Put A Ribbon On It

What happened this year and where are we headed? Let's dive in.

December 19, 2024

Read Time: 3 minutes

The news cycle is fast in 2024.

Remember when Trump got shot, and 2 weeks later people barely spoke about it?

The barrage of economic data, our Canadian political circus, family life and immediate business objectives are enough to keep anyones mind occupied.

But a lot happened in 2024 in multifamily.

From shifting buyer behaviour to bond yields - this year has been a rollercoaster.

Let's unpack the highlights.

Ontario Multifamily in 2024

You can't talk about multifamily without the the backdrop of interest rates. So let's start there.

Bond Yield Volatility

The Canada Mortage Bond (CMB) forms the base for all CMHC financing - then your lender adds a yield premium.

As a rule of thumb - you can assume you're financing rate will be the CMB + 40 - 70 basis points (depending on deal size). Today that means an rate of 3.6 - 3.9%.

If you recall - last December - most economist thought we had already broken the back of inflation. Financing rates in the preceding months had come down from a high of 5.2% (give or take) to roughly 4.0%.

Then in January, inflation spiked (unemployment was less than expected), and the yield run-up began.

Why is this important?

Because aside from influencing a buyers loan-to-value, the market hates uncertainty. Thus we entered a frigid first half of the year for multifamily activity across Ontario.

If we flash forward to today - total (overnight interest) rate cuts from the BoC were largely as predicted - and financing costs are marginally below where we started last year. Buyers are back at the table.

Inflation is no longer the scariest metric. Instead it's our hobbled Canadian economy. This means there's a minimal threat of meaningfully higher yields. This stability will result in increased deal volume in 2025 at LTVs that actually make sense. Good.

How Are Deals Getting Done?

In June 2024 - CMHC dropped a surprising update.

For context - CMHC's MLI Select program was (and is) wildly popular for buyers of value-add.

It works like this: If a buyer agrees to reduce the building's energy consumption by 40% (over a 2 year period), CMHC will provide a loan of up to 95% of the purchase price, with a 50 year amortization at a 1.1 debt service cost ratio (DSCR). Pretty great.

But in June - CMHC announced that energy upgrades would only get you part of the way there (i.e. it only gets you to an 85% LTV with a 40 year amortization).

To get the full benefit, you now need to include a combination of energy and affordability (or accessibility). Most purchasers don't love this option, because this hinders your ability to grow rents.

Why is this important? It's one of the many influences on buyer behaviour today.

Bottom line: deals now have to make sense. Negative leverage? Doesn't make sense. $400K/unit for Scarborough value-add? Doesn't make sense.

But there is a TON of capital for deals that do make sense. This is the way it was before the zero interest rate policy (ZIRP) days, and this is the way it should be.

The new normal: where sellers get great value, but the buyer can make money without solely depending on appreciation brought on by falling rates.

Outlook 2025

There is a tale of two markets happening across Canada. Depending on who you speak with, they'll tell you multifamily development is everywhere, or non-existent.

For instance, Calgary and Edmonton are experiencing a construction boom. Interprovincial migration, combined with greater affordability and brighter local economic conditions allow development to actually pencil.

Conversely - the Greater Toronto Area has seen development fall off a cliff. With few exceptions, any crane you see in the sky is a project that has been underway for at least 2 years. But new shovels in the ground? Basically zero.

Where am I going with this?

Rents - and cap rates as a function of upside in rents - are based on supply and demand. So if you thought the housing crisis in Ontario was bad now - just wait 2 years. Smart buyers recognize this. The fundamentals of our multifamily market continue to be rock solid. Proof of this lies in the fact that our team has been averaging 6+ bids on each of our marketed opportunities. 2025 looks bright.

Closing

There are currently 15,231 of you on this email list. I've been lucky to get to know many of you well (to those that haven't - call me).

I wish you an amazing holiday. I hope you and your families get to enjoy a ton of quality recharge time. Our team is excited to hit the ground running with you next year.

Note - I'll still be office so call me if you want to chat.

Sincerely,

Dayma Itamunoala

👋 P.S. I helped my clients sell $263M in 2023 ([see recent deals](https://www.collierscanada.com/en-ca/experts/dayma-itamunoala)).

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