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Signals of a Market Bottom - A Deep Dive

Thu, 09 Apr 2026 15:44:50 GMT

“Rule No. 1: Most things will prove to be cyclical. Rule No. 2: Some of the greatest opportunities for gain and loss come when people forget Rule No. 1.”

— Howard Marks, Oaktree Capital

Introduction

In the past, we’ve written about the market cycle generally , but today we will take a more focused approach as we walk through 40 years of data to better understand the typical conditions and signals associated with market bottoms.

There are 4 different statistics that when combined, provide exceptional insight into market health and likely price trajectory for any given housing type: unabsorbed inventory, completions, inventory under construction and average construction times.

In this edition of the bird’s eye view, we take a rigorous approach to walking you through the CMHCs data on each of these statistics, discuss how they are used to understand and forecast market bottoms, and share rough estimates for how far off a market bottom each housing type is.

Unabsorbed inventory

Unabsorbed inventory refers to residential units that have reached physical completion but that have yet to be purchased or rented. It’s a critical variable for assessing market health and for determining position within the market cycle because it has very little lag effect. If unabsorbed inventory is on the rise, it’s because people can’t or aren’t willing to pay at current price levels. Similarly, if it’s falling, it’s because demand is outpacing supply in real time.

While there are lots of variables in real estate that have connection to prices, there are very few where that relationship is so immediately obvious. Market bottoms tend to coincide with periods of high unabsorbed inventory, and market tops are associated with low unabsorbed inventory.

On the charts below, note the periods of high and low unabsorbed inventory represented by the black line, and compare it to the annual percentage change in the New Housing Price Index represented by the red line. The top chart is BC and Ontario is on the bottom:

Source: Data from CMHC Housing Market Information Portal , Statistics Canada, Table 18-10-0205-01

* Cautionary Note : As always, data is only a useful predictor when it is reliable, and while we believe the CMHC data generally corresponds with conditions on the ground in terms of direction, we suspect there is something inconsistent happening with the absolute numbers. It genuinely surprises us that BC is reported to have almost half of all unabsorbed units in Canada and nearly twice as many unabsorbed units as Ontario. The CMHC has formally acknowledged it “is conducting a methodology review of the unabsorbed inventory data series in the Ontario context, and advises that this data be used with caution.”

There may be issues with this data and we don’t know which way the data might be skewed, but we do believe that unabsorbed inventory in both markets is at or near its all time highs. As is typical of this inverse relationship, prices have been falling to match.

But there is a wrinkle to this logic. Not all asset classes are going through the same level of absorption crisis. Consider the data below across Canada as a whole:

Since 2022, the delivery of new completions across all housing types has consistently outpaced market absorption, signaling a growing disconnect between pricing and current buyer demand. Even as prices have fallen, unabsorbed inventories have continued to climb, which puts further downward pressure on prices.

Knowing what is happening has some use, but the real value comes from using this data to get a sense for what may happen over the next 1-2 years. To do that, we need to understand how many completions there have been and how many there are likely to be based on average construction times as inventory under construction is completed.

Completions

When unabsorbed inventory is considered alongside completions, you get a sense for the number of new units that the market can absorb:

Source: Data from CMHC Housing Market Information Portal

Looking at each asset class, the absorption picture becomes more clear.

Apartments - Historically high levels of apartment completions in 2023-2025 pushed the unabsorbed inventory higher, but the class has actually performed comparatively well. Apartments represent 63.2% of all completions in 2025, but only 41% of the unabsorbed units.

Row housing - Completions were well above historical averages, but the market has hit a saturation point. Row housing represents 10.3% of all completions, but 20.4% of the total unabsorbed inventory. These units are having a hard time finding buyers at current price levels.

Single detached - Completions have been slightly below historical averages over the last 5 years, unabsorbed inventory has climbed, meaning demand for single detached has been tepid. Single-detached homes account for 21.8% of total completions, but 29% of unabsorbed inventory.

Semi-detached - This type only represents 4.8% of total completions, but makes up 9.6% of unabsorbed inventory.

Combining unabsorbed inventory with completions by type, we can derive the unabsorbed inventory to completion ratio (UCR), which shows the percentage of homes in that housing type that are unsold relative to the amount constructed each year. This is one of the most critical statistics for understanding the current market demand for any given asset type:

Source: Derived from CMHC Housing Market Information Portal , Calculated by Hawkeye Wealth

Asset types with a lower UCR mean there is higher demand for that asset, so it is easier to see that for everything other than apartments, there is a fairly high level of unabsorbed inventory compared to historical averages.

Now that we have a sound understanding of where demand in the market is at current levels of supply, we can begin the fun work of estimating where it is going based on inventories under construction and construction times.

The Construction Overhang

In Canada, the pace of housing starts has mostly been higher than the pace of completions since 1995. One of the chief effects of this incremental difference between starts and completions is that over time and by definition, inventory under construction has climbed to a level far higher than anything ever seen in the past:

Source: Data from CMHC Housing Market Information Portal

There are two important structure notes to observe from this:

First, in Canada, when we talk about new housing, we are increasingly talking about apartments. The ~320,000 units under construction make up a whopping 81.5% of the total inventory under construction, so even small changes to absorption patterns in that market have disproportionately large effects.

While single-detached housing makes up only ~10% of the new home market, it is still the most common housing type overall, and these homes play a major role in price-setting for the resale market. When new single family homes go unsold and there is downward pressure on prices, that pressure also affects the resale market.

We only need one more piece of data before we can wrap it up to make predictions, and that is understanding how long it will take for these units under construction to be completed.

Construction times

Ignoring the data blip of 1992-1993, construction times for every housing type have increased in a roughly linear fashion. There are many reasons for this that we will likely write about in the future, because we feel it is a material contributor to the overall housing affordability crisis, but for now, the most important data is the 2025 average construction time for each housing type:

Source: Data from CMHC Housing Market Information Portal

Applying these averages to the inventory under construction for each type, we can create a short-term forecast for completions.

Putting all this data together

When you apply average construction times to inventory under completion, you get the following:

Source: Data from CMHC Housing Market Information Portal, Forecast from Hawkeye Wealth

For rigour, we referenced actual housing start data so that we could more accurately estimate when this inventory would come online.

The upshot is that we anticipate two years of even higher levels of apartment completion. For 2026, single-detached completions should fall with semi-detached completions also falling slightly. Row Housing will likely remain flat.

With current market absorption known and an estimate for future completions, we can finally get to the fun part, a picture of how far away each housing type is from reaching a bottom.

Unabsorbed Inventory Predictions

In short, we think that there will be slightly different ‘bottoms’ in Canada for each of the housing types:

1. Apartments - The market for completed apartment units has been the most resilient of all asset classes in Canada in recent years, but there are major caveats here. The pre-sale market, which is something of a canary in the coal mine, has been experiencing weakness for years.

The market has already demonstrated that it hasn’t been able to fully absorb the high number of completions from 2023-2025, and there are at least 2 more years of even higher completions coming. In our view, unless there is unexpectedly high demand growth, we are likely at least 2 years, and potentially 3-4 years from seeing a bottom as unabsorbed inventory will continue to grow and prices soften.

Verdict: A long way from the bottom

2. Row Houses - Levels of unabsorbed inventory are comparatively high, and still rising. Row houses are expected to deliver a similar number of completions in 2026 as 2025, so we think that unabsorbed inventory will likely continue to grow and prices will soften. That said, the bottom here may only be 1-2 years off because a slowdown in building affects the market more quickly due to ~13 month construction times.

Verdict: Hasn’t bottomed, but is closer than apartments

3. Single-detached - There isn’t strong demand for single-detached homes at current pricing, but 2026 projects lower completions than 2025, so there will be less pressure on unabsorbed inventory. When you combine this with the fact that the UCR (the unsold inventory relative to number of completions) peaked for single-detached homes in 2024, there are signs that barring further economic weakness, unabsorbed inventory is likely to flatten or even drop slightly and prices may hold.

Two cautionary notes on Single-detached data:

a) There are high levels of regional variance in this category, so local research is particularly important.

b) While the market may be at or near the bottom, it is only because the building taps are being slowed, not because of improved demand, so it’s still highly vulnerable.

Verdict: Bottomed, and if it hasn’t, it’s close.

4. Semi-detached - This is a hard category because it’s so small it can swing more wildly from year to year. Demand is low for semi-detached, but like single-detached, the category will see fewer completions in 2026 than it did in 2025. Also like single-detached, the UCR for semi-detached peaked in 2024.

Verdict: Bottomed, but with demand even more precarious than single-detached, it’s extremely vulnerable.

Conclusion

The combined factors of unabsorbed inventory, completions, inventory under construction and average construction time can provide an excellent indication of market health and positioning in a market cycle. When unabsorbed inventories are high and likely to rise, prices are likely to fall.

Until more robust demand returns and the economy strengthens, the housing market will remain in a precarious balance, but finding a market "bottom" will not be uniform for each asset type nor across geographies.

For high-density condo projects, the correction phase appears far from over. Conversely, single-family and semi-detached segments are showing signs of stabilization, even if that stabilization is driven by lower supply rather than stronger demand.

Assessing Entitlement Risk For Investors

Sun, 15 Mar 2026 03:42:05 GMT

“Development required multiple steps, and every step meant one more chance for something to go wrong.”

- Sam Zell, Am I Being Too Subtle?

Development isn’t for the faint of heart, but it can be rewarding when navigated with precision. While market demand and building costs set the foundation for any project, entitlement risk remains one of the most volatile development variables. To an outsider, entitlement feels like a binary "yes or no" outcome, but in reality, it is a graduated staircase of legislative and administrative hurdles where risk is systematically removed at every milestone.

Since the passage of Bill 44 on November 30, 2023, the entitlement risk profile in BC has shifted. While a massive development slowdown has temporarily masked the benefits, the impact is structural. Public hearings, a major component of entitlement risk, are now prohibited for residential projects that align with an Official Community Plan (OCP).

In this edition of the Bird’s Eye View, we examine the interaction between OCPs and Zoning Bylaws. We map out the legislative processes that a development goes through and the precise moments where entitlement risk ‘steps down’, information that a savvy investor can use to evaluate the risk and reward of a development deal at any stage of the process.

OCP and Zoning Bylaw

The interplay between an OCP and a Zoning Bylaw is a relationship of vision versus law. The OCP serves as a high-level, long-term strategic map that outlines the city’s future intent for land use, density, and community character in various areas of a City.

However, it is the Zoning Bylaw that provides the granular, legally binding rules for every specific parcel of land, including permitted uses, height limits, and setbacks.

For a development to proceed, s. 478 of the Local Government Act requires that its zoning must be consistent with the OCP. If a project aligns with the OCP’s vision but the underlying zoning does not yet allow for it, the Zoning Bylaw must be amended, though a public hearing is no longer required. If the project doesn’t align with the OCP however, it significantly increases the ‘height’ of the entitlement risk.

The Entitlement Staircase

When legislative hurdles are mapped onto a timeline, we see that the entitlement process is a series of discrete events where varying levels of risk come off the table at each step:

The following list explains what occurs at each milestone and the specific risk removed:

1. Pre-Application

What Happens: The developer meets with municipal planning staff for a pre-application review. This is an informal review to identify major red flags such as sewer or water capacity issues, heritage concerns, or blatant conflicts with the Official Community Plan

Risk Removed: The risk of a 'hard no' on the basic concept is eliminated.

2. Application

What Happens: The developer submits a formal package including preliminary architectural drawings, site surveys, and the required fees. The city assigns a file manager and starts the formal referral process to departments like Engineering, Fire, and Parks.

Risks Removed: The risk that the application is technically deficient or lacks necessary documentation is removed. Once an application is in, the project is also protected against adverse legislative changes or fee increases for a period of time.

3. First and Second Reading

What Happens: These votes usually occur during the same Council meeting. First reading is a procedural step to put the bylaw in front of Council for formal review, typically involving no substantive debate. Second reading is when Council begins debating the merits of the development after reviewing staff recommendations and developer presentations. Because Bill 44 now prohibits public hearings for OCP-compliant projects, second reading has become a more significant stage where Council is more inclined to request project changes.

Risk Removed: First reading removes that negligible risk that a staff-supported application will fail to enter the legislative queue. Second reading gives the developer their first formal view into the leanings of Council and provides a sense of whether the project is likely to be approved or what changes might be required. In the new legislative landscape, clearing second reading is a stronger indication of Council’s general satisfaction with the project’s scale and design without requiring further major concessions.

4. Public Hearing

What Happens: This is the primary forum for community input and occurs between second and third reading. Under Bill 44, this step is prohibited for residential projects that align with the OCP, but it remains mandatory for projects requiring an OCP amendment.

Risk Removed: In reality, public hearings usually skew towards negative submissions, though there is variance in the level of interest based on the location of the development. The question is always whether the level of neighborhood opposition displayed will successfully pressure Council to reject the project at third reading.

5. Third Reading

What Happens: Council votes on the project immediately following the public hearing or after second reading if no hearing is held. This is considered approval in principle.

Risk Removed: This is the most significant reduction in risk of the entitlement process. Once third reading is granted, the political will is established and the city is essentially committed to the project as long as the developer meets the remaining technical conditions.

6. Adoption (Final Reading)

What Happens: This occurs once the developer has satisfied all the conditions of third reading such as paying Development Cost Charges, signing legal covenants, or securing servicing agreements.

Risk Removed: The OCP or zoning bylaw is officially adopted and becomes law. The density and use are now vested in the land. Some would argue that this is the point where entitlement risk is zero, though in our view, that doesn’t come until permits are in hand.

7. Development Permit (DP)

What Happens: The focus shifts from use and density to form and character. The city reviews the specific design, materials, landscaping, and environmental impacts of the building.

Risk Removed: The risk that the city will demand significant architectural changes or redesigns that impact the project's layout or cost.

8. Building Permit (BP)

What Happens: This is a purely technical review of the detailed construction drawings to ensure they comply with the BC Building Code and safety standards.

Risk Removed: Protects against changes to building codes. This is the final 0 percent mark on the staircase. The developer now has the absolute legal right to commence construction.

Conclusion

The purpose in understanding these milestones isn’t to study in municipal bureaucracy, it’s a necessary component for evaluating the risk-adjusted returns of a development deal.

While the slow market has temporarily made the 2023 legislative amendment moot, the long-term structural shift of Bill 44 is undeniable, and we are eagerly watching to see how the removal of public hearings for most projects will affect future investment structures. In particular we are asking:

Will the removal of public hearing volatility encourage investors to enter projects at the application stage rather than waiting for third reading?

If the overall level of entitlement risk has been compressed for certain projects, will the risk-premium demanded by early-stage capital shrink?

Will ‘eligible for OCP-compliant rezoning’ become the new gold standard for de-risked land acquisition?

We don’t know the answers definitively, but we do know that at some point the ‘tap’ of development will inevitably turn back on. When it does, the advantage will go to those who understand entitlement not as a game of chance, but as a sequence of de-risking milestones that may present attractive risk-adjusted investment opportunities.

Sou rce: Hawkeye Wealth

Where Are The Wealthy Putting Their Money?

Sat, 31 Jan 2026 17:04:46 GMT

Introduction

"It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!" - Jesse Livermore

“The big money is not in the buying and the selling, but in the waiting” - Charlie Munger

It’s easy to feel unconfident as an investor today. We are currently operating in a market of ‘brittle optimism’, where major indices flirt with all-time highs while headlines warn of trade wars, a potential AI bubble burst, and the destabilization of institutions.

For many people, the natural instinct in the face of volatility and future uncertainty is to protect what they have by taking defensive positions, hedging, or selling altogether until the future feels rosy again.

But that doesn’t appear to be what the wealthy are doing. In this edition of the Bird’s Eye View, we consider the data from three wealth reports ( Tiger 21 , Knight Frank , and Capgemini ) to see how different cohorts of the wealthy are positioning their portfolios, and how their portfolio construction is changing in response to uncertainty.

Asset Allocations by Investor Profile

The table below represents the most recent reported weightings and rankings across the three major cohorts. Note that while Tiger 21 and Capgemini provide percentage-based portfolios, the Knight Frank data reflects rankings by weight within institutional family offices.

Understanding the Cohorts

To find the signal in this data, we must understand the differences between these groups of wealthy. The portfolio allocation differences between the cohorts sampled in these reports are a reflection of different approaches that people with different levels of wealth tend to display on average.

Tiger 21 Entrepreneurs: Active Capital

Tiger 21 members must have $20M+ in investible assets to join. These are mostly former entrepreneurs with high risk tolerance who went from running their businesses to actively managing their newfound wealth after a liquidity event.

The Tiger 21 data is revealing because of how it is collected. Instead of the typical anonymous survey, the data comes from the “portfolio defense” presentation that members make to their peers each year, defending their investment decisions and the reasoning behind each position.

We suspect that the peer-to-peer justification, reflected in their much lower levels of cash (9%) compared to other HNWIs (High Net Worth Investors). While they hold similar levels of public equities and real estate as other HNWIs, they have a larger 30% allocation toward private equity, demonstrating a preference for investments where they have specialized knowledge, influence or control.

The Average High Net Worth Individual: A Preservationist

The vast majority of respondents in the Capgemini survey are people with investable assets in the $1M to $5M range (89.8% of respondents). These are the "Millionaires Next Door" who built their wealth through traditional careers or small businesses.

This group has enough money to live comfortably through retirement, provided they avoid major missteps. That need for safety is reflected in their heavy 26% allocation to cash and 18% to fixed income. They hold significantly less in real estate and alternative investments.

The cost of this ‘safety’ clearly manifests in stronger markets. From 2023-2024, these investors increased their wealth by 2.6%. Meanwhile, UHNWIs (Ultra High Net Worth Individuals - $30M+), who held much lower levels of cash and fixed income, grew their total wealth by 6.3% over the same period.

Family Offices: Balancing Growth and Preserving Generational Wealth

The Knight Frank data samples institutional family offices with an average of $560M of assets under management.

Between direct ownership (22.5%) and indirect ownership (8%), family offices hold a higher proportion of real estate compared to other HNWI portfolios. These offices aren’t always trying to hit home runs with their real estate because it serves so many useful functions for family offices, from capital appreciation and income generation, to wealth preservation and geographic/sector diversification.

The Knight Frank data indicates that on average, family offices are targeting an annual unleveraged return of 13.8% on their real estate holdings. Their allocations strike a middle ground between the high cash and fixed income positions of the HNWIs sampled by Capgemini, and the high private equity allocations of the UHNWIs sampled by Tiger 21.

The Commonality: Subtle Shifts

While each cohort has different levels of wealth and goals, the overall allocations tend not to change much from year to year. Even through periods of crisis, these investors don’t make radical changes. The wealthy as a whole tend to avoid impulsivity and practice patience.

The Chart below shows asset allocation percentages since the turn of the millennium:

Sou rce: Table created by Hawkeye Wealth, based on Tiger 21 , Knight Frank , and Capgemini data

Source: Capgemini, World Report Series 2025

Conclusion

If world affairs or headlines have you feeling anxious, it can be helpful to step back and review your portfolio in a broader context. Are you feeling uneasy because your exposure no longer aligns with your long-term goals, or simply because short-term noise is dominating the conversation?

The data suggests that many wealthy investors are not attempting to outmaneuver markets through dramatic shifts. Instead, they focus on constructing portfolios that support their long-term goals and will be resilient across cycles, allowing them to remain patient through uncertainty.

How Development Charges Are Pricing New Buyers Out of Homes

Sat, 20 Dec 2025 04:41:30 GMT

“The provincial government has provided local government with only two options to build infrastructure: development cost charges and property taxes. And I will always be on the side of property taxpayers, and we will look for developers and ‘growth to pay for growth’ as a principle.”

- BC Mayor, Oct 9, 2024

Introduction

This Mayor’s sentiment represents a long-standing consensus among many elected officials. The logic is intuitively appealing. Existing homeowners shouldn’t be burdened with the costs of new infrastructure. The result is that over the last decade, municipalities have aggressively increased development charges (DCCs) with the assumption that these costs are borne by developers.

However, the current housing crisis is forcing a necessary re-evaluation of this approach. As housing starts continue to slow, it is becoming clear that in a weak market, high development charges are a tipping point that is causing project pro-formas to fail.

Governments are beginning to acknowledge this friction. For some housing types, Mississauga has eliminated development charges, and drastically reduced them for all others. Vancouver and Hamilton have temporarily reduced development charges by 20%. At the Federal level , the government has linked $17.2B in infrastructure funding to development charge reform, requiring municipalities to substantially reduce development charges to qualify for funding.

While these policy shifts aimed at increasing supply are important and welcomed, the CMHC’s recent paper, “ Who Bears the Cost of Growth? ”, may have delivered the data-backed death knell to the ‘growth pays for growth narrative’.

In this edition of the Bird’s Eye View, we highlight the CMHC’s key insights that suggest that these charges haven’t just hindered supply, they have functioned as a massive, unintended wealth transfer.

The Winners and Losers with Development Charges

The intention behind the ‘growth pays for growth’ slogan is making sure that developers pay for the full cost of their developments and associated infrastructure, so that the burden doesn’t fall to existing taxpayers. On paper, it’s a perfectly reasonable proposition, but there are three reasons that levying development charges don’t achieve their intended aim:

1. Developers don’t pay, new buyers do

As CMHC notes on page 4 , when markets are strong, developers pass the costs of development charges along to purchasers in the form of higher prices. When markets are weak and developers are unlikely to generate reasonable returns, they simply choose not to build.

2. Development charges increase housing costs by more than the amount of the charge

For new housing, CMHC concluded that “the transmission to new house prices is typically proportional to, but often greater than the size of the development charge. This markup may account not only for the fee itself but also for associated financing costs and administrative overhead associated with the fees.”

The even more insidious effect is that the same holds true for the resale market. Studies suggest that each additional dollar of development charges can increase the price of existing homes (which aren’t subject to development charges) by between $1.00 and $1.68. This over-shifting effect comes as buyers priced out of new construction compete more aggressively for resale housing.

While we don’t know the actual multiplier in any given market, we can look at an extreme example like Markham to understand the potential impacts. There, DCCs represent 15.7% of a new condo’s price . When considering the multiplier identified in CMHC’s research, DCCs likely account for between 15.7 and 26.4% of the price of existing condos in that community. In other words, a quarter of a home's value in that community may be explainable by municipal fee policy alone.

3. Suppression of New Supply

If development charges are too high, some new projects don’t move ahead. This reduces future supply, which increases the premium of all existing homes in that municipality.

CMHC’s conclusions make the distributional effects clear:

Striking a New Balance

To be clear, we aren’t advocating for the total abolition of development charges. They have been used in Canada since the Second World War, and have long served their primary purpose of funding essential infrastructure that requires upfront capital and purposeful overcapacity relative to current needs. Without development charges, existing property owners would carry an unfair proportion of new development costs.

It is the recent overreliance on development charges as a primary infrastructure funding mechanism that has caused market distortions, particularly in BC and Ontario.

The issue is one of balance. By raising development charges to unsustainable levels, we have effectively asked the next generation of homeowners to subsidize existing owners; a policy that doesn’t make any sense given the tough financial reality for many young families. Governments face the challenging task of finding equilibrium between their infrastructure needs and those of both existing and new homeowners.

What does all this mean for investors?

As the "growth pays for growth" myth begins to crack, we expect to see a shift in the municipal fiscal landscape towards reducing DCCs and increasing taxes, though the timeline for implementation could be gradual. We anticipate three primary effects from this shift:

1. Improved project feasibility - Reductions in DCCs will likely bring some marginal projects back to the table, but there are enough other barriers, both in terms of cost and demand uncertainty, that it may take cuts in excess of the 20% proposed in Vancouver to really move the needle.

2. Property tax normalization - If DCCs come down, we think it’s likely that property taxes will rise eventually. Investors should prepare for slightly higher operating expenses, which would affect net operating income, though this may be offset by a more robust and liquid housing market.

3. Price normalization - There is a case that at least some of the price appreciation since 2020 has been induced by DCC increases. We expect that reductions in DCCs may cause price decreases. This would be a welcome trade-off for new development, but could make value-add strategies less attractive.

Conclusion

The debate over development charges is less about infrastructure and more about the politics of picking winners and losers. The CMHC’s research makes it clear that the loser has rarely been the developer, and it has consistently been the aspiring homeowner, a group that most policymakers would agree is in need of help.

