Economic review

• The Bank of Canada (BoC) implemented two interest rate cuts totalling 50 basis points in Q3’24, bringing its key interest rate to 4.25%. August inflation data showed that Consumer Price Index growth fell to within the BoC’s 2.0% inflation target for the first time since February 2021. With inflation tracking downward, a slowed economy, and rising unemployment, the BoC will likely continue to steadily cut rates, contributing to improved market conditions and moving cap rates in a favourable direction.

Transactions

• Residential home price growth continued to stall, with Toronto and other premium markets particularly impacted. This led to modest transaction gains that nonetheless reached their highest level since July 2023.
• Decreased competition across most categories, including purpose-built apartments, created advantageous buying opportunities for well-capitalized companies to expand their portfolios with strategic acquisitions.
• In contrast to modest transaction gains in other categories, multifamily sales volume soared 1,000%+ Y/Y to $1.06B from $91.1M in Q3’24, This resurgence was primarily driven by institutional capital, and includes the Trust’s second major acquisition of the year. Institutional activity generally precedes broader moves within the market and can indicate its trajectory.

Home prices and rents

• National average asking rents ended the quarter at $2,193, up 2.1% from a year ago. Rents for purpose-built apartments rose by 5.4%, while condominium rents declined 1.7%. Although Canadian home prices ended the quarter 3.3% below year-ago levels, they made modest gains throughout the quarter compared to early-year lows. This trajectory may signal homebuying challenges in the future, favouring the rental category.

Construction and starts

• Canada Mortgage and Housing Corporation (CHMC) housing supply data released Q2’24 found that, in the first half of 2024, Canada’s six largest metro areas observed the second strongest wave of new construction since 1990. Purpose-built rentals comprised nearly half of all apartment starts during the period.
• In Q3’24, builders broke ground on a larger-than-expected number of units in July, with Ontario housing starts surging 57% from the previous month. Nationally, total starts increased 5.0%, driven in part by a 6.0% increase in multi-unit urban starts. Toronto continued to lead North America in construction activity with over 80 cranes in operation. However, this represents a substantial decrease compared to the 220 cranes recorded earlier this year. This slowdown may signal worsening supply shortages in the future. CMHC noted that the pace of new housing is still unlikely to satisfy demand, doing little to improve housing affordability.
• With this longstanding supply-demand gap in mind, Equiton partnered with Concordia University’s John Molson School of Business to launch new, artificial-intelligence (AI) driven insights into key factors contributing to rental growth across Canada. Leveraging a neural network model to generate rental projections, the report forecasts rent price increases of up to 225% in major markets, by 2032.

Portfolio Update 

New property acquisition in Toronto 

The Equiton Residential Income Fund Trust (the Trust) expanded its presence in Toronto with a three-property acquisition in September. The addition represents just under 350 residential rental units, including premium townhomes situated in one of the city’s most exclusive mid-town communities. This strategic move into Forest Hill and North York further expands the Trust’s footprint in one of North America’s strongest multifamily markets and bolsters its portfolio with strong existing and potential cash flow. The Trust’s total holdings now comprise 41 properties in Ontario and Alberta with a total of 3,463 portfolio units. 

The purchase complements the previous quarter’s acquisition of four rental properties in Welland, Ontario. The Welland portfolio features a gap to market of 73.3%. The Trust has since started the process of making improvements that will reduce operational costs over the long term, including the implementation of a utility sub-metering program. Sub-metering is proven to reduce energy and water consumption by enabling Residents to directly control their usage costs, thereby enhancing the overall living experience. 

Committed to resident satisfaction 

In adherence to the firm’s commitment to Environment, Social, and Governance (ESG) practices, Resident satisfaction remains a priority. To track satisfaction and help guide Resident initiatives, Management conducts regular satisfaction surveys at key points in each Resident’s tenure. By the end of the quarter, the number of resident satisfaction surveys collected had already surpassed last year’s total. To further enhance Resident satisfaction portfolio-wide, on-site Resident Managers received comprehensive customer service training, equipping them to respond more effectively to feedback. Training is a key part of Equiton’s governance and social strategies, with regular sessions offered both online and in person for all Employees, from new hires to the leadership team. 

Management is in the process of finalizing the leasing strategy for Maison Riverain, a joint development in Ottawa that will add over 1,100 rental units to the local market. Tactics include model suites, virtual tours, and a dedicated leasing office. Occupancy is projected to commence in early- to mid-2025. 

