Mid-Year Pulse Check (Multifamily)
Mid-Year Pulse Check (Multifamily)
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Today we'll unpack the Q2 data and our markets driving forces.
July 24th, 2024
Read Time: 4 minutes
Summer’s flying by, but our market doesn’t take a vacation. There’s plenty to discuss.
Today, we’re taking the pulse of the Ontario market. We’ll cover transaction volume, the impact of the capital gains hike, who’s active, and where we’re headed by December.
Let’s dive in!
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Q2 Unpacked - A Market Commentary
Alright, let’s break down the Q2 2024 GTA multifamily market.
Spoiler alert: It’s a mixed bag. And while we're focusing on the GTA here, you can use this as a solid proxy for the broader Ontario market.
Key Stats:
Average Price Per Suite: $321,280 (down 1.3% YoY)
Capital Gains Hike
The big story in Q2 was the increased capital gains inclusion rate. The federal government announced this change just 70 days before it took effect, putting pressure on deals already in negotiation.
Many vendors scrambled to close deals before the deadline. In fact, 14 of the 21 Toronto multifamily deals in Q2 happened within 7 days of the June 25th implementation date (we managed to get 3 done).
Surprisingly, the market has digested the new rate well. It’s mostly business as usual. Vendors are accepting the new normal, acknowledging that taxes are part of the landscape in Canada. While it's frustrating, we carry on.
State of the Market
Interest rates are a key driver for our asset class, specifically the Canada Mortgage Bond (CMB) 5 and 10-year rates. This is the base on which most multifamily financing is priced.
The good news: Inflation is normalizing, and our economy is signaling that the BoC will continue to drop its overnight rate. This has been reflected in the CMB. The CMB 5-year has dropped from 4.15% to 3.55% since May 1st, implying lending rates around 4.20% today.
But remember - multifamily buyers need a path toward positive leverage. They’re not buying the year 1 NOI; they’re buying the potential. With this in mind, lower rates signal a more optimistic outlook and an easier path toward positive cash-flow.
The less good news: Bond rates factor in forward-looking expectations. Most purchasers believe today’s cost of debt represents the new normal and won’t materially change in the near or medium term.
This reality is reflected in buying behaviour, hence the reduced transaction volume versus this time last year. Note that private buyers (our team knows thousands of them) have picked up the slack and become a key driver in our market.
Looking to December (Outlook)
The “new normal” has been acknowledged by sellers, which is healthy for our market. Buyers and sellers are becoming more aligned by the day. With this in mind, we anticipate a continued increase in transaction volume through the balance of the year.
At the end of the day, the long-term fundamentals of Ontario’s multifamily market have never been stronger. Replacement costs are not coming down, and there’s virtually no hope for supply to catch up to demand, indicating rents will continue to soar long term. Buyers have primarily become long-term players again. And the cycle renews.
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