Working Capital The Real Estate Podcast

Real Estate Market Analysis with Shaun Hildebrand of Urbanation |EP83

Dec 15, 2021

In This Episode

Shaun Leads the Team at Urbanation, Armed with a Background as an Economist and 15 ears of Experience in Residential Market Analysis. Shaun is a Thought Leader in the Residential Development Industry and his Unique Perspectives on the Market Guide Urbanation’s insights, Analytics and Research Strategy

 

In this episode we talked about:

 

 • Urbanation Background

 • Shaun’s Bio and First Steps in Real Estate

 • Overview of Toronto Condo Market

 • Shaun’s Thoughts on Purpose-built Rental Housing

 • Rent Control

 • The Size of Toronto Condo Market

 • The Outlook on How Immigration Will Impact the Real Estate

 • Inflation and Asset Growth

 • Mentorship, Resources and Lessons Learned

 • Book or Podcast

 

Useful links:

https://urbanation.ca

Transcription:

Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. All right, ladies and gentlemen, my name’s Jennifer Gallan. You’re listening to working capital the real estate podcast. My guest today is Shawn Hildebrand. Sean is the president of urban nation, Inc.

 

For those that don’t know, urban nation was founded in 1981 by Eve Lewis, an industry leader and visionary. That’s an emerging market opportunity for high rise condominiums in Toronto at a time when they were considered a niche product, how’s it going? I’m doing great, Sean. We we’re just chatting a little bit before the podcast and wanted to have you on for a little while for those that don’t know urban nation. Maybe you could give a little bit of a background as to what you guys do and kind of how that company has evolved over the years with your involvement.

 

Shaun (1m 7s): Sure. Yeah. So as you mentioned, Urbanation was founded basically 40 years ago and began actually from Eve Louis’s graduate thesis at the time. So condos were sort of a new product in the housing market in Toronto, and, you know, she studied the market, collected all the data and realized that there was a business at that could be formulated out of this research. And over the years, Urbanation continued to collect on a quarterly basis, new condominium apartment market activity by serving directly the developers that were active in the market, putting out our quarterly condo market survey publication.

 

And eventually over time, as, as technology evolves, moving the data and reporting into an online format. I joined the company almost nine years ago in early 2013. So at that point we were, we were just sort of really launching the full database. So that was kind of my first initiative as I, as I began to take over leadership in the company. And over the years, we’ve, we’ve continued to expand that database and the technology behind it.

 

We’ve also sort of branched out our research into more than just condominiums, but now tracking what’s happening in the purpose-built rental markets. That’s been a big focal point for the company over the last number of years is tracking all of the new rentals that are coming into the market, surveying them in the same sort of way that you would survey a new condo project by going directly to the building owner or property manager and collecting data such as vacancy rates and rents and, and producing a separate quarterly reports in conjunction to our previous reporting that was being done on the secondary condo rental market.

 

So individual condo investors, which has been sort of the biggest supplier of new rentals in Toronto for a number of years, but now we’re starting to see, you know, traditional rental development happening. So it’s, it’s really sort of allowing us to have a more holistic lens of what’s happening across real estate development. We’ve also expanded into tracking the land sale market as well. So through, through research that we do leveraging our relationship with CareNet and using land registry, we track all of the land acquisitions that are occurring.

 

So again, allows us to, to further expand our reach into the real estate market research area and, and track projects from, from a very early stage. So we, we offer this information for a subscription module. So our, our, our subscribers are very diverse. They include obviously all of the top developers in the region, but also financial institutions, private equity, other types of lenders and suppliers, government organizations, appraisers brokers, and, you know, what, what really drew me to Urbanation when I joined the company, was that it was, it was more than just a data, right?

 

So previously before I joined the company, I was working as the lead analyst at Canada mortgage housing corporation. And my job was to forecast the Toronto housing markets and provide a market intelligence to senior government officials. And I leveraged Urbanation to a great degree and trying to really try to figure out what was happening in the condo market at the time. This is sort of in the, in the mid to early two thousands. And in the later two thousands, there was a big focus on whether or not we were, we were over supplying the market with, with condos and having ordination was an invaluable resource to be able to really dig into the data and understand what was happening.

 

And, you know, w what drew me to company was that, again, it was more than just, you know, supplying the industry with levers. It was, it was really kind of putting meaning behind that, that, that, that, that research, and to be able to analyze the data and provide market intelligence that provides guidance and insights as to what’s actually going on, you know, across the market. So that’s something that we continue to expand. You know, we, we, when we, when we, when we enter into a new area of research, it’s not just about supplying the data and the stats it’s, you know, what’s actually behind these numbers, what’s driving them.

 

And from that, we’ve, we’ve really started to evolve our advisory practice. So we, we, we produce custom market feasibility reports for individual sites that developers are looking to bring to market. And over the years that that’s become a very large part of our business as well. So we’re continuing to expand on all fronts. We’re looking into new markets in terms of our geographic expansion. We’ve been extremely active in sort of the tertiary markets that surrounded GTA within Ontario and very meaningfully within Ottawa on what’s been a big part of our expansion recently, as we’ve been doing a lot of market work in that area and collecting data on every new rental developments.

 

And we’ve pumped a project that’s active in the market there.

 

Jesse (6m 27s): Yeah. Fair enough. On the point of CMHC for those that don’t know, I guess the equivalent for the states would be a Fannie Mae, Freddie Mac, just kind of an institutional crown corporation, is that I think that’s correct. In terms of just on that note, was your background always in real estate? Was it always kind of in the economics of real estate world, or did you come at it from a different angle?

 

Shaun (6m 51s): Well, I went to school to study economics, both undergraduate and graduate degrees. And when I was doing my master’s, you know, I found it to be very theoretical as a lot of graduate programs are. And, you know, I had a hard time really understanding what I was, what I was being taught and, and trying to think about it in practical terms. And, you know, at the time there weren’t any, at least within my program, real estate economics classes, but I was really interested in the housing market, which was, which was kind of starting to take off at that point in time.

 

And I felt that when I applied the economic concepts that I was being taught to, to real estate, it all kind of started to make sense because, you know, all of the, the sort of macro economic theories could be put into practice when you’re understanding what’s happening in the housing market. And eventually I did my, my, my graduate thesis on the housing market. And from there really started to focus my, my, my career aspirations in, in real estate economics.

 

And initially I was, I was working in Ottawa for the bank of Canada and the federal government for a little bit of time, and then eventually moved to private consulting in Toronto, and then to see an HC. And then now over the past homeless nine years with termination.

 

Jesse (8m 16s): Yeah, it’s interesting. We’ve had people on the show before and I call it the Paul Samuelson ization of economics, where you start getting more mathematical and more statistical where you’re kind of turning out economy nutritions rather than, than policy a policy makers are employees at companies. I’m curious, you’ve got a great graph or kind of timeline for anybody that’s interested. You can go to urban nation.ca where it basically from the inception of the company to today. So, you know, in 1981 or urban nation launches to today, the global pandemic, but on the way you see such a, such an interesting story of, of condo sales and development in Toronto, for those that don’t understand, or, or those that aren’t aware of the condo market in Toronto or, or Ontario for that matter, how would you describe it to somebody, you know, looking in from say, another state or another country where their world is housing and purpose-built and condos are kind of a, you know, a smaller piece of, of the market.

 

Whereas for us, it’s, it’s all we know in, in large part.

 

Shaun (9m 24s): Yeah, very, very much. So Toronto is quite unique in the context of north America, where the bulk of, of high-rise development here locally happens within the condo sector, as opposed to the purpose built rental market. In fact, as of the third quarter, we had six times as many condoms, either construction as we did rental apartments, which is usually the inverse when you go to another large market in United States. So the condo market has worked very well in Toronto through, through pre-sales and investment activity.

 

So the typical course is that a, any project will launch offer their units through the broker channel who typically access investor purchasers, who, who buy very quickly and early on. And that helps fund the construction to be able to proceed with the development and investors have been extremely active in the Toronto market over the last 20 years and continue to be so in today’s market, typically we’ll sell 20 to 25,000 new condo units.

 

And then we’re going to get in here this year will probably be somewhere around 27, 20 8,000. So it’s going to be probably the second highest year on record behind 2017 for new condo sales. And, you know, it’s, it’s, it’s one where we’re seeing the market mature. So where as in the past condo development in pre-sale activity was very much focused within the central core of the city. It is now expanding out geographically across the region.

