Edmonton Multi-Family Property Market Report, February 2023
Overview
Since 2010, global investment in the multifamily sector has risen at an annual growth rate of 15.6%, putting it among the fastest-growing asset classes. Investors have flocked to the sector thanks to its mainly resilient qualities through volatile economic conditions, as well as the demographic and population trends which have underpinned demand. Nationally, rent growth continued to accelerate at a rapid pace through 2022 and investment volumes in the sector were significant.
As lenders assess their risk, the availability of debt has been an issue for real estate assets, which has affected liquidity across markets. However, lenders have favoured multi-family assets for their resiliency and have increased allocation to the sector.
Market Trends
Edmonton has been experiencing a shift in municipal policy over the last decade toward higher-density zoning ordinances and direct control permissions along major arterial roadways in the core of the city. The city wants to see higher-density development, and reduced urban sprawl, implementing plans for a 15-minute city policy. Coupled with this, parking requirements have also been relaxed and are at the discretion of the developer. These two bold regulatory changes will have a major impact on community occupants, neighbourhood aesthetics, and property values.
Insights
Immigration policy will have a major impact on the Canadian real estate market over the next decade. The Federal Government has announced a forecast of approximately 500,000 new immigrant permanent residences with an additional 500,000 non-permeant immigrants. This also does not include another 500,000 approved Ukrainian refugees, for a total of 1.5M immigrants over one year. This immigration policy will have a major influence on housing supply and with-it rental rates & property values. Alberta in particular has seen major net migration figures, which is reflected in the timely absorption of new multi-family product, which has led vacancies to remain stable despite many new apartment projects entering the market.
High-interest rates have pushed many participants out of the buying market and into the rental market, which has put significant upward pressure on rental rates, as well as multi-family property values. Higher interest rates have not stopped capital investment into the sector, as sale volumes have increased considerably year over year. Further, housing supply shortages and steady demand have made multi-family a sought-after commodity with investors looking for safe returns and portfolio stabilization. Interest rates have made it more difficult for smaller players to enter the market, which has put even greater pressure on supply, however, larger players appear to be eager to fill the gap. The need for housing across Canada is astronomical and it appears this need will continue into the foreseeable future.
Market Conditions
Construction costs have seen significant destabilization over the last few years, however, despite some supply chain issues regarding China and Eastern Europe, the price of most building materials has begun to stabilize. The price of lumber, for instance, has returned to pre-pandemic levels. Energy prices, interest rates, inflation, and labour shortages will be key factors for costing over 2023, all of which appear to have somewhat stabilized and/or are coming down. A tight labour market and skill shortage are still an issue for contractors; however, many of these labour vacancies should be filled with an increase in immigration over the coming year and into the anticipated future.
The West Texas Intermediate (WTI) price of oil, often a world reference price quoted in the media, appears to be holding around $75/bbl USD, which has somewhat stabilized shipping costs. Oil production in Alberta was 18.9 million cubic metres in November 2022, up 2.9% compared to November 2021, indicating a steady ramp-up in production in the province.
In January 2022, Alberta's seasonally adjusted unemployment rate was 6.0%, a decrease of 0.8 percentage points from January 2021, up 0.4 percentage points from December 2022.
In the third quarter of 2022, net migration into Alberta was 52,582, compared to 17,131 in the same quarter of 2021, which had similar figures as 2015 to 2019, an increase of 206.9%. Nationally, net migration was 340,666 in the third quarter of 2022 compared to 175,633 in the same quarter of 2021. Net international migration into Alberta was 33,297, while net interprovincial migration was 19,285.
In Alberta, urban housing starts totalled 2,010 in January 2023, a year-over-year increase of 16.5%. Canadian housing starts remained unchanged over the same period.
On a year-over-year basis, Albertans paid 6.0% more in December 2022 for the goods and services that comprise the Consumer Price Index (CPI) than in the same month a year ago, while the national average CPI was up 6.3%. In Alberta, all broad categories increased, with Food (+10.0%) and Shelter (+7.6%) increasing the most.
