Welcome to Soundbites, weekly insights on market trends and investment strategies, brought you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we talk to Steve Marino, executive vice-president, portfolio management at GWL Realty Advisors, about the risks and opportunities of residential real estate investments, where he sees opportunities, and how societal changes are impacting them. We started by asking about the evolving dynamics in the multi-family purpose-built rental market.

Steve Marino (SM): Historically, rental is seen as a temporary or transitional housing solution. Today, we see tenants increasingly appreciating purpose-built rental as a more permanent solution. Suburban assets fared very well during the Covid era. The combination of population circulation restrictions, together with the realities of working from home, made larger suburban units with proximity to green space particularly inviting for occupants. Tenants appreciated the additional square footage, and the separation it provided from roommates, together with the access to green space. Conversely urban assets, particularly those in proximity to central business districts and post-secondary institutions, struggled as their locational advantages were rendered somewhat inconsequential as we migrated to that virtual world. As we emerge from these Covid circulation restrictions, we’ve seen a significant level of pent-up demand as people are eager to return to living in urban areas, enjoying the vibrancy of our downtown areas.

The impact of immigration and demographics.

SM: Canada has a very robust immigration target with a forecast of more than 400,000 people per year over the next three years. The vast majority of these immigrants will locate in our urban areas in pursuit of employment and educational opportunities. The availability of affordable quality rental accommodation is critical to the continued success of Canada’s immigration program, and ultimately helping to fuel our economy’s expansion. To that end, it is critical that all levels of government help support our industry’s efforts to meet the supply shortage.

The impact of rising interest rates.

SM: Depending on the nature of your capital and your reliance on debt, rising interest rates can be a headwind for some real estate investors. Generally, the institutional market uses a limited amount of financing, helping to dilute its associated impact. This can help to thin the competitive herd, as I describe it, providing all cash buyers a competitive advantage. Arguably, the more meaningful impact for developers is high inflation and the associated impact on the cost of construction. In that light, we’re starting to see some developers pause on plans for new development activity.

On pre-approved mortgages.

SM: Certainly the recent interest rate movement is impacting the single residential market in a fairly meaningful way. Increased interest rates are constraining the ability to service the necessary principal and interest payments, which in turn is necessitating the need for larger down payments. It’s also heightening the stress test scenarios, creating more conservative lender underwriting. Collectively, this is all eroding investor confidence as purchasers are concerned about the prospect of potential value erosion, and many are waiting on the sidelines to see where the market settles.

The resiliency of real estate.

SM: I’d say historically, the asset class has been a strong source of performance stability. There’s a couple of key reasons, I would say, for its resilience. First and foremost, by its very nature, the asset class provides the basic need of shelter, benefiting from what I would describe to be a very inelastic demand quotient. Everyone needs a place to live. Secondly, the asset class benefits from strong tenant diversification. Unlike a commercial asset, that might have one or two tenants, purpose-built rental buildings have a large number of individual tenants, helping to diversify the underlying cashflow stream. Typically, tenants are signing one-year leases. So, effectively, that provides investors the ability to reset rents to market with greater frequency. So, all of those together help to really create some very positive and resilient characteristics for the asset class.

And finally, what’s the bottom line on real estate investing in a downturn?

SM: Downturns can prove to be attractive entry points. But they can also be very difficult to time. My counsel is to be focussed on the underlying fundamentals, using a disciplined portfolio investment strategy, using key risk-mitigation tactics such as diversification and stringent property underwriting practices, to help provide a necessary framework to successfully invest through cycles. We see purpose-built multi-family rental as an ideal component of this strategy because of its strong income characteristics and the ability to create value through active repositioning of assets. Capital markets will come and go. We try to focus on what we know we can manage and control on a day-to-day basis and that’s really looking at underlying fundamentals, vacancy rates, the ability to drive rent, the ability to actively position our assets through capital investment, and I call that active asset management — really, how we create value for stakeholders day-to-day.

Well, those are today’s Soundbites, brought you by Investment executive and powered by Canada Life. Our thanks again to Steve Marino of GWL Realty Advisors.

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