Reducing DCCs won’t solve the housing crisis overnight, largely because hard costs remain a significant hurdle to supply, but it would make a meaningful difference towards making the math work again, both for developers and new buyers.

As the ‘growth pays for growth’ consensus continues to crack, we expect the pace of DCC reform to accelerate, particularly in BC and Ontario. At Hawkeye, we view this shift as a net positive. While it may mean higher property taxes and normalization of resale prices, we will always prefer a market where value is driven by operational excellence and market dynamics rather than municipal fee policy.

Source: Table created by Hawkeye Wealth, based on CMHC findings

Fee Simple Under Fire: The High Stakes of Aboriginal Title in British Columbia

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 01 Nov 2025 19:47:00 GMT

“To a landowner, there is nothing more important than security of title. Once you have fee-simple title in B.C., it has to mean that land is your land. And that is very fundamental to our province – and in fact, to the country.”

- Niki Sharma, BC Attorney Genera l

Introduction

How secure is property title in BC? The Cowichan Tribes v. British Columbia decision, released on Aug. 7, 2025 has brought that question into the open. It has sparked a storm of reaction and concern that goes far beyond the parcels in question in that case.

Land rights are a major part of where the rubber hits the road on the path to reconciliation, and if the public’s reaction to this decision is representative, it appears that support for reconciliation in BC runs right up to the line of private property, but not past it.

In this edition of the Bird’s Eye View, we examine this decision and what it means practically in both the short and long term, what the next steps will be, and how long it may take to get clarity.

Overview

In this 863 page decision , based on 5 years of trial involving 86 different lawyers, the B.C. Supreme Court declared that the Cowichan Tribes hold Aboriginal title to portions of their traditional village lands on Lulu Island in Richmond, which includes not just Crown lands, but areas that are held in fee simple.

The Court held that Aboriginal title is a senior interest to fee simple title, and that it “lies beyond the land title system in British Columbia”, which negates land title defences.

The Court declared that Canada’s and Richmond’s fee simple interests are “defective and invalid” (excepting one property). Regarding the properties owned by third parties, the Court directed BC to negotiate in good faith regarding those fee simple interests.

Additional Reading:

If you are looking for a general summary of a situation, the letter sent out by the City of Richmond is a good starting point.

If you want more information about the specific legal arguments and defences that were advanced, Cassels , and BLG (among many other law firms) have provided excellent summaries.

What does this decision mean practically?

The effects of this decision, and any appeals that follow, will primarily be felt in BC and Quebec, since those are the two Provinces that mostly aren’t covered by treaty, as shown on the map below (land in white is not covered by treaty):

While there is nuance to this position, the primary effect of Canada’s historic treaties was the surrender or extinguishment of Aboriginal title to the Crown in exchange for reserve lands, annuities and other rights. This functionally means that at least in regards to this particular issue, Alberta, Saskatchewan, Manitoba, Ontario, and most of the Maritime provinces are more insulated from claims that Aboriginal title supplants fee simple title.

On the other hand, in BC, Quebec, Newfoundland and portions of the Territories, where Aboriginal title was never ceded, this decision and subsequent appeals will have a critical impact.

Who will bear the effects in the interim or if the decision stands?

While private property owners in the subject area are rightfully worried, we anticipate that senior levels of government would bear most of the immediate effects of this judgement, particularly in the long-term. That said, even if property owners are shielded from direct loss, taxpayers will ultimately foot the bill.

In the area in question in this case, it seems clear that the intent isn’t to take control of those properties, but instead seek some form of compensation from the Province for them.

In their October 27, 2025 statement , the Cowichan Tribes said, “To be clear, the Quw’utsun Nation's court case regarding their settlement lands at Tl’uqtinus in Richmond has not and does not challenge the effectiveness or validity of any title held by individual private landowners. The ruling does not erase private property.”

They continued to say, “If any individual private titleholders at Tl’uqtinus are concerned about somehow suffering a loss, they should know their remedy is against British Columbia, the party responsible. It is not to get involved in the Quw’utsun Nation case.”

It’s wishful thinking that British Columbians won’t be keenly interested and increasingly vocal about this case, because speaking plainly, the vast majority of the Province is potentially subject to Aboriginal title claims .

Proving Aboriginal title isn’t a simple process, and it’s highly unlikely that it will be proven in all or even most areas. That said, if the requirement moving forward is to pay compensation (even at heavily reduced values) for all fee simple title properties in areas where Aboriginal title is proven, it will forever cripple a Province that is already struggling economically.

In the meantime, we don’t think anyone knows the full impacts of this decision. There have been rumblings about refinancing processes being held or cancelled, but to date, there is no concrete evidence for that ( National Bank denied that this case was a factor in their $100M financing decision ).

The Province knows that it needs to do whatever it can to ensure confidence in indefeasible title. Institutions are likely to conclude that either the Province will win on appeal, nullifying the concern, or it won’t and it will have to compensate the Cowichan Tribes on behalf of property owners, but it’s hard for us to picture a world where individual property owners are left holding the bag.

Timing

Certainty is coming, but not soon.

The Federal and Provincial governments, as well as the City of Richmond have indicated their intent to appeal this decision. Regardless of the outcome at the BC Court of Appeal, it’s highly likely that this case will rise to the Supreme Court of Canada. Given the time required so far and the overall importance of the issue, it will be many, many years before this litigation comes to an end.

In our view, this situation creates separation between the question of what is right and what is feasible. While courts go through the multi-year appeal process focusing on the question of what is right, governments will simultaneously need to review legislation and policy as it pertains to reconciliation, consultation, and land title with consideration to what is feasible.

We fully anticipate that this will continue to be a leading theme for the next decade, and while the process hurts, it is a necessary step towards a decisive answer to the question of whether your property is really yours.

Conclusion

The Cowichan decision marks a turning point in how Canada approaches the intersection of reconciliation and property rights.

For British Columbia, the stakes are immense. Both housing and commerce depend on the legal assumption that fee simple title is final. If that assumption weakens, even in narrow cases, confidence in the entire system is tested.

The legal process will take many years, and if the government does end up losing, we anticipate that they will step in to shield individual property owners from direct loss, but that protection doesn’t come without cost. If Aboriginal title is proven across larger swaths of the Province or involves significant urban lands, the financial burden could be extraordinary.

For us, this is one more factor that could detract from investment in BC at a time when that investment is sorely needed. We will be watching this case unfold closely.

Source: Government of Canada

Investing in Canadian Farmland

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 04 Oct 2025 19:57:44 GMT

Introduction

Canadian farmland hasn’t posted a single annual decline in value since 1992 . Take a second to soak that up. More than thirty years, multiple recessions, inflation spikes, a housing crash and a tech- bubble. Through it all, farmland kept climbing.

In a world where many asset classes appear vulnerable to technological disruption or shifting consumer preferences, the core value in farmland is tied to a necessity that will always remain constant. Food.

In this edition of the Bird’s Eye View , we discuss the case for investing in Canadian farmland and share the most compelling points and potential risks from our due diligence on this asset class.

The Investment Case for Canadian Farmland

In our view, farmland has six main features that make farmland investment attractive:

1. Consistent Performance and Low Volatility - A 30+ year track-record of positive annual returns is astounding, even more so when you consider that the average annual increase over that period has been 8.1%.

Past performance doesn’t guarantee future returns, but there is merit to the fact that farmland has been remarkably consistent through periods of high market volatility. When considering that the figures above don’t account for any profit from the land, farmland has done an impressive job of delivering returns comparable to U.S. equities, but with a volatility profile that more closely resembles bonds.

2. Natural Scarcity - Most cities are established near fresh water and fertile soil. Thus as populations grow and cities expand, that development inherently reduces the base of potential farmland.

While most provinces have some level of agricultural land protection program in place, the fact remains that there is a finite amount of farmable land, and each year there is less of it.

3. Diversification and Inflation Hedge - Farmland has a long track record of holding its value when inflation eats away at other assets. Rising food prices translate directly into stronger farm revenues, which in turn support rental income and land appreciation.

Additionally, over the last 50 years, farms have averaged an increase in productivity of ~1.5% per year by adopting new technology and processes (machinery, irrigation, nutrient management), which serves as a natural inflation hedge.

Unlike equities or bonds, farmland’s performance has shown little correlation with public markets , giving it genuine diversification benefits.

4. Investor-Tenant Alignment - For anyone feeling exhausted with the rhetoric about ‘greedy developers’, it may come as welcome news that investors and landlords aren’t automatically the bad guy in the farmland space.

Research shows that farmers are able to drive higher levels of profitability per acre when renting compared to when purchasing farmland , and that trend is accelerating. While renting doesn’t necessarily outperform ownership over the long-run when accounting for land appreciation benefits, it does improve cashflow. Since farming is capital intensive, renting land allows farmers to allocate funds that would have otherwise gone to land, toward equipment and operations that improve yield and profitability.

Since farmers’ profitability depends on sustaining yields, they are naturally incentivized to care for the soil and manage the land well, which not only supports their own returns but helps preserve and even enhance the underlying land value. As a result, the ‘renter’s mentality’ sometimes seen in other real estate sectors is far less common in farming.

5. Comparative Affordability - In housing, the current challenge is that people can’t afford to pay what developers can feasibly build. In comparison, while farms are comparatively less affordable than they were 5 years ago, the gap is far less dramatic than it has been in housing.

Farm values and rents have rapidly increased, but the revenue generated by those farms has also substantially increased , which has slowed the loss of affordability. While current affordability levels are still a concern in the space, farmers can still operate profitably at current price levels and as shown on the chart below from Farm Credit Canada , we are nowhere near the peaks of unaffordability that farmers experienced during the 1980’s:

Sources: S tatistics Canada, FCC Calculations

6. Sector Protection - Wrapping up our comparison to housing, the government is highly motivated to support farmers at all levels and across party lines. Food security continues to be a major focus for governments and that is reflected in regulation and subsidy programs.

Each province in Canada also offers crop insurance, which protects against things that can destroy or reduce crop yields, such as drought, flood, frost, hail, pests, and disease. The premiums for this insurance are partially subsidized by Provincial governments.

We don’t profess to know enough about canola markets or the newly launched $370M Biofuel Production Incentive to measure its effectiveness in the face of China’s massive tariffs on canola, but coming from housing, the level of tangible support and positive rhetoric is a difference between night and day.

If you can’t beat em’, join em’?

Farmland Investment Risks

While we think the positive features outweigh the potential drawbacks, we will keep things balanced by presenting 6 potential risks with farmland investment:

1. Specialized Knowledge Requirement - This isn’t a sector you can just jump into. Farmland investing works best when you have farming expertise on your team, or a manager with deep agricultural experience. Without that, it’s easy for assets to underperform.

2. Slowing (or negative) Population Growth - Food demand ultimately follows population and consumption trends. If growth slows or declines in key markets, demand for agricultural products could soften. Globally, the trend is still toward rising food consumption, and we don’t see that shifting in the near future, but local shifts could influence land use, rental demand, and commodity prices.

3. AI and Technology Improvements - New technology, whether AI, automation, or vertical farming, could boost productivity per acre. That’s usually good for farmers, but if each acre produces more, we may need less farmland overall. This could impact long-term land values.

4. Adverse Weather and Climate Change - Crop insurance and government programs cover many year-to-year risks, but nothing protects against gradual, structural shifts. Prolonged droughts, soil degradation, or flooding could reduce yields and impact both rental income and long-term land appreciation.

5. Illiquidity - Farmland isn’t something you can sell on a whim. Transactions take time, and finding a buyer, or even exiting a farmland fund can take months. New structures may help limit this challenge in the future, but from the models we’ve reviewed, this is a long-term commitment.

6. Market and Commodity Price Risk - Farm revenues depend on commodity prices, input costs, and global trade. Tariffs, trade disputes, or changing consumer demand can all affect profitability, and by extension, rental income or debt repayment. There is currently strong government support that partially offsets these risks, but that isn’t always guaranteed.

Conclusion

Farmland may never be the investment that gets everyone talking at a cocktail party, but that’s

exactly why we like it. It’s steady, it’s essential, and it keeps producing value year after year. For long-term investors, that kind of quiet reliability is attractive, particularly since historical returns have kept pace with the market.

Of course, it’s not without risks. Specialized knowledge, weather and climate concerns, technology adaptation, and illiquidity all require thought and care. But for investors willing to take a long-term view, farmland offers a rare combination of tangible value and resilience that’s hard to find elsewhere.

The Affordability Conundrum: Supply Without Returns

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 23 Aug 2025 20:09:57 GMT

Introduction

On paper, the cure for unaffordable housing is simple: build more.

In practice, the very act of building undermines the incentive to keep building.

The federal government has set a target of 500,000 new homes per year by 2035, but supply follows returns, not political will. As more units come online, margins shrink and investors retreat, a dynamic made worse by slowing population growth.

In response, experts across Canada have signed competing open letters and budget submissions, each offering prescriptions for how to restore affordability.

In this edition of The Bird’s Eye View , we explore the widening gap between Canada’s housing ambitions and the market realities on the ground. We look at why supply targets are so difficult to reach, how policy prescriptions diverge between advocates and developers, and where governments may need to adjust course to bring targets and incentives into alignment.

The Scale of the Challenge

By 2035, the federal government wants to see 500,000 new homes started each year ( Source ). CMHC estimates that for that same year, between 430,000 and 480,000 annual starts will be needed to restore affordability to 2019 levels ( Source ). Hitting these targets means roughly doubling today’s pace of 245,367 starts.

The critical, often unstated requirement behind these supply targets is profitability.

If projects don’t offer an attractive risk-adjusted return, they simply won’t get built. That challenge is already visible in Vancouver and Toronto, where housing starts are down because many projects just aren’t worth the risk of building for the returns projected.

In the CMHC’s Housing Market Outlook Summer Update , CMHC cut housing start forecasts for every year from 2025–2027, with the 2027 baseline revised downward by 5.5% only five months after the previous forecast:

Source: CMHC Summer Update - Housing Market Outlook

Reaching 500,000 homes is straightforward to state, but financing that scale is another matter.

When Ambition Meets Demographics

To understand why the 500,000 target will be so difficult to hit, it helps to look at the supply and demand equation.

Statistics Canada projects that Canada’s population growth rate is forecast to slow sharply in the coming decade, from 1.5% annually from 2014 - 2024 to just 0.6% from 2025 - 2035 (Source). In other words, Canada is planning to double housing construction during what projects to be the weakest demand growth decade in Canada’s history.

Capital doesn’t flow to markets where demand is slow and supply is surging, it goes to places where demand outpaces supply and prices are rising. That’s not a flaw, it’s the system working as designed, rewarding investment in those markets that most need it.

The challenge with the 500,000 homes target is that it creates an intentional oversupply scenario that makes investment inherently unattractive. Why would developers start, or investors fund projects when price growth is projected to be weak or potentially negative? As it stands, they won’t.

If Canada wants to hit 500,000 new homes per year, policy is going to need to do some heavy lifting in order to change the investment equation.

The Policy Balancing Act

The aim in policymaking is to solve a problem without creating new ones.

Governments try to design measures that are just broad enough to hit the target, while limiting unintended negative effects. The public sector’s typical caution sharply contrasts with the urgency required for a 500,000 home target.

In fairness, the federal government has introduced numerous initiatives to bring down housing costs and expand non-market supply (Canada Housing Plan). These may be enough to keep today’s pace of development steady despite slowing demand, but it is hard to see how they would double construction within an intentional oversupply scenario. Canada will soon need to either scale back its target or accept policies that involve sharper trade-offs.

Recent advocacy highlights this divide:

One camp, a group of BC Housing advocates, argues that supply doesn’t automatically translate to affordability. They call for abandoning supply interventions altogether and doubling down on non-market housing (BC Housing Advocate Open Letter).

On the other side, the Large Urban Centre Alliance, representing some of Canada’s largest developers, warns that building won’t accelerate unless costs come down, proposing tax relief, financing support, and pre-sale rule changes to make projects more viable (LUCA Budget Submission).

We will not detail every recommendation here, but two points are worth examining:

1. Supply ≠ Affordability

We agree that supply alone doesn’t guarantee affordability. The evidence presented on that point is sound, as Vancouver’s housing stock has grown much faster than population, yet affordability has worsened.

However, the next leap from ‘supply doesn’t guarantee affordability’ to ‘non-market housing is the solution’ doesn’t work.

Non-market housing makes up ~3.5% of housing units in Canada (source). Expanding that figure would help the most marginalized households, but focusing on this segment while neglecting market housing will leave the vast majority of Canadians without affordability relief. Surely the goal is to restore affordability so that fewer people, not more, need to rely on non-market solutions.

2. Developers and the Investment Equation

It’s easy to read the Large Urban Centre Alliance submission and conclude that it is self-interested. Yes, many recommendations shift costs to government or buyers.

Yet these are exactly the types of measures that the government will need to implement if it wants to hit its 500,000 target. This isn’t about greed, but about explaining why starts are falling and what must change

We think it’s likely that if the federal government gives serious consideration to these proposals, offering tax reductions beyond those already proposed, there will be accompanying mechanisms to ensure savings are shared with end users. If designed well, there is a workable trade-off to be had: tax reductions that encourage supply and reduce project risk paired with policy guardrails that may limit the upside for developers but support greater affordability.

Both letters ultimately focus on shifting costs around the system to improve affordability. That is a necessary conversation, but it does not address the deeper challenge: the fundamental cost of building itself. Without tackling the drivers of construction cost, Canada risks creating a housing strategy that redistributes costs without ever reducing them.

Reducing Fundamental Building Costs

One of the clearest opportunities to reduce fundamental building costs lies in revisiting Canada’s building codes. While codes are primarily a provincial responsibility, the federal government plays a role through the National Building Code and could use that influence to encourage reforms.

Successive increases in energy efficiency, seismic, and accessibility requirements have all added cost and complexity, pushing more projects to the edge of viability. These standards each serve important goals, but collectively they raise a difficult question. Have we struck the right balance between safety, sustainability, and affordability?

Building codes that continually raise requirements without regard to cost are slowing construction and making homes less affordable. Given the scale of today’s housing crisis, this is a conversation Canada can’t afford to avoid.

Conclusion

Canada’s affordability challenge is not for lack of ambition. Ottawa has set bold targets, but in a market-driven system supply follows returns, and returns shrink when demand slows and supply rises. The 500,000 home target asks developers and investors to build into an oversupply scenario that makes projects unattractive unless policy changes the math.

Advocates are right that supply alone doesn’t guarantee affordability, but non-market housing cannot scale to meet the needs of most Canadians, so improving market affordability remains critical.

Developers are right that costs must come down. The cost-shifting measures they propose are the types that government will need to implement if it wants to hit supply targets. Rather than rejecting them outright, there is opportunity to structure those policies so that a lower cost of building translates into sufficient risk-adjusted returns for developers and real affordability for buyers and renters.

Affordability will only improve when ambition, policy, and incentives point in the same direction. Until then, 500,000 starts will remain a target on paper rather than a path in practice.

The Truth about Prefab: What it Can – and Can’t – Do for Canadian Housing

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sun, 06 Jul 2025 21:19:42 GMT

Canada’s $26B prefab housing bet promises faster, greener builds — but claims of affordability gains don’t hold up under scrutiny.

“You may have to fight a battle more than once to win it.”

- Margaret Thatcher

Let’s consider what we know about the state of pre-fabrication through the lens of the above Venn Diagram, reviewing each of the claims of Cost, Speed and Quality by appealing to both scientific and anecdotal literature.

Cost

The claims that “prefabricated and modular housing can reduce construction times by up to 50 per cent, costs by up to 20 per cent”, both come directly from a McKinsey & Company whitepaper from 2019 . It’s an excellent read, though we have two issues with the government’s use of statistics from it.

First, the authors of that report are largely speaking normatively about what prefabrication ‘should’ be able to achieve as the industry matures, not where the industry currently is. Second, the government omitted stats about the current state.

Let’s take a closer look at the quotes from that paper in their full context.

The authors do state that, “Modular can and should deliver construction cost savings of up to 20 percent - if done right - and can deliver life cycle cost benefits.” (Page 12).

However, only a few sentences later it reads, “But as yet there is no track record of consistent, game-changing cost savings among projects following this model. Indeed, there is often a premium associated with modular construction. This will likely change, however, as the construction industry changes mindset and gains capabilities”.

In short, the authors acknowledge that in the real world, modular construction was often more expensive, not cheaper, and only hypothesized that it would change over time.

There have also been a number of other studies that provide greater clarity.

In “ The State of Prefabrication in Canada ”, a 2022 market study that is generally bullish on the opportunities for pre-fabrication in Canada, the authors concluded, “Often offsite construction has a higher upfront capital cost and a longer breakeven period which results in little or no construction cost savings. Add in the hard costs of labour, material, and transportation, and offsite construction will be more expensive than conventional projects.”

In fairness, that paper also notes that there are many soft benefits associated with off-site building that do affect the bottom line, but aren’t necessarily captured by comparisons to traditional on-site building. These are mostly benefits that come from shorter project times, including lower financing costs and general contractor costs. There may be earlier revenue from faster completion and also potential savings associated with energy efficiency, which is generally easier to achieve in pre-fab solutions.

In his 488 page PhD thesis on the subject , Malay Dave conducted a thorough review of available literature, ultimately finding that there are multiple studies showing evidence in both directions. He states, “It is often claimed that prefab costs less or that it is more affordable compared to TOC [traditional onsite construction]. However, the literature review presented earlier suggests that prefab’s role in delivering reduced cost and thus higher affordability may not be straightforward.“

Even where the industry is more developed, such as in China, studies have found that capital costs with pre-fab housing are significantly higher, and that in many instances, labour savings aren’t sufficient to make up the additional capital costs. However, they also note that savings are possible when considering the full lifecycle of the building ( Study 1 , Study 2 , Study 3 ).

Anecdotally, the builders we speak with are finding that at the present time, using pre-fabricated solutions isn’t cheaper, which appears to be consistent with reported experience ( Global News , Storeys ).

Our take on Cost:

Currently, it strains credibility to claim that prefabrication can decrease costs by 20%. It’s often more expensive.

Might it one day get there? Sure. But today, pre-fabrication isn’t a cost-saver. The equation may change on a ‘whole life cycle’ cost basis, but that’s an issue for developers that are responsible for higher upfront costs.

Maybe this $26B incentive program will be enough to make up the difference and catalyze the industry towards lower long-term costs, but let's not pretend pre-fab is cheaper today.

Speed

This is likely the least controversial of the three. While there are papers and studies that contradict each other when it comes to price and quality, most research has consistently found that pre-fabricated construction is faster, with the claim of up to 50% being a reasonable upper-bound.

The primary speed advantage comes from being able to manufacture building components while the foundation is being poured on site, but there are also speed advantages from indoor production, less congestion with on-site workers, and design standardization where the same design is being re-used.

Naturally, those projects that are more complex and customized yield less time savings, while those that can be repeated without modification yield the most time savings.

Our take on speed:

Pre-fabrication leads to faster projects, and the 20-50% faster figure used appears reasonable.

Quality

Quality is quite all-encompassing, but for the purposes of this discussion we will only consider the points of energy efficiency, durability/craftsmanship, and aesthetics.

Energy Efficiency

Energy efficiency is one of the strongest arguments for pre-fabrication. While there is variance between pre-fabrication solutions, on the whole, studies consistently and conclusively show lower energy use from pre-fabrication ( South Korea , China , U.S. ).

This is particularly relevant where stringent energy efficiency standards are being implemented across Canada. Back in 2023, we wrote an article about the BC Energy Step Code , which requires that homes in BC be built to higher energy efficiency over time. In 2025, we are at Step Code level 3, which requires a 20% energy efficiency improvement versus the 2018 building code standards. By 2027, level 4 will be required (40% energy efficiency improvement) and by 2032, level 5 will be required (80% energy efficiency improvement).

From our discussions with builders, step 4 will be very difficult (and increasingly costly) to achieve using traditional building methods and step 5 is nearly cost prohibitive. That said, these levels are readily achievable in pre-fabricated solutions.

It’s entirely possible that increasing energy efficiency standards will be the primary driver behind the shift to pre-fabricated solutions. In BC, that may happen as soon as 2027 when step code level 4 comes into effect and the corresponding costs of building to that standard will increase.

Durability/Craftsmanship

On the issue of durability, there isn’t much reported difference between traditional and off-site builds. The factory construction process helps prevent exposure of materials to the elements and a high level of quality assurance can be maintained at the factory.

