Multifamily assets were consistent performers again last year for institutional investors represented in the MSCI/REALPAC Canada Property Index. Newly released 2024 results peg the average total return for residential properties at 3.7 per cent across 54 participating portfolios — surpassing the index-wide average total return of 3.21 per cent.
The multifamily category registered positive capital growth, albeit at a modest 0.1 per cent, while the total index — encompassing 2,225 individual assets collectively valued at CAD $165.4 billion — sustained a 1.63 per cent drop in value from 2023. Multifamily also came out of the year with the lowest average cap rate, at 4.2 per cent, and continued a long string of years as the second-best performer among the major property classes.
Retail was on top, posting a total average return of 6.5 per cent. Industrial was slotted third with a total average return of 3.4 per cent, while office bottomed out the chart with a flat return. All four asset categories showed improved performance over 2023, largely attributable to income return.
Index participants include pension plans, insurance companies and open-ended property funds. As a group, these investors largely channelled their spending into residential properties last year, including about $367 million in standing multifamily assets and about $1.672 billion on “other” assets, primarily comprised of development land. On the flipside, investors divested a net of $756.6 million in industrial properties and $97.8 million worth of retail properties in 2024.
“Speaking with clients, the consensus is that most of that other (category) will go to residential, but until you get (development) permits in place, you can’t actually reclassify that land as residential,” Peter Koitsopoulos, a vice president with the index producer, MSCI, reported as he presented the 2024 investment results to a gathering in Toronto last week.
The year’s favoured investment is in keeping with the ongoing shift within investors’ portfolios and gaining weight of multifamily assets. As of December 2024, multifamily accounted for 19 per cent of the capital value in the index, up from about 8 per cent 10 years earlier. Industrial likewise climbed from 10 per cent to a 23.7 per cent share of capital value in the same period, while retail and industrial slipped correspondingly.
Expectations for income growth
Comparing investment levels from before and after the COVID-19 pandemic, MSCI’s chief economist, Jim Costello, noted that deal volume in 2024 was relatively on par with the five-year average just prior to 2020.
“Before, it was around $34 billion per year. Now, in 2024, the market was $31 billion so it’s kind of in line,” he said. “There’s been a change in the composition of what people are buying. Apartments and industrial, that’s really where the market has shifted to. This changes how institutional investors have to think about the market.”
Other MSCI analysis of transaction data suggests that multifamily investors have strong expectations for income growth. That sentiment is gleaned from a comparative examination of sales prices versus cap rates to derive an indicator of how investors are pricing expected growth into their purchasing decisions. Costello theorizes that those expectations partly explain why cap rates have not risen in step with interest rates, but, rather, the spread between cap rates and the 10-year bond rate has narrowed.
“There’s a lot of different countervailing forces that have a say in what happens with cap rates,” he said. “For Canada, the industrial sector, the retail sector, the apartment sector, they all have healthy income growth expectations. All things equal, that’s going to help bring cap rates down.”
Despite their intentions, Costello also pointed to some inherent obstacles for institutional investors to seize opportunities.
“Most of the money moving in so far is private investment. They don’t have the fiduciary challenges of the big managers. It’s their own money,” he said. “If you’re embedded in a market and you see an opportunity, you’re going to move faster than institutions because you don’t have a board to report to. You don’t have the same kind of reputational risk of being at the bottom of the index because you bought at the wrong time.”
Intensification opportunities on retail mall sites
Meanwhile, industry insiders participating in an associated panel discussion sketched out some of their companies’ multifamily development initiatives. Oxford Properties, Salthill Capital Corporation and LaSalle Investment Management all have intensification opportunities at retail mall sites.
“We are looking at using the incredible financing that CMHC (Canada Mortgage and Housing Corporation) has for constructing apartments right now, and we are definitely trying to use that to our advantage,” confirmed Liz Murphy, chief financial officer at Oxford Properties. “Even though, when you look at the numbers, residential in Toronto doesn’t look great, in those outer areas, it’s a little bit different than building in downtown Toronto.”
Accordingly, Salthill Capital is aiming to move forward with a mixed-use project at Toronto’s eastern boundary, at the Pickering Town Centre. It’s envisioned that pre-sales for the first two residential towers could be complete by this fall. Thus far, Salthill’s chief executive officer, Cathal O’Connor, reported that target is about 75 per cent met.
“We can build 6,000 condo units without touching the existing mall,” he advised. “Recently, sales have picked up.”
Michael Fraidakis, chief investment officer for LaSalle’s Canadian portfolio, reported his company and its development partners are at an earlier stage of the process for potential projects at Vaughan Mills, just north of Toronto’s boundary, and at Guildwood Town Centre in Surrey, British Columbia, which is the fastest growing municipality in that province.
“I think development will come back,” he maintained. “The numbers have not pencilled out for some time, but, like other developers, we’re doing the work to get there so that we can be in position when the time is right to pull the trigger.”
