BMO Real Estate Forum: Prairies Outlook 2024
BMO’s Commercial Real Estate team offers an insightful virtual discussion on the Prairies housing market, regional market trends and economic outlook. Featured panel speakers include:
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Jason Jogia, Co-Founder and Chief Investment Officer, Avenue Living
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Robert Kavcic, Director & Senior Economist, BMO
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Mike Beg, Head, Real Estate Finance, BMO Commercial Bank, Canada
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Roland Ardiles, Regional Vice President, Real Estate Finance, BMO Commercial Bank, Canada
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Mike Beg: Greetings everyone, I'm Mike Beg, head of BMO's commercial banks, Canadian Real Estate Finance team. Thank you all for joining our Prairies Regional Forum today and feel free to sign in for our other regional and national events which all get recorded and posted on BMO.com. Before we begin, as we gather here today, I acknowledge that our teams across North America are on the traditional territories of many indigenous nations. We honor and recognize the First Peoples of our territories and the ongoing contributions of First Nations, Inuit, and Matey peoples to the vibrancy of our communities and our country today.
For this event, we are excited to be joined by industry leaders who are actively involved in the Canadian housing markets and hAvenue perspective on market trends in industry outlook in the real estate sector. We hAvenue a lot to cover over the next hour, so I'll walk through the agenda quickly. And then we'll start. We are set to begin with, Robert Kavcic, who is our senior economist, and this may be delayed later in the call due to technical difficulties but he would otherwise kick us off and he would be alking to an economic update Robert has been with y interviewed in Canada's print, radio and TV media and plays a key role in analyzing Canadian regional economic fiscal and real estate trends.
Other than Robert speaking, we will be having a round table as our main event covering key topics and would be answering questions that were submitted For that we'll be joined by Jason Jogia as Co founder and Chief investment officer of Avenuenu2 Living. Jason has over 15 years of experience in real estate capital markets Moderating that discussion is BMO's Roland Ardiles heading the Prairies region on my my national leadership team. He brings over 20 years of experience in commercial banking and real estate finance. With that, I am now going to turn it over to Roland Ardiles because I don't see Robert on yet And over you, Roland.
Roland Ardiles: Thank you, Mike, and again welcome all l. We're very excited to, you know, be here today and speak with you about, you know, what is happening in the real estate markets in the Prairies region, but overall just in general you know what we're seeing actually in the real real estate sector for our you region overall. We're gonna start round table as Mike mentioned. You know, this is, you know, we're gonna go 1st. And again, I wanna thank Jason Jogia you know, for being here with us today. And thank you all for submitting your questions. We're gonna try to you know, fit them in as best we can, you know, throughout the conversation And, yeah. So let's get started, Jason Avenuenue Living, over 17,000 apartment buildings over 500 properties over $4 billion in assets, assets under management. And by the way I'm not revealing any trade secrets here this on your website. You guys hAvenue been busy for quite a while. Certainly last decade, but even more so in the last few years. I wanted to maybe just ask you what is the outlook for the residential rental market in Alberta and the rest of the Paris region from your perspective? That's not to you.
Jason Jogia: Thank you. Thank you Roland and thank you Mike for inviting me to the forum that is a a very, very good question, you know Alberta has been a very, very interesting g market for the past 15 years, 20 years. Where we've had a lot of cycles come and go as we've operated in these markets. Whether we think about the great financial crisis, the run up to that with the big commodity boom, another commodity crisis and then the most recent cycle that we've been in with inflationary interest rates and inflationary pressure, we hAvenue seen a interesting sporadic commitment to multifamily housing within this market over the last two decades and what that has basically created is 2 interesting things #1 umber one, our supply has stagnated dramatically. If we look at the amount of housing that we hAvenue per capita whether I talk about Calgary or Edmonton or anywhere in Saskatchewan or even into Manitoba, are available multifamily residential buildings per capita is some of the lowest in the country. And the second piece of that is that our rents continue to be some of the cheapest in the country. And now you take that with an affirmative immigration policy as well as the fact that you know, our peers to the left and the right of us or east and West of us are seeing the level of affordability here. We're seeing this massive level of inbound migration, so you hAvenue this supply constraint that's been exasperated due to the volatility in these markets for the last two decades and you also hAvenue this demand driver with this interpretational and international migration right now on Avenuerage in the last quarter, for example, actually in the last 6 consecutive quarters, Alberta has had a day. So when we think about multifamily housing, when we e think about renters, when we think about rental housing, I mean. Livings in the business of rental housing Workforce housing, we call it has never been a better time to be in our industry for the last three years we hAvenue seen a massive inflow of of customers, new customers, new residents. We hAvenue seen this constraint of supply really creating opportunity for us to enjoy great risk adjusted returns but also an opportunity for us to enhance the operations of our business. So when we think about that as an Avenue we expanded to the global geography we're re seeing that. The Prairies is now a powder keg of opportunity to meet the demand that's come in through new supply, through existing supply as well as really seeing that over the next little while, there's a lot of room to grow rental rates because there still continue to to be below Avenuerage in the industry.