As long as sound transportation and crane practices are implemented and skilled onsite finishing teams are used, quality should be comparable and will depend on the team doing the work.

Aesthetics

This is a challenging one. There are loads of examples of beautiful pre-fabricated or modular buildings, but it generally takes a high degree of customization to get it there, which adds to the cost. The greatest savings from pre-fabrication come from standardization and repeatability, so if we are really wanting affordability, cranking out a handful of designs with minimal customization is the lowest cost option.

A cursory review of the Canada Housing Design Catalogue , a federal initiative to provide standardized designs for affordable housing, has us feeling like buildings could all have the same look and feel. The question remains as to whether people will be O.K. with that or not.

Our take on Quality:

We don’t have any concerns when it comes to the quality of pre-fabricated options. It will be easier to achieve higher levels of energy efficiency with pre-fab, which should theoretically add value to a home, but remains to be seen whether it actually does.

While we acknowledge that there are savings to be had in repeatability, we suspect that the industry will eventually land in a happy middle ground for most projects, where some degree of customization and extra features will be added to improve aesthetics, even though it adds to build time and costs.

Conclusion

After reviewing enough studies to make our eyes bleed, we aren’t convinced that pre-fabrication is going to move the needle on affordability the way that the government wants it to, but it does have redeeming features.

The truth is that pre-fabrication isn’t usually cheaper, rather, it’s often more expensive. On the bright side, it’s faster to build, can still be high quality, and offers excellent energy efficiency. Hailing back to the 'Good, Fast, Cheap' diagram, pre-fabricated housing is likely to be good and fast, but not cheap.

We are curious to learn more about the structure of the proposed $1B in equity and $25B in financing for builders that utilize pre-fabricated solutions. It’s wholly possible that these incentives will move the needle on pro-formas enough to see builders move towards pre-fabricated solutions, and this transition will likely be accelerated by ever-increasing energy efficiency standards.

Pre-fab won’t solve affordability, but paired with targeted incentives and rising energy standards, we do feel it will play a meaningful role in reshaping how we build in Canada.

Introduction

Canada has been fighting and losing the housing crisis battle for a decade, and like the Prime Minister before him, Prime Minister Carney vows to change that. In our last two editions of this newsletter, we discussed how likely that is to happen as we’ve reviewed the Build Canada Homes plan and provided critique of what we expect will and won’t work.

However, there is one major aspect of those plans that we have yet to analyze, the government’s bet on pre-fabricated housing.

“BCH (Build Canada Homes) will also catalyze the housing industry and create higher-paying jobs by providing $25 billion in debt financing and $1 billion in equity financing to innovative Canadian prefabricated home builders. Prefabricated and modular housing can reduce construction times by up to 50 per cent, costs by up to 20 per cent, and emissions by up to 22 per cent compared to traditional construction methods” ( Liberal Housing Plan ).

In this edition of the Bird’s Eye View, we deconstruct this statement, analyzing what we know about recipient eligibility, and the bold claims that pre-fabricated housing can massively reduce construction times and costs.

Recipient Eligibility

In our discussions with industry, it’s become apparent that there is a misunderstanding floating around on who will be eligible for the financing and equity incentive associated with prefabricated housing.

From our reading, this incentive isn’t for the manufacturers of pre-fab panels, mass timber, etc., it’s for the builders who choose to use these solutions.

If the government is going to introduce an incentive, we think this is a smart way of structuring it. Instead of directly subsidizing the manufacturers, the incentive will create demand for pre-fabrication (if this incentive is sufficient to get builders to try it), and introduce builders to new technologies.

Still, whether the incentive makes sense depends on the validity of the government’s claims about the degree to which pre-fabrication can reduce build times and costs, which when it comes to costs at least, we feel are overstated.

Pre-Fabrication Claims

When we read “prefabricated and modular housing can reduce construction times by up to 50 per cent, costs by up to 20 per cent, and emissions by up to 22 per cent”, our hackles immediately go up.

This phraseology sounds an awful lot like the mystical unicorn at the centre of the classic “Good, Fast, and Cheap” Venn Diagram:

From Hype to Hard Numbers: The True Scale of Ottawa’s New Housing Push

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 31 May 2025 21:31:26 GMT

Introduction

The Liberal Government is in and we are starting to get more clarity on what that means for housing in Canada.

In our last article, we compared the Liberal vs. Conservative Housing Platforms , and discussed how the majority of the Liberal housing platform would be positive for housing investors, but that the Build Canada Homes program had the potential to negatively overshadow everything else.

One month later, our opinion has softened. The limited documentation available about Build Canada Homes indicates that the government will be (directly) building far fewer homes than we initially anticipated, which has materially lowered our level of concern. Build Canada Homes looks to be far too small to displace private builders or upset private markets.

In this edition of the Bird’s Eye View, we review publicly available information on the Build Canada Homes program to determine its scale and potential impact. We then turn to the secondary question of how successful that program is likely to be as we review two of the models that the Liberals have used as inspiration for Build Canada Homes; the Wartime Homes Limited program that saw the Federal Government get directly involved in homebuilding post-WWII, as well as the Singaporean Public Housing model.

Build Canada Homes

“The Liberal housing plan will double Canada’s current rate of residential construction over the next decade to reach 500,000 homes per year”.

Liberal Housing Plan, March 31, 2025

We begin as we so often do with a caveat. It’s important to recognize that there is uncertainty about what this program will look like, as the entire housing plan (at least what is publicly available) is a mere two-page document. The truth is that we really don’t know what this program will look like, even if we know its goals and now have cost estimates.

Canada built ~245,000 homes in 2024, which is near the all-time high for annual construction (257,453 units were built in 1974). Getting to 500,000 units by 2036 feels like it borders on impossible, and is potentially much higher than what’s necessary.

When we saw the 500,000 homes per year target, alongside the words “deeply affordable,” and the announcement that “the Federal government will get back in the business of building homes”, we saw a very real potential for the heavy disincentivization of private development. If the government is going to compete with private industry while subsidizing costs, why would private industry build anything? Why would private investment fund it?

On further review, those concerns are now much smaller than we initially feared. Since we won’t see the 2025 federal budget until the fall , we are limited to the Liberal Housing Plan as well as the Liberal Fiscal and Costing Plan to get a sense for the program itself and how much money the Feds will be allocating to it, but those documents indicate that funding allocations will be small.

Here are some of the housing highlights from the Liberal Fiscal and Costing Plan:

Source: Liberal Fiscal and Costing Plan , Chart recreated by Hawkeye Wealth for legibility.

The full cost of housing initiatives, including GST cuts, DCC reductions, the new MURB tax incentive, and the Build Canada Homes program, is expected to fall between $4.9B and $6.8B in spending per year, while the Build Canada Homes portion is expected to cost ~$2.85B to $3.0B annually. With the 2024 budget at ~$449B, the Build Canada Homes program is smaller than we anticipated at 0.65% of the annual budget.

At the proposed funding levels, the Build Canada Homes program simply doesn’t have the funding to build an appreciable number of homes and displace private investment, which we see as a positive. At $250,000 per unit, the Feds could build ~12,000 (small) units per year with this funding. It’s not nothing, but it’s also only 2.4% of the 500,000 target, or ~5% of 2024 building levels.

Unless funding levels increase, we would be surprised to see more than 60,000 homes directly constructed by the government under the Build Canada Homes program over the next four years.

With the question of the size of the program answered, let’s look at whether Build Canada Homes is likely to be successful by reviewing the Wartime Homes Limited program, as well as the Singapore public housing model.

Wartime Housing Limited

“Mark Carney’s Liberals unveil Canada’s most ambitious housing plan since the Second World War.”

“Canada has solved a housing crisis before, and we can do it again”.

Much of the rhetoric around the Build Canada Homes plan is based on the Wartime Housing Limited (WHL) program, which has been credited for pulling Canada out of the 1940s housing crisis.

What might surprise you is that for all the hype, WHL only oversaw the development of 31,192 homes between 1941-1947. This represents approximately 8.2% of the total number of homes constructed during that time.

By most accounts, WHL was highly successful in achieving its mandate. Jill Wade’s 1984 thesis paper details and evaluates the WHL program from when it began in 1941 to when it wrapped up in 1947, and we’ve provided highlights below:

In the early 1940s, Canada experienced a housing shortage that stemmed from a lack of new supply built during the Great Depression, followed by labour shortages during wartime.

The intent of the program was to build ‘temporary housing’ at the lowest possible cost and rent the homes to veterans. Homes were only intended to last 10 years, even though many of the units lasted far longer, and some still stand today.
Panels were pre-fabricated, and workers needed ~16 hours (not a typo) to put up a small house. Neighbourhoods of 20 homes could go up in 30 days.
The intent behind building ‘temporary’ homes was to keep permanent housing the purview of private development, so as not to disincentivize it.

Source: City of Kelowna, WHL Era Home (Built in 1946) - Kelowna, BC

These units weren’t ever intended to be ‘subsidized housing’. Leonard Marsh, a program official stated that, “The corporation does not supply low-rental housing”, and that WHL had no intention of subsidizing its tenants, only building the lowest cost housing possible.

Even in the WWII era, “many municipal governments reserved hostility, or at best passive tolerance for WHL projects”. The primary concern from municipalities was the perceived quality of WHL housing, as municipalities wanted more permanent (and more expensive) solutions.

The program was largely successful at delivering low-cost, temporary housing, but once the war was over and the immediate need passed, the government privatized and sold most of the homes, and what didn’t sell was transferred to CMHC.

How will WHL differ from Build Canada Homes?

1. WHL homes were temporary and not subsidized.

In contrast, we assume that all homes under Build Canada Homes will be permanent, and given the language that has been used around ‘affordability’, we anticipate that they will be subsidized to some degree. This is especially likely after hearing Housing Minister Gregor Robertson’s comments last week that ‘ he doesn’t want to see home prices decline and that the Federal Government needs to focus on affordable housing’.

2. WHL era permitting was comparatively simple and build times were extremely short. The first National Building Code was adopted in 1941 to accompany the WHL building program (and along with it, the broad adoption of building permitting).

Modern building codes, permitting and inspection processes aren’t conducive to speed, even when using partially pre-fabricated solutions.
If the government is subject to the same planning and permitting queues as private industry, it will add to costs and timelines. If they aren’t, private developers will be furious.

3. Availability of land, particularly in urban areas.

Modern projects will need to put more units on smaller footprints, as developable tracts of land, even federal lands, are increasingly rare and expensive in urban centres.

4. Much of the oversight on WHL projects was provided by voluntary committees that supported land selection, negotiation, tenders, etc. This kept costs down (until they started using more staff in 1945).

In 2025, all of these functions would likely be paid, not volunteer.

5. During and after WW2, there was general agreement and support from municipalities regarding the necessity for federal intervention as a wartime effort, despite not being overly enthusiastic about WHL projects.

Today, many municipalities are likely to be less enthused about federal intervention.

Government can implement the same strategy that it did in WW2, building the cheapest pre-fabricated buildings possible, but there are still challenges that exist today that either didn’t exist or were smaller in the 1940s.

We highly suspect that both government and hopeful citizens will be surprised at how expensive these units will be to build and buy. While new technology may drive efficiencies that we don’t account for, we think it will take considerable subsidization to hit an ‘affordable’ price tag.

Singapore Public Housing Model

Anytime public housing is discussed, Singapore is held up as the poster child of success. You’ve probably read Canadian news articles or social media posts about the Singapore public housing model, echoing common refrains like ‘if Singapore can do it, why can’t we’?

It’s true that Singapore’s public housing program has been extremely successful. With home ownership rates at 90%, it’s easy to argue that they’ve done many things right. The Housing and Development Board (“HDB”) has built 77% of the homes that Singaporeans live in today.

While there are some elements of the Singapore program that could likely be ported to Canada, there are fundamental differences between Singapore and Canada that would make implementation of a similar program much more difficult in Canada.

Here are some important stats that help paint a picture as to why Singapore’s program has been so successful, and why it might be more challenging in Canada:

Source: Statistics Canada, Singapore Department of Statistics, Metro Vancouver Regional District. Chart compiled by Hawkeye Wealth

Singapore is less than 1/10,000th the size of Canada, and is less than a quarter the size of Metro Vancouver. Setting up an effective public building program in an area smaller than Metro Vancouver, but with 8x more population density leads to incredible economies of scale efficiencies.

Couple this with the fact that the national government owns approximately 90% of all land in Singapore and that there is one building code and no municipal or provincial governments (just one national government), and you have a situation where the government controls its own development and permitting process entirely.

The 12-person HDB board is capable of having a high level of knowledge and oversight for all projects. Their manufacturing and design is for a single climate, and pre-fab solutions have minimal freight considerations. Highly skilled development and construction teams don’t have to be mobile, allowing deeper specialization.

In short, Singapore is a near perfect place to run a vertically integrated government housing system. In that context, Singapore’s policy decision to have the government become the main developer and run multi-billion dollar losses to build ~15,000 - 25,000 units annually is both wise and admirable. They only rely on private developers to build the much smaller proportion of housing types not provided by the Housing and Development Board (luxury homes, single family homes, etc).

By contrast, Canada is massive, has a huge variety of different climates that require different building solutions, along with inter-provincial variation in building codes. Public projects require coordination with 3 layers of government (as well as first nations in some instances), all with differing ideas, values and roles. The personnel structure that would be required to provide a similar level of local specialization and expertise across Canada would be enormous compared to Singapore.

Canada is not Singapore. If Canada tried to run an aggressive public housing program that in any way threatens private development, it would fail miserably. Thankfully, it doesn’t seem like Canada is moving that direction.

Conclusion

For investors, the majority of the Liberal Housing Plan is positive for investors, and the Build Canada Homes is the only item that has the potential to discourage private building and investment.

However, given that the Fiscal and Costing Plan preliminarily allocates only ~$2.9B to that program annually for the next 4 years, we think its impact on private markets will be minimal.

Despite its limited scope, we genuinely hope that the Build Canada Homes program is efficient and successful. That said, a modern WHL program would be much more costly and difficult to replicate in the current era, and there are enough differences between Canada and Singapore to believe that their model would also be much more costly here. Ultimately, Canada has an uphill battle to deliver cost-effective public housing.

The industry is a little nervous right now, and rightfully so given the current market challenges. But in our view, with the MURB tax exemption and DCC cuts around the corner, we believe the future is at least as bright as it was before the Build Canada Homes announcement.

Conservative vs. Liberal Election Primer - Housing Policy

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 19 Apr 2025 21:45:49 GMT

Introduction

Election season is here, and while housing affordability and availability have taken a backseat to how Canada should approach its relationship with the United States, changes to housing policy still feature as central pillars of both the Conservative and Liberal party platforms.

What makes their proposed changes particularly notable is that since the 1980s, the Federal Government has played a smaller role in housing compared to Municipal and Provincial governments, influencing markets indirectly through immigration and monetary policy. Those days look to be over, as both parties have introduced proposals that would see the Federal Government take a much more active role.

In this edition of the Bird’s Eye View, we review the housing platforms for both the Conservative and Liberal parties, and offer our opinion on how these policies will impact development generally, and real estate investors specifically.

Note: We recognize that other parties also have housing platforms, but for brevity, we are only covering the Conservative and Liberal platforms.

Policies in Common Between Conservatives and Liberals

Before we dive into the novel proposals from each party, we begin with three policies in common:

1. Elimination of GST on new homes

Both parties have proposed to eliminate GST on new homes, but there is a massive difference in the size and scope of the two programs:

Source: Conservative party website and Liberal party website , data compiled by Hawkeye Wealth

Our take:

These two policies may have the same target, but they have completely different levels of relevance. The Liberal program will benefit a much smaller number of purchasers given that only first-time homebuyers are eligible, and at a lower threshold value.

Quantifying the size of the difference between these policies is not as easy as it seems, as the publicly available data on the proportion of first-time buyers that purchase new homes is weak. CMHC data shows that first-time homebuyers were responsible for 55% of new mortgages in 2023 (page 8), but we suspect that first-time homebuyers are much less likely than repeat buyers to purchase new homes, which further reduces the relevance of the Liberal policy.

Overall, both of these proposed policies are positive, but the Conservative policy is much more likely to actually move the needle on housing prices.

2. Incentivizing municipalities to cut Development Cost Charges (DCCs)

Both parties say that they will work to reduce DCCs, though their approach varies:

Our take:

Though neither of these programs have been fleshed out, there is a fair bit to glean from the little bit we do know. First, and most problematic, under both programs it is the municipalities that raised their DCCs the most over the last few years that stand to receive the greatest level of financial support from the federal government. In contrast, the municipalities that tried to keep DCCs to reasonable levels might be out of luck unless accommodations are made as these programs are built out.

Second, the Conservative plan has municipalities absorbing 50% of the cost reduction, while it sounds like the Liberal plan has the federal government paying for 100% of the reduction in DCCs. Both are likely to be effective in achieving drastically reduced DCCs, but the way the governments would get there will be different. We do think the Conservative plan will be effective in incentivizing municipalities to decrease DCCs, but they will also likely increase property tax rates to offset revenues forgone. Under the Liberal plan, either taxes will need to rise, other services will need to get cut, or most likely, the costs will get added on to the ever-growing national deficit.

The devil will be in the details, but any move that sees DCCs getting chopped will be favourable for Canada and for investors.

3. Speeding up zoning and permitting processes

Both parties acknowledge that zoning and permitting processes need to be faster and less costly, but the Conservative party will mostly use a big stick to get there, while the Liberal Party will use a fat carrot.

The Conservatives will require municipalities to build 15% more homes each year (compounding). If targets are missed, then a portion of federal funding will be withheld until they catch up. If targets are exceeded, municipalities will receive bonus funding.

The Liberals propose to speed up processes by expanding on the Housing Accelerator Fund, a fund intended to provide financial support for those communities that are working to reduce red tape in the building process. The theory is that this will result in lower building and administrative costs for developers, thereby enabling more building. To date, over $1.0B of the $4.4B fund has been awarded, but it isn’t clear whether this has resulted in projects that are materially faster or lower cost for developers.

Our take:

The idea of the Housing Accelerator Fund isn’t inherently bad, but the effort to create bespoke solutions for each applying municipality is always going to be slow and difficult to oversee. It’s a new program (launched in 2023) so we are hesitant to judge it before homes are even complete, but to date, the current iteration doesn’t appear to be working as envisioned.

We think that there is a quiet elegance in the Conservative approach of setting a clear expectation for municipalities, but not prescribing the methods they use to get there. Our favourite part about this plan is that it forces a fundamental change in the municipality vs. developer mentality that exists in many municipalities. Municipalities will only be able to achieve their goals with the help and investment from private developers, which should in theory materially change interactions between the two.

This also allows municipalities the autonomy to customize how they get to their building targets. Whether by implementing tax cuts, refining and improving zoning and permitting processes, or lobbying the Province for building code changes.

The key downside with this approach is that municipalities don’t control market factors, meaning that even if they are doing all the right things, it’s wholly possible that investors and developers may not line up to build, and the hammer of potentially losing federal funding on top could put municipalities in a difficult position.

Liberal Platform

The Liberals have proposed two novel policies:

1. Build Canada Homes

The cornerstone of the Liberal housing plan is to double the pace of construction to almost 500,000 new homes per year by acting as a developer to build affordable housing at scale, including on public lands.

This plan also proposes to provide $25B in financing to prefabricated home builders, and $10B in low-cost financing and capital to affordable home builders.

Our take:

This plan won’t work. It won’t even come close to enabling 500,000 new homes to be built annually, and has the potential to seriously disincentivize private building.

The often cited precedent for this plan is the highly successful public building program implemented in Singapore, which has overseen the development of more than 1 million units, housing approximately 77% of Singapore’s population. Conversely, only 23% of homes in Singapore were privately built.

After thoroughly reviewing the Singapore public building program, there are so many conditions necessary for its success there that don’t exist in Canada.

If the Liberals win this election, we will release a full article on why the Singapore public building program has been so successful, the reasons why it will be difficult to port to Canada, and why we believe the Build Canada Homes plan is destined to fail.

In the meantime, we have no confidence in any government's ability to deliver on this promise.

2. Re-introduction of the MURB Tax Measure

The Multiple Unit Residential Building (“MURB”) program was implemented from 1974 to 1981 (excepting 1980). Its function was to relax the capital cost restrictions of the Income Tax Act to allow Capital Cost Allowances to be deducted against any income, as opposed to just income from the property, acting as a tax deferral mechanism. The hope was that this would be a sufficient incentive to stimulate the construction of rental housing.

This program also allowed for the immediate deductibility of developers’ soft costs (mortgage insurance, landscaping, interest, property taxes, etc) incurred during construction.

A 1988 CMHC Assessment Report of the MURB (and other federal rental housing programs) says the following about the programs attractiveness to investors:

Much of the attractiveness of MURB's from the investor's perspective derived from the ability to leverage the investment where a substantial proportion of the project cost was financed by borrowed funds. Since the investor could claim the entire CCA and/or soft costs associated with the project, the magnitude of the deductible loss relative to the size of the initial investment could be large.

Our take:

The details of what this iteration of the MURB might look like aren’t known, but we anticipate that the two key features of the previous iteration of allowing CCAs to be deducted against any income, and for immediate deductibility of soft costs would return.

This program received a fair bit of criticism for other reasons, but it is a definite advantage for investors. With what we know today, it isn’t likely going to be enough to overcome the downside potential of the Build Canada Homes plan, but on its own, this would be a welcome policy for investors.

Conservative Platform

In addition to the policies in common covered above, the Conservatives have proposed three other policies to support homebuilding:

1. Sale of Federal Lands

The Federal Government owns 37,000 properties, and intends to sell 15% of these properties to be used to build new homes.

Our take:

There are thousands of unutilized or underutilized federal properties, so putting these properties to better use makes sense. It isn’t clear whether these lands would be sold at market value or not, or whether there will be some type of a deal if developers covenant to immediately build housing on the land. The answer to that question will likely affect program uptake.

Selling land is permanent and should always be done thoughtfully, but there is a clear and present need.

2. More Boots, Less Suits

The Conservatives would fund 350,000 positions over 5 years to train red-seal apprentices by expanding the Union Training and Innovation Program. They would also reinstate apprenticeship grants of up to $4,000.

Our take:

While this won’t do anything to solve the immediate housing crisis, it does address one of the underlying issues that is making solving the housing crisis so difficult. Without the labour necessary to ramp up development, housing targets are largely meaningless.

Programs like this are essential and should be commenced immediately in order to ease future housing pressures.

3. Canada First Reinvestment Tax Cut

This program would allow investors to defer capital gains if they choose to re-invest in Canadian investments. While not exclusive to housing, housing would be an eligible investment so we include it here.

The intent is that this program would function similarly to the 1031 exchange that is popular in the U.S., except that it would be applicable to all Canadian assets, not just real estate.

Our take:

This is a clear win for all investors and for Canada. Frankly, we wish this item would have received much more attention from the Conservatives, as it hasn’t been regularly discussed in the media or in debates.

This is a simple policy that could serve as a major catalyst for investment in Canada. As long as you continue to re-invest in Canada, you can chain together capital gains deferrals, allowing your investments to compound faster. You would eventually need to pay capital gains if you choose to cash out or invest in a non-Canadian asset, but the compounding benefit would be substantial.

Conclusion

All of the Conservative proposals would be positive for housing investors and developers. The majority of Liberal proposals would also be welcomed by investors, but their Build Canada Homes program has the potential to overshadow all of their other initiatives and squeeze private developers and investment from the market.

In a little more than one week we will have a new government, and whatever the result, we will be here working to identify the best risk-adjusted investment opportunities in the market.

Analyzing CMHCs 2025 Canadian Housing Market Outlook

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 22 Feb 2025 22:01:36 GMT

Most investors would be thrilled with the outcomes forecasted in the CMHC 2025 Housing Market Outlook given the level of uncertainty ahead. The question is, how likely is CMHC to be right?

Introduction

The Canadian Mortgage and Housing Corporation (“CMHC”) has published their 2025 Housing Market Outlook Report , and as we predicted in our May 2024 article , it appears that they significantly overestimated the pricing forecasts they set up 9 months ago. Admittedly, the tariff situation that Canada is facing was a new wrinkle for the market, so we don’t fault them for not taking them into account, but their overestimation of immigration from 2024 onwards was foreseeable.