 

So the greater Toronto area includes the city of Toronto and the sofa in the suburbs that surround it. And for the first time this year, we’re actually seeing more new condo sales happening in what we call a nine oh five region of the GTA, the suburban areas of the GTA, then actually within the city proper. And I think this really speaks to the affordability and, and, and, and, and sort of the history of the call, the market and why it’s caught fire in that. You know, we, we don’t build very many single family homes anymore in the GTA for a number of reasons, which we could probably have a whole podcast on its own, but basically condos are the dominant form of new housing developments in the region.

 

And as this has happened, single family housing has become scarce even more so during the pandemic, as a lot of buyers look for more space, backyards, larger properties, they weren’t commuting as much. So they felt more comfortable buying my larger homes outside of, outside of the core. And the price for single family housing was just skyrocket. And this is something that’s unique to Toronto. It’s obviously happening across Canada and a lot of markets in the U S as well, but it’s created an abnormal divergence between price appreciation and the low rise market and price appreciation in the high rise market.

 

And it’s created this very large gap in pricing between a house and an apartment. One that is, is very, very abnormal. So if you look at the average price of a house right now, it’s $1.5 million in the GTA, look at the average price of a condo it’s about $700,000 or so. So that, that gap over around 800 grand has never been as large as, as it is right now. And in fact, it’s increased by about 50% since the pandemic. So affordability has become an even bigger issue after the pandemic.

 

And a lot of the trends that I would say that they were seeing pre pandemic have only just accelerated as a result of COVID-19. So, you know, the condo market was harder initially because, you know, people were adverse to buying high rise units located in the core because of, you know, issues around the pandemic. And in the fact that a lot of businesses were closed downtown, you didn’t necessarily need to be downtown. And there was probably some health concerns as well with, you know, being a very densely populated areas, but the kind of market has staged and remarkable turnaround.

 

And now you’re starting to see, you know, double digit inflation once again, but that gap still persists. And I think it’s one of those things that continues to drive demand for condos, whether they be downtown or whether they be in the suburban markets. And it’s been, it’s been fascinating to see, you know, how quickly a condo project can pre-sell, whether it’s, you know, located at center ice downtown, or whether it’s located in a suburb, you know, a hundred kilometers from, from, from the city core in almost every case, the project will sell out extremely quickly and you’ll still get quite a lot of investor purchasers, even if the, the development isn’t located downtown.

 

So I think this speaks to how the market has evolved over time and has continued to consistently produce sales volumes that, you know, are meeting or exceeding 20,000 units a year, which is, which is remarkable for us. But, you know, w in the context of the overall housing market, probably not enough to satisfy, you know, population growth is coming into the region.

 

Jesse (14m 32s): So in terms of the, the market itself, you, you mentioned that we’re starting to build more purpose-built purpose-built apartment buildings, and you mentioned Ottawa as you know, one of those areas. I’m curious to get your thoughts. I, I talk with a lot of, a lot of individuals in our industry that are older than I, that have had lived through the eighties and nineties. And we had on the podcast, Richard Epstein, who is a professor of law at NYU. And we did a podcast on the history of rent control and rent stabilization in New York.

 

And I’m curious if you think that that had an effect on development of purpose-built over the last 20, 30, even 40 years in Ontario, or a few things, there was another, another factor that basically resulted in an over not overdevelopment, but leaning towards condos, as opposed to purpose-built because for those that don’t know, the, the stock of purpose-built up until recently has been pretty old stock. And I was always curious if, if it was an actual thing with policy, or if it was more of a cultural thing of, of owning, owning a property rather than renting,

 

Shaun (15m 41s): I think it’s a, it’s a combination of things like rent control introduced in the seventies and evolved over time has, has certainly played a role. So capping the amount of increase that can be passed off to a tenant, obviously with strict revenue growth for, for that asset class and makes it economically less attractive to develop new as a result. So that that’s, that’s one factor, I think for sure, but I think, you know, part of it is the fact that, you know, during, during the mid mid two thousands, I’d say there was a big push from the government to put renters into the home ownership market, right?

 

This was a way of kind of reviving the economy, reviving the housing market after, you know, a pretty significant slope during the very most of the 1990s. And you saw, you know, things like 40 year amortizations get introduced to 0% down mortgages cash back at closing. I think it was, it was almost, you know, you’re, you’re almost a fool to, to rent at the time because it was, it was so much easier to get into the housing market and to arrest pepper, to buy than it is than it was to rent. So for a period of time, you saw this massive outflow of, of renters from the existing rental stock into the home ownership market.

 

And on an annual basis, we were actually losing renters as a population because we were adding so many of you to the ownership market and the home ownership rate is wrong, or just skyrocketed from between, you know, 2001 up until around 2011, 2016. And, you know, there wasn’t really command to be building new rental apartments because the demand was all on the ownership side. And that’s where kind of condominiums started to really take off because this was around the same time.

 

And since then the dynamics that started to change somewhat. So as, as, as the housing market has entered into the, you know, the later stages of this purchase cycle and, and housing has become so expensive, it’s, it’s had a huge impact on affordability. And as a result, homeownership rates have actually started to decline a little, and you’re starting to see most of the household growth occurring within Toronto, actually happening within the rental space.

 

And this has pushed rents up, or at least a decrease in that dynamic to a level that started to make better economic sense to build than to invest in, you know, existing low cap rate buildings that were rent controlled. So, you know, starting, I would say around 20 15, 20 16, we started to notice that, you know, there were requests for market studies that were coming across our desks were starting to shift from condo to purpose-built rental, and you started to get a lot more institutional interests kind of coming into the marketplace.

 

So developers and, and investment partners looking at Toronto from a longer-term lens than they have in the past. So, you know, it was, it was pretty much entirely common development, presale the units getting move on to the next project. Whereas now it’s, you know, how can we, how can we invest into the markets for the longterm and recognize that the population is expanding, we’re going to in a, in a, in a, in a rental market that has structurally low vacancy rates at an average, you know, around a 2% for the last 10 to 20 years, we know that the population is going to continue to expand.

 

We know that whole ownership affordability is going to continue to be restricted for first time buyers. So how do we plan ahead for the future? And so, you know, a lot of the development proposals that are actually coming into the markets, they are for traditional purpose built rental, and we’re, we’re at a stage now where I think according to our latest report, we had about a hundred thousand units in the proposed pipeline that were expected to be developed as traditional rentals. And I’d say there’s probably at least another 50,000 above that, that we’ve been looking at, haven’t actually been officially submitted yet.

 

So we’re building up the supply pipeline for the future. I think the next challenge is actually getting it through the development cycle because, you know, less than 20,000 units are actually in the pipeline and approved for development. So it’s, you know, it’s, it’s, it’s tough, you know, the, with, with COVID, you know, the rental market was hit pretty hard, particularly downtown and rents are only starting to come back now in our latest report, we’ve gotten that rents were up on a year, over year basis for the first time, since the pandemic in the third quarter, but there’s still about four or 5% below what those pre COVID highs were.

 

So I think there’s been a lot of uncertainty about, you know, when the market’s going to come back, you know, what sort of a rent growth projection should, should we be incorporating into our performance? And, you know, has the outlook changed at all? Or is it even looking stronger because of increased immigration targets? And what’s happened to housing prices since COVID-19, so it be interesting, it’s interesting times, and, you know, th the development applications that are coming in or are starting to be, you know, more geographically dispersed.

 

So, you know, traditionally it only really made sense to build rental downtown because you could get $4 a square foot plus rents. But now one of the, one of the trends that we’ve seen since COVID-19 was that the suburban areas of the GTA were pretty much untouched in terms of the rental markets. And these are low supply markets that had, you know, very little existing purpose-built rental stock to begin with. They were entirely relying on, on Palmdale stock for rentals, which there wasn’t that much out as well, because investors were mostly focused downtown then in the suburbs.

 

And then you saw this infusion of demand as the population began to sort of spread itself out around the region. And rents actually are, you know, higher today than where they were pre COVID vacancy rates are still stuck at around one to 2%. And, and I think developers are starting to notice this and, and, and a lot of development slated for master plan communities around existing shopping centers located on the group of fringe. And, and then I don’t buy. And, you know, it’s not just a matter of, you know, getting a site and throwing up a tower.

