’S LONG TERM STABLE RENTAL MARKET IS ATTRACTING APARTMENT DEVELOPMENT
anada’s gateway to the Asia-Pacific region continues to see good prospects for job growth, especially in the commodities and high tech IN VANCOUVER, sector. Over the next decade, THERE IS EVERY British Columbia expects as many INDICATION as a million new job openings in THAT RISING the labour market. This demand HOUSING PRICES should encourage immigration to ARE INCREASING the province, particularly its largest DEMAND FOR RENTAL markets, Vancouver and Victoria. APARTMENTS, AND The apartment market in B.C. YOUNG URBAN remains strong. In Greater Vancouver, PROFESSIONALS ARE with an apartment universe of BEING DRAWN TO 105,634. Vacancies have been holding SMALLER SIZED UNITS. steady in the 1-2.5% range, while average rents have been increasing, jumping from $995 to $1,052 in the past two years. Vacancies are even lower in Vancouver’s core, where a heated housing market is pushing people towards rental living. Downtown Vancouver had a vacancy rate of 0.7% and average rents of $1,197. This continues a long trend, which had vacancies throughout Greater Vancouver dip as low as 0.5% in 2008. These vacancies are comparable to those found in the Greater Toronto Area, and the average rents are as much as $50 per month higher. New apartment construction in Vancouver has lagged in the past decade as the condominium market has heated up, but the extremely low vacancy rates seen throughout the city bodes well for new apartment construction in the near future. Already the city is giving developers bonus densities they build rental properties. There is every indication that rising housing prices are increasing demand for rental apartments, and young urban professionals are being drawn to smaller sized units (see the accompanying article on micro apartments) offering lower rents per unit, but bringing a higher return per square foot to developers. The presence of the University of British Columbia, Simon Fraser University and Capilano University provide a large population of students (over 90,000) that need to be served with student housing. Vancouver’s location in a river valley surrounded by mountains limits urban sprawl and increases land values, which makes high rise rentals more economical by design. However, Vancouver is supporting intensification with investments in public transit infrastructure. New rental communities have been built up around transportation nodes.
CITY British Columbia Vancouver (CMA) Victoria (CMA)
Victoria is the second largest centre for apartments in British Columbia, with 23,678 units in its universe. The city’s population currently stands at 82,000, and has been increasing at a steady rate for the past decade. The city’s status as the capital of British Columbia give it a strong core of public sector jobs. The city’s three universities with a combined enrolment of 27,000 provide a strong base for student housing. Although Victoria has seen little in the way of new apartment construction, vacancy rates are low (ranging from 2-3% over the past two years) and average rents have been increasing at a steady rate. Clearly, a market exists for new construction, now and into the future.
BURNS BLOCK ADDS MICRO-LOFT LIVING TO VANCOUVER MARKET
hen the City of Vancouver closed the Burns Block building in the downtown eastside in 2006, local Courtesy ITC Construction Group activists complained that the city was making the housing crisis worse. The 102-year-old building had been converted to a low-income hotel before it was shut down due to fire code violations. The property sat vacant for years afterward before it was acquired by Reliance Properties for conversion to brand-new micro apartments. The 270 sf apartments will rent for nearly $300 less than an average bachelor suite on Vancouver’s hot apartment market. The Burns Block is not far from the Woodwards development, which also took an old commercial/industrial building and converted it to loft living. As Vancouver’s apartment market continues to heat up, more developers will take former industrial properties and completely convert them into new residential space. The process is complicated, with the developer navigating local regulations and more challenging construction techniques, but the old industrial stock is plentiful, and the market is eager to snap up the new units.
For more information on new construction, please visit: www.rockadvisors.ca to watch videos on New Construction.
UNEMPLOYMENT Units Median After-‐Tax NEW % POP'N RATE RATE Per 100 Average UNITS GROWTH Household 2010 2011 Ppl Income UNIVERSE (Est) % NEW 2011 Pop'n SINCE 2006 EMPLOYED Vacancies Rents 166,723 4,700 2.82% 4,554,085 8.0% 2,284,900 7.1% 6.5% 3.66 $67,200 3.5% $960 105,634 4,000 3.79% 2,413,546 14.0% 1,219,600 7.5% 7.3% 4.38 $60,240 2.9% $1,052 23,678 400 1.69% 358,100 5.2% 182,000 5.9% 6.1% 6.61 $52,131 3.4% $894
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These are the images of recently constructed purposed built rental apartments
ROCK is not just a brokerage firm wanting to do a transaction; ROCK genuinely loves the rental apartment business. They love to find an opportunity to fix buildings and it is always fun to have a team that truly loves what they do.
Marco Ventola Senior Vice President, Business Development, Shiplake Management Company
FORT ST. JOHN
“ROCK is one of the
premier apartment investment advisors in Canada. We plan to use ROCK to find development partners and ultimately sell the properties we build.
Armand Charbonneau, Chief Investment Officer, Diamond Realty Investments, Inc.
THE ROCK NEW APARTMENT CONSTRUCTION REPORT 11
FUNDAMENTALS FOR NEW APARTMENT CONSTRUCTION WORK WELL IN CALGARY AND EDMONTON
or the past twenty years, increasing oil many cases, the resale market has increased CALGARY’S NEW APARTMENT prices have meant spectacular economic building prices beyond replacement value. times for this western Canadian province. CONSTRUCTION WILL EXPLODE, In addition to Calgary, Edmonton and Fort Alberta has led the Canada in growth; by 2007, its WITH AS MANY AS 2,500 UNITS McMurray, new construction has also taken STARTING CONSTRUCTION IN GDP per person was the highest in the country place in Lethbridge, Camrose, Grand Prairie, THE NEXT TWO YEARS. ($74,825), and the median annual family income Medicine Hat, Red Deer, Wetaskiwin and after taxes was $70,986 (compared to $60,270 for Sylvan Lake. Canada as a whole). This significant increase in jobs has resulted in a As oil prices are likely to stay high for the foreseeable future, the correspondingly large population growth. Alberta’s population has commodity should remain the mainstay of Alberta’s economy in the grown by almost a million since 2001, and now stands at 3,720,945. years to come, with considerable activity taking place in and around This influx of jobs and migration to Alberta’s heated economy, Fort McMurray as the oil sands are developed. Spin-off growth and the specialized nature of some of the jobs around the oil industry should also benefit Calgary and Edmonton, and vice versa. have fed a demand for housing, especially short-term, multi-family Alberta has also taken steps to diversify its economy, building housing. Throughout the province, at least 7,500 new units were its high tech sector. This will mean an increase in high-paying, added to the apartment universe in the past decade, with the bulk high-skilled jobs, and an influx of young professionals to Alberta’s of that growth coming in Greater Edmonton (3,300 units), Calgary largest urban areas. Calgary and Edmonton are responding to the (1,500 units) and Fort McMurray (1,181 units). Fort McMurray’s problem of urban sprawl by enacting official plans that call for the explosive population growth (a 68% increase since 2001) has meant intensification of their urban cores, with increased densities along that new construction now takes up 40% of the local marketplace. major transportation corridors. There was a brief interruption in Alberta’s economic good news, as More importantly, as Alberta’s population continues to grow, the 2008 recession reduced demand for oil, but oil prices are increasing so to will the need for new educational institutions, and there will again, and the outlook for the commodity is good. The apartment be a corresponding need for new student housing to serve those rental market has also shifted in relation to the rise and the fall of institutions. Alberta already has six universities serving 136,361 the condominium market. The condominium market was stronger students in Edmonton, Calgary, Lethbridge, Camrose and Athabasca, in Calgary ten years ago, resulting in a boom of construction that and the University of Alberta has plans to expand its new campus in significantly increased supply. Now that the condominium market the south side of Edmonton. is softer, more developers have been drawn into rental. Edmonton’s Alberta’s diversifying economy and its strong commodities sector building boom is already underway, and we predict that Calgary’s bode well for new apartment construction for the foreseeable future. new apartment construction will explode, with as many as 2,500 CONSTRUCTION INFLATION CAN RAISE units starting construction in the next two years. COSTS OF NEW DEVELOPMENT Vacancy rates throughout the province are dipping down, with Calgary dropping from 5.3% in 2009 to 1.5% in 2013. Edmonton’s n any heated construction market, construction inflation is a concern vacancy rates have also dropped from 4.5% in 2009 to 1.7% in 2013. to developers as it can raise the costs of new developments beyond Fort McMurray’s vacancy rates have dropped from 9.4% in 2011 to what is economically feasible to build. In Alberta, the development of the oil sands and related growth, not to mention the rush to meet 2.8% in 2013. In terms of rents, Fort McMurray’s average rents are the increased housing demand resulting from job growth and higher than Toronto or Vancouver -- $2,093 per month. Edmonton migration, can absorb construction labour and building supplies, and Calgary’s rents are also on the increase, with Edmonton’s rents raising prices in the apartment construction industry. rising over 28% over the past five years, and Calgary rising by 15% In Calgary, concrete costs significantly more per metre compared over the same period. Rents in the two cities stand at $961 and $1,040 to other centres like London, Ontario. In Alberta, this has given a per month respectively. considerable advantage to low-rise wood-built developments over These rising rents, combined with a more landlord friendly high-rise concrete ones. Though the apartment markets in Calgary tenancy act and development charges that are lower than those seen and Edmonton are so heated that older buildings are selling for in Ontario and British Columbia, have made new construction highly more than the replacement cost of wood-built buildings, they haven’t economical, especially in wood-frame low-rise construction where, in reached the replacement cost of concrete buildings, yet.