In January the Bank of Canada increased the overnight interest rate to 4.5%, which has helped mitigate inflation by reducing the availability of money and restricting the demand for goods & services. Coupled with this, oil prices are down, and supply chain issues have been moderated, which has brought inflation from a high of 8% to 6%. Because of this, a major increase in interest rates is unlikely, which will bring greater certainty and stabilize the financial lending market. According to the BoC, CPI inflation is expected to decrease to 3% by mid-year. This has, however, started to slow the economy and a recessionary adjustment period is likely, with single-family housing sales taking a major hit, which will increase the need for rental accommodation.
Forecast
Although the economic outlook for the year and beyond is somewhat uncertain, what is certain is that various parts of the world will continue to see destabilization and therefore, Canada will continue to see immigration demand. Federal policy toward immigration is also unlikely to shift by any extreme measure, as all major political parties are pro-immigration.
Economic metrics are indicating that Canada, North America, Europe, and much of the Globe will likely see a recession through the tail end of 2023. Inflation, interest rate hikes, monetary tightening, supply issues, and oil prices have put significant strain on the economy causing it to slow. However, it is predicted to be short-lived, as labour markets are tight and household & corporate balance sheets appear to be doing okay. There have been job cuts in certain sectors such as the tech industry, but this does not appear to be heavily affecting the Alberta market.
Interest rate hikes appear to have reached or are nearing their peak, which has and will continue to bring greater certainty to lenders & borrowers and will make decision-making easier for businesses both large & small. Repricing of real estate assets will continue to unfold and will stabilize as the volatility of debt costs ease. This stabilization will bring capital investment to the market that has been sitting on the sidelines. Alberta’s pricing has remained relatively stable, as its thriving economy has attracted considerable investment into the province.
Oil prices are likely to stay above $70/bbl over the next two years, which is a positive for Alberta’s economy, royalty revenue, employment rate, and ability to weather the short-lived recession. Alberta is in a good economic position, and whether this will continue will depend largely on policy toward federal overreach and political shifts. Alberta’s net migration numbers indicated previously reflect its economic prosperity. However, regardless of its economic situation, Alberta is also desirable because of its affordability and quality of life, which is attractive for young families and immigrants.
Price Trends
Demand for multi-family assets has put significant upward pressure on prices. Major players that are willing to pay cash have bypassed interest rate hikes, and although there is still significant capital on the sidelines, multi-family product continues to be an attractive asset for the capital that is in play. With the significant rise in migrants and a strong rental market, it is easy to see why investors are looking for multi-family assets to be a large part of their real estate portfolio.
Transactions
YEAR AMOUNT NO.
2020 $536,548,200 49
2021 $1,152,677,320 70
2022 $1,800,379,339 72
The above chart indicates an increase in the overall value traded in Edmonton through 2022, which indicates a significant appetite for the product despite interest rate hikes.
Vacancy
Vacancy in Edmonton continues to push downward to pre-pandemic levels of around 5%. It is currently hovering around 6% from a high of 8% in 2021, which must be considered with the fact that there has been a significant amount of new supply entering the market, indicating that demand has continued to fill inventory. As migrants continue to enter the province, we will likely see vacancies drop to below 5% by the end of 2023 until lagging construction projects come online.
Cap Rates
The high demand for multi-family product has put downward pressure on cap rates, however, high-interest rates have moved many participants to the rental market, increasing yields and putting upward pressure on cap rates. Because many have been pushed out of purchasing, interest rate hikes have reduced the buyer’s market and therefore, have put downward pressure on values. However, within the multi-family sector demand for product from an investor standpoint, as well as demand from occupants, has been so strong that it has put upward pressure on values and downward pressure on caps. Overall, cap rates have increased with interest rates and rental rates, but not to a significant degree.
Edmonton proper: 4% - 6%
Greater Area: 7% - 9%
Lease Rates
Rental rates have been specified for one-bedroom apartments, which will vary depending on several factors such as location, building amenities, and the age of the building.
Based on historical data, the rental rates per month for a one-bedroom apartments in Edmonton range significantly from:
Northwest: $800 - $1,500
Southwest: $900 - $1,600
Northeast: $800 - $1,300
Southeast: $900 - $1,500
Central: $800 - $1,500
It's important to note that rental rates will fluctuate and vary depending on the current supply & demand of multi-family development in the area, as well as other factors such as seasonality and economic conditions. It's recommended that you contact a professional to ensure specific, accurate, and timely data.