Continuing our samples from the Rock Report, we come to the star of Eastern Ontario, the nation’s capital, Ottawa. It’s no surprise that Ontario’s second largest city, with its large base of people looking for temporary accommodation, has a strong apartment market. The presence of two nationally prominent universities means a strong demand for student housing. But Ottawa has some surprises as well:

Ottawa, Canada’s capital and the largest city in eastern Ontario, has been seen as recession proof. Its large public sector has buffered the city against economic downturns in the past.

Ottawa’s status as the nation’s capital makes it a unique apartment market. The presence of international diplomats and many other officials visiting the city for a few months out of the year have given the city a big market in furnished apartments, as well as in short term rentals. When the world looks for a safe place to invest, Ottawa is a standout.

But Ottawa has become more than just a government town. The burgeoning tech sector has contributed a great variety of jobs and has led to the revitalization of many inner city neighbourhoods as well as the construction of new suburbs. Employment growth remained a respectable 3% between 2006 and 2008, and although employment fell by 1.7% in 2009, 2010 and 2011 show good signs of a recovery.

In the past five years, Ottawa added 11 new buildings comprising 1,682 units to the city’s rental stock (balanced by pullback through redevelopment). With an apartment universe of 60,507 units in its CMA (47,790 in the old city itself), the city has one of the highest concentrations of apartments in the province (6.76 per 100 people). In spite of this, vacancy rates have remained at 2% or under since 2006. Rents have been increasing at rates of 2.35% or better since 2007, passing the provincial average in 2009.

The city’s growth is expected to continue in the coming decades, and Ottawa’s city council is pursuing a policy of urban intensification, including a revived LRT project, that should increase demand for new rental housing. Other good news in the employment market include the Department of National Defence purchasing the former Nortel Campus.

For the remainder of this year and into 2013, look for vacancies to continue to trend down and rents to increase, even with an infusion of new supply. Capitalization rates should be in the 4.5-5.75% range.

As I reported earlier, Eastern Ontario has two major markets. Everybody knows about Ottawa, and it’s no surprise to find activity there quite heated, especially in the furnished apartment niche. But Kingston often surprises people. In spite of its size, it has a substantial market, and in spite of its market, vacancy rates are among the lowest in Ontario. The presence of a large student market only tells part of the story, I think.

Here’s what we said about Kingston in the ROCK Apartment Report:

Located in eastern Ontario where Lake Ontario meets the St. Lawrence River, the City of Kingston isn’t a large centre (city population of 117,207 in 2006; CMA population of 152,358). Its centuries’ long history, including a period as the capital of the colony of Canada, gives it a downtown core steeped in heritage, and the challenge of re-inventing itself as economies change over time. Currently, the economy is heavily based on the education and government sectors, including a military base and training centre (Royal Military College), a major university, and a large corrections centre.

Kingston’s apartment market is large and well established, with 12,407 units or a concentration of 8.14 apartments per 100 people. In recent years, however, this large market has seen a lot of interest. Vacancies dropped sharply from 3.2% in 2007 to 1.3% in 2008, giving it the lowest vacancy rate in Ontario at the time. Its 2010 vacancy rate is even lower, at 1%, and beaten only by the municipal grouping of Pickering, Ajax and Uxbridge and their much smaller market.

One large apartment operator is building at rapid pace, putting pressure on older properties, but vacancies keep heading downwards With interest in the Kingston rental market so high, rents are rising in response, averaging a 3.28% increase per year since 2005. Average rents now stand at $882, and are quickly catching up to the provincial average. All of this activity has helped spur new construction.

While too far from Toronto or Ottawa to ever be seen as a bedroom community, Kingston’s transportation connections offer a bright future. Its proximity to Highway 401 and Highway 416 and the St. Lawrence River give it easy access to Toronto, Ottawa, Montreal and the U.S. market. Kingston’s potential as a gateway can not be overlooked. With its large market already heated, the centre is a good place to consider future investment.

Even with vacancies as low as they are, we see vacancy rates falling further into 2012, and average rents increasing. Cap rates should be in the 5.25-6.25% range and the city should remain, for its size, one of the most stable rental markets in the province. In terms of new construction, over 1,400 units have been added since 2000 (at least 11 buildings) and we expect more new construction in the near future. Even so, the market here is far from saturated.

