January 11, 2024
As we begin the new year with optimism and determination, we look forward to capitalizing on opportunities for growth in 2024 and forging ahead in our existing investments with a commitment to maximizing investor returns and prudently managing risk.
Last year will be remembered as a challenging year around the world for many countries, markets, organizations, and individuals alike. From an economic standpoint, the complexities stemming from the aftermath of the pandemic have continued to foster a feeling of uncertainty for businesses and consumers left coping with the higher borrowing costs brought on by central bankers in their attempt to curb rapidly rising costs and inflation. These conditions have made affordability a significant challenge for families and individuals while slowing the pace of growth and innovation as businesses began pulling back on their hiring activities and capital investments. Yet, despite these challenges, our sense of hope for a more stable, peaceful, and prosperous future remains strong as we head into this new year.
Reflecting on the current state of the world has provided us with valuable perspective and has served to reinforce our commitment to navigating these periods of complexity on behalf of our investors, partners, and employees who rely on us to make sound decisions. With an expansive real estate development portfolio in Southern Ontario and the U.S., along with a growing apartment portfolio in Montreal and the U.S. Sun Belt, we have a lot at stake, and we remain steadfast in our resolve to work closely with our partners, lenders, and other industry relationships to anticipate risks, engineer solutions, and seize opportunities.
Throughout the year, our team has been working diligently with our development partners to advance our active projects and make strategic decisions at each and every stage. It is times like these that the benefits of our active asset management approach and our real-time experience across our large and diverse portfolio are front and center. Leveraging our experience across markets and projects and collaborating with some of the most experienced development teams in the industry has helped ensure we are in the best position to make optimal decisions.
As we navigate towards a more stable market, we continue to evaluate a myriad of investment opportunities that align with our investment strategies, and we are well-positioned to take advantage of any opportunities that arise from market dislocations. We continue to be very bullish on expanding our investments in both existing and new markets including the addition of more U.S. value-add investments in markets like Atlanta, Georgia, and others in the U.S. Sun Belt.
Housing Supply & Development Industry in the Greater Golden Horseshoe
As our investors know, our primary investment focus in Canada is within the Greater Golden Horseshoe (“GGH”) region, “Canada’s economic engine”, and a part of the country that is experiencing considerable growth as national immigration targets increase each year to new record levels. At the same time, the supply of new housing units to support this growth continues to fall well short of the requirement, and the resulting housing crisis has been widely publicized and felt by those who live here, as well as by municipal and provincial governments alike.
Unfortunately, the housing supply shortage in Ontario has not improved during this recent period of monetary tightening by the Bank of Canada (“BOC”). Making progress towards the lofty goal set by the provincial government in 2021 to build 1.5 million new homes in Ontario over a 10-year period has become even harder given the impact of rapid interest rate escalations on both developers and consumers over the past 18 months.
Rising Rates Driving Cost Pressures
For developers and new construction projects, higher interest costs combined with the elevated construction costs and softer home prices have made it challenging for some projects to demonstrate the margins necessary to qualify for construction financing. Even those already in construction are feeling the added pressure of higher financing costs, which, in some cases, have posed additional challenges in progressing projects towards completion without further capital injection or financial restructuring. In some cases, developers have had to delay or cancel projects already underway (with pre-sold units) due to these high costs.
Suffice it to say, the current conditions are not helping to address the existing housing shortage and in fact, today’s conditions are likely only to increase future imbalances (which, as investors represents an opportunity). Fortunately, for experienced and financially strong developers like Greybrook and our chosen partners, who have long-standing banking relationships and considerable financial resources, navigating this unusual period until interest rates decline has proven manageable.
Beyond financing costs, construction costs did begin to level off in 2023, with commodity prices (e.g., lumber, steel) decreasing as we moved past the pandemic-era supply chain issues, and for the most part, trade costs also began to stabilize. As rates continue to come down in 2024, we expect to see a further easing of cost pressures, which is likely to positively impact the supply of new units coming online as the market strengthens again.
Homebuyers and Developers Waiting on Sidelines
Aside from the impact that rates have had on the cost side, higher borrowing costs and an uncertain economic outlook for the past 18 months have also weighed on buyer activity in the housing market. Many would-be purchasers and investors have either been forced onto the sidelines due to affordability constraints or have otherwise elected to remain there until they have greater certainty regarding the direction of interest rates and their rate of decline. Similarly, developers that are well-capitalized and who could afford to wait, including Greybrook and our partners, have, in general, held back from launching sales in new pre-construction projects until demand has returned and the market exhibits better and more stable pricing of new inventory.
