BMO Real Estate Forum: Prairies Outlook
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May 22, 2022
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Commercial Real Estate
BMO’s Commercial Real Estate team offer an engaging virtual discussion on the Prairies housing market, regional market trends and economic outlook. Featured panel speakers include:
- Bill Blais: President and CEO, Maclab Development Group
- Tally Hutchinson: Chief Executive Officer, Tacada
- Robert Kavcic: Director and Senior Economist, BMO
- Gautam Kumar: Managing Director & Market Leader – Edmonton, Real Estate Finance, Canadian Commercial Banking, BMO
- Roland Ardiles: Regional Vice President, Real Estate Finance, Canadian Commercial Banking, BMO
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Roland Ardiles: Greetings everyone. I'm Roland Ardiles, regional vice president of the Prairies region for BMO Commercial Real Estate Finance team. Thank you all for joining us today. For this event, we're excited to be joined by industry leaders who are actively involved in the Canadian housing market and have perspectives on trends and outlook for what's ahead. It's guaranteed to be an informative discussion. We have a lot to cover over the next hour. I'll walk through the agenda quickly, and then we'll get started.
We'll start with Robert Kavcic, who will kick us off with an economic update. Robert has been with BMO since 2006 and plays a key role in analyzing Canadian regional economic, fiscal, and real estate trends. Following Robert, we will then have a round table discussion covering key topics and answer questions that were submitted previously. For that, we'll be joined by two industry experts.
Bill Blais is president and CEO of Maclab Development Group. Bill, leads a dynamic team focused on real estate development with the intention to hold assets for the long term. He is responsible for the strategic direction, culture, and growth of the Maclab team. Tally Hutchinson, chief executive officer at Tacada. He's responsible for providing a strategy, driving organizational growth, and maximizing shareholder return. With over 27 years of a family business, Tally has held a number of leadership roles, including president of Daytona Homes for 13 years, and vice president of Housing four years prior.
Moderating that discussion is BMO's, Gautam Kumar. As managing director and market leader in Edmonton, he brings 13 plus years of banking experience, primarily in commercial real estate financing in the Prairies region. Before we get started, if you're watching the event on a desktop or laptop, you will see a chat box next to the video screen. Please feel free to use it at any time during the presentation to submit questions to our panelists. Additionally, below the video screen, you will see a link to a survey. We welcome your feedback so we can better shape future events like this one. With that, I'll turn it over to you, Robert.
Robert Kavcic: Great. Thanks a lot, Roland, and thanks to everyone for coming on today. I'll start us off with a higher-level overview of what we're seeing in the economy with the growth prospects, interest rates, mortgage rates, and then some of what we're seeing in the housing market because we are seeing conditions change pretty quickly across parts of the country. What that means before we drill into more of on the ground look with our panelists after.
To start off, we've seen quite a bit of volatility in financial markets. Clearly, equities have been under pressure. Commodity prices have surged alongside, just broader inflation pressure plus score in Ukraine. Really for us in the housing market, the biggest factor here has been the backup in long-term interest rates. 10-year treasury yields, as an example, have risen by roughly 100 basis points or so just since early this year. We've seen similar moves in Canada across the yield curve. That as we've already seen on the ground has started to filter through into mortgage rates.
When we look at the economic outlook, we're actually looking at pretty solid growth still in North America. We did see a little bit of a weak first quarter in the US, a negative print there, but we do suspect that underlying growth in both the US and Canada is running at a pretty solid 2% to 4% clip right now. When you look at our forecast for this year a little bit over 4% in Canada, 3% in 2023, and a little bit slower in the US, just because, this is a timing issue where the US was a little bit quicker and a little bit earlier to come out of some of the pandemic restrictions.
A little bit ahead of the curve in terms of where they are with respect to the growth profile, but either way, you slice it. The reality is on the ground today, we're worse seeing economic growth run considerably above what is long-term potential in both Canada and the US when you smooth out some of the quarterly swings in the data. What that means from a policy perspective is that the economy is running hot.
The labor market is strong and policymakers are at the point now where they're trying to pretty well aggressively catch up to the strong economic backdrop. I'll get more into that in a few minutes when we come to the interest rate outlook. From a regional perspective, in Canada, what we're seeing is pretty well broad-based growth across the country. Canada's pretty unique in that you tend to have periods where certain parts of the country perform extremely well, and certain parts of the country tend to lag.
