2019 Real Estate Market Predictions

Happy New Year, readers! Hope you had a great holiday season and that your 2019 is off to a great start. Now that everyone is back to business, who wants to talk some real estate? Today, we are going to offer our real estate market predictions for 2019.

Cap Rates Will Mostly Flatten Out or Even Increase A Bit

Cap rates have seemingly hit bottom. They didn’t really have much further to go, so this isn’t surprising. Now that interest rates have increased a bit, investors appear to be looking for a higher cap rate on their commercial investment properties. We reached a bit of a standstill with some properties in 2018, with sellers' lofty expectations not being achieved in the market. To get these deals done, sellers will need to adjust their expectations.

Multifamily Will Still Be On Fire

While it is our opinion that cap rates commercially will stall out, multifamily still has some positive dynamics that will keep it chugging along. First off, the demand is still very high from across Canada and the supply is very limited. It isn’t economical to build with these new construction prices, so adding new supply wont help the situation. Plus, the rental market is tight and rents are increasing—that doesn’t look like it will be changing anytime soon.

Interest Rates Will Increase, But Not As Much As Expected

Economists and market forecasters are expecting multiple interest rate increases this year, on the back of the three times the Bank of Canada raised last year. While we foresee rates to go a little higher, we don’t think the market in general can withstand an interest rate spike without causing a significant recession. The population is far too indebted and—particularly in expensive cities like Toronto and Vancouver—the cost of increased interest expenses can't be born. For these reasons, we think interest rates will have a lid on them.

The Lending Environment Will Get More Difficult For Borrowers

The government has introduced several measures over the last few years to try and cool the housing market. It finally seemed to have been working, as Toronto and Vancouver didn’t have such great stats in the second half of 2018. Combining these measures with higher interest rates, qualifying for the house you want is getting more difficult. We are also seeing lenders and mortgage insurers pulling back their risk, scrutinizing more deals and generally acting less competitive in the financing market.  We expect this to continue in 2019. This may also lead to more firm deals falling through at closing due to some of these factors.  So we advise sellers and listing agents to be extra diligent in ensuring buyers are qualified and pre-approved for a mortgage in your price range, with a little extra buffer for safety. Also, ask for big deposits!

Rents Will Rise & Vacancy Rate Will Fall Again

Residential rents have really increased in the last few years and the factors driving that don’t seem to be changing anytime soon. In fact, with the housing market continuing its climb and with the tightening lending environment, more people could be driven into the rental market, increasing demand. Adding to this is the start of the Gordie Howe Bridge, bringing with it a large influx of temporary workers coming to the area; the vacancy rate is forecast to continue to trend lower.

2019 should be an interesting year in the real estate market. Those are our predictions. What are yours?

Considerations when Evaluating a Multifamily Property

We are in the process of concluding a multifamily listing that kept us very busy these last few weeks. During the listing period, we came across several investors who seemed new to this area and had a lot to learn before pulling the trigger on something. Therefore, today we are going to discuss some points that are always worth considering when evaluating a multifamily property.

What is the Structure Like?

Does the property have a concrete or wood frame? Is the exterior full brick or have siding? How old is it? With a multifamily property, you are not just buying a cashflow—you are acquiring an asset. How solid is that asset? Make sure the structure is sound.

How is the mechanical in the building?

Are there forced air furnaces in each unit? Is it a boiler system with hot water or is it electric baseboard heating every unit? Heating is a very important consideration. In Ontario, hydro rates are sky-high; having electric heat is a huge drawback and can sap the cash flow of any building. Gas is a more economical choice.

Are utilities separately metered?

Are there separate meters for gas and hydro? Having your tenants pay for their utilities adds lots more certainty on expense projections. Statistically when tenants pay their own utilities, they are natural incentives to not waste energy.  

How do the existing rents compare to CMHC average rents?

If you review the rent roll and the rents seem low, this can be both good and bad. It's good that there is upside in the average rents in future should you have tenant turnover; it's bad in the fact that if you have very low rents, the tenants will be much less apt to leave such a good deal. You’ll only be able raise their rent by the annual CPI percentage (1.8% this year).  

What is the tenant profile?