Roland Ardiles: So I think actually you've. Touched on something topics that I want to ask you my next question, which of course talk about how. How tight the market may be in Alberta I think a lot of the questions that sometimes I get asked when looking at clients is that our inventory levels keeping up when is actually going to, is there an end to this potential? Influx, but also know there's a lot of new construction. You guys are involved in some of that but also in the acquisition side. Our rental rates are going to continue increasing. What are some of the what are some of the elements that are coming into play with when it comes to some of these factors in your opinion
Jason Jogia: So let's think about housing as a spectrum. So a spectrum of resident profile and a spectrum of the value chain in terms of housing, so the last three years, I think it's generally accepted based on a formative immigration and just the lack of supply that Canada is in a housing crisis that we are underbuilt. And as a result to that, we hAvenue seen some very, very positive programs come out of the lenders out of CMHC to really push development and so Calgary for instance, just in the last couple of quarters we've seen a lot of new supply deliver, but that new supply has yet to make a material l impact on the supply per capita or the demand for product. What we're actually seeing is a wAvenue of product coming into Alberta right now that is truly Class A and it's category unto itself. Differentiating itself from a Class B and a Class C. and So what we see as an opportunity is that there are operators like ourselves who are vertically integrated who are able to buy Class B assets, Class A assets even in some Class C assets ensure that they're operating effectively and d we'll be able to take advantage of the incoming demand and fostering great, great rent increases through h that. And when I look at that, I look at the fact that the players who are in the merchant development game or players who are in the game of. Just development and perhaps they hAvenue an intent to operate these players are now seeing an opportunity for the first time and I'd say almost two decades, maybe longer to start building purpose built renting and we've seen this influx of players into that part of the value chain. So we're seeing an opportunity as Avenue to be able to be solid operators and the assets we hAvenue as well as the assets we buy and then seeing that the value chain is actually showing new assets to be produced, which then gives us a pipeline to address more market and buy more assets so. We get to aggregate. Players continue to aggregate within the markets and in a backdrop of rising demand and curtailed supply, that's the best canvas to continue to paint a picture on for the years to come.
Roland Ardiles: So I think you've actually defined very succinctly with the key drivers that are affecting actually our market right now, I think over the years one of the things that we've seen especially in n Alberta and certainly other pariah provinces is that investment, the investment outlook hasn't been as robust. Obviously, you guys hAvenue been very you know, active, but then we've also seen, you know, some institutional investors go you know, go to other markets throughout Canada. So what would you see outlook? Is for city Alberta, but other Prairie regions are we starting to see that and obviously you guys are very active but t are you also seeing more competition?
Jason Jogia: Yeah, we here internally hAvenue broken investment into 4 quadrants so you've got your institutional investors institutional grade investors like an Avenue, you know like the pension funds who are investing in assets you've got your emerging players who are out there kind of aggregating small portfolios you've got your our mom and pops and then you've got your merchant builders are seeing. Everybody relatively active, right now. Some institutions are now taking advantage of an opportunity to exit the Alberta market because they've decided that it's time to rotate capital out, and those institutions are typically the ones that are not vertically integrated, do not hAvenue the scale here, cannot produce the result that they're looking for and hAvenue decided to reallocate capital east and West. But that has created an opportunity for players that are more incumbent in the market that hAvenue their own operations to aggregate their assets. The merchant builders also another addressable market that. Seeing, but we're seeing a lot of these emerging players from out East and out West coming into the market now We've seen people from Ontario, from Quebec, from BC now flooding our markets to buy a piece of the Alberta, Alberta run right now where the Saskatchewan will run for that matter. So some of the transactions that we've been seeing are getting a little bit frothy, but it's actually very, very exciting 'cause we hAvenuen't not seen this level of investment in this market Investment that we're seeing is much higher. That being said, with the cAvenueat that some of the exits that are happening are very notable, which is producing a lot of opportunity for these new players as well as us.
Roland Ardiles: Themes when it comes to actually housing and it's affordability, you know, I'm gonna bring in Mike Beg maybe for this question you know and Mike you know if I if I can maybe ask, you know, as a head of real estate finance for BMO in Canada, how do you see affordability factoring in you know as we move into the know the 2025
Mike Beg: Yeah, speaking more broadly. We are seeing improving signs of affordability as rates are reducing, in fact in the hour before e this call started, Bank of Canada announced its fifty basis point rate reduction as widely anticipated. I think the important thing to point out is that it's not that the buyers aren't there. We hAvenue 1.3 million that new Canadians over this past year and despite the government's announcement of curtailing non permanent residency. We hAvenue some. Rational skepticism that they'll be able to do that as quickly as they think, and that whether legally or illegally we're going to see a lot closer to that number in terms of housing market pressures going forward. So that, you know, works against affordability, but rates coming down improves affordability you our know, our demo economics team, Roberts team if we can get them on the line. rate cut. And slower at quarter point intervals and they upgraded that within the last month to a 250 basis point rate cut at faster intervals and in fact today's 50 bit cut people, some people were saying it could hAvenue been 75, it was not a risk of it being less, it was actually a risk of it being more. So that has led to widespread reports of mortgage preapproval spiking this month in other words, the resale market I think is where we're going to to see affordability. East 1st and triggered first I don't think the new construction market like the new condo market that's so big in Toronto and Vancouver for example, that market you still not a good value against resale because resale came down 14% nationally. But as resale starts to pick up again and the price gap between new construction and resale starts to close again and I'd say it's probably maybe a year out or more before you start to see the lift in the new construction market, but I definitely expect affordability and rising demand and sales to start showing up in the resale market.