If you go back to the pre-pandemic period four or five years after 2014 as an example, where Alberta and the Prairie Provinces were really struggling with an initial recession and a very slow period of growth, while at the same time Central Canada was really firing alongside lower interest rates and lower oil prices. The balance has really changed now in that, we saw every province in Canada go into this pandemic together, every province came out together, and now we're starting to settle into, if you look at our forecast for this year, and next year, an environment where we start to see some of that relative performance settle down.
Where do we think longer-term growth will be? You can see right on the top of the leaderboard, we actually see Alberta and Saskatchewan leading the pack, both this year and next, and Alberta is at 5.5% growth this year, and 4% next year, that's well above the national average. It's probably not quite as robust in the economy, as we saw in prior oil booms because the difference here is that in past oil booms when we had $100 plus oil, and that was creating a lot of new project investment, a lot of new oil sands investment and construction activity that was creating a lot of job growth, and the economic spin-offs from that.
The difference this time is we're not seeing the same level of new capital investment into new project creation but what we are seeing is a lot of the past capital that was sunk into the energy sector, in that part of the country is now starting to pay off. It might not be building as much in terms of physical oil production, but we are now churning out that oil that had capital sunk over the past decade, $100 oil and profits in the sector, incomes in the provinces in the Prairies of Canada are actually very well supported right now.
That is spilling over into other areas of the economy as well. Saskatchewan and Manitoba are a little bit slower than Alberta as they tend to be. Then Manitoba, as it always is probably the most stable province in Canada with not a lot of exposure to any one sector, but a little bit of exposure to every one sector, and hence why we tend to see pretty well baseline or national average growth in that part of the country. Overall, as long as we are in this elevated inflation, higher resource price environment, we do think that Prairies are a pretty good place to be from an economic perspective in Canada.
When we look at the labor market, what's pretty clear is that the labor market in Canada is extremely tight and we'll get into that a bit later on in the construction sector specifically but if you look at the unemployment rate in Canada, right now, we're down at the lowest we've seen since at least the early 1970s, around just over 5% on the jobless rate. In the data that we have going back to 1970, this is the tightest labor market that we've ever seen. There are a million job vacancies in Canada and when you look at things like the number of unemployed people, for every one job vacancy in this country, we're at a record high.
The struggle out there is not creating jobs, we have a lot of jobs, the struggle is actually filling those jobs with bodies. In that environment, we are seeing some constraints on output, and we're seeing some wage pressure. Then again, when you look across the country, I'd say where employment is versus pre-pandemic levels, what's clear here is that every province in Canada has now fully recovered from an employment perspective. Some like British Columbia and Ontario are a little bit ahead, some like the Prairies are maybe a little bit behind, and some of them didn't quite sink as much as somewhere like Ontario, where there were more drastic lockdown measures. When you smooth it all out here, the point really is this, that the Canadian labor market is as tight as it's ever been and it's tight from coast to coast across the country.
Contrast that to some of the past cycles where Alberta was really tight for labor, were able to actually draw in a lot of bodies from other parts of the country. It's not quite that easy right now, because every other province in this country is looking for labor at the same time. That's pushing up wages, and that's one side of the inflation story. The other side here is that we're seeing consumer price inflation obviously, at multi-decade highs, 6.8% year-over-year in Canada for headline CPI inflation, that's Cannes headline basket, 4.2% for core inflation. These are about 30 or 40-year highs depending on how you want to splice the data.
If you look at our forecast here, we are expecting to see peaks in these year-over-year inflation numbers play out over the course of the next year or so but part of that is base effects. What we're really actually looking at, to spot some relief on the inflation front is what happens to inflation from a shorter-term perspective, what's the shorter-term momentum look like?
I charted a US core inflation here, but the picture really looks the same in Canada or the US on both sides of the border. The Bank of Canada complicates things because they look at three different measures of core inflation and they don't publish all of the necessary data to look at some of those shorter-term changes. This is a very good proxy of what we're seeing on both sides of the border. What you can see here is that even if we start to see those year-over-year numbers come down.
When you look at three-month annualized core inflation, six-month annualized core inflation, and 12-month, we're all pretty consistent right around the 6% annualized rate. That is the level that policymakers are just not comfortable with, and because that shorter-term momentum is not cooling, we are going to continue to see policymakers tighten, raise interest rates to bring this momentum down. I would say that this chart right here is the one we'll be looking at for the first signs that inflation is starting to break. You'll start to see some of the short-term momentum settle back down towards that target range.
When it does, we might see policymakers back off, but until it does, rates are heading higher. What are we looking for here, and where is the relief going to come from on the inflation front? First of all, we are actually starting to see demand for goods level off. Everybody knows the pandemic story at this point where there's a dramatic increase in demand for physical goods, things that you consume around your house. If you look at real inflation-adjusted spending volumes in Canada, they've actually leveled off for the last, six to eight months or so.
