By Shawn P. Lubic, Senior Financial Analyst, Capital Markets
As an investment sales underwriter, I have a crystal ball that enables me to make the following predictions:
- While it will never be on the same level of the U.S. industry due to the market’s smaller size, the student housing industry in Canada will continue to evolve and grow. Purpose-built housing will become more attractive to residents, investor/developers, and Canadian institutions. P3 arrangements will gain traction and offer a logical option for Canadian universities looking to add to or upgrade their on-campus living facilities.
- The dominant players will be the ones able to convince the Canadian institutions that student housing is a stable, stand-alone, property type worthy of investment. Due to the many cultural differences discussed in part two of this series, as well as some financial- and market-specific considerations outlined below, the major players will be Canadian or Canadian/U.S. joint ventures.
Writing these blogs has allowed me to meet many wonderful people in the student housing business on both sides of the border and to reconnect with a lot of old friends in the U.S. industry. In talking to my American contacts, my question was simple: Would you look to build to buy or build in Canada? To my delight, there were several yeses and a few maybes. Though I’m not a tax accountant and don’t know the ramifications of a U.S. company owning real estate or operating a company in Canada, here are some of my observations:
Poor Grades for Demand Tracking
A challenge presented by Canada’s student industry is its young age. According to one owner/developer, there’s a lack of solid supply and demand statistics. Off-campus living is fragmented with students residing in single-family homes and low to mid-rise apartments (high-rise urban markets). As discussed in my second blog, Canada also has a large population of second-generation immigrant students who choose to live at home. When the developer I interviewed decided to build his complexes, he had to “believe” that the demand was there — and fortunately it was. I can see this being a little nerve wracking for any U.S. developer in Canada, although as another U.S. expert pointed out, the situation was much the same in the U.S. in the mid- 90s.
Though a recent article in the Financial Post claims there’s a demand for 416,000 student beds in Canada, this figure was met with some skepticism by the people I talked to.
Urban Locations: Toronto vs. Philadelphia
Canadian universities tend to be located in dense urban areas where land costs are extremely expensive, making new student housing development unfeasible.
Take Toronto versus my home town of Philadelphia as a case in point. Both cities are home to a large student populations. The University of Toronto has an enrollment of 88,766. The University of Pennsylvania and Drexel University have a combined total of 50,401 students in Philadelphia’s University City neighborhood and Temple University has an enrollment of 39,581 in North Philadelphia.
Competition for development sites in Toronto is fierce pushing the prices of high-rise condominium land over $250 per square foot of buildable area. The most recent apartment rental development site close to the University of Toronto sold for $189-per-buildable square foot. High density residential land values in the premier locations of Philadelphia on the other hand range from $45 to $55 per buildable square foot.
Lack of Liquidity
The Canadian student housing industry is in its infancy. Campus Living Centres, Campus Suites, CHC Student Housing, Knightstone Capital Management, and Varsity Properties, along with a few others are industry pioneers. Multiple contributors to this blog commented that there is no student deal flow in Canada. One source asked me “During your research, how many student deals have you heard closed?” My answer was two. According to Real Capital Analytics, three buildings classified as “student housing greater than 200 units” have sold in all of Canada since January 2017! I note that RCA may not have the superior coverage in Canada as it does in the States.
Gary Holloway, stated in Part One that a tipping point for the U.S. industry came in the late 1990s when it was finally proved that there were buyers for student housing. Once the institutions became involved with purchases, student housing was seen as its own product class and the industry took off. This must happen in Canada — institutions are key.
Every American multi-family or student housing owner/developer looking to expand in Canada should know about the Canadian Mortgage and Housing Corporation (CMHC). As per the document linked below: “CMHC mortgage loan insurance provides access to preferred rates that can lower borrowing costs for the construction, purchase and refinancing of multi-unit properties and facilitates renewals throughout the life of the mortgage. In addition to mortgage loan insurance, CMHC offers a variety of services and products to support the development of rental properties, from planning, through construction, and beyond.”
CMHC insurance is based on its own value underwriting, which tends to utilize going-in capitalization rates 0.25% – 0.75% bps above-market cap rates. The benefits, however, include LTVs of up to 85%, amortization periods of up to 40 years, and below-market interest rates currently estimated at 3.20% to 3.25%. Insurance premiums and recourse provisions do apply. A link to CMHC’s reference guide can be found here.
CMHC historically only applied to traditional multi-family and would not include student assets unless the property had an agreement with the university it served or was located basically on the school’s doorsteps.
Recently, CMHC broadened its criteria to allow for student housing assets in close proximity to a university or directly on public transit leading to the school, and which have no more than four bedrooms within a unit. One of my sources questioned this new openness citing a recent experience in London, Ontario, home to the University of Western Ontario. While looking to refinance, this individual’s property was turned down for CMHC insurance because the deal was labeled a student housing asset. So clearly, there are still no guarantees!
It’s been a pleasure to write this blog series, and I hope you have found them informative – and entertaining. I would like to thank the following contributors to part three: Joseph D. Pasquarella (Newmark Knight Frank), Trip Lukens (Valbridge Property Advisors), David Fulop (Cushman & Wakefield), A.J. Keilty (Varsity Properties), Daniel Bragagnolo (First National Financial LP), Craig Smith (CHC Student Housing), Henry Morton (Campus Suites), Brian Thompson (CA Ventures), Jason Taylor (EdR), Mike Porritt (The Scion Group), Sandy Harrington (IC Funding) and Jason Schwartz (Blue Vista Capital Management).
Shawn Lubic, Senior Financial Analyst, Capital Markets, Cushman & Wakefield, Toronto, has 24 years of commercial real estate experience in investment sales brokerage and financial analysis/valuation across all commercial property types. Shawn has been responsible for the disposition of investment-grade real estate for private and institutional sellers on a local, regional, and national level. Shawn also provides advisory services in the areas of market research, lease analysis, acquisition underwriting, mortgage financing, REO and foreclosure evaluation, real estate tax appeal, and portfolio management.