Like many real estate brokers, we at ROCK Apartment Advisors subscribe to RealTrack. Information is the life blood of this business, and RealTrack provides us with a valuable and ongoing window on the sales activity going across the province. This information, along with other sources, helped us to put together the ROCK Apartment Report and the upcoming ROCK New Construction Report. To learn more about their services, you can call them at 1-877-962-2211 or visit their website.

Last week, we learned of six apartment building sales having closed in Ontario. Without going into too much detail, here are some interesting numbers from that week:

Total Transactions Closed: 6
Total Transaction Value: $23,529,983
Number of Units Sold: 191
Highest Price Per Unit: $300,000
Lowest Price Per Unit: $71,929
Location of Transactions: Toronto (City) – 2, Port Colbourne – 2, Oshawa – 1, Scarborough – 1

Many thanks to RealTrack for helping all of us keep our fingers to the pulse of this business.

Well, a lot of it is about Ottawa, but there are other centres worth investing in.

In the ROCK Apartment Report, we devoted a few pages to the opportunities that existed in Eastern Ontario. Here’s what we had to say by way of introduction…

Eastern Ontario, stretching from Port Hope in the west to Algonquin Park in the north and the Quebec border in the east is, along with the Niagara region, the oldest settled area of Ontario. In spite of this, eastern Ontario is a very rural part of the province, featuring mostly small towns with small apartment markets.

The exception, of course, is the City of Ottawa, Canada’s capital, and the second largest city in Ontario. A major jobs centre and growth destination, it’s no surprise the city boasts a considerable and active apartment market, but the prospects do not stop there.

Eastern Ontario is far from the influence of the Greater Toronto Area. A number of the small towns, such as Peterborough and Belleville, have long histories, and have themselves been administrative and industrial centres in their region. This is especially the case in Kingston, which has a strong apartment market thanks to its established centre, and the presence of a major university and Canadian Forces base.

Most of the markets in eastern Ontario are stable, with good average rents and moderate-to-low vacancies. Ottawa leads the pack, here, as a historically strong market with a solid base of institutional and public sector jobs, and a growing influence in the tech sector.

Kingston in particular is remarkable for being such an intensive apartment market, in spite of its relatively small size. More remarkable is the fact that this hasn’t negatively affected vacancy rates or average rents.

And, of course, Ottawa has a number of unique features by virtue of its status as our nation’s capital.

So stay tuned the next few days as we go through the Eastern Ontario market. Some of what we discovered there may surprise you.

DALA often hears from industry operators that it’s hard to get a good return from rental apartments given prices these days. In other words, it costs so much to buy apartments for investment that returns typically only 5%, little better than GICs.

So, why buy new apartments? Why not spend money on what you already own?

In our experience, if industry operators invested in the apartment buildings they already owned, they could get a much better return on their investment — as much as 20% in some cases. At DALA, we have found that many older rental apartments are under performing, even though they are located in strong rental markets. Vacancies are low, and apartment owners can raise their rents, but they don’t realize it.

Repositioning older apartments is a great way for apartment owners to leverage existing assets. The challenge is knowing what one can do, or needs to do. This is where we come in.

At DALA, we have over 25 years of experience in what to do, when to do it and how to do it. We conduct detailed repositioning studies which teach clients the following: 

1. What are the maximum rents which your local rental market can bear?
2. What do you need to do to get those maximum rents?
3. Who in your market has already repositioned, what did they do, and what do you need to do to exceed them?
4. Energy Audit: are you maximizing your savings and returns on investment?

We don’t just tell you what to do, we show you what to do and provide specific, actionable recommendations backed up with examples. So, if you have a property that you think is underperforming, call us, and we can help you bring it into the 21st century.

It’s generally known that housing prices have gone through the roof in Canada, especially in the hot markets of Vancouver and the Greater Toronto Area, but until you see some of the items on sale, this doesn’t quiet hit home.

Consider this property: a three bedroom, two bathroom bungalow, with a deep lot, located in Richmond Hill Ontario. Few pictures exist of what this property is like, save for a obscured shot of the front, but it and the property it sits on can be yours for a mere $2,189,000.