CITY UNIVERSE Alberta 111,328 Calgary (City) 33,775 Edmonton (City) 53,065 Fort McMurray (Wood Buffalo) 2,808
NEW % POP'N Median After-‐Tax UNEMPLOYMENT UNITS GROWTH Units Per Household Average (Est) % NEW 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies Rents 7,538 6.77% 3,720,945 13.1% 2,131,000 5.5% 4.9% 2.99 $77,800 1.5% $1,015 1,500 4.44% 1,090,936 10.4% 755,300 5.9% 4.9% 3.42 $67,950 1.3% $1,040 3,268 6.16% 764,740 4.7% 478,247 5.4% 4.6% 7.27 $61,414 1.7% $961 1,181 42.06% 76,797 25.1% 62,416 4.8% 4.3% 4.58 $105,418 2.8% $2,093
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These are the images of recently constructed purposed built rental apartments
THE ROCK NEW APARTMENT CONSTRUCTION REPORT 13
These are the images of recently constructed purposed built rental apartments
MEDICINE HAT SYLVAN LAKE
CONDOS VS. RENTALS: A CANADIAN BATTLE-ROYALE
housing market is less heated, but where a latent demand for housing has built up over time, developers are rushing into the rental market. Halifax and Winnipeg are the largest centres in Canada where more than half of all construction is rent-related. Cities with large portions of their population requiring shortterm housing also provide favourable rental markets, as seen in Kitchener-Waterloo, where student housing has been at the forefront of the construction boom. While condominiums lead the construction industry in Canadaâ€™s major markets, it is important to note that they are not suppressing the development of apartments. Far from it. Many condominium units are purchased by investors who then rent their suites out. A significant portion of the new rental unit market is being met by newly built condominium suites.
cross Canada, a very different picture emerges, city to city, on whether the local construction universe favours condominiums or purpose-built apartment construction. The major centres such as Toronto, Ottawa and Vancouver have seen 10% or less of their construction come in the form of apartments. By comparison, centres such as London, Kingston and Saint John have seen more than 85% rental apartment construction. The condominium market appears to be favouring cities where interest in the local real-estate market has pushed up land prices, and where housing prices remain exceptionally high. Condominium developments offer developers the advantage of getting back much of their initial equity quickly, often through pre-sales before the condominium is built. In areas where the
Total Apartment Completions: Major Canadian Centres (source: CMHC Housing Data, 2007 to Nov 2011)
70% 60% 50% 40% 30% 20% 10%
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ACTIVE WINNIPEG MARKET DOMINATED BY LOCAL PLAYERS
hile Manitoba and Saskatchewan are sometimes overlooked as attention is drawn to Alberta’s hot petro-economy, both provinces have seen strong growth this past decade. Coupled with northern Canada, this region offers considerable opportunities for new construction in the apartment market. In Saskatchewan, the opportunities are driven COUPLED WITH NORTHERN by a rising commodities CANADA, SASKATCHEWAN market, especially in oil and AND MANITOBA OFFER potash. Saskatchewan’s CONSIDERABLE OPPORTUNITIES population is rising and it FOR NEW CONSTRUCTION IN is no longer considered a THE APARTMENT MARKET. “have not” province. New construction has been slow to start, with only 441 units added to Saskatoon, and no new construction in Regina, but with the median after-tax household income hovering in the $55,000-$58,000 range, the opportunities for new construction are strong and growing stronger. In 2013, vacancy rates were 2.6% in Saskatoon and 1.0% in Regina, suggesting that there is room for new construction and that it is overdue in Regina. In Manitoba, Winnipeg’s market is very strong. Its population has increased by over 21,000 in the past two years and unemployment has dropped to 5.6%. In 2010, Winnipeg had the tightest apartment
CITY UNIVERSE Saskatchewan/Manitoba/North 93,372 Saskatoon (City) 12,763 Regina (City) 10,871 Winnipeg (CMA) 52,569 Yellowknife 1,747
market in Canada with a vacancy rate of just 0.8% within its apartment universe of 52,319. Vacancy rates are still under 2%, and average rents have increased in all apartment categories. In the north, activity is picking up around such centres as Yellowknife and Iqaluit. Although the markets are small (only 1,747 units in Yellowknife’s universe), populations are already increasing, thanks to the improving commodities market, and the increasing likelihood of resource development in the Canadian Arctic. New housing projects are already underway, with 63 units in Yellowknife, and 79 units in Iqaluit. A further 118 unit rental development has been proposed for Iqaluit’s central business district. Manitoba also benefits from the increased economic activity in the Canadian arctic, as they have a well-developed port at Churchill whose traffic has already seen an increase in recent years. Economic activity shipped through Churchill feeds back to Winnipeg. These same economic realities carry over into northern Ontario, which has not yet taken part in the apartment boom seen in southern Ontario, but where vacancies are tightening and average rents are rising thanks to growing strength in the resource sector. Manitoba, Saskatchewan and northern Canada are at the beginnings of a new construction boom. The first investors have already entered the market, expecting strong returns over the long term. The markets are tight, but development hasn’t reached the heated pace of neighbouring Alberta or southern Ontario.
NEW % POP'N Median After-‐Tax UNEMPLOYMENT Units Per Average UNITS GROWTH Household (Est) % NEW 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies Rents 4,200 4.50% 2,421,431 8.0% 1,255,900 5.5% 5.5% 4.17 $66,603 2.3% $849 441 3.46% 234,200 15.7% 173,800 5.1% 4.9% 6.31 $55,885 2.6% $918 25 0.23% 199,250 11.2% 169,000 4.2% 3.3% 6.06 $58,647 1.0% $897 2,000 3.80% 695,900 0.2% 435,900 5.5% 5.3% 7.57 $54,567 1.7% $783 183 10.48% 20,000 7.0% 12,195 7.0% 7.9% 9.34 $99,336 3.9% $1,568
These are the images of recently constructed purposed built rental apartments THE ROCK NEW APARTMENT CONSTRUCTION REPORT 15
GREATER TORONTO AREA
CHANGING TRENDS SHIFT CONDO DEVELOPERS TO NEW APARTMENT CONSTRUCTION IN THE GTA
ith a population over five million, the Greater Toronto Area is the largest urban centre in Canada and one of the largest in North America. It continues to experience strong economic growth and an influx of immigration. Two distinct apartment markets exist within the GTA. The mature centres such as the cities of Toronto, Mississauga, Brampton, Hamilton and Oshawa have large apartment universes, with most stock built prior to the imposition of rent control in the 1970s. Outside of these centres, in the newer suburbs which comprise half of the GTA’s population, very little apartment construction has taken place. In the mature centres, which have larger and older apartment universes, all indications are that the marketplace is starved for new stock. The condominium boom taking place throughout the GTA shows that the area’s demographics strongly favour high-rise housing over single-family home ownership. The heated housing market has made rental accommodations more attractive, and created a shadow-rental market within condominium developments. In these established urban centres, new stock comes in at the top of the market. The population of the GTA is expected to increase by over two million over the next twenty years and, in response, every municipality within the GTA has enacted official plans that
BRAMPTON AND OAKVILLE: A TALE OF TWO CITIES
nlike every other centre in the Greater Toronto Area, the City of Brampton has seen continual new construction through the rentcontrol period, and retains the largest stock of apartments built in the eighties and the nineties in Ontario. By contrast, Oakville has seen no new construction over the same period. This difference has had a tremendous effect on the demographics of both cities, but both approaches bode well for new construction in both centres. The availability of new apartment stock has helped Brampton’s market to mature, giving it a variety of apartment styles to serve its growing and
CITY City of Toronto Greater Toronto Area Oshawa Markham Barrie Mississauga Brampton Oakville Hamilton Niagara Falls Burlington
call for significant intensification. In the newer suburbs, this has produced a heated apartment marketplace where any new construction is easily absorbed by latent demand. Vacancies in the GTA are among the lowest in the nation, and rents are rising rapidly. Traditional single-family suburbs like Markham, Vaughan, Burlington, Oakville and Milton are among the best places to invest in the apartment industry in Canada, since with so little rental apartment stock available, the majority of future investment has to come in the form of new construction. Student housing is another sub-sector which has seen new construction in the GTA. McMaster University in Hamilton, the University of Ontario Institute of Technology in Oshawa, as well as the Universities of Toronto, York and Ryerson and other campuses across the GTA are seeing growth in student enrolments and a corresponding rise in demand for high-end student housing. New off-campus student residences are being built, and are being sold for some of the highest per unit rates in the country. The Greater Toronto Area has one of the largest apartment markets in Canada and the largest opportunity for new construction. Competition is already heating up for the best lands for new development, but the market is large enough and diverse enough that new construction is not only a good investment, but long overdue.
UNIVERSE 256,547 132,400 8,228 1,598 3,300 26,671 9,912 4,419 31,517 3,094 8,306
increasingly upwardly mobile population. As its population continues to grow, so too will demand, and new construction will be added to the market in the years to come. Oakville has some of the most favourable demographics in Canada for high-quality rental housing, but so far no developers have stepped forward to meet this demand. These demographics, future growth, and the decision of Oakville city council to pursue a policy of urban intensification should ensure that new apartment construction finally comes to Oakville, if the right developers seize this opportunity.
NEW % POP'N Median After-‐Tax UNEMPLOYMENT UNITS GROWTH Household 2011 Units Per Average (Est) % NEW Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies Rents 6,200 2.42% 2,720,000 8.7% 1,403,260 9.9% 8.4% 9.43 $60,678 1.7% $1,103 3,600 2.72% 4,529,800 13.9% 3,210,190 9.1% 8.5% 2.92 $64,097 1.8% $1,095 153 1.86% 361,240 9.3% 91,150 6.0% 5.5% 2.28 $61,291 2.1% $894 66 4.13% 300,000 14.7% 418,990 9.5% 8.5% 0.53 $73,366 1.7% $1,080 94 2.85% 190,900 7.8% 127,738 6.4% 6.3% 1.73 $58,132 2.0% $993 30 0.11% 734,000 9.8% 178,200 8.5% 7.6% 3.63 $66,507 1.8% $1,099 1,228 12.39% 504,900 16.4% 182,000 10.7% 8.1% 1.96 $64,566 2.0% $1,081 68 1.54% 181,100 9.4% 104,300 10.1% 8.9% 2.44 $76,733 0.9% $1,204 750 2.38% 533,751 1.0% 211,500 8.7% 6.7% 5.90 $55,923 4.2% $747 70 2.26% 85,000 3.4% 44,405 9.1% 6.8% 3.64 $52,475 3.8% $804 950 11.44% 170,000 3.4% 113,753 6.4% 6.3% 4.89 $66,617 1.3% $1,087
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GREATER TORONTO AREA
These are the images of recently constructed purposed built rental apartments THE ROCK NEW APARTMENT CONSTRUCTION REPORT 17
SOUTHWESTERN ONTARIO LEADS THE WAY WITH MOST NEW APARTMENT CONSTRUCTION IN CANADA
conomically, southwestern Ontario benefits from strong transportation connections to both the GTA and the United States market. Growth in the high tech sector and in manufacturing is contributing to rapid population growth and a strong economy. Over and above this, centres in southwestern Ontario have been leading the way in terms of new apartment construction, both in terms of numbers, and in terms of return on investment. London in particular has seen rapid and sustained rental apartment growth, with over forty new buildings added to the local apartment universe over the past decade. Whereas other regions highlight the promise and the need for new apartment construction, centres like London show the benefits of making such investments. London’s success can be attributed to a number of developers who are vertically integrated and have built continuously for the past twenty years. These developers are land owners, experienced builders, and strong property managers who have taken the longterm view in developing their holdings. As a result London, with a population of under 500,000, has seen more new apartment construction in the past decade than the Greater Toronto Area, with a population ten times higher. London is not the only success story of southwestern Ontario. Significant investments by major universities in the region has produced a significant influx of new student-oriented housing, which have sold for some of the highest prices per square foot in Canada (see our article on student housing). Waterloo Region, for example, is a particular bright spot, since two major universities and a polytechnical institute have created one of the hottest markets for high end student housing in Canada.