Performance 

In the third quarter of 2024, Class F DRIP Unitholders received a 7.94% trailing 12-month total return, contributing to a 10.92% annualized return since the class’s inception. The portfolio’s weighted average cap rate appreciated to 4.43% Y/Y by approximately 46 basis points, inclusive of recent acquisitions. Operational performance predating the recent Toronto acquisition offset this increase, which was attributed to market-driven conditions. The portfolio generated quarterly revenue and NOI increases of 18.8% ($6.5M) and 21.0% ($4.1M) Y/Y, respectively. 

Rental growth was supported by efficiently filling vacancies through active marketing strategies. Portfolio occupancy of rent-ready units ended the quarter at 99.3%, well above the national average of 96.8%. While same-store market rents rose approximately 5% Y/Y, the Trust achieved an 11% increase in same-store rents in the same period through its extensive renovation program. 

Meanwhile, the Trust realized same-store utility savings of more than $350K (11% Y/Y) through a combination of lower natural gas costs, energy conservation efforts, and the ongoing portfolio-wide sub-metering program. 

The Trust’s demonstrated ability to capitalize on gap to market rent while reducing costs speaks to the effectiveness of its active management approach, which generates value through operational efficiencies and strong organic growth. The portfolio’s gap to market remains stable at 35.1% as at September 30, from 35.8% in the previous quarter, retaining potential for future appreciation. 

Market Outlook and Fund Strategy 

Rate cuts spur real estate activity 

The slower pace of the economy and controlled inflation leave room for further interest rate cuts in Q4’24. Canadian economic growth is poised to recover moderately as rates potentially settle at a new baseline. Rate easing could trigger new real estate activity as early as the first half of 2025, particularly in the residential market, pushing up home values and constricting cap rates on income-producing properties. 

The potential for lower rates could further ease underwriting challenges and encourage cautious optimism around new dealmaking. 75% of Canadian real estate firms, responding to Altus Group’s latest sentiment survey signalled an intent to transact in the next six months. The Trust’s capitalization and prudent financing strategy positions it to benefit from improved financing conditions. As an active buyer, the Trust continues to explore the growing Ontario and Alberta markets. 

The slowing in market rent growth recently experienced by major cities like Toronto is expected to rebound slightly. In certain metros, such as Kitchener, Waterloo, Guelph, and Ottawa in Ontario, this moderation already appears to have run its course. Equiton’s portfolio of income-producing properties benefits from a substantial gap to market, creating opportunities for growth beyond rental increases alone. 

As more buyers enter the market and home sales recover, new home construction is expected to rise in 2025. According to Deloitte’s Fall Outlook, the number of new homes could rise from 246,000 in Q1’25 to 267,000 by the end of the year. Nonetheless, housing completions are expected to fall far short of existing demand. As home affordability improves in the near term, Equiton anticipates that some renters may transition to homeownership, creating new turnover opportunities. 

Market cycle presents new opportunities 

Looking ahead to Q4’24 and beyond, Canadian rental markets are beginning to recover from pockets of marginally higher vacancies and slower rental price growth. Historically, softer rental markets have been part of natural market cycles, often presenting brief windows of opportunity for strong gains during the subsequent rebound. The Trust’s acquisition of assets with exceptional fundamentals bolsters its resilience and positions it for substantial gains in upcoming quarters, leveraging both market rent gaps and capital appreciation. 

Find Equiton’s previous quarterly report here:  Q2 2024 Commentary and Outlook – Rate Cuts to Extend Rental Growth 

Click here to download this article in PDF 

Forward-Looking Information

Certain information in this communication contains “forward-looking information” within the meaning of applicable securities legislation.

• Forward-looking information may relate to future events or the Trust’s performance.
• Forward-looking information includes, but is not limited to, information regarding the Trust’s distributions, growth potential and volatility, investor returns, ability to achieve operational efficiencies, objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations and other statements that are not historical facts. These statements are based upon assumptions that the management of the Trust believes are reasonable, but there can be no assurance that actual results will be consistent with these forward-looking statements.
• Forward-looking information involves numerous assumptions, known and unknown risks, and uncertainties that contribute to the possibility that the forward-looking statements will not occur and may cause actual results to differ materially from those anticipated in such forward-looking statements. Some of these risks are discussed in the section “Risk Factors” in the Offering Memorandum. These forward-looking statements are made as of the date of this communication and the Trust is not under any duty to update any of the forward-looking statements after the date of this communication other than as otherwise required by applicable legislation.

The post Q3 2024 Commentary and Outlook – Rate Cuts Spur Rise in Multifamily Activity  appeared first on Equiton.