 

It’s, you know, how do we, how do we make a complete community here? How do we make it mixed use near transit, integrated with retail office, other commercial components that can make a new place, a new living environment for, for renters. And it’ll be fascinating to see how this evolves over the next 10 to 20 years, because you know, the, the old model of, of renting in Toronto, it’s going to dramatically change as we move through the next couple of decades.

 

Jesse (22m 22s): I got to get your thoughts on the 2018 bill. That was a, I believe it was 2018 bill that was basically buildings built after 2018 were exempt for the most part, I believe from, from rent control, built buildings built prior to that, you know, the stabilization we have in our various provinces, at least for Ontario would stay status quo. Do you think that had a, had a, an effect on, on the, you know, this push to more purpose-built developments?

 

Shaun (22m 53s): I think so, you know, the, the data did show that after, after November, 2018, we did, we did begin to see a greater inflow of development applications come in for rental. They were building before that, but we did see that pace of, of, of, of, of, of submissions actually accelerate. But I, I think there’s, there’s probably some level of skepticism w within the development industry, that this policy could change with the change of government, right.

 

Quite, quite easily, and quick, quickly, particularly in this environment where we’re housing it is is, is forefront on political issues. And, you know, if another government takes over the province, you know, we could see that change fast. So I think, I think, I think developers realize that, you know, it could be forced to, to, to, to have rent control units in the builds. And, you know, for the most part, for, for those that we do work with, they don’t typically have aggressive rent, growth assumptions.

 

Like they need to be able to make these numbers work with conservative growth estimates. So they’re, they’re looking at rents today. They’re, you know, they’re factoring in a rebound pre COVID numbers in the short term, which is like, which is, I think, a realistic, but also looking at, you know, a historical rate of rent projection that is consistent with what we’ve been seeing over the last 10 to 15 years, which is, you know, I think we’re probably carrying around if we’re going to have 4%, which is, which is, I think a conservative given the fact that it won’t be long before we’re back to, you know, 2% or less vacancy rates across the city.

 

And our latest data shows that we’re, we’re pretty much on our way there.

 

Jesse (24m 42s): So I guess one of the, one of the benefits with the new, I mean, the newer build, even if the policy did reverse, like you’re saying whether it’s two or 3%, maybe 4% rental growth projections, I think it’s just as a in competition or with the backdrop of you can buy an existing apartment building. And it’s really the issue. There is the mark to market of rents where you have historically low rents. I’m curious on your thoughts. You know what I mean? These things are completely interwoven in our city, but the, the shadow market or the condo market, there’s different names for it, where that these condo owners rent out their space.

 

And it’s kind of, you know, typically mom and pop, I have a couple of condos I rent out and it’s kind of taking the place of the apartment buildings. Purpose-built how big of a market is that, you know, like what, from, from your data, w what size of the market would you say that that encapsulates?

 

Shaun (25m 40s): So what 40% of condos in Toronto are used as, as rental properties, so that that’s grown over the years. I think it was 20 to 25%, maybe, maybe 10 to 15 years ago. So it, it tends to rise, but it’s, it’s rising at a slower pace than it has in the past. It seems like we’re kind of reaching a, an equilibrium of around 40%. And I think, you know, it’s, it’s been, it’s been easy for investors to buy units and hold onto them because the economics of doing so and so favorable, right?

 

You could buy a unit three construction, and you don’t have to close on it for four or five years. So you have that timeframe for rents to inflate, to a level that will make the unit cashflow positive. And historically that’s always worked out very well. In fact, we did a study on all of the condo units in the GTA at rich completion in 2020. And we looked at what their closing price was. We looked at the rents that they were able to at closing, and we also teamed up with land registry to understand what their mortgage costs were.

 

So we were able to actually calculate on a unit by unit basis, what, what cash flow actually realized was, and what we found was that most investors still were cash flow positive or cashflow neutral, though. Two thirds of them are, and less than 40% were, were at cashflow negative position. And really it was only investors that were comfortable negative or only those that had remortgaged the unit at closing. So if you closed on the unit at the, at the secure pre-sale price from several years ago, and you also were able to take advantage of interest rates that were on historical lows.

 

I mean, it was, it was so easy to, to, to just get it out, even at right levels that were somewhat depressed last year, but this all kind of looks backwards at the fact that, you know, investors were closing on units that were bought before the big jump up the condo crisis. So when we looked at the average price per square foot for units that closed in 2020, it was less than $700. So less than $700 a square foot, the average new condo price in the GTA right now is $1,200 a square foot.

 

And for the units that are going to be closing in, let’s say, 20, 24, 20 25, they’re going to be closing at a presale price of around $1,300 a square foot. So I was bullish as the next guy on the rental market. I think we’ll, we’ll, we’ll see good rent inflation in the next few years, but that’s going to require about 75% growth in rents from where they are right now for investors to continue to be cashflow neutral or cashflow positive in, in, you know, four years time, let’s say.

 

So I think the shadow market is going to change. It may not be as, as, as, as strong as it’s been in the past because of the big jump in prices. And the fact that this is going to make it tougher for an investor to hold on to their units. And, you know, investors are generally okay with being cashflow negative so long as the unit continues to appreciate. So if we get into a situation where, you know, the, the cashflow is isn’t there, and, you know, the, the price of the unit is appreciating perhaps slowly, there’s going to be less of an incentive to hold onto the unit for, for, for as long as they have historically.

 

So I think this represents an opportunity for the primary market to step up, right? Like you’re, you’re not going to have as much competition with the secondary market because of the fact that they’re going to have to be pushing rents to $6 a square foot by 2025, if they’re going to have any chance of making these units cashflow positive and probably higher than that, if we’re factoring in some increases in interest rates. So the other thing is that the shadow market, the secondary condo rental market tends to be heavily skewed towards small units, right?

 

So you’ve got a small one bedroom units, some studios that are favorable amongst investors because they have a lowest price tag. And historically they’re able to generate the greatest rental yields, but the demographics of renters are much more diverse than just having a 500 square foot unit. And this is where purpose-built rental development helps to fill a void. You see that, that, that purpose-built rental projects typically have a larger average suite size and it called the rental window, usually about a hundred, hundred square feet larger, much more, much, much more diverse in terms of its unit mix, some more tubings suites, for instance, that could accommodate, you know, couples, small families, roommate situations, it’s, you know, gas sizers.

 

We’re seeing quite a, quite a few of those gravitating towards the rental market. So liquidating the primary residence and using that to help fund retirement and, and actually downsizing into a rental as opposed to purchasing a similar sized condo unit, which would be well over a million dollars in today’s marketplace. So I think, you know, purposeful rental is, is, is, is evolving the apartment market in general by, you know, looking more towards the future demographic trends and also from a product standpoint, right?

 

There’s, you know, when you, when you, when you, when you build a building and you’re holding it, you have to kind of resell it over time, right. To the next tenant that’s been moved in. So there’s much more attention that gets paid to the amenities spaces, the Walgreens, the experience of living in the building resident services. So I think you’re, you’re, you’re seeing some in a lot of cases, higher quality buildings coming in. And I know that the developers that are active in today’s space are looking quite closely to what’s been happening in the us, right?

 

Like the U S is much more advanced than we are in building new multi-family housing. So, you know, understanding what’s worked and what hassles and bringing in professional management and into those new buildings, it’s, it’s been interesting to see, and it’s, I think it’s a learning exercise. And even within, you know, a small number of new rentals that are being built, you know, I I’m seeing that product evolve from where it was even just a few years ago.

 

Jesse (31m 50s): Yeah. I think that’s a positive thing. And even on the consumer level or the, you know, the renter, if there’s that more certainty that you’re not going to get evicted, or that there’s a certainty of, of tenancy, as opposed to having a condo where you can be in a precarious situation, I want to switch gears to some of the supply aspects. You mentioned immigration, obviously COVID has had an impact on, on the whole world, Canada, generally speaking, we’re pro-immigration country countries built by immigrants in terms of the effect that you think that we’ll have in the next few years, given the numbers, being slightly adjusted to where they were a few years ago, but basically your outlook on how immigration will impact real estate.

 

And if you think that we are, we are, we have enough supply because I know you mentioned 20, 21 would be a record year for condo units, I believe, but, but is there still a supply constraint given the fact that we could have, you know, more population growth?

 

Shaun (32m 54s): Yeah, for sure. So if you look at the last 12 months for permanent immigrants admissions into Toronto, then it’s written back about a hundred thousand, but for the last fall, last of September, 2021. So a lot of this is the conversion of non permanent residents into permanent residence. So a lot of them may already be living here, but the government seems to be very, very focused on continuing to raise those integration targets over the next few years, and as travel returns to more normal levels, you’ll actually see that begin to materialize into actual population growth.