WHEREAS OTHER REGIONS HIGHLIGHT THE PROMISE AND THE NEED FOR NEW APARTMENT CONSTRUCTION, CENTRES LIKE LONDON SHOW THE BENEFITS OF MAKING SUCH INVESTMENTS.
Similarly, Brantford has used LONDON, WITH investments by Wilfred Laurier university A POPULATION OF and associated student housing to reverse UNDER 500,000, HAS the deterioration of its downtown core. SEEN MORE NEW Significant student housing has also been CONSTRUCTION IN built in London. Other centres which THE PAST DECADE have seen new construction include THAN THE GREATER Woodstock (see below) and Sarnia, whose TORONTO AREA. new construction has come in at the high end of its marketplace. In terms of future growth, Waterloo Region is still building new construction and planning further developments. The city of Guelph benefits from the presence of a major university and good connections to the GTA, and should see more developments in the future. Windsor also has a university and is seeing millions of dollars in new investment with a new border crossing, so its market is turning around. Southwestern Ontario centres like London lead the nation in building and sustaining new apartment stock. Their example is one for other centres to emulate, particularly those with decades of repressed demand.
WOODSTOCK: SMALL CITY, BIG INVESTMENTS The city of Woodstock is small by Ontario standards, with a population of 35,480 and an apartment universe of 2,391. However, this city has seen significant investment in new apartment construction in the past five years, adding as much as a third to its total apartment universe: since 2000 seven new apartment buildings have been constructed, adding approximately 735 rental units to Woodstock’s universe. Woodstock’s apartment market has seen vacancy rates rise due to the 2008 recession, but the downturn in the market wasn’t reflected in average rents, which increased from $679 in 2009 to $881 in 2013. This reflects the impact of the new rental stock which has been priced at the upper end of the rental market.
“ROCK is the first name we think of for consulting, when we consider new
apartment construction. They are a trusted and valued company for us. ROCK provides critical information that is carefully researched and thoroughly studied, so we can be sure of our investments.
Anne Marchildon, Vice President of Sales & Marketing, Andrin Homes, The Kerbel Group CITY Southwestern Ontario Waterloo (City) Kitchener Cambridge London (City) Sarnia Woodstock Brantford
UNIVERSE 117,674 5,135 17,990 4,763 38,912 5,426 2,391 4,657
NEW % POP'N Median After-‐Tax UNEMPLOYMENT UNITS GROWTH Units Per Household Average (Est) % NEW 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies Rents 13,165 11.19% 2,618,200 2.7% 4.49 3.8% $781 2,029 39.51% 121,700 24.9% 71,980 7.7% 6.7% 4.22 $66,893 3.4% $941 2,200 12.23% 223,400 9.2% 132,131 7.7% 6.7% 8.05 $57,279 2.5% $840 567 11.90% 130,000 8.0% 76,889 7.7% 6.7% 3.66 $58,180 2.4% $847 6,760 17.37% 380,000 7.8% 243,000 8.5% 9.0% 10.24 $57,269 4.0% $852 590 10.87% 91,600 3.2% 59,990 10.3% 10.3% 5.92 $57,554 7.1% $741 964 40.32% 39,200 10.5% 17,880 8.5% 8.8% 6.10 $55,561 1.8% $881 32 0.69% 139,100 11.6% 70,000 8.8% 8.1% 3.35 $54,852 3.5% $800
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CITIES CHOOSING TO GROW UP, RATHER THAN OUT
ajor cities like Toronto have many examples where excess land has been subdivided from established properties and developed for increased density. This phenomenon has been fostered by the economic and demographic changes that have favoured new apartment construction, and by favourable bylaws enacted by city councils to increase densities along major transportation corridors. One such infill development is the Uptown Towers on Sheppard Avenue in Toronto are new apartments built on land that largely lay unused, or as low-density residential development, until the construction of the Sheppard subway. Developers and property owners benefit from this arrangement, getting a higher return for their developed land. The city benefits through a more efficient use of infrastructure and an increase in the municipal tax base without increased urban sprawl. Suburban shopping centres and apartment buildings built
in the 1960s have become sites of opportunity for developers looking to intensify. Such developments are usually surrounded by vast parking areas or greenspace that usually lie unused. For cities, adding new residential units in these spaces increases the effectiveness of local transit, and increased local transit helps make these new properties even more desirable. Cities like Toronto, Vancouver, Montreal and Ottawa are working to support these new developments with new transit infrastructure, including new subway lines and light rail transit. The City of Toronto expects that intensification will allow the City of Toronto to reach a population of 3,000,000 by 2020, without substantial sprawl. This means that within the next eight years, at least 300,000 people will migrate to Toronto, pushing vacancy rates down and average rents up. The demand for new construction will intensify, and only intensification will allow produce enough supply to meet it.
THE ROCK NEW APARTMENT CONSTRUCTION REPORT 21
THE APARTMENT DEV
WE OFFER END TO END SERVICES TO INVESTO
INITIAL INVESTMENT CONSULTATION
CONS Feasibility Study Phase-I Qualitative & Quantitative Assessment Land Acquisition
Unit Mix Rent Levels Amenities
Best Area to Build Apartments
Supply & Demand Analysis
Preliminary Construction Budgeting
Equity Partner Mezz Financing JV Partner
Feasibility Study Phase-II Pre-design Consultation
• Should you build? • Writing a business plan for investment
• What to build?
• Possible deal structures?
• What are the rents?
• Construction and cashflow
• Which cities to invest in?
• Financing possibilities?
• Depth of market?
• Design spec
• What neighborhoods to invest in?
• Financing risks?
• Amenities to consider?
• Interest rate risk?
• Consultation architects an designers.
• Development profitability?
n budget ow
ns with nd interior
Forward Sale OR Property Management Pre-leasing
Sale of a Stabilized Asset OR Long Term Hold
• Minimizing leasing risk • Establishing cutting edge leasing services • Training leasing staff
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OTTAWA AND EASTERN ONTARIO
STABLE OTTAWA REMAINS ATTRACTIVE TO INVESTORS
astern Ontario, stretching from the Quebec border in the east to Port Hope in the west and Algonquin Park to the north may be one of the oldest settled areas of Ontario, but it is very rural as well. Its centres are small, as are the corresponding apartment markets. There are, however, two significant exceptions: Ottawa and Kingston. Ottawa, Canada’s capital, is the second largest city in Ontario, with over a million people within its urban region. The city combines the stability of thousands of public sector jobs with the growth potential of a large high tech sector. Ottawa’s status as Canada’s capital adds unique wrinkles to its apartment market. The foreign embassies, the presence of international diplomats and other government officials have produced a large market for short term leases and furnished apartments, however the large and growing population has produced a strong market in all sectors. Carleton University and the University of Ottawa are increasing demand for student housing. Ottawa’s continuing strength allowed it to build 11 new buildings, adding over 1,600 units to the city’s universe. These were easily absorbed into the large marketplace (60,160 units), as vacancy rates have remained under 2.5% since 2006, and rents have been increasing by 2.35% or higher since 2007. CITY Eastern Ontario Ottawa CMA (Ontario only) Kingston
NEW UNITS UNIVERSE (Est) % NEW 93,233 3,433 3.68% 60,160 2,010 3.34% 12,654 1,423 11.25%
Ottawa is expected to grow in the near future. Ottawa city council is pursuing a policy of urban intensification, and a revived LRT network. These and other indicators suggest that the market is a good one for new construction. The surprise in Eastern Ontario is Kingston. While not a large urban centre, it has a high concentration of apartments (over 12,000 in its universe), and the market does not appear to be saturated. Kingston boasted the lowest vacancy rates in Ontario in 2008, and average rents have been rising steadily since 2005. The presence of Queen’s University and the Royal Military College has created a strong market for student housing, and new development is under construction. A military base and a major corrections centre is driving jobs in the local marketplace. Most of Eastern Ontario is too far from the Greater Toronto Area to be influenced by the large market there. Only Peterborough is a significant market with a rising number of commuters and student housing around Trent University. Belleville is the next largest centre with a stable apartment universe but an aging local population which may offer future opportunities for the seniors’ housing market. Eastern Ontario offers the stability of two large and steadily growing markets, a strong demand for student housing, and a diversified economy built to withstand cyclical shocks.
% POP'N Median After-‐Tax UNEMPLOYMENT GROWTH Units Per Household 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies 1,741,500 4.4% 8.6% 8.8% 5.35 1.8% 894,600 5.6% 556,800 6.6% 6.1% 6.72 $70,528 2.5% 162,500 6.7% 85,500 6.7% 6.4% 7.79 $57,287 1.7%
Average Rents $920 $996 $947
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IN QUEBEC, CANADA’S LARGEST RENTAL MARKET OFFERS OPPORTUNITIES FOR NEW CONSTRUCTION
he Province of Quebec has undergone a renaissance over the past fifteen years. Montreal has revitalized derelict areas around its downtown core. Its population has increased, and the city has become a fashionable place to live and work. More importantly, Quebec is a province of renters. Montreal has the largest apartment universe in Canada by far. Its 477,517 units are close to topping the apartment universe of the Greater Toronto Area and Greater Vancouver combined. Its unit density of 13.13 units per 100 people is higher than the City of Toronto and among the highest in the country. While Quebec City is a comparatively smaller market, it has an apartment density of 11.18 units per 100 people, and there are 79,982 units in its apartment universe, more than the City of Ottawa. Densities are similarly high in smaller centres, including Sherbrooke (17.6 units per 100 people) and Trois-Rivières (12.2 units per 100 people). The size of the Montreal and Quebec City markets has helped keep average rents low: under $728 per month for both centres. However, vacancies in both cities are also low: 3.0% in Montreal and 2.2% in Quebec City. Both vacancy rates have remained steady over the past five years. The size of both markets allows for a considerable range in the types of apartments renters will rent, and the amounts they are CITY Quebec Montreal (CMA) Quebec City (CMA)
NEW UNITS UNIVERSE (est) % NEW 728,115 3,025 0.42% 477,517 2,446 0.51% 79,982 529 0.66%
willing to rent at. New construction has taken place in both markets, with nearly 3,000 units added to the universe in the past decade. While this is a drop in the bucket compared to the size of the surrounding universe, this new construction has come in at the high end and commands some of the best rents in Canada. The low vacancy rates in both markets show that the new construction has been easily absorbed. The development of 515 Rue Ste. Catherine shows that high-end student housing, especially close to McGill University and its 6,800 international students, is a profitable niche. A third strong market exists in Gatineau, across the Ottawa River from the City of Ottawa. There, public sector jobs and access to Ottawa’s developing high tech industry has driven up population and employment, as well a creating a demand for short-term lease apartments and furnished units. Vacancies are trending down based on an apartment universe of 20,200. The province of Quebec may not have the repressed marketplace of the Greater Toronto Area or Vancouver, where demand easily absorbs new supply, but a marketplace clearly exists for new construction that caters to the high-end, luxury, student and furnished markets.