• In the second quarter, the Bank of Canada (BoC) decreased its key interest rate by 25 basis points to 4.75%. The cut was supported by the rising unemployment and flat GDP growth that had characterized previous quarters. In April, inflation had eased to 2.7%, within the BoC’s target range. It laid out an optimistic case for a second rate cut at the July meeting.
• Multifamily real estate emerged as the industry’s most-favoured asset class in terms of expected performance over the next 12 months, according to the Altus Group’s CRE Industry Conditions & Sentiment Survey for Q2’24. Responding real estate firms polled in the survey anticipate NOI and property revenue growth to remain stable or increase. Likewise, respondents expect cap rates will remain stable over the next year, and fewer expect rates to increase than in the previous quarter.
• Throughout the quarter, cap rates showed further signs of contracting after expansion slowed in the previous months. As a result, property valuations could be seen to stabilize in the multifamily, industrial, and commercial spaces.
• National average asking rents for all residential property types hit a record high in May, followed by a slight pullback in June. Purpose-built rents were up 11.0% Y/Y and the increase in condo apartment rents hit 2.6% Y/Y by quarter end.
• Although sentiment improved, the BoC’s still-restrictive rate level is not expected to materially improve market conditions in the near term.
• Transactions across all property types slowed throughout the quarter, particularly in residential markets where sales fell below pre-COVID levels. A significant build-up of resale properties in Vancouver, Toronto, and Montreal went unsold. Despite this, high prices continue to present a major obstacle for first-time home buyers.
• Regarding supply, high interest rates likely contributed to a decrease in total starts in major cities, led by slowing multi-unit construction. Compared to June 2023, actual housing starts in Toronto and Vancouver declined 60% and 55%, respectively. This potential undersupply of newly built units could lead to price increases in the category.
• Population growth, a key driver of real estate and rental market expansion, is now becoming more widespread. While major metros like Toronto continue to attract the majority of new immigrants, lower-cost- of-living markets such as Niagara, Hamilton, and London in Ontario, as well as Edmonton and Calgary in Alberta, are also experiencing accelerated population growth.

Portfolio Update

In June, the Equiton Residential Income Fund Trust (the Trust) purchased four properties located in Welland, Ontario, increasing the Trust’s AUM to over $1 billion. The acquisition totalled 388 rental units, representing more than 10% of the local market’s primary rental stock. This strategic entry into the Niagara Region capitalizes on the area’s strong economic growth and rental tailwinds.

Meanwhile, we continued to strengthen the existing portfolio through physical improvements and by increasing Resident satisfaction. Ongoing projects of note include common area renovations and a major garage restoration aimed at enhancing the Resident experience. Energy-saving projects that were completed included building envelope repairs, lighting installations, and water-systems maintenance across the portfolio.

In Ottawa, the first of the Maison Riverain development project’s three towers remains on track to welcome Residents in late Q1 or early Q2’25. Ultimately, it is expected to add over 1,100 rental units to the Trust’s portfolio.

Performance

The Trust posted a trailing 12-month return of 11.07% (Class F DRIP) in Q2. Without taking the Welland acquisition into account, the portfolio’s top line growth and operational gains fully offset the appreciation of market cap rates, a potential $10.5M negative impact to portfolio market values. A 16.6% quarterly increase in portfolio NOI, led by high occupancy (99.3%) and new lease rental growth (20% Y/Y), contributed to the Trust’s strong balance sheet.

The Trust maintained a weighted average borrowing rate of 3.19%, in line with its conservative leverage strategy.

Equiton qualifies for Canada Mortgage and Housing Corporation (CMHC) rates (estimated at 4.35% to 4.55% at 10-year market rates during the previous quarter), generating significant savings over conventional mortgage lending rates, which were estimated at 5.25% to 7.50%. This approach, which saved the Trust approximately $13.3M in 2023, strengthens the Trust’s ability to make accretive acquisitions in a fluctuating rate environment.

Market Outlook and Fund Strategy

Falling rates 

Persistently low inflation data, weak consumer spending, and a slower labour market strongly suggest the possibility of more rate cuts later this year. In turn, cap rates can be expected to stabilize and contract as rates decrease, positively impacting the Trust’s fair value should property values recover in the first half of 2025.

Notwithstanding the BoC’s earlier rate cut announcement, buyers and sellers are unlikely to step off the sidelines until greater rate certainty is achieved. A recent poll for the Toronto Regional Real Estate Board suggests that cumulative rate cuts of at least 100 basis points will be required to stimulate homebuying activity. Should falling rates encourage a surge of buyers off the sidelines, the resulting demand could result in a significant run-up in home prices. Until then, stagnant resale transactions typically lead to fewer renters transitioning to homeownership.

