Greater Victoria Multifamily Update 2017


With so much activity ($127M) in the multi-family sector in 2016, it is no doubt that investors will continue to flock to this asset class in 2017.

So often, we hear the term ‘fundamentals‘. We are constantly being told that strong fundamentals support the price levels, and that there is no foreseeable decline in demand. Let’s take a look and see exactly why Victoria continues to paint a positive story for investors.

0.5% Vacancy 

Sustained demand for rental housing compressed Greater Victoria’s vacancy rate to 0.5% in 2016. Vancouver experienced a vacancy rate of 0.7% earning Victoria the title of most competitive rental market in Canada.

5.5% Rent Growth

James Bay saw the strongest rent growth of 7.4%, while the West Shore increased the least due to the delivery of over 200 new units. Overall, rent growth was 5.5% across the region in 2016.

*Data was not available for other areas of Greater Victoria.

1,800 Under Construction: Langford lead the region in multiple dwelling starts in Q1 2017. Currently over 500 purpose-built rental units are under construction in downtown Victoria. Absorption of these new rental units is rapid, with many buildings achieving full lease out within the first few weeks.

24,000 Rental Unit Stock: The stock of rental apartments remained relatively unchanged from the previous year as aging units were removed out of the overall stock for renovation. Victoria’s apartment stock is tired and aging, with over 80% of the units being pre-1970’s.  A significant amount of renovations and new product is being prepared for lease at higher rates.

3.8% Unemployment:

Victoria leads the country in employment growth with strong job creation in technology, services, and government. Strong migration of the 16-24 age group is a key driver to rental demand. Acceleration in single family home prices keeps many would-be first time homebuyer in the rental market.

3.0 – 5.5% CAP rate

Cap rates range significantly on apartment transactions. Downtown, Oak Bay, James Bay, and Fairfield enjoy the lowest cap rates in the region at under 4%. Lower quality and smaller buildings in the suburban areas require higher cap rates as cap-ex, tenant quality, and location are compromised. It is important to note a myriad of variables are to be considered on each transaction: suite mix, rent/sf, rent leaseable area, buildings’ age and condition, location, frame or highrise, strata vs non-strata, land value (development site), special financing.

2.3% GDP

Real GDP is expected to be in excess of $16B in 2017, a growth of 2.3%. The previous year, 2016, yielded an impressive growth of 2.6% placing Victoria in the top 10 Canadian cities. Recent surpluses posted by the B.C. government are now leading to increased public spending, prompting output gains in the previously sluggish public administration and noncommercial services sectors. Victoria Shipyards is showing growth with a contract to upgrade 5 frigates for the Royal Canadian Navy, and refit of diesel submarines. The Federal government granted the facility $36M to upgrade weapon systems on 5 patrol frigates beginning in 2018.

0.5% Overnight Rate BOC

The central bank eased off expectations of an interest rate hike, leaving the overnight unchanged at 0.5% in the May 24, 2017 announcement. This low interest rate environment has compelled investors to refinance existing properties, rather than sell outright, in order to unlock built up equity in their portfolio (one reason why supply / inventory of apartment buildings is low). Today financial institutions and lenders are charging only 100 – 200 basis points above the 5 year bond rate (risk free rate). Investors are starting to perceive this as ‘free’ money. Supply of capital > supply of investment grade real estate.
Mortgage loans are primarily influenced by the yield on Canadian government bonds (bond yields) of corresponding maturity. This is because bond rates represent the benchmark for financial institutions’ cost of funds. The difference between the two rates (mortgage rates and bond yields) represents the yield that financial institutions require to lend the funds out on the mortgage market.

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