Edmonton Multifamily Report 2Q10
From Cushman & Wakefield Edmonton www.cwedm.com

Economic Overview
Albert and Greater Edmonton’s economies continue to gain strength as the global economy is slowly recovering from the worst downturn since World War II. As expected in the last quarter, the Bank of Canada has increased the prime interest rate by 0.25%. However, it is important to note that rising long-term interest rates are a signal of economic strength, which in turn is beneficial to real estate across the country. The Canadian dollar hit parity with the US dollar on April 6, 2010 but has since fallen below 95 US cents as of July 5, 2010 as it often moves with oil prices. The price of oil has dropped more than 10 US dollars per barrel since the first quarter of 2010 with increasing news coverage concerning the environmental concerns associated with drilling and exploration in light of BP’s recent oil disaster in the Gulf of Mexico which has overshadowed Syncrude’s tailing pond trial.

Apartment Overview
Cushman & Wakefield Edmonton continues to see a stagnant approach towards the multifamily market. Long time owners or those who paid non-condominium-conversion prices are able to take advantage of today’s healthy vacancy rates and traditionally strong rents. Vendors are choosing to sell only if the sale proceeds after taxes can be used to generate returns greater than the cash flows produced by the property, which, for the most part, is not the case. This has resulted in the lowest transaction volumes in years. Purchasers are encouraged by continued low mortgage rates but, for the most part, are unwilling to pay the priced demanded by the market’s few vendors. That said, only those properties that are priced with reasonable rates of return, or those with superior quality and location, are attractive to purchasers.

Outlook
Continued volatility in the equity markets draw investors towards real estate as they look for more tangible bricks and mortar asset classes. Increasing vacancy and competition from rented condominiums will discourage rental increases. Sales volume is likely to remain below average, throughout 2010. Capitalization rates should stabilize around 6.75%, however with such a small transaction volume any significant outliers can easily skew central tendency measurements. Demand will grow as long as vendors price their properties competitively, thereby affording potential investors a reasonable rate of return. Until that happens, purchasers will wait on the sidelines waiting for the rare “deal” that comes along.

Sales Activity
Demand for reasonably priced product has remained strong as investors take advantage of continued low mortgage interest rates. Despite this, however, owners for the most part have elected to sell. The sales volume for the first six months of 2010 was $24M; a 66% decrease from the $70M that transacted in the same time period in 2009. In comparison, volumes were $50M for the first six months of 2008 and $440M in 2007. The average capitalization rate is 6.2% which is down significantly from the first six months of 2009 when the average cap rate was 7.0%. It is expected that capitalization rates will stabilize around 6.75%. The average price per suite is $91,450. This average includes all property types (lowrise, high rise, and row house) regardless of age or construction type. It should be noted that current averages are easily influenced by outlying data considering the reduced market volume thus far this year. Only 16 properties have closed so far this year, compared to 25 properties this time last year, 21 in 2008 and 108 in 2007.

The Rental Market
Edmonton’s apartment rental market is made up of approximately 2.000 buildings containing over 65,000 suites. The majority of buildings contain a small number of suites: 50% of the buildings have less than 20 suites per building; 43% have 20-99 suites; 7% have 100 suites or more. The secondary, or shadow, rental market continues to grow as investors rent newly constructed and newly converted condominium units to tenants.

Vacancies
Edmonton vacancy has increased from 4.7% in April 2009 to 5.2% in April 2010. The increase is due in part to the depressed employment market and lowered provincial in-migration. Other influencing factors include tenants moving towards home ownership as interest rates remain low, many new and recently converted condominiums being rented out as part of the secondary, or shadow, market, and an increase in cohabitation because of traditionally high rent levels. In terms of vacancy, bachelor units decreased from 4.9% in April 2009 to 4.1% in April 2010; 1 bdrm units moved from 3.2% to 4.6%; 2 bdrm units from 4.4% to 6.0%; and 3 bdrm units from 13.2% to 5.3%. Cheaper rents and rent splitting account for the vacancy drop among bachelor and 3-bdrm units. The highest vacancy in Alberta occurred in the municipality of Grande Prairie where vacancies increased from 8.5% to 14%. This was due in most part to decreased activity in oil and natural gas exploration, production and support services. In Wood Buffalo (Fort McMurray), vacancies have soared from 0.9% in 2007 to 13.2% this year.

Rents
The average rent decrease over the last twelve months is statistically nil with the average rent in Edmonton remaining $911. This decrease pales in comparison to 2008’s increase of 14.2%. In April 2010, a bachelor unit averaged $712 (down from $718 in April 2009), a 1 bdrm unit averaged $838 (down from $832), a 2 bdrm unit averaged $994 (down from $1059), and a 3 bdrm unit averaged $1132 (up from $978). In the municipality of Wood Buffalo (Fort McMurray), rents decreased 5.7% from $2088 to $1968. Still, Fort McMurray remains Canada’s most expensive rental market.

Housing Starts
There were 989 housing starts in Edmonton in May 2010, making for a total of 4,428 starts so far this year, compared to 346 starts in May 2009 and a total of 1,462 for the first five months of 2009. There have been 2,554 single detached dwelling starts this year, an increase of 201% when compared to 849 starts during the same time period in 2009. This is in part due to increased demand and developers’ attempts to catch up after numerous quarters of low completion rates. Multiple unit starts are up 206% year-to-date, with 1,874 starts since the first of the year. Most multiple unit starts are for condominium, not rental apartment, properties.