Billions of dollars worth of Canadian apartment buildings on the block as sellers rush to cash out at record prices

Open this photo in gallery:

Apartment building owners in major Canadian cities are quietly selling billions of dollars worth of properties at premium valuations, despite the pandemic, with pension funds, private equity firms and other investors desperate to swallow large portfolios that rarely hit the market.

Buildings currently up for grabs include a portfolio of roughly 7,000 apartment units owned by Ranee Management and largely located in the Toronto area, as well as a portfolio of apartments in the Montreal area owned by Habitations Trigone, according to three people familiar with the sales processes.

The Toronto portfolio is expected to sell for $1-billion to $2-billion, while the Montreal portfolio is expected to fetch close to $1-billion, according to three people familiar with the sales processes. The Globe is not identifying the sources because they are not authorized to speak publicly about the matter.

Other properties on the market include large blocks of units in Ottawa and Halifax. Ranee did not return a request for comment, and Habitations Trigone declined to comment “out of respect for the partners and the processes involved in any possible transaction.”

Before the pandemic hit, rental apartments, which are also known as multifamily properties, were some of the most coveted commercial real estate assets. But sales activity ground to a halt because of last spring’s hard lockdown, and many investors also abandoned publicly traded real estate investment trusts that specialize in rental apartments, such as Canadian Apartment Properties REIT, with the prospects of plunging rent collections and mass unemployment terrifying buyers.

The market for apartment buildings started to thaw in the second half of 2020, then quickly grew feverish near year-end. Because the supply of properties available for sale was still limited, bidding wars between 10 different institutional investors were common, sending prices to record levels.

Valuations have only climbed higher since, convincing many private sellers – especially family-owned companies – to cash out. “There are a lot of properties out there, and a number of big portfolios,” Dan Dixon, senior vice-president at the Minto Group, a major rental apartment owner, said of the current sales environment. Mr. Dixon could not comment on individual portfolios put up for sale because of confidentiality agreements.

Many of the pre-COVID-19 market dynamics are still at play. Canada has hardly seen any new rental development for years, with roughly 80 per cent of the country’s entire supply of apartment buildings at least three decades old. Meanwhile immigration coupled with natural domestic demand has vastly outstripped new supply. With such a mismatch, building owners were seeing rent increases as high as 30 per cent when tenants turned over before COVID-19 hit.

Although the pandemic was troublesome, rent collections proved remarkably resilient, partly thanks to government stimulus. After the economy stabilized, prospective investors eventually became enticed by older buildings with higher vacancy rates, because they saw the potential to increase vacant unit rents once the economy recovered. Plunging interest rates also made mortgages unbelievably cheap.

Today, vacancy rates remain high in some cities – especially in downtown Toronto, Montreal and Vancouver – but large buyers have the financial heft to absorb short-term woes. Some universities, such as McGill and UBC, have already said they will hold in-person classes this fall, and students take up a lot of rental stock.

As for vendors, sky-high valuations coupled with growing fears of capital-gains tax hikes are providing ample motivation to sell. “We have seen increased deal flow that I’ve never seen in my 35 years of being involved in real estate,” InterRent REIT chief executive Michael McGahan said on a March conference call.

Many apartment buildings are also family-owned, often through multiple generations, and their ownership may now be fragmented. “Sometimes the third generation is not into operating an apartment portfolio or managing real estate,” said Nicholas Kendrew, vice-president of investment sales for commercial real-estate firm Cushman & Wakefield.

At the same time, some private owners have been hit by changes that Canada Mortgage and Housing Corp. made to its eligibility requirements for mortgage re-financing last year. For years, CMHC has given rental apartment building owners preferential mortgage rates, a policy originally designed to spur building construction.

But last year the federal agency curtailed one aspect of this, known as upward financing, that allowed building owners to refinance at the discounted rate. Previously, there had been very few limits on it, which meant owners could theoretically borrow for cheap against their properties and then use the money for personal reasons.

Going forward, the money borrowed has to go toward development or capital expenditures, pushing owners to cash out in order to access the capital embedded in their properties.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.