The result is that in the 2025 Housing Outlook, CMHC has significantly reduced their housing price and rental rate forecasts versus what was projected in 2024, but in our view, they may not have revised far enough.

In this edition of the Bird’s Eye View, we share the key findings from CMHCs 2025 Canadian Housing Outlook, compare how and why their forecasts changed between 2024 and 2025, and give our perspective on whether their updated forecasts are likely to be accurate.

How did the forecast change?

In the charts below, we briefly summarize the key changes between the 2024 and 2025 Housing Outlook forecasts:

Source: 2024 and 2025 CMHC Housing Outlook Reports, data compiled by Hawkeye Wealth

We will dive into the reasoning in the next section, but the short answer is that CMHC has cooled their resale and rental market expectations across the board, with projected housing price increases getting chopped in half, vacancy rates rising, and lower rates of rental price increases.

That said, I think most investors would still be thrilled with these outcomes given the level of uncertainty ahead. The question is, how likely is CMHC to be right?

CMHCs Forecast Rationale

Economic Uncertainty

CMHC begins with a caveat that the forecasts in their report are subject to considerable uncertainty due to foreign trade risks, and that they’ve modelled a ‘low’, ‘medium’, and ‘high’ scenario based on the size and duration of tariffs over the next few years.

Source: 2025 CMHC Housing Outlook Report

While CMHC doesn’t expressly hold out any of these 3 scenarios as being the one they see as most likely, for the purpose of our analysis and for comparison between the 2024 outlook and the 2025 outlook, all figures in this article reference the ‘Medium’ scenario.

Lower Housing Starts

We expect housing starts to slow down over the forecast period, remaining above their 10-year average. The slowdown is primarily due to fewer condominium apartments being built. With low investor interest and more young families looking for family-friendly homes, developers will find it harder to sell enough units to fund new projects. The increase in unsold units will likely reduce new project launches, leading to a decline in new condominium apartment construction.

This finding is consistent with their 2024 forecast, and we generally agree with it. That said, we think they may be slightly overestimating the level of new housing starts in some major markets, notably Vancouver and Toronto, as it doesn’t appear that CMHC is fully considering the tapering of new purpose-built rental projects that has already begun.

CMHC accurately showcases the massive wave of purpose-built rental projects that are currently under construction (see chart below), but they primarily use it as support for their assertion that “asking rents and rents of new units [will] have limited growth” (Page 11).

Frankly, we think that assertion feels crazy in circumstances where they are projecting out ~6% rental rate increases for the next three years, but putting that aside, they don’t appear to go one step further to consider how the massive backlog in purpose-built rental projects, combined with lower population growth rates may further deter developers from starting these projects.

Source: 2025 CMHC Housing Outlook Report

This chart shows that as of the end of 2024 in Vancouver, a whopping 17.2% of all purpose-built rental units in Vancouver were currently under construction. This is an all-time high figure, and will put downward pressure on rents as inventory comes online. The prospect of high land costs, high construction costs, regulatory and tax hurdles, lower immigration, and an influx of supply has developers looking elsewhere and to other asset types.

Our prediction : CMHC gets it right that housing starts are lower, but that they overestimate the number of new starts in each of 2025 and 2026. One potential caveat would be if the government dramatically reduces development fees, which would lower costs and give developers the confidence to proceed despite lower prospects for rent growth or appreciation.

Home Prices Up

“We expect housing sales and prices to rebound as lower mortgage rates and changes to mortgage rules unlock pent-up demand in the short term. In the longer term, stronger economic fundamentals will support this rebound.”

CMHC's underlying thesis for higher resale prices is that the reduction in immigration demand will have less impact on housing than on rentals, and that lower mortgage rates will prop up housing prices.

It seems like an odd time to be projecting out ‘stronger economic fundamentals’ for 2026 and 2027, but maybe that’s just us?

Our prediction : We think that there is less pent-up demand in the market than what CMHC projects and that fears of economic downturn will prevent large housing price increases in 2025. We see it as unlikely that housing prices rise by the 6.1% forecast for 2025, but feel that their 2026 and 2027 price growth rates are more reasonable.

Rents Keep Climbing

“A record number of units are under construction as part of efforts to increase rental supply… As more new, higher-priced units come onto the market, average rents will continue rising. However, we expect asking rents to be negatively pressured as rental demand declines.”

In this report, CMHC doesn’t give Canada-wide rental forecasts, only regional forecasts. As such, we focus on the Vancouver rental market in this article.

CMHCs rationale for three years of ~6% rental price increases feels incredibly weak, even if they did adjust downward somewhat from their 2024 predictions. Yes, the wave of new units that come onto the market will be priced above current averages, and given the size of that wave, it will have a noticeable effect.

However, even before any economic weakness that stems from potential tariffs, demand is already falling and will continue to do so as plans to slow immigration kick in.

Our Prediction : CMHC is overestimating rental price increases, as they continue to underestimate the slowdown in demand and the cooling effect of new supply. In our view, we anticipate flat or low rental growth rates in Vancouver, and believe that negative rent rates are a real possibility over the next couple of years.

What does this mean for investors?

CMHC continues to paint an optimistic picture for investors in the BC housing market, but in our view, the data is leading us to believe a more bearish stance is prudent when underwriting.

At the least, investors will want to make sure that potential investments will still yield acceptable returns in a lower growth environment than what CMHC has projected.

In the meantime, we continue to look at deals on both sides of the border. While we believe many markets in Canada are in for some turbulence, we are more bullish on U.S. multifamily ( see our last article ), where a number markets are seeing new supply dwindle and rents are starting to grow again.

Why U.S. Multi-Family is Likely to Turn the Corner in 2025

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 25 Jan 2025 22:11:50 GMT

Demand is high and has nearly chewed through the supply overhang in many markets, which should result in rising rents and falling vacancies over the next few years.

Introduction

The last couple of years have been painful for U.S. investors as housing prices have fallen and rent growth has stagnated or even gone negative in high supply markets. However, the pendulum is shifting and we believe that 2025 will be an excellent year to scale into multi-family housing in the U.S.

In this edition of the Bird’s Eye View, we walk through U.S. multi-family market data to share why we think that U.S. multi-family deals will outperform Canada in 2025.

The U.S. Bounce - Explained with 4 charts

In response to the surge in demand for housing during the pandemic, the U.S. responded with an unprecedented wave of new housing projects. The result? For 13 straight quarters, U.S. multifamily has seen more net deliveries than units absorbed, which has led vacancy rates to climb from just under 5% in 2021 to over 8% in 2025.

Source: Co-star Data

There are two major points to glean from the chart above.

The first is that net deliveries peaked in 2024, and there is a steep decline in new units that are forecast to come online through 2028. At the end of 2024, there were only 560,000 multi-family units under construction in the U.S., the lowest number since 2018. Further, only 230,000 units broke ground in 2024, the lowest level of new construction starts since 2012. Supply is tapering, but demand remains high. (Source Cushman & Wakefield Q4 2024 U.S. Multifamily Report )

Second, vacancy rates for the U.S. as a whole likely peaked in late 2024. As expected from decreasing supply and vacancy rates, rents are expected to climb again in 2025 as shown in the chart below:

Cap rates are also at their highest levels since 2019, and are expected to remain reasonably high through 2025:

For investors, the set-up of high cap rates, decreasing supply and vacancy, high demand and increasing rents looks excellent, but this brings its own set of challenges, namely that many people see it coming. Transaction volumes have been low, as even those who want to sell are doing what they can to arrange financing that will allow them to hold on until they can sell in more favourable market conditions. As shown below, 2023 and 2024 saw extremely low levels of sales volume, and that likely won’t change dramatically through 2025:

Source: Co-star Data

All this is to say that while 2025 may be an interesting time to invest in U.S. real estate, there won’t necessarily be good deals everywhere you look, particularly since there is so much variance between submarkets.

For example, we closely follow the Dallas-Fort Worth metropolitan area, and we don’t expect the market there to turn until 2026. Dallas-Fort Worth led the nation both in number of units delivered in 2024 (41,018, representing 4.6% of total inventory) and units absorbed (30,718), but it still has another 35,532 units under construction. With vacancies at 11.2% and 12-month rental growth coming in at -1.2%, it will need more time than other areas of the U.S. to work through its supply overhang. The seeds of future supply crunch are being sown however, as there were only 19,930 new starts in 2024, compared to the 35,709 in 2023 and 39,213 in 2022.

That said, in some ways, the later expected turnaround makes it more likely that deals will come up in 2025, so just because a market isn’t quite ready to turn doesn’t necessarily mean that it isn’t worth looking at if the right deal comes our way.

Conclusion - It’s Time To Be Looking

In our view, it’s a great time to be looking for opportunities in the U.S.

Cap rates are comparatively high. Demand is high and has nearly chewed through the supply overhang in many markets, which should result in rising rents and falling vacancies over the next few years.

For those investors that have been carefully holding on to capital to take advantage of distress, we anticipate that 2025 will present unique opportunities with the best risk-adjusted return potential we’ve seen in years.

We have already found one U.S. deal that we are excited about this year, and suspect that with the way markets are shaping up, more are coming.

The Impact of GDP on Housing Prices: Insights for 2025

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 21 Dec 2024 22:19:21 GMT

Introduction

The best investors challenge commonly-held assumptions, even those that feel obvious and go unchecked. That’s been the driving force for our trifecta of articles on three of the major factors that affect housing prices: interest rates, population growth and the strength of the economy (GDP growth).

In June 2024, we wrote about the effect of interest rates on housing prices . There we looked at historical data and noted that periods of falling interest rates have historically seen slower than average housing price appreciation. However, the 3 years after rates stop falling have historically seen higher than average housing price appreciation.

In November 2024, we wrote about the effect that population growth has on housing prices . With the likelihood of seeing two years of low, or even negative population growth in Canada, there is a natural temptation to assume that prices will be weak over that period. However, the data shows that in the short-term at least, correlation between population growth and housing prices is quite weak, making population growth rates a poor predictor of housing prices in the short-term.

In this final article of 2024, we cover the connection between GDP growth and housing prices. We conclude with our thoughts on how these variables fit together, what other factors come into play, and what investors should expect from the Canadian housing market as we move into a new year.

GDP vs. Housing Price Growth

Unlike what we observed with both interest rates and population growth, intuition is accurate and there are fewer surprises in the data. There is a definite correlation between GDP growth and housing prices, as the two tend to run in the same direction, but housing prices generally see greater extremes than GDP growth.

Before we look at the data, a few notes on how it was derived:

Annual GDP % (dashed yellow line) - Statistics Canada reports GDP in real terms, meaning that the dataset is already adjusted for inflation.
New Housing Price Index (solid red line) - The NHPI only includes new houses, meaning that resales aren’t included in the data. Statistics Canada reports the NHPI in nominal terms, meaning it isn’t adjusted for inflation. To make for a more accurate comparison to GDP rates, we adjusted the NHPI by converting it into real terms by subtracting the annual “All-items” CPI rate from the NHPI. NHPI data goes back to 1981.
Canadian Real Estate Association Housing Price Index (solid blue line) - For our purposes, we used the aggregate composite, which includes all housing types, both new and previously owned. Similar to the NHPI, it is also a nominal index, so the same approach of subtracting CPI was used to convert the data into real terms. HPI data only goes back to 2005.

While GDP isn’t a perfect predictor of housing prices, the two tend to run in the same direction. If we do in fact see a decline in GDP from 2024, it would take a unique set of circumstances to see anything more than flat housing prices in 2025.

Chart created by Hawkeye Wealth, using the following data:

1. GDP - Statistics Canada. Table 36-10-0104-01 Gross domestic product, expenditure-based, Canada, quarterly

2. CPI - Statistics Canada. Table 18-10-0004-01 Consumer Price Index, monthly, not seasonally adjusted

3. NHPI - Statistics Canada. Table 18-10-0205-01 New housing price index, monthly

4. HPI - Canadian Real Estate Association - HPI Data

Source: Statistics Canada. Table 10-10-0145-01 Financial market statistics, Bank of Canada

Observations

The direction of GDP rates has historically been an excellent predictor of the direction of housing prices, but on its own, it is less useful for explaining the size of the change in housing prices. Other factors, such as interest rates, population, housing supply and foreign investment all interact with the strength of the economy to create swings in housing prices that tend to be more volatile than what GDP exhibits.

Though the sample size is small, since 2005, new homes have been more tightly correlated with GDP and seen less volatility than previously owned homes.

The correlation between new housing and GDP has been especially strong since 1991, when Canada first introduced the inflation control target of 2%. Prior to 1991, interest rates were more important for explaining and predicting housing prices.

In the early 1980s, housing prices were declining more sharply than the overall economy. GDP bottomed at -2.5% in 1981, but new home prices fell by -12.5% that year. This gap is largely explained by interest rates, which peaked at over 20% in 1981 in an attempt to reign in inflation. These historically high interest rates had a disproportionate cooling effect on housing prices.

A similar story played out from 1988 to 1991, as another period of stagflation (low GDP, high inflation and unemployment) prompted increases in the bank rate up to ~14%, sinking the market for new homes.

Once interest rates stabilized throughout the 1990s and into the 2000s, housing price growth began to align much more closely with GDP growth rates.

Periods of modern divergence

2005 - 2007: Since 1981, there have been very few years where new homes appreciated despite a declining GDP, but the period between 2005 - 2007 is the most notable example. The major difference in this period was the boom of credit availability combined with low interest rates, which fueled price growth independent of GDP.

2014 - 2017: Interestingly, this boom wasn’t felt for new housing, but the existing stock saw significant appreciation. Elected officials have often claimed that this housing boom was largely explained by foreign investment, which led to the introduction of foreign buyer taxes in BC in 2016 and Ontario in 2017. In reality, there is very little data on foreign investment from that period, and the data there is, such as the CMHC’s survey of Foreign Ownership of Condos in Canada, shows that only 3.3% of condos in Toronto and 3.5% in Vancouver were foreign owned. This surge is likely explained by supply/demand imbalance caused by a mix of speculation and increasing migration to urban centres, with minimal new supply to absorb it.

Despite these periods of divergence, GDP has historically been a primary determinant of the direction of housing prices, with many other factors combining to determine the strength of the overall housing market.

Looking out at Canada's GDP in 2025

Our best guess is that GDP will slow in 2025 but not fall into recession territory, though there is some reason to believe that GDP could take a larger hit. Much has been made about the fact that while Canada isn’t in a technical recession, GDP per capita has declined for six consecutive quarters (Morningstar). If this trend continues, Canada is almost guaranteed to see a negative GDP in 2025, seeing as we are projecting population declines for the first time in Canadian history.

To balance this, lower interest rates and the associated lower cost of borrowing should serve to spur investment in both industry and housing and offset the slowing economy to at least some extent.

The wildcard from a GDP perspective is whether tariffs from the U.S. will materialize, the proposed rates, and the industries targeted. While any tariffs would likely have a negative impact on Canadian GDP, the scope and extent will depend on what is implemented.

While GDP isn’t a perfect predictor of housing prices, it does tend to get the direction right. If we do in fact see a decline in GDP from 2024, it would take a unique set of circumstances to see anything more than flat housing prices in 2025.

Conclusion - Putting it all together

For whatever reason, it’s an incredibly popular belief in investment circles that periods of low interest rates lead to strong housing price appreciation (Dec 12, 2024 - BNN Article). In fact, Alana Riley, head of mortgage insurance and banking at IG Wealth Management said just last week that, “Historically, periods of declining interest rates have led to increased property values in larger urban markets across Canada”.

Our reading of data found exactly the opposite. Historically, periods of falling interest rates have seen below average housing price appreciation, as falling interest rates have typically been a sign of a weak economy and slow demand. The weakness of the economy typically overshadows the effect of declining interest rates. However, it is true that once rates stop falling and the economy stabilizes, markets experience above average rates of housing appreciation.

As interest rates are expected to continue to come down in 2025 to head off potential recession, history says that on average, we should expect below average rates of housing price appreciation.

On the population side, if the projected negative population growth rates in 2025 and 2026 materialize, the market will have two years to add supply without seeing any significant new demand, which doesn’t support price strength.

Combining all of these factors together, there is little reason to believe that lower interest rates alone will be sufficient to buoy up the housing market in the face of declining GDP and low demand for housing.

As we enter the holiday season, this slower market environment also represents a time for reflection and preparation. While the outlook for 2025 is murky, history reminds us that challenges can create opportunities for those prepared to act decisively. We also believe it could be a great year to keep an eye out for real estate opportunities south of the border.

Here’s to a prosperous and thoughtful year ahead! Happy holidays from our team at Hawkeye Wealth and we look forward to working with you in 2025.

Population Declines and the Housing Market: What Investors Need to Know

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 23 Nov 2024 23:29:00 GMT

It doesn’t take a genius to hypothesize that population decreases could cause rental rates and housing prices to soften over the next two years. However, a look at historical data shows that changes in population growth often don’t result in immediate housing price changes.

Introduction

Oh, what a difference a year makes!

August 2023:

“I don’t see a world in which we lower [immigration targets], the need is too great.”

-Marc Miller, Immigration Minister ( source )

September 2024:

“There certainly is a world in which we would reduce [immigration targets]”.

-Marc Miller, Immigration Minister ( source )

And reduce immigration targets they have. With the Federal Government's release of the 2025-2027 Immigration Levels Plan, there is a very real chance that we go from seeing the highest population growth levels since the 1950s (in 2023 and 2024), to seeing the first annual population decreases in Canadian history in both 2025 and 2026, with annual decreases of ~57,500 people annually.

In this edition of the Bird’s Eye View, we discuss why it is that there is a disconnect between housing prices and population growth, and aim to help investors understand what geographies and housing types are most likely to be affected by the reduction in immigration targets put forward in the 2025-2027 Immigration Levels Plan.

Historical Population Growth vs. Price Growth

The knee-jerk reaction to slowing or negative population growth is to think that prices are going to come down. It’s an understandable reaction, but historically, the immediate correlation between housing prices and population growth hasn’t been as strong as one might expect.

As the graph below hints at, population growth is just one factor among many, and in the past, it’s rarely been the most important one.

Chart created by Hawkeye Wealth, using the following data:

1. Statistics Canada. Table 17-10-0009-01 Population estimates, quarterly

2. Statistics Canada. Table 18-10-0205-01 New housing price index, monthly

3. 2025–2027 Immigration Levels Plan

In the 1980s, Canada had moderately rising population growth rates (between 1-1.75%), but it was runaway inflation that was the primary driver behind the increase in home prices, not changes in population.

From 1990 to 1996, population growth rates slightly slowed, but remained between 1.1% and 1.7%. However, home prices dropped significantly due to recession and rising unemployment, high interest rates and oversupply following the late 1980s housing boom.

From 1997 to 2007, population growth held stable at a lower rate of between 0.8% and 1.1% per year, but home prices went on a tear as interest rates came down amidst a stronger economic backdrop. This period also saw a rising global interest in Canadian real estate, which contributed to higher prices.

Most recently, in 2023 and 2024, home prices have remained flat, despite extremely high population growth rates of between 2.5-3%.

Explaining the Disconnect

Population growth is an important part of the equation, but there are two primary reasons why changes in population growth tend not to have an immediate impact on housing prices.

First, in most cases, there is a long time lag between population increases and the resulting housing demand. Natural population increases result in demand 25 years later (babies can't afford homes yet) and immigrants and non-permanent residents are disproportionately renters, at least initially. As we discuss in greater detail later, population growth can still move housing prices in the short run, but their greater impact is spread out over many years after the increase in population has occurred.

Second, a stable housing market often has the capacity to absorb an initial surge in demand from population growth, which delays immediate upward pressure on prices. This is less applicable in 2024, but on a historical basis, the principle holds true.

With all that said, it’s also important to remember that if the -0.2% growth rates proposed for 2025 and 2026 do materialize, they are unprecedented. At no point since confederation in 1867 has Canada ever had a negative annual growth rate (Source). Further, there has only twice been a growth rate lower than 0.7%. In 1916, the middle of the first world war, Canada posted a 0.3% growth rate, and in 2021 the pandemic ushered in a 0.6% growth rate.

Looking forward, we acknowledge that given the magnitude and rapid change in immigration targets and the potential for regional concentration of impacts, there is a greater likelihood that these changes will have immediate effect on the market.

With that background information out of the way, let’s pivot to those regions that are most likely to be impacted, and how the market might deal with slow or declining growth.

Which Regions will likely be most affected?

In 2021, the Vancouver, Toronto and Montreal Census Metropolitan areas contained ~36% of Canada’s total population, but were home to ~59% of Non-Permanent Residents (NPRs). Montreal had the highest proportion of NPRs of any city, and the Vancouver CMA had the highest proportion of NPRs of any CMA in Canada at 5.04%. BC had the highest proportion of NPRs of any Province at 3.42 (2021 Census).

What may be even more instructive however, is where the influx of NPRs have landed since 2021. The table below shows the number of NPRs in each province in both 2021 and 2024:

Table created by Hawkeye Wealth, using the following data:

Statistics Canada. Table 17-10-0009-01 Population estimates, quarterly
Statistics Canada. Table 17-10-0121-01 Estimates of the number of non-permanent residents by type, quarterly

Interestingly, despite the fact that Ontario, Quebec and BC all gained the most NPRs, on a percentage increase basis, many other provinces saw greater influxes, including Alberta, New Brunswick, Newfoundland, and Manitoba.

For our purposes, the % of all NPRs figure serves as a rudimentary guide for how the reduction of 115,753 NPRs may be allocated across provinces.

If the decrease is proportional to that percentage, BC would see a reduction of ~20,430 over the next two years, Ontario would lose ~53,119 people, Quebec would lose ~22,688 people, and Alberta would lose ~9,781 people.

In our opinion, these reductions may be slightly further skewed towards decreases in Ontario and BC, because the cap on international students appears to be one of the government’s key measures for reducing NPRs, and those provinces have the largest number of international students.

As a note, these reductions do not include what may come from the balance of inter-provincial migration, or natural population change, but both factors could serve to exacerbate the issue in these provinces. For example, in BC, the net interprovincial migration (people in less people out) from July 1, 2023 to June 30, 2024 was -9,199, and the natural population change (births minus deaths) was -3,103 in 2023, and has been negative every year since 2021. If that trend continues, we anticipate that the declines in BC could be higher than the national average.

As we discuss in the next section, the cities and neighborhoods that support universities with a high percentage of international students are likely to feel the most acute impacts. The top universities by percentage of international students are UofT (32.7%), UBC (26.1%), McGill (25.2%) and UofA (23.5%), with SFU, University of Waterloo, and Queen’s University (all at 20%) (source).

What will 2 years of slow or negative growth do to housing?

The answer to this question will likely look very different for the rental and ownership markets.

As mentioned earlier, recent immigrants and NPRs tend to rent.

One study, published in 2021 but based on 2018 data, found that recent immigrants were more likely to live in rented dwellings (56%) than the total population (27%).

Another Statistics Canada publication published in 2023 and based on 2021 data, found that 78.5% of NPRs lived in rental housing.

There is also reason to believe that these figures have increased since then, both because of a tighter housing market, as well as the introduction of the Prohibition on the Purchase of Residential Property by Non-Canadians Act , which came into force on January 1, 2023 . This Act prohibits non-Canadians, including NPRs from purchasing property in Census Metropolitan Areas. Barring a change in policy, this prohibition is expected to remain in place until 2027.

If the proposed immigration targets are met, we anticipate that there will be lower demand for rentals, and rent rates should come down as a result. In time, we expect knock on effects to condo and townhome markets as well, as the reduced revenue makes purchasing these as rental properties becomes less attractive.

Investors also need to anticipate the amount of new supply that may come online during the period of negative growth rates, as each new unit has the potential to further drive down rental rates and housing prices.

Calculating New Supply

Investors considering Canadian deals should pay close attention to upcoming supply in the rental market for the area you are considering (as well as the supply for housing types that serve renters).

You don’t need sophisticated tools or data packages to conduct a quick and dirty market review, and the CMHCs Housing Market Information Portal can be a great place to start.

For example, if you review the data for Toronto, you will see that there is a backlog of inventory under construction that is near its all time high, and if the government delivers on their immigration targets, that product might end up being delivered to tepid demand.