% POP'N Median After-‐Tax UNEMPLOYMENT Units Per GROWTH Household 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies 7,979,663 5.7% 4,276,600 7.9% 8.7% 9.12 $57,300 3.1% 3,814,738 4.9% 1,030,600 8.2% 8.8% 13.13 $51,289 3.0% 759,896 6.2% 436,300 4.4% 4.3% 11.18 $51,516 2.2%
GATINEAU These are the images of recently constructed purposed built rental apartments 26 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
Average Rents $674 $704 $728
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HALIFAX LEADS ATLANTIC CANADA INTO NEW APARTMENT CONSTRUCTION BOOM
wenty years ago, Atlantic Canada was seen as an economically troubled part of Canada. Its resource economies were weak, and it lagged behind the rest of the country in job creation and growth. Since then, the region has risen to become one of the nation’s economic leaders. The manufacturing jobs the region has lost have been replaced by jobs able to withstand the economic pressures that caused the downturn in the first place. The development of Hibernia oil, the growth of other commodity sectors, and an influx of high tech jobs have reduced unemployment WHILE THE REST OF and created opportunities for growth ATLANTIC CANADA IS in many centres, and the apartment SHOWING STRENGTH market has responded in kind. The IN NEW APARTMENT population of major centres such as CONSTRUCTION, THE Moncton, St. John and Fredericton MARKETPLACE IN AND in New Brunswick, Charlottetown in AROUND THE CITY OF Prince Edward Island and St. John’s HALIFAX HAS TOPPED Newfoundland have all increased THESE GAINS. in the past decade, and at least 1,379 units have been added to the universe, or will be added in the near future. Vacancy rates range from a high of 8.7% in Saint John, New Brunswick to a low of 2.8% in St. John’s, Newfoundland. Everywhere, average rents are rising. While the rest of Atlantic Canada is showing strength in new apartment construction, the marketplace in and around the city of Halifax has topped these gains. As the region’s largest centre, Halifax’s economy is leading Atlantic Canada in growth. Halifax is a provincial capital, a centre for military operations on Canada’s east coast as well as the financial centre for Atlantic Canada with expanding investment banking and ICT sectors. This combined with being a major health care centre has given Halifax a base of jobs that has allowed it to avoid the worst of the 2008 recession. Unemployment is down to 6.3%, and the local population is rising (up to 408,000 in 2011). Halifax’s vacancy rates have remained steady at around 3.0%, and average rents are increasing. Of all the major centres in Atlantic Canada, Halifax had the highest median after-tax household income, at $55,765. The growing and diversifying economy has produced a growing demand for high-end, condominium-style apartments. This trend has been boosted by demographic changes that have produced a large number of empty-nesters looking to downsize from their single family homes.
CITY Atlantic Canada Halifax (CMA) Moncton (CMA) Saint John (CMA) Fredericton (CA) Charlottetown (CA) St. John's (CMA)
UNIVERSE 89,263 41,349 10,190 8,558 7,094 4,527 3,457
Halifax’s apartment market has responded with considerable growth. In many ways, it is a mirror to Vancouver’s real-estate market. Whereas the bulk of Vancouver’s high rise construction has been in condominium stock, Canada Mortgage and Housing Corporation estimates that as many as 90% of new CANADA MORTGAGE AND construction starts in Halifax HOUSING CORPORATION over the past five years have ESTIMATES THAT AS MANY AS been for rental accommodation 90% OF NEW CONSTRUCTION over condominium housing. STARTS IN HALIFAX OVER THE The heated market has raised PAST FIVE YEARS HAVE BEEN FOR land prices, giving developers RENTAL ACCOMMODATION a strong incentive to build OVER CONDOMINIUM concrete buildings, maximizing HOUSING. height and density. Halifax’s 41,349 units represent a larger apartment universe than the rest of Atlantic Canada combined. At least 6,000 units have been added to Halifax’s apartment market between 2000 and 2010, and the pace of new construction is picking up. CMHC logged 599 apartment unit starts in 2009, 1,043 units in 2010, 1,625 units in 2011, and over 1,450 units in 2012, the highest level of activity seen in Halifax in twenty years. This activity has not been limited just to Halifax city proper, but has benefitted Dartmouth across the harbour. While Halifax’s strong economic growth has largely been the result of a diversifying economy, one of the city’s core businesses has also received a considerable boost. Halifax beat out competitors from British Columbia and Quebec for a $25 billion shipbuilding contract from the federal government. The Irvine shipbuilding contract is expected to support 8,500 jobs per year, and should bolster the local economy, as well as the economy of all of Atlantic Canada, for years to come. Although Halifax is home to six well-established universities and colleges with a total student population of over 30,000, student housing has not been part of the construction boom in Halifax in the past decade (and most students could not afford the rents being charged by most of the new apartments that have been built). Student housing has had greater influence in some of the new construction taking place in Charlottetown, Fredericton, Moncton, Saint John and St. John’s. Atlantic Canada has much to offer developers in new construction. This is especially the case in Halifax where the economy is strong and diverse, and looks to remain so for the foreseeable future.
NEW % POP'N Median After-‐Tax UNEMPLOYMENT UNITS GROWTH Units Per Household (Est) % NEW 2011 Pop'n SINCE 2006 EMPLOYED RATE 2010 RATE 2011 100 Ppl Income Vacancies 8,731 9.78% 2,357,361 3.2% 3.79 $54,851 3.3% 6,725 16.26% 408,000 9.4% 238,400 6.7% 5.4% 11.09 $55,765 3.0% 609 5.98% 137,346 8.6% 79,700 6.4% 5.7% 8.06 $49,375 6.7% 186 2.17% 128,000 4.6% 67,200 6.1% 7.6% 6.99 $48,810 9.7% 540 7.61% 105,688 23.3% 66,700 6.9% 8.0% 8.28 $52,454 5.2% 592 13.08% 61,210 4.4% 33,702 10.2% 11.5% 7.72 $52,996 8.7% 79 2.29% 194,938 7.6% 114,000 6.8% 7.8% 1.91 $51,962 2.8%
28 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
Average Rents $759 $893 $709 $660 $762 $785 $758
These are the images of recently constructed purposed built rental apartments THE ROCK NEW APARTMENT CONSTRUCTION REPORT 29
ST. JOHN, NB
ST. JOHN’S, NL These are the images of recently constructed purposed built rental apartments
WHAT’S THE CAP RATE FOR A NEW APARTMENT BUILDING?
t depends. Is the building sold full, with two years of stable operating history? Has the building just been leased up? Is the building built and vacant? Or is it just a piece of land with a vision?
When the operating ratio falls below 50%, the net income grows exponentially if both revenue and expenses inflate at the same rate. This is especially important and accretive in newly constructed buildings where expense ratios are typically below 35%. Consider an older building where the half of its monthly revenue WHAT DETERMINES THE CAP RATE? is eaten up by operating expenses. Year to year, operating expenses 1. Occupancy level and length of stabilization. 2. Location. Vancouver has some of the lowest cap rates in the are likely to increase by, say, 5%, while the forces that limit rising rents will likely constrain NOI growth to just 3%. If operating expenses and country and Atlantic Canada has some of the highest. NOI start at an equal footing, and operating expenses grow at 5% 3. Construction type. Assuming equal net operating income (NOI), and NOI grows at just 3%, very quickly, the dollar value of operating a concrete building should sell for a lower cap rate than a frame expense growth exceeds the growth in the building’s NOI. building because its lasts longer. Now consider a newer building where operating expenses take 4. Rent levels. New construction should be leased at or very near up just 30% of monthly revenue. If operating expenses grow by market rental rates. Meaning, the new buyer can’t raise the rents 5% and NOI growth is constrained to 3%, the dollar value of NOI more than normal rental inflation. growth in the first few years increases, since 5% of 30% is lower than 5. Lower Capital Expenditures. Since 3% of 70%. The chart below the building is brand new, there illustrates this. WHEN THE OPERATING RATIO FALLS BELOW 50%, should be virtually no capital All these factors above need THE NET INCOME GROWS EXPONENTIALLY IF BOTH expenditures for ten years and to be taken into consideration REVENUE AND EXPENSES INFLATE AT THE SAME maintenance and repair should when determining the cap rate RATE. THIS IS IMPORTANT AND ACCRETIVE IN NEWLY be lower when compared to an for a new building. In summary, CONSTRUCTED BUILDINGS WHERE EXPENSE RATIOS older building. This positively a fully stabilized concrete ARE TYPICALLY BELOW 35%. affects the NOI. building in Vancouver should have the lowest cap rate in the BETTER NOI GROWTH country, and a vacant frame building in rural Atlantic Canada should A critical factor determining a new apartment building’s cap rate is its have the highest cap rate. better NOI growth compared to the growth of its operating expenses. New Building Old Building Monthly Revenue NOI Operating Expenses Monthly Revenue NOI Operating Expenses Inflation is a fact of life in North America, and over time a landlord Year 0 $200,000.00 $140,000.00 $60,000.00 $200,000.00 $100,000.00 $100,000.00 can expect to raise rents (and thus his or her NOI) by a certain Year 1 $207,200.00 $144,200.00 $63,000.00 $208,000.00 $103,000.00 $105,000.00 Year 2 $214,676.00 $148,526.00 $66,150.00 $216,340.00 $106,090.00 $110,250.00 percentage each year, depending on market factors, government Year 3 $222,439.28 $152,981.78 $69,457.50 $225,035.20 $109,272.70 $115,762.50 Year 4 $230,501.61 $157,571.23 $72,930.38 $234,101.51 $112,550.88 $121,550.63 regulation, and so on. As buildings age, one can expect operating Year 5 $238,875.26 $162,298.37 $76,576.89 $243,555.56 $115,927.41 $127,628.16 expenses to grow as well. Newer buildings are assumed to have Year 6 $247,573.06 $167,167.32 $80,405.74 $253,414.79 $119,405.23 $134,009.56 Year 7 $256,608.37 $172,182.34 $84,426.03 $263,697.43 $122,987.39 $140,710.04 better NOI growth because the older a building is, the more likely its Year 8 $265,995.14 $177,347.81 $88,647.33 $274,422.55 $126,677.01 $147,745.54 operating expense growth will exceed its NOI growth. Year 9 $275,747.94 $182,668.25 $93,079.69 $285,610.14 $130,477.32 $155,132.82 Year 10
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U R B A N
L I F E S T Y L E
BECOMING A MERCHANT BUILDER
HOW TO BECOME A MERCHANT APARTMENT BUILDER
he difference between a merchant builder and a conventional builder is that a conventional builder finances, builds and owns a development. This means that the conventional builder receives all of the profit of a venture, but accepts all of the risk to build it. For a development as large or as complicated as an apartment building, it may not be feasible for any one party to build without assistance. Apartment buildings require a substantial cash down payment to build them, which can range from 20-30% of the total cost of the project. A developer may not have sufficient equity to invest, or be unwilling to take so much risk at the beginning of the project. Alternately, an investor may have sufficient money, but not the development expertise.