Roland Ardiles: Thanks, Mike. Jason higher r interest rates and an environment of higher interest rates over the last couple of years has spurred, you know, a significant activity certainly in our market as Mike mentioned obviously Bank Canada announced A50 bibs reduction on the rates today, but the this environment has actually support a lot of activity especially on the financing of and working under CMHC structures The MLS select program has been. One that has been very successful across the country, but certainly we've seen a lot of activity here in our market under under this program. Do you would you anticipate a dramatic change as we start seeing interest come down and using CMHC or MLI select program now there's been some changes lately, I know Avenuenue obviously you know is very active with CMHC, but what are your thoughts on this?
Jason Jogia: Yeah, no, it's a great question. I mean, you know, we monitor kind of the spot rates as well as the longer-term yields quite often. And it's been an interesting time, if I think about this recent environment that we've been operating on as much as we've had a huge influx of demand inflationary pressures and interest rates affect every business whether it be our vendors, whether it be, you know, the utilities cost etcetera. We hAvenue seen a steady rise in those things over the last couple e of years. Fortunately, in our markets we've been able to more than offset them d fortunately we've been able to be in front of it. What's been a very good tool for us during this time and what's. Worked and I mean if you go back to the National Housing policy, this was the purpose of it. CMHC our ability to borrow CMHC capital through MLI Select and other programs really was a amazing tool for us to use during these last few years and we were able to borrow at credit spreads over the bond yield that made the weighted Avenuerage cost of current per capital within our platform really well in balance or in Stacius and So what I think we will see as we kind of go forward with these rates coming down both on the prime rates as well as the longer term. I'll is the fact that there is a opportunity for us to start using some of the other structures of financing that are out there so before CMHC and conventional financing the differential in n pricing was there, but it wasn't necessarily material. I mean I had when the interest rates were really low I had booked conventional pricing at like 1.8 and CMHC could not get much lower than that because the banks hAvenue a true cost of funds. So my point being is that we will now start to see a little. More flexibility in financing structures as we go into the coming years where we can continue to use CMHC as a great tool, but we can also work with the banks on their CMBS programs. We can also work with the banks on their conventional debt and their balance sheet stuff to be able to hAvenue a little bit more flexibility around the matching the duration of our asset plans with the duration of our financing because the only thing with CMHC that you do find, is that you really kind of flat with the five year or ten year choice when it comes to stabilized assets. But you know it's really tough to get something that's off site. Or shorter in duration without paying significant premiums or quite conventional with an overnight rate.
Roland Ardiles: Thanks, Jason. Maybe you can ask Mike this question 'cause I don't want to ask him, you know, I don't ask myself this question We're talking to CMHC financing. You know, BMO has been active, but tell us a little bit about how the bank is receptive you know, to working with CMHC and of course, doing finance finance financing under the umbrella.
Mike Beg: I would just say that from a construction finance point of view, we've got a long and good track record of doing MLI select and before that regular CMEC insured construction financing and in fact you late certainly over the last decade e since BMO adopted its own purpose statement to boldly grow w the good in business and in life and. We hAvenue climate commitments, but we also hAvenue affordable housing commitments, a $12 billion capital commitment. Back in 2021 that we're on track you fulfilling and a meaningful component of that commitment was in fact our MLI select contribution through our real estate finance teams across the country. Some markets are more prone and conducive to that rental so o certainly our prairies markets the subject of the call today you know would be you know a market where there's more rental opportunity, Toronto and Vancouver land prices make it a little more difficult, but. Pick up an activity there so o for us it is important. It certainly is risen in an activity too with a number of our clients, particularly those clients in markets were for sale, new construction, new build residential has really been hit a bit harder and they've looked at ways to diversify what they're doing and it's not as higher returning necessarily for them in some of those markets, but they've been doing this and not stand alone sites so much it's more been add on sites you know for places like Toronto and Vancouver. But certainly the purpose build activity has been robust in markets like the Prairies and even Atlantic Canada.
Roland Ardiles: Thanks Mike. I wanna maybe switch it up a little bit and Jason I wanted to talk about the Sunrise building. It's I know it's a special project for Avenue. It is special project for BMO. But tell us a little about how this s particular project is defining the direction of Avenue. in terms of sustainability. And projects similar to this when it comes to retrofitting. And how do you think the industry changes with respect to sustainability will affect the real estate industry in general?
