Alberta real estate in a slump? (Market analysis included)

[JDE]

Hey everyone,

I am interested in investing in residential real estate and was considering Alberta as a possibility. After filling out Don Campbell's checklist however it would appear Alberta may be in a slump. I have limited experience in real estate investing and was wondering if there were any more seasoned investors out there that would agree or disagree with this? Does anyone actually use this checklist in practice? Here is the checklist and data (some is from Calg/Edm because none available for AB as a whole) (Data mostly from CMHC, statscan, AB gov, CREA)



This is unemployment rate inverted and flipped to visualize employment % more easily:



Teranet is an index for house values

Affordability:

 

[MonicaPaslawski]

Good going. [emoji4]yes I use this. Analytic personality. And although we're not buying right now and I have not done this research my general knowledge would think you're right

 

[Matt Crowley]

@JDE awesome post, you put some serious effort in! How does the scorecard work? Looks like you are summing the red bubbles but not sure why?

The absolute easiest way to think about the real estate cycle is simply where is price compared to net asset value.
P = current market price of real estate
NAV = the analyst's value of real estate (income method, replacement method, direct capitalization, comparables)

P > NAV, real estate becoming overvalued (sell)
P = NAV, fairly valued (neutral)
P < NAV, real estate undervalued, (buy)

Great introduction to NAV: https://s3-us-west-2.amazonaws.com/gstqa-us-west/public_files/GreenStreetPricingModelReport.pdf

NAV is only 2 elements driving value: appreciation potential of property and current income of property. Historically, the unleveraged split of returns are roughly 50% income and 50% appreciation. Good discussion of historical income vs. appreciation split: http://realforecasts.com/where-will-commercial-real-estate-returns-go-from-here/ (don't worry about the forecast into 2016+, focus on historical)

Check out JLL's property cycle clock: http://www.us.jll.com/united-states/en-us/research/property-clocks/multifamily (go back and read historical research reports to see where and when markets were in the states that boomed / declined)

It is a good buying environment in Alberta right now for well-capitalized investors but the value-hangover for oil at $100 is real. So, yes real estate values are somewhat depressed but Edmonton / Calgary multi is trading around 4%-5% cap on 2% appreciating year 1 rents. So the mix of buying for income / appreciation is probably in the range of 70% - 65% appreciation in Alberta (from what I've seen), vs. U.S. markets where cap rates elevated in a slump. Part of this is our systemic love for housing as a consumption good in Canada and not going through the 2008 cleanse the states experienced.

 

[Thomas Beyer]

Many of your circles are in the wrong spot or based on old data as AB is clearly recovering ( rising house prices, avg wages, car sales, restaurant sales, retail .. all UP from a year or 2 ago ). But there is too much inventory thus high vacancies for about two more years.

Proceed with caution. Waiting for higher prices but lower vacancy an option, of course, in a year or 2.

 

[Matt Crowley]

Yes, in recovery clearly, likely to lead Canada short term in GDP growth but driver is affordability and (nationally attractive) disposable income, not investment and substantial cap ex growth in the economy. Recovery at this point is to a very moderate level...however a lot of dry powder for growth if/when oil makes a rebound.

 

[JDE]

Thanks everyone for the feedback, I really appreciate it.

Matt basically the scorecard is based on the assumption that the key drivers (ie net migration, vacancy rate etc.) will be increasing, decreasing, peaking, or troughing at specific stages in the RE cycle. This isn't an exact science though so you add them up and if most of the key drivers seem to be indicating a certain phase then you can be reasonably confident that's where you are at. Thomas is right however that not all my numbers were as up to date as they should have been.

Thanks for the article on NAV, that's another great approach that I hadn't been exposed to before but is an interesting way of looking at it and I'll have to read up some more.

 

[Cory Sperle]

In my opinion ignore analysts. Most are employed by large real estate firms that look at absolutely everything. Your average starting Investor is 90% gut and 10% analysis. Common sense would imply to buy low, which is where we are now. Find a location and property you like and then buy it.

 

[Martin1968]

When looking at those scorecards my head starts spinning.
In general, analyzing potential purchases based on these reports will likely mean you won't purchase at all.
It's exactly as said, 90% gut 10 % (Simple) analysis. You either have the business sense and know when and where money can be made or you don't.
It reminds me of some past business neighbors who opened a business next to one of mine, great gals, smart cookies(?), business degrees, landlord impressed with their approach and research and business plans presented. It was gonna be a huge succes, a slam dunk!
Despite their analytical approach, the business failed, had to walk away from it after 3 years, heavily in debt and a broken friendship between the partners (who were bff)
My gut feeling was right, I didn't believe it would work.
And that's how it is most of the time in real estate. You are better off going for coffee with someone that has been around the block a few times it will likely give you a way better idea on how to approach.
Call it gut feeling, call it business sense. You have it or you don't.
Good luck though, Alberta still is a great market despite the report

 

[Matt Crowley]

Think about analysts as part of the hockey team. On a good team you need some 1st liners, some 2nd, some grinders, a fighter, someone who will pass instead of shoot, a hothead who can get under the skin of the other team, mature experienced players... they are all part of the team and part of a winning formula.

Analyst reports are excellent for top-down view. If you want to get into bigger deals one day you will want to know the investment brokers who came from the analyst broker stream. On the private equity side, most managing directors come from the analyst side as well. The analyst skills are very valuable as there should be as little gut involved as possible. At my work, we have an investment committee with $7 billion in acquisition experience to review any acquisition so we can remove as much of the the gut element as possible. There is a gut about the future, but the choice should be very systematic.

 

[Cory Sperle]

Well I suppose if I'm looking for a career as a managing director or an investment broker I may look at this, but for most of us too much analyzing creates analysis paralysis. Certainly if I was building an office tower in Calgary, or an industrial complex in Edmonton and I really needed to drill into the demographics analysis would be crucial. No analyst, or nobody for that matter can accurately predict real estate prices. For most of us CMHC rental reports, a good team of professionals, a network of fellow investors, the REIN scorecard or something similar is enough analysis to make an informed decision on location, and the rest is finding a decent property in that area which is often a gut call. For me personally as long as the market is not overheated, I can locate a good buy in a good location, and I plan to hold long term with sufficient reserves there is rarely a bad time to buy.

 

[Martin1968]

Think about analysts as part of your soccer coaching staff (sorry Im a soccer nut and rather use that as an example) You are the head coach, they are the assistants and/or support staff. You respect them for the value and support they bring to your team, but you also know you are the one responsible for the teams performance and can't doubt yourself. When you fail, it's your job on the line. When you fail, often you are the one getting the sack. So, you listen and use what's relevant but you set the course often by gut feeling.

For the type of investing most of us on this forum do, you need to understand how to run the numbers and how to turn a profit on prospective purchase. That's your number 1 analysis. If that looks and feels good, then that's what's called gut feeling. You could sure look at some more things to strengthen that gut feeling.
Other then that, for starting out your career in real estate investing by (over) analyzing till you see blue in the face likely means you won't get there. It means you are trying to cut out all risks and seeking guarantees that don't excist. Bite the bullet, run simple numbers and take some risks. That's what makes an entrepreneur.

 

[Paresh]

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