That said, there were projects that launched successfully in 2023, achieving their desired prices with strong interest from both buyers and investors. More affordable price points, compelling value propositions, and desirable locations seemed to be the determining factors in a project’s success. Timing of launch was also a key variable, which benefitted projects that launched during the brief period in the spring of 2023, where demand for housing roared back in both pre-construction and resale housing markets on the signal that the BOC would be pausing interest rate hikes. Though the response was short-lived, with the BOC quickly reaffirming its intention to continue tightening, it is perhaps a foreshadowing of things to come once inflation is considered in check and rates trend lower. Keeping in mind the critical shortage in housing supply against the backdrop of record population growth (430,000 new immigrants to Canada in Q3 alone), it stands to reason that today’s inactivity will quickly turn into tomorrow’s re-energized market activity once the economic and rate outlook improves.
Impact of Provincial Legislation and Action on Residential Development
For their part, the Provincial government introduced legislation via Bill 23 – More Homes Built Faster Act, 2022, as well as Bill 108 and 109, among others, which endeavour to address several challenges the industry faces in delivering more homes, faster. So far, we have seen some positive changes from this legislation, including a reduction in development charge increases in certain municipalities, as well as more clarity on the rate of future increases. Other positive changes introduced to improve process efficiency include limiting third-party appeals with respect to minor variance and consent decisions, eliminating the public meeting requirement for applications for approval of a draft plan of subdivision, and expanding the Ontario Land Tribunal’s authority to dismiss a proceeding without hearing and to prioritize the resolution of specified classes of proceedings. While other changes that were introduced to expedite approvals, like the mandate for municipalities to reimburse development application fees for zoning by-law amendment and site plan applications if statutory decision-making deadlines are not met, have not yielded the intended outcome. That said, we believe the new legislation is an important step forward in recognizing that the supply issue is largely a result of cumbersome and inefficient municipal processes that need to be reexamined and improved. As time passes and additional staff and funding resources are added, our hope is that the impact of this legislation continues to be positive, both by improving the approvals processes and timelines and providing greater cost certainty for developers.
In the meantime, where possible, efforts are being made by the private sector to address planning process bottlenecks. For example, in some of our low-rise developments where Official Plan Amendments and/or Secondary Plan processes are required, we, along with other landowners in our landowners’ groups, are working with municipal planning groups to initiate a “private-public” approach to progress through approvals. This involves coordinating private sector resources to help complete some of the necessary studies that municipalities require to move applications forward more expeditiously. This hybrid approach can, in some cases, address some of the staff and funding shortages that municipalities have, and we are encouraged by the willingness, in some regions, to engage in this more collaborative approach.
We have also experienced positive changes that have come out of Bill 23 legislation that supports increases in density on projects. With the changes introduced by the Bill, developers no longer have to wait two years from the receipt of their zoning approval before requesting a minor variance to amend their approval and add more density. This has allowed developers the opportunity to apply for additional density on recently approved projects where it may make sense from a planning and project economics standpoint. Over the past year, Greybrook and our development partners have undertaken a review of our high-rise and mid-rise projects where we believed higher densities could be supported by Staff and Council and have since applied. In cases where a decision has been rendered, we have achieved the additional density, and we are optimistic the same will be the case for the projects where we await responses. This is another example of a positive policy change that will allow the industry to increase the amount of new housing more rapidly.
While there have been a number of positive outcomes resulting from provincial policy changes, certain decisions and actions taken by the province last year proved controversial. The provincial government’s decisions to remove land from the Greenbelt in the summer of 2023 called into question the Housing Minister’s actions and resulted in the new Housing Minister rolling back the decision on the Greenbelt lands as well as some prior urban boundary expansion decisions made across the GGH. These actions were a surprise to the industry and have created some headwinds in moving the collective industry towards the goal of addressing the housing supply shortage. As we enter 2024, uncertainties remain regarding the implications of these changes and the avenues that may be available to developers to appeal these decisions, or otherwise move forward with their interests using other pathways. That said, the industry has always proven to be adaptable in the face of legislative change and we expect that will continue to be the case.