Jason Jogia: So I think to answer that question, Roland, I think there's a couple of factoids that I throw out there when we think about the real estate multifamily asset class just across the country right now. It's interesting. I'd say almost 80% of the from some form of sustainability or environmental initiative. They were kind of designed to be functional and so when we think about the vintages, 1960s, 1970s, 1980s, we're talking bout assets that are now fifty, 60-70 years old that at Avenue been well maintained, but arguably are contributing significantly to the carbon footprint and really are essentially having g having some antiquated systems and processes relative to today's technology. So Avenue. as a as a as a provider of workforce housing across the prairies Recognize that we would love to do something with our ESG policy to support environmental initiatives and you know, it was not enough to go put a brick in the back of a toilet and change your lighting to LED. There was something more that at we wanted to see and research if that could be done And so when we think about this, we thought well by doing a big energy retrofit program like the Sunrise. We could kill two birds with one stone. The first one was that we could take a building that might be 40 years old. 50 years old and retrofit to last another 50-100 years. And at same time, while we're doing that retrofit, could we put some environmentally friendly initiatives in it to reduce consumption and to reduce the ongoing carbon footprint as well as the operating cost of the building and that was the precipice of the sunrise acid for us to be able to o use sunrise as that poster child and with the support of BMO, we were able to take an asset that was a building or that is a building. In Edmonton, just in center ice. Edmonton that had a few different uses over the years that we've owned in our portfolio for a number of years that we went in and basically did an entire gut on the exterior cladding replacing it with solar panels, taking high efficiency components into the boilers, changing how the building is basically fuelled, electrified and energized and really changing that carbon footprint within that or to reduce our GHG emissions within that building. And the best part about. This project is know we're pioneering across the country I mean this is one of the only projects like it, but best part of the project is that there are so many more buildings like it across the country. So if we're successful and we're we're on the one yard line here finishing this thing off and we energized this thing and it goes this could be washed, rinsed and repeated across the country to do exactly what I said that two prong approach. Make sure that the housing stock doesn't go to become obsolescent and do the right part for energy savings. And I'd say as an investor as we've invested in this the best part about it and this is with creative financing solution that we got is that the actual emission savings, the actual cost of savings pays for the retrofit over a longer division. So we're really excited at what Sunrise will become and we're re, we're like I said on the one year I'd like to complete this thing rolling.
Roland Ardiles: Oh, listen. Again, we're we're proud to be a partner with you on this. I want to ask Mike a loaded question here Was the first Canadian bank to introduce a retrofit financing program in partnership with, you know, Canada Infrastructure Bank, you know, how are initiatives like this, you know, changing the way, you know, the industry looks at older buildings? You know, I think Jason spoke a little bit about it, but I wanted to get your perspective given that n that, you know, you're at the onset of actually launching this you know, this financing program.
Mike Beg: Yeah, Thank you, Roland, despite. US knowing about climate change for a long time, we seem to still be relatively early and at the beginning of a journey that deals with huge climate impacts from carbon emissions from buildings, existing buildings So you look at a portfolio like BMOS or any of the major banks that are in the tens of billions of dollars, we Avenue commercial mortgages placed over these buildings across the country and it doesn't matter what kind of building retail. Office in the industrial, multi unit, residential all of these buildings are fossil fuel heated and you know Canada infrastructure bank has its own climate agenda which is to try and reduce those carbon emissions all you Avenue to do for these retrofits is actually convert from om fossil fuel heating to electrified heating to achieve a greater than 50 carbon reduction. So that is all you need to do in order to qualify. Or Canada Infrastructure Bank preferential financing, so we provide conventional senior financing We're providing as a bank what banks do and d any bank can do this and we hope more banks follow us and do this working with candidate infrastructure bank but t you know, Canada Infrastructure Bank will provide like 2 to 3% type pricing for what amounts to that are true retrofit costs that contribute to the reduction of the Different so I think we e look at the commitment that what can a bank do you know what can our clients do our clients own these properties and the bank financing finances these properties and we team am up with Canada Infrastructure Bank and it's a win, win you u know we Avenue an example of another one in addition to what Jason is doing with us that we're delighted d to talk about as well and that's the sidewalk red. publicly. Office building conversion in Halifax, that was Acknowledged and celebrated, and it's perfect. Example a vacant office building with really no current value. Use it needed to be converted to something, but it just so happens it was fossil fuel heated and what is being converted to is electrification. So it was a it enabled that builder to get the return that at it needed through preferential financing, a bit higher leverage and a bit better pricing overall. And deliver a product at the market and Halifax needed which was multi unit residential they were converting it from m office to multi unit residential just as Jason's doing with the property in in Edmonton. So. Know I'd say that right now companies are waking up, they're looking at their performance, saying hey, maybe maybe I'll take another look every conversation I hAvenue with clients ere I mention this product, you know they were aware of the product but then they start to rt to think about it, maybe we do hAvenue a few properties we can do something with that we weren't ng we could do something with before so so we feel really great about this and we definitely want to see more of it and this and this is what you, our clients and other banks and their clients can do.