You’ve got the money, I’ve got the time…
An answer to this problem is for a developer to find a capital partner who wants to share in the development profit and is willing to share a portion of the risk. A developer who enters into such a partnership becomes a merchant builder. A capital investor puts up the money, essentially buying a building in advance (a forward sale). The developing partner then builds the building, and the two cooperate to sell it to an end-buyer (which may be the capital partner, or a third party). • There are typically three parties in a merchant builder scenario: • The developer. He or she finds and entitles the land, and builds the project. • The capital partner. He or she usually gets involved when the land is under contract and the entitlement work is complete. When the project is fully designed and the building specification is complete. • The end-buyer. Usually a long-term apartment owner who wants to own Class-A luxury apartments, but doesn’t have or want the development skills or take the development risk associated. Sometimes the capital partner structures the deal so that he is also the end-buyer
A Complicated Process
But while bringing in a partner helps to divide the risk, it does complicate the process. Here at ROCK Apartment Advisors, we have structured many forward sale apartment contracts. This is a
“I have known Rock for about 10 years. ROCK helps
us understand the Canadian apartment industry better than anybody else. We see the future of our company in Canada to meet the demand; and ROCK would be our foremost preference to do business with. ROCK with its services is in a good niche in the industry and it is a needed niche.
Jonathan Holtzman, Chairman and CEO, Village Green Companies
32 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
complicated process. This means that we have: • assisted in the assembly or acquisition of the land the building sits on, • completed a feasibility study, • sat on the design team, • assembled the offering memorandum for the project to be built, • assisted with the lease-up and, • ultimately brokered the sale of the building.
The Value of Trust
For the merchant apartment building process to work, there has to be trust on both sides. The developer has to know that the capital partner will be there to fund most of the project, and the capital partner has to trust the developer to build the project on time, to specifications and leased-up at the per-forma rate.
How to Structure the Deal: One Example
There is no limit to the number of ways that you can structure a forward sale. For example: consider a proposed $30 million apartment complex. The initial equity that must be provided before a financial company will loan the remainder is $7.5 million. Of this equity, 90% ($6.75 million) is provided by the capital partner, and 10% ($750,000) comes from the developer. This secures a construction loan of $22.5 million, with the mortgage covenant assigned to the developer. Let us say that the building takes two years to build and is sold to an end-buyer for $34.5 million, generating a profit of $4.5 million. After paying off the construction loan and taking back the equity, the time comes to divide up the profit. The first thing to do is to pay the return on the equity the capital partner and the developer have paid into the project. Assuming a preferred return of 10% on the initial equity invested (agreed to at the start of the project), the capital partner is entitled to $675,000 per year, or $1.35 million. The developer also gets a 10% return, translating to $150,000. Thus $1.5 million of the $4.5 million profit is paid out in preferred return. The remaining $3 million can be paid out in a 50/50 split, or $1.5 million each. Thus, based on an initial investment of $6.75 million from the capital partner and $750,000 from the developer, both parties get that equity back, and the capital partner gains a profit of $2.85 million, and the developer gains a profit of $1.65 million.
Sharing the Risk and Reward
This is just one of many variations on how such profits can be paid. For example, the capital partner may ask for a 20% Internal Rate of Return on their money (a guaranteed profit of $6 million for every year of construction), allowing the developer to keep the rest. The percentage split could be varied depending on the profit received. There are an infinite number of combinations. Becoming a merchant builder allows a developer to build bigger projects with far less risk, while still retaining a good return on his or her investment. A capital partner gets a good return on his or her investment with limited risk.
THE PLACE OF GOVERNMENT
WHAT PLACE DO GOVERNMENTS HAVE IN BUILDING APARTMENTS?
hile we were working on getting the ROCK New Apartment Construction report to the printers, the Federation of Canadian Municipalities released a position paper on what they saw as a serious shortage in rental apartment housing in Canada. This report was released to the media, and highlighted Canada Mortgage and Housing Corporation statistics which suggested that growth of tenant households would outpace rental construction over the next decade. The Federation of Canadian Municipalities likens the tightening of rental supply to a housing crisis. We disagree. We share the Federation’s concerns that supply be increased to
by as much as $20,000 per new unit built. Unfortunately, since 2001, the federal government has already subsidized new construction to the tune of $120,000-$150,000 per unit, and the FCM’s own numbers indicate that this has failed to significantly increase new construction. Politically speaking, it seems unlikely that the current federal government will be amenable to a new subsidy program or an increase of subsidies. Fiscally speaking, it seems irresponsible to add this burden in this age of high deficits. Further, the Federation of Canadian Municipalities seems to have overlooked tools they already have at hand to launch a rental construction boom.
WE SHARE THE FEDERATION’S CONCERNS THAT RENTAL SUPPLY BE INCREASED TO MEET INCREASING DEMAND, BUT WE FEEL THAT SOLUTIONS TO THE ISSUE ARE READILY AVAILABLE AND, IN CERTAIN MARKETS, ALREADY UNDERWAY... ...WE ACKNOWLEDGE THAT, IN SOME CENTRES, THE WILL TO BUILD NEW CONSTRUCTION HAS BEEN LACKING. THE QUESTION WE MUST ASK IS: WHY?
Conditions are already favourable for a significant investment in rental housing in this country. Demand for apartments is high and supply is tightening. Rental construction booms are already taking place in smaller centres such as London (Ontario) and Halifax (Nova Scotia). We feel that the fact that little construction is taking place in the Greater Toronto Area or Vancouver is largely due to developers’ concerns over regulatory obstacles, including high municipal fees and development charges. The will to build new rental apartments exists, and one of the best steps municipalities can take to encourage such development is a step to one side. Rent control itself is one reason why supply in certain centres is so tight. When rent control was imposed on the Ontario marketplace in the 1970s, construction of new apartments basically stopped throughout the province. Although regulatory controls were eased beginning in the mid 1990s, new construction was slow to start because the constraints of rent control had forced a number of developers out of the industry. This has reduced the pool of developers that can quickly step in to create a rental construction
meet increasing demand, but we feel that solutions to the issue are readily available and, in certain markets, already underway. In a number of venues, including the recently released ROCK Apartment Report, we have called for developers to build purpose-built rental housing. The renter market is there. The endbuyers are there. The returns are there. There has been no better time than now to build. Average rents are rising and vacancy rates are dropping. We acknowledge that, in some centres, the will to build new construction has been lacking. The question we must ask is: why?
While we understand the FCM’s concerns about the lack of new purpose-built rental housing, we do not believe that the solutions the FCM offer are fiscally or politically realistic. The FCM position paper called for senior levels of government – particularly the federal government – to increase the subsidy of new construction
The Marketplace is Eager to do the Work
THE FACT THAT LITTLE CONSTRUCTION IS TAKING PLACE IN THE GREATER TORONTO AREA OR VANCOUVER IS LARGELY DUE TO DEVELOPERS’ CONCERNS OVER REGULATORY OBSTACLES.... THE WILL TO BUILD NEW RENTAL APARTMENTS EXISTS, AND ONE OF THE BEST STEPS MUNICIPALITIES CAN TAKE TO ENCOURAGE SUCH DEVELOPMENT IS A STEP TO ONE SIDE.
“ROCK has a vision and we have always seen them as the advocate for the apartment
industry. We have worked with ROCK for over 15 years and there is no question in our minds that they understand the business and the needs of private developers like ourselves. ROCK will play an important role in positioning the business for the next generation. David Horwood, Vice President, The Effort Trust Company 34 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
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THE PLACE OF GOVERNMENT boom. Developers do exist in the commercial, industrial and condominium sectors, but those seeking to re-enter the industry today face high municipal fees and development charges as their biggest barrier in building purpose-based rental housing, alongside high land costs.
Positive Government Influence
The more new buildings that get built, the more affordable rents become. The market can do the work the municipalities want done. A perfect example of this is the construction that is taking place in the city of London, Ontario. London has a large apartment universe that has added over 5,000 new units since the beginning of the millennium. Average rents in London are 75% of those seen in Oakville, Pickering or Vaughan, which have built next to nothing over the past decade. And yet developers continue to add new units to London. The question Oakville, Pickering and Vaughan need to ask is: why have developers chosen to build in London where rents are lower and vacancies higher? Why have they chosen not to build in their cities where the market is so much tighter?