Acquisitions strategy 

We continue to view the current economic environment as an opportunity to scale up holdings in key markets. Generally, the low transaction volumes of recent quarters have allowed well-capitalized firms to make purchases with minimal competition. This advantageous window is expected to remain open until falling interest rates reaccelerate the market.

We continue to explore new acquisitions to diversify and strengthen the resiliency of the portfolio. In a departure from previous quarters, multiunit starts led a significant decrease in the annual pace of overall housing starts in urban centres. The CMHC attributes this shift to a higher interest rate environment and predicts fewer starts through the end of 2024.

In fact, a partial rebound in starts activity is unlikely to occur until 2025 or 2026, according to the agency. A constricted development pipeline will result in fewer launches over the coming years, resulting in higher overall competition for product that actually reaches completion.

Tight rental market conditions 

Occupancy rates declined primarily in markets impacted by the higher cost of living. As part of the Trust’s active management approach, we have successfully deployed an aggressive marketing stance to quickly close vacancies. Strategies included the use of referrals, targeted digital advertising campaigns, and in-person open houses.

This active management tactic will become more central as lower interest rates encourage homebuying activity, resulting in higher turnover among rental apartments and more opportunities to close rent gap to market.

Through its conservative approach, the Trust achieved significant growth despite the challenges of recent quarters. Even in a high-rate environment, the Trust expanded and strengthened its property portfolio while maximizing operational efficiencies. With interest and cap rates headed in a positive direction, we expect accelerated growth in the months and years ahead.

Find Equiton’s previous quarterly report here: Q1 2024 Commentary and Outlook – A Turning Point for Rentals?

Click here to download this article in PDF

Forward-Looking Information

Certain information in this communication contains “forward-looking information” within the meaning of applicable securities legislation.

• Forward-looking information may relate to future events or the Trust’s performance.
• Forward-looking information includes, but is not limited to, information regarding the Trust’s distributions, growth potential and volatility, investor returns, ability to achieve operational efficiencies, objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations and other statements that are not historical facts. These statements are based upon assumptions that the management of the Trust believes are reasonable, but there can be no assurance that actual results will be consistent with these forward-looking statements.
• Forward-looking information involves numerous assumptions, known and unknown risks, and uncertainties that contribute to the possibility that the forward-looking statements will not occur and may cause actual results to differ materially from those anticipated in such forward-looking statements. Some of these risks are discussed in the section “Risk Factors” in the Offering Memorandum. These forward-looking statements are made as of the date of this communication and the Trust is not under any duty to update any of the forward-looking statements after the date of this communication other than as otherwise required by applicable legislation.

The post Q2 2024 Commentary and Outlook – Rate Cuts to Extend Rental Growth appeared first on Equiton.

Throughout the first quarter of 2024, Canadian real estate navigated interest rate uncertainty, a slower economy, and stabilizing inflation as anticipation built for a potential rebound in the market. 

The initial optimism over February’s lower inflation waned as March posted a 10 basis point rebound to 2.9%. As such, interest rates held at 5.0% for the Bank of Canada’s fifth consecutive meeting in March, where they remained at the end of the quarter. The central bank expects inflation to hover around 3.0% until the second half of the year. Slowing economic growth this past quarter bolstered the case for a mid-year rate cut — a possible turning point. Lower rates are expected to reinvigorate transaction activity across all property categories and ease construction costs.   

That said, early 2024 still presents rich possibilities for investors in the Canadian multi-family space. Growing rental prices and occupancy rates maintain near-record highs, supported by ever-rising immigration and low supply. An undervalued environment provides a buyer’s market, creating an opportunity to bolster portfolios with new acquisitions presenting long-term growth potential.   

Against this backdrop, the Equiton Residential Income Fund Trust (the Trust) ended the quarter with a net return of 2.12% (Class F DRIP). 

Rental Market Pressure to Grow in Coming Quarters

Residential transactions showed decreased activity during the quarter. In the GTA, single-family home sales fell to 51% below the 10-year average. However, new listings surged in major cities across Canada, suggesting potential buyers may not be far behind.   

A rate cut is likely to renew confidence among prospective homeowners navigating increased living expenses and challenging mortgage rates. Regardless, for most it may not be enough to support the transition from renting to ownership. The Canada Mortgage and Housing Corporation (CMHC) projects the national average home price could reach 2022’s historic $816,7207 by 2025 and surpass it the following year. In the agency’s view, homeownership barriers will drive record rental occupancy and rent increases on unit turnover in 2024.    