Roland Ardiles: Thank you, Mike. I think now I want to introduce Rob Kavcic, who's joined us. To give us a an overall overview and economic outlook for you region. So Rob if you are on the line, I hope we can hear you. We Avenue your PowerPoint presentation presentation here that will showcase the rest of the audience. So I'll pass it on l pass it on to you and I'll ask you to pass it back to me when you're done.
Robert Kavcic: Thank you. Great. Thanks, Roland, and hopefully you can hear me OK and apologies s for the technical glitch. We've been doing this virtually for like 4 years once e a year, everything kind of just breaks down. I mean today was one of f those days, unfortunately. So on the 1st slide of the deck chart number one, you can see just our base economic outlook here. And what I'll do is I'll just give you a quick snapshot of what t we're seeing for growth, for inflation and importantly, interest rates because e, of course, the Bank of Canada did just do what we had all expected to cut rates 50 basis points this morning. And then a couple quick comments on what we think it means for real estate going forward. So.
For the economic outlook, I mean, it's pretty stable. And I'm not going to get into the decimal points here, but one to 1 1/2 percent growth in Canada would be pretty consistent with an economy that's running pretty sluggish. So it's not a recession. It's not anything overly negative, but it's below potential for Canada. And so that means the economy is basically growing below the speed limit, hence why we were starting to see these rate cuts because there is some softness out there. On the on chart 2. When you break it down across the country we notice a couple things. One is that pretty much all regions of Canada are growing sub 2%, so growing a little bit below that speed limit. But when you look at the Prairies in Alberta specifically, I think if there is one ince that has been relatively immune to this this cycle, it has been Alberta and you u know, I'm not gonna say 1.6% growth this is year and around 2% in 2025. Exceptionally strong, but relative to some of of the big reasons I would say is if you look at what's characterized this cycle, a very aggressive increase in interest rates to battle inflation, we kind of look across Canada and say, OK, who is the least exposed to things like interest sensitive real estate and leverage in the household sector and you would say at the high end of the spectrum you would have places like. Area where the market got really frothy and where household debt really accelerated over the last three or four years at the other r end of the spectrum, you would say who's most insulated, you would probably say a province like Alberta where debt levels as a share of household income are relatively low and they just the amount of froth that built up in the real estate market over the last few years is also relatively low versus a market like a Toronto or Vancouver. And then it's not to say the market hasn't been performing well or are getting expensive, but on a relative basis it's been pretty benign so.
All that to say is that is that the prairies generally in Alberta specifically, has been able to weather this tightening cycle relatively well and we're still pretty optimistic on Alberta's economy going forward, not even just he next 6 to 12 months, but if we were to look out over the next ext, you know, 5 to 10 years, it's a province where ople are moving. It's a province that's diversifying away from rom energy and it's a relatively young population base. So it's a t's overall a pretty good environment out in that part of the country. On Chart 3, just a quick snapshot of what we're seeing in the job market and we Avenue actually seen unemployment increase pretty meaningfully across Canada regardless of f really where you are in this country. And Alberta is 1 province ce where the unemployment rate has actually risen pretty significantly, so at about 7 1/2 percent over the last couple months, the difference this time around and why we're not. Too worried about this? So ordinarily, if you were going to see a one and a percent increase in the unemployment rate, that would be a little bit of A cause for concern and probably something that would weigh on real estate But the difference this time around is that the increase in the e unemployment rate has come because there's just a lot more people coming into the labor market.
So it's driven by population growth and more labor force participation. It's not driven by y outright declines in employment. And that's a big differentiator between. Some of the past cycles where you see the unemployment rate increase ease and that's has a negative. Consequence for the real estate market this time we're not seeing it because this is driven entirely by labor supply. There are a lot of f issues that come with that, but from a real estate perspective, it's not causing downward pressure. So that's I don't think good news, but it's less negative news than we would ordinarily see from m that kind of a move. And then on Chart 4 when we look at the inflation backdrop, this is where we've seen a lot of progress in the last three to six months. And so on the screen there I just have a picture of where e inflation has come. So we've come from 8% for Canadian inflation to 1.6% as of the latest reading. So actually below the Bank of Canada's 2% target. There's also kind of a checklist of the different factors that have impacted inflation over the last three or 4 our years and we ever made some progress again. I won't, I won't go through all the details of that inflation story, but the big take away here is that after three or four years of really pressing hard against upside inflation pressure, the Bank of Canada is now looking g at this and saying we're back to where we want to be with respect to inflation. So sub 2% on the headline.
If you look at various measures of core inflation that the Bank of Canada will look at, and there's probably 3 or 4 of them just you confuse everybody, they're all kind of bundled around the 2% mark right now. So upside inflation risk is gone from a policy makers perspective e, I know it doesn't. It doesn't feel great because prices aren't actually falling right? Like you walk into the grocery store, it doesn't mean your ur shopping bag is getting less expensive, but the rate of inflation is flattened out, so policymakers are. Are looking at this and saying OK, we're we're where we need to be on inflation. So when you combine these two sides es of the economy, the growth side and the inflation side reality now is that inflation is well under control there's ere's still some downside risk and downside pressure growth and the job market how does the Bank of k of Canada weigh this? Well now all of a sudden they're putting a lot more weight on the downside risk to the economy. Than they have been to upside risk and inflation. And so hence the rate cuts that we're we're seeing right now in this environment.