One thing is certain, the province urgently needs more homes to be built and the industry is willing and eager to deliver on this when the economics make sense. The underlying market fundamentals in Southern Ontario remain very compelling, and we head into 2024 motivated to pursue the development of new communities that fulfill the need for homes in Ontario and generate strong returns for our investors. It is important to remember as investors, that notwithstanding the frustrations we have experienced as it relates to planning processes, it is these complexities that have contributed to today’s supply/demand imbalance and the resulting sustained upward pressure on housing prices over the long-term.
Within our organization, we are bringing the full force of our internal resources, leveraging our team’s innovative ideas, and exploring new and creative approaches to ensure we continue progressing on every project. Our asset management teams are consistently striving to make the best decisions at critical milestones, securing the best terms in financings, and entering into favourable contracts with construction trades as we endeavor to deliver the best outcomes for investors in our projects. Externally, we are leveraging our industry relationships, including those within the broker community, our network of consultants, and our major banking partners to gain valuable insights that help inform our decisions.
We are fortunate to be in an exceptionally strong position with investments in partnership with developers of considerable financial strength, and together, our industry scale and relationships provide us with an advantage in turbulent times. Furthermore, our investment structure protects investors from financial hardships such as capital calls and provides credit support to lenders in projects. Our model has always focused on capitalizing each project responsibly and through a structure that protects investors.
In Southern Ontario, we are co-managing over 60 active projects at various stages of development and making important decisions with our partners on the strategic timing of sales launches, financing programs, the advancement of planning approvals, construction programs, and working to successfully complete home closings and projects.
With respect to projects in the planning stages, as mentioned, we are progressing our applications to achieve or exceed our planned density on projects and to achieve the optimal draft plan and site plan approvals for low-rise projects that will enable strong sales programs and efficient construction programs while working to find ways to unlock bottlenecks and reduce time to approvals where possible for each of our projects.
Where possible we are working with our partners to engage with City Council and Staff early in the planning process to understand their needs and pain points in advance of submitting applications to reduce the amount of “back and forth” negotiation typical of the process. While the processes are still long, we believe this is helping.
For our projects in active construction, the overall pace of construction has been quite good, a welcome change from challenges experienced in the prior two years. Our projects are well capitalized, and we have conservatively modeled higher interest rate forecasts in our proformas, stress-tested our financial assumptions, and reviewed our financing programs and financial needs across all projects. We continue to be directly involved in financing discussions and decisions and believe our partners are managing through these times well.
For projects that are ready or preparing for a sales launch, we believe we are drawing nearer to a market that will support more robust sales with a return of buyers to the pre-construction market. As we saw briefly in early 2023, indications that the BOC will start tapering interest rates are likely to positively impact sales and investor confidence. While the last “spike” was short-lived, we believe the BOC is ready to start de-escalating rates in 2024, which is expected to accelerate activity in the residential real estate market.
With a dozen projects preparing to launch, our partners’ sales teams are actively working to prepare for the right launch timing, considering several factors, including overall market sentiment, unit pricing, project size, submarket comparables, etc. The process of deciding to move forward is very dynamic, with the final decision often made just weeks before launch. Our teams are continuously evaluating the variables in real-time and are prepared to be swift in “pulling the trigger” whenever the decision to go forward has been made.
We are excited to launch our upcoming projects and believe they all represent exceptional opportunities for different purchasers with a variety of desirable options including projects along the waterfront, in Yorkville, near current and future transit, and in other growing and well-established parts of the Greater Toronto Area. We invite you to view all our projects in active sales including those most recently launched at Eversley Estates in King City, Joya on The Queensway in Etobicoke, and Lindsay Heights in Lindsay, Ontario. The “Buy A Home” page also features projects that will be positioned for a sales launch and for which we will hold a Friends and Family event or offering.
The volatility in the price of homes over the past 18 months, starting with the surge through the pandemic and followed by today’s interest-rate-induced dip, has made it challenging for some purchasers to qualify for mortgages at higher rates when it comes time to close on and take possession of their homes, particularly those that purchased at or near market highs.
Across our portfolio, we have completed home closings on over 1,200 homes in Southern Ontario and have had a very low number of purchasers default on their home purchases, with less than 3% of homes defaulting in 2023. And, in cases where we have had defaults, our partners have been working, as they would in the normal course, to resell defaulted homes at price points that protect the values of homes we have closed in the development to minimize any impact on project profitability. In our experience, it is rare for purchasers to walk away from their purchase deposits and disregard their contractual obligations unless they are subject to significant financial distress. While there is still work to do on future closings until conditions improve, our prior experience has allowed us to get ahead of any potential situations to address closing risks.