Strong Rental Market Offers Value Amid Affordability Issues

With high prices making single-detached homes unaffordable for many, rentals continued to offer Canadians much-needed value. For example, a representative two-bedroom condo cost 40.8% more to own than to rent in the GTA in Q1’24.  

In Vancouver, the expenses of owning a representative two-bedroom condo exceeded renting by 66.3%. Meanwhile, in relatively affordable condo markets, such as Ottawa and Edmonton, the difference worked out to 10.5% and 9.2%, respectively.  

In March, purpose-built apartment rents grew by an average of 12.7% Y/Y versus rental condos’ 3.9% Y/Y nationally. Demand remained favourable in the Greater Toronto and Hamilton Area. Vacancies declined in the last quarter despite the significant addition of 1,700 new rental units.   

Rentals and Condos Lead New Canadian Housing Development

The past year’s economic challenges sidelined many single-detached homebuilders well into the quarter. Housing starts in the category dropped 20.0% Y/Y in major Canadian cities at the end of 2023. However, robust purpose-built rental and condo apartment construction, up 7.3% the same year, helped offset overall homebuilding declines.  

Purpose-built rental starts slowed in the quarter but were up 176% since construction activity hit a low in Q3’22. Meanwhile, purpose-built rental units under construction reached a multi-decade high. That said, CMHC anticipates that these units will fail to meet outsized demand as they come online in future quarters. Accordingly, high-cost-of-living regions like the GTA will continue to experience tight rental markets.   

Mitigating Construction Headwinds Through Self-Performing Capabilities

Industry organizations attribute growing rental construction, in part, to recent government policies. Both low-interest loans and the removal of federal and provincial taxes on purpose-built rentals have helped improve certainty for builders. Additionally, the Province of Ontario tabled changes designed to limit municipal development proposal wait times to 90 days. While a welcome start, policy changes alone will not necessarily erase key obstacles to scaling up construction.  

For instance, government charges and fees have come to represent more than 31.0% of the total cost of building a home in major cities. A significant reduction in taxes on development and construction would provide a much-needed boost for the sector. The Canadian Chamber of Commerce’s Housing and Development Strategy Council* recently recommended expanding tax relief to rental projects under construction. A shortage of skilled labour has contributed to elevated construction costs, presenting a challenge of its own.  

As governments weigh courses of action, Equiton has taken a proactive stance to mitigating prevailing uncertainties. The firm’s development arm, Equiton Developments, is in the process of building its self-performing construction capabilities. Bringing construction in-house will enable Equiton to manage its own timelines and create operational efficiencies in all economic environments.  

In partnership with Ottawa developer Main and Main, Equiton is expected to bring the first tower of its 1,100-unit Maison Riverain project online in early 2025. Future phases will benefit from federal and provincial tax cuts on purpose-built rentals.  

*Equiton is a member of the Housing and Development Strategy Council 

Non-Permanent Resident Caps Anticipated to Have Low Immediate Impact

In order to ease extreme housing pressures, the federal government has taken steps to pare back temporary resident arrivals with the intent to reduce temporary residents to 5.0% from 6.5% of the total population over the next three years. This would cut Canada’s roughly 2.5 million non-permanent residents by about 20.0% from current levels.  

Similarly, Canada will implement a temporary cap on new international study permits, reducing admissions by 35.0% in 2024 and 2025. These changes are expected to disproportionately impact Ontario and British Columbia, where many temporary residents arrive.  

The impact of these immigration caps may be short-lived due to the rate at which demand is growing. For example, reduced student admissions could moderate rental growth in the near term, but are unlikely to reduce overall demand.  

Given these points, permanent immigration to Canada remains a chief contributor to mounting housing demand. Federal government immigration targets will admit 485,000 permanent residents in 2024. In addition, another million are expected in 2025 and 2026. The rapid pace of Canada’s population growth now ranks it among the fastest-growing advanced economies.  

According to CMHC, maintaining current immigration trends through 2030 would require an additional four million housing units to restore affordability. Equiton has focused its acquisitions on high-growth regions, particularly the GTA, to meet demand for housing where it is highest.   

Federal Housing Plan and Budget Outlook

This past quarter saw the introduction of a new federal housing plan and budget.  

Generally, the government’s housing plan pledged several measures to make home ownership more attainable in addition to increasing housing supply. To that end, the government expanded its low-cost rental construction loan program by an additional $15 billion. Also, it committed $6 billion to infrastructure and plans to open underutilized public lands for development. The plan’s ambitious target is to encourage the creation of 3.87 million homes by 2031, with a focus on rentals.   