 

So I think that’s partly important to understand Toronto typically receives about 35% of all the immigrants that come to a public country. And unfortunately we’re not building a pace that’s going to be able to satisfy that level of demographic demand. So we’ve been pretty much stuck at building at a pace of under 40,000 housing units a year for the GTA for the past 20 years.

 

Housing construction generally across the province has risen in, in, in the last number of months. So it is responding to demand and anticipating future demand, but it’s been that growth has been entirely focused outside of the GTA. So it’s happening in less supply constrained markets within the province. And in fact, for the first time in a long time, there’s more housing being built outside of Toronto in other parts of the province than there is within Toronto. So I think, you know, this is, this is, this is a policy problem that you’re introducing higher immigration targets, but you’re not necessarily looking towards housing supply to, to accommodate that growth.

 

And inevitably what happens is that the new immigrants get, get shut out of the Toronto housing market because there just simply isn’t any supply. And they begin to move into areas where perhaps there is more supply and that may not be economically the right thing to do because you know, a lot of the immigrant new immigrate immigrants are, are working in, in, in, in, in economic hubs, which are mostly located in central areas of Toronto. So, you know, there’s more commuting and that sort of thing that goes on.

 

So I think, you know, more certainly needs to be done. W we will see a lot of condo completions in 20 20, 22. And you can look at this through, you know, the historical relationship between presale launch launches. And then there’s normally a five-year lag between when they actually get delivered a record year in 2017 for launches. So it stands to reason that next year there’s going to be a pretty big year for, for condo occupancies. Most of those will be offered for rent still, I believe. So. I think you’re going to have, you know, a little bit of an increase in supply to meet that additional demand, but by no means, will we be building a pace that’s going to satisfy the, the level of population growth that’s going to be coming into the market in the next few years.

 

So, unfortunately, there’s, there’s really, isn’t much that can be done about this in the interim, because all of the supply that’s going to be coming to market, I would say over the next seven years has already been spoken for, we already know how many units are under construction. We already know how many units are approved for development. So we know generally how much supply is going to be coming in, you know, within the next five, seven years. And it simply isn’t going to be enough. And if you look at kind of how the dynamics are going to be shifting between ownership and renting, there’s going to be an even larger deficit of rental units.

 

Then we then we’ve seen in the past. So it won’t be long before we’re, we’re back to 1% vacancy rates and rents that are inflating much, much higher than, than, than, than historical norms. You know, it just, in the first quarter of this year, we were recording vacancy rates in downtown Toronto at 9%, six months later, they were below 4% and another six months they’ll probably be below 2%. And this is without immigration, right? This is, this is, this is happening, you know, before that big surge in population happens.

 

So, you know, what it’s going to look like in the next few years is, you know, much of what we were seeing pre COVID, but, you know, amplify to a degree.

 

Jesse (37m 10s): So we asked four questions at the end of the show with all the guests, but before we get there, I wanted to kind of, you talked a little bit about it, but a prognosticate a little bit about the next few years for development, you know, you touched on rental rental growth. I can assume I can infer from that, that as we have compression of vacancy rates, that rents will go up. Do you see a, a point where, you know, we’ve seen, at least in, in, in our brokerage, we’ve seen record prices, record cap rates.

 

You know, I’ve said for the last 10 years, interest rates can’t get any lower and they continue to get lower. Where do you see if at all that we come up to a wall when it comes to whether it’s asset inflation or rental growth?

 

Shaun (37m 55s): Well, for per housing crisis, I think you’re going to see some resistance next year as is inflation numbers. And the communication coming from the central bank made it quite clear that interest going to start to revise it soft point probably early next year. And you know, the market’s pricing in at least four moves by Canada. So, you know, given where housing prices are, that’s going to have an impact on affordability, for sure. I mean, that’s the been one of the biggest drivers of, of the asset inflation that we’ve been seeing, it’s the record, low interest rates. And as those start to normalize, you begin to see some headwinds in terms of that growth.

 

So whether that happens, you know, the first half of the second half or the early 20, 23, it’s hard know because you know what impact that’s having on the broader economy. But certainly I think, you know, the narrative is going to shift from one where we’re seeing housing prices grow by 20 to 30% to one where they’re starting to at least level out, but usually there’s, there’s trade off there, right? As you see big increases in housing prices inflation, it tends to lead to higher rates of rent inflation.

 

And we haven’t seen it yet, but I think we will see it. But to your point, you know, when you’re looking at rental growth in rent inflation, you’re constrained by incomes, right? Like there’s only so much that a you can afford. And yes, we’re seeing higher income, new immigrants coming into the GTA that can afford higher rents. But, you know, even though there’s going to be some, some resistance levels, if you look at the average price of a new purpose built rental in the, in the GTA, it’s about $2,400 a month. So the average new new immigrant coming in, you know, is, is probably earning something that, that, that would make that kind of on the fringe of being affordable.

 

But if you relate it to the average ownership costs for a condo, for instance, it’s a thousand dollars a month cheaper. So it is really the de facto way of introducing a affordable housing supply in the GTA that, that is geared to the market. So at a certain point, though, you know, you will, you will start to see some resistance and we actually did begin to see that pre COVID. So once rest started to rise to 25, 20 $600 a month, you began to see renters pull back a little bit and, and, and, and the demand didn’t dissipate, it just started to move into less expensive markets.

 

So I think that that’s something that will, that will reemerge, like right now, the hottest segment of the market for rental growth is the downtown market because it’s in that recovery phase. But once it starts to exceed those preached pre pandemic levels, you’ll probably begin to see, you know, renters look for more affordable pockets of the market, and that will help to manage, I suppose, the, the continued growth that we’re expecting.

 

Jesse (40m 42s): Fair enough. All right, Sean, we have four questions if you’re ready to go all LABA, Matt. Yeah. All right. Something, you know, now in your career, whether business or in the real estate industry, you wish you knew when you first started out

 

Shaun (40m 57s): Something that I know now, geez, I guess it’s, you know, the market never works the way that you’re going to expect it to work. You know, you can, you can have the best economic model, but you know, there there’s, there’s, there’s so much human emotion in real estate, in psychological elements that, you know, sometimes I think, you know, we’d be better equipped to be a psychologist and an economist when trying to evaluate the market outlook.

 

So learning to, to understand that a forecast is, is more than opinion and, and, and, you know, it’s subject to a lot of variability. I think every economist in marketing analyst there has had to learn over the last several years

 

Jesse (41m 47s): In terms of mentorship, somebody that’s just breaking into or thinking about breaking into our industry, what would you say to that person

 

Shaun (41m 57s): Learn as much as you possibly can, you know, a firm such as organation is great at, at learning the industry from the ground up. So understanding the data, gaining, getting exposed to, you know, the development industry across the board, I think is incredibly valuable. So, you know, you know, we’re working for a large organization is, is great, or a boutique organization such as organization as well, but being exposed to understanding how the market works and learning the data, learning how to source information and how the, the market functions practically I think is probably a great starting point

 

Jesse (42m 36s): Booker podcasts you could recommend to listeners

 

Shaun (42m 41s): Or podcast. Geez, I’m not big on both. To be honest, I, I, I, I read the news. Like I slipped a little, little, little time that I, I try to consume media through, through the newspaper. So I’m probably one of the few people that actually still get a printed global mail delivered to me every morning. And that’s really all the time I have to spend on, on, on consuming media is, is when I sit down and actually read through the paper, you know, I think I was, I was starting to get into podcasts a little bit more before the pandemic, while I was commuting into work, but not having that time to sit down and listen to podcasts anymore is, you know, reverted back to traditional media and said, okay,

 

Jesse (43m 30s): All right. And for those that aren’t, aren’t watching this and listening, Sean, you look like you’re, you’re 35. So that’s, that’s awesome that you’re still getting the, the paper. Last question, you know, this is the toughie first car make and model

 

Shaun (43m 44s): My first car. That was my own, that, that wasn’t provided to me by my parents was a Chevrolet cavalier.