What is the area like? What sort of tenants would you attract in this building? What sort of jobs do these tenants have? It is important to understand what sort of rental pool you are operating in. If you want to attract high-end renters, you need to look at high-end locations.  

What is the cap rate?

Is the cap rate consistent with the market? Does it seem too high or too low? If it's too high, it might indicate there is something off with the building or problems with the tenants. If it's too low then it probably won't appraise at the bank, meaning you’ll be forced to put down a higher downpayment, lowering your returns.

Do the expenses seem legitimate?

We continuously see buildings being advertised with several items being excluded from the expenses. For example, they’ll only include utilities, insurance & property taxes. What about other items? Where are the repairs and maintenance, management, grass cutting, snow removal, and vacancy allowance? Sometimes these buildings are run and managed by the owner, but if you are a hands-off investor, you need to hire someone for these tasks—they need to be accounted for. An appraiser working for the bank is going to rework these expenses too and run the number based on their expense assumptions.

Do you notice any major deficiencies related to fire code?

This one isn’t easy to identify and it's a bit of a grey area at times, but there are some easy items to look for. Are there any basement units? Did they get permits for the basement unit? Are there egress windows in the basement units? Are there multiple entrances and exits to the building for tenants to access? Do items like fire alarms and smoke detectors seem somewhat recent?

Those are just some items to consider when evaluating a multifamily building. There are quite a few more, but we wanted to keep this at a beginner level. Readers, are there any more you think should be added?

More Real Estate & Related Predictions for 2017

Last week we made a few real estate and related predictions about 2017.  This week we will take a crack at a few more.  So without further ado…

New Construction of Rental Units

With the vacancy rate dropping again last year to a minuscule 2.9%, conditions are ripe for new construction of multi-family units.  Very little has been built in our area since the 70s.  Combine that with some incentives being offered, like no development fees in the downtown core area, and investment is sure to show up.

The Residential Vacancy Rate Flattens Out

After topping out north of 15% back in the recession of 2008-09, the local vacancy rate has continued to plummet in the last 7-8 years all the way to 2.9% in 2016.  As the law of small numbers would dictate, additional improvement will be small from here.  Combine that with an increased number of sales of condos and homes to investors and new construction coming online, the supply of rental units should increase to flatten excess demand.

New Construction Of Industrial Space

The vacancy rate for quality industrial space has really plummeted to near zero levels locally.  Suppliers are worried that they don’t have the floor space to produce enough to meet contracts.  The market might finally be ripe for a wave of new buildings being built.  Increases in rent prices are almost at the point to justify new construction costs for landlords.

Office Shows Modest Improvement But Still Too Much Supply

With the local economy being much improved, demand for office space is getting better everyday.  Having said that, there is still too much supply in the market.  We expect to sop up some of that inventory, but not materially so.

Windsor-Essex Real Estate Market Continues to Get Positive Media Exposure

Last year was the first year where local and national media really started to notice the renaissance going on in our local real estate market.  General inquires for real estate are rolling in everyday.  With continued migration, immigration and a buoyant local economy, things look rosy for 2017 and therefore we should see continued positive media.

There are some more predictions for 2017.  Hopefully we get some of them right!  Do you agree or disagree with any of them?

Investing In Real Estate – Building The Right Team #8: General Maintenance Professionals

Just like at your principle residence, general maintenance items must be done to ensure the property is safe and well maintained. This is general labour type maintenance such as grass cutting, landscaping, snow removal & cleaning of common areas (if in a multi-unit building). Today we are going to elaborate on this subject and discuss a few items you should be aware of.

Can I do this general maintenance myself?

You certainly can get your hands dirty and tackle these items yourself, as long as you have the time and will be completing them on a timely basis. Saving money on these items will certainly increase your cash flow but make sure to put a value on your time. Don’t let the place go in between visits, as poor curb appeal or lack of general maintenance can be a large turn off for tenants and can negatively affect your occupancy rates and rental rates. Maybe you want to start with handling these items yourself when you are just getting started, but as you progress as an investor, and as your portfolio grows, it may be prudent to outsource some help.  

If I hire out my general maintenance, who should I hire?