In our view, this holds true for many of the Canadian markets we follow. That said, we wouldn’t be afraid to consider projects that we feel will be well insulated from any demand shock that stems from reducing the number of NPRs. We will also look at those projects that that account for the strong potential for rental rates softening on their pro forma. After all, in our view, the seeds of a future rental supply crunch are being sown as we speak once NPR population stabilizes.

Conclusion

As Canada prepares for a new era of reduced immigration targets, the implications for the housing market are both uncertain and complex. While population declines may lead to softer rental rates and cooling housing prices, history shows us that real estate trends don’t always move in lockstep with demographics. The lag between population shifts and housing market reactions offers both challenges and opportunities for investors.

For those keeping a finger on the pulse of these changes, understanding the nuances of geography, politics and the interplay between the rental and housing markets will be critical.

In the end, we know that as investors, it’s our job to be prepared for everything and to find a way to take advantage of any market. We are on the lookout for distressed opportunities in this environment. We also continue to believe in well-managed, low loan to value mortgage funds that are defensively positioned, particularly those focused on lending against existing assets in major markets.

As you navigate the coming years, remember: every market holds opportunities—it’s just a matter of knowing where to look.

A Poor Man's Guide to Market Assessment

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 21 Sep 2024 00:13:34 GMT

"We may never know where we’re going, but we’d better have a good idea where we are."

- Howard Marks

“It’s a great time to be investing ca pital. We’ve been doing it for the last 6 months in real estate. I expect you’ll see a lot of it in the back half of the year as well”.

- Jon Gray, Blackstone President, July 25, 2024

“It’s too early to buy distressed CRE…If the economy starts to slow down more meaningfully, as the consensus expects, the problems for rental housing, multifamily, and warehouses will get a lot worse.”

- Torsten Sløk, Apollo Chief Economist, August 16, 2024

Jon Gray and Torsten Sløk, leaders in their respective multi-billion dollar funds have drawn their lines in the sand on real estate. While we don’t know which of these predictions will prove more correct, the fact that they are so opposed is a stark reminder that even the most skilled investors struggle to precisely predict the peaks and troughs of market cycles, both in terms of extent and timing.

Howard Marks, another distinguished investor, makes the case that investors shouldn’t overly concern themselves with guessing the future, and should keep their primary focus on current conditions:

Most people strive to adjust their portfolios based on what they think lies ahead. At the same time, however, most people would admit forward visibility just isn’t that great.

That’s why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear. (The Most Important Thing, Chapter 15)

In this edition of the Bird’s Eye View, we discuss the importance of focusing on the current state of the market, and share a practical exercise from Howard Marks called “The Poor Man’s Guide to Market Assessment”, that can help you with that. We will also share how we’ve adapted that assessment to allow us to better gauge and compare markets over time.

The Poor Man’s Guide to Market Assessment

In Chapter 15 of The Most Important Thing , Howard Marks introduces “The Poor Man’s Guide to Market Assessment” by saying:

I have listed a number of market characteristics. For each pair, check off the one you think is most descriptive of today. If you find that most of your check marks are in the left-hand column, as I do, hold on to your wallet.

Try it yourself: As you read through the assessment, consider how each characteristic applies to a market that you follow closely. What trends do you notice?

I suspect that for the most part, your answers landed primarily in the right column.

The Poor Man’s Guide to Market Assessment is much as the title implies, a quick and dirty exercise to gauge the position of a market. In the simplest terms, it aims to determine what the herd is currently doing.

We want to know what the herd is doing so we can do the opposite. Warren Buffet offers the famed advice that investors should, “be fearful when others are greedy, and be greedy when others are fearful”.

When you hear things like “which options should I buy with my Covid relief (CERB) money”? or when banks begin offering NINJA mortgages (No Income, No Job or Assets), it’s time to be fearful. It’s easy to spot market froth with hindsight, but it’s considerably harder to avoid poor decisions when you find out that your 15 year-old neighbour became an overnight millionaire with some obscure cryptocurrency.

On the other hand, it is equally difficult to muster the confidence to purchase assets when it seems like all you read is bad news about the current economy and future prospects.

The Modified Poor Man’s Guide

Since October 2022, our team has completed a modified version of the Poor Man’s Guide to Market Assessment each month.

We’ve adapted the assessment by adding a scoring system, with the characteristics on the left earning a positive value and those on the right, a negative one. The results allow us to quickly evaluate market trends and better quantify how strongly market sentiment is leaning.

Each month this assessment helps us break out of the herd mentality, and gives us directionality on which real estate markets we should focus on, based on where fear is the highest.

For example, in Vancouver, many of the market characteristics are in the right-hand column, but there are other characteristics, such as stubbornly high asset prices that balance out the overall score. Unless there is an exceptional deal on the table, this exercise points to markets where scores are more deeply negative.

Limitations of the Assessment

There are some inherent limitations to this assessment worth noting:

1. This exercise is much more precise, and therefore more valuable for decision making, when applied to narrow markets.

Example:

2. This exercise was never meant to have scores attached to it. That said, if you do decide to take a similar approach, we recommend giving consideration to assigning higher weights to the most important characteristics. For example, the Asset Prices characteristic might have a higher weighting than other characteristics. For us, the aim was to get this to a spot where the scores accurately reflect the conditions and sentiment we see, which required some manipulation.

3. If being used for comparison purposes, such as comparing sentiment scores between Nashville and Calgary multi-family markets, a fair amount of market specific knowledge is required to accurately answer the questions.

4. It’s a starting point for further analysis and research, not an ending point.

Conclusion

In the words of Howard Marks, “We may never know where we’re going, but we’d better have a good idea where we are.”

We aren’t Jon Gray or Torsten Sløk, and we don’t know whose prediction will be more correct in the future.

What we can comfortably say is that while Apollo may be right that there is more pain ahead, from our perspective, it’s also the case that most real estate markets in North America are experiencing at least some degree of pain in the present.

Investors that stay sensitive to those markets that are experiencing the most bearish market characteristics will be well positioned to take advantage of deals as they arise.

How Do Election Results Impact Residential Real Estate Prices?

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 24 Aug 2024 01:02:06 GMT

While we will continue to watch and seek to understand how investors may be affected by who ends up in government and any resulting policy shifts, there is something reassuring about knowing that in the past, real estate has performed well for investors regardless of who is in power.

It’s federal election season in the United States and the Canadian federal election is just a year away.

Elections, particularly federal elections, present the potential for substantial change in a nation’s trajectory. Personally, you might be analyzing how your life, your business, and your investments may be impacted depending on election results.

While we can’t answer that question in all areas, we have conducted research on how the party in power has historically affected real estate values in both the US and Canada.

In this edition of the Bird’s Eye View we analyze this historical data, share our thoughts on weaknesses in the data, and offer commentary on what investors might experience moving forward.

How Federal Government Affects Housing

There are 4 primary ways that federal governments get involved with the supply/demand equation for housing, thereby influencing costs and pricing:

Immigration Policy - Government can increase or decrease demand for housing based on changes to immigration policy (which can also have secondary effects on supply).
Policies that Affect Availability of Land for Development - This is more relevant for Canada than the US, where private land ownership rates are much higher (~60% of land in the US is privately owned, vs. ~11% in Canada).
Direct or Indirect Funding Programs for Housing - These can include subsidies, tax credits, transfer payments, etc.
Taxation - While federal governments don’t control property tax, changes to capital gains, federal sales taxes, or other related taxes can affect real estate project costs and pricing.

For the foreseeable future, all major parties in both the U.S. and Canada are focused on ‘housing affordability’. This isn’t necessarily a new phenomenon, but the focus is definitely more acute than it has been historically, and investors should be aware that governments, regardless of political leaning, are actively trying to reduce housing prices. Where parties differ is in their approach to how they want to see prices lowered, or the specific combination of the factors above, to achieve that goal.

While the means might be different, the data is fascinating in that it shows similar levels of historical price appreciation in the U.S., regardless of which party is in power. In contrast, there has been more divergence between parties in Canada.

Data Summary

United States

The All-Transactions House Price Index for the United States tracks residential housing prices that have been securitized by Freddie Mac and Fannie May, back to 1975.

(*If you’ve ever wondered, these nicknames come from the acronyms of each organization: Fannie Mae from the Federal National Mortgage Association (FNMA) and Freddie Mac from the Federal Home Loan Mortgage Corporation (FMCC)).

Here’s how housing prices changed over the last 50 years, based on who has controlled the White House:

Notable Observations:

On average, historical housing prices have appreciated at a similar rate, regardless of whether Democrats or Republicans are in power.
Unified governments, both Republican and Democrat, saw much higher rates of housing appreciation than divided governments

With regards to unified vs. divided government, it is tempting to hypothesize that unified governments cause higher rates of appreciation. However, this can’t be determined without further study, and in our opinion, this relationship is much more likely to be coincidence, as shown by the very different Canadian experience with Majority/Minority governments.

Canada

Canada doesn’t have a direct equivalent to the U.S All-Transaction Housing Price Index, however, it does have the New Housing Price Index , which beginning in 1981 measures changes only in the sale prices of new homes (and land) in 27 cities across Canada.

The following table shows average price changes since 1981, relative to who was in power and whether they formed a majority or minority government:

Notable Observations:

Conservative (including Progressive Conservative) governments have seen higher home price appreciation on average than Liberal governments.
Minority governments have seen much higher levels of price appreciation than Majority governments, the exact opposite of what the US has experienced with unified governments.

Shortcomings of the Data

Given the simplicity of the data reviewed and our approach to it, it’s necessary that we acknowledge some of the key issues with the use of this data.

First, the significant differences between the US and Canadian indexes makes comparing raw percentages between the two problematic.

Second, there are many other economic factors that affect housing prices at the national level, such as interest rates, GDP, consumer confidence, and consumer debt levels. Analyzing the single variable of who is in government without also analyzing those other variables means we can’t properly measure the impact of government on housing prices (and whether it is causal, correlational, or pure coincidence). As such, this data has limited value for explaining why prices have appreciated at any given rate.

Third, any fulsome study on this topic should look at the change in housing prices relative to the change in housing costs, which we didn’t do here. Looking at housing price changes alone is only half the picture.

Conclusion

In the US, there has been little difference between Democrat and Republican governments when it comes to home price appreciation, while Conservative governments have historically seen higher levels of price appreciation in Canada.

Unified governments in the US have seen much higher rates of price growth than divided governments, but in Canada, the opposite has been true. Minority governments have seen much higher price growth than Majority governments.

Perhaps there are structural explanations for the different experiences between countries, but much more likely is that other economic factors are more important in driving price changes.

Limited Partner Bargaining Power Leads to Better Deals

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Tue, 23 Jul 2024 01:13:08 GMT

Over the last 6 months, we’ve seen some creative trends from developers in response to the competitive capital environment.

In this edition of the Bird's Eye View, we look at deal structure changes that developers are making to attract LP investors, and how these features are making deals more attractive on a risk-adjusted basis.

If you were to focus on media headlines alone, the only logical conclusion is that the world of real estate is a post-apocalyptic barren wasteland from which it will never recover.

Yes, there is uncertainty about the economy, demand growth, and ability to pay higher prices. Land, building and borrowing costs are high. In the U.S., many markets are still dealing with oversupply.

We have no intention of minimizing the challenges associated with those points, though we do want to stick our heads out and highlight some of the positive developments we’ve seen in private real estate over the last 6 months, specifically as a result of increased LP bargaining power.

In this edition of the Bird's Eye View, we look at deal structure changes that developers are making to attract LP investors, and how these features are making deals more attractive on a risk-adjusted basis.

Focus on risk-adjusted returns

When we talk about better deals, we mean deals that are more attractive on a risk-adjusted basis. Functionally, this can happen either by reducing risks while maintaining or increasing returns, or increasing returns while maintaining or reducing risks (for more on risk premiums and how they have changed between 2021 and 2024, see our previous article, Where’s the Opportunity in Private Real Estate in 2024 ).

With that said, let’s take a look at 3 deal features we’ve seen in the last 6 months that have improved projected risk-adjusted returns for LP investors.

LPs Hold the Cards

For the first time in many years, there is heavy competition for capital both inside and outside of real estate, putting LPs in a strong bargaining position. The result is that developers are giving up margin and getting creative to try and attract LP investment. Here are some of the ways we’ve seen this increased bargaining power manifest in deals:

1. Improved Access

We've seen a growing number of developers that have traditionally raised capital solely from institutions open up to the possibility of working with individual investors and family offices, providing access that would have been unheard of three years ago.

Where a substantial portion of project risk comes from execution, being able to invest with AAA developers - those with access to low-cost debt and a proven track record of profitable projects over decades - mitigates some of this risk.

In addition to better access, we are also seeing earlier access to deals, providing a healthier environment to complete proper due diligence.

2. Participation in the Land Lift

It is common for developers to raise capital in two tranches, the first at the time of land-purchase and the second typically when the project is ready to begin construction. In many cases, the land has appreciated in value between the first and second tranches, particularly if it has been rezoned.

In most circumstances, the first-tranche investor, which is often the developer, will keep some or all of this increased land value to themselves. The rationale is that the first-tranche investor(s) took on higher risk by buying unzoned land, and should therefore be eligible for a greater reward.

This makes sense because particularly in Canada, there is a sizable risk associated with entitlement. Even though these processes are usually successful, they are often lengthy, acting as a drag on returns.

However, we’ve seen some situations this year where second-tranche investors, entering a deal that is ready for construction, have captured the full benefit of the increased land value, making returns to LPs much more attractive on a risk-adjusted basis.

3. Improving Fee and Profit Split Structures

Some developers have also shifted their compensation and waterfall structures, so that if a deal does underperform, investors take proportionally higher amounts of the profit.

In practice, this concept isn’t new. Preferred returns and hurdle rates have long been used to accomplish this purpose, though we are seeing more creativity and emphasis on structures that reduce downside risk for investors. In other words, if the pie ends up smaller than anticipated, investors are ending up with a larger portion of it than we’ve ever seen.

Conclusion

Over the last 6 months, we’ve seen some creative trends from developers in response to the competitive capital environment.

While we don’t believe it’s time to hit the “risk-on” button in general, we are excited about the pro-LP deal structures that we are seeing top developers adopt. In our view, these types of measures go a long way toward making private real estate deals more attractive on a risk-adjusted basis, even after accounting for current market conditions.

Do Falling Interest Rates Make Real Estate Prices Go Up?

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Fri, 21 Jun 2024 01:23:51 GMT

In this edition of the Bird’s Eye View, we cover how real estate prices have historically moved in falling rate environments and explore some of the perils both in forecasting rates and what prices will do as a result of changes in rates.

Source: Professional Forecasters’ Projections. Source: Figure 3 from Kirby, Barry, “Diminishing Returns: The Incredible Shrinking Bond Yield,” CapTrust, October 24, 2019 .

On June 5th, 2024, the Bank of Canada announced its first interest rate cut in more than 4 years, stating that “with continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive”.

Many experts believe there will be further reductions in 2024, and while we aren’t in the business of forecasting rates, we are in the business of determining how real estate prices might react to a variety of interest rate scenarios.

The Peril of Forecasting Interest Rates

It’s important to recognize at the outset that there is a huge amount of guesswork in forecasting interest rates. Even experts and Central Banks are prone to guessing incorrectly.

This point is summarized well by this chart comparing the 10-Year U.S. Treasury Rate, versus forecasts by the Survey of Professional Forecasters:

When it comes to interest rates, there are so many variables in play that the forecasts of experts are often incorrect. Even Tiff Macklem, the Bank of Canada governor, is now somewhat famous for his July 2020 claim that “if you’ve got a mortgage or if you’re considering making a major purchase, or you're a business and you're considering making an investment, you can be confident rates will be low for a long time”.

All this is to say that when you read the news and see a consensus of experts agreeing that we will see 2 more rate cuts in 2024, take it with a grain of salt. We also believe that’s a likely outcome based on current information, but forecasting interest rates has a way of making even the most informed individuals look like fools.

With that caveat in mind, let’s explore how real estate has performed in previous declining rate cycles to get a better sense of what the future may have in store.

Learning from previous periods of rate decrease

Between August 1981 and March of 2022, Canada saw 41 years of generally declining interest rates, and over that time new house prices in Canada tripled, with an average price increase of ~2.8% per year over that period (adjusted for inflation).

However, looking specifically at the periods of declining rates on the table below, we see some interesting trends:

Source Data: Statistics Canada. Table 10-10-0145-01 Financial market statistics, as at Wednesday, Bank of Canada

Source: Statistics Canada. Table 18-10-0205-01 New housing price index, monthly

Source: The Economist

Each of these periods saw wildly different economic circumstances, and interest rate is only one variable in what causes changes in home price, but for the purposes of this article, it suffices to point out there has historically been a trend of below average price growth in periods of falling rates, followed by a period of above average appreciation.

The average annual new home price growth during the combined 14.83 years of rate decline considered above was 0.38%.

Why? In general, the Central Bank lowers interest rates in response to economic weakness. The low or negative GDP growth, higher unemployment and slower wage growth during these periods tends to slow home price growth more than the added affordability that comes with lower borrowing costs.

However, in the 3 years that follow a period of rate reduction, real estate has historically performed well. The average annual new home price growth during the combined 15 years following periods of rate decline was 4.84%, as lower borrowing costs along with an improving economy supported high price growth.

It’s also worth noting that in addition to the differing economic circumstances from today, these periods saw much larger rate decreases than we are likely to see in 2024-2025, so it’s difficult to know how applicable these previous scenarios are for forecasting.

Conclusion

This has been a whole lot of writing to come to some rather simple conclusions.

First, preparing yourself to be successful in any rate environment is much more fruitful than trying to predict where rates are going.

Second, when you see social media gurus, journalists, or industry insiders asserting that rate cuts are going to cause real estate prices to suddenly increase ( Bank of Canada interest rate cut could be ‘tailwind’ for GTA real estate ), know that they might be right, but that historically, price growth has been slower during rate decreases.

Third, owning real estate during periods of rate decline hasn’t been particularly rewarding, but the years following have been exceptional.

We don’t know how much and how fast rates will fall, how resilient our economy will be, or who will form government in the next election.

But that uncertainty is causing plenty of fear in the market, and frankly, we don’t mind that. It’s not the time to be swinging at every opportunity, but for those keeping their ear to the ground, there are genuinely exciting investment opportunities in this market.

Breaking Down the CMHCs 2024 Housing Market Outlook

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 25 May 2024 01:27:23 GMT

In this edition of the Bird’s Eye View, we review and analyze the 2024 Housing Market Outlook report, prepared by CMHC, where they forecast major price and rent increases in Canada over the next three years.

The year is 2026, and when compared to 2023:

Home prices across Canada are 20.1% higher
New housing starts in Canada are 11% lower than they were between 2021-2023.
Rents in Vancouver are up by 28.6%.

That’s the future portrayed by the CMHC in their 2024 Housing Market Outlook, which was released on May 1, 2024. Their forecast paints a bullish picture for real estate investment in Canada, though sadly, it also implies that unless we see major changes in policy and economics, Canada will fail spectacularly at addressing the housing crisis.

While we think there is reason to believe that the CMHC may be overestimating price and rent growth, this report serves as an interesting data point for what could happen if Canada continues on its current trajectory of low supply and high population growth.

In this edition of the Bird’s Eye View, we examine some of the key findings of this report, and opine on how likely it is that their forecast is accurate based on what we know today.

Lower Housing Starts

"Expecting lower housing starts in 2024. There is a slight improvement forecasted over the next 2 years. Supply challenges, notably the lagged effects of higher interest rates, mean that new construction in 2025–2026 won’t reach 2021–2023 levels."

It's almost comical that just a few weeks after the Federal government formally set a target of 3.87M new homes by 2031 (a pace of 483,750 new homes per year), CMHC, the Federal Crown corporation responsible for housing, says that for at least the next 3 years, they expect housing starts to come in lower than the 240,000 starts recorded in 2023. Even CMHC doesn't expect the Federal Government's housing plans to work.

If CMHCs supply forecast through 2026 is correct (an average of 229,615 new starts per year), Canada would need to build 636,231 homes per year from 2027-2031 to hit the 3.87M new home target. In other words, we would need to hold a 5-year average of 2.35x more starts than the highest year ever recorded (271,198 in 2021), That’s possible right?

Genuinely, we love big goals, but even if we saw a massive wave of policy change to incentivize the level of private investment and building that’s needed to nearly double housing starts, we simply don’t have the labour to develop at that pace in the short term.

Our take: We wholeheartedly agree with CMHC’s forecast on supply. Lower interest rates will help, but we’ve got a pretty good pulse on the economics of the average development deal, and from what we are seeing, we don’t think it’s likely we will see an uptick in supply over the next few years.

Home Prices Up

“Demand for homes will push prices up throughout the projection horizon. By 2025, prices could reach the peak level recorded in early 2022 and surpass it in the following year… We anticipate a rebound in MLS® sales and prices from 2024 to 2026, fueled by declining mortgage rates alongside stronger growth in population and real disposable income.

[The] strong population growth recorded in 2023, the highest since the 1950s, will continue into 2024."

CMHC's underlying thesis for higher housing prices is strong population growth and falling interest rates amidst insufficient supply. However, we think there’s reason to believe that CMHC may be overestimating population growth.

The Federal government has already signaled its target of reducing the non-permanent resident count to 5% of the population by 2027 ( Minister Miller’s Speaking Notes, March 21, 2024 ), which implies a 0.74% population growth rate between 2024-2027, down from 3.2% in 2023.

It’s true that 2024 population growth will likely be higher than 2025-2027, as it takes time to slow down non-permanent resident intake programs. In spite of this, we think that the 2024 population growth rate will likely be much lower than it was in 2023 and that growth rates will continue declining through 2027 (subject to further policy change).

Our take: We do think that prices will increase, though because we believe population growth will be much lower than what CMHC is forecasting, we anticipate that price increases will be more modest than the 6.7% rate average forecasted by CMHC for the next 3 years.

Rents Up

“Rental demand will remain high in 2024, contributing to continued rent growth across all bedroom types. We expect that turnovers will continue to be low, as existing renters have limited alternatives in the rental market.

As mortgage rates decline, some households that transition from renting to homeownership may alleviate some rental demand. However, if immigration to British Columbia (which is absorbed by Vancouver) remains at levels seen in recent quarters, it will continue to put pressure on the rental market, as immigrants are more likely to be renters.”

In the report, rent increases are broken down by market and not aggregated at the national level, but in the Vancouver region, CMHC is forecasting that average 2-bedroom rents in the Greater Vancouver area will rise from $2,181 in 2023 to $2,800 by 2026, a 28.4% increase over 3 years.

Our take: We agree with much of CMHC’s logic. It is true that Vancouver sees disproportionate levels of immigration inflow and that demand will remain strong, but we don’t see population growth continuing at the levels seen in 2023, and as such, we are using lower rental growth numbers in our underwriting.

Conclusion

Though not expressly stated, this report implies that without policy and economic changes, CMHC believes our country will catastrophically fail at addressing the housing crisis over the next 3 years. Housing will become much more unaffordable for both owners and renters.

In our opinion, population growth rates will be lower than CMHC’s forecast, but in combination with low levels of new supply and interest rate reductions, we still expect to see increases in prices and rents, just at a slower pace than the report suggests.

If CMHC's forecast comes even close to being accurate though, there is a lot of potential upside on today’s projects.

Budget Beat: Insights for Real Estate Investors

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 27 Apr 2024 01:30:29 GMT

In this edition of the Bird’s Eye View, we provide summaries and commentary on federal budget initiatives through the lens of private real estate investment. We focus on items that have seen less commentary from media, such as the potential freeze of development cost charge increases in communities over 300,000 population, and the Public Lands for Homes Plan, parts of the recently released Solving the Housing Crisis: Canada’s Housing Plan.

With the Canadian Federal Budget dropping on April 16th, there has been no shortage of commentary from news outlets and social media. The budget has not been well received (even by the younger demographic it purports to help, link to Leger poll ), with much of the frustration directed at the increase to the Capital Gains Inclusion Rate and continued high spending and projected deficit ($39.8B).

In this edition of the Bird’s Eye View, we provide brief summaries and commentary on budget initiatives through the lens of private real estate investment. We focus on items that have seen less commentary from media, such as the potential freeze of development cost charge increases in communities with over 300,000 population, and the Public Lands for Homes Plan , parts of the recently released Solving the Housing Crisis: Canada’s Housing Plan.

The Federal Budget

Before diving into the substance itself, we want to clarify a question we have seen going around, ‘ Is the budget final’?