Some of that is starting to normalize, obviously it takes time, but it will take some pressure off the supply chain. Asset price inflation was another big one, and that actually does feed into what policymakers do because home prices indirectly do feed into the consumer price index. What we're seeing in housing markets, which I'll get into in a few minutes, again, is that we're seeing price momentum cool if not come down in a lot of the markets. Those are two factors that are helping, but there's still a lot that we need to go right on the inflation front. One is that we're seeing more demand for services.
Obviously, now we're able to go out and eat at a restaurant or go out to a bar or travel somewhere. There's a tremendous capacity pressure on a lot of services, so prices in that area of the economy are not slowing down. On the resource side, we're not seeing any lead-up in oil prices. Agriculture prices, and food prices look especially concerning just given what's happening not only in Ukraine but also with crop conditions across parts of North America. It's looking like another challenging year on that front that's going to continue to push up food prices.
The supply chain issues we talked about, part of it is just COVID-related restrictions in various aspects of the supply chain, especially in Asia. Part of it is just excess demand for goods that the supply chain is not able to handle. Those probably can start to balance each other out by the time we get through the rest of this year. Where we see continued upside pressure is on the wage front. We talked about the labor market, and we really don't see the labor shortages going away anytime soon.
Wage pressure takes a little bit longer to filter through the economy than say, obviously gas prices or consumer prices, but the pressure is there for sure, just given how tight the labor market is. Then the final one is psychology. You drive down the road and you see in big red or orange letters, the price of gas, and that is just inflation flashing consumers right in the eye. That's what people are talking about right now. The longer that inflationary psychology is allowed to sink into the economy, the tougher it is to break.
The bottom line here is the inflation story is going to be with us for the rest of this year, probably through next year as well until some of these factors start to ease off. At the root of that is going to be tighter monetary policy to cool down demand in the economy. Where we go from here, we saw the Bank of Canada raise rates 75 basis points already off of the lows. We think we are looking at a 50 basis point rate hike in June, 50 basis point rate hike in July, and 25 basis points in the fall.
By the time this year is up, another 125 basis points of Bank of Canada tightening, probably another 50 or so next year, and that'll take interest rates you can see in the chart here up to about 275 on the overnight rate in Canada. Two points here. One is that this tightening cycle is happening fast. You got to go back probably 20 or 30 years to find 50 or 75 basis point tightening increments by the Bank of Canada. It's fast because frankly, central banks just waited too long to start tightening policy. It was just too easy for too long.
We saw it reflected in asset prices, we saw it reflected in consumer prices. Part of the issue here is that by waiting too long to tighten policy and maybe making a little bit of a mistake on that front, they have to fix it by tightening fast. This tightening cycle compared to the last one which was a much different deflationary crediting event is going to be faster. The other thing we can see here is that the endpoint for interest rates is higher than at the end of the past cycle by about 100 basis points or so in Canada.
Longer-term interest rates on the right side of the screen are probably pretty close to leveling off. We do see a continued upward drift in longer-term interest rates over the course of the next 18 months or so. Even already within just the last couple of weeks, we've seen 10-year yields, especially in the US back off a good 20 or 30 basis points just to reflect some of the possible easings of inflation pressures down the road, possible economic risk of the fed in the bank of Canada, tightening the economy into a slowdown.
That's where we are right now with respect to interest rates. What that means in the mortgage market obviously is we've seen interest rates, we've seen mortgage rates back up and we have more to go. In the five-year fixed space, I think for the most part we're up above or around 4% right now. We'll probably see another 30 or 40 basis points of upside there. In the variable space that's going to be where the real test is because through the pandemic we saw this abnormal Canadian behavior where more than half of the mortgage markets switched into variable.
Why did they do that? Fixed rates rose first and Canadians were able to shift into the variable market and still take 125 or 150 for variable mortgage rates. By the end of this year, we think we're probably going to be up around 375 for variable, just based on our Bank of Canada forecast. This changes the economics in the market a lot. If you look at a market and you price it at about 150, 1.5% for mortgage rates, then you take those mortgage rates and on average you crank them up to 4%, the asset price to maintain all else equal, probably has to come down about 20% or so.
In some parts of the country, that process has already started. The psychology in the market has changed quite a bit. We have seen demand cool down. Make no mistake, we've said all along that this is a demand-side story in housing, where we've had excess housing demand right through the pandemic driven by too low for too long interest rates really was at the root of it. That took some of the fundamental changes that were happening in the housing market, drove stronger price growth and that strong price growth, and this expectation that interest rates were going to remain low for a long period of time, brought in a lot of speculation, a lot of fear of missing out a lot of investment activity into the market.
