Key takeaways from the Western Canada Apartment Investment Conference

The strain apartment developers and operators are feeling in Canada isn’t going away, and if anything, margins are getting tighter. As costs continue to rise — whether for construction, labour or insurance — and tenants are limited in what they can afford to pay, it’s become a challenging balancing act.

Edmonton played host to the annual Western Canada Apartment Investment Conference on Tuesday, where talk of the challenges — and opportunities — in the apartment sector was at the forefront. Although the interest rate cut debate hung over nearly every conversation, with some predicting summer cuts and others expecting a drop in the fall, it was far from the only hot topic.

Here is Green Street News‘ summary of our top takeaways from the event.

High migration to Alberta

Alberta has seen staggering population growth, with over 200,000 new residents added last year alone — the largest annual increase the province has ever seen. This migration is from both foreign countries and other provinces. In fact, it saw inflows from every other province and territory in 2023, which no other province has ever experienced.

The vast majority are younger residents. Mark Parsons, chief economist for ATB Financial, said this is “due to affordability considerations” as Calgary, and even more so Edmonton, offer less expensive housing options. Although the province has seen increased housing construction activity, Parsons says there’s still some catch-up to be played. And the province will need to attract more skilled trades workers to do it.

MLI Select success

The overwhelming consensus around the Canada Mortgage and Housing Corp.’s MLI Select financing is that it’s a good program, but with some tweaks, it could be great. The multi-unit mortgage loan insurance product has allowed borrowers to access better interest rates and amortization periods, helping projects to pencil out and encouraging more rental development. As Nadeem Keshavjee, president at GreenBirch Capital, put it, “We thank our lucky stars that program came out when it did.”

Kasey Chauhan, vice president and managing director of originations at Equitable Bank, felt similarly, saying, “If it wasn’t for CMHC, I don’t think the economy would have survived over the last 36 months.” But he went on to note that CMHC “can’t be the go-to for every transaction.”

“We thank our lucky stars that program came in when it did”

Nadeem Keshavjee, GreenBirch Capital

Several panellists raised issues with MLI Select’s current structure, namely the 24-month waiting period for refinancing, which has “locked borrowers into existing high-interest-rate debt,” said Jordan Forfar, Kingsett Capital’s multifamily mortgage group director. Others said there’s a need to update CMHC’s definition of “affordable” units to better suit each market.

Faster approval opportunities

In many municipalities across Canada, lengthy zoning approval timelines have become so costly that there has been a split in equity groups between development sites that are shovel-ready and those that require rezoning. “We’re starting to look at them as separate investments,” said Judy Husen, head of capital fundraising and investor relations for Kerkhoff Develop-Build.

What some western municipalities are offering is the chance to experience more efficient approvals. Developer Westrich Pacific recently received zoning on an Edmonton project in just three months. “By far, Edmonton has been the best,” Westrich co-CEO Richie Lam said, later adding, “It’s a good time to be in Alberta for sure.” The absence of development cost charges in Edmonton adds another financial benefit.

“It’s a good time to be in Alberta for sure”

Richie Lam, Westrich pacific

Private buyer prominence

Although large institutional investors aren’t out of the game, and areas like Vancouver are still seeing them come in on joint venture partnerships, for the most part, they’re waiting out market conditions. Instead, smaller private buyers now account for the majority of asset acquisitions, and as such, the number of transactions and suites trading has dropped.

Activity in Calgary is expected to remain low in 2024 with no movement on capitalization rates, but Edmonton could see an upswing. Paul Chaput, senior vice president of investments at Marcus & Millichap’s Institutional Property Advisors, said there is “a run of buildings just on the cusp of making sense” to trade if cap rates can shift just 25 bp. “I think this is going to be an absolute banner year for Edmonton,” he said.

Capital gains tax increase forcing sales

With the federal government’s increase in capital gains tax set to kick in on June 25, some are expecting an onslaught of sales in the next few weeks. Dexter Realty commercial real estate broker Cynthia Jagger noted that the last time there an increase to capital gains was announced, nearly one-third of existing stock turned over before the change took effect. “If they are thinking of selling, they’ll probably rush to sell,” Jagger said.

Experts highlighted a potential unintended consequence of the tax change: investor owners of single-family homes will be less inclined to sell. Apartment builders who buy up several single-family lots to construct their buildings could then have a more challenging time doing so, further restricting housing construction.

Rising operating costs

The rising cost of labour and labour shortages have dampened multifamily development for years — something that may get worse as more developers try to get shovels in the ground without enough new labourers entering the skilled trades. But an increasing drain on rental investors’ wallets has been operating costs.

The rising cost of utilities in particular has been challenging, as well as increasing insurance costs and needed maintenance on vintage properties. AJ Slivinski, president and CEO of Zen Residential, noted that pest control is now a “very significant” line item when that didn’t use to be the case.

“We’ve hit a little bit of a wall and the tenants are moving out because they can’t afford it”

AJ SLIVINSKI, ZEN RESIDENTIAL

At the same time, rents have largely plateaued and finding tenants who can pay a higher premium to help cover costs has become challenging. “We’ve hit a little bit of a wall and the tenants are moving out because they can’t afford it,” Slivinski said. Phil Milroy, founder and CEO of Westcorp, noted that Edmonton rents have only in the last 12 months recuperated enough to reach 2014 levels.