Overall, we are nearing completion on a number of projects in our portfolio and we look forward to continuing to deliver unitholder distributions to our investors as projects substantially complete.
Across the U.S., our portfolio consists of urban multi-family developments and ultra-luxury condominium developments, as well as a growing portfolio of value-add apartment properties we are actively repositioning. Our U.S. teams have been working diligently throughout the year to drive progress on each of our projects and are collaborating with our partner on important financings, sales, leasing, planning, and construction decisions, among others, and separately, working to advance our value-add repositioning programs.
With respect to our multi-family portfolio, rent levels in South Florida and Atlanta have remained very strong, particularly in the Miami market, where we have recently begun pre-leasing for our Society Wynwood development – the latest project to launch in our Society Living portfolio. Our mixed-use multi-family building will feature over 318 units including rent-by-the-bedroom options for renters, and it is expected to command a strong rent premium given the quality of the asset, its social living offering, and its centre ice location. In Denver, rent growth has started to come back after a period of decline in 2022 and early 2023. We are seeing rents stabilize and trend upward, notwithstanding some challenges with respect to cost escalation and a prolonged planning process that we are continuing to work through.
On the construction front, our Society Atlanta development in Midtown Atlanta topped off, marking a major milestone in the project. Thus far construction has been progressing very well with plans to begin pre-leasing the rental apartments in late 2024. In Fort Lauderdale, our second tower in the Society Las Olas project is in the process of underground construction and preparing for vertical construction in 2024.
With respect to our for-sale condo developments, the demand for luxury, high-end condo product has remained strong. We have seen consistent sales velocity at our recently completed 646-unit project, The Elser Hotel & Residences Miami that we converted from a multi-family building to a condominium in 2022 to maximize investor’s risk-adjusted returns. We expect to complete the residential sale of the remaining units in 2024 and successfully complete the project. Our Waldorf Astoria Miami Hotel and Residence project also continued to command higher and higher per-square-foot prices on the most recent sales as the project completed its complex below grade program while gearing up for vertical construction of the 100-storey supertall tower.
Last year, we made the decision to more actively invest in the acquisition and repositioning of U.S. value-add assets in key markets within the U.S. Sun Belt. These investments offer an annual cash yield and downside protection in markets that have demonstrated consistent population growth and rent growth. We believe they present compelling investments in the current market in the U.S. with opportunities to acquire well-priced or distressed assets.
In late 2023, we closed on the acquisition of a 352-unit garden-style apartment asset in a suburb of Atlanta with plans to reposition the asset to improve its operating and financial performance ultimately increasing its asset value. This is our second value-add asset in the U.S. with the first being our 566-unit garden-style apartment property in Houston Texas, that is actively being operated and repositioned under our subsidiary Greyspring Apartments.
We intend to expand our investments in this asset class in the immediate future leveraging our experience and in-house asset management, and investment expertise in U.S multi-family and value-add apartments to acquire, execute, and complete value-add projects in our target markets.
Looking Ahead
With respect to monetary policy, we expect policymakers in both countries will end their historic and aggressive monetary policy tightening campaigns and start to gradually reduce current interest rates in 2024. So far, it seems both central banks have been mostly successful in reigning in the pandemic-era inflation that resulted from prior years’ stimulative monetary policy, and both are doing as much as can be expected to avoid seeing any prolonged recession as the economy, labour market (and de facto the level of price growth) slows. While the phrase “higher for longer” has been bandied about for months by central bankers when addressing the likely pace of interest rate deceleration, it seems “how high” and for “how long” will depend wholly on the level of economic slowdown we see over the next few months. Overall, while the war on inflation may not yet be fully won, we believe central bankers in Canada and the U.S. have begun to feel as though it is enough in control such that they can start to balance better the cost/benefit trade-off between realizing the incremental unit of inflation deceleration and a further unit of “engineered” economic decline.
