Foreign investors contemplating Canada’s multifamily market are likely to see a stable tenant base, few risks of oversupply and a regulatory environment that’s no more restrictive than what they could encounter in Europe. Yet, that may pose more theoretical than actual opportunity these days since they won’t see an abundance of product for sale and should expect strong domestic competition if prime assets become available.

“Canadian institutions have been divesting Class A assets in order to pursue development and readjust their allocations away from office and more robustly into industrial and residential,” Amy Erixon, president of investment management with the global real estate services firm, Avison Young, observed during a recent webinar that examined a range of factors seen to be motivating foreign investors’ interest in Canadian commercial real estate.

While institutional-grade multifamily properties have recently been a rarity in the marketplace, a notable transaction closed May 1 when Blackstone Real Estate completed the privatization of Tricon Residential Inc. — a USD $3.5 billion deal that now sees 786 existing multifamily units and a pipeline of 4,800 more in development in Canada enfolded into the U.S.-based investment manager’s global real estate portfolio.

Erixson speculates there is more potential to strike similar arrangements with purpose-built rental developers who have been walloped by rising interest rates after breaking ground on projects. That could give investors admittance into an upscale slice of the market set to command lucrative rents.

“There is a lot more opportunity (for investment) in that space than normal, and I think it’s definitely on people’s radar as the southeast U.S. is getting a little bit overbuilt,” she said. “They can get that same quality north of the border without the volatility.”

Looking to that market, a record-level 600,000 new purpose-built multifamily rental units are slated to be completed in the United States this year. In summarizing first quarter global real estate data and expected trends for the remainder of 2024, an online JLL presentation earlier this week highlighted the positive absorption of 100,000 multifamily units in the U.S. over the course of the winter, which outperformed projections.

Matthew McAuley, JLL’s research director, global property sectors, hypothesized tenants are staying in the U.S. rental housing market longer due to high homeownership costs and this should help to fill the glut of new units. Purpose-built rental housing construction is forecast to ebb in 2025, mirroring what’s already occurred elsewhere.

“We’ve seen steep declines in new housing starts across the major European markets and that’s going to keep rents rising,” McAuley reported.

Re-evaluating opportunity and risk in the context of geopolitical turmoil

Erixon and her colleagues enumerated Canada’s lures for foreign investors, underscoring its safe haven status in a period of geopolitical turmoil, general economic outperformance of other G7 countries and gaining competitiveness for investment returns. The Canada-U.S. exchange rate is tapped as an additional bonus, adding a significant currency lift, for U.S. investors, while the days of negative interest rates are long over in Europe.

“Canada was seen as being expensive over the last 10 years. As a result, you haven’t seen the level of foreign investment taking place that was occurring prior to that timeframe,” noted Robin White, founder and principal of Avison Young’s capital markets division. “That’s changed. There are opportunities now in Canada for people to take advantage of higher yields — opportunities that they probably wouldn’t have seen in the last 10 years or so.”

Various federal and provincial government moves to stimulate more housing construction are drawing some of that attention. He cited “Middle Eastern and Israeli groups” now assessing the possibilities for purpose-built rental and/or condominium deals.

“They’re looking at that inside partnerships or as developers in their own right, and I think we’re going to see more of that kind of activity taking place as well,” White said.

Mark Sinnett, executive vice president with Avison Young capital markets, suggested that earlier perceptions of priciness are partly tied to outsiders’ unfamiliarity with the nuances of the Canadian market, which also tend to guard against the deep lows experienced in downturns in other global regions. Circa 2024, more investors could be re-evaluating their strategies through a risk-adjusted lens.

“It’s a matter of understanding just how tight Canadian real estate is, how concentrated it is and what that does in terms of creating the floor,” Sinnett said. “If you adjust your risk profile a little more in tune with what’s happening around the world, the stability of the Canadian real estate landscape, as well as the Canadian economy, ensures that there’s a defensive play to acquiring real estate assets here.”

Cross-border comparisons accentuate differing market attributes

Looking specifically at multifamily, Erixon compared the average seven-year duration of renters’ tenure in Canadian units versus about 18 months in the United States — arguing that it equates to something of an upside on the rent restraints that are in place in most provinces except Alberta, Saskatchewan and Newfoundland and Labrador. She also pointed to the multifamily sector’s more advantageous financing options through Canada Mortgage and Housing Corporation (CMHC).

“You have rent control — it’s different in each province, but it’s largely indexed to inflation and you can move those units to market when the tenant leaves — but the flipside is that you have a lot fewer turnover costs. That shows up in the bottom line and is virtually offsetting the downside of having your upside staggered or phased in over time,” Erixon maintained. “There’s better financing both from the loan-to-value perspective as well as the rate perspective. So cap rates have moved more than other sectors, not because it’s less attractive, but because people use more leverage.”

To date, Canadian investors are more likely to be purchasers of U.S. multifamily properties than vice versa. Speaking in conjunction with the release of 2023 results of the REALPAC/MSCI Canada Property Index in late January, Jim Costello, chief economist with MSCI Real Assets, charted a drop-off in outbound investment last year, with the exception multifamily acquisitions.

“Where they’re doing more globally than at home is apartments,” he said. “In the United States the apartment market is just so large; it’s so liquid. If you want that exposure, it just provides that opportunity. So that’s the one thing that has been a constant for the Canadian investor.”

Looking at global trends thus far in 2024, Sean Coghlan, JLL’s global head of capital markets research, confirmed that multifamily is one of three favoured asset types, along with logistics and data centres. Across the broader range of asset types, many prospective investors are turning their attention to discounted prices hitting the market in the U.S. and the United Kingdom.

“We’re seeing adjustments between 20 and 35 per cent from peak levels for core product come through increasingly in the U.S. and the U.K,” Coghlan reported. “More buyers are active in the U.S. and the U.K. markets — a function of increasing confidence in pricing levels and a bit of a fear of missing out on opportunities.”