Pier 4 on separating sentiment from fundamentals, finding opportunity in secondary markets and evaluating private REITs
Sherlock Holmes warned against theorizing before one has data. Pier 4 argues that much of today’s housing conversation starts with broad assumptions about residential real estate, even though the data continues to point to strong opportunities in multifamily.
“Many investors view all real estate through the same headlines, treating single-family and multifamily as though they respond to the same market forces,” said Jake Levy, VP Finance at Pier 4. “Multifamily over the course of the last 20, 30, 40 years has remained relatively strong, and the historical returns compared to even similar bonds or equities speak for themselves.”
For Levy, the recent softness in the sector has had far more to do with the price of debt than with the underlying health of multifamily properties. As interest rates climbed, financing costs rose and valuations adjusted accordingly. That, he argues, is a very different story from weakening demand.
Demand, in fact, is where Michael Ashby, co-founder and CFO at Pier 4, believes another misconception has taken hold.
“There’s a common misconception that immigration’s down,” he said. “If you look at the 20-year average, it’s been increasing every single year outside of the pandemic.”
Adam Ashby, CEO and co-founder of Pier 4 finds the media narrative has become part of the challenge. “Just because there’s a lot of outside noise doesn’t mean real estate isn’t a great investment,” he said. “A lot of people are being swayed by the media, which is creating a difficult time for operators that are operating well.”
The opportunity isn’t where everyone is looking
The irony is that some of the strongest rental markets aren’t the ones dominating the conversation. When rents soften in Toronto and Vancouver, it’s easy to assume the rest of the country is following suit.
Adam points instead to the places that receive far less attention. While asking rents have cooled in Canada’s largest cities, a number of secondary markets have continued to post annual gains. Halifax posted annual growth of 5.4 per cent, Saskatoon climbed 9.4 per cent and Greater Sudbury rose 7.7 per cent, highlighting a market that is far from moving in lockstep.
Rather than chasing Canada’s largest urban centres, the firm has focused on secondary markets where affordability, population growth and infrastructure investment continue to support rental demand. Adam sees Kitchener as one example. “This wouldn’t have happened unless there was demand,” he said of the city’s expanded GO Train service, adding that sustained population growth, a stronger employment base and continued infrastructure investment have all reinforced that demand.
Michael observes the same story playing out in transaction activity, “We’ve continued to see strong transaction activity in the space that we’re in,” he said. “There’s still an appetite and demand for multifamily.”
In other words, while higher borrowing costs have changed pricing, they haven’t emptied the market. If anything, the team argues they’ve created more room for disciplined buyers.
Buying when the market feels uncomfortable
Today’s opportunity as Adam sees it comes down to separating the property from the financing environment around it.
A building generating the same net operating income it did a few years ago may still trade for less today, not because the asset has deteriorated, but because higher interest rates have changed what buyers can afford to pay. In his view, that’s an important distinction.
“There’s a significant amount of opportunity that’s in front of us that we are looking to acquire because we think the current conditions present attractive long-term opportunities,” he said.
The backdrop hasn’t fundamentally changed. Canada continues to face a housing shortage, demand for rental housing remains strong and new supply is still struggling to keep pace.
“We have demand, but we don’t have supply,” Adam says. “Some markets have seen pricing soften, but when you look at the income these assets generate, today’s valuations can represent an attractive entry point.”
Levy saw, from a longer-term perspective that real estate cycles come and go, but the case for multifamily has historically been built over decades rather than quarters.
“We’re seeing a lot of deals come in below where they were two or three years ago on a price-per-door basis,” Levy said. “Over the long term, multifamily values have historically demonstrated resilience.”
When the tide goes out
The recent market has made valuation harder, but also more important. A lower price can reflect deteriorating fundamentals, or simply a higher cost of capital. Levy says advisors need to know the difference.
“Looking at weighted average cap rate can tell you if something’s overvalued, which would be worrisome from an advisor standpoint, or undervalued, which can be more conservative,” he said. “But that also gives you a good indication that there’s growth if it’s undervalued.”
That’s where Levy encourages advisors to dig deeper. Historical returns and distributions can show how consistently a manager has delivered through different market cycles, while metrics such as occupancy, same-property net operating income growth, and payout ratios offer a clearer picture of how the portfolio is performing beneath the headline yield.
For investors, Michael says private REITs provide access to an asset class that would otherwise be difficult to own directly. Rather than purchasing and managing a single apartment building, investors can gain diversified exposure to dozens of professionally managed properties through a single investment. They can also complement traditional public equities and fixed income by adding a source of returns that isn’t driven solely by public market movements.
“A lot of people, for $10,000, can’t buy an apartment building,” he said. “So you get the opportunity to participate and buy 40 or 50 or 100 apartment buildings, again with the upside and potential of growing.”
That’s also where Pier 4 believes its approach stands apart. Rather than betting on rising real estate values, the firm focuses on buying well, using conservative leverage and improving the performance of properties over time. Its emphasis on Canada’s secondary markets, operational improvements and long-term portfolio management is intended to create value even when market appreciation is harder to come by.
Markets like today’s tend to test that approach. They make it easier to distinguish between returns driven by disciplined execution and those that were largely the product of a favourable market.
This article was produced in partnership with Pier 4