Grass, landscaping and snow removal can usually be done by a local landscaping company. You can consider hiring your tenant or a tenant in your building to handle these items, but beware of the pitfalls. Especially with snow, if they don’t do their job in a timely manner, you could end up with someone falling and injuring themselves on your property and inheriting legal trouble. On the cleaning of common areas, it is common to see one of the on-site tenants handle the job. Usually the cleaning of the common areas, or handling of grass cutting or snow removal can be done with a reduction in the rent, just make sure it is stated in writing.

How much should I budget for maintenance on my property?

You should budget an ongoing expense for maintenance items regardless of if you do them yourself or contract them out. A good rule of thumb is to budget 5% of gross rent, or up to one month’s gross rent per year, towards repairs and maintenance. This amount will also include large repairs such as roof, furnace, etc. which will be amortized over their expected life to smooth out your repairs and maintenance budgeting year to year. You don’t want to overspend on these maintenance items so you should err on the cheaper side when allocating expense dollars to these items.

Make sure you budget for these maintenance items in your income property and ensure the work is done in a timely manner. You'll be thankful you did!

Readers, do you do your own maintenance on your income properties or do you outsource them?

Love Is In The Air - Market Segments Clients Love

With Valentine’s Day just this past weekend, love is definitely in the air. After a weekend of blowing your budget on your significant other, our investor clients are thinking of ways they can reverse some of the damage by making a solid investment.

In honour of Hershey’s favourite holiday, we have a list of some of the market segments our clients are loving in 2016:

1. Industrial – During the downturn of 2008-09, the manufacturing sector was especially hard hit, with several of the large automakers on the brink of bankruptcy. The restructuring that went along with that has brought about the rebound of the last several years. This year we are looking at a record year for auto sales and the roll out of many new cars. This is all translating into super low supply of buildings, increasing rents and the start of a new construction cycle. We see continued upward pressure on prices and rental rates as new construction costs are prohibitive compared to resale in many cases.
2. Multifamily – The demand for yield with today’s near zero percent interest rates has fueled unprecedented demand for multifamily investment properties. This demand has far outstripped supply and prices have rose and cap rates have fallen. With continuing low supply and high demand we see this trend persisting and further downward pressure on cap rates. In our market specifically of Windsor ON, we still have a cap rate discrepancy with larger markets in Canada and we see that continuing to narrow.
3. Retail Plazas – Stable, long life assets such as these have always had plenty of investor interest and with cap rate compression this has increased demand. Cap Rates on Retail Plazas are still significantly higher than multifamily and as such we see a narrowing of this spread as plaza prices continue to rise.
4. Small Turn Key Office Space – Office space units of 1500-2000’ with good existing buildouts are in high demand in our market and landlord’s with these vacancies are sure to benefit. Office tenant’s seem to be doing more with less square footage these days and smaller spaces such as this are more marketable.
5. Townhouses & Condos – With our previous discussion about the aging population, demand from downsizing baby boomer has been buoyant in the townhome & condo market. Millennial buyers have also had a preference to this segment of property. New construction of townhomes have been booming and a new wave of condo construction has begun. We see this trend continuing as demographics continue to support it.

These are the segments being shown the love in our market. Where is the love in yours?

---

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620

Breaking News - Vacancy Rates in Windsor Drop Below 4%!

CMHC (Canada Mortgage and Housing Corporation) released its latest rental market survey last week and Windsor’s vacancy rate has declined again.

Last year’s vacancy rate of 4.3% is now down to 3.9%.

Source: Urbanite News

This marks the 7th straight year that vacancy rates in the area are down in the area. Average rents also edged up by 2.8% year over year. The final report will be released in December.

How can we interpret this news? Here are some of the takeaways:

1. This is good news for the multifamily sector as they have lower vacancy and therefore higher net incomes. This is also good for property values as this translates into higher valuations based on the income approach.
2. The population must be growing again as more and more units are being occupied.
3. This moves the Windsor market further inline with the Ontario average of 3.1%.
4. The vacancy rate has continued its decline since 2008, toping out north of 14%. This is a remarkable turnaround.
5. This puts Windsor vacancy rate below those of large markets such as Calgary (5.3%) and Edmonton (4.2%).
6. This could put further demand pressure on the housing market as more and more renters decide to leave a tight rental market and buy a home.
7. Landlords could begin looking to build rental units as the economics improve with these lower vacancy rates. We have already seen one starting in the suburb of Lasalle this year.
8. Tenants will have a harder time finding units to rent and will be looking at paying higher rents than they have been.