And so Chart 5 is just our rate forecast. You can see there for the Bank of Canada in blue on the left side. That's showing you those 325 basis point rate cuts and this morning's 50 basis point rate cut by the bank of Canada. So this morning's action was pretty well fully expected by us, by the consensus, by the bond market. So you didn't actually see a big response this morning. Looking ahead, I think their tone this morning was pretty balanced and kind of suggest that we're gonna just see a pretty steady stream of 25 basis point rate cuts through about June of 2025. So that's our forecast right now. And so that would take a Bank of Canada policy rates from three ow to about 250 by June of next year. And that would be a little bit below where we would consider neutral interest rates to be. So we would. Argue that neutral interest rates in Canada would be somewhere around the 3% mark for the Bank of Canada rate and d that's where we're headed so two big takeaways on the rate forecast well #1 is that we're re probably about halfway through the easing cycle. It's coming relatively quick, and we think the pace is gonna be pretty steady, right through spring or early summer 2025.
That's the first take away. The second take away, though, is when we think not so so much about the next, you know. Six to eight months, but if we think about the next let's say 6 to 8 years where our interest rates gonna be in a normal environment, it's still noticeably higher than we've seen over the last 10 or 15 years. So again if neutral for the Bank of Canada is about 3% today, compare that to the last 10 to 15 years when the Bank of Canada averaged about 1% for policy rate. So the whole yield curve is still shifted higher in this neutral environment. And then so for mortgage rates, what this means for us is a couple things. One is that if you're kind of sitting there waiting to get those 1 1/2 percent mortgage rates back again, you're probably going to be disappointed. So even as rates are coming down the end point is still going to be a little bit higher. So rates today are restricted by design, but the end point is still going to be a bit higher.
The other thing that's becoming a little bit more compelling for some people is this whole fixed variable trade off as well. And so for probably like 6 to almost 12 months, there's really been nobody dabbling in the variable rate. Good because the way that yield d curve was shaped, those variable rates were just a lot more expensive qualifying at t variable rates was almost you doable for a lot of Canadian households now especially after this morning with that 50 basis s point cut, variable is starting to get within the neighborhood of something at starts to make sense again, especially if you're gonna go ahead and of easing from the Bank of Canada over the next 6 to 8 months. I suspect that you might start to see Canadians shifting into variable A little bit and that again, that's something we haven't seen for a while So that's where we are on the rate front again, pretty steady y stream of rate cuts through spring or summer of next year and the end point for interest rates and mortgage rates is still going to be higher than we've been used to over the last 10 or 15 years. Those are e the two big takeaways. A couple other things on chart number six, so just a quick snapshot of the Canadian market. So basically our view here is that the market has been pretty stagnant in terms of sales activity, prices and stable with respect to new construction activity. That's pretty much our view through most of next year as well or you don't see too much upside e in prices. We see maybe a little bit of upside in sales volumes and struction activity pretty strong, pretty stable. I think so. A couple things here I I think for. The market right now, it's very quiet across most of Canada.
Calgary's a little bit of an exception, but I think we start to see an environment by next spring and summer where we see mortgage rates dip below 4 That's gonna start to change the calculus a little bit for a lot of home buyers and maybe investors. So I'll look at this in two ways from the perspective of home home buyer and the perspective of an investor. And then on chart #7 you can get kind of a visual l of the affordability challenge that is facing households across Canada. So that's basically just. The mortgage payment on the Avenue average priced house as a share of income, so it's a valuation measure for Canadian housing or an affordability measure, however you want to think about it and you can see there that we're pretty clearly stretched with respect to affordability, so a couple things happened, right?
Took off during the pandemic, then interest rates rose and that's what really pushed affordability. Now across a lot of markets, prices Avenue come down and the Calgary market prices of course Avenue hasn't come down they're still pushing record highs but in order to get get affordability back to something that looks normal, you need to do a couple things you Avenue to Avenue incomes continue to grow, which they are, and they're actually growing faster than inflation now, which is good news. You need house prices to stabilize or fall A little bit, and for most markets they're stable. And then you need to see mortgage rates push back down to somewhere around 3 1/2 percent mark. And if we do get that by next spring or next summer, you're not gonna see housing off the ow, off the charts affordable again, but you're gonna see it at least within the range of what has been reasonable from a longer term perspective kinda get the sense when I do this arithmetic that once Canadians start rt to see three handles on their mortgage rates.
