A record-setting residential real estate deal takes centre stage in the latest episode of Behind the Headlines.
To hear the full podcast with OBJ publisher Michael Curran and editor David Sali, please watch the video above. Prefer an audio version of this podcast? Listen to it on SoundCloud or Spotify.
MC: We know the business audience likes big numbers, and this is a big number: a quarter of a billion dollars. This is a three-building rental apartment complex in Westboro, and it sold for $267 million. We think it’s the largest residential real estate deal in Ottawa history. Dave, tell us about it.
DS: CBRE brokered this historic deal. It actually took three of their offices – Ottawa, Toronto and Montreal – working together to get this deal done. That’s how big it was. The buyer is Homestead Land Holdings out of Kingston. They already own a couple of dozen properties in Ottawa along with dozens more across the province. As Nico Zentil of CBRE’s Ottawa office told me, it is just very rare that you would see a property of this scale ever come on the market in Ottawa because we have a pretty tightly controlled market here. This is part of Homestead’s play to expand its footprint here – they also recently filed an application to build a 25-storey apartment tower with 235 units near Baseline and Greenbank. Clearly, they’re wanting to go big in what they think is going to be a big bounceback for the Ottawa rental market. Zentil said the properties were hotly pursued and got multiple bidders. That’s a testament to the strength of the Ottawa residential market right now.
As you know, last year wasn’t great for the rental market in Ottawa. With the pandemic, two big groups that are normally pretty steady, reliable renters – students and new immigrants – well, there weren’t many of those coming to the capital last year, so that caused a little bit of a dip in the rental market for sure. But the general consensus seems to be that things are ready to bounce back.
Toronto real estate broker John Pasalis laughed at Greg when asked about campaign housing pledges and whether any of them make sense for addressing affordability. Check out that refreshingly candid reaction, and why Pasalis (like many other guests we’ve spoken with) fears the Liberals’ strategy will backfire and actually drive up prices. Mattamy Homes Founder Peter Gilgan was even more blunt, telling us “we need to declare that we’re at war with affordability.” We’ll have plenty more insight in the days ahead about what to expect in Justin Trudeau’s third mandate, including this afternoon when CAPREIT CEO Mark Kenney joins Greg to discuss the Liberals’ targeting of real estate investment trusts. We’ll note here that the Prime Minister’s Office released a readout yesterday evening from Trudeau’s call with U.S. President Joe Biden; the two “committed to getting together in person soon.”
Markets will find out this afternoon if the U.S. Federal Reserve is prepared to fine-tune its language about taper timing. Last we heard from Chair Jerome Powell in his Jackson Hole speech, he confirmed that the central bank thinks it will be in a position to scale back asset purchases before the end of this year, but signaled “considerable” progress was still needed to attain maximum employment. Since then, we saw August non-farm payrolls that fell way short of expectations. The policy statement and updated forecasts land at 2 p.m.; followed by Powell’s news conference a half hour later.
The debt-laden Chinese property developer that’s captured the financial world’s attention amid concern (seemingly misplaced, at least for now) that it could be heading toward a Lehman moment has managed to assuage some immediate fear, while simultaneously stirring confusion. China Evergrande Group said in a regulatory filing that it “resolved” an interest payment coming due tomorrow, without providing many details. Meanwhile, less than 24 hours ago, Bloomberg Intelligence Analyst Damian Sassower told us the big question surrounding Evergrande was what the People’s Bank of China was prepared to do about it. Overnight, it pumped additional liquidity into the financial system in a reverse repo operation. That all added up to a steady session in Asia, where the Shanghai Composite closed flat after a two-day holiday.
OTHER NOTABLE STORIES
FedEx had a rough fiscal first quarter as profit fell year-over-year amid supply chain woes and a US$450-million jump in costs due to what the company calls a “constrained labour market.” The parcel shipper cut its full-year profit forecast as a result. Shares have been down more than five per cent in pre-market trading.
Celestica announced last night that it’s paying US$306 million to acquire Singapore-based electronics manufacturer PCI Limited. Celestica, which also raised its profit forecast, said the deal will add more than 20 “blue-chip” customers to its business. CEO Rob Mionis is on The Open at 10:10 a.m.
Telus International announced a secondary offering of 12 million shares after yesterday’s closing bell. None of the proceeds are flowing to the company. TIXT shares have surged almost 22 per cent since their first day of trading in February.
Walt Disney Co. shares have steadied in pre-market trading after an abrupt five per cent plunge yesterday afternoon on the heels of a management warning about Disney+ subscriber additions this quarter.
Reminder that Ontario’s COVID vaccine passport program takes effect today, forcing venues including restaurants, bars, and movie theatres to screen patrons for full vaccination.
