Scarce supply is prompting proactive multifamily investment strategies in Victoria. Colliers International reports all 18 transactions in the first half of 2016 were off-market deals, in which purchasers made unbidden offers to undeclared vendors and convinced them to sell. At the same time, a dozen developers have new purpose-built rental apartment projects in the works for the city’s downtown.
Victoria’s strong market fundamentals underpin investor interest. Canada Mortgage and Housing Corporation (CMHC) found a 0.8 per cent vacancy rate in its spring 2016 rental market survey, with average rents at $890 for one-bedroom units and $1,160 for two-bedroom units. However, Colliers’ analysts theorize that Greater Vancouver’s paucity of supply and even lower cap rates are also driving “an influx of capable investors from the Lower Mainland who are being frustrated by market circumstances” to look for opportunities elsewhere.
As of the first quarter 2016, Colliers pegged cap rates for Vancouver high-rise multifamily properties in the 2.5 to 3 per cent range, and at 3 to 4 per cent for low-rise. Victoria’s average multifamily cap rate was 4.3 per cent at the end of the second quarter, down from 4.8 per cent in June 2015.
Victoria transactions in the first half of 2016 typically involved smaller buildings, with the largest 85-unit, $17-million acquisition outdistancing the next biggest deal by more than $9 million. The 18 transactions collectively tallied $58.3 million, averaging approximately $188,000 per suite — a jump in both the number or deals and sales values compared to 11 transactions totalling $30 million in the first half of 2015.
Off-market targeting of aging owners may be one of few avenues to pry some product onto the market, as Colliers reports most owners currently see little reason to sell. “These owners are typically reluctant to give up the returns they are enjoying, understanding that, although they are deriving a premium price for their properties, they will have difficulty replacing these return levels in today’s market environment,” the Q2 market overview states.
Meanwhile, housing and financial market dynamics make the case for investors. “Sustained historically low interest rates, combined with significant capital in the hands of lenders looking to put these funds to work, are enabling investors to justify lower returns while maintaining acceptable spreads,” Colliers hypothesizes.
Downtown Victoria is set to absorb nearly 1,600 units of purpose-built rental housing, which is now under construction or in the planning and development approval stages, over the next couple of years. Both local and Vancouver-based developers are building the projects.
“This recent increase in building has been in reaction to market demand fundamental from a robust tenant base looking to upgrade their accommodation,” the Q2 report states. Demographers note this robust tenant base includes a growing portion of renters who have postponed or relinquished homeownership, as well as in-migration of millennials from elsewhere in British Columbia or Canada now working in the city.