 

Jesse (43m 54s): I was very close. That was the Sunfire. That’s great. That’s great too. We’ve had, we’ve had some interesting cars on the show over the last 80 episodes. That’s awesome. Shine. I really appreciate you taking the time for those that want to learn a bit more about urban nation or, you know, reach out to you. What’s the best, best approach

 

Shaun (44m 13s): You can visit our website. urbanation.ca. We have a lot of information there. You can send an inquiry into the, the general line in Cote urbanation.ca or myself, Shawn S H a U n@urbanation.ca. Happy to answer any questions that may come up,

 

Jesse (44m 29s): I guess today has been Shawn Hildebrand. Sean, thanks for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.

Transcript

ion:

Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. All right, ladies and gentlemen, my name’s Jennifer Gallan. You’re listening to working capital the real estate podcast. My guest today is Shawn Hildebrand. Sean is the president of urban nation, Inc.

 

For those that don’t know, urban nation was founded in 1981 by Eve Lewis, an industry leader and visionary. That’s an emerging market opportunity for high rise condominiums in Toronto at a time when they were considered a niche product, how’s it going? I’m doing great, Sean. We we’re just chatting a little bit before the podcast and wanted to have you on for a little while for those that don’t know urban nation. Maybe you could give a little bit of a background as to what you guys do and kind of how that company has evolved over the years with your involvement.

 

Shaun (1m 7s): Sure. Yeah. So as you mentioned, Urbanation was founded basically 40 years ago and began actually from Eve Louis’s graduate thesis at the time. So condos were sort of a new product in the housing market in Toronto, and, you know, she studied the market, collected all the data and realized that there was a business at that could be formulated out of this research. And over the years, Urbanation continued to collect on a quarterly basis, new condominium apartment market activity by serving directly the developers that were active in the market, putting out our quarterly condo market survey publication.

 

And eventually over time, as, as technology evolves, moving the data and reporting into an online format. I joined the company almost nine years ago in early 2013. So at that point we were, we were just sort of really launching the full database. So that was kind of my first initiative as I, as I began to take over leadership in the company. And over the years, we’ve, we’ve continued to expand that database and the technology behind it.

 

We’ve also sort of branched out our research into more than just condominiums, but now tracking what’s happening in the purpose-built rental markets. That’s been a big focal point for the company over the last number of years is tracking all of the new rentals that are coming into the market, surveying them in the same sort of way that you would survey a new condo project by going directly to the building owner or property manager and collecting data such as vacancy rates and rents and, and producing a separate quarterly reports in conjunction to our previous reporting that was being done on the secondary condo rental market.

 

So individual condo investors, which has been sort of the biggest supplier of new rentals in Toronto for a number of years, but now we’re starting to see, you know, traditional rental development happening. So it’s, it’s really sort of allowing us to have a more holistic lens of what’s happening across real estate development. We’ve also expanded into tracking the land sale market as well. So through, through research that we do leveraging our relationship with CareNet and using land registry, we track all of the land acquisitions that are occurring.

 

So again, allows us to, to further expand our reach into the real estate market research area and, and track projects from, from a very early stage. So we, we offer this information for a subscription module. So our, our, our subscribers are very diverse. They include obviously all of the top developers in the region, but also financial institutions, private equity, other types of lenders and suppliers, government organizations, appraisers brokers, and, you know, what, what really drew me to Urbanation when I joined the company, was that it was, it was more than just a data, right?

 

So previously before I joined the company, I was working as the lead analyst at Canada mortgage housing corporation. And my job was to forecast the Toronto housing markets and provide a market intelligence to senior government officials. And I leveraged Urbanation to a great degree and trying to really try to figure out what was happening in the condo market at the time. This is sort of in the, in the mid to early two thousands. And in the later two thousands, there was a big focus on whether or not we were, we were over supplying the market with, with condos and having ordination was an invaluable resource to be able to really dig into the data and understand what was happening.

 

And, you know, w what drew me to company was that, again, it was more than just, you know, supplying the industry with levers. It was, it was really kind of putting meaning behind that, that, that, that, that research, and to be able to analyze the data and provide market intelligence that provides guidance and insights as to what’s actually going on, you know, across the market. So that’s something that we continue to expand. You know, we, we, when we, when we, when we enter into a new area of research, it’s not just about supplying the data and the stats it’s, you know, what’s actually behind these numbers, what’s driving them.

 

And from that, we’ve, we’ve really started to evolve our advisory practice. So we, we, we produce custom market feasibility reports for individual sites that developers are looking to bring to market. And over the years that that’s become a very large part of our business as well. So we’re continuing to expand on all fronts. We’re looking into new markets in terms of our geographic expansion. We’ve been extremely active in sort of the tertiary markets that surrounded GTA within Ontario and very meaningfully within Ottawa on what’s been a big part of our expansion recently, as we’ve been doing a lot of market work in that area and collecting data on every new rental developments.

 

And we’ve pumped a project that’s active in the market there.

 

Jesse (6m 27s): Yeah. Fair enough. On the point of CMHC for those that don’t know, I guess the equivalent for the states would be a Fannie Mae, Freddie Mac, just kind of an institutional crown corporation, is that I think that’s correct. In terms of just on that note, was your background always in real estate? Was it always kind of in the economics of real estate world, or did you come at it from a different angle?

 

Shaun (6m 51s): Well, I went to school to study economics, both undergraduate and graduate degrees. And when I was doing my master’s, you know, I found it to be very theoretical as a lot of graduate programs are. And, you know, I had a hard time really understanding what I was, what I was being taught and, and trying to think about it in practical terms. And, you know, at the time there weren’t any, at least within my program, real estate economics classes, but I was really interested in the housing market, which was, which was kind of starting to take off at that point in time.

 

And I felt that when I applied the economic concepts that I was being taught to, to real estate, it all kind of started to make sense because, you know, all of the, the sort of macro economic theories could be put into practice when you’re understanding what’s happening in the housing market. And eventually I did my, my, my graduate thesis on the housing market. And from there really started to focus my, my, my career aspirations in, in real estate economics.

 

And initially I was, I was working in Ottawa for the bank of Canada and the federal government for a little bit of time, and then eventually moved to private consulting in Toronto, and then to see an HC. And then now over the past homeless nine years with termination.

 

Jesse (8m 16s): Yeah, it’s interesting. We’ve had people on the show before and I call it the Paul Samuelson ization of economics, where you start getting more mathematical and more statistical where you’re kind of turning out economy nutritions rather than, than policy a policy makers are employees at companies. I’m curious, you’ve got a great graph or kind of timeline for anybody that’s interested. You can go to urban nation.ca where it basically from the inception of the company to today. So, you know, in 1981 or urban nation launches to today, the global pandemic, but on the way you see such a, such an interesting story of, of condo sales and development in Toronto, for those that don’t understand, or, or those that aren’t aware of the condo market in Toronto or, or Ontario for that matter, how would you describe it to somebody, you know, looking in from say, another state or another country where their world is housing and purpose-built and condos are kind of a, you know, a smaller piece of, of the market.

 

Whereas for us, it’s, it’s all we know in, in large part.

 

Shaun (9m 24s): Yeah, very, very much. So Toronto is quite unique in the context of north America, where the bulk of, of high-rise development here locally happens within the condo sector, as opposed to the purpose built rental market. In fact, as of the third quarter, we had six times as many condoms, either construction as we did rental apartments, which is usually the inverse when you go to another large market in United States. So the condo market has worked very well in Toronto through, through pre-sales and investment activity.

 

So the typical course is that a, any project will launch offer their units through the broker channel who typically access investor purchasers, who, who buy very quickly and early on. And that helps fund the construction to be able to proceed with the development and investors have been extremely active in the Toronto market over the last 20 years and continue to be so in today’s market, typically we’ll sell 20 to 25,000 new condo units.

 

And then we’re going to get in here this year will probably be somewhere around 27, 20 8,000. So it’s going to be probably the second highest year on record behind 2017 for new condo sales. And, you know, it’s, it’s, it’s one where we’re seeing the market mature. So where as in the past condo development in pre-sale activity was very much focused within the central core of the city. It is now expanding out geographically across the region.

 

So the greater Toronto area includes the city of Toronto and the sofa in the suburbs that surround it. And for the first time this year, we’re actually seeing more new condo sales happening in what we call a nine oh five region of the GTA, the suburban areas of the GTA, then actually within the city proper. And I think this really speaks to the affordability and, and, and, and, and sort of the history of the call, the market and why it’s caught fire in that. You know, we, we don’t build very many single family homes anymore in the GTA for a number of reasons, which we could probably have a whole podcast on its own, but basically condos are the dominant form of new housing developments in the region.