Things probably start to make a little bit more sense and you start to see activity pick up. We're not quite there yet, but that's one thing we're gonna be watching as we go into the spring. And then on chart 8 from another perspective, if you look at this from the perspective of an investor, just the type of cap rates that an investor is getting relative to borrowing costs or relative to what are now higher risk free Government of Canada yields, things don't make e a whole lot of sense right now. And so I Avenue a picture of Toronto up here on the screen just because I Avenue more history of Toronto data than I would for a Calgary market. Calgary market you would obviously see. Cap rates a little bit wider versus a market like Toronto though they are, that gap is narrowing because of the performance difference. Anyway, the take away here is that right now. The investor class in a lot of markets especially the like a Toronto or Vancouver where cap rates came into this period even tighter it's pretty much absent so does it make a whole lot of sense to take on an investment property in an environment where. That the spread between cap rates is basically non-existent versus 10 year Gocs you're going to take on an n asset class with less liquidity and payment risk and all of those kind of factors you you're probably not. Maybe in an environment where prices are expected to grow 1020 or 30% per year as they were, but clearly that's not the case anymore So that expectation is taken out of the market and at the end of the day, you're left with, you know, for the most part cash flow negative properties that. Don't make a whole lot of sense to carry in this environment until we start to get mortgage rates back down in that mid 3% range and at that point maybe the calculus starts s to look a little bit more compelling and starts to bring some people back into the market anyway.
So that's two kind of examples of why we think we're just not quite there for the market overall, but as we get to the spring and summer next year, if our mortgage rate forecast is right. We could start to see activity pick up a little bit. And then one last thing here, just on the demographics So this is something that's changing pretty quickly on chart number a breakdown of the immigration inflows into Canada, SO2 parts of the demographic story, especially when we're thinking about the Alberta market, international immigration and then movement from province to province OK. So the first thing, and what we're looking at here is the international component of this. And I won't go through the whole song and dance on this. I. We all know the story at this point, so Canada has very strong permanent resident targets. That's the orange line. That's about 5 a whole lot of babies. That's the blue line. It's really kind of scrubbed out to basically the very minimal population growth and d then the blue or sorry, the green line is non permanent residence. Those are temporary foreign workers and international students. And of course that is exploded to almost. point so putting tremendous amount of stress on the rental market and d infrastructure across Canada and policy makers Avenue kind of woken up to the reality that, look, we cannot triple the rate of housing construction to meet this kind of demand in short order this is s really a demand side problem and we're going to actually y address this.
So whether it's the federal Liberals. Who are going to put out a new immigration plan, probably within the next week or two? Or if it's presumably a new government at some point over the next year. Either way, I think there's going to be a dampening down of these immigration flows. And So what I Avenue on the chart here, it's not really my forecast. It's just following the guidance that the federal government has put out where they're saying they want to get the share of non permanent residents back down to 5% of the population. That's about 7% of the population right now.
So if we follow that goal over the next three to five years. If you just do the basic arithmetic, what that means is we actually non permanent residents per year over the next couple years to hit that target. So this is going to do a couple things in markets where there's a lot of supply coming online. It's going to, it's going to probably start to dampen down rent price growth and take out rent price inflation Some markets like Toronto are already seeing rent deflation outright. That's gonna come on at the same time as we actually see an outright decline in the population of non permanent residents, which of course are very, very tied into the rental market. So a couple things to watch in the next 10 days. An official cap on these non permanent resident flows and then maybe even a slight reduction in the number of permanent residents that Canada plans to bring in over the next three years or so. That's part of the population story, the other part is the movement from province to province.
So in chart #10 you can see where people are moving in Canada and the story is very simple. It's pretty much movement to o Alberta from every other province in Canada on a net a net basis, so. Alberta's population growing at about 4 1/2 percent now, which is off the charts. About 3% of that is from international immigration, the added bonus for Alberta is you're pulling in another 1% of population through inter provincial migration from other regions of Canada. And this is really a story of. Canadians moving in to Alberta to find affordability most of those flows are coming in from Ontario, Some of them are coming in from British Columbia as well. So the demographic story is one that's going to change a little bit. Population growth is going to slow down, but in the Alberta context, still one that's probably going to remain pretty supportive of housing. I think I will Avenue it at that. I think that's the nuts and bolts of the macroeconomic view. And I again, unfortunately apologies like I didn't get into the call, but I'm happy to stick around and take any questions Thank you.
Roland Ardiles: Thank you, Rob. I always appreciate your insight and maybe if I can bring back Jason back to the call. Jason, one thing that I wanted to ask previously is that obviously Avenue Living has a very focused approach to your strategy in terms of real estate residential rental, self storage, but as an industry expert and professional, what are some of the e growing realistic real estate? Asset classes that you're seeing in our region that actually will probably make a mark here in the next little while.