Now, Governments have helped to influence the rental market in positive ways through creative tax structures and easy financing through Canada Mortgage and Housing Corporation. Incentives such as the proposed eco-energy tax credit will help to build rental units that consume less energy and reduce operating costs. However, municipal fees and development charges are a stark disincentive for developers to build new stock. Municipalities need to ask themselves what good does it do to maintain such rates and What Municipal Governments Should Lobby For regulations if it leaves a plot of land undeveloped and generating Where the Federation of Canadian Municipalities may be effective little or no tax revenue? in lobbying the federal government is in the restructuring of federal What if municipalities were to offer a stay in development tax regulations that also currently provide a disincentive to build. charges, or a ten-year stay in taxes, which would get construction Convincing the federal government to lower capital cost allowance started and, after the tax holiday ended, generate tax revenue for rates, allow the deduction of soft costs from taxes, as well as rollovers the municipality? The City of Gatineau, Quebec, already offers such – measures that existed up to the 1970s – could remove significant a policy for condominium developers, cutting property taxes on obstacles to new rental apartment construction without the use of new condominiums by 75% for the first ten years of their existence. further subsidies. The move has revitalized The most effective way the city’s downtown and to build more affordable FURTHER REGULATORY RESTRICTIONS WILL IMPEDE, NOT given it a competitive housing in Canada is to PROMOTE, THE CONSTRUCTION OF NEW RENTAL HOUSING. edge against Ottawa in the encourage more housing to THE FEDERATION OF CANADIAN MUNICIPALITIES’ PROPOSAL FOR be built, full stop. The means drive for new residents. ANTI-CONVERSION BYLAWS WILL NOT PROTECT THE OVERALL Why not a similar policy to create such a housing boom RENTAL SUPPLY. FEWER RENTAL UNITS WILL BE BUILT, WHICH RUNS will not come in the form of for new rental apartments? COUNTER TO THE FEDERATION’S GOALS. subsidies and regulation, but instead in the form of creative Take the Fetters Off municipal, provincial and federal tax and development charge Further regulatory restrictions will impede, not promote, the construction of new rental housing. The Federation of Canadian regimens which take away the disincentives developers face when Municipalities’ proposal for anti-conversion bylaws, preventing trying to build. rental buildings from being upgraded to condominiums, will not protect the overall rental supply, as claimed. Such laws will only A Call to Action mean that investors looking to buy or build rental buildings will see We call upon the municipalities of Canada to look at their fewer options for getting the best return for their money, and they bylaws, their municipal tax structures and their development will be less likely to invest their money in the first place. Fewer rental charges, and to lobby the senior levels of government for a units will be built, which runs counter to the Federation’s goals. friendlier tax structure for purpose-built rental apartments. If Municipalities across Canada seem unaware of the market municipalities are serious about getting more rental housing solutions already in existence that can create a construction built in their jurisdictions, they must ask themselves what boom in rental housing. Rather than expanding their efforts in obstacles need to be removed to reduce barriers and encourage social housing and regulation, municipalities should realize that developers to start building rental apartments which Canadian developers are already lining up to build new rental buildings. taxpayers, investors, and families deserve.
“ROCK has done two feasibility studies for us. These have helped us not only to decide
where to build and what to build, but we were able to use these studies to convince financial institutions and other companies to partner with us on our projects. Having a ROCK Report gives us the best credibility that we can get, to whoever we are speaking with.
Terri Johns, President Planning & Development, Starward Homes
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FINANCING NEW CONSTRUCTION
HOW TO FINANCE NEW APARTMENTS
ne of the most important aspects to achieve the desired rate of return that developers of apartments often overlook is acquiring the right financing strategy for their construction projects. The financing process has changed; lenders require more information and take a conservative approach to lending, making this a time consuming component of development that will tie up considerable equity. When all these factors are considered, hiring a commercial mortgage broker to manage the lending process is essential for the developer to achieve their desired results.
apartment construction are substantially higher than trends dating from the 1970s would indicate, and that niche markets like student and seniors’ housing offer a substantially higher return per square foot, this is not common knowledge among the lenders, yet. So the first task of a developer in gaining financing for his or her project is to provide the data that shows the potential return of a new development. This can often come in the form of a feasibility study (see our article on feasibility studies). The developers themselves must have supreme confidence in their numbers, or they will never transfer that confidence to a lender.
The Benefits of Developing
The Development Budget
For the past three decades, market rents were not high enough to In new construction, there is an advantage to developers who have justify the construction of new apartment buildings. Over the past been building a while and have a number of projects under their five years, however, economies changed, and developers proved that belts. Developers just getting into the field often need to hire third the right product in the right market can reap considerable returns. parties in order to get confident enough to go forward on a project. The reasons many developers have started They need to learn new construction techniques, A NEW APARTMENT building new apartment buildings again are as new designs, new ways to market the project. For PROJECT IS A RISKIER varied as the developers themselves. Many are many potential developers, the time and expense looking to expand their portfolios or enter more INVESTMENT FOR A LENDER in entering new markets stalls the decision and THAN A PURCHASE AND specialized markets and have found, in this heated makes many walk away. REPURPOSING OF AN OLD market, no apartment stock available to buy at the Developers that take the leap need to gather right price. Others have spare land available from APARTMENT. BY DEFINITION, data on their project, and provide good estimates A NEW APARTMENT HAS a developed subdivision and, rather than sell that of the building’s construction costs, its ongoing NO HISTORY. land, they want to develop it into an asset that expenses, and its projected rents. The prospective provides a steady revenue stream to help support developer must be confident that the market has their growth during slower build-out periods. a sustainable number of potential tenants who would be able to pay There are numerous benefits to developers in building new the rents that justify the building. These numbers must be gathered apartment stock. For condo developers and homebuilders, a in a feasibility study that, if done well, will convince the lender to rental property turns an unproductive piece of land into a revenue back you. This data may be hard to find, especially in niche markets, stream that will help carry a developer through periods of slow such as student and senior housing, which are not effectively growth. As demand for new stock is strong, as a result of supply covered by the Canadian Mortgage and Housing Corporation. being repressed for decades, new apartments garner substantially However, brokers with experience in these fields can help you build higher rents than older stock, and can offer higher rates of return if a strong case for your project. positioned properly by a strong and experienced manager.
Building Confidence With Your Lender
The first task in applying for financing for a project is to convince a lender that the project is viable. The challenge here is that lenders, before lending out money, carefully assess risk based on criteria that new projects have a hard time meeting. Lenders look at history, at the developer’s previous projects and at the performance of the asset class in general, before deciding that a project is worth investing in. A new apartment project is a riskier investment for a lender than a purchase and repurposing of an old apartment. By definition, a new apartment has no history. Not only does the project itself offer no history of rents achieved and costs incurred, the asset class itself offers little in the way of back data to give the lender confidence. There has been very little new construction in Canada since the 1970s, and promising new markets such as seniors’ housing and student housing remain largely hidden from a lender’s data bank. While current experience shows that rents received from new 38 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
Control Your Costs
It is important to control your costs from the beginning. Developers who are sitting on land that they bought years ago when it was cheap have a distinct advantage over developers buying land in today’s heated market. Remember that the more you spend, even before construction begins, the more you will have to get from rents later on in order to cover that spending. If you design a condominium project and you’re wrong about construction costs and demand, typically you are only out the cost of a sales trailer and the marketing costs, as most condominiums presell their units before they build them. In an apartment building, a wrong decision is a lot more costly, since the apartment is typically already built before the mistakes become clear. Developers need to design in the right unit mix, focus on the right target market, choose the right location and be extremely confident about their risk, or a lender will not share that risk with you. Moreover, with the landscape perpetually changing, the lending appetite becomes a moving target,
FINANCING NEW CONSTRUCTION often forcing the developer to spend more time sourcing the solution that enables them to achieve their required return. When gathering data, developers tend to be optimistic on the expense side – and for good reason. A new build will have a lot of advantages in terms of lower utility costs and maintenance costs compared to an older building, but it is important not to go overboard. The hardest number to gather will be the projected rents. As few apartments have been built since the early 1970s, there are no good references for rental rates. New apartments will show a leap for rents compared to nearby established properties, but you should justify such rents by ensuring your new build has a high level of finish. Renters today, many of whom are leaving home ownership, will expect good amenities and good quality construction, and this will push up the perceived value and subsequent premium rents. This is the balance developers of new projects will have to maintain in order to build confidence in the rents they are projecting.
Lenders Looking Over Your Shoulder
Any new project requires roughly 25% equity to be put into it before a lender will approve a loan. On a $30 million building, that’s roughly $7.5 million that a developer has to spend. The initial investment from the developer can include the cost of the land (and this is the current market valuation, not the price the developer paid when the land was acquired years ago). Once the developers provide an acceptable budget with costs comparable to industry standards, the lender will advance money based on an analysis of costs in place and the cost to complete the project. The lender distributes the money in stages so that he or she doesn’t end up in a position where they are forced to either put more money into the building than previously negotiated, or be left with an uncompleted building. These advances are often reviewed by a quantity surveyor or project monitor. This professional oversees the project and advances money on a schedule after satisfying themselves that the costs in place are occurring according to that schedule. The cost of this professional is borne by the developer. It is at this stage where projects often run into difficulty. If construction costs get out of control, the developer will be expected to inject any additional funds to cover them, and not the lender.
Finalizing the Project
Marketing costs are included as a budget item, and funds for marketing will be loaned as soon as the structure moves beyond the first couple of floors. It’s at this time that a developer should have a model unit available and have started marketing his project to prospective renters. Once the project is substantially complete, construction financing will be replaced by permanent financing. This usually occurs when rental income equals 75% projected gross revenue. A building can be considered done from a lender’s point of view as early as 75% done from a construction point of view, as long as the renters are there, and assuming you are achieving the rents you have projected.
WITH THE LANDSCAPE PERPETUALLY CHANGING, THE LENDING APPETITE BECOMES A MOVING TARGET, OFTEN FORCING THE DEVELOPER TO SPEND MORE TIME SOURCING THE SOLUTION THAT ENABLES THEM TO ACHIEVE THEIR REQUIRED RETURN. More importantly, it is at this stage when the developer has to assess whether it is more advantageous to continue working with the construction lender to arrange take-out financing, or whether there is an alternative lender that would be more suitable at this stage. Having an experienced commercial mortgage broker to assess your market options can make a dramatic impact on your final equity requirements, and the subsequent rate of return you will be able to achieve on the project.