A: No, but yes.

When the budget is presented in the House of Commons, it functions as a notice of taxation and policy changes that the government will make, even though those changes haven’t yet been introduced or adopted by legislation.

Convention dictates that taxation proposals become effective when the budget is released, or on the dates stipulated in the budget, and the accompanying legislative amendments can be introduced at a later date ( House of Commons Procedure and Practice ).

After the initial motion (April 16, 2024), the budget process allows for a maximum of four additional sitting days of debate and any amendments before adoption. This means that potential amendments could still be made through early May, but historically, any amendments have only been minor in nature.

In short, while the nitty-gritty details haven’t been set down in legislation and there is still theoretical room for amendment, investors should treat the April 16th budget proposals as final and prepare accordingly.

Budget Proposals

Link to 2024 Budget

With that out of the way, here is our take on a number of budget proposals that we think have a direct impact on private real estate investment:

1. Increase to Capital Gains Inclusion Rate

Summary: The capital gains inclusion rate has been raised from 50% to 66.7% for corporations, trusts and for individuals with capital gains over $250,000. Effective June 25, 2024.

Hawkeye Commentary: More taxes…that’s the best way to inspire supply right? In truth though, we were expecting worse. To whatever extent this change may cool the Canadian investing climate, we anticipate that the impacts will be smaller for private equity real estate than stocks and direct real estate ownership.

Why? The income from development deals (and some private credit funds) is generally reported as active business income, not capital gains. Capital hates taxes, so this may make private equity real estate deals more attractive compared to alternatives.

However, while PERE may have dodged the bullet relative to certain other types of investment, there will still be secondary effects from this change. For example, a higher capital gains inclusion rate may affect the price that a purchaser is willing to pay for the rental assets of a Limited Partnership, which could affect deal returns, even if not directly.

Solving the Housing Crisis: Canada’s Housing Plan

Most of the proposals in the budget relevant to real estate fall under the scope of the recently released, “ Solving the Housing Crisis: Canada’s Housing Plan ”. The overarching goal of this plan is to see 3.87M new homes constructed by 2031, including a minimum of 2M homes over and above the 1.87M homes we are already on pace for by 2031.

In our view, there is no chance that this plan leads Canada to more than double the pace of housing development (this was echoed by Raymond Wong, Altus Group’s Vice President of Data Solutions in a webinar we hosted on April 25th) but that doesn’t mean that the proposals themselves are bad, only that there are critical components still missing.

Let’s take a rapid fire look at several initiatives in this plan that the government is counting on to increase housing supply:

2. Accelerated Capital Cost Allowance

Summary: The Capital Cost Allowance (CCA) for purpose-built rental buildings has been increased from 4% to 10%. The CCA system determines the deductions that a business may claim each year for income tax purposes. This allows depreciation deductions for purpose-built rentals to be spread across 10 years instead of 25, reducing income tax payable in those years. Applies to buildings that begin construction after April 16, 2024.

Hawkeye Commentary: This is a positive development for supply, making development and ownership of rental assets more attractive. We are still trying to get a sense of how much this will affect project returns, but we suspect that this will at least partially offset the downside stemming from the increase to the Capital Gains Inclusion Rate.

3. Encouraging Municipalities to Freeze Development Cost Charges

Summary : The Federal Government will make a total of $5 Billion in funding available to provinces that commit to a list of items that will increase housing supply, three notable items include:

“Implementing a 3-year freeze on increasing development charges from April 2, 2024 for municipalities with a population greater than 300,000.”
Legalizing ‘missing-middle’ housing, to facilitate the development of up to 4 units on single family lots as-of-right (much as has already been done in BC).
“Providing pre-approval for construction of designs included in the government’s upcoming Housing Design Catalogue”

Hawkeye Commentary: This initiative has received very little attention, but it may be one of the most important for stimulating supply if this funding is sufficient to induce Province’s and Municipalities to come to agreements to freeze DCC’s. Take Vancouver for example, which is expecting to increase its Development Cost Levies on residential construction by over 20% beginning on September 30, 2024.

It appears that if BC wants a piece of that $5 Billion, those increases would need to be put on hold for 3 years. We are not privy to the inner-workings of municipal/provincial negotiations, but we suspect that there are discussions in the works that would see municipalities over 300,000 population receiving compensation in exchange for freezing Development Cost Charges.

4. 30-Year Mortgages for First-Time Buyers of New Homes

Summary: The government will now allow insured 30-year mortgages (up from 25 years) for first-time home buyers purchasing newly built homes, effective August 1st, 2024.

Hawkeye Commentary: We aren’t convinced that this initiative is going to do much to make housing more attainable (and thereby increase demand) in urban centres, though it may have more impact in rural areas.

Only new homes under $1M are insurable and would qualify for this program. In Metro Vancouver or Toronto, the price alone precludes everything but condos, with few exceptions. Seeing as most first home buyers aren’t likely to wait up to 2 years to get into their first home through a condo pre-sale, it feels like the market for this program might be limited. However, in areas where more housing types are available under $1M for new builds, this will likely see more use.

5. Home Buyer’s Plan

Summary: Increases the Home Buyers’ Plan withdrawal limit from $35,000 to $60,000. The HBP allows individuals to make tax-free withdrawals from their RRSP to purchase or build their first home.

Hawkeye Commentary: This is an admittedly minor change, but it makes good sense given the size of down payments required today. When combined with the increase to 30-year mortgage amortizations for first-time buyers of new product, this change will make ownership of a home more attainable for some.

6. Public Lands for Homes

Summary: The Federal Government will conduct a review and make available surplus, underused, and vacant land for housing, with an intention to lease instead of sell. The initial plan is to focus on Canada Post, National Defence, and underused federal office properties.

Hawkeye Commentary: The Federal Government is right that land availability is one of the critical missing components to providing affordable housing, and we were thrilled to see steps being taken to unlock public lands, but so far, we aren’t enthused with the program’s chosen direction.

First, the focus appears to be on previously developed, titled properties, as opposed to large tracts of undeveloped Crown land. The scope of the program proposed is so much more limited than it needs to be, but it’s a first step. Our best guess is that this first step is limited because it largely sidesteps First Nations title claims, which accompany most undeveloped Crown land.

Second, the model is focused on leasing land. From the information released, it isn’t perfectly clear how development will occur, but the rhetoric is leaning towards relying on non-profit and public housing to build out projects. If the goal is more, lower-cost housing, we aren’t convinced that governments becoming primary housing providers is the best value solution.

This will probably increase supply, though we aren’t convinced that we will see the 250,000 additional housing units projected.

7. Launching the Canada Build’s Program

Summary: Canada hit copy-paste on the BC Build’s program, bringing it national and encouraging other Provinces to adopt similar programs. It encourages more direct government provision of housing by providing funding and low-cost loans.

Hawkeye Commentary: We feel that if the cost of this program was instead used to further reduce municipal infrastructure development costs that are passed along to developers, it would result in much more housing than the government trying to develop directly. Instead, it appears that private developers will be forced to watch as governments skip to the front of development queues to deliver their own projects.

Conclusion

This budget isn’t ideal for facilitating real estate investment, though there are bright spots that had us both surprised and excited.

The Capital Gains Inclusion Rate increase hurts, and the budget as a whole does little to address some of the underlying issues preventing steady supply. In particular, ‘who is going to build the homes’? There is a small $10M investment in high school trades training and another $50M for foreign credential recognition to identify skilled trades workers for immigration programs, but these do little to address current construction limitations.

We also have a healthy level of skepticism around the government’s plans to directly provide housing, even if we are glad to see the first step being taken towards better utilizing Crown Lands.

The increase to the capital cost allowance for purpose-built rentals is a helpful addition, and if the Federal Government’s $5B fund is leveraged successfully to induce municipalities to freeze DCC rates, that would be hugely welcome news and a definite factor in increasing supply.

From a private real estate investment perspective, things could have been much better, though they also could have been much worse. There is enough here to believe that there will continue to be interesting investment opportunities on the horizon in Canada.

The Real Estate Cycle - A Tale of Two Countries

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Fri, 29 Mar 2024 01:39:31 GMT

In this edition of the Bird’s Eye View, we explore the stages of the real estate cycle, focusing on the multifamily asset class, and compare the very different positioning between the United States and Canada within this cycle. Let’s explore this tale of two countries!

There are patterns associated with each phase of the real estate cycle, and while this article will provide a cursory overview, a more detailed review is covered in Dr. Mueller’s most recent real estate market cycle monitor report :

Phase 1 – Recovery

The market is in a state of oversupply, either from previous new construction or negative demand growth. Point 1 is generally where new supply from the previous cycle stops coming online and new building stops or is massively curtailed. This phase continues as demand slowly absorbs oversupply.

Phase 2 – Expansion

As supply begins to tighten, rents begin to rise and reach a level that makes development and investment cost-feasible (Point 8). Capital flows into real estate to take advantage of favourable rents and price appreciation. Demand continues to outstrip supply, gradually pushing rents and occupancy higher until equilibrium is reached.

Phase 3 – Hypersupply
Categorized by supply growth rising above demand growth. Very often, market participants don’t immediately recognize it as rent growth and occupancy rates remain above long-term averages. As participants confirm the trend, new capital inflow and construction halts or drastically slows.

Phase 4 – Recession
Due to the long lead time in real estate, markets have limited ability to react to new information and projects continue to come online for a period, widening the oversupply gap. Rents and occupancy fall as landlords compete for occupancy. The cycle reaches a trough when completions cease, or demand begins to grow at a rate higher than the new supply being added to the market.

With a description of the cycle itself out of the way, you probably have some inklings of where both the US and Canada are currently at within this cycle.

A Tale of Two Countries

Canada

In 2023, Canada saw the highest population growth rate since 1957 (3.2%), record low vacancy rates (1.5%) and record high rental growth rates (8.0%) in multifamily rental properties ( CMHC Rental Market Report, January 2024 ), with these rates being even more extreme in Toronto and Vancouver. These factors point to Canada being in the “Expansion” phase of the market cycle, where the typical outcome is an influx of capital and development until an equilibrium is reached.

To understand why this hasn’t happened, investors need to consider both the supply and demand sides of the equation.

Demand

Demand in Canada is almost entirely driven by permanent and temporary immigration, which accounts for 97.6% of population growth in Canada ( Statistics Canada, March 27 2024 ). That report states, “Most of Canada's 3.2% population growth rate stemmed from temporary immigration in 2023. Without temporary immigration, that is, relying solely on permanent immigration and natural increase (births minus deaths), Canada's population growth would have been almost three times less (+1.2%).”

While the Federal Government has given clear indication that it intends to continue with its planned levels of permanent immigration (485,000 people in 2024 and 500,000 in 2025 and 2026, 2024-2026 Immigration Levels Plan ), the same cannot be said for temporary immigration. Immigration Minister Marc Miller recently signaled the Ministry’s intention to reduce the proportion of non-permanent residents to 5% of the population by 2027 , which will mean a reduction of ~525,000 people from the current pool of 2.66M non-permanent residents in Canada.

Using this information and data from Statistics Canada ( Table 17-10-0040-01 ), we can create a simplistic model to forecast population growth through 2027:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, … it was the spring of hope, it was the winter of despair …”

- Charles Dickens, A Tale of Two Cities , 1859

Cliché? Yes. Does it aptly describe the current real estate environment? Yes.

For multifamily investors in many US submarkets, where residential vacancy rates are over 10%, things may be feeling ‘wintery’. But for investors in Canadian markets who are looking down the barrel of an unprecedented wave of demand and constrained supply, it should feel like spring. Why doesn’t it?

The Real Estate Cycle

Dr. Glenn Mueller, a professor at the University of Denver, developed a simple model for the real estate cycle that provides a useful starting point for analysis. His real estate cycle model is separated into 4 phases and 16 points, as follows:

Source: Statistics Canada. Table 17-10-0009-01 Population estimates, quarterly

This simple model serves to show that if stated immigration policy holds, Canada will likely be entering a 4-year period of below average population growth.

Additionally, since non-permanent residents have been prohibited from purchasing property since January 1, 2023 (with exceptions, source ), that population being reduced should have an oversized impact on cooling demand in the rental market in particular.

Supply

Despite governments at every level and the development community agreeing that we are in a housing crisis, the number of housing starts went down in 2023 compared to 2022, from 240,590 to 223,513 ( CMHC ).

There are 4 primary constraints that have prevented developers from being able to quickly respond to the demand shock that sent rent and occupancy rates rocketing:

High land, interest, and building costs.
Scarcity of economically viable land for development (ALR and Crown land is locked up).
Comparatively slow entitlement and permitting processes. There are welcome attempts in many jurisdictions to improve this, though we have a long way to go.
Even if projects get approved and funded, Canada doesn’t have sufficient construction and trades workforce to aggressively increase supply.

What this means for Canada

Looking purely at Canada’s rent and occupancy rate growth, one might expect investment dollars to be pouring into real estate and new buildings to be popping up like dandelions in the Spring, but a deeper dive reveals that investment conditions aren’t as attractive as they look on the outside.

Since costs are so high, the investment case for multifamily in Canada is highly dependent on increasing rents and asset prices. Canada already has comparatively expensive housing, and with a period of below-average population growth on the horizon, we believe that the current ‘expansion’ indicators are unlikely to lead to continued high rent growth and low vacancy.

There are attractive development projects in Canada, though it's not the majority of deals and in our view, savvy investors ought to be paying particularly close attention to whether projects are forecasting continued high rent growth or price appreciation to justify their returns. Even in a tight market, the high costs of development and potentially slowing demand have us skeptical that we will see the uptick in development and investment that Canada sorely needs.

Source: The Economist

The United States

Unlike Canada, most submarkets in the US are somewhere in the Hypersupply and Recession phases. According to CoStar data, the US saw 583,000 multi-family units completed in 2023 (a 40-year high), with another 460,000 units anticipated for completion in 2024 ( source ). The full year absorption of units in 2023 was 315,000, meaning that the US saw an oversupply of 268,000 units nationally.

While the below chart from Dr. Mueller shouldn’t be used in isolation to determine the positioning of any individual submarkets, it does give a strong sense of where most U.S. urban centres are at in the real estate cycle:

Consistent with these findings, in most markets that we follow, there are very few new projects being started and there continues to be a glut of supply that is coming online.

In some markets, rent growth is still positive but declining, and in others, occupancy has dropped like a rock and rent growth is clearly negative. (For analysis on the Dallas-Fort Worth and Phoenix markets specifically, check out our recent webinar with CoStar .)

It’s not all doom and gloom though. Compared to Canada, it’s nice to see the cycle playing out in a more natural fashion, such that once demand absorbs excess supply, we fully anticipate seeing exciting investment opportunities. In the interim, two strategies worth looking at are investment in those markets near equilibrium, where the data clearly shows strong demand and limited supply moving forward. Alternatively, should assets come up at fire sale prices in Recession markets, there could be interesting opportunities as the next cycle begins.

Conclusion

While Canada and the US are at very different places in the real estate cycle, there are barriers in both countries that limit investment attractiveness.

Canada desperately needs housing and is theoretically in a strong position for investment, though it is challenged by the question of how high prices can go before it materially affects demand. In our view, investors should be looking to invest with developers whose systems and processes give them an edge in driving profit, such that even if rent growth is modest, investors can achieve solid returns.

Most markets in the United States likely need 1-2 years before the next cycle begins in earnest, though we are seeing interesting opportunities in some markets that look to be nearer the equilibrium point, and we are keeping our eye out for distress pricing in recession markets.

BC Multiplex Strategy - A Look Under the Hood

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Wed, 21 Feb 2024 22:09:43 GMT

In this edition of the Birds Eye View, we aim to improve on the traditional experience of looking under the hood by giving you a guided tour of the multiplex development strategy in BC, which has gained momentum following BCs recent housing legislation changes.

Popping the hood is a right of passage for any vehicle purchaser, though truthfully, most of us have almost no idea what we are supposed to be looking for.

If we don’t see rats nests, the belts aren’t worn and the engine looks clean, it probably passes our inspection. However, we may continue to look for a while, hoping that if something is wrong, it will jump out at us.

Unless you have some mechanical aptitude, I suspect that you’ve had this experience.

In this edition of the Birds Eye View, we aim to improve on the traditional experience of looking under the hood by giving you a guided tour of the multiplex development strategy in BC, which has gained momentum following BCs recent housing legislation changes.

We will conclude by trying to answer the only question that really matters, is this an attractive strategy for investors?

The Model

The model here is simple. Buy land. Design, get permits for, and build between 3-6 units per property. Sell the units on the open market. Do this at scale, rinse and repeat. The goal is to take advantage of the relative simplicity of these projects to keep timelines short and maximize returns.

Why now?

The strategy of building multiple units on a single family lot isn’t new, though it has previously been at least partially constrained by zoning requirements. With the passing of Bill 44, multiplex housing is permitted on all single-family lots in municipalities with a population greater than 5,000, with the amount of units permitted varying between 3-6 depending on lot size.

Functionally, all single family lots in these municipalities got an upzone, but contrary to what usually happens with upzoning, land values didn’t immediately increase because the upzoning happened everywhere. This is one of the key reasons for why this strategy may be advantageous to investors; when you can achieve higher density without having to pay an additional premium for the land, there is an avenue for opportunity.

Compare this with the Transit Oriented Development Areas introduced by Bill 47, which allows for higher density in a bullseye around transit stations, as follows:

What we like

There’s lots to like about investing in multiplex housing, so let’s start with the strong points:

You can buy the land needed quickly and (relatively) inexpensively.

When compared to the land assembly process, which is usually necessary to support multi-family projects in developed areas, it is easier and less expensive to buy a handful of single family lots in good locations.

Shorter permitting and construction times

Comparatively, these are simpler projects, which leads to shorter development and building permit processes, as well as construction timelines.

Shorter project timelines provide for (slightly) more visibility into the future

We aren’t advocates of using the crystal ball around here, though when project timelines are less than 2 years, and sales begin even earlier, it makes it easier to establish reasonable assumptions for both costs and revenue based on the current environment.

Lower building costs

Not needing to provide underground parking and less common space reduces overall building costs.

Strong projected IRRs

Shorter timelines make for attractive IRRs. The challenge is that returns are highly sensitive to any delays or slow market conditions for unit sales.

What could go wrong

There are diverse ways that things can go wrong with any real estate project, and even though this strategy is comparatively simple, investors should be aware of potential pain points that are unique to this strategy:

Parking and green space

One of the pros of this strategy, effective utilization of the whole property for building space, does have obvious drawbacks with limited or no parking and minimal outdoor space. Even if the purchase prices are lower than options with these amenities, proximity to transit and parks becomes more important.

Unfortunately, we suspect that most multiplexes will be built outside of Transit Oriented Development Areas (otherwise, why wouldn’t they be developed to even higher density), so it can put these projects in a bit of an awkward spot for transportation.

First-mover advantage

To date, multiplexes have been hoovered up by purchasers, but it remains to be seen how deep the buyer pool is for this style of property compared to more traditional styles such as condos, townhomes, and duplexes. The level of demand is one reason we suspect this is a strategy where it will be better to be early than late. Another is that each additional multiplex on a street may exacerbate parking issues, which may make the 10th multiplex on a street a less attractive product than the 1st multiplex on a street.

Infrastructure Upgrades

One major challenge with this type of development is that infrastructure in single family neighbourhoods is often insufficient to support anything more than single family houses. Sewer pipes could be undersized and electrical upgrades may be required, etc. In our experience and from conversations with developers, negotiating who pays for what upgrades and setting up latecomer agreements can present both a time and financial hurdle with this type of development.

Finding the Right Development Partner

Finding the right development partner is always critical, and the size and scale of these projects generally lends itself to small to mid-size developers, where the track record may not be as extensive, or there is less capacity to implement this strategy at scale.

Conclusion

At Hawkeye, we pride ourselves on being strategy agnostic. We are regularly out looking for the strategies and jurisdictions that present the most attractive real estate investment opportunities. What this means is that we get to look under a lot of hoods.

For the most part, we like a lot of what we see with the BC multiplex strategy and there is likely opportunity here for investors. While we haven’t found the right project to take a swing at this strategy just yet, we are keeping our eyes and ears open.

Where’s the Opportunity in Private Real Estate in 2024?

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Fri, 19 Jan 2024 21:59:05 GMT

In this edition of the Bird’s Eye View, we highlight 3 strategies within private real estate that we think will offer opportunities for superior risk-adjusted returns in 2024, and share our thoughts on why.

If we were asked to review the 2023 private real estate market in the simplest possible terms, it would probably look something like this:

Private credit opportunities were excellent, thanks to higher interest rates.

Private equity deals were less excellent, thanks to higher interest rates.

As we look forward to 2024, the overarching questions in the market are when, and by how much, will interest rates fall, and for what reason. Will we see rate decreases before Q3 2024? Will we see a reduction of 50 basis points or 150 basis points? Will the driver for rate decreases be reining in inflation, or will it be recession?

While we don’t purport to know the answers to these questions, we think it is wise to embrace the ‘higher for longer’ mantra and prepare an investment strategy accordingly.

In this edition of the Bird’s Eye View, we highlight 3 strategies within private real estate that we think will offer opportunities for superior risk-adjusted returns in 2024, and share our thoughts on why.

The Private Equity Risk Premium

Before we dive in, allow us a brief primer on risk premium.

Risk premium is the rate of return in excess of the “risk-free rate”, which you can expect to receive on risk bearing assets (for a strange example of negative risk premium, see our article “ Making Sense of Negative Cap Rate Spreads ”).

Understanding both the risks, and the risk premium helps investors answer the question, “am I being sufficiently compensated for the level of risk with this investment”?

The attractiveness of any given strategy changes as the underlying bundle of risks changes, and/or as the risk premium paid for that strategy changes.

A Typical Real Estate Private Equity Development Deal

Let’s consider a typical real estate private equity development deal to understand how the risk premium and underlying risks have changed between 2021 and 2024:

Off the top, note how the higher risk-free rate in 2024 cuts into the risk premium, meaning that even if deals are projecting similar returns, they are less attractive on a risk adjusted basis.

Second, and more interestingly, on the deals we have seen, projected deal returns between 2021 and 2024 haven’t changed much. Here’s why that’s problematic in many situations.

Most development deals rely on debt to some extent, and with higher interest rates, the costs of carrying that debt has increased, which pushes down returns.

To make up for this, we’ve found that a growing number of developers have used more aggressive assumptions in their underwriting to project similar levels of returns, such as projecting high rent growth, lower levels of vacancy, faster lease-up, future interest rate decreases, etc.

Reality may unfold in line with these more aggressive assumptions, though there is a lower probability of this happening.

In short, in the current environment the risk premium on development deals is lower, and in our view, the risk of not meeting projected returns is higher.

There are still excellent developers doing exciting deals, though to be attractive in this market, these deals have to be substantially de-risked, use conservative assumptions in underwriting, and present above average return potential.

With that framework set, let’s look at the areas where we think opportunities for superior risk-adjusted returns are most likely in 2024.

Areas of Opportunity

Mortgage Funds

We think that mortgage funds will continue to offer excellent risk-adjusted returns in 2024. When you can get equity-sized returns with debt-level stability and defensive positioning, investing in debt is something worth considering.

If you look at the TSX Composite Index, over the 50 year period from November 30, 1971 to November 20, 2021 the average annualized return was 7.94%. Debt products are delivering returns in this realm, if not higher. One of our fund partners delivered over 10% returns (net of fees) last year and is projecting similar returns this year.

Compared to the 2 year bond rate at ~4%, we think that the returns from our partner funds are highly attractive relative to the associated level of risk.

Select US Multi-family

Out of all of the asset classes we’ve invested in over the past 5+ years, US multi-family properties have been one of the hardest hit. There are many contributing factors, including rising interest rates, higher renovation costs, and substantially higher operational costs, particularly insurance and property taxes.

New residential developments that started two or three years ago during the strong market are now coming online, leading to increased vacancy and decreasing rental rates. Lenders are also more hesitant to lend in this environment, offering lower loan to values and more restrictive loan terms. The result? Many multi-family properties in traditional growth markets are down over 30% from peak pricing.

Identifying the bottom of the market is a difficult task, though we believe that in a world where high-quality assets are selling below replacement cost, there are likely to be some unique opportunities with an attractive risk-adjusted return.

