The Greater Toronto Area’s multifamily market has been subdued of late, with smaller, value-added properties comprising the bulk of the handful of trades each quarter.
Despite the headwinds, Jonathan Hittner, principal and senior vice president at Avison Young, and his team have brought a steady flow of listings to market, and closed a few $20m-plus deals – illustrating there are still successes to be had.
Hittner, whose commercial real estate career spans over 18 years, spoke with Green Street News about what’s selling, who’s buying and whether the market will be able to absorb the influx of new builds completing in the near future.
Your team has sold properties in recent weeks at a price point that seems to be rarer these days. What’s the key to getting that done in today’s market?
A lot of persistence. You have to be creative, you have to really listen and pay close attention to what the buyer’s hot buttons are and what the seller’s wish list is. You really have to understand how everybody’s feeling and figure out the way to bridge the gap, if there is one. I can give you an example: For the 290 Morningside deal … there was a vendor take-back but the owner didn’t want to do too large of a VTB, so we figured out a pay-down structure to help bridge the gap.
Nothing is easy to sell right now, but what, relatively speaking, is easier to find a buyer for?
There are a couple types that are more popular than others. The value-add product, which is generally an older apartment building with a lot of room in rents, that’s always very, very strong. These days though, being well-located helps a lot. You want to have some upside in the rents, but a buyer also doesn’t want a lot of cap ex. They don’t want to have to come in on day one and replace the roof, replace the boiler, etc. The other would be what the market calls core-plus product, which is generally renovated buildings with very little upside left but a lot of the cap ex is done, so you’re not going to have to do any heavy lifting for the foreseeable future. Those would be two of the stronger classes of multifamily right now.
In terms of locations, obviously Toronto is always great. An A or B location in Toronto will always stand out. Kitchener, Waterloo, Cambridge, Guelph – they’re always very strong markets. Ottawa has also seen increased interest for sure and there are lots of buyers who still love Hamilton and going east to Whitby and Pickering, as well.
On the flip side, what’s the most difficult? Is there anything you’d be hesitant to take on?
There’s a buyer for everything in this market, there always is. It’s just about hustling and finding the right buyer. But what some buyers don’t love is what I would call the deep-value-add product, so that’s the product that has a lot more cap ex to do immediately or soon after you buy the building, and very low rents. Usually buyers love very low rents, and they still do, but it’s harder to finance right now. So if they can buy it at a great price, then obviously they’re very interested, but if the seller’s expectations are a little bit higher, it gets tricky sometimes.
Who’s looking to buy now? Are institutional investors back?
Private investors are very active and they have been over the last couple of years. I would say there are more and more privates entering the market. The institutions are all back at the table. If they were taking a break, they’re back and looking to do deals. I would expect them to be very active in the last half of this year and next year as well.
What kind of bid-ask spreads are you seeing? Are seller expectations more on par with market values now?
They’ve closed considerably for sure. Anybody that saw offers in 2021 or early 2022 had their eye levels raised and it probably took a little while to come around to selling again. A lot of those groups now have sold or are open to selling, so the bid-ask spread has definitely become more realistic.
What about capitalization rates? Are you seeing any movement?
I think they’re very stable, and they’re trending in the right direction for sellers – so trending downwards.
The two largest multifamily sales so far this year in the GTA were in Brampton. Is that a coincidence or growing interest in that market?
I think it’s a bit of a coincidence. You could argue that there are a couple institutions that were looking to get out of Brampton. Whether that’s specific to the market of Brampton or just wanting to sell some buildings and recycle the money, that’s something that a lot of groups are doing right now, too.
Over the last few quarters, we’ve seen smaller-value deals make up the majority of multifamily sales volume. Are you still seeing that or are more high-priced deals taking place?
Something around $5m, $10m, $15m – they’re easier deals to do. There are a lot of buyers that have a few million dollars that can take on a building of that size. The bigger deals, the last couple years when rates were very high, they’ve sometimes been a little harder to do. But there’s lots happening and I think we’re going to see a lot more bigger transactions in the next six months to a year.
There’s been a lot more purpose-built rental development in recent years, and more coming. How do you see that playing out in two to three years? Are you expecting an influx of inventory, and are there enough buyers who can transact at the higher price point of a new building?
Yeah, there are a lot of buyers for new purpose-built rentals, and I think there’s going to be more and more. There are a lot of new funds and new buyers that are entering our market looking for new product only. Some of the institutions have sold their older product in the last few years to cycle into new product, so I believe there are enough buyers to handle more of these buildings coming up for sale. I think as rents go up and rates come down, it’s going to help bridge the gap for more of them to sell.
