Institutional investors in ferocious competition for rental stock

Toronto’s multifamily residential buildings have been in hot demand among institutional investors, and while rental demand in the condo market is soft, REITs have identified healthy demand for purpose-built rentals.

The institutions have been locked in bidding wars with each other for the city’s older rental stock because newer purpose-built rental buildings aren’t for sale and, after some initial pandemic-induced trepidation, they’ve emerged as one of the few safe property asset classes in the city. According to Keith Reading, director of research at Morguard, office and retail spaces are languishing right now, leaving industrial and multifamily residential properties as the only pieces left of a shrinking pie.

“Now things have bounced back reasonably well, and investors, as they’re wont to do, look for security,” said Reading. “They’re going for older buildings in established neighbourhoods because, frankly, that is what makes up a lot of the apartment inventory. They need stability in their portfolios, and that’s to be found in multifamily in Toronto, Canada’s biggest market.”

Although there’s a moratorium on immigration right now, and students are temporarily studying remotely, institutional investment firms are still collecting rents at a rate north of 90%, thereby demonstrating the sector’s resilience.

“Again, investors have evidence that the sector will perform well, even if the economy goes into a pretty significant downturn, which has been the case with COVID,” said Reading. “Investors know this because apartments performed well in past downturns, and here we are again witnessing that they’re resilient.”

The bidding wars stem from the fact that there have been very few purpose-built rental developments completed in Toronto in the last decade, and the ones that have aren’t up for sale. Toronto’s purpose-built rental stock is upwards of six decades old, but that hasn’t deterred large funds from scooping them up where they have been able.

“[Institutional investors] are in a position where, if the buildings need upkeep, they build that into their pro formas, and the reality is that these big institutions are in the business of maintaining the value of their assets, so if they need repairs and updating, they’re more than willing to do that because it increases the value of the apartments, and in some cases it allows them to push the rents a little higher.”

According to data from Urbanation, a real estate analytics firm, purpose-built rental apartments in the GTA no more than 15 years old had a vacancy rate of 2.4% last quarter. That’s an elevated vacancy rate compared to Q3-2019, although it’s slightly lower at 2% in Toronto’s downtown.

However, pre-pandemic, Toronto’s vacancy rate was at an all-time low, signifying to investors that the sector will rebound once the city’s fundamentals, which are Canada’s strongest, return to normal.

“Even at 3%, that’s a pretty low vacancy rate. If you were in office, industrial or retail and there was a 3% vacancy rate, most people would be happy,” said Reading. “Investors are nevertheless taking a longer term view.”

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