Apartment REITs see higher revenues amid tight rental market. Will this spur new supply?

The Calgary-based Boardwalk Real Estate Investment Trust (REIT) is among the REITs posting higher year-over-year revenues amid a stubbornly tight rental market.

In the first half of the year, the trust — which owns more than 33,000 apartment units, most of them in Alberta — saw its same-property net operating income (NOI) grow by 13 per cent compared to the same period last year.

Same-property NOI is a popular measure of profitability in the real estate sector that looks at revenues from properties, minus operating expenses, and controls for events like acquisitions and dispositions that might skew the numbers. 

Boardwalk says its growth was driven in part by the surge of people who have moved to Alberta in the last year, leading to higher occupancy rates and the ability to phase out discounts used in tougher times to coax renters into signing leases.

"When demand increases and supply does not increase proportionately, we're seeing no discounts [are] needed to keep our occupancy at high levels," said Sam Kolias, the trust's chairman and CEO. 

It's a trend happening across the industry, as all five of Canada's largest publicly traded apartment REITs — Boardwalk, Killam, Minto, CapREIT and InterRent — saw their net operating incomes grow somewhere in the neighbourhood of seven and 13 per cent year-over-year in the first half of 2023. 

The healthy results come as REITs face criticism for their role in what advocates describe as the "financialization" of housing, which they say is contributing to the high cost of apartments in this country.

The industry, for its part, has pushed back against that characterization, saying investment is needed to build and maintain rentals, and that REITs provide a key source of affordable housing.

Whatever your perspective, experts say the sector as a whole is in a strong position relative to the rest of the commercial real estate market, as migration trends, inflation and high borrowing costs boost demand for rentals and spur investment in apartment REITs. 

That level of demand and profit could spark a wave of new apartment construction, though so far this hasn't quite materialized.

As a tightening housing market boosts apartment REITs' revenues, these trusts have also started attracting a "significant" amount of capital from investors, said commercial real estate consultant John Andrew. 

"Not just individual investors, but the large institutional investors like pension funds and life insurance companies and so on," said Andrew, who said industrial REITs are also faring well. "They're flooding into these REITs, no question about it."

Andrew said this investment, along with higher rental revenues, will likely be used to maintain and renovate these trusts' existing properties, and to develop new ones — though it isn't clear yet how that balance will shake out. 

At Boardwalk, for example, developing new apartments wasn't previously part of the company's growth strategy. This has recently changed owing to a surge in demand for affordable rentals, according to the trust's latest annual information form.