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I hope this finds you having a great start to your 2011 year! I wanted to touch base and keep you informed on the commercial real estate market in Alberta. This new format commercial newsletter is what I’ll be sending out 3-6 times per year as relevant and important information comes out from various sources. Please feel free to give me your feedback on what content you’d like to see and feel free to pass this on to other successful commercial real estate investors you know that would find this valuable.

What’s in this issue: - 2010 market in review - 2011 Key indicators to watch - Residential mortgage rule changes & there impact - What should you do now? - Who’s buying & selling?

2010 market in review:
The Fall 2010 report put out by CMHC showed mixed changes in the market of multi-family residential rental property from 2009. (all reports downloadable & viewable here…)
- Vacancy rates down from 4.5% to 4.2% in Edmonton, and 5.3% to 3.6% in Calgary
- Alberta as a whole, including smaller communities, had vacancy reduce from 5.6% to 4.6%.
- Both are higher than the national average of 2.6%, down slightly from 2.8% in 2009.
- Alberta has the highest average monthly rent for a 2 bedroom unit at $1,036/month however
- In Edmonton:
   o Vacancy is highest in properties built 1960-1974 showing an increase of 0.2%, while all other age ranges saw a notable decrease. Properties built pre 1960 saw vacancy drop from 5.9% to 3.1%.
   o Buildings of 3-5 units saw the largest increase in vacancy rate from 3.7% to 7.5% across all bedroom types. 6-19 unit size increased from 5.0% to 5.5%, and all other sizes of properties saw decreases, with 20-49 unit buildings dropping from 5.4% to 4.7% lead only by 50-99 unit buildings dropping from 4.3% to 3.3%.
   o Average rents by bedroom type & structure size saw lower rents in 3-5 units size of $846 to $817 in 2010. While 6-19 units and 20-49 units saw only minor average rent rates drop. 50-99 units remained stable, and only 100+ unit structures had average rental rate increases.
- Secondary rental market – CMHC started surveying individual condos as part of the overall rental universe
   o National average of for vacancy in this sub market was 2% or below in 6 of 10 centers surveyed
   o Edmonton and Calgary both at 5.2%, were the highest for individual unit rental vacancy
   o Edmonton was second only to Quebec City ($952) for the lowest average rental rate for a 2 bedroom condo unit at $1,050/month.
   o Edmonton saw the largest increase in percentage of condominium units being rented, from 24.2% to 28.7%.
- Edmonton & Calgary saw the best gains in rental housing affordability. Calgary was up 10.0% to 132 and Edmonton was up 9.3% to 129). This means it is more affordable in these markets now to rent.
- Condominium conversion is down again in 2010 to approximately 700 units versus over 1050 in 2009.

2011 Key indicators to watch:
- Rents up in 2011 – Edmonton’s average 2 bedroom rent is expected to increase by $20/mo. to $1,035.
- Vacancy down in 2011 – expected to drop to 3.5% from 4.2% in fall 2010
- Less, if any, offering rental incentives in 2011
- New construction of multi-family for rental & for sale is down – this will not add new rental inventory to compete with
- Condominium conversion is virtually over in the current market; with only those properties in desirable locations, with suitable suite mix, and correct renovations being saleable. Contact us if you are wondering if your building meets this or not.

Residential Mortgage rule changes & there impact (full article on our blog here…)
Finance Minister Jim Flaherty announced official changes to the Canadian mortgage rules earlier this month. The three changes are:
   1. The maximum number of years the government will back a mortgage was lowered from 35 to 30.
   2. The upper limit that Canadians can borrow against their home equity was lowered from 90 percent to 85 percent.
   3. Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

What does this mean for Edmonton’s Real Estate market? Well, it will definitely have an impact in the immediate future. The combination of tightening dollar amounts on qualification combined with an expectation of a rise in interest rates is likely going to create an 'over-heated' market earlier in the year than we normally see with market cycles. Expect the months of February-April to have the sales volume of summer, but likely with lower inventory levels. As a result, prices will likely rise in the short term, but then fall more dramatically in May or June through the end of the year.

What should you do now?
With all this information, what should you do with your particular property and your particular situation?

If you are an owner of investment property, now is the time to revisit your investment. Are you willing to hold onto your property for other 3, 5 or 7 years? Are you nearing retirement, or simply wanting fewer hassles? If so, and if you have over 25-50% equity in your property currently, then you should analyse what your ROE (return on equity) is. The property made sense when you bought it, but have you done the same analysis from an opportunity cost of your tied up equity? In many cases recently, I’ve been able to assist owners with evaluating this and most realize they should sell now when the market is stable and buyers are active again. We can help you minimize tax consequences with various strategies, and re-allocate the net equity into other investments to generate overall higher returns on your capital.

Looking at buying multi-family or other investment property? If this is you, then educating yourself on the market, and selecting the right professional to assist you with your purchase is key. Opportunities are varied, and how you structure any given deal can make or break it. The most successful strategy we are finding with our buyers currently is those working with a minimum investment amount of $450,000 looking to purchase for 3 or 5 years on a cash flow basis, targeting properties over 6% cap rate.

Who’s buying & selling?
We have buyers currently looking for multi-family & retail commercial strip mall properties in Edmonton, Calgary, and smaller communities around Alberta. Commercial strip mall asset class needs to be 8-10% cap rate, depending on tenant quality, remaining lease duration, and location. Multi-family in the 12 units up to 150 units, given true cap rates at minimum of 7% in Edmonton, and 8%+ for smaller communities. We do still have three buyers for condominium conversion quality properties willing to pay upwards of $125-$140,000/unit for walk-up properties in A areas.
Most vendors we are consulting with currently have owned since prior to 2000, are either nearing retirement and looking to liquidate equity to reap the rewards of their investment and enjoy life, or re-invest into re-positioned properties in Alberta or properties in other markets. Several are looking at purchases in the US, with most targeting Phoenix and Las Vegas.
See testimonials from all our past clients here…