Demand-side measures gave first-time homebuyers access to 30-year mortgages when buying new builds and an increased $60,000 withdrawal limit for the RRSP Homebuyers Plan. The government also barred corporations from purchasing single-family homes. The targeted nature of these measures is unlikely to stoke undue demand among prospective owners. On the other hand, overall construction productivity may receive a much-needed boost.  

Capital gains tax increase may impact some, but not all, real estate investors

Beyond housing and affordability measures, the federal budget increased the capital gains tax inclusion rate effective June 25. Individuals will pay taxes on 66.7% of realized capital gains exceeding $250,000, while companies will pay the higher inclusion rate on all investment profit.  

Equiton expects individual real estate owners, a significant portion of the rental market, to pause transactions in the short term to avoid incurring higher tax charges. “Mom-and-pop” investors own 23.0% of condos and 11.2% of houses in Canada, more than corporate and foreign investors combined.  

As such, institutional real estate corporations will likely execute the majority of transactions this year. With access to large pools of free capital, they are strongly positioned to buy and sell assets strategically.  

The Importance of Resident Satisfaction

Building vibrant communities and fostering resident satisfaction remain key to growing a resilient business. Satisfied residents have longer tenures and contribute to higher occupancy rates, providing a source of stable, long-term rental returns.  

Exploring this dynamic, Equiton began monitoring resident satisfaction measures portfolio-wide as part of its Environmental, Sustainability, and Governance (ESG) efforts. The first full year of results available in Q1’24 revealed a 7.2% Y/Y increase in overall satisfaction among Equiton residents.  

This improvement reflects the effectiveness of Equiton’s active approach to property management. Its subsidiary, Equiton Living, stations trained Resident Managers at every property to maintain open communication and respond to resident needs. Three Equiton properties won the 2023 SatisFacts Resident Satisfaction Award, which recognizes superior resident satisfaction and retention rates, in Q1’24.  

Green upgrades produce long-term benefits

As Canada builds toward a net-zero future, energy-efficient improvements to existing housing play an increasingly essential role. Upgrades to building envelopes, appliances, and electrical and water systems provide lasting environmental benefits and reduce costs.  

As a contributor to climate efforts, Equiton continued to make property upgrades that generate cost savings over the long term. This past quarter, key properties comprising 200+ units received motion-sensing LED lighting throughout common and parking areas. These improvements are expected to reduce hydro consumption by dimming when not in use. To reduce water consumption, Equiton’s water fitup program installed showerhead regulators and replaced toilets at properties totalling 150+ units.  

This builds on Equiton’s longstanding hydro and water sub-metering programs, which incentivize residents to conservate utilities.  

Equiton has continued to make progress on its waste audit program. The program monitors waste outflow with the aim of reducing costs. Next quarter, Equiton expects to complete waste audits across all properties and continue lighting, water, and boiler-room upgrades.  

A Turning Point for Canadian Real Estate?

Key rental measures experienced marked growth in Q1’24 even as the market shifted from last year’s record-setting pace. Housing affordability pressures and population growth continued to drive rents, while new rental supply was quickly absorbed. Rentals continue to provide Canadians with an alternative to less accessible housing options.  

Into the second quarter, macroeconomic conditions — such as slowing inflation and employment — increasingly indicate that a favourable interest rate decision could be feasible this year. If a rate cut occurs, investors could anticipate revitalized conditions for construction, financing, and acquisitions. As the year unfolds, Equiton continues to actively monitor the market to uncover opportunities to improve resident satisfaction and reward investors.  

Find Equiton’s previous quarterly report here: 2023 Market Commentary and 2024 Outlook

Forward-Looking Information

Certain information in this communication contains “forward-looking information” within the meaning of applicable securities legislation.

• Forward-looking information may relate to future events or the Trust’s performance.
• Forward-looking information includes, but is not limited to, information regarding the Trust’s distributions, growth potential and volatility, investor returns, ability to achieve operational efficiencies, objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations and other statements that are not historical facts. These statements are based upon assumptions that the management of the Trust believes are reasonable, but there can be no assurance that actual results will be consistent with these forward-looking statements.
• Forward-looking information involves numerous assumptions, known and unknown risks, and uncertainties that contribute to the possibility that the forward-looking statements will not occur and may cause actual results to differ materially from those anticipated in such forward-looking statements. Some of these risks are discussed in the section “Risk Factors” in the Offering Memorandum. These forward-looking statements are made as of the date of this communication and the Trust is not under any duty to update any of the forward-looking statements after the date of this communication other than as otherwise required by applicable legislation.

