Supply and demand are outweighing the negative impacts that interest rates are having on real estate in the short term, according to Vikram Rajagopalan, senior managing director at Trez Capital, during the Canadian Investment Review’s 2023 Risk Management Conference.
Canada and the U.S. are experiencing population booms, he said, noting the Canadian government’s plan to welcome 500,000 immigrants per year by 2025, while the U.S. is already experiencing an internal migration with people relocating to Sun Belt states, such as Florida and Texas.
In a world of constrained capital, institutional investors are gravitating towards housing stocks in a very undersupplied market, said Rajagopalan, citing data that says Canada needs to build about 3.5 million units and the U.S. needs to build around 15.5 million units to match current and future immigration patterns by the end of the decade. Filling this housing gap will be a difficult task for governments, he added, though they’ll try, which will bring capital flowing into building more multi-residential, for-rent products because of this pull in population.
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Additionally, nearly 50 million Americans are locked into a mortgage of five per cent or less that aren’t renewing for 14.5 years, said Rajagopalan, citing a statistic reported by Bloomberg. “The resale market in the United States is basically frozen because no one’s moving out of their homes. What this is exacerbating . . . is that six months of resale is the equilibrium [and] it is now going to drop in some states. This is going to drive a lot of demand into rental units in the U.S.”
Texas currently accounts for almost half of all of the job growth in the U.S. with Florida making up nearly the rest, according to the U.S. Bureau of Labor Statistics, due to their lack of a state income tax, which has led to a migration of companies to these regions, he said. Looking forward, he noted, the Sun Belt will account for almost two-thirds of all population growth in the U.S. over the next five years.
Rajagopalan suggested institutional investors that are considering investing in real estate look into these states in particular to be at the forefront of the expected population growth.
In addition, he noted investors are putting capital towards the self-storage and rental apartment sectors because, historically, they’ve held up very well, even in the worst recessionary times. And any investor in the rental multi-family sector is continuing to do fairly well.
Indeed, Rajagopalan said homebuilder stocks, particularly those in the public markets, are one of the best performing asset classes this year on the stock market. The reason why institutional investors are gravitating towards development is because it’s very expensive to buy existing products right now.
Another reason is that, with construction, investors are gaining profits over time, he added. “If you’re buying an existing core property, you’re paying that yield to cost on the purchase, but when you’re constructing it, you’re building it up. You’re getting good income and good appreciation on the development side of things.”
Read more coverage of the 2023 Risk Management Conference.