Notable data: Canadian manufacturing sales flash estimate, U.S. existing home sales
Notable earnings: BlackBerry, General Mills
8:30: Wheaton Precious Metals investor day
9:10: Suncor Energy East Coast Vice-President Josee Tremblay addresses Newfoundland and Labrador Oil and Gas Industries Association conference
10:00: Ontario Superior Court resumes hearing Cineworld-Cineplex case
11:00: U.S. President Joe Biden convenes virtual COVID summit on sidelines of United Nations General Assembly
14:00: U.S. Federal Reserve releases interest rate decision and updated forecasts (plus 14:30 news conference)
Canadian Council for Aboriginal Business hosts virtual conference on rebuilding the Indigenous economy. Speakers include Suncor Energy CEO Mark Little (12:45)
It is part of the REIT’s overall strategy of divesting Calgary office property, which began in late 2016, to concentrate on other real estate assets.
At its peak in mid to late 2016, just prior to its shift in its strategy, Artis (AX-UN-T) owned in excess of 2.5 million square feet of office property in Calgary across approximately 20 properties.
“Artis pursued a significant portfolio shift away from Calgary office to prioritize capital allocation to higher-growth strategies, particularly emphasizing the U.S.A. industrial development program,” said Corey Colville, head of strategy, real estate, at Artis.
Colville said the present occupancy of the Calgary office portfolio is about 70 per cent.
“Strategic decision” to exit Calgary office sector
“We still have a very robust portfolio of retail and industrial properties in Calgary, but we’ve made this strategic decision to market our remaining Calgary office buildings,” said Colville.
Artis has five retail properties in Calgary of over 343,000 square feet and six industrial properties with over 362,000 square feet.
“Over the past trailing few years, Artis has marketed and successfully transacted on much of their Calgary office portfolio. These remaining six assets, we’re of the view that there’s a terrific opportunity for the market to capitalize on a substantial discount (to) replacement cost and create significant value,” said Colville.
“We’ve had interest from owner/user investors, from repositioning and converter investors as well as office investors.
“With these properties, we think with the amount of potential there’s just fundamentally an opportunity in the market for local investors to capitalize on.”
Colville said Artis has held some of the Calgary office assets for more than a decade. On balance, they’ve been longer-tenured assets for Artis.
“At the peak, (Calgary office) was a really significant component of Artis’ total valuation. At this point of time, the remaining assets in relation to our gross book value is actually quite immaterial and the contributory cash flows from them,” he said.
“We’re looking to focus our efforts in a more strategic way. We think that we’ll be very dominant long-term and competitive landlords and we don’t feel that this is going to be the case now that we’ve reduced our position so much in the Calgary office market.”
Downtown vacancy about 30 per cent
Corey Colville, head of strategy, real estate, at Artis REIT. (Courtesy Artis)
Calgary’s office market has struggled for the past seven years since the collapse of oil prices in late 2014. That led to massive layoffs, particularly in the city core where many energy companies had their corporate head offices. Obviously, fewer people has meant less need for office space throughout the city.
The downtown Calgary office vacancy rate has hovered around the 30 per cent mark for some time.
“You know, we’re not quite as pessimistic as some of the news headlines would indicate. Naturally, and quite obviously, there’s been a struggle in the market, but we are confident that Calgary is one of the most important cities in Canada and that Canada is a phenomenal country to invest in,” said Colville.
“In time, we believe that Calgary will make a strong resurgence and comeback and we believe that Calgary will benefit from the wave of immigration to come and the rejuvenation to the energy markets over time.”
The Artis REIT property portfolio
In Q2 2016, Artis had 260 properties of about 26.6 million square feet overall; 191 properties in Canada with about 17.1 million square feet and 69 properties in the U.S.A. with about 9.5 million square feet.
At that time, it owned 73 properties in Alberta with about 6.7 million square feet. By the end of Q2 2021, that number had decreased to 40 properties with about 2.7 million square feet.
At the end of Q2 2021, Artis had 133 Canadian properties with about 10.4 million square feet and 70 U.S. properties with about 11.6 million square feet for an overall total of 203 properties and 22 million square feet.
The REIT’s portfolio at the end of the second quarter was 42.7 per cent office, 38.2 per cent industrial and 19.1 per cent retail.
Its overall occupancy was 92.3 per cent in Canada; 97.7 per cent for industrial, 83.3 per cent in office and 90.8 per cent in retail. In the U.S., its overall occupancy was 91.8 per cent comprising 94.3 per cent for industrial and 87.4 per cent for office.
Colville said the third quarter will feature a further and material shift of the portfolio following the sale of 27 of 28 of its Greater Toronto Area industrial properties. The 28th property is also for sale.
Other recent portfolio activity
– Acquired a parcel of industrial development land in Minnesota’s Twin Cities Area, for US$1.5 million.