The post Q1 2024 Commentary and Outlook – A Turning Point for Rentals? appeared first on Equiton.

It was an undeniably challenging year in Canadian real estate. High interest rates in particular impacted transaction volume, borrowing costs, and housing starts through the introduction of rate uncertainty. By the time the Bank of Canada paused — and potentially ended — its protracted interest-rate hiking cycle mid-year, it had become clear which real estate companies had built resilient portfolios capable of navigating macroeconomic challenges such as lingering inflation costs. Though not isolated from those same economic forces, firms exercising conservative operation entered the period from a position of strength, ultimately rewarding their investors. With a disciplined debt portfolio consisting of fixed-rate mortgages and a conservative investment approach, the Equiton Residential Income Fund Trust (the Apartment Fund) navigated this high-interest environment to yield an annual net return of 11.9% (Class F DRIP) in 2023.

The fourth quarter of 2023 concluded what was a banner year for Canadian rental growth. Looking forward to 2024, underlying market fundamentals are strong. Rental demand outpaced the construction of new supply, despite the latter achieving noteworthy gains throughout the year. Buoyed by tailwinds such as surging population growth, the rental market will continue to present investors with considerable opportunities.

Finding Opportunity in a High-Interest Environment

Canada avoided a significant recession amid high interest rates, but economic growth remains languid. A strong foundation will be necessary to capitalize on acquisition and development opportunities that arise in the initial months of 2024. Within this window, a lower transaction volume offers well-positioned companies the chance to make acquisitions with less competition. In such an economic environment, private equity firms have historically exhibited an ability to leverage a deep pool of capital to satisfy the creation of value over the long term. Indeed, while only 64 multi-residential transactions took place in the Greater Toronto Area last year, private equity real estate firms constituted 70% of total dollar volume.

With that in mind, Equiton made two acquisitions in Q4’23. Located in London and Brantford, Ontario, the properties totalling 170 rental units were an exceptional fit for the portfolio. Both were purchased at below-market values, and one is adjacent to an existing Equiton-owned building, unlocking operational efficiencies.

For the year ahead, Equiton is maintaining a selective, proactive posture to ensure all opportunities are captured effectively. Equiton will look to reinforce its market position in Ontario’s high-growth regions, including Toronto and the GTA, where transaction activity is expected to pick up, as well as expand its presence into Vancouver and secondary markets such as New Westminster, Coquitlam, and Victoria. In the growing Edmonton market, Equiton will seek to bolster the scale of its portfolio.

Optimism in Purpose-Built Rental Construction

Other opportunities may arise out of the entrenched supply-demand gap in Canadian rentals, which is expected to widen amid high population growth and robust employment. Federal immigration targets will continue to drive population growth in larger markets, particularly in the Ontario and Vancouver areas where immigrants have a higher tendency to rent. Canada expects to welcome up to 485,000 permanent residents in 2024, and up to another million by the end of 2026. In parallel, housing starts dropped off sharply in 2023. Though purpose-built rental construction slowed as well, quarterly completions in the GTA hit a 30-year high in Q4’23. Ultimately, rentals comprised 35% of total housing completions in major Canadian markets last year.

While challenges to creating new supply remain, Equiton is encouraged by accelerating policy trends aimed at easing the construction of purpose-built rentals. Various levels of government have taken measures to shorten development timeframes and reduce costs in key markets. Industry groups suggest that the recent removal of HST and PST on purpose-built rental construction positively impacted starts in Q4’23.

As one example, the tax rebate on purpose-built rentals has added a level of cost certainty to new and some in-progress projects, including the three-tower Maison Riverain development in Ottawa where Equiton partnered with local-market experts Main and Main. While the first tower is on track to welcome residents in early 2025, investors will benefit from lower costs in future phases of the project. Riverain will contribute approximately 1,100 sorely needed residential units to the local supply when it is completed.

In addition, Q4’23 saw several more major metros engage with federal and provincial incentives by committing to end exclusionary zoning practices and allow purpose-built rentals in residential areas by default; opening greater density along transit corridors; and slating municipal lands for high-density development. In Equiton’s view, these policy tailwinds must evolve into more incentives to increase the viability of building rental supply at scale. Other opportunities include reducing multi-residential property taxes, a key component of post-construction costs and rent prices, to the level of condos and low-rise homes. Ongoing work by organizations such as the Canadian Chamber of Commerce’s Housing and Development Strategy Council*, in addition to demonstrations of political will, are causes for optimism in the realm of construction.