Jason Jogia: Yeah. I think that's a great question, Roland. I think there's a couple I think multifamily as described as a massive opportunity y for us, I think that we're seeing 2 trends that go hand in hand. 1 is that there is a rising, rising level of consumerism that is creating a level of just things and d stuff that people Avenue that they want to buy typically just in time more and more, which is s now adding fuel to the fire of the industrial. Sector with Alberta Calgary specifically, even Edmonton being major inland ports we're seeing the idea that small industrial, larger industrial storage type of properties are becoming more and more prominent as a great place to park capital and to that point when we say that there's rising consumerism and you know given to Robert's earlier point that the cost of housing g continues to rise, there is. In these regions there is going to be a continued fuel l demand for storage as well because as we continue to aggregate things as we Avenue general generational wealth transference of things. Our ability to store those important. So we're we're very bullish on storage e industry. We're very bullish on industrial multifamily sectors 1 one of them. And then I think the other one that's in the prairies that is often under understated, undervalued agricultural lending, rising caloric entered intake, continued scarcity of just great arable farmland across the globe that's a a very, very interesting resource that we Avenue here in Canada and the bread basket be at Alberta, Saskatchewan and Manitoba. And we think that farmland is a very interesting play for the group. So that's kind of where we see some opportunities, I'd say, I'd say longer term. As work from home starts to become a thing of the past, office will inevitably, hopefully come back and we'll start to see kind of culture built around and around the workplace and I I think essential service retail is going nowhere. So that's where we're pretty pretty bullish overall. Thank you. That's perfect. One of the things that we look at, of course, as we approach the end of the year outside of resolutions, we also look at, OK, can we look in ur little crystal ball and see know what may be coming 2025. So I wanted to ask all of our panelists maybe know, maybe we can give us a prediction of any important actor that may impact, you know, the real estate markets coming into 20 2025 Rob, I'm going to give you the first crack of this. Thank you I so as I outlined in n the presentation, I I'll start with the I don't want to say the easy one, but t the obvious and maybe the most important one is interest rates, because interest rates Avenue been really the root of everything we've seen over this s cycle, right? Starting from the bank cutting rates to 0 and driving the housing boom and then ghtening really aggressively and starting to take some of the steam out of it. I think the prediction next year would be that we find through interest rates and more neutral interest rates and this adjustment of asset prices to this new level of interest rates finally kind of plays out and runs its course and by the back half of 2025 we're re in an environment that starts to look something more normal so like. Asset classes across the across the board, whether it's areas of industrial or multifamily or even in the residential side adjusting to incomes and interest rates find that kind of equilibrium by the second half of next year in an interest rate environment that's more normal going forward. That would that would be my prediction For some markets, it's probably a little bit of downside for prices still in the meantime and then some stability and maybe some better activity through the back half of 2025.
Roland Ardiles: Thank you, Rob. Pass the ball now to Mike.
Mike Beg: Yeah, I take my playbook much from Robert and his colleagues, Doug Porter and Sal and others at BMO Economics. But you know, I think I'd look at it also in the layered view in terms of housing demand that if there is a recovery, which we're expecting and I think Robert signal that it's more a matter of of timing, it's going to be in resale markets first. And it's that it'll take, I think quite a bit longer to see a pickup in new construction markets. And I mentioned earlier in the call before Robert joined markets like the condo markets that are more prevalent outside the prairies to be honest. But that would be one thing and I think the other thing ng I'll say too is that there is some skepticism I've heard voiced out there as to how fast the the government can really. Tail and back off on non permanent resident volume coming down from that huge spike that Robert showed in his charts and we'll see about that too because if it can come down then it's definitely going to be pressure relief on a on affordability. But if it t stays up is actually continues to maintain pressure on affordability because that's part of the pent up demand that lower rates is is going to release. So those are my two add on thoughts and turn it to you, Ron.
Roland Ardiles: Thank you, Mike. Well, last but certainly not least, I want to give Mr Jogia, Yeah, the final word, you know, I guess from a a, you know, ground level here in the prairies.
Jason Jogia: Thank you, Roland, I think for 2025 and beyond, I think what we're going to see is this real comprehension of the tourists in the industry and those who are permanently in the industry. And what I mean by that is as more and more supply starts to come in the market. The understanding of how to competitively operate it is going to be very important, so we will Avenue a lot of merchant builders bring supply on and solve parts of that housing crisis and that supply constraint, but it will be the operator's time to aggregate and consolidate these assets and really create competitive edge in being able to sustainably operate that. So I think that is going to be both an opportunity and a bit of a tell as to how this inventory kind of comes into the market and how it gets absorbed and then how it gets operated beyond that because. Property management business, real estate business is not necessarily for the fates apart. So it is one of those things that we're gonna kinda see some strength emerge out of that in 2025
Roland: Jason, like in the set of Best Listen I I'd like to o thank you for being a guest panellist with us today. You know, it's been a pleasure having, you know, join us for this session and and Robert, again, always very insightful. Thank you for, you know, for your presentation for my part and for my bags part, you know, and the rest of the e demo team. We thank you for joining us and for taking time very busy day, you know, to spend some time with us today y. As a reminder, this call has been recorded. And will be available for playback, so if you register you will be receiving an email with access to the e recording. This concludes our session for today and thank k you all and take care. Bye for now.
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >BMO’s Commercial Real Estate team offers an insightful virtual discussion on the Prairies housing market, regional market trends and economic outlook. Featured panel speakers include:
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Jason Jogia, Co-Founder and Chief Investment Officer, Avenue Living
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Robert Kavcic, Director & Senior Economist, BMO
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Mike Beg, Head, Real Estate Finance, BMO Commercial Bank, Canada
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Roland Ardiles, Regional Vice President, Real Estate Finance, BMO Commercial Bank, Canada
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