You can see that sales here were running through the pandemic a good 30%, 40%, 50% above what was normal pre-COVID and that's sales, that's the demand side of the housing market. The other thing you can see here is that sales are slowing down pretty quickly. We think that sales through the rest of this year are going to continue to fade back down to or slightly below that longer-term baseline in Canada as demand normalizes. Where we're going to see this probably hit hardest is in some of the markets that were strongest.
When we talk about a housing correction in Canada, it's actually more common than you might think. We've gone back to the early 1990s and looked at some various regional housing market corrections. Typically, what you actually see is home prices do often decline 10%, 15%, some cases, 20%. They usually take about two or three years to bottom out and they usually take about four to six years to recover where we were. Our view here is that peak and home prices were probably February and March of this year. In some markets, we are on the way down.
For the Prairie audience what I'll say is that when we look across the market today and see where most of the froth was and where the biggest price declines have already started, they're very much in Southern Ontario and parts of British Columbia. Those markets were just expensive going into the pandemic, they were the frothiest during the pandemic, and they're the first to break right now. Where I'm sitting here in the GTA, we've already seen prices come down 10% or 15% in some pockets. That's just a fact already today. The Prairie market actually looks very solid on a relative basis.
Two reasons. Maybe three reasons. One is that you can see what is always at the root of these housing market corrections outside of the Prairie markets is interest rates. What's always at the root of housing corrections within Calgary, Edmonton, and Regina is oil prices. The outlook for oil prices is actually pretty stable. We think that the leverage to that part of the economy is going to help those markets hold up better. We also think that coming into this period now of higher interest rates, valuations in markets like Calgary, Edmonton, Regina, and Winnipeg are just that much more favorable relative to say suburban Toronto.
Keep in mind too that housing in the Prairie markets corrected from 2015 right through 2019. Those markets got progressively cheaper and cheaper, even as other markets in Canada were seeing prices rise. The starting point was more favorable as well. All those factors considered I think we do actually start to see some localization here where we could very well see Southern Ontario correct 20% or so even while a market like Calgary holds relatively steady and holds ground from here. Make no mistake, housing conditions even in that environment are going to be slower than we've been used to.
What ultimately supports the market here? Because I do think a lot of this is actually rooted in fundamentals. It's just the asset price in the market just got a bit ahead of itself in the later stages of the pandemic. One is demographics. The demographic story in Canada is obviously still very robust. International immigration targets around 450,000 per year. That's not going to change. Those tend to get distributed relatively even across the country based on population share and the Prairies are no exception to that.
Millennials. The leading age of the millennial group is probably in their high 30s right now. The biggest millennial cohort-- The biggest single age group right now is about 32. Those are first-time home-buying years prime move up years where you have your second or third kid, you look for a single-detached house with space. Those are just demographic realities that are not changing, and they're still very supportive of housing.
One issue for the Prairies is that we have actually seen migration flows province to province turn outward. That is something we see come and go with fluctuations, oil prices, and relative economic strength. We don't see a lot of signs of that changing around right at the moment, but I think if we get used to this world where Alberta is in fact growing a good 1% or 2% percentage points above the national average, there's better affordability there. There's more of a work from a home shift where we're actually anecdotally seeing some people move out of Toronto into a market like Calgary to work remotely and pick up more affordable real estate.
Some of those flows might start to stabilize a little bit. When you look at the deceleration in prime home-buying population growth right here, the 25 to 39 group on the Prairies, really it has been that province to province migration flow that has been the biggest drag over the last year or two. My hope here is that we actually do start to see some stability on that front because of relative economic performance. That obviously is still supplemented by that underlying millennial cohort plus those international flows leaves us still in a pretty good environment.
The other side of the equation here that's supportive is building costs. I'll try and wrap this up relatively quick. In Canada, we're building the most homes we've ever tried to build historically in raw numbers. When you're just for the size of the population in Canada, which we all know has grown at a fast clip, we're building just as much as we build in the 1970s building boom. When we hear the federal government and various provincial governments come out and say, "We want to double the rate of housing construction in this country over the course of the next decade." That's great.
From a demographic perspective, we need more supply. Maybe we need a little bit of a different composition of supply, but we just physically can't do it. We're literally building as much as we possibly can right now. The jobless rate in construction's at a record low, vacancies in construction jobs are at a record high and building material costs are obviously rising. From a political perspective, yes, it's one thing to change zoning rules and stuff, but there's a lot of pushback down at the municipal level and the neighborhood level in terms of just coming in and changing zoning laws in areas that are pretty heavily populated with single detached housing. That's part of the issue here.
