Paul Liberatore

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Self-storage is becoming a hot commercial real estate sector, with many B.C. properties seeing 90 per cent occupancy levels and per-square-foot rents that can surpass that of a condominium.

In Metro Vancouver, typical rent for a 100-square-foot self-storage unit ranges between $1.84 and $2 per square foot, which, according to an Urban Analytics study, is equal to a typical condo rent in Burnaby or Richmond.

“Storage lockers are a simple investment,” said real estate consultant Ozzie Jurock. “There’s often no heat, little maintenance, and if you want to make it a luxury unit, you put in a light bulb.”

Two primary factors influence storage, according to Vadim Kobasew of Re/Max Commercial, who specializes in self-storage sales: the large amount of stuff that people acquire and their reluctance to throw any of it away.

On average, one-third of self-storage clients store their stuff for three years, meaning a steady cash flow for the owners, Kobasew noted.

There are other quirks that make self-storage property different from most commercial real estate. The buildings can be in less-than-desirable locations: small towns, noisy roads on the outskirts of cities or tucked in behind industrial areas.

Tenants pay little or no deposit and can leave at a moment’s notice, but Kobasew pointed out that, because of the wide tenant base, owners are protected from long-term vacancies that can occur in other commercial real estate categories.

Studies show that nearly 80 per cent of Canadian self-storage properties remain in the hands of small independent owners, but the sector has begun to hit the radar of large institutional investors.

Of the top 25 real estate investment trusts measured in five-year returns last year in the U.S., four were in the self-storage business, according to SNL Financial, a real estate research firm.

Los Angeles-based DealPoint Merrill recently launched a $25 million fund that will convert former retail properties, in particular stand-alone big boxes and strip centres, into self-storage properties.

“Self-storage is now legit; it’s not anymore like that odd business model that nobody really understood,” said R. Christian Sonne, executive managing director in Cushman & Wakefield Inc.’s self-storage industry group. “We’ve had entities from family money to equity firms and hedge funds jumping into the sector, which is now considered at least core, if not core-plus.”

Kobasew added some B.C. investors have been creating portfolios of self-storage buildings, but they’re mostly looking for large facilities of 200 to 300 units or more, which are rare.

He said the typical investor profile and facility remains “mom-and-pop” operations that provide a relatively secure investment or retirement income with a minimum of management.

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Fear: Condos are over built in Canada

The most pervasive fear is that developers are overbuilding and this will eventually lead to a glut of empty condos, which will increase supply and push down prices, sparking a condo market crash. But  Marc Pinsonneault, senior economist with the National Bank of Canada, spends his days analyzing condos in Canada’s big cities. He supports the belief that there’s overbuilding in the Canadian condo market—just not in the cities you’d expect.

According to Pinsonneault developers are not overbuilding in Toronto, Vancouver or Calgary—Canada’s three hottest real estate markets and the cities that boast some of the largest condo growth in recent years.  Yet, the numbers show that developers in Montreal, Saskatoon, Regina and Winnipeg are overbuilding and if the market hasn’t already cooled it will, says Pinsonneault.

The fact is that despite an increase in building permit applications and an increase in completed, new condo units entering the market, supply really is keeping up with demand in Toronto, Calgary (although a little less so in Vancouver).

“In Canada as a whole, the number of completed and unabsorbed condo units amounts to only two months [worth of supply], versus the more than four months [of unabsorbed condos that existed] in the 1990s,” explains Pinsonneault.

Fear: Foreign investors prop up the condo market in Canada

The fear is that foreign ownership is propping up the condo market, particularly in Toronto, Calgary and Vancouver. And there’s basis for that fear. But like all things real estate, it really does boil down to location, location, location.

Late last year, the Canada Mortgage and Housing Corporation released it’s first ever report that attempted to shed some light on who actually own’s condos in Canada. Wildly publicized when it was released, the report highlighted the apparently low percentage of condos owned by foreign investors (defined by the CMHC as condo-purchasers whose primary residence is not in the city where the condo-investment is located). As such, the CMHC reported that only 2.4% of condos in the Greater Toronto Area and only 2.3% of Greater Vancouver’s condos are owned by foreign investors, respectively. Edmonton, Regina and Winnipeg had the fewest number of foreign condo owners, at 0.1%, while Calgary’s foreign ownership of condos was just over 0.2%.

But drill down and the CMHC numbers start to reveal an alarming trend: a concentration of foreign-owned condos in a city’s downtown core. For instance, 5.8% of condos in downtown Vancouver are foreign owned. In Toronto’s downtown core 4.3% of condos are foreign-owned. Surprisingly, the CMHC did not drill down Calgary’s condo ownership, however, it did unearth a big concern when it comes to Montreal’s downtown condos. According to the recent CMHC report 6.9% of the condos in Montreal’s downtown core and Nun Island area are foreign owned—compared to the city’s 2.3% average.

Foreign ownership is a key concern as real estate analysts fear that if the market turns, foreign owners will be more likely to put their units up for sale and this can flood the market, push overall condo prices down, and start a market crash.

Montreal aside, most analysts are now far less concerned about the percentage of condos owned by foreign investors. CIBC World Market’s deputy-chief economist, Benjamin Tal, estimates that the number of “pure foreign investment” condos in actually a small segment of the market—and only slightly higher if you factor in families where one spouse continues to live overseas while the other lives with children who attend school in Canada.

Still, that doesn’t mean that the number of condos owned for investment purposes isn’t surprisingly high in Canada. According to a CMHC report, released in mid-2014, just over 17% of condo owners own a secondary condo-unit as an investment. (For statistical accurateness the CMHC combined the findings for Toronto and Vancouver.) This number doesn’t include the number of investors who rent out their condo and live in another type of accommodation (either a single-family home or a rental apartment) nor does it include investors who use corporations to purchase property.

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