– Disposed of an office property in Calgary, three retail properties in Regina and a portion of a retail property in Fort McMurray, Alta., for an aggregate price of $62 million.
– On June 30, Artis entered into an agreement to sell the GTA Industrial Portfolio, comprising 28 industrial properties located in the Greater Toronto Area. On July 15, the REIT closed on 26 of the 28 properties for $696.7 million. One of the remaining properties is expected to close in Q3 2021 and generate gross proceeds of $26.7 million. The remaining property will be actively marketed for sale.
– Subsequent to June 30, it also disposed of the King Edward industrial portfolio, comprised of two properties in Winnipeg, for $3.2 million.
New arrivals may further stress Canada’s already tight housing markets
Author of the article:
Just when you thought you could catch a break from pandemic-fuelled housing madness, experts are predicting the reopening of the U.S.-Canada border, and Canada’s commitment to boost immigration, could fuel even higher levels of demand. All those new arrivals, students and family members rejoining loved ones will need places to live. And Canada’s housing supply is tight.
“If you think it’s expensive now, just wait,” says Tom Storey, a real estate agent with Royal LePage in Toronto. “The numbers tell us that prices should go up because there’s a lot of people coming here and we’re not building enough new properties.”
Canadian government raising immigration targets
Exactly when new arrivals will impact housing markets is vague. Border entry is limited to those who can show they’re fully vaccinated.
But, once the pandemic’s threat has largely passed, the U.S. and Canadian governments have both expressed hopes that border traffic will return to normal.
Likewise, while Canada’s immigration goals call for 401,000 new permanent residents this year (reaching 1.2 million by 2023), dates aren’t specific and COVID-19 will continue to delay things in the short term.
Canada’s borders have been closed to most immigrants for much of the pandemic. But as the country’s population ages, economic immigration from workers and employers who ultimately become permanent residents has become more important.
“The key to both short-term economic recovery and long-term prosperity is immigration,” Marco Mendicino, Canada’s Minister of Immigration, Refugees and Citizenship, said at a news conference where he revealed the country’s goals through 2023.
The newcomers will put pressure on housing — either as homebuyers or renters.
In addition to new permanent residents, the number of international students in Canada is also rebounding. Those numbers were rising sharply before the pandemic, growing to 402,500 in 2019 — a 15 per cent increase from 2018, according government data.
Those with temporary work permits will also grow the population. Almost 70,000 more people were issued work permits in 2019 (a total of 404,000) and 63,020 people with temporary work permits were granted permanent residency.
Newcomers will need housing
Home prices were rising pre-COVID-19, due to a lack of housing supply combined with low mortgage rates and strong consumer demand.
Amid the new immigration policies, a growing student population and a proposed childcare system that’s expected to give families room to save more of their income, demand for housing will only grow, according to a recent report from Scotiabank.
Yet, home construction hasn’t kept up with demand for several years.
This year, as fewer newcomers have entered the country, the ratio of home completions to population has improved slightly. That’s likely to worsen as the government meets its immigration targets, the report says.
To avoid a continued rapid acceleration in home prices, experts argue immigration targets should align with housing policies that help meet the demand.
“Our federal government’s decision to raise immigration targets today without making the corresponding supply-side housing policy changes needed to increase supply is a decision to inflate home prices out of reach of most Canadians tomorrow — including many of our newest fellow citizens,” John Pasalis, the president of Toronto-based Realosophy Realty, says in a recent market report.
Immigration to impact the resale and rental markets
While Canada’s major cities have seen double-digit home price growth in recent years, the market overall appears to be calming.
July sales slipped 3.5 per cent on a month-over-month basis, according to the Canadian Real Estate Association, and sales are down a cumulative 28 per cent from a March 2021 peak.
Home sales in Canada fell a significant 14 per cent year over year in August, the Canadian Real Estate Association (CREA) said Sept. 15. Still, the association says, home sales in this country remain historically strong. And a lack of supply of homes for sale is pushing prices to record levels in Canada’s most populous cities.
The rental market, too, has been down from its high — in part due to restrictions on Airbnb units, which released bundles of short-term rentals into the traditional leasing market.
“When the borders open and [people] go back to university, you’re going to see an increase in the rental market,” Storey says. “Then it will flood into the sale market.”
But analysts say the property market is facing headwinds — namely inflation and the specter of rising interest rates.
And many of the Canadians who wanted to buy a home in order to get more space amid the pandemic, or even downsize, have already done so, says Adil Dinani of the Dinani Group for Royal LePage West in Vancouver. That may help cool off prices in the months to come.
Building more housing also will help.
“Supply is the common denominator in most of these major markets,” Dinani says. “There’s a shortage of quality inventory.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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