The other is building costs. As much as home prices have outpaced building costs through the course of the pandemic, because of that froth that built up into the asset market, building costs have risen pretty significantly as well across the country. As resale prices start to correct, eventually they're going to run into a floor that is set by building costs, where it just becomes more economical to go in and support the resale market, just given how much it costs to physically build a home in Canada right now if you actually can find the labor to complete a project.
When we're looking at this correction, the one thing I'll reiterate and I'll wrap it up here, is that from an economic perspective we're pretty solid right now. We're growing at a strong clip. The labor market is very tight. The risk is that because of inflation, central banks have to tighten pretty aggressively and they will, they are right now. Where does that leave us in 18 months? Does that open up the risk of a slowdown in a recession? Yes, it does. Really that hinges on how quickly inflation is able to come back down towards that target range, and if that allows central banks to back off in time to keep the cycle going. From a housing perspective when we're looking at a correction here in a slowdown, the one thing, again, I would reiterate is that this is really an asset price phenomenon, and in some markets in Canada, fortunately for this audience not so much the Prairies, but this was a case of an asset market that just ran too far ahead of fundamentals. That froth is coming out of the market. The fundamentals underlying those prices are still actually very strong from a demographic and a supply-side perspective.
I think there will be a floor that gets put in across most of these markets. Again, as I said, when we look on a relative basis, the Prairies are probably one that are more insulated than most from what's coming in terms of higher interest rates and some softness in the market. Maybe I will leave it there and then I'll turn it over so we can get an on the ground look and get some Q&A going with our panel. Thank you, everyone.
Gautam Kumar: Thank you, Robert, for your valuable insights and update. A lot of information there to digest. Now we'll move into the round table portion of the event. Thank you to everyone that submitted your questions here in registration. We're going to address as many as possible given that we have only about a half-hour. Let's get started. Bill and Tally, thank you for your time and thank you for joining us on the panel today.
The first question here. The Prairies region is one of the last affordable places in Canada to buy a home considering rising costs, relatively stagnant wages due to inflation, and rising interest rates. Will the Prairies market, in particular, Alberta, continue its housing bull run? Tally, we'll start with you.
Tally Hutchinson: Thanks, Gautam. I don't see any market continuing on with this bull run. Interest rate increases, as Robert has said, they will slow the consumer and investor appetite. Usually, until we see that customer wage increase and subsequent adjustment to the new realities on pricing of homeownership. We don't expect this bull run. In fact, the bull run is already over and we're starting to see that adjustment. Alberta, Saskatchewan, and Manitoba, they're no different. Again, referring back to Robert, they shouldn't be as severe as the other markets which run a little hotter.
Having said all that, there is a lot of positives, a lot of good things, including the Prairies being very affordable. The MLS and builder inventory is lower in balance. The employment remains plentiful. The immigration targets, again, that Robert spoke to earlier around 450,000. We'll get our share of that. The commodity, the resources, our agriculture ability to produce the necessity of food, there is a lot of positive things going on. The interest rates will slow down the bull run and we'll see the adjustments. However, optimism should remain.
Gautam: Thanks for that, Tally. Bill, your thoughts on the bull run sustaining and also you've got a huge part of your business both in development side and property side. How would that affect rental rates as well?
Bill Blais: I'd echo what Tally said and really what Robert said, which was said very well. We see Alberta as that bull run is slowing down, I would consider it more moderating than stopping I think. The increase in interest rates is such a blunt instrument and it's going to have a bigger effect on those markets that run much hotter than Alberta and Saskatchewan and the Prairie areas. We also see a lot of good things in Alberta, in Edmonton, and in Calgary with great job prospects and everything that the world needs right now is produced here in Alberta and in Saskatchewan or comes through here. We see lots of opportunities.
There's going to be a lag as employment increases and we continue to attract people to the province and wages go up, but certainly see lots of good opportunities here in Alberta. We do see with a rise in interest rates, people will likely stay in rental a bit longer, which we're certainly well-positioned in that space and are starting to see really good pickup at all of our locations and continue to see rents increasing as that demand is increasing. Back to you, Gautam.
Gautam: Thanks, Bill. The next question we have here is, given the current high inflationary environment, what inputs in the construction process are you finding most challenging to manage from a price escalation perspective? How about labor and the availability of qualified trades? Tally, we'll start with you.