 

And as this has happened, single family housing has become scarce even more so during the pandemic, as a lot of buyers look for more space, backyards, larger properties, they weren’t commuting as much. So they felt more comfortable buying my larger homes outside of, outside of the core. And the price for single family housing was just skyrocket. And this is something that’s unique to Toronto. It’s obviously happening across Canada and a lot of markets in the U S as well, but it’s created an abnormal divergence between price appreciation and the low rise market and price appreciation in the high rise market.

 

And it’s created this very large gap in pricing between a house and an apartment. One that is, is very, very abnormal. So if you look at the average price of a house right now, it’s $1.5 million in the GTA, look at the average price of a condo it’s about $700,000 or so. So that, that gap over around 800 grand has never been as large as, as it is right now. And in fact, it’s increased by about 50% since the pandemic. So affordability has become an even bigger issue after the pandemic.

 

And a lot of the trends that I would say that they were seeing pre pandemic have only just accelerated as a result of COVID-19. So, you know, the condo market was harder initially because, you know, people were adverse to buying high rise units located in the core because of, you know, issues around the pandemic. And in the fact that a lot of businesses were closed downtown, you didn’t necessarily need to be downtown. And there was probably some health concerns as well with, you know, being a very densely populated areas, but the kind of market has staged and remarkable turnaround.

 

And now you’re starting to see, you know, double digit inflation once again, but that gap still persists. And I think it’s one of those things that continues to drive demand for condos, whether they be downtown or whether they be in the suburban markets. And it’s been, it’s been fascinating to see, you know, how quickly a condo project can pre-sell, whether it’s, you know, located at center ice downtown, or whether it’s located in a suburb, you know, a hundred kilometers from, from, from the city core in almost every case, the project will sell out extremely quickly and you’ll still get quite a lot of investor purchasers, even if the, the development isn’t located downtown.

 

So I think this speaks to how the market has evolved over time and has continued to consistently produce sales volumes that, you know, are meeting or exceeding 20,000 units a year, which is, which is remarkable for us. But, you know, w in the context of the overall housing market, probably not enough to satisfy, you know, population growth is coming into the region.

 

Jesse (14m 32s): So in terms of the, the market itself, you, you mentioned that we’re starting to build more purpose-built purpose-built apartment buildings, and you mentioned Ottawa as you know, one of those areas. I’m curious to get your thoughts. I, I talk with a lot of, a lot of individuals in our industry that are older than I, that have had lived through the eighties and nineties. And we had on the podcast, Richard Epstein, who is a professor of law at NYU. And we did a podcast on the history of rent control and rent stabilization in New York.

 

And I’m curious if you think that that had an effect on development of purpose-built over the last 20, 30, even 40 years in Ontario, or a few things, there was another, another factor that basically resulted in an over not overdevelopment, but leaning towards condos, as opposed to purpose-built because for those that don’t know, the, the stock of purpose-built up until recently has been pretty old stock. And I was always curious if, if it was an actual thing with policy, or if it was more of a cultural thing of, of owning, owning a property rather than renting,

 

Shaun (15m 41s): I think it’s a, it’s a combination of things like rent control introduced in the seventies and evolved over time has, has certainly played a role. So capping the amount of increase that can be passed off to a tenant, obviously with strict revenue growth for, for that asset class and makes it economically less attractive to develop new as a result. So that that’s, that’s one factor, I think for sure, but I think, you know, part of it is the fact that, you know, during, during the mid mid two thousands, I’d say there was a big push from the government to put renters into the home ownership market, right?

 

This was a way of kind of reviving the economy, reviving the housing market after, you know, a pretty significant slope during the very most of the 1990s. And you saw, you know, things like 40 year amortizations get introduced to 0% down mortgages cash back at closing. I think it was, it was almost, you know, you’re, you’re almost a fool to, to rent at the time because it was, it was so much easier to get into the housing market and to arrest pepper, to buy than it is than it was to rent. So for a period of time, you saw this massive outflow of, of renters from the existing rental stock into the home ownership market.

 

And on an annual basis, we were actually losing renters as a population because we were adding so many of you to the ownership market and the home ownership rate is wrong, or just skyrocketed from between, you know, 2001 up until around 2011, 2016. And, you know, there wasn’t really command to be building new rental apartments because the demand was all on the ownership side. And that’s where kind of condominiums started to really take off because this was around the same time.

 

And since then the dynamics that started to change somewhat. So as, as, as the housing market has entered into the, you know, the later stages of this purchase cycle and, and housing has become so expensive, it’s, it’s had a huge impact on affordability. And as a result, homeownership rates have actually started to decline a little, and you’re starting to see most of the household growth occurring within Toronto, actually happening within the rental space.

 

And this has pushed rents up, or at least a decrease in that dynamic to a level that started to make better economic sense to build than to invest in, you know, existing low cap rate buildings that were rent controlled. So, you know, starting, I would say around 20 15, 20 16, we started to notice that, you know, there were requests for market studies that were coming across our desks were starting to shift from condo to purpose-built rental, and you started to get a lot more institutional interests kind of coming into the marketplace.

 

So developers and, and investment partners looking at Toronto from a longer-term lens than they have in the past. So, you know, it was, it was pretty much entirely common development, presale the units getting move on to the next project. Whereas now it’s, you know, how can we, how can we invest into the markets for the longterm and recognize that the population is expanding, we’re going to in a, in a, in a, in a rental market that has structurally low vacancy rates at an average, you know, around a 2% for the last 10 to 20 years, we know that the population is going to continue to expand.

 

We know that whole ownership affordability is going to continue to be restricted for first time buyers. So how do we plan ahead for the future? And so, you know, a lot of the development proposals that are actually coming into the markets, they are for traditional purpose built rental, and we’re, we’re at a stage now where I think according to our latest report, we had about a hundred thousand units in the proposed pipeline that were expected to be developed as traditional rentals. And I’d say there’s probably at least another 50,000 above that, that we’ve been looking at, haven’t actually been officially submitted yet.

 

So we’re building up the supply pipeline for the future. I think the next challenge is actually getting it through the development cycle because, you know, less than 20,000 units are actually in the pipeline and approved for development. So it’s, you know, it’s, it’s, it’s tough, you know, the, with, with COVID, you know, the rental market was hit pretty hard, particularly downtown and rents are only starting to come back now in our latest report, we’ve gotten that rents were up on a year, over year basis for the first time, since the pandemic in the third quarter, but there’s still about four or 5% below what those pre COVID highs were.

 

So I think there’s been a lot of uncertainty about, you know, when the market’s going to come back, you know, what sort of a rent growth projection should, should we be incorporating into our performance? And, you know, has the outlook changed at all? Or is it even looking stronger because of increased immigration targets? And what’s happened to housing prices since COVID-19, so it be interesting, it’s interesting times, and, you know, th the development applications that are coming in or are starting to be, you know, more geographically dispersed.

 

So, you know, traditionally it only really made sense to build rental downtown because you could get $4 a square foot plus rents. But now one of the, one of the trends that we’ve seen since COVID-19 was that the suburban areas of the GTA were pretty much untouched in terms of the rental markets. And these are low supply markets that had, you know, very little existing purpose-built rental stock to begin with. They were entirely relying on, on Palmdale stock for rentals, which there wasn’t that much out as well, because investors were mostly focused downtown then in the suburbs.

 

And then you saw this infusion of demand as the population began to sort of spread itself out around the region. And rents actually are, you know, higher today than where they were pre COVID vacancy rates are still stuck at around one to 2%. And, and I think developers are starting to notice this and, and, and a lot of development slated for master plan communities around existing shopping centers located on the group of fringe. And, and then I don’t buy. And, you know, it’s not just a matter of, you know, getting a site and throwing up a tower.

 

It’s, you know, how do we, how do we make a complete community here? How do we make it mixed use near transit, integrated with retail office, other commercial components that can make a new place, a new living environment for, for renters. And it’ll be fascinating to see how this evolves over the next 10 to 20 years, because you know, the, the old model of, of renting in Toronto, it’s going to dramatically change as we move through the next couple of decades.

 

Jesse (22m 22s): I got to get your thoughts on the 2018 bill. That was a, I believe it was 2018 bill that was basically buildings built after 2018 were exempt for the most part, I believe from, from rent control, built buildings built prior to that, you know, the stabilization we have in our various provinces, at least for Ontario would stay status quo. Do you think that had a, had a, an effect on, on the, you know, this push to more purpose-built developments?

