Inflation, Low Vacancy and Other Key Themes Impacting the Quebec Multifamily Market

Some of the biggest players in Quebec’s multifamily development and investment sector were reunited for the Québec Apartment Investment Conference hosted by Informa Connect in February. The event is the largest real estate conference focusing on the multifamily sector in Quebec, featuring presentations by owners, developers and lenders, among others.

Over the course of the day, several themes reemerged, including the deficit of multifamily housing, expensive construction costs and the impact of rising inflation.

The day began with a presentation by Emna Braham, managing director at Institut du Québec, who provided an overview of how the evolving economic context is affecting real estate investment in the province.

Inflation remains high, noted Braham at the start of her presentation, adding that the roots of that inflation – such as labour shortages and the war in Ukraine – are potentially ephemeral.

Interest rates have gone up eight times between March 2022 and February 2023, as rates soared from an all-time low of 0.25% to 4.5%, a strategy carried out by the Bank of Canada to control inflation. This rate hike means it costs more to borrow money, which affects anyone owning property, from homeowners to multifamily investors.

According to Braham, there are few incentives to invest in ground-up development at the moment. Materials costs are still high, and the shortage of labour and goods is worsening an already bad situation. All panelists agreed that the upcoming year will be difficult for owners, developers and investors in multifamily investing. “For the next 12 months, the market will be volatile at the transactional level,” noted Marc Hétu, vice president, capital markets, national apartment group at CBRE.

Short term, transactions for existing properties have slowed because of a combination of high finance costs and high purchase prices. Marc-André Plante, director of governmental and public affairs at CORPIQ (Corporation des Propriétaires Immobiliers du Québec) added that the rise in finance costs has a direct effect on construction. He indicated that there was 16% less new multifamily construction in 2022 compared to 2021, and he anticipates that construction will decrease by 19% in 2023.

According to Michael Tsourounis, managing partner and co-head of real estate at Hazelview Investments in Toronto, the biggest issue in development is to find labour to build. For Asad Hanif, vice president of acquisitions at InterRent REIT, also in Toronto, the main issue is that there “needs to be stability in capital markets before making our portfolio grow.”

According to Tsourounis, “Canada is a great place to be because the country has a lot of growth opportunities.” However, right now, “there are definitely headwinds."

James Palladino, managing director at RBC Capital Markets, said that during the first quarter of 2022 , there was strong liquidity and REITs were very active, focusing mainly on new products.

During the second quarter there was a slowdown, with prices dropping from 5% to 10%, and some investors withdrawing from the market. In the third quarter, institutional investors became more hesitant, while private investors became more opportunistic, according to Palladino. During the fourth quarter, investment activity was mostly directed toward smaller transactions of less than 50 million Canadian dollars, as well as toward new and affordable housing.

“We have a lack of housing, we have an affordability problem, so we have to foster development,” Palladino said.

While most housing needs are still in the Montreal area, there is also growing demand in other cities such as Quebec City, Gatineau and Sherbrooke.

According to Michael Tsourounis, “Quebec is an excellent place to invest.” Hanif noted that his business “continues to grow within the market,” especially in downtown Montreal, close to universities and CEGEPs. His company is also growing in Montreal’s suburbs. “We like the South Shore,” Hanif said, adding that his company recently purchased a property there.

Tsourounis echoed Hanif’s enthusiasm for Montreal and the South Shore. “There are reasons to be optimistic. Students seem to be back in post-secondary institutions and people are coming back to the office,” he noted.

“We are also thinking about investing in Quebec City; it’s an interesting market for us. [But] we aren’t there yet,” Tsourounis explained in a statement that was consistent with the hesitancy that seemed to envelop most of the conference attendees.

In Quebec, the multifamily vacancy rate currently stands at 1.7%, the lowest level recorded since 2004. As vacancy rates are dropping throughout the province, there are few available units, especially for people with lower incomes.

Plante noted that even if rents are going up in Quebec, the province remains the most affordable in the country. However, this doesn’t mean that Quebecers are worried about affordable housing; survey results presented by Plante at the conference indicate that 64% of respondents were concerned about affordability. That survey also indicated that in the province, 25.2% of renter households were allocating 30% or more of their revenue to housing expenses in 2021.

The average rent rose in 2022, with Gatineau at the top of the list, posting average rent of CA$1,269; Montréal followed with an average rent of $1,022; and Quebec City listed an average rent of $976. The most affordable cities in Quebec – Saguenay and Trois-Rivières – are smaller. The latter market also featured the most multifamily construction in 2022, with a 104% annual variation.

Despite the growth in construction in some submarkets, there are still not enough new units being built in Quebec, according to Plante. In June 2022, the Association des professionnels de la construction et de l’habitation du Québec (APCHQ) conducted a study which evaluated the lack of housing in Quebec and determined the province was lacking approximately 100,000 units. In addition to apartments that are already under construction or planned, 620,000 new units need to be built by 2032 to be able to meet demand.

One reason there is a need for more apartments is because more people are living alone. According to statistics presented by Plante, there were 1.4 million people living alone in Quebec in 2021, some 500,000 more than in 2001.

To respond to this modified demand, developers are adapting. Jérôme Thibeault, cofounder of Groupe Firma, is building smaller units. According to him, two-bedroom apartments were more popular a few years ago, whereas now, people are asking for smaller apartments. “We are modifying apartments, so they are smaller and better designed,” Thibeault said. This approach also results in higher profits since the revenue generated is more cost-effective for owners.

However, Braham saw things differently. She noted that demand is transforming in other ways. For instance, she said that renters are seeking more collective housing rather than individual homes. She also noted that two pandemic-era trends will remain: people are looking for larger spaces to be able to work from home and Quebecers are moving to more remote areas.

Despite the many challenges facing the real estate industry, developers need to keep building to reach construction targets. According to Matteo Fiorilli, president of Figicorp, long-term profitability and value in 10 years are factors to consider when starting construction. Even if construction is more costly in 2023, he said that “it’s more expensive to step back because we are missing opportunities.”

To build or not to build also depends on the mindset. If Fiorilli is bullish and plans to keep building, Thibeault is moving ahead cautiously. Thibeault noted that his company has a production capacity of 200 units per year and that 63 are currently being built.

As costs increase for everyone, developers also talked about raising rents. Thibeault said that he is increasing rents by 4% to 5% in 2023 because of rising costs, mostly attributable to interest rate hikes. According to Quebec’s Tribunal administratif du logement, the recommended increase for an unheated dwelling (meaning that the tenant is responsible for the heating costs) is 2.3% for 2023, and a hike of 5% is suggested only if major renovations have been performed.

Even with all the challenges the sector is confronting, the need for new multifamily development remains. In fact, as interest rates rise, demand for rental housing tends to increase as well.

“People will be in the rental market longer before buying their first home,” said Tsourounis. “At the end of the day, everyone needs housing.”