Tally: Thanks, Gautam. I would say and probably, many of our colleagues in the industry would agree that lumber was definitely the most challenging component to manage with and through. I would say, however, that we estimate there to be plus or minus 170 inputs into a singular house between development trades, suppliers, and manufacturers. Every single one of them are experiencing labor and supply which ultimately creates price issues. The labor, most definitely, and as Robert spoke to earlier, in 2007, were able to attract labor from out of province where now today, we can't.
That has been an issue, will continue to be an issue as the baby boomers retire and not having any control over attracting foreign skilled trades. The labor issue will continue to prevail. There are a lot of sold houses in the builders' system that are yet to be built. We see the issue lasting here throughout the year.
Gautam: Thanks, Tally. Bill, your thoughts on construction inputs rising and the availability of labor?
Bill: Construction inputs have risen significantly over the last 12 months. Kind of saw it coming, we have a couple of large development projects underway and confronted as much as we could. The next challenge it led to was, we have materials that have arrived and need to be stored, which is usually an easy solution to find something to store it, but with the industrial market also running as hot as it is in Western Canada, they pose some challenges. Certainly, something that we've now sorted out, but was one of the things that when you thought you had a solution, you had another challenge that needed to be overcome.
On the labor side, we see it throughout our business and throughout all of our trades, suppliers businesses, that there's just a shortage of people all through that process. I just think what a time to be a young person and be able to choose a career path. I do think it highlights some of the challenges with bringing in skilled foreign workers. Also, making sure that young people are attracted into the trades to deal with some of the aging workforce that we have. We need to make sure that those pathways for careers are available and open and encouraged because what a great opportunity for everybody.
Gautam: Thanks for that. An interesting question here. With this whole work from home movement, how is that affecting what and where you're building in terms of product, and how is that changing what you're doing with your companies? Tally, we'll start with you.
Tally: Like everyone else, we had to manage through the government restrictions and keep health and safety top of mind. The fortunate part was our industry was an essential service and everybody had to quickly adapt. I would say that working from home on a full-time basis wasn't necessarily productive. Although we had to work with it, we continued to adjust and work with our team. We still to this date have some flexibility built-in for our staff and we believe we'll have to continue to do that as we move forward.
Gautam: Thanks Tally, and just to follow up Tally, how has that changed in terms of the product you're building? In terms of, are you building more, are you seeing the end-users or end purchasers looking for more space or more suburban type of housing? How has that changed in that aspect?
Tally: Yes, definitely. It created an opportunity actually for us in the Greenfield space. Consumers needed space, they wanted a safe and quiet place to work from. It really took us all by surprise actually in the entire industry. At one point we were perhaps pulling the reigns in and a month later we have folks standing outside our showhome. Ultimately, like I said earlier we continue to adjust. We had to work real closely with our team inside our office and in our sales centers, for the most part, they remain closed and we had to work through appointment only, but for the most part, there was a lot of positives and takeaways from that experience. I think as we go forward, we'll continue to see those structural changes in our workforce and flexibility as we work forward.
Gautam: Thanks, Tally. Bill, how has changed for Maclab in terms of the type of product and where you're building with this whole work from home movement?
Bill: For our development projects, we looked closely at the design of the units to make sure that there was a workspace for people in each of the units that they could use that was separate from just a kitchen table or a countertop. That was one of the things that we implemented. Then as we went through the pandemic, the other thing that we needed to look at in our development projects and in the new neighborhoods we build was the importance of connection and that focus on people's mental health.
It became more and more important where there was a movement to health and safety meant you couldn't go anywhere near anybody, and then shifted to actually, we need to have those connections as people and we crave them and we require them. It made us really focus on the design of our buildings and the design of our communities to ensure that we have those opportunities for people to meet and create and connect with each other and have those chance happen to our business, certainly that human contact was something that I think everyone started craving once they'd missed so much of it for so long.
That was certainly something that was important. It was important to balance that health and safety with that importance of the mental health aspect. We also worked really hard and learned a lot from our team and what was important to them in their day-to-day lives and understanding that flexibility. We still have a bit of work-from-home flexibility built-in. Overall, back in the office, people can work from home a couple of days a week and certainly take advantage of that. It's allowed us to bridge that focus back on lifestyle and a bit away from working all the time, which has been helpful in keeping the team together and consistent.
Gautam: Thanks, Bill. The next question here would love to hear your insights into the post-pandemic world specifically related to migration into the Prairie region. Tally, we'll start with you.
Tally: That's a big question. In the post-pandemic world-- As Robert said we do have a lot of positives going for us with inside the Prairies. Whether that's enough to attract migration into the province as others slow down, I guess that's yet to be determined, but of course, we'd welcome that. Having said that, the resource, again, agriculture, there's a lot of positive things going on within the Prairies. Although things will soften, we do remain cautiously optimistic that the prairies will be an attractive place to live on the go forward.