*Equiton is a member of the Housing and Development Strategy Council

Demand for High-Quality, Accessible Rental Options

The costs of buying and owning a home, pushed up by high lending rates and the lingering costs of inflation, supported the retention of potential homeowners within the rental market. Though rent prices increased as well, purpose-built rentals continued to offer a more affordable alternative to homeownership’s escalating costs, as indicated by record low vacancy rates and a cooler market for private homes. In this regard, Equiton places great importance on providing residents with high-quality and accessible housing options.

In addition, stability has become a primary renter concern. Renters living in purpose-built units benefit from regulated rent prices that can offer a measure of predictability in periods of high rent growth. By contrast, renters in newer condo units can be subject to sudden rent hikes in line with tax, strata fee, and market rent increases. They may also face eviction for a unit owner’s personal use — in Toronto, personal-use applications surged 77% in the first nine months of 2023.

Responding to Renters’ Evolving Expectations

The population of potential renters aged 24 and under accelerated in most provinces, with more forming households owing in part to employment gains. Among this group, Equiton observes an acceptance of (and preference for) the rental lifestyle, which offers greater flexibility and mobility than ownership. Although these and other renters gravitate toward creating households in lower-cost accommodations and smaller unit sizes due to economic constraints, many have also signalled a desire for single-occupant accommodations. Equiton explores opportunities to meet this demand within its existing portfolio through units that offer an attractive combination of accessibility and privacy.

Equiton’s demonstrated ability to identify and respond to the changing needs of residents is foundational to its mission of building a resilient, stable portfolio that continues to create value for investors through many different market conditions.

ESG: Adding Value in Challenging Times

In alignment with Environmental, Social, and Governance (ESG) practices, Equiton concluded its first full year of participation in the Global Real Estate Sustainability Benchmark (GRESB). The independent environmental assessment provided insights into Equiton’s strengths and areas for improvement, informing our approach to the year.

When faced with a challenging environment for acquisition and development, Equiton turned to implementing a number of green upgrades to existing properties to strengthen the quality of its portfolio. For example, Equiton recently completed the modernization of windows at five of its largest properties, with the aim of improving heat retention and reducing energy consumption. Measures of resident satisfaction experienced an immediate boost. Over the long term, the retrofits are expected to achieve significant cost savings as well. By harnessing a variety of approaches to create value, Equiton aims to achieve sustainable growth within its portfolio and stay on pace to achieve the goal of net-zero carbon emissions by 2050.

Equiton’s commitment to creating spaces where residents thrive was recently recognized by SatisFacts. The independent multi-residential housing evaluator awarded three Equiton properties with the 2023 SatisFacts Resident Satisfaction Award, which recognizes superior resident satisfaction and retention rates. Notably, two of these award-winning communities were the site of Equiton’s new emergency awareness and community social pilot programs, which were designed to engage residents and foster a sense of belonging. Equiton regularly connects with residents through satisfaction surveys at multiple touchpoints throughout their tenancy and acts on the findings.

A Portfolio Built to Navigate Uncertainty

The past year was an ultimately positive period for firms demonstrating a commitment to conservative decision-making and growing value. 2024 is widely predicted to be another year of exceptionally tight rental markets amid ongoing population growth. Rental demand continues to be well-supported by robust employment numbers, and rental growth — expected to moderate toward its five-year average of approximately 5% in 2024 — establishes room for further gains. Equiton will continue to respond to the dynamics of immigration, interest rates, and new rental trends as they arise to continue to provide solid returns for investors.

Forward-Looking Information

Certain information in this communication contains “forward-looking information” within the meaning of applicable securities legislation.

• Forward-looking information may relate to future events or the Trust’s performance.
• Forward-looking information includes, but is not limited to, information regarding the Trust’s distributions, growth potential and volatility, investor returns, ability to achieve operational efficiencies, objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations and other statements that are not historical facts. These statements are based upon assumptions that the management of the Trust believes are reasonable, but there can be no assurance that actual results will be consistent with these forward-looking statements.
• Forward-looking information involves numerous assumptions, known and unknown risks, and uncertainties that contribute to the possibility that the forward-looking statements will not occur and may cause actual results to differ materially from those anticipated in such forward-looking statements. Some of these risks are discussed in the section “Risk Factors” in the Offering Memorandum. These forward-looking statements are made as of the date of this communication and the Trust is not under any duty to update any of the forward-looking statements after the date of this communication other than as otherwise required by applicable legislation.

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