Because a new apartment project has no history and a lot of perceived performance risk, the equity required includes personal guarantees from the developer and the potential investor partners. These people must be prepared for covenant support for the project – they need to put their names behind their money. No developer is getting unsecured financing in today’s economy. The lenders want the developer to have “skin in the game” to ensure the success of the project through the construction phase until there is a sufficient occupancy level to provide a return on their investment. In the buildings that are being built, the developers have analyzed the risk and looked at the reward and have established confidence that they will succeed in building and filling the units.
To CMHC or Not CMHC
Developers need an experienced and active commercial mortgage broker to negotiate with various lenders and present the best market options according to their expertise. You have to shop around with knowledge. Developers will find that the initial lender response will be geared more to condominium experience, as even the lenders themselves haven’t been exposed to the nuances of new apartment construction. Canadian Mortgage and Housing Corporation (CMHC) will need to be considered as one of the lending options. Developers will need an expert to independently make an application and see if CMHC’s solution meets the needs and expectations of the developers compared to a conventional lending source. One of the deciding factors in assessing whether a CMHC application makes sense, is to assess whether a high enough loan amount and reduced interest rate are enough to warrant the premium’s that are charged for the application. Because people have not been building new apartments, it will take time to gather the information to gain confidence that the project makes sense and to determine the highest level of financing available and the balance of equity to make the project go.
MAXIMIZE CASH FLOW AND VALUE NOI Enhancement • 9 Point Marketing Plan • Fast Lease Up •Hidden Value Market Survey • Mystery Shopping • Training Seminars • Apartment Repositioning Studies THE ROCK NEW APARTMENT CONSTRUCTION REPORT 39
NEW CONSTRUCTION IN STUDENT HOUSING
STUDENT HOUSING A GREAT LEARNING EXPERIENCE
significant portion of new apartment construction that has taken place since the year 2000 has come in the form of student housing. The economics and demographics of Canada’s population has made new student housing an extremely profitable enterprise, offering a high rate of return for those who invest in the marketplace. However, student housing is very much a niche market, with an unusual demographic that requires amenities different from a typical purpose-built rental apartment development. Investors who seek to enter the student housing market with the mentality of a conventional apartment developer will fail.
The Growing Student Market
Across Canada, over 940,000 students are currently enrolled in colleges or universities. By ACROSS CANADA, September 2021, that number OVER 940,000 STUDENTS is expected to increase to over ARE CURRENTLY a million. This presents a ENROLLED IN COLLEGES challenge to local communities, OR UNIVERSITIES. BY and an opportunity to investors. SEPTEMBER 2021, THAT Demand is already strong for NUMBER IS EXPECTED TO quality student housing in INCREASE TO OVER A centres with universities, and MILLION. it’s only going to get stronger.
Not only will an additional 200,000 students be looking for accommodations, students will be staying in school longer as they pursue more years in education.
Developers need to be aware that student housing comes with a unique set of demands that must be met before new housing leases out at the top rents. Location is a major factor to consider, since students are moving into their own accommodations for the first time in their lives. Many do not have access to an automobile. Students need to be close to their schools, and will pay much higher rates for a property that’s located close to a university, and far less for one that requires a longer commute to class. Renting to students means shorter term leases with more tenants per year than conventional rental apartments. Although many universities are offering more classes during the summer term, the bulk of the market still needs a new apartment lease starting on September 1st, and the summer is a challenging time to keep apartments occupied.
Building the Best
Most importantly, students these days want well-managed, high quality housing. Gone are the days when overcrowded houses in student ghettos are acceptable. Students today have more
“ROCK’s services are very valuable to the industry. Their feasibility studies helped
us get a better understanding of new apartment construction and gave us the encouragement we needed to explore, returning to the purpose-built rental apartment sector after many years.
Gloria Salomon, CEO, Preston Group.
CONTINUED... These are the images of recently constructed purposed built rental apartments 40 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
Solutions Mortgage Financing
We SPECIALIZE in CONSTRUCTION FINANCING FOR MULTI-FAMILY AND STUDENT RENTAL HOUSING, where Centurion Apartment REIT obtains a right to purchase the property upon completion.
Loan to Value
Loan Term Loan Type , Reﬁnance, Location
Loan Size $500K – $15M Interest Rate
All funding provided by Centurion Apartment REIT through Centurion Mortgage Capital Corporation.
Contact Stephen Stewart, V.P. (Mortgage Agent Number M12002383) Centurion Mortgage Captial Corporation (Broker License Number 12372) 416-733-5609 | firstname.lastname@example.org www.centurionmortgagecapital.com www.centurionapartmentreit.com
NEW CONSTRUCTION IN STUDENT HOUSING Institution
STUDENTS THESE DAYS WANT WELL-MANAGED, HIGH QUALITY HOUSING. GONE ARE THE DAYS WHEN OVERCROWDED HOUSES IN STUDENT GHETTOS ARE ACCEPTABLE disposable income, their parents are willing to contribute towards housing costs, and students are willing to share space in order to split the cost of higher rents. Students are also looking for privacy, meaning that purpose built student housing must be designed with multiple bedrooms, with doors that lock. Kitchens must be fully equipped, and each unit should have a minimum of two bathrooms. Students will also pay a healthy premium for updated amenities like fitness centres, game rooms and study rooms as well as ease of access to such amenities as restaurants and movie theatres. A good student apartment should feature amenities one would find in a midrange condominium, including flat screen TVs and double beds.
Bigger Investments, Bigger Returns
Student housing is a management-intensive investment. Each unit will have a high tenant density over the course of a year. Parents will visit, friends will come over, and many will stay overnight as they cram for exams. Landlords must be prepared for increased wear and tear on the building. Additional amenities will add to the costs of upkeep. However, in return for these higher operating costs, students these days have more disposable income, as well as parents and two sets of grandparents willing to help their children take this first step into adult life. A well-designed student apartment will get building owners more dollars per square foot than a conventional apartment.
What to Build, and Where to Build It
Successful developers of student housing need to examine the market carefully and build near universities. Look to the future and build near colleges and universities that are growing. Note that some are growing more rapidly than others. Also look at the university’s full-time vs. part-time enrollment figures, since only full-time students need housing. Be aware too of the local demographics. Student housing will bring a higher rate of return in centres where more students come
“Right from the beginning, I was impressed with
what ROCK has been doing. They offer a higher level of professionalism and capabilities in the market for institutional developers, investors and so on. We are very interested in exploring the opportunities in Canada with possible partnership with ROCK in the near future. I think ROCK is at the cutting edge. It is really refreshing to be a part of that.
Rick Graf, Chief Operating Officer, Pinnacle Family of Companies
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Established Undergrad Post grad Total
Athabasca University University of Alberta University of Calgary Grant MacEwan University Mount Royal University University of Lethbridge
Athabasca Edmonton, Camrose Calgary Edmonton Calgary Lethbridge, Edmonton, Calgary
1970 1906 1966 1971 1910 1967
36240 29250 23320 11721 10670 7930
3460 6930 6540 0 0 300
University of British Columbia Simon Fraser University University of Victoria
Vancouver & Kelowna Burnaby, Surrey, & Vancouver Victoria Richmond, Surrey, Langley, and Cloverdale Kamloops Abbotsford, Chilliwack and Mission North Vancouver Nanaimo, Duncan, Parksville, & Powell River Victoria
1908 1965 1903
41700 29697 18863
8630 50330 5507 35204 3542 22405
Kwantlen Polytechnic University Thompson Rivers University University of the Fraser Valley Capilano University Vancouver Island University Royal Roads University University of Northern British Columbia Trinity Western University Emily Carr University of Art and Design University Canada West Quest University Fairleigh Dickinson University
39700 36180 29860 11721 10670 8230
1970 1974 1968
13072 8124 7500
100 13172 40 8164 0 7500
Victoria Squamish Vancouver
2005 2002 2007
350 300 78
0 0 0
350 300 78
1877 1871 1899 1944
23640 9010 3140 1600
University of Manitoba University of Winnipeg Brandon University Canadian Mennonite University College universitaire de Saint-‐ Boniface
Winnipeg Winnipeg Brandon Winnipeg
University of New Brunswick Universite de Moncton Mount Allison University St. Thomas University Crandall University Kingswood University St. Stephen's University
Fredericton & Saint John Moncton, Shippagan, Edmundston Sackville Fredericton Moncton Sussex St. Stephen
1785 1963 1839 1910 1949 1945 1975
9253 5184 2648 2655 685 300 100
1444 10697 738 5922 12 2660 0 2655 0 685 0 300 0 100
Memorial University of Newfoundland
St. John's, Corner Brook & Harlow, UK
Dalhousie University Saint Mary's University Saint Francis Xavier University Acadia University Mount Saint Vincent University Cape Breton University University of King's College NSCAD University Nova Scotia Agricultural College Universite Sainte-‐Anne Atlantic School of Theology
Halifax Halifax Antigonish Wolfville Halifax Sydney Halifax Halifax Bible Hill Church Point Halifax
1818 1802 1853 1838 1873 1974 1789 1887 1905 1890 1971
13478 6682 4571 3437 2898 2987 1250 986 910 438 0
3783 17261 575 7257 356 4927 519 3956 959 3857 181 3168 7 1257 27 1013 84 994 63 501 147 147
University of Toronto York University University of Ottawa University of Western Ontario Ryerson University McMaster University Carleton University University of Waterloo University of Guelph Queen's University Brock University University of Windsor Wilfrid Laurier University Laurentian University Trent University Lakehead University University of Ontario Institute of Technology Nipissing University OCAD University Royal Military College of Canada Algoma University Redeemer University College Tyndale University College Saint Paul University Dominican University College
Toronto, Mississauga, Scarborough Toronto Ottawa London Toronto Hamilton Ottawa Waterloo, Cambridge Guelph Kingston St. Catharines Windsor Waterloo, Brantford Sudbury, Barrie Peterborough & Oshawa Thunder Bay & Orillia
1827 1959 1848 1878 1948 1887 1942 1957 1964 1841 1964 1857 1911 1960 1963 1965
60660 46640 33000 29500 30200 22940 20950 20500 19800 16700 15747 14700 13750 8200 7700 7300
University of Prince Edward Island
Universite de Montreal Concordia University Universite du Quebec, Montreal Universite Laval McGill University Universite de Sherbrooke HEC Montreal Universite du Quebec, Trois-‐Rivieres Universite du Quebec, Chicoutimi Ecole Polytechnique de Montreal Universite du Quebec en Outaouais Universite du Quebec, Rimouski L'Ecole de technologie superieure Universite du Quebec en Abitibi-‐ Temiscamingue Bishop's University Ecole nationale d'administration publique Institut national de la recherche scientifique
Montreal Montreal Montreal Quebec City Montreal & Ste-‐Anne-‐de-‐Bellevue Sherbrooke Montreal Trois-‐RiviŠres Chicoutimi Montreal Gatineau Rimouski Montreal
University of Saskatchewan University of Regina First Nations University of Canada
Saskatoon Regina Regina, Saskatoon & Prince Albert
Newfoundland and Labrador Nova Scotia
3160 26800 0 9010 120 3260 0 1600 54
14100 5650 5700 4600 1570 3130 3300 3660 2280 3850 1259 1480 1000 600 360 750
74760 52290 38700 34100 31770 26070 24250 24160 22080 20550 17006 16180 14750 8800 8060 8050
North Bay Toronto Kingston Sault Ste. Marie Ancaster Toronto Ottawa Ottawa
1909 1876 1876 2008 1982 1982 1965 1900
6300 3450 1040 1150 955 850 430 190
400 0 660 0 0 0 350 54
6700 3450 1700 1150 955 850 780 244
Prince Edward Island Quebec
1878 1974 1969 1663 1821 1954 1907 1969 1969 1873 1970 1969 1974
41055 32347 33100 27530 23758 13490 9390 9160 5140 4060 4360 4620 4050
14485 6462 6570 10270 8756 6010 2590 1450 1030 1490 1090 810 630
55540 43944 41670 37800 32514 19500 11980 10610 6170 5550 5450 5430 4680
Sherbrooke Quebec City, Montreal, Gatineau, Saguenay & Trois-‐Rivieres.