Gautam: Thanks, Tally. Bill, your thoughts?
Bill: I think there's a lot of advantages. In the Prairie provinces, there's a lot of wide-open spaces, which I think people want. I also think the welcoming atmosphere that Alberta certainly is well known for makes this an opportunity for people to move and create that life that they've been either looking for, or that's been disrupted or taken away from them by things that happen in the world. I certainly see that as a huge opportunity for Western Canada and Alberta and something that we will continue to attract our share of migration and hopefully grow that share of migration into Western Canada.
Gautam: Thanks, Bill. A follow-up with that question that's related on the same point. I'm curious to hear what you're seeing on the ground from your team in terms of, whether it's for homes for sale, or for rent. Is your team seeing a lot of migration or people from outside investors or people moving in from other provinces? Tally, we'll start with you.
Tally: Yes, we did experience investors and speculators less on the foreign buyer. That didn't necessarily affect things. There was a bit of a gold rush there from the investment community and the speculative community. We do believe the investor community is still healthy, but a speculator is not. We may see some units come back to the market because of that speculative buyer.
Gautam: Thanks, Tally. Bill, your thoughts?
Bill: We're one step removed from it from mortality is certainly, but we have heard from the homebuilders we deal with that there were a number of investors and speculators. I would expect that it's getting tempered as rates have increased. I also think it's something on the investment side that's going to continue. Single-family homes for rent is an asset class that's not going to disappear anytime soon. It's something that's going to be here for a long time and we're going to see that through North America. There's large investors who are in it and there's smaller individual investors also who are in it. We see that as something that's going to continue to be around.
Gautam: Thanks, Bill. A little bit of a crystal ball question. Any bold predictions for the rest of 2022 in where you see the market going? Do you see any big changes in market trends for the rest of 2020? Tally?
Tally: Those interest rates will adjust things from that bullish run. Again, we're already experiencing that. At the end of the day, it will slow things down for us. We don't believe that costs or product or supply will get any better probably into the tail end of 2023. Labor, only by virtue of perhaps some slate adjustment may become a little more readily available. I don't think it'll-- Definitely, it won't be solved. As those rates continue and if they are as Robert was saying see another 2.75% this year, and another 1.25% next year, it'll definitely adjust things for us. We're hoping that by the end of 2023, sorry, we'll see some level of stability as we go forward into the tail end of '23 and into '24.
Gautam: Thanks, Tally. Bill, your thoughts?
Bill: Yes, I think as Tally shared, I think it's going to continue to be the supply chain challenges for a number of months. I think the interest rates certainly are going to have an impact on consumers and it's going to have an impact on projects viability. I do think there's going to be a bit of a lag as Robert shared, Alberta is going to lead the country and grow this year and next year. I do think there's some opportunities that come with that, that may balance out those changes in interest rates and some of the challenges we have in the marketplace. I do think there may be some positive wins that are back in the latter half of this year and going into 2023.
Gautam: Thank you. The next question here. Given the current rise in interest rates, what hedging strategies are you employing as a company in your current projects or as you enter new projects? Also, how is it changing the way you look at new projects going forward? Tally?
Tally: I'd definitely recommend to continually complete a sensitivity analysis on your original performers and be realistic. Test those extended timelines, lower absorptions, lower revenues, higher cost of boring, and apply contingencies. These factors that our industry faces are real. In addition, I'd also suggest that we always examine exit strategies. Perhaps, don't continue with the gas pedal down in terms of your build-out and slow it down.
Lastly, I would also suggest that work with your lenders. The good lenders of BMO as an example. What's the ability to lock in rates for a longer term? Perhaps a blend and extend, or you can take advantage of certain growth programs like the MRI Select Program as well.
Gautam: Thanks, Tally. Bill, your thoughts?
Bill: Yes, we're looking at a bunch of things. We like long-term fixed debt on our existing assets. It's something that we've always-- We like the certainty of what the rate is as opposed to taking the risk. We do review regularly our floating rate debt on our construction and development projects. We've always priced that into our proforma at a rate that's higher than what we expect to pay just to have some cushion and sensitivity to it.
I'd echo Tally's comments also that this is time to really be focused on all these things because there's a lot of moving parts and a lot of volatility all throughout what we're faced with today is something that we've got to pay attention to. We also work with BMO on hedging options. We have some idea on what the cost is to hedge our interest rate takeout debt, and so something we're certainly appreciative of that service, and something that we look at.