One potential strategy may be to purchase these multi-family properties using very little debt, waiting for the market to improve, and then refinancing the property to return investor equity and increase returns. This would give investors the staying power to ride out any market turbulence over the next few years.

Special Situation Residential Development Deals

We are beginning to see another compelling category of deals; Canadian residential developments that started two or three years ago that need more cash to complete, usually due to higher than anticipated construction and interest costs. Many of them still look to be quite profitable as projected revenues have increased as well.

These types of deals have multiple benefits. Many of them have little to no entitlement risk as they are fully rezoned and have already received (or are about to receive) development and building permits. In a number of markets that we work in, particularly in BC and Ontario which are notorious for slow moving development processes, being able to remove development risk is a big advantage.

The second benefit is having much more clarity on costs and projected revenues, as we have the added benefit of additional information that the developer did not have at the time of purchase.

The last potential benefit is higher annualized returns due to having a shorter time-horizon than the original investors.

It all adds up to lower risk and potentially higher returns and we hope to see more of these “special situation” deals in 2024.

Conclusion

We are optimistic for a better environment for deals in 2024, particularly in the latter half of the year if interest rates start to come down. The quality of the deals that we are seeing has definitely increased over the last few months, maybe not to the point where we are proceeding, but some have been attractive enough to get a second or third look. This wasn’t the case for most of the deals we were seeing for most of 2023.

As always, we are here to bring you the best deals possible, and are prepared to hold off on doing equity deals entirely until we see an opportunity that meets our underwriting standards.

In the meantime we continue to believe that in this high-rate environment, investing in debt is a great option.

What Legislation is Government Changing to Address the Housing Crisis?

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 16 Dec 2023 21:37:24 GMT

In this edition of the Bird’s Eye View, we provide a summary of 7 different amendments to housing law (one federal change, and six provincial changes), and share our thoughts on how we think these changes will impact investors.

T’was the month before Christmas, when all through the House (of Commons), legislators were passing bills to try and address Canada’s housing crisis.

There has been a furious pace to housing law and policy amendments over the last three months, particularly in BC. If you’ve missed some, don’t feel bad, even industry professionals have had troubles keeping track of the changes.

In this edition of the Bird’s Eye View, we provide a summary of 7 different amendments to housing law (one federal change, and six provincial changes), and share our thoughts on how we think these changes will impact investors.

The Big Federal Change

1. Dropping GST on Purpose-Built Rental

Link to Bill C-56

Summa r y : Increases the GST rental rebate on new residential rental developments from 36% to 100% (functionally, no GST). The rebate will apply to any building with at least 90% of its units designated for long-term rental and projects must have at least four private units to qualify, or 10 individual units for student or senior living residences. To qualify, projects must start after September 13, 2023, begin before 2031 and complete before 2036.

*Note: Some Provinces, like Ontario, are following suit by waiving their Provincial Sales Taxes (or HST) on the same. In BC, PST is already waived on purpose-built rental.

Hawkeye Commentary : Pay less taxes…need we say more? This is an unequivocal positive for real estate development, but it also isn’t the panacea that some have made it out to be. In our view, this change will likely spur some additional supply, but it probably doesn’t provide enough juice to make previously unattractive deals make sense in this higher interest rate environment. When you find a deal that can stand on its own though, this is a welcome addition.

Status : Completed three readings in the House of Commons and completed third reading at the Senate on December 14, 2023. Bill is awaiting royal assent, which should happen imminently.

BC Provincial Changes

2. Short-Term Rental Accommodation Restrictions

Link to Bill 35

Summary : Restricts short-term rentals (AirBnB, VRBO, etc) to principal residences, which includes secondary suites, carriage homes, etc. on the property of a principal residence. Short-term rentals are defined as 90 days or less. The legislation applies in municipalities with populations over 10,000, excluding the 14 resort municipalities (Whistler, Tofino, Revelstoke, etc.).

Hawkeye Commentary : Let’s first get this out of the way. This is a massive over-reach into private property rights.

Some of BC’s ~28,500 short-term rental properties are in principal residences and will continue to operate. Others will be pushed into the long-term rental housing market as intended (and potentially slow rental growth rates), though we suspect that many of these units will also be listed for sale, as some owners don’t want the hassle of being long-term rental landlords in BC. It’s too early to call the proportional effects of this one, though given hotel undersupply, tourism may take a hit in some markets.

Status : Bill passed, is law as of October 26, 2023.

3. Small Scale Multi-Family Housing and Fewer Public Hearings

Link to Bill 44

Summary : There are two major changes in this Bill. First, multi-unit housing (3-6 units depending on lot size) is permitted on all single-family lots in municipalities with more than 5,000 population. Second, where a residential development is consistent with the City’s Official Community Plan, no public hearings will be required for rezonings.

Hawkeye Commentary : Fewer public hearings is a loss for NIMBY’s and a win for everyone else. This legislation will reduce entitlement timelines and investor risk through that process. The primary knock here comes from some of the municipalities that feel the small scale multi-family changes are a blunt approach that undermines their planning and systems, forcing them to allocate resources to these small lot files and detracting from more impactful initiatives.

Status : Bill passed, is law as of November 30, 2023.

4. Transit-Oriented Development Areas

Link to Bill 47

Summary : Sets density thresholds near transit hubs (ie: Skytrain stations and bus exchanges) and removes parking requirements. These density thresholds act as a floor, such that municipalities can have higher density, but they cannot reduce it lower than the amount set out by province.

Hawkeye Commentary : This Bill is likely a net win for housing availability, affordability and investment. However, the Province’s claim that this bill could generate an additional 100,000 housing units over 10 years in Transit Oriented Areas seems wildly overblown. BC has been developing ~40-48k housing units per year for the last 5 years ( see BC Stats ), so in context, adding an average of 10,000 units per year is a jump of 20-25%.

Being allowed to develop higher density is a significant part of the equation, but it doesn’t trump economics. These Transit Oriented Areas are mostly already developed. Re-development is often expensive, capital is finite, and land prices will adjust upwards to reflect the new permitted density. Just because developers will soon have permission to build at higher density doesn’t necessarily mean that it will make economic sense to do so.

Status : Bill passed, is law as of November 30, 2023. Municipalities must designate Transit Oriented Development areas that meet provincial standards and remove parking requirements by June 30, 2024.

5. Development Infrastructure Financing

Link to Bill 46

Summary : Development Cost Charges (DCCs) and Development Cost Levies will be abolished and replaced with Amenity Cost Charges. The aim is to make infrastructure development charges more transparent and predictable from the outset of a project. In addition, this will allow municipalities to offset the costs of new categories of infrastructure such as fire halls, police facilities, daycares and solid waste facilities, in addition to the previously existing categories of water, sewer, roads, parks, and drainage.

Hawkeye Commentary : When the system is fully rolled out, this change should add cost certainty for developers and speed up the development process, both are winning features. On the negative side, this bill will likely result in municipalities charging higher development fees, as they now have additional categories of infrastructure to raise funds for, where previously, they were dependent on using taxation for that infrastructure. We will be watching for this in our underwriting.

Status : Bill passed, is law as of November 30, 2023.

6. New Building Code

Link to BC Building Code webpage

Summary : Changes to increase building safety in earthquakes (seismic requirements) and increase accessibility.

Hawkeye Commentary : The accessibility changes are needed and given the real risk of earthquake in BC, the earthquake measures may provide great value over time, though both of these will add to initial building costs and reduce affordability (similar to the BC Energy Step Code Program, which we wrote about previously ).

Status : 2024 Building Code passed, though it doesn’t come into force until March 8, 2024, and the earthquake requirements don’t come into force until March 10, 2025.

7. Single-stair Egress

Announcement on Exploring Single-stair egress

Summary : BC will explore options for allowing single-stair egress in the Building Code (think one staircase in multi-family structures instead of the currently required two).

Hawkeye Commentary : Many of the experts we associate with assert that this would be a huge positive for affordability (and also building aesthetics), as it would allow for more varied and more efficient building design. Single-stair egress is common in Europe and parts of Asia.

Status : Consultation phase, no legislation proposed to date.

Conclusion

The government has been doling out Christmas gifts this season, and while some will be great for investors, the jury is still out on others.

We love the GST rebate, removal of public hearings in some situations, transparency on development fees, the potential for single-stair egress and increased options for densification. However, the encroachment on property rights by prohibiting short-term rentals is concerning and the changes to infrastructure financing and the new building code will likely increase building costs as these changes are implemented in 2024-2025.

From all of us here at Hawkeye, we wish you and your family the very best this holiday season and a prosperous 2024!

Making Sense of Negative Cap Rate Spreads

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 25 Nov 2023 23:12:32 GMT

In this edition of the Birds Eye View, we cover what cap rates are, their relationship with interest rates, then dive into why seeing negative cap rate spreads is so strange.

In the DC Comic book universe, there is a planet named “Htrae” (Earth spelled backwards). On Htrae, everything happens opposite to expectations. Up is down, hello means good-bye, and people qualify for leadership only if they can demonstrate a sufficient level of stupidity. On Htrae, one of the best selling financial instruments are bonds that are guaranteed to lose you money.

While we aren’t quite to the level of Htrae (with the possible exception of government leadership), the commercial real estate market here on Earth has some truly backward features at the moment, with the most notable being negative cap rate spreads in some markets and asset classes.

In this edition of the Birds Eye View, we cover what cap rates are, their relationship with interest rates, then dive into why seeing negative cap rate spreads is so strange.

What are Cap Rates?

Cap rates (short for capitalization rates) are a commonly used metric used to evaluate the profitability (and indirectly, risk) of commercial real estate investments. The equation for calculating cap rates is as follows:

Cap Rate (%) = Net Operating Income (NOI) ÷ Market Value of property

The cap rate thus indicates the annual return of the investment if you bought the property with no debt. More risky assets will generally have a higher cap rate (out of favour asset class, less desirable location, vacant or older buildings), while more stable properties will have a lower cap rate.

The relationship between Interest Rates and Cap Rates
Interest rates and cap rates usually run together, with a variable spread between them. When interest rates rise, cap rates tend to increase as well. Higher interest rates mean higher borrowing costs, such that investors will require a higher return on their investment to compensate for the increased cost. When interest rates are low, cap rates decrease since borrowing costs are lower.

While the chart below is only current to Q1 2023, it does an excellent job at portraying historical cap rate spreads between the relevant interest rates, and the recent narrowing of that spread:

Sources

- Colliers Q3 Canada Cap Rate Report / Colliers Q1 Canada Cap Rate Report

- MarketWatch - Canadian 10 Year Bond

- Altus Group Report Q3 2023

Forward Looking Statements

This material is not intended to be relied upon in connection with a purchase of securities. This article is for informational purposes only and do not constitute an offer to sell or a solicitation to buy any securities referred to herein. This article includes forward looking statements that do not constitute a guarantee of future performance and are based on assumptions and estimates using the data and information provided.

A Deep Dive on Rental Growth Rates

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Wed, 20 Sep 2023 16:49:54 GMT

In this edition of the Bird’s Eye View, we take you on a deeper dive through both the art and science of one of these variables: rental rate growth.

Underwriting a multi-family real estate deal is a mix of art and science. Projected investment returns are highly dependent on the assumptions you make, especially about cap rates, deal timeline, interest rates, government regulation, inflation rates, vacancy rates, and rental growth rates.

The science part of underwriting comes from using the best possible data, combined with knowledge of economic patterns, to evaluate a range of scenarios that could play out in a given project, market and asset class.

The art part of underwriting comes when we attempt to establish probabilities for each of these potential scenarios.

In this edition of the Bird’s Eye View, we take you on a deeper dive through both the art and science of one of these variables: rental rate growth.

Rental Rate Growth

Since early 2021, rental rates in Canada have been rising at unprecedented speeds. The question is, will they continue or will the trend reverse? To answer, we need to understand the supply/demand equation and what has driven rental price increases.

Demand

The story of real estate demand in Canada is synonymous with the story of immigration and temporary residents, and the rental rate chart above tracks closely with immigration levels.

In 2020, as a result of border closures, Canada brought in the lowest totals of immigrants and temporary residents seen in recent history. The result is that Canada’s population only increased by 134,449 (while 198,761 new units of housing were completed). This brought a corresponding decrease in rents.

In 2021, immigration numbers reversed to record-breaking levels, which records were further broken in 2022, and likely will be again in 2023.

For 2022, Statistics Canada reported, “international migration accounted for nearly all growth recorded (95.9%) [...], Canada welcomed 437,180 immigrants and saw a net increase of the number of non-permanent residents estimated at 607,782.” The total increase in population from these sources was approximately 1,044,962 people in that year.

Though the counts aren’t yet official for 2023, Statistics Canada is projecting an even higher rate of population growth on the heels of a record breaking 1st quarter in 2023, with 98% of population growth coming from immigration and temporary residents.

Immigrants and Non-permanent residents (NPRs) are primarily renters

According to another 2021 publication , “recent immigrants were more likely to live in rented dwellings (56%) than the total population (27%), owing to a greater proportion of individuals in both subsidized and non-subsidized housing.”

Further, Statistics Canada cites that in 2021, 78.5% of NPRs lived in rental housing.

If these proportions hold true, in 2022, Canada added 721,930 people to the rental pool from immigration alone.

This is an increase in rental demand at a level that is completely unprecedented in Canada.

What would happen if we slowed immigration?

If we are bringing in over 1M+ people into Canada each year, and 96-98% of population growth is explained by immigration, wouldn’t slowing down immigration drastically slow rental rate growth?

The answer is yes, but it would also cause detrimental effects on the economy because of Canada’s low birth rates, aging population, and labour shortages.

Consider these chilling quotes from Statistics Canada :

“Immigration accounts for almost 100% of Canada’s labour force growth.”

“Canada’s aging population means that the worker-to-retiree ratio is expected to shift from 7-to-1 50 years ago to 2-to-1 by 2035.”

“Immigrants account for 36% of physicians, 33% business owners with paid staff, and 41% of engineers.”

Canada’s economy has become highly dependent on immigration and NPRs.

On a going forward basis, the Government of Canada’s Immigration Levels Plan for 2023-2025 sets a target for immigration levels to increase further to 500,000 by 2025 (while the rate of new NPRs has been high for 2023, it remains to be seen whether Canada will bring in as many NPRs in future years).

This plan is revised every year by November 1st, and the Immigration Minister, Marc Miller, has indicated that he doesn’t see targets decreasing in the 2024 - 2026 plan. “I don’t see a world in which we lower [immigration targets], the need is too great … whether we revise them upwards or not is something that I have to look at but certainly, I don’t think [we will] lower them”.

At this point, it isn’t clear how immigration targets may change if there is a change in leadership at the Federal level. Pierre Poilievre hasn’t specifically answered the question of whether he would reduce immigration targets, but he has clearly taken the stance that he would implement policy to accelerate supply.

What happens to rental demand if we see a recession that heavily affects employment?

Though we have heard no talk of this in the media, we feel that if we entered a recession that seriously affected employment, there is a possibility that rental rates could decrease.

If there is a recession that seriously affects employment (compared with a recession where there is still full employment), many temporary foreign workers will lose their jobs and be required to return home.

This is an untested assumption, but seeing as immigrants have been disproportionately affected during previous recessions, we anticipate that the huge number of temporary foreign workers, brought in to fill labour shortages, may experience job loss at a higher rate in a recession. If this happened at scale, Canada would likely see low population growth, or even population decline, and rents could drop significantly.

While we see this as a low probability outcome, it is an important risk to consider.

Other factors affecting rental demand

Affordability of ownership - As the costs of ownership continue to rise, largely due to higher interest rates, we anticipate that some people may choose, or be forced into renting as a lower cost alternative.

Freedom of mobility - Across all age groups, there is a greater proportion of renters compared to homeowners than a decade ago (RBC, The Rise of Renters). For those that express a preference to rent, freedom of mobility is often cited as a primary reason.

Supply

Over the last 4 years, Canada has averaged 239,903 housing starts and 207,138 units completed each year.

This total is woefully insufficient to meet current demand. In 2020, Scotiabank released a housing brief that indicated that Canada had the lowest number of homes per 1,000 people, at 424.

In 2022, Canada would have needed to construct 445,246 new housing units, just to maintain our worst-in-class average. Instead, we added 219,942 new housing units, which equates to 209 units per 1,000 new people in Canada.

While this analysis is slightly simplistic, it makes it painfully obvious why rents are increasing. Canada added half as many units to the supply as it needed to in order to maintain the historic equilibrium.

How likely is it that Canada will be successful at increasing supply?

Regardless of who is running the federal government, given the public outcry and focus from all parties, it is likely that new housing starts will increase over the next 3 years.

However, we are sceptical that there is any chance of doubling the number of housing units completed per year in the near term. Incentivizing development with policy, such as the recently announced GST rebate will make an appreciable difference, though there are two other hurdles that must be overcome for massively increasing supply to become a legitimate possibility.

First, we do not presently have enough construction workers to support a vastly higher level of construction. Unfortunately, labour shortage has been a barrier even at present levels of construction. (For an in depth read on this point, check out CIBC’s recent Economic Report )

Second, without sweeping changes to municipal development approval processes, processing a much higher number of applications in a shorter period of time is a pipe dream. As a former City Manager, I don’t have any confidence that this could be done quickly, unless senior levels of government are willing to override municipal authority, a proposition that would bring its own set of issues.

Conclusion

Canada’s current level of construction is sufficient to support annual population increases of approximately 518,731 at present levels of affordability. All indications are that Canada intends to expand its population at nearly double this rate, and it is unlikely that increases in supply will be able to keep up.

Though we still underwrite conservatively, since immigration policy could change quickly, or we could experience a major recession, we anticipate that we will continue to see strong rental rate growth over the next 3 years.

Though this is only one variable of many, we hope that it gives you a sense of the types of considerations we make in the process of underwriting investment deals. We can’t predict the future, though we take pride in our role in vetting deals, researching, and talking with industry experts, and using that information to present you with the best possible real estate investment opportunities.

Profiting in the Energy Efficiency Era

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 19 Aug 2023 15:40:26 GMT

Government plays a massive role in the supply and demand equation for housing. From the Federal down to Municipal governments, there are dozens of policies that affect housing.

As an investor, you don’t need a deep understanding of the policies themselves, though you do want to understand the effects these policies have.

This edition of the Bird’s Eye View will look at BC’s Energy Step Code program, outline how it is affecting development in BC, and conclude with how investors can best position themselves as governments march toward ‘net-zero’ housing.

While this article focuses on BC, the trend of requiring more energy efficient housing appears to have some degree of national traction, and we anticipate that these types of policies will become more common in all Provinces, though the specifics will likely differ.

BC Energy Step Code

In BC, the Provincial Government’s plan to increase the energy efficiency of newly built, and renovated buildings, is called the “BC Energy Step Code”.

Developers need to get into the weeds and work with “energy advisors” to review plans, model energy consumption, and ultimately, ensure that certain energy efficiency thresholds are met.

As investors, what you need to know is that today, all new buildings in BC must be 20% more energy efficient than they were required to be in 2018. By 2027, that number will be 40%, and by 2032, a whopping 80%, where new buildings will be “net-zero energy ready”.

However, municipalities may choose to implement these timelines even sooner. Some municipalities, such as Richmond, Surrey, North Vancouver and West Vancouver, have already implemented municipal bylaws to accelerate these timelines.

What will the BC Energy Step Code do to housing supply and costs?

Energy efficient buildings are an admirable goal, though as with anything else, there are tradeoffs.

A 2019 modeling study by the Homebuilders Association of Vancouver (HAVAN) articulated that implementing step 5 increased building costs by as much as $48,220 for a typical house, and that Custom-built homes could incur even higher expenses.

In reality, most builders have been able to satisfy the requirements of Step Code level 3 by making minor tweaks to building materials, at slightly higher build cost. However, there is concern from many in the development community regarding steps 4 and 5.

Hawkeye has spoken with two developers recently who have shared these insights regarding the BC Energy Step Code:

"Level 4 and 5 are major hurdles and require more than just using different materials. Those levels require changing how buildings are planned and constructed. If we needed to build a Step 5 building today, we quite literally wouldn't know how to do it. We will get there, I'm sure, but it will take time, effort, and money. I suspect that some developers will just phone it in rather than learn a new game."

- BC Multifamily Developer

"The combination of Step 4 and new seismic requirements is going to make developing multifamily rental in BC nearly impossible. Unfortunately, we know this could be our last hurrah in BC building rental due to the massive rising costs."

- BC Multifamily Developer

“ We don’t want to overstate the impact that this policy may have on supply, though the added inspections and cost, on top of other regulatory challenges and high rates, are deterring at least some builders from taking a more aggressive approach to development in BC.

If it becomes clear that these measures translate into additional unit values or rental rates, or as costs come down and new building methods become more common, it is possible that this policy will have little effect on supply.

However, in the interim, investors should expect that the BC Energy Step Code will result in higher building costs and a possible slowdown in new supply being brought to market.

Impact on current and future deals

The likely decrease in supply from the resulting policy will likely mean markets that are already facing prohibitive vacancy rates will continue to struggle in their fight against lack of housing. This potentially bodes well for existing assets and their valuations, though will likely have a net-zero effect for new developments as the newer costs are offset by either higher rents or higher asking prices.

This transition period means underwriting newer deals requires closer attention. Determining whether the developer has the expertise to deliver is key, and so is having a thorough understanding of the new development and construction costs. Finally, developments that will be completed prior to the policy’s milestones are likely to benefit from a potential slowdown in builds and deliveries as they complete at a time that operators are continuing to scramble to understand how to best approach a site’s potential.

At Hawkeye Wealth, we strive to stay ahead of such changes to make sure we bring only experienced operators with solid deals to your inbox. If you want to learn more about the work we are doing in the background as well as hear more about any upcoming deal we have in the pipeline, get in touch at info@hawkeyewealth.com .

What to make of the current state of commercial real estate?

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Wed, 26 Jul 2023 14:44:41 GMT

“When the tide goes out, you see who is swimming naked.” - Warren Buffett

There has been no shortage of captivating commercial real estate headlines this month. Bloomberg alone issued headlines like “ Distressed US Commercial Property Assets Rise to $64B ” and “ Commercial Real Estate Reset Is Causing Distress From San Francisco to Hong Kong ” – and that is one news outlet. The lingering effects of the March banking crisis combined with the rapid interest rate rise has kept pundits busy, and investors uneasy.

Unfortunately, there is some truth to the concerns being raised in the commercial real estate industry as a whole.

As debt servicing has become more costly, we are starting to see who was swimming naked under the tides.

This market is presenting opportunities, though against a tough economic backdrop, a deal needs to have special factors in its favor to warrant a closer look. To give you a look behind the curtain, we are seeing about forty deals for every one that gets serious consideration.

Today, we dive into each asset class to discuss what we see happening moving forward–and what that means for you as an investor.

Office:

The office asset class is struggling, no surprises there. From high-profile defaults by Brookfield and PIMCO-owned Columbia Property Trust to the highest vacancy rate recorded in Manhattan since 1984 , office properties have taken a large hit to their valuations. Of the $64B in distressed assets reported by MSCI Real Assets, office represents around $18B (28%) of distressed US commercial real estate. The same index reports a potential $43B in additional office assets that could become equally troubled in the near future.

The reasons for distress are clear. The pandemic-induced hybrid work model seems to be here to stay. Despite efforts by firms to bring back employees, overall demand for office space has decreased. While trophy assets in key markets have held their ground with healthy occupancy rates, anything below a AAA-rating is suffering under the weight of empty space and soon-to-be-renewed debt.

Our team has been presented with a few office deals with reduced vacancy as opportunities for value-add, where operators are betting that the trend will reverse and companies will need the space again. We have also seen operators repurposing offices into industrial and residential properties. While we are keeping our eyes out for deals of this sort, we are cautious as this strategy requires significant expertise to identify the right properties that can indeed be cost-effectively refurbished and brought up to market rate standards.

The bottom line: A significant amount of commercial real estate distress at the moment is found in office due to a significant shift in market demand coupled with costlier debt. Expect more properties changing hands at vastly different valuations, especially in Secondary and Tertiary markets and those assets in sub-optimal locations. Refurbishing and value-add in this space has strong potential but requires significant expertise, capital, and risk tolerances.

Retail :

Despite some bright spots, retail is still bleeding from the effects of the pandemic. Online shopping trends have shifted consumer behavior such that many retail spaces have become obsolete, and higher debt costs have led to the shuttering of under-performing assets. MSCI reports that retail properties in the U.S. make up $23B, or 36%, of the $64B in distressed real estate.

