Multifamily asset values appear to be holding steady through recent economic tumult. Valuation data from Altus Group shows a 0.01 per cent year-over-year upswing in the 12 months between the first quarters of 2022 and 2023 across 94 institutional-grade income properties contributing to the benchmark.

That pales against the 9.5 per cent value gain across 269 industrial assets in the benchmark during the same period, but stands in contrast to an 11 per cent drop in office values and a 5.7 per cent slip for retail assets. Drilling down further during a webinar last week, Mike Helm, senior director of national portfolio management with Altus, highlighted how the key valuation components — cash flow and yield — are cancelling each other out in the multifamily context.

He charted a 3.95 per cent year-over-year gain in cash flow alongside a 3.94 per cent negative impact on yield. That’s a similar albeit more muted pattern to the industrial benchmark, which saw a 21.9 per cent jump in cash flow coupled with a 12.4 per cent year-over-year hit to yield. Helm also noted some differences in how appraisers interpret value factors for the two asset classes.

“I think we find that multi-res has less alignment in the industry when it comes to stabilizing NOI and forecasting cash flows versus a fully leased triple-net asset in industrial. That may be contributing to the more cautious approach we’ve seen to valuation change in multi-res,” he said.

Helm and other Altus colleagues participating in the webinar acknowledged that a steep decline in transactions since early in 2022 is complicating the exercise. Conventionally, appraisers look to cap rates from recent sales to peg yield, but there is currently a much shallower pool to draw from and it is considered to be less reflective of the market.

“It’s difficult to transact today. It is difficult to finance your real estate, it’s difficult to underwrite real estate and, quite frankly, there is a notable bid-ask spread between vendors and purchasers,” observed Jonas Locke, vice president of Altus Canadian business advisory services. “There’s certainly not the volume that we’re used to seeing and many of them aren’t as clean as we’d like to see. A lot of the transactions we are seeing, there’s a story behind them. So you need to understand that story.”

Colliers Canada’s recently released Q1 capital markets snapshot reports slightly less than $109 million in multifamily deals for the first three months of 2023, or about 5 per cent of the $2.1 billion investment volume in Q1 2022. Across five surveyed asset types (office, industrial, retail, multifamily and hotel), Colliers registers a 49 per cent year-over-year drop in investment value, with multifamily seeing the lowest deal volume of any sector.

“Borrowing costs dragged down the market,” Colliers analysts state. “Apartments remain one of the more interest-rate-sensitive commercial assets as, in Canada, multifamily is a very decentralized market with many small-scale investors.”

Raymond Wong, vice president of the Altus data and research division, noted that many of the Q1 transactions stem from agreements made in Q4 2022 or earlier. Rising interest rates and associated market challenges have been disruptive in the interim with some purchasers struggling to get the required financing, while vendors remain reluctant to make concessions.

“Whether or not there’s a vendor take-back to help get the deal across the finish line, as well as to maintain certain pricing, sellers right now do not want — unless they really have to because there are other certain circumstances — to lower their prices for the transactions,” Wong said. “The deals that we see over the next two quarters will be reflective of the deals that were exacted in the first quarter. Based on the challenges with the U.S. banks and the credit risk, I think that’s going to slow down the market.”

Helm hypothesized the current bid-ask spread is partly due to prospective purchasers accounting for the risk of rising interest rates. The gap should start to narrow as rates come down again, at least for sectors like multifamily that enjoy strong fundamentals.

“Tied back to office, flat interest rates are not going to create confidence in cash flows,” he asserted. “Downside risks remain high.”

Meanwhile, the upside for multifamily landlords is well documented as Canada grapples with a housing supply-demand imbalance that’s seemingly entrenched for the long term. Inflation and rising interest rates have created obstacles for development, but various levels of government, nationwide, are offering inducements for new purpose-built rental and/or energy and sustainability upgrades in existing stock.

Locke pointed to the City of Calgary’s incentive program to encourage conversion of downtown office buildings into residential units, which is progressing toward a targeted 6 million square feet of repurposed space. “Will programs like that surface in other markets? I think they probably will,” he mused.

Concurrently, more multifamily markets are capturing a share of immigration as newcomers increasingly move out from the predominant entry points of Toronto, Vancouver and Montreal.

“I think that’s largely driven by affordability,” Locke said. “That’s another piece of this puzzle where new demand from immigration is now spreading itself a bit more around Canada than in the past.”

Barbara Carss is editor-in-chief of Canadian Property Management.