We're looking at MRI Select Options for a number of our assets also to have some longer-term amortization that might be available to us.
Gautam: Thanks, Bill. interesting question. Looking at the various jurisdictions in Canada, any market in particular that you favor more or you're more focused on or are investing more going forward? Tally?
Tally: Again, a difficult question, but probably the best way to handle that is we prefer geographic diversity, it is part of our risk strategy. Not being reliant on a single source, boom or bust. Each province and even municipality have specific employment or economic drivers. In Edmonton, as an example, is much different than Winnipeg. Regardless of those municipalities, I would suggest to continue to focus on best-in-class locations, as there always is a market for those premium locations.
Gautam: Thanks, Tally. Bill, your thoughts?
Bill: We own assets throughout Western Canada and the Northwest territories that provide us with a stable base. Our development focus is solely in Edmonton and it's split between building vertical multifamily projects and building new neighborhoods. Both those cater to two different consumer groups and the idea around a new vertical multifamily is to rejuvenate our asset base into newer products and something that knowing that we've got two underway that really have some key features of LRT access, phenomenal amenities one at the university and one downtown, it'll be on a new urban park that the city's working on.
We found some really good opportunities working with the city of Edmonton, on both those projects and find that environment very welcoming and helpful to us.
Gautam: Thanks, Bill. We have time for just two more questions. This is related to something we discussed earlier, we touched on but curious, are you concerned that our markets, like Prairies, are vulnerable to outside real estate speculators and investors overheating the market? Is there a concern with that at this time, Tally?
Tally: I would say at this time no because the investors have already come and gone from the market and that's part of the adjustment that we spoke to earlier the bullish run is over. Again, the investors are here and I still see that as a positive thing for our markets and the speculators how many of them exactly are-- I know the industry really did their best through their builder conditions to try and curb speculative purchasing. That's yet to be determined how many there may be but I don't think it's enough to affect our market. The rising prices was was not caused, ultimately, by that investor or speculator in the market. There were just so many other factors that added to the price increase that I spoke to earlier in the program that would help drive prices.
Gautam: Thanks, Tally. Bill, your thoughts in the related question? What are you seeing in terms of investor sentiment for multifamily assets?
Bill: We've seen some good investment in multifamily assets from outside investors, we've seen two transactions for new construction, CX Brandon and Augustana both are sold and enclosed in the last three months, which I think is a great indicator of interest in Edmonton and interest in new multifamily product. We've also, in the last 12 months sold a number of our legacy assets. We've seen some really good appetite for well-located, well-managed assets, as people have moved into Edmonton or added to their portfolio in Edmonton and continue to see different groups looking for opportunities in the Edmonton area.
Gautam: Thanks, Bill. The last question, given all the challenges you've faced over the last couple of years, is there one piece of advice you would give yourself or someone else as we move forward? What would that be? Tally?
Tally: I can never keep it to one, but if I had to keep it at one is at the end of the day, when it's complicated or there's confusion remember that cash is always king.
Gautam: Thanks, Tally. Bill?
Bill: Yes I think something we said a lot was that this too will pass, which I think when you're going through two years of a pandemic, it's hard to see the light at the end of the tunnel, but certainly it has felt like it has passed and now we're catching up to a bunch of the economic opportunities that were slowed down seems to be catching up in Alberta, which is great.
Gautam: Thank you so much, Tally and Bill, I enjoyed the discussion. I'll hand it over to Roland.
Ronald: Let me thank our panelists again, your insights and wisdom are very much appreciated. Thank you all again for joining us. We hope that you enjoyed today's session and I want to thank you for taking the time out of your busy day to spend with us today. On behalf of BMO, we want you to know that we're thinking of you, your families, and your organizations. We're here to help.
We've been through uncertain times over our more than 200-year history as an institution. We have a strong capital position and we're well prepared to serve our clients. As a reminder, today's call was recorded and is available for playback. You will receive details on how to access this in an email that you'll receive later this week. This concludes our call today. Thank you and take care.
BMO’s Commercial Real Estate team offer an engaging virtual discussion on the Prairies housing market, regional market trends and economic outlook. Featured panel speakers include:
- Bill Blais: President and CEO, Maclab Development Group
- Tally Hutchinson: Chief Executive Officer, Tacada
- Robert Kavcic: Director and Senior Economist, BMO
- Gautam Kumar: Managing Director & Market Leader – Edmonton, Real Estate Finance, Canadian Commercial Banking, BMO
- Roland Ardiles: Regional Vice President, Real Estate Finance, Canadian Commercial Banking, BMO
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