CIBC Notes Multi-family – It’s Not Just A Supply-side Issue
The multi-family sub-sector is widely considered (and rightly so, in our opinion) to be one of
the most defensive of the Real Estate asset classes; the operational performance of
residential REITs pre- and post-pandemic easily supports this notion. Defensiveness aside,
we also believe apartment REITs can play both sides of the ball and win (much like the 1941
Chicago Bears, the last year the gridiron game was played both ways and a time that echoes
the current explosive population growth). However, unlike the 1940s, Canada’s housing
supply today simply can’t keep pace with the current population growth, thereby creating
chronic demand/supply imbalances that will continue to put upward pressure on rental rates
and valuations. The growing gap between in-place rents and current market rents continues
to grow quickly, suggesting a long runway for internally generated growth, and while recent
initiatives by all levels of government to fast track new development are very welcome, they
simply won’t be enough.
CMHC estimates that an additional 3.5MM housing units need to be built (on top of what is
already forecast) just to meet the forecast demand through 2030, costing in excess of $2T. In
short, and absent a material reduction in demand-driven factors, Canada needs significantly
more tradespeople, more zoned and approved land, and a whole lot more money to return
the housing market to an equilibrium, not something we envision happening over even an
extended period of time. The problem (if we may be indulged to call it such) is reminiscent of
Ernest Hemingway’s The Sun Also Rises: “Gradually, then suddenly.” While we see the
set-up for all of the residential REITs as quite positive, our favoured way to gain domestic
exposure is once again through Killam Apartment REIT, and south of the border we continue
to favour U.S. single-family rental exposure through Tricon Residential Inc