More Canadian real estate investment trusts and developers are expanding their footprints in the multiresidential space via mixed-use developments.
A panel discussion moderated by Colliers vice-president Dayma Itamunoala at the Sept. 11 Canadian Apartment Investment Conference at the Metro Toronto Convention Centre examined the motivations, challenges and potential benefits of this strategic diversification.
There’s a nation-wide need for more housing, interest rates have started to come down again and construction costs seem to be levelling off somewhat, so the perception is now should be a good time to launch new apartment projects.
However, many municipalities across the country have directives requiring some multifamily developments to include a commercial mixed-use component — sometimes even when developers may not think this space allotment makes economic sense.
Main + Main
Toronto-based Main + Main is a mixed-use developer that since 2011 has invested in over 75 properties, assembled over 25 projects and has a development pipeline of almost 7,000 residential units — including about 2,000 under construction. It generally completes between 300 and 500 units per year, according to president Daniel Byrne.
Main + Main develops on its own but also partners with REITs, pension funds and other developers.
“We have a long-term view that class-A Canadian apartment buildings are one of the best assets you can produce for long-term cash flow and long-term value,” Byrne said.
Main + Main is primarily focused in the Toronto, Ottawa and Montreal markets.
Byrne said development conditions are probably most favourable in Ottawa — which he called a “very rental-oriented market” — today. However, the numbers in Toronto have started to move to a place where he thinks launching new projects will work.
“I’m probably bearish on when pre-sale condos in Toronto are going to come back to life,” Byrne said. “As an industry we have to be a little careful of what we wish for, though.
“If the market stays soft for too long, you’ll start to destroy capacity in the construction market. A lot of your tradespeople are going to move to Alberta. A lot of your subs are going to go bankrupt. These guys can’t sit around waiting five years for projects to start.”
Byrne believes Toronto land values will continue to lag from where they were at the height of the city’s condominium boom.
“If you have really high-quality sites, there’s still some liquidity and value there,” he said. “But I think there’s a lot of zoned land that isn’t going to return to its peak. Maybe my kids will buy it when it comes back, but I don’t think it’s going to happen in my career.”
Killam Apartment REIT
Halifax-headquartered Killam Apartment REIT owns a $5.3-billion portfolio comprised of approximately 18,000 units in Atlantic Canada, Ontario, Alberta and British Columbia. Killam’s Ontario and Alberta vice-president Carrie Curtis said the trust has development projects kicking off in four different markets over the coming months.
“We own several mixed-use assets in several different markets,” Curtis said. “Some of them do better than others.”
Commercial spaces generally do okay in downtown, transit-oriented, walkable areas, but Curtis said it can be more difficult to fill them in less central locations.
Curtis noted commercial space often isn’t leased until near, or after, the completion of residential construction. So, it has to be built to accommodate different uses, which can pose a challenge.
Gyms have almost become standard in new multifamily buildings and differentiators must be found to entice people to want to live in yours.
“As you talk to your leasing people, your operations people and your property management people, you really understand how people live in the spaces and what they need in those spaces,” Curtis observed.
Developments in Alberta are now taking longer to complete because there have been so many new housing starts from different companies, while it’s the opposite situation in Ontario, Curtis noted. Condo starts have slowed in the province, so more trades are submitting bids when tenders go out for purpose-built apartment construction projects.
Boardwalk REIT
Jeff Klaus, the VP of asset management and development at Calgary-based Boardwalk REIT, said the trust’s multi-province portfolio of purpose-built rental properties has been largely accumulated through acquisitions, but it has become involved with development during the past 10 years.
“We usually have around 500 units under development and completion throughout a year, and we have a couple thousand units in our development pipeline that we would look at scaling over the next two to five years,” Klaus said.
“We’re more along the lines of pure-play residential over our 30-million-plus-square-foot portfolio,” Klaus added. “Only a few per cent is ancillary commercial, so it’s definitely been a learning curve.”
Klaus has noticed more land becoming available in the past six to nine months than he did a few years ago, so multifamily and mixed-use development opportunities are opening up.
“Hard cost shocks over the last couple of years have luckily been offset by rent increases to a large extent, and sometimes there’s even positive spread,” Klaus explained. “Interest costs went against us for a couple of years and had some pretty drastic effects on pro formas.
“That was a big change for us in our interest reserves and looking at the cost of carry for debt capital over a construction period.”
Klaus said there are fewer tradespeople available, depending on the market, which is extending construction timelines. He’s concerned about the long-term impact of having less access to labour to build apartments.
“We love Alberta right now,” Klaus said. “Access to land is pretty available and the relative lack of DCCs (development cost charges) is huge. You’re saving $100,000 before you even get going.
“No developer loves civic timelines, but we’re all beholden to them. They’re relatively achievable in Alberta.
“Non-rent-controlled markets really help on the pro forma side of things as well. Geographically, we typically like non-rent-controlled markets or near non-rent control.”
