Opportunities remain in the beaten-down real estate market

October 19, 2022
Posted in News
October 19, 2022 veps

While Canada’s real estate market has softened this year on the back of rising interest rates, record high inflation, slowing economic growth and volatile stock markets, pockets of opportunity remain for advisors and investors to consider.

“Caution is the watch word in these uncertain times,” says Morley Greene, chairman and chief executive officer of Trez Capital.

He still sees prospects in select segments of the market, including multi-family rental properties and single-family homes in Canada and select southern U.S. states.

Trez Capital, a Vancouver-based firm established in 1997, is a top-tier real-estate financier. It is one of North America’s largest non-bank commercial lenders, a diversified real estate investment firm, and a preeminent provider of private commercial real estate debt and equity financing solutions.

Through 2022, interest-rate hikes have had a significant impact on borrowing costs, which has led to a sharp decline in existing home sales.

The Bank of Canada (BoC) this year has raised interest rates on five occasions to curtail rising inflation, marking the most aggressive hiking cycle in decades.

The central bank’s policy rate now stands at 3.25 per cent, up sharply from 0.25 per cent at the beginning of the year. The BoC is expected to continue raising interest rates, putting additional pressure on the real estate market.

Given the trend, TD Economics has forecast that average Canadian home prices could fall between 20 per cent to 25 per cent on a peak-to-trough basis from the first quarter (Q1) of 2022 to Q1 2023, with sales falling by about 35 per cent over the period. The steepest declines are expected in B.C. and Ontario.

“Although interest rates have been going up over the past year, there has been a huge demand for houses, with demand outstripping supply,” Mr. Greene says. “What we are seeing now is a reduction in the acquisition of houses and a shift to the rental market due to affordability issues. First-time home buyers have been locked out of the housing market and forced into renting.”

Trez Capital recognized this emerging trend early, says Dean Kirkham, the firm’s president and chief operating officer.

“We shifted focus to the multi-family rental market a couple of years ago,” he says. “Over the next 12 to 18 months, we will continue to focus on residential development, with a lean toward rental in Canada.”

Mr. Kirkham says that while single-family residential homes and condos pose more risks, strong tailwinds will fuel the rental market. These include an increase in immigration (amounting to more than 400,000 people this year), a smaller inventory of rental units due to a macro supply/demand imbalance, and the declining affordability of homes.

Mr. Kirkham sees opportunities for growth in U.S. Sunbelt states such as Florida, Texas, the Carolinas and Georgia. While the United States is also experiencing inflationary and interest rate pressures, these states are growing for different reasons.

“Nearly half of the U.S. working class population is being sucked into the south, with people moving away from states such as New York and California,” he says.

In addition to these demographic trends, Mr. Kirkham says southern states have lower barriers to entry, lower taxes, and job creation initiatives that are inducing growth.

“These factors should remain in play for at least a dozen years.”

From a strategic standpoint, “remaining disciplined in the current environment is key. You can’t get caught up in a falling market,” Mr. Greene says.

“We are in a position in which we don’t feel pressure to put out capital,” he adds. “We only look at the best opportunities for investors and we never forget that the money we’re deploying is not our money; it’s investors’ money. The type of opportunities we seek have followed a rigorous due diligence process for over 25 years. Our process has given investors consistent returns that they can count on.”

Mr. Greene does recognize that one challenge for lenders in this space is the ability to attract capital. Trez Capital, however, has been able to leverage its track record in delivering returns to attract capital globally.

“Regardless of market conditions, we’re well positioned to grow,” Mr. Greene says. “We have 25 years of history navigating through multiple market shifts, one of the best teams in the industry, and a strong track record of protecting capital and delivering returns.”

source: theglobeandmail