1907 1911 1976
16430 10690 840
2190 18620 1480 12170 0 840
NEW CONSTRUCTION IN STUDENT HOUSING WATERLOO (CON’T)
These are the images of recently constructed purposed built rental apartments from out-of-town. Cities like Toronto and Montreal have well-established universities with large student populations, but George Brown College has a higher portion of students who have grown up near these campuses, and commute from their parents homes. On the other hand, 20% of the students attending McGill University come from outside of Canada, and have large disposable incomes and a need for luxury student accommodations.
Approaching the Community
developments, and prepare information for public meetings in order to address the concerns of local residents. Being open to the community response not only helps you to identify and meet demand, but helps build your brand as a good neighbor. Finally, whatever you build, build well. Low quality product will age quickly and lose its market position. Amenities in line with a condominium lifestyle will help attract the best student tenants paying the highest rents. A well-built, secure facility will also help with the parents’ peace of mind. Building high rise or low rise, concrete or woodframe depends on the target city or town. A mid-rise development is more appropriate in a suburban town like Barrie whereas high rise developments make more sense in Toronto and Montreal. Student housing is a specialized marketplace requiring specialized knowledge to provide the best rate of return. However, the rapid growth of this marketplace and the quality of the clientele offers many opportunities for a developer willing to take the time to learn the nuances of the marketplace.
IN BUILDING STUDENT HOUSING, IT’S IMPORTANT TO BUILD RELATIONSHIPS WITH THE COLLEGES AND UNIVERSITIES YOU BUILD NEAR. THEY ARE PROVIDING THE BULK OF YOUR MARKET.
In building student housing, it’s important to build relationships with the colleges and universities you build near. They are providing the bulk of your market, and they can help you lease up your product through word-of-mouth advertising, or even distributing pamphlets to students as they arrive. Some communities have also had an antagonistic relationship between student communities and local residents, with disputes going before city council. Keep the public informed about your
“ROCK has always been a great supporter of the FRPO. They know almost every
significant player in the industry. ROCK has taken enormous steps to educate people about the opportunities of new apartment construction, which many weren’t yet aware of. We can all learn more about this industry from Rock.
Vince Brescia, Former President & CEO, Federation of Rental Housing Providers of Ontario (FRPO), President of Wyse Meter Solutions Inc. THE ROCK NEW APARTMENT CONSTRUCTION REPORT 43
KEY ELEMENTS OF A SUCCESSFUL APARTMENT DEVELOPMENT
STRATEGIES TO GET THE HIGHEST RETURN FROM YOUR NEW DEVELOPMENT INVESTMENT
hroughout this report, we have shown that many opportunities exist for new apartment construction throughout Canada. Low interest rates, low CAP rates and decades of repressed demand have made the industry a beacon of stability in a shaky economy. Demographic changes indicate that the apartment asset class will be a strong investment for years to come. But it is not as simple as ‘if you build it, they will come’. It is more than possible to lose one’s shirt in this industry, if investors don’t do their due diligence, ignore feasibility studies, or fail to pay attention to the local marketplace. If you have committed to developing new apartments, here are a few strategies that will help ensure that your investment is well looked after:
that encourage such sharing, such as student housing or multibedroom units, and you may find yourself enjoying higher rents on the square foot.
Buy the least expensive land, with the greatest potential for return.
Ultimately, the best strategy for getting the best return on your investment is to go out and make that investment in the first place. The marketplace has changed. Decades of government regulation have eased and rents are rising across Canada. The development industry, however, has been slow in getting back into building new apartment units. The investor who makes bold moves now will reap the irreplaceable benefit of getting in on the ground floor as the new market takes off.
This has become tougher in today’s marketplace, as the real estate market heats up throughout Canada. The investors who have secured land before the current boom have granted themselves a considerable advantage in buying while land was less expensive. A savvy investor looking for land today needs to pay attention to how Canadian cities are growing. Land may be cheap at the edges of cities, but many centres are pursuing long term intensification projects that will gather development in new and old centres. Planned investments in new transportation infrastructure could turn an underperforming neighbourhood into the next fashionable place to live. Keeping an ear to the ground and judging where the next growth centres will be in the next five or ten years can help you make an investment that will pay dividends.
Build it big, build it well, build it luxurious.
The best rates of return have been in the luxury market, where purpose-built rental apartments have gone head-to-head against the burgeoning condominium market. Many new renters are turning away from condominium ownership due to the premium of mortgage ownership, but they can still be enticed to your rental property if you offer what was available at the condominium they turned down, from concierge services, in suite laundries, better finished suites, and so on. And if you don’t provide these amenities, your competitors will, and they’ll reap the benefits.
If you can’t make it luxurious, make it affordable.
While the best rates of return have been in the luxury market, there remains decades of repressed demand waiting to be served by affordable units. This is a huge market to ignore, and it can be served through economies of scale, such as building large numbers of units to the same specifications. Also consider that two tenants who share a unit may be able to afford a higher rent per unit than they could if they rented individually. Consider investing in units 4 4 w w w.rockadvisors.ca | 1 (80 0) 898 - 0347
Operating in niche markets, especially where competitors are few and far between, can give your rents a premium boost. There are already companies out there that buy high-quality apartments in bulk, furnish them, and rent them at a considerable premium. There is no reason why you shouldn’t reap that premium yourself. Be careful, though: niche markets are, by definition, smaller than the main market, and easier to oversaturate.
e sincerely hope that you have enjoyed reading the ROCK New Apartment Construction Report. We wrote this report to help developers and industry professionals to better understand the opportunities that exist for New Apartment Construction across Canada. It has been our privilege to serve developers from coast to coast for the past twenty-five years and we look forward to opening a dialogue with you and the industry at large over the coming years. If you would like to contribute to the discussion on new apartment construction or to participate as a speaker, writer or sponsor of our publications or symposiums, please contact us. We look forward to discussing things with you. Please review our web page where we update information related to new apartment construction on a regular basis. We look forward to hearing from you and helping you achieve your investment needs. Derek Lobo Solo Deo Gloria email@example.com
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25 YEARS IN BUSINESS ROCK SELLS NEW APARTMENT BUILDINGS At ROCK Advisors Inc., Brokerage, we understand new apartment construction. We have helped sell hundreds of millions of dollars in new apartments over the past two years. To learn more about our skills and how they can help you, please contact Derek Lobo at firstname.lastname@example.org
HERE ARE SOME OF THE NEW DEVELOPMENTS THAT WE HAVE SOLD OTTAWA
• $42,000,000 • 146 units • $287,600/unit
• $33,000,000 • 137 units • $240,876/unit
• $58,000,000 • 306 units • $190,000/unit
on these and other forward sales across Canada • $37,500,000 tact us at:•• $46,750,000 100 units • 107 units • $467,500/unit
NORTH 400 units se to highway mass transit FOR dings /common lobby SALE
• $59,100,000 • 163 units • $362,500/unit
GTA West 249 units Large clubhouse 4 storey frame w/underground APARTMENT CONSTRUCTION & surface parking
For more information on these and other forward sales across
Close to highway and Large clubhouse large units mass transit 4 storey160 frame w/underground 2 buildings/common lobby & surface parking Luxury oriented building on these andadult other forward sales across Canada
ng, deck units 400 units NORTH StudentCanada Housing 500 beds on these and other forward sales across se to highwayplease contact us at: Close to main university act us at: d mass transit student demand ge • 51-5100 South Service Road 400 • Burlington, • L7L 6A5 GTA NORTH units SteadyON GTA West 249 units ORTH 400 unitslobby GTA West 249 units ldings /common • Fax: (905) 319-2528Close • Web:towww.rockaptadvisors.ca Large clubhouse highway Large clubhouse e to highway and mass transit 4 storey frame w/underground mass transit 4 storey frame w/underground 2 buildings /common lobbySW Ont Separate & surface parking ings /common lobby & surface parking Student Housing Alberta 200 units GTA North 400 units units 500 beds Transit friendly, central Close to highway and 160 large units ing, deck location Close toStudent main university GTA NORTH 400mass unitstransit Housing 500 beds ORTH 400 units Student Housing 500 beds Steady student demand 2 buildings/common lobby Luxury adult oriented building e units Phase 1 of 3 phases Close to highway Close to main university e to highway Close to main university and mass transit Steady student demand mass transit Steady student demand 2 buildings /common lobby ge •/common 51-5100 South • Advisors Burlington, ON • L7L 6A5 South Service Road • Burlington, ON ROCK Inc., Brokerage • 51-5100 FOLLOW US ON:Service Road ings lobby
Phone: (905) 331-5700 • Fax: (905) 319-2528 0 • Fax: (905) 319-2528 • Web: www.rockaptadvisors.ca
MID-MARKET APARTMENT BROKERAGE FACILITATING JOINT VENTURES APARTMENT LAND BROKERAGE
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