 

Shaun (22m 53s): I think so, you know, the, the data did show that after, after November, 2018, we did, we did begin to see a greater inflow of development applications come in for rental. They were building before that, but we did see that pace of, of, of, of, of, of submissions actually accelerate. But I, I think there’s, there’s probably some level of skepticism w within the development industry, that this policy could change with the change of government, right.

 

Quite, quite easily, and quick, quickly, particularly in this environment where we’re housing it is is, is forefront on political issues. And, you know, if another government takes over the province, you know, we could see that change fast. So I think, I think, I think developers realize that, you know, it could be forced to, to, to, to have rent control units in the builds. And, you know, for the most part, for, for those that we do work with, they don’t typically have aggressive rent, growth assumptions.

 

Like they need to be able to make these numbers work with conservative growth estimates. So they’re, they’re looking at rents today. They’re, you know, they’re factoring in a rebound pre COVID numbers in the short term, which is like, which is, I think, a realistic, but also looking at, you know, a historical rate of rent projection that is consistent with what we’ve been seeing over the last 10 to 15 years, which is, you know, I think we’re probably carrying around if we’re going to have 4%, which is, which is, I think a conservative given the fact that it won’t be long before we’re back to, you know, 2% or less vacancy rates across the city.

 

And our latest data shows that we’re, we’re pretty much on our way there.

 

Jesse (24m 42s): So I guess one of the, one of the benefits with the new, I mean, the newer build, even if the policy did reverse, like you’re saying whether it’s two or 3%, maybe 4% rental growth projections, I think it’s just as a in competition or with the backdrop of you can buy an existing apartment building. And it’s really the issue. There is the mark to market of rents where you have historically low rents. I’m curious on your thoughts. You know what I mean? These things are completely interwoven in our city, but the, the shadow market or the condo market, there’s different names for it, where that these condo owners rent out their space.

 

And it’s kind of, you know, typically mom and pop, I have a couple of condos I rent out and it’s kind of taking the place of the apartment buildings. Purpose-built how big of a market is that, you know, like what, from, from your data, w what size of the market would you say that that encapsulates?

 

Shaun (25m 40s): So what 40% of condos in Toronto are used as, as rental properties, so that that’s grown over the years. I think it was 20 to 25%, maybe, maybe 10 to 15 years ago. So it, it tends to rise, but it’s, it’s rising at a slower pace than it has in the past. It seems like we’re kind of reaching a, an equilibrium of around 40%. And I think, you know, it’s, it’s been, it’s been easy for investors to buy units and hold onto them because the economics of doing so and so favorable, right?

 

You could buy a unit three construction, and you don’t have to close on it for four or five years. So you have that timeframe for rents to inflate, to a level that will make the unit cashflow positive. And historically that’s always worked out very well. In fact, we did a study on all of the condo units in the GTA at rich completion in 2020. And we looked at what their closing price was. We looked at the rents that they were able to at closing, and we also teamed up with land registry to understand what their mortgage costs were.

 

So we were able to actually calculate on a unit by unit basis, what, what cash flow actually realized was, and what we found was that most investors still were cash flow positive or cashflow neutral, though. Two thirds of them are, and less than 40% were, were at cashflow negative position. And really it was only investors that were comfortable negative or only those that had remortgaged the unit at closing. So if you closed on the unit at the, at the secure pre-sale price from several years ago, and you also were able to take advantage of interest rates that were on historical lows.

 

I mean, it was, it was so easy to, to, to just get it out, even at right levels that were somewhat depressed last year, but this all kind of looks backwards at the fact that, you know, investors were closing on units that were bought before the big jump up the condo crisis. So when we looked at the average price per square foot for units that closed in 2020, it was less than $700. So less than $700 a square foot, the average new condo price in the GTA right now is $1,200 a square foot.

 

And for the units that are going to be closing in, let’s say, 20, 24, 20 25, they’re going to be closing at a presale price of around $1,300 a square foot. So I was bullish as the next guy on the rental market. I think we’ll, we’ll, we’ll see good rent inflation in the next few years, but that’s going to require about 75% growth in rents from where they are right now for investors to continue to be cashflow neutral or cashflow positive in, in, you know, four years time, let’s say.

 

So I think the shadow market is going to change. It may not be as, as, as, as strong as it’s been in the past because of the big jump in prices. And the fact that this is going to make it tougher for an investor to hold on to their units. And, you know, investors are generally okay with being cashflow negative so long as the unit continues to appreciate. So if we get into a situation where, you know, the, the cashflow is isn’t there, and, you know, the, the price of the unit is appreciating perhaps slowly, there’s going to be less of an incentive to hold onto the unit for, for, for as long as they have historically.

 

So I think this represents an opportunity for the primary market to step up, right? Like you’re, you’re not going to have as much competition with the secondary market because of the fact that they’re going to have to be pushing rents to $6 a square foot by 2025, if they’re going to have any chance of making these units cashflow positive and probably higher than that, if we’re factoring in some increases in interest rates. So the other thing is that the shadow market, the secondary condo rental market tends to be heavily skewed towards small units, right?

 

So you’ve got a small one bedroom units, some studios that are favorable amongst investors because they have a lowest price tag. And historically they’re able to generate the greatest rental yields, but the demographics of renters are much more diverse than just having a 500 square foot unit. And this is where purpose-built rental development helps to fill a void. You see that, that, that purpose-built rental projects typically have a larger average suite size and it called the rental window, usually about a hundred, hundred square feet larger, much more, much, much more diverse in terms of its unit mix, some more tubings suites, for instance, that could accommodate, you know, couples, small families, roommate situations, it’s, you know, gas sizers.

 

We’re seeing quite a, quite a few of those gravitating towards the rental market. So liquidating the primary residence and using that to help fund retirement and, and actually downsizing into a rental as opposed to purchasing a similar sized condo unit, which would be well over a million dollars in today’s marketplace. So I think, you know, purposeful rental is, is, is, is evolving the apartment market in general by, you know, looking more towards the future demographic trends and also from a product standpoint, right?

 

There’s, you know, when you, when you, when you, when you build a building and you’re holding it, you have to kind of resell it over time, right. To the next tenant that’s been moved in. So there’s much more attention that gets paid to the amenities spaces, the Walgreens, the experience of living in the building resident services. So I think you’re, you’re, you’re seeing some in a lot of cases, higher quality buildings coming in. And I know that the developers that are active in today’s space are looking quite closely to what’s been happening in the us, right?

 

Like the U S is much more advanced than we are in building new multi-family housing. So, you know, understanding what’s worked and what hassles and bringing in professional management and into those new buildings, it’s, it’s been interesting to see, and it’s, I think it’s a learning exercise. And even within, you know, a small number of new rentals that are being built, you know, I I’m seeing that product evolve from where it was even just a few years ago.

 

Jesse (31m 50s): Yeah. I think that’s a positive thing. And even on the consumer level or the, you know, the renter, if there’s that more certainty that you’re not going to get evicted, or that there’s a certainty of, of tenancy, as opposed to having a condo where you can be in a precarious situation, I want to switch gears to some of the supply aspects. You mentioned immigration, obviously COVID has had an impact on, on the whole world, Canada, generally speaking, we’re pro-immigration country countries built by immigrants in terms of the effect that you think that we’ll have in the next few years, given the numbers, being slightly adjusted to where they were a few years ago, but basically your outlook on how immigration will impact real estate.

 

And if you think that we are, we are, we have enough supply because I know you mentioned 20, 21 would be a record year for condo units, I believe, but, but is there still a supply constraint given the fact that we could have, you know, more population growth?

 

Shaun (32m 54s): Yeah, for sure. So if you look at the last 12 months for permanent immigrants admissions into Toronto, then it’s written back about a hundred thousand, but for the last fall, last of September, 2021. So a lot of this is the conversion of non permanent residents into permanent residence. So a lot of them may already be living here, but the government seems to be very, very focused on continuing to raise those integration targets over the next few years, and as travel returns to more normal levels, you’ll actually see that begin to materialize into actual population growth.

 

So I think that’s partly important to understand Toronto typically receives about 35% of all the immigrants that come to a public country. And unfortunately we’re not building a pace that’s going to be able to satisfy that level of demographic demand. So we’ve been pretty much stuck at building at a pace of under 40,000 housing units a year for the GTA for the past 20 years.

