Yield Sign

Drive 'til you quantify: Yield-hunting in Ontario

Monday Feb 08th, 2021


I feel like I've been generally about as exhaustive as I can be about the impact/existence of the "urban exodus" in the GTA, but you can expect a little bit more data in the future. The team at informedrealtor.com is putting together a visual timeline video. BlogTO & Zoocasa posted a great map detailing price growth across the GTA that echoed my original exodus mapping project. From my perspective, price is the more important metric than individual or household mobility, which can be tracked using Google & Apple Mobility Trends - more here: https://www.gstatic.com/covid19/mobility/2021-02-02_CA_Ontario_Mobility_Report_en.pdf

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Mobility of Capital

It appears suburban investment capital is moving outside of the core, too. I don't say this to fear-monger, because I think it's been more than adequately replaced by development capital and end-users. But it's an important trend to be aware of if you like to watch what investors are doing as a smart money indicator for real estate (read more: https://sentimentrader.com/blog/smart-money-index-everything-you-should-know/)

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This is why I believe that price is a more important metric than individual mobility. Price has the most quantifiable impact on my clients, and the market as a whole. It is the quantitative, not qualitative metric of the exodus - I think we all have a general understanding of the qualitative reasons for movement. It shows us where the dollars are moving, rather than where the people are moving. It represents the potential onset of inflation, and it changes the dynamic of investment in the broad market, especially when considering geography.

I spent the last decade becoming the best I could at selling major arterial product in suburban secondary plans. Functionally, these properties are often small commercial or multifamily assets (2-6 units) with mixed-use infill potential in the future. The reason I mention this is because I haven't sold any of that product so far in 2021 (I actually did sell 1, but it was to a smart residential end-user.) There's a clear reason why this is happening:

  1. As detached house prices in the suburbs accelerate, the margins and return metrics on those houses as investments decreases; therefore
  2. The likelihood that investor clients want to purchase that property for income and future development purposes decreases.

Back to the future

We've seen this before - a decline in suburban incentives/returns brought on by residential competition and rapid price acceleration. Smart money sat on the sidelines. I'm not implying this could happen again, in fact I think it's unlikely, given that B20 and other constrictive policies were designed to be removed if stimulus is required. What I'm saying is that it has happened, and we can still learn from smart money.

In the post-crash 2017 market, I put out a video with my thesis for what the best investment in the GTA was. It basically summarized what I learned from some of my most intelligent clients by analyzing their behaviour and listening to what they had to say. I stated that the best type of property to purchase was:

"a cash-flowing duplex on a major arterial road in a suburban GTA secondary plan"

and I was probably correct, until present day. The challenge in Q1 2021 is that this type of property is close to extinction. It's not that these properties don't exist anymore, it's that they're no longer a good deal. In the past 3 years, an investor could usually get a residential property on a main road for a discount compared to the identical property in a subdivision because they weren't competing with end users. It was often the only type of property you could find distressed in the post-crash 2017 market. You could purchase these properties at 5-7% cap rates in the GTA with exceptional development upside as a secondary-plan infill site for 4-5x more units. You could be highly cash-positive at 20% down, and you could do it with Sched 1 residential debt.

Today, supply is so scarce that end users are happy to live on the main road, and the discount has been erased.

The good part about this change of pace is that when small-cap infill buyers are competing with end users for major arterial product, it can create a bit of a positive feedback loop. It forces buyers to develop that land faster to realize their returns, which could positively impact the housing supply. This is very noticeable in the type of people buying property we list in the secondary plan today. In the past 3 years, the buyers were predominantly investors targeting cash-positive holding income, anticipating a development partnership or disposition within the next decade. Today, these sites are purchased by residential developers who have the intention of turning them around as soon as possible.

The bad part about this change is that it constricts existing residential rentals in the meantime. About 80% of my investors (not developers) have exited the GTA in regards to rental holdings, and we've been rigorously researching submarkets in Ontario with growth potential and high-yield rental investments. It's worth noting that most of them believe their time buying outside of the GTA will be temporary. We've identified a few exceptional markets that suit the investors and have started acquiring, the most popular areas being:

  • Cornwall
  • Sarnia
  • Northern Ontario

This brings me to the final idea or thought experiment that I intended to understand in this post. I want to know what you think these trends mean for the today and tomorrow of GTA real estate. My admittedly limited perspective of the market is telling me that:

  1. GTA investors are yield-hunting all over Ontario (and nationally in many cases);
  2. Small- and mid-cap developers are competing for suburban GTA infill and greenfield;
  3. Land assembly is squandered by end-users' higher willingness-to-pay.

What does it all mean, and where do we go from here?

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