This is not to say that retail is dead; far from it. There is one particular type of retail property that has remained resilient and is performing well in the current rate environment. These are properties anchored by businesses that are essential to communities. Think grocery stores, liquor stores, and pharmacies, or as one local Vancouver developer likes to put it: “food, booze, and drugs” retail. Many of these properties are also becoming more integrated into developments that allow for better store-front traffic due to the residential component of projects (such as the Vancouver master-planned development in Oakridge).

The bottom line: retail properties are likely the most distressed asset class at the moment in most markets, though the “food, booze, and drugs” sector is likely going to continue to do well. Knowledgeable operators that can capitalize on the negative sentiment for retail properties can likely acquire cash-flowing assets at attractive prices.

Multi-Family

The multi-family story continues to be driven by demand outpacing supply.

On the demand side, North America is seeing strong population growth, led by high immigration numbers. Canada alone estimates that a new immigrant arrives in the country every minute. We anticipate that higher interest rates will also push more individuals towards renting due to unaffordable house prices, which should put further upward pressure on rents.

On the supply side, developers are reporting significantly longer build times vs. 2019, due to slow regulatory processes, and supply and labour shortages. With governments beginning to offer incentives for purpose-built rentals (such as faster rezoning and attractive lending rates), many developers will likely focus on this strategy for the time being. That means more potential for deals, but also raises the potential for over-supply depending on the market.

Moving forward, we expect that well-capitalized properties will continue to benefit from higher demand. However, strong fundamentals are not enough to offset additional debt costs for operators that employed high-leverage strategies on assets purchased near the market peak. As we have noted recently, there has been a rise in the use of preferred equity to recapitalize distressed properties. We expect this trend to continue, presenting both challenges and opportunities depending on which side an investor finds themselves. Hawkeye Wealth is connecting with as many operators in the space as possible to find those managers that have been able to keep their properties afloat despite the adverse market conditions.

Given the rate environment, those that can secure the best financing and have the expertise to deliver on the development will stand to create significant value on their properties. Institutional demand for this type of asset is not going away (see concluding note below), so there should be plenty of opportunities for successful exits.

The bottom line: Multi-family will likely see continued demand growth that will outstrip supply for the time being, which bodes well for the rent growth of many properties (whether existing or currently being built). Despite all the strong fundamentals, interest rates still pose a risk, especially in areas where rent control will further squeeze landlords’ cash-flows. Expect many properties to change hands as some asset managers are forced to sell.

Industrial

If office is still trying to recover from the pandemic hangover, industrial as an asset class is still having drinks at the bar. Shoppers continue to move online, logistics needs continue to grow, and on-shoring of manufacturing due to geopolitics has pushed up the need for industrial properties. A 3.3% vacancy rate for North American big-box industrial facilities (over 200,000sqft in size) and record-breaking rent increases are showing the resilience of industrial properties in this current market.

Vancouver, one of the markets that Hawkeye Wealth has been particularly active in on the industrial side, continues to maintain its status as having one of the lowest vacancy rates for all industrial space at 1%. Since industrial properties require significant amounts of land and present challenges when developing multi-story properties, we expect the tightness in key markets to continue.

Consequently, we expect an increase in demand for industrial in gateway markets, due to affordability. As urban areas have an increased need for last-mile logistics, that will continue to push manufacturing to the outskirts where industrial lands can be purchased and developed more cheaply.

The bottom line: The demand trend is likely to continue as manufacturing-heavy industries continue to move back to the U.S. and Canada while logistics’ needs also push rents and prices higher. As competition ramps up our team is focused on identifying the operators that can indeed find and acquire the right assets at the right price. The current market environment does impact existing assets on cash-flow and construction costs, though the long-term fundamentals might provide upside at the exit.

Conclusion

While some asset classes are faring better than others, there is certainly a level of distress in the commercial real estate space due to higher debt servicing costs and operational expenses. While this will present new opportunities to invest with the right operator, it brings up a key question we are asking ourselves: is this level of distress signaling something systematic or are only a few segments of the market impacted? Or, to put it in a different way, are we going to have a soft landing or a full-blown recession?

We don’t have a crystal ball. The Canadian and American Central Banks seem to believe that inflation is yet to be tamed. Many local lenders remain tight, investors are getting capital calls, and the unease is causing liquidity to dry up.

The flip side of this is to consider that despite such large defaults from groups like Brookfield reported earlier, Blackstone has raised $30.4B for the largest real estate fund ever while Brookfield partnered with Fidelity to offer additional real estate exposure to their clients. While it is impossible to know whether the level of available capital for real estate is sufficient to hold off this wave of distress, it does signal that the demand for real estate has not gone away (at least at the institutional level).

As assets continue to reshuffle and reprice, we are monitoring the strategies and assets that we feel will likely offer the highest risk-adjusted returns. We anticipate that there will be some excellent deals over the coming year, but there is nothing wrong with making sure you have cash in the bank in the event that there is an economic downturn that leads to generational buying opportunities. Whatever you choose, just make sure you are wearing something when going swimming in the ocean.

The Rise of Rescue Capital

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Tue, 30 May 2023 13:52:51 GMT

The dramatic rise in interest rates continues to reverberate through the real estate market. As a result, strategies that made sense two or three years ago may not in the current market. On the other hand, some strategies that were less appealing to us in recent years are now quite compelling. Enter preferred equity.

Preferred equity sits between debt and equity on the capital stack, meaning it is paid back after debt, though prior to equity investors. As such, projected risk and returns usually fall somewhere between debt and equity.

For most of the last decade, which has been characterized by strong market fundamentals and abnormally low interest rates, common equity holders have been richly rewarded for any additional risk taken. Annual returns of over 20% have been common-place. The upside was too good to pass up.

The rapid rise of interest rates has since thrown cold water on the market, leading to declining prices in most asset classes. This has knocked common equity investors' return-expectations down a notch or two and losses and cash calls are becoming more common. The current economic climate also makes it much more difficult to decide what to do next.

Preferred equity presents a compelling option if you believe medium-term growth for real estate assets will be more moderate and a collapse from today’s prices is unlikely. This scenario could produce equity-like returns for preferred equity investors without equity-sized risk.

One place we are seeing preferred equity opportunities is in the US Multifamily market. Particularly with properties purchased within the last two years using bridge financing, which has been commonplace. For many multifamily investors, their intended strategy when they purchased the property was to increase net operating income and then refinance at lower interest rates, anticipating that they would achieve long-term financing between 70% and 80% loan to value (LTV).

Due to falling values and increasing lender caution however, many borrowers have only been able to refinance between 50% and 60% LTV, leaving a gap in their capital stack. This creates an opportunity for preferred equity investors to provide an additional 10-20% of the capital stack, while still having substantial common equity behind them.

There are numerous properties that will need to refinance in the coming quarters, and many see preferred equity as a natural solution to plug the gap. Current demand for preferred equity puts investors in the driver's seat to negotiate terms, and can often demand 12-14% returns, which we believe are quite attractive in the current environment.

While we don’t have any current opportunities in preferred equity, we are exploring options. We look forward to discussing this strategy further should a deal present itself. As always, if you have any questions or there’s anything we can do to help, please don’t hesitate to reach out.

Bank Volatility & Real Estate

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Tue, 28 Mar 2023 03:05:54 GMT

Private real estate funds apparently are not the only thing being gated right now. The collapse of Silicon Valley Bank (SVB) and the other institutions that followed has shifted expectations and market perceptions in a dramatic fashion. And while every expert and news channel has weighed in on the event (and the subsequent reverberations in the financial markets) our team wanted to provide our insight from a real estate perspective. So, what happened, will it spread, and what does it all mean to real estate investments of the sort Hawkeye Wealth partners with?

What Happened?

SVB suffered a classic bank run. Their clients, primarily composed of tech companies and start-ups with significant cash holdings, lost faith in their ability to withdraw their deposits when the bank failed to raise over $2 billion in capital to cover losses they suffered in the bond market.

The issue originated partly on the fact that SVB’s deposits tripled between 2019 and 2022. Their loan business could not keep up with that much cash so the bank decided to purchase long-dated U.S. treasury bonds, which lost significant book value due to the interest rate increases that followed. And due to an unexpected volume of deposit withdrawals, the bank had to realize those losses when they sold them for liquidity. When they announced they were raising capital to fill the gap, the alarm bells rang and the run on the bank followed.

What should be a surprise to most is a bank not following one of the most important tenets of investing: diversification. They did not diversify their investments (largely government bonds that were hit hard by interest rate increases) or their deposit base (primarily a small number of tech businesses with several million dollars of deposit each).

At the time of its collapse, approximately 97% of the $175B in deposits were not insured by the U.S. Federal Deposit Insurance Corporation (FDIC). The idea of that capital being wiped out rattled the markets. Luckily (at least in hindsight), the government stepped in quickly enough with measures that guaranteed customers’ full access to their funds (and at the time of this writing they also secured a buyer for the embattled bank). While this helped calm the situation on the SVB front, the concern over banks’ balance sheets had already become a widespread concern.

How Far Will It Spread?

From Signature Bank to First Republic, to Credit Suisse and bank stocks the world over, these past two weeks have been a rollercoaster. Government intervention has been robust and swift, providing massive loans to certain banks and convincing large banks to move deposits to the embattled institutions, among other measures.

The more you read about this topic, the more it starts to look like a soap opera: there was an arranged marriage (Credit Suisse’s merger with UBS orchestrated by the Swiss central bank), characters from previous seasons re-emerging (Barney Frank, from the Dodd-Frank Act, was a board member at the now-closed Signature Bank), and unexpected plot twists (central banks whipsawing their policies).

The jury is not yet out on whether the actions by the private and public sector will keep these collapses from becoming a systemic issue. On the one hand, the reaction seems quicker than in previous crises, with liquidity in other forms providing a back-stop to these institutions. On the other hand, it is clear that it will still take some time for investment managers, lenders, and capital allocators to feel like they can see clearly what is around the corner. The concern over lending and a risk-mitigation-first approach can be felt across our issuer partners, industry colleagues, and others in finance.

What Does It All Mean for Real Estate?

While market uncertainty is never helpful for making any investment decisions, the latest developments are relatively bittersweet for real estate.

Start with interest rates. There is a saying about central bank policy that states they raise interest rates until something breaks. And with the confusing macroeconomics of late (consider how good news for the labour market meant a bad day for stocks due to higher expectations of further interest rate increases), perhaps this is the type of breakage that central banks needed to see.

This has already been reflected in the 25bps increase in the latest Fed announcement this past week, when markets were pricing a 50bps raise just before SVB collapsed. Minutes from the meeting signals a less aggressive rate hike regime for the rest of the year. In fact, while the Fed hasn’t announced any plans for rate cuts this year, markets disagree and are already pricing in cuts.

Thus, for real estate deals with floating rates and well positioned to refinance and restructure their capital stack, this could be a welcome sign that we are nearing an end of interest rate increases and potentially welcoming rate decreases some time later in the year. That should help ease the financial burden on a number of properties, allowing for much needed liquidity.

This brings us to the more important question of whether you have a bad asset or a bad ownership structure. Liquidity drying up, higher market uncertainty and high asset prices in early 2022 makes for a bad cocktail. Many asset owners have had to resort to creative financing, unfavorable equity terms, and other forms of capitalizing their properties that choke out the returns of the deal. Many are turning to rescue capital in the form of preferred equity (a topic we plan to cover soon).

On the one hand, that is a difficult position for the current asset holder but it presents an opportunity for groups with the right amount of patience and strong balance sheets. In fact, some industry colleagues are indeed reporting an ability to negotiate better acquisition pricing as owners are having a harder time re-structuring their assets.

Conclusion

The collapse of SVB itself was in fact an example of improper patience and bad balance sheet management. The assets they held were not necessarily bad assets, but rather owned in an illiquid, improperly managed way. They had to sell at a loss at the worst possible time. And we are seeing a number of real estate operators having to do something quite similar.

While we do not have a crystal ball to determine with certainty whether this current bank turmoil will reverberate across all markets, it does serve as a reminder that an investment strategy with the right fundamentals can ride out a liquidity crisis–as long as the operators themselves are managing their balance sheets well and staying prudent with debt-usage.

As one large Vancouver developer put it in a recent seminar: “We have put some of our properties for sale at the prices we need for the returns we want. If no one is willing to pay that now, that is fine. We’ll wait. We can afford it.”

Those are the words of someone with patience afforded by a fat wallet. Those are the words of the type of real estate partner we are looking to (and do indeed) work with.

Barring a complete collapse of the economy, we believe that when acquired in good terms with a properly structured capital stack, and managed by a professional team with the right track record, real estate can weather times of market uncertainty like these.

If you have any questions or would like to learn more about investing with Hawkeye Wealth, email us at info@hawkeyewealth.com or call us at (604) 368-2980 .

Deal Structure Matters

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 25 Feb 2023 03:05:54 GMT

Many factors influence the probability of success for any private real estate investment, including the strength of the market, the quality of the deal operator, and the quality of the asset. However, deal structure is an oft neglected element of risk and return that can lead investors to make poorer decisions and leave money on the table.

We will discuss two common investment structures, individual deals and funds, to help you understand the pros and cons of each and determine which is a better fit for your portfolio.

For clarity, we define individual private deals as investments where a specific asset has been identified and put under contract by the operator, with an entity formed for the sole purpose of acquiring that asset. Private funds on the other hand are usually set up with a defined strategy of acquiring multiple assets within the same entity, though those assets haven’t been identified or put under contract yet.

There are multiple reasons one may choose to invest in a private real estate fund, including:

Potential redemption options rather than having to wait until an individual asset is sold
Built-in diversification due to the fund holding multiple assets
Higher degree of passivity for investors as they delegate the responsibility to select which assets they’ll invest in entirely to the fund manager

The pros of investing in a fund are essentially the cons of investing in an individual deal, where redemption options are limited and there is little to no built-in diversification. While individual deals are usually quite passive once you decide to invest, some due diligence to understand the deal before going ahead is highly recommended, whether you do it yourself or rely on companies such as ours. So why might you decide to invest in individual deals and why is this our preferred structure for equity deals with our clients? It mainly comes down to three main benefits:

Capital is used more efficiently, often generating higher risk-adjusted returns

Funds rarely have their cash fully invested, which drags down returns. This is for a few reasons. One is that since funds raise money prior to finding properties to invest in, that cash may be sitting for months or even years before being put to work. Another is that some funds offer redemption options, requiring sufficient cash to fund potential redemptions whether they materialize or not. For individual deals, cash is usually put to work quickly and no cash has to be set aside for potential redemptions. This more efficient use of capital results in higher returns, all else being equal.

It is also common for closed-ended funds to get commitments on investment amounts from investors and then only ask for the money as it is needed for deals. These funds often calculate annualized returns only from the time the cash call is made, not from the time of the commitment. This makes returns appear higher because of the shorter amount of time that the cash was with the manager. In practice though, most investors will keep any committed capital in highly liquid and lower risk investments to be ready for any cash calls, likely generating only a nominal return in the interim. As such, many closed-ended funds generate a lower annualized return in practice than in theory.

No commingling of funds

Another benefit of investing in a variety of individual deals is that there is no commingling of funds. This means that if a particular deal you have invested in performs poorly, there is no impact on your other deals since each deal is in a separate entity. As such, our goal becomes to pick and choose which individual deals have the best potential risk-adjusted returns.

Greater control over the assets invested in

Perhaps the biggest benefit of investing in individual deals is we know exactly what we are investing in before doing so, allowing us and our investor group to do due diligence on a deal by deal basis before making the decision to invest. Investing on a deal by deal basis also allows our investors to create a bespoke portfolio of assets according to their individual strategies.

Furthermore, since each new individual deal requires a new investment decision, this strategy forces us and our investors to keep our fingers on the pulse of the market. Not only must we decide if a particular deal is worthwhile, we must also determine regularly whether the broader investment strategy continues to make sense in the current environment or whether we need to pivot. This constant review is something investors are less likely to do when investing in a fund since no new decisions need to be made other than whether to stay in the fund or not.

Something to keep in mind is that pivoting strategies is easy for you, the investor, who just has to change the operator or fund you send the cheque to. Pivoting strategies for operators and funds is much tougher though, as they have often built entire systems and teams around specific investment strategies. As a result, they may be more hesitant to change the strategies they employ, even when the evidence suggests they should.

The ability to pivot with ease can lead to better deal selection and higher risk-adjusted returns over the long run, which is our goal at Hawkeye Wealth.

Which strategy is better for you?

When deciding which structure is right for you, it usually comes down to two main questions. How badly do you need liquidity for your investment and is your portfolio large enough that you can achieve proper diversification across a number of individual deals?

Most individual deals are illiquid. As such, you must determine how much of your portfolio you would be comfortable not having access to for longer periods of time, usually at least three years, though often longer.

After determining an amount of capital that you would be comfortable having illiquid, the question is whether that illiquid portion is substantial enough to be able to diversify across a number of individual deals, each with varying minimum cheque sizes. For reference, most of our deals have minimum cheque sizes of $50,000 and $100,000.

If your portfolio is smaller, making you hesitant to take on concentration risk and liquidity risk, investing in public and private funds could be a great option for you. If your portfolio is large enough to achieve some diversification across individual private deals and you don’t require liquidity for this portion of your portfolio, you should consider looking more seriously at investing on a deal by deal basis to potentially earn a higher risk-adjusted return.

We hope you are enjoying the Bird’s Eye View. As always, please feel free to reply to this email or call us if there’s anything we can do to help or you would be interested in working with us on future deals.

The Gating of Private REITs

admin@hawkeyewealth.com (Hawkeye Wealth Ltd.) — Sat, 21 Jan 2023 03:05:54 GMT

Dear Investor,

As many of you know, Hawkeye Wealth sources and evaluates real estate investments with the goal of achieving strong risk-adjusted returns for our clients.

While there is an element of luck that factors into each successful investment, superior insight is the key to stacking the odds in your favour. To this end, we will start providing you with monthly insights related to the private real estate investment industry.

The first topic we would like to discuss is the recent pausing of redemptions (known in the industry as “gating”) of multiple private funds. As you may be aware, a few notable funds such as Blackstone REIT and Starwood REIT have paused redemptions, causing many investors to take notice.

Some of you may have invested (or considered investing) in various private REITs similar to Blackstone or Starwood. While we can’t offer blanket advice because each situation is unique, we’d like to offer a few thoughts that you may find helpful.

Be watchful of how Net Asset Value (NAV) is reported. For private funds, NAV is often determined quarterly by management teams and their boards (of which the directors are often not independent). As of now, there is no standardized process for calculating NAV in a private REIT and there is a risk that the NAV does not properly reflect the value of the underlying assets in a fund.

There can be multiple reasons for this discrepancy, including inaccurate appraisals and rapidly shifting markets. Some fund managers may also be hesitant to lower NAV for fear of spooking investors and causing redemptions. The irony is that a fund manager’s hesitance to lower NAV may end up causing the redemptions they are trying to avoid. This is because investors might believe they can redeem at a price that is higher than the value of the underlying assets.

If you notice that NAV doesn’t seem to be adjusting to the current market conditions, it may warrant a closer look to make sure you understand why and whether the reasons are legitimate.

Pausing of redemptions in and of itself is not necessarily a cause for alarm. When the underlying assets in a fund aren’t quickly and easily converted to cash, as is the case with most real estate funds, an occasional lack of liquidity may be reasonable. Managing cash is a difficult balancing act for a manager as being fully invested in illiquid assets lessens investors' ability redeem. On the other hand, excess cash in the fund, while great for liquidity, drags down investor returns.

While liquidity is an important element to understand in any fund, do not mistake liquidity risk (i.e. pausing of redemptions) for risk of loss of capital.

When determining your liquidity risk, understanding the fund's redemption terms is not enough. Be sure to consider how quickly and easily the underlying assets can be converted to cash to get a better sense of how long you may have to wait in the event redemptions are paused. For example, a mortgage fund holding primarily three-year loans would generally be subject to more liquidity risk than a mortgage fund focused on shorter-term bridge loans of one year or less.

The liquidity of the underlying assets is a better measure of your liquidity risk than the redemption terms of the fund.

Making sure we understand the liquidity risk of each investment and that you as an investor are properly compensated for that risk is one of many important considerations in our due diligence process. We look forward to providing additional insights in the coming months and if you have any questions or there is anything we can do to help, please feel free to reach out.

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Signals of a Market Bottom - A Deep Dive

Assessing Entitlement Risk For Investors

“Development required multiple steps, and every step meant one more chance for something to go wrong.”

1. Pre-Application

What Happens: The developer meets with municipal planning staff for a pre-application review. This is an informal review to identify major red flags such as sewer or water capacity issues, heritage concerns, or blatant conflicts with the Official Community Plan

2. Application

What Happens: The developer submits a formal package including preliminary architectural drawings, site surveys, and the required fees. The city assigns a file manager and starts the formal referral process to departments like Engineering, Fire, and Parks.

3. First and Second Reading

4. Public Hearing

5. Third Reading

What Happens: Council votes on the project immediately following the public hearing or after second reading if no hearing is held. This is considered approval in principle.

6. Adoption (Final Reading)

7. Development Permit (DP)

8. Building Permit (BP)

Where Are The Wealthy Putting Their Money?

Introduction

How Development Charges Are Pricing New Buyers Out of Homes

Introduction

Fee Simple Under Fire: The High Stakes of Aboriginal Title in British Columbia

Introduction

Overview

What does this decision mean practically?

Who will bear the effects in the interim or if the decision stands?

Timing

Conclusion

Investing in Canadian Farmland

Introduction

﻿ The Investment Case for Canadian Farmland

Farmland Investment Risks

Conclusion

The Affordability Conundrum: Supply Without Returns

Introduction

The Scale of the Challenge

When Ambition Meets Demographics

The Policy Balancing Act

1. Supply ≠ Affordability

2. Developers and the Investment Equation

Reducing Fundamental Building Costs

Conclusion

The Truth about Prefab: What it Can – and Can’t – Do for Canadian Housing

Cost

Speed

Quality

Energy Efficiency

Durability/Craftsmanship

Aesthetics

Conclusion

Introduction

Recipient Eligibility

Pre-Fabrication Claims

From Hype to Hard Numbers: The True Scale of Ottawa’s New Housing Push

Introduction

Build Canada Homes

Wartime Housing Limited

How will WHL differ from Build Canada Homes?

Singapore Public Housing Model

Conclusion

Conservative vs. Liberal Election Primer - Housing Policy

Analyzing CMHCs 2025 Canadian Housing Market Outlook

Why U.S. Multi-Family is Likely to Turn the Corner in 2025

The Impact of GDP on Housing Prices: Insights for 2025

Population Declines and the Housing Market: What Investors Need to Know

A Poor Man's Guide to Market Assessment

The Poor Man’s Guide to Market Assessment

The Modified Poor Man’s Guide

Limitations of the Assessment

Conclusion

How Do Election Results Impact Residential Real Estate Prices?

Limited Partner Bargaining Power Leads to Better Deals

Do Falling Interest Rates Make Real Estate Prices Go Up?

Breaking Down the CMHCs 2024 Housing Market Outlook

Budget Beat: Insights for Real Estate Investors

The Real Estate Cycle - A Tale of Two Countries

BC Multiplex Strategy - A Look Under the Hood

In this edition of the Birds Eye View, we aim to improve on the traditional experience of looking under the hood by giving you a guided tour of the multiplex development strategy in BC, which has gained momentum following BCs recent housing legislation changes. ﻿

Where’s the Opportunity in Private Real Estate in 2024?

In this edition of the Bird’s Eye View, we highlight 3 strategies within private real estate that we think will offer opportunities for superior risk-adjusted returns in 2024, and share our thoughts on why.

What Legislation is Government Changing to Address the Housing Crisis?

In this edition of the Bird’s Eye View, we provide a summary of 7 different amendments to housing law (one federal change, and six provincial changes), and share our thoughts on how we think these changes will impact investors.

The Investment Case for Canadian Farmland

In this edition of the Birds Eye View, we aim to improve on the traditional experience of looking under the hood by giving you a guided tour of the multiplex development strategy in BC, which has gained momentum following BCs recent housing legislation changes.

In this edition of the Bird’s Eye View, we take you on a deeper dive through both the art and science of one of these variables: rental rate growth.