Given that the property (likely built in the past thirty-to-forty years for far less than two million dollars) isn’t taking the time to advertise itself with photographs of its interior, one wonders what the owners are actually selling. Very likely it’s the land the bungalow sits on, and the possibility of bulldozing the bungalow and putting up something much more lucrative.

With housing prices so high, it’s no wonder why demand for rental properties are increasing. Carrying a mortgage has such a high premium over renting these days. And given that low interest rates that make $2 million mortgages feasible can’t stick around forever, anybody who is renting in this day and age is protecting themselves from future financial heartache once market conditions change.

In the ROCK Apartment Report, we listed Markham and Vaughan/King/Richmond Hill as the top markets for purpose built rental apartments in Ontario, and this illustrates why. The apartment market is so thin on the ground here that anything that can be bought and repositioned will net substantial returns. And with vacancy rates as low as they are, it’s only a matter of time that suppliers come forward to fill this demand. Given how long supply has been suppressed, there should be plenty of demand to go round.

Closing out our examination of the opportunities in the purpose-built apartment industry in northern Ontario, consider Sault Ste. Marie. It’s a border town and its a resource town, but like the rest of northern Ontario, the economy and the local apartment industry has picked up thanks to the rising commodities sector.

Here’s what we had to say in the ROCK Apartment Report:

Located where Lake Superior meets Lake Huron, Sault Ste. Marie is a city of 74,948 people and the third largest city in northern Ontario. Since its incorporation in 1888, the city has grown around transportation, trade and steel making, thanks to its place on the St. Lawrence Seaway and its border crossing with Sault Ste. Marie, Michigan.

The city boomed in the sixties and the seventies, but hit hard times thanks to aging factories and global competition. Recoveries in the steel and forestry industries as well as a rise in the service sector and new casinos have helped restore jobs. Algoma University also contributes to the economy through jobs and students. All of this has stabilized demand for apartments in this city.

Sault Ste. Marie’s earlier development has given it an apartment market of 4,617 units, or a concentration of 6.16 units per 100 people. This supply has been slowly dropping over the past five years with 122 units removed from the market. In spite of the size of the market, and the city’s past economic troubles, vacancy rates have been exceptionally low, remaining below 1.8% in the past five years, and dipping to 1.2% in 2010. Rents have gone up by 2.1% per year, on average, though this growth levelled off in 2010, with average rents reaching $656.

Sault Ste. Marie was affected by the 2008 recession, losing 3,800 jobs in 2009. It regained 1,700 jobs in 2010, however, and is only 100 jobs short of the 38,100 it had in 2005. The economy appears to be stabilizing and the apartment market is strong, promising good return for investors.

For 2012, we expect vacancies will be down and rents will be up, while the supply remains static. Capitalization rates should be in the 6-7% range. And as with other northern centres, a diversified economy and strengthening commodities sector will increase jobs and drive up demand. There are excellent repositioning opportunities all around through renovation and new ownership efficiencies.

As CEO of ROCK Advisors and DALA Group of Companies, I have toured and studied many rental apartments in Canada and often find that landlords and building owners don’t realize the true value of the assets in their hands, and what they could do with them. Here are five things that landlords should know, given the state of the marketplace:

1. In many markets, especially the Greater Toronto Area, Vancouver, Calgary and Edmonton, the land that’s under their buildings is often more valuable than the buildings themselves.
2. Many properties sit surrounded by vast quantities of unused or underused land, like parking lots or fields of grass. This land can be put to use, especially in markets where intensification is encouraged by local governments.
3. A property in the hand is worth two in the bush. Buildings can often be renovated and upgraded, moving their value up in the marketplace.
4. Upgrading a property allows one to upgrade rents, which increases net operating income, and further adds to the value of the property.
5. In short, too many building owners and landlords see their building as it is, and not as it could be.

We here at DALA can help landlords and apartment owners “get it”. We have helped dozens of clients see the true potential of their rental properties, reposition them, earn higher rents and returns, and even explore intensification strategies. If you would like help in ‘getting it’, please give us a call.