It is our view that the “higher for longer” scenario is unlikely given the pace of inflation deceleration, aggregate economic slowdown thus far, and closer to home the fact that the BOC is keenly aware of the high level of residential mortgages renewing throughout 2024, 2025 and 2026 (all of which would at today’s rates be renewing with considerably higher payments). As such, we believe interest rates will firmly establish their downward direction in 2024. Canada will likely have to be more aggressive than the U.S. Federal Reserve to balance its economy, consumers’ higher interest rate sensitivity, and its comparatively heavier economic reliance on residential real estate.
In Canada, we believe this will mark the beginning of a strong market recovery in residential real estate, and, more specifically, the development industry. This will be represented by what we believe will be a leveling off (and greater predictability) of costs and a more robust market for new home/condo sales. As we move past the “black swan” events represented by the pandemic and the subsequent tightening of historical monetary policy, we expect the industry to return to a state of “normal” towards the latter half of 2024 and into 2025. As consumer/investor confidence returns to the real estate market with an improved economic outlook, we believe the strong fundamentals that have always been driving the GTA/GGH housing market will prevail. As history has shown in past cycles, every rate tightening cycle has been followed by a period of rate easing. During that period, the GTA/GGH residential real estate market has rebounded with strength, and we expect history to repeat itself this time as well.
Similar to Canada, we anticipate 2024 will see a meaningful reduction in interest rates in the U.S. The U.S. and Canadian economies have experienced similar yet different impacts due to the post-pandemic monetary policy tightening programs implemented by their respective central banks. South of the border and with a far less indebted consumer, the U.S. economy has remained strong, defying most expectations. While forecasts call for a slowdown, the U.S. economy has performed considerably better than Canada’s and conditions in the real estate market, across our focus markets have continued to remain relatively stable. We expect these conditions will have a further positive impact on the residential real estate market both in sales and rent growth, particularly if the U.S. realizes a soft landing for the economy, as most economists expect.
New Investment Opportunities
With respect to new investments, we remain as committed as ever to our investment theses and strategies within our target markets. We believe our Canadian investment strategies have never been more relevant and believe we are investing in the best place – where the underlying fundamentals are very strong and, within a market where we have accumulated extensive experience. As a firm, we are consistently challenging our forecasts, investment theses, and assumptions to ensure we are positioning ourselves to manage our risk and maximize return potential with every new acquisition.
The current environment will create opportunities for new acquisitions with potentially greater flexibility on the terms of land acquisitions, and we are currently evaluating many opportunities for long-term investment in the GGH region. We are focused on bringing a variety of high-quality investment opportunities to our investors that include long-term low-rise development and land development projects in the GGH region, transit-oriented high-rise or ideally located mid-rise developments in Toronto, in addition to U.S. value-add properties. As mentioned, we continue to be bullish on the U.S. and seek to add to our expanding portfolio, particularly in acquiring new value-add garden-style apartment properties in key Sun Belt states including Georgia, Texas, North and South Carolina, among others. This will allow investors to continue to build diversified portfolios with Greybrook and create a well-balanced, risk-adjusted exposure to a portfolio of projects that includes variation in geographies/submarkets, asset type, operator, and project duration.
As we plan for growth, our commitment to investing in our operations and in our talented team remains unwavering. A capable and well-equipped team is essential in executing our strategies and successfully managing our existing projects while maintaining the trust of our more than 10,000 investors worldwide.
We would like to take the opportunity to acknowledge the contributions, hard work, and dedication of our talented teams over the years, and we encourage each of our employees to continuously grow, improve, and challenge themselves and one another for our firm’s betterment and to reaffirm our commitment to our investors and partners. For our part, we are dedicated to building and cultivating a team of value-creators, equipping them with enabling technologies to enhance processes and support strategic decision-making, while continually striving to improve our investor experience.
Over the past two decades of investing, we have experienced a myriad of different and complex issues as well as many exciting opportunities for growth. What we have learned is that there are consistent themes to maintaining our success and performance. We have learned to be resolute in our convictions, but more importantly, we have learned to be flexible in our approach. We have learned to be unwavering in our principles, yet at the same time, willing to learn from our mistakes and grow. We have all faced adversity at times, as is inevitable in life and business, but regardless of the conditions, we remain dedicated and relentless in our efforts. In the year ahead, we look forward to tackling our challenges head-on, seizing opportunities we create, and navigating a path ahead for the collective.
To all of our investors, thank you for your continued partnership. We are proud and privileged to partner with such a vast and diverse group of investors, as well as development and industry partners. We look forward to connecting with you throughout the year and keeping you updated on our progress.
Sincerely,
