I attended the Real Estate Forum in Calgary on October 27 and was fortunate enough to sit in a session where some major developers discussed the future opportunities they saw in the multifamily building market.
The information that jumped out at me most is the upcoming changes in the Condominium property act; how it will affect the future of the condo developer. The legislation was introduced into the Alberta legislature as: Bill 9; Condominium property amendment act, 2014 and received Royal Assent in December 2014. (http://www.servicealberta.gov.ab.ca/Consumer-condominiums.cfm)
This first major change is specifically referred to in the payment of contributions section (10.3) of Bill 9. It states that once the first unit is transferred from the developer to its owner, the developer must pay the condo fees for each unit that remains unsold. He must pay the same rate as other owners are required to pay. My understanding is that this change adds significant cost to the developer, especially in cases where the plan is to use the proceeds from the sale of unit 1 to fund the completion of the remaining units or phases.
The second change is a requirement of developers to provide purchasers with the most recent or proposed budget of the condo corporation. This Includes the estimated amount of the monthly unit condo fee contributions. The budget must allocate 15% of the total revenue to the capital reserve fund. If the actual expenses are more than 15% higher than the budget, the developer is to pay the entire difference between the actual and projected expenses to the condo corporation. The developer is protected from: reasonably unforeseeable expenses, changes in insurance premiums, changes in utility rates and any expenses for legal services provided to the condo corporation.
The combined effect of these two changes will benefit condo owners. It protects them from developers who purposely under estimate condo fees in order to keep the fees more attractive to potential purchasers. It will also ensure all units contribute equally to the reserve fund regardless of when they were transferred from the developer to the purchaser. This is great for consumers but adds significant risk to the developer. As a result, investors and developers are finding higher returns in smaller projects where all units can be completed at the same time. These smaller projects include smaller condo projects, and multifamily rental properties built specifically as a 1 title rental building. The experts at the forum expected that by 2019 half of the new multifamily buildings developed will be purpose built rentals, the other half will continue to be condo developments.
Because of the success of condos, we have built very few apartment buildings in Alberta since the 70s. As a result we have created 35 years of new neighborhoods that do not contain a purpose built multifamily option for renters. This creates a shortage of lower cost professionally managed “entry level” rentals. The current rental market has been supplied by: condo owners renting out their premises, single family homes, basement suites and older rental apartment buildings.
There is an opportunity to build smaller wood framed apartment or townhouse developments in existing or new neighborhoods. With the Alberta economy being in the scary position it is in, it still may be a good time to develop. With unemployment rising (projected to hit 7.5% in Alberta) there is the potential for the cost of construction labour declining as the supply of skilled workers will be higher. These type of projects take 2-3 years to complete from planning to completion. This may be attractive timing as the potential is there for the building to complete as the economy starts to recover or even expand.
As with any project it’s important to consider your target market and design along with your location. Recent trends are showing that there are 4 main demographic groups currently renting in Alberta:
Traditional renters – Traditional renters are a demographic that is unlikely to ever disappear. This category typically contains: new Canadians, students and individuals needing short/medium term accommodations, low income earners, transient employees and tenants who don’t believe in home ownership. These occupants are prime candidates for the 1 or 2 bedroom, purpose built, rental buildings.
New Generation – The “new generation” demographic are 25+ established professionals who are not interested in the responsibility of home ownership. These individuals are “too busy” and look to avoid yard maintenance, snow shoveling and other ownership related tasks. These tenants are not buying a condo property as they expect their needs to change as they marry and start families. They may also be recovering from poor credit, large amounts of student debt and have an inability to save a down payment for future ownership. The new generation is looking for modern buildings with central locations and nearby entertainment.
Recently single – This is a relatively new market segment. This is typically a much more established higher earning individual who is not in a position to buy a property due to the financial set back of their recent split or ongoing legal proceedings with their former significant other. This individual is looking for more features from their building. The recently single individual is attracted to: exercise rooms, pools, common social areas, party rooms and nearby commercial buildings (coffee shop, etc.) They are prime candidates for renting existing condos from individual owners as well as newer higher end rentals in mixed use developments.
Retired Seniors and Baby Boomers – As the generations retire they may realize that they may not have saved enough money for their retirement. They have spent a majority of their life paying off the 5 bedroom 3 bathroom home that is now much too large for their needs. As their savings begin to run out these tenants can sell their property using the proceeds to fund future expenses. The needs of this segment vary greatly depending the age of the individual and the severity of their financial woes. Some tenants are able to afford a higher end executive rental while others choose to downsize significantly to a more traditional renter property. The underfunded senior is embarrassed to be “taking a step back” by renting. They are looking to save face by appearing to live in a high end building but may be unable to afford to keep appearances.
We can’t ignore how the price of oil is going to affect the economy. We cannot be paralyzed by the price of oil. We need to treat the downturn as an opportunity to prosper. In the condo development industry, we have an opportunity to build a different type of building. The most successful businesses adapt, innovate and find the chance to serve an ever changing market.