 

Housing construction generally across the province has risen in, in, in the last number of months. So it is responding to demand and anticipating future demand, but it’s been that growth has been entirely focused outside of the GTA. So it’s happening in less supply constrained markets within the province. And in fact, for the first time in a long time, there’s more housing being built outside of Toronto in other parts of the province than there is within Toronto. So I think, you know, this is, this is, this is a policy problem that you’re introducing higher immigration targets, but you’re not necessarily looking towards housing supply to, to accommodate that growth.

 

And inevitably what happens is that the new immigrants get, get shut out of the Toronto housing market because there just simply isn’t any supply. And they begin to move into areas where perhaps there is more supply and that may not be economically the right thing to do because you know, a lot of the immigrant new immigrate immigrants are, are working in, in, in, in, in economic hubs, which are mostly located in central areas of Toronto. So, you know, there’s more commuting and that sort of thing that goes on.

 

So I think, you know, more certainly needs to be done. W we will see a lot of condo completions in 20 20, 22. And you can look at this through, you know, the historical relationship between presale launch launches. And then there’s normally a five-year lag between when they actually get delivered a record year in 2017 for launches. So it stands to reason that next year there’s going to be a pretty big year for, for condo occupancies. Most of those will be offered for rent still, I believe. So. I think you’re going to have, you know, a little bit of an increase in supply to meet that additional demand, but by no means, will we be building a pace that’s going to satisfy the, the level of population growth that’s going to be coming into the market in the next few years.

 

So, unfortunately, there’s, there’s really, isn’t much that can be done about this in the interim, because all of the supply that’s going to be coming to market, I would say over the next seven years has already been spoken for, we already know how many units are under construction. We already know how many units are approved for development. So we know generally how much supply is going to be coming in, you know, within the next five, seven years. And it simply isn’t going to be enough. And if you look at kind of how the dynamics are going to be shifting between ownership and renting, there’s going to be an even larger deficit of rental units.

 

Then we then we’ve seen in the past. So it won’t be long before we’re, we’re back to 1% vacancy rates and rents that are inflating much, much higher than, than, than, than historical norms. You know, it just, in the first quarter of this year, we were recording vacancy rates in downtown Toronto at 9%, six months later, they were below 4% and another six months they’ll probably be below 2%. And this is without immigration, right? This is, this is, this is happening, you know, before that big surge in population happens.

 

So, you know, what it’s going to look like in the next few years is, you know, much of what we were seeing pre COVID, but, you know, amplify to a degree.

 

Jesse (37m 10s): So we asked four questions at the end of the show with all the guests, but before we get there, I wanted to kind of, you talked a little bit about it, but a prognosticate a little bit about the next few years for development, you know, you touched on rental rental growth. I can assume I can infer from that, that as we have compression of vacancy rates, that rents will go up. Do you see a, a point where, you know, we’ve seen, at least in, in, in our brokerage, we’ve seen record prices, record cap rates.

 

You know, I’ve said for the last 10 years, interest rates can’t get any lower and they continue to get lower. Where do you see if at all that we come up to a wall when it comes to whether it’s asset inflation or rental growth?

 

Shaun (37m 55s): Well, for per housing crisis, I think you’re going to see some resistance next year as is inflation numbers. And the communication coming from the central bank made it quite clear that interest going to start to revise it soft point probably early next year. And you know, the market’s pricing in at least four moves by Canada. So, you know, given where housing prices are, that’s going to have an impact on affordability, for sure. I mean, that’s the been one of the biggest drivers of, of the asset inflation that we’ve been seeing, it’s the record, low interest rates. And as those start to normalize, you begin to see some headwinds in terms of that growth.

 

So whether that happens, you know, the first half of the second half or the early 20, 23, it’s hard know because you know what impact that’s having on the broader economy. But certainly I think, you know, the narrative is going to shift from one where we’re seeing housing prices grow by 20 to 30% to one where they’re starting to at least level out, but usually there’s, there’s trade off there, right? As you see big increases in housing prices inflation, it tends to lead to higher rates of rent inflation.

 

And we haven’t seen it yet, but I think we will see it. But to your point, you know, when you’re looking at rental growth in rent inflation, you’re constrained by incomes, right? Like there’s only so much that a you can afford. And yes, we’re seeing higher income, new immigrants coming into the GTA that can afford higher rents. But, you know, even though there’s going to be some, some resistance levels, if you look at the average price of a new purpose built rental in the, in the GTA, it’s about $2,400 a month. So the average new new immigrant coming in, you know, is, is probably earning something that, that, that would make that kind of on the fringe of being affordable.

 

But if you relate it to the average ownership costs for a condo, for instance, it’s a thousand dollars a month cheaper. So it is really the de facto way of introducing a affordable housing supply in the GTA that, that is geared to the market. So at a certain point, though, you know, you will, you will start to see some resistance and we actually did begin to see that pre COVID. So once rest started to rise to 25, 20 $600 a month, you began to see renters pull back a little bit and, and, and, and the demand didn’t dissipate, it just started to move into less expensive markets.

 

So I think that that’s something that will, that will reemerge, like right now, the hottest segment of the market for rental growth is the downtown market because it’s in that recovery phase. But once it starts to exceed those preached pre pandemic levels, you’ll probably begin to see, you know, renters look for more affordable pockets of the market, and that will help to manage, I suppose, the, the continued growth that we’re expecting.

 

Jesse (40m 42s): Fair enough. All right, Sean, we have four questions if you’re ready to go all LABA, Matt. Yeah. All right. Something, you know, now in your career, whether business or in the real estate industry, you wish you knew when you first started out

 

Shaun (40m 57s): Something that I know now, geez, I guess it’s, you know, the market never works the way that you’re going to expect it to work. You know, you can, you can have the best economic model, but you know, there there’s, there’s, there’s so much human emotion in real estate, in psychological elements that, you know, sometimes I think, you know, we’d be better equipped to be a psychologist and an economist when trying to evaluate the market outlook.

 

So learning to, to understand that a forecast is, is more than opinion and, and, and, you know, it’s subject to a lot of variability. I think every economist in marketing analyst there has had to learn over the last several years

 

Jesse (41m 47s): In terms of mentorship, somebody that’s just breaking into or thinking about breaking into our industry, what would you say to that person

 

Shaun (41m 57s): Learn as much as you possibly can, you know, a firm such as organation is great at, at learning the industry from the ground up. So understanding the data, gaining, getting exposed to, you know, the development industry across the board, I think is incredibly valuable. So, you know, you know, we’re working for a large organization is, is great, or a boutique organization such as organization as well, but being exposed to understanding how the market works and learning the data, learning how to source information and how the, the market functions practically I think is probably a great starting point

 

Jesse (42m 36s): Booker podcasts you could recommend to listeners

 

Shaun (42m 41s): Or podcast. Geez, I’m not big on both. To be honest, I, I, I, I read the news. Like I slipped a little, little, little time that I, I try to consume media through, through the newspaper. So I’m probably one of the few people that actually still get a printed global mail delivered to me every morning. And that’s really all the time I have to spend on, on, on consuming media is, is when I sit down and actually read through the paper, you know, I think I was, I was starting to get into podcasts a little bit more before the pandemic, while I was commuting into work, but not having that time to sit down and listen to podcasts anymore is, you know, reverted back to traditional media and said, okay,

 

Jesse (43m 30s): All right. And for those that aren’t, aren’t watching this and listening, Sean, you look like you’re, you’re 35. So that’s, that’s awesome that you’re still getting the, the paper. Last question, you know, this is the toughie first car make and model

 

Shaun (43m 44s): My first car. That was my own, that, that wasn’t provided to me by my parents was a Chevrolet cavalier.

 

Jesse (43m 54s): I was very close. That was the Sunfire. That’s great. That’s great too. We’ve had, we’ve had some interesting cars on the show over the last 80 episodes. That’s awesome. Shine. I really appreciate you taking the time for those that want to learn a bit more about urban nation or, you know, reach out to you. What’s the best, best approach

 

Shaun (44m 13s): You can visit our website. urbanation.ca. We have a lot of information there. You can send an inquiry into the, the general line in Cote urbanation.ca or myself, Shawn S H a U n@urbanation.ca. Happy to answer any questions that may come up,

 

Jesse (44m 29s): I guess today has been Shawn Hildebrand. Sean, thanks for being part of working capital. Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse, for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.