Overall this is very positive news for Windsor, its economy and investors in the community.

Readers, what do you make of this news?

---

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620

Windsor's Moving Up Against The Big Boys - New Series

Source: National Post

Great way to kick off our new series, COMMERCIAL PROPERTIES  – WINDSOR FOCUS.  

Real Estate was hit hard during the 2007-2010 period, but since 2010 we have seen major moves across all sectors of our real estate market. 

via National Post

Just to highlight a few key areas –

* Multi family vacancy rates are down below 4% (from 12% back in 2010)
* Industrial lease rates on a per ft. basis (have increased 70-80 % since 2010)
* Industrial building sales on a per ft. basis  (have increased similarly)
* Residential sales activity (both new and resale) are turning over at unprecedented rates
* Commercial Property interest and sales are in a significant growth phase given strong demand
* Out-of-town investment into the Windsor market is at record levels

What is the take away? 

Windsor’s market offers a great upside for investors / developers / landlords and owner-occupants looking to acquire good (aka sound) real estate value.  Cap. rates are more attractive than other major Canadian markets, competitive financing terms are available, a good mix of products exist, and many new developments are either under way or on the horizon. The population is once again growing and the economic issues of 5-6 years ago are now in the rear view mirror.

The Windsor Market is still in the ‘early innings’ and it is really just starting to make its move. Whether you are local or from outside of the area, give us a call and let us put our commercial expertise to work for you in Windsor – Essex.

We love feedback so don't be shy about letting us know your thoughts and where we agree/disagree! Intellectual discussion is always welcome. 

We are rolling out a new BLOG series, COMMERCIAL PROPERTIES – WINDSOR FOCUS, and we look forward to all your comments as we move through the last quarter of 2015. 

---

Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

How A Sold Windsor Multi-Family Portfolio Affects You

For those of you that either own rental properties, or just generally follow the real estate industry in your region, you have surely noticed the froth of the market over the last several years.  

With the continuation of historically low interest rates, investors of all sorts have been searching for returns in different asset classes and that has resulted in a hard charge into multifamily real estate.  

With this increased demand, prices have been rising and cap rates (click here to learn more about a similar concept) have been compressing. 

This seems to have come to a head this summer as Boardwalk REIT (Real Estate Investment Trust) has agreed to sell their Windsor multifamily portfolio to Skyline Apartment REIT.  This transaction turns Skyline into the dominant Landlord in the region with close to 2000 units.  Of note to market observers is the reported cap rate of 5.43% or $80,800 per unit.

Illustration By Chloe Cushman/National Post

Takeaways to Note From This Deal:

1. Cap rate compression.  This is a new benchmark for the multifamily sector in Windsor as cap rates have never been this low.  This has major repercussions for the market as Sellers will try to adjust sale prices to reflect this favorable comparable.  Back in 2010, it was common place to see cap rates in the range of 10%.  Now those came with higher vacancy rates and a more difficult financing environment, but is telling in how far things have come in the last 5 years.
2. Low interest rates continue to drive asset prices up as investors can still make money at these cap rates when they can borrow at less than 3% interest rates.
3. Multifamily is considered a safe haven asset class, and as such, commands a premium relative to comparable properties in other sectors of Commercial real estate.
4. Ability to finance multifamily properties remains robust, even as cap rates have compressed.
5. Skyline is making a large bet on Windsor and must be bullish on the region long term, with regard to employment, populations growth, etc.
6. Finding large multifamily properties for individual investors will become more and more difficult as the market is increasingly controlled by REITs such as Skyline and Timbercreek (to name a few in the Windsor market).
7. There could be a pushback from Buyers at these cap rates as they view the market as priced for perfection and therefore higher risk.

What do you think readers? What are your views regarding this transaction and how it pertains to the Windsor multifamily market?

Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620