For Pier 4, rent gaps, conversions and tighter operating costs are doing more of the work as the market softens
This article was produced in partnership with Pier 4
Markets naturally gravitate toward areas of growth, but scarcity can be just as important. Assets that are expensive to replace, slow to develop, or difficult for competitors to reproduce can become more valuable over time, and in the years ahead, those supply constraints could prove to be a significant source of investment value.
In multifamily real estate new supply takes years to clear approvals and financing in most Canadian cities, longer still in the secondary and tertiary markets across Ontario and Atlantic Canada where Pier 4 Real Estate Investment Trust does much of its buying, markets many larger competitors skip altogether.
Scarcity alone doesn’t collect rent, though. What happens after Pier 4 buys the building is what does. Take gap to market, the difference between current rents and prevailing market rents on the same unit once a tenant moves out on their own terms.
If the current tenant is paying $1,000 a month, once they vacate on their own terms the unit can be rented to a new tenant at the prevailing market rent of $1,500, that’s a $500 gap, one running at roughly 41 to 42 percent across Pier 4’s portfolio right now. Jake Levy, Vice President, Finance at Pier 4, calls closing it “a two-way street,” good for the investor and for the resident who stays behind.
Rents have softened across parts of Canada lately as new supply and slower immigration cool the market, and Pier 4’s pitch to investors isn’t that rents are about to climb again. It’s that the economics of a building have the potential to improve once Pier 4 owns it, regardless of which way the market moves.
Value creation begins after acquisition
John Lucic, Vice President, Operations at Pier 4, points to space inside older buildings that may be generating little or no income at all. Storage rooms, oversized common areas and other underused parts of a property can sometimes be converted into another suite.
One property had roughly 600 to 700 square feet tied up in storage. After Pier 4 took ownership and examined the building more closely, that space became another apartment.
“That is something that we can’t technically model in from the get-go,” Levy says. “Until we inspect it, go through heightened due diligence.”
Those sorts of gains are easy to miss in a spreadsheet because they do not necessarily exist in the trailing numbers. They depend on what the operator notices once it gets into the building.
Lucic says Pier 4 also looks at energy projects and operating contracts, areas where small savings become more meaningful across a larger portfolio. The firm handles some work internally as well, particularly around suite turnover, which can bring down renovation costs.
A different use for the rent gap
Gap to market is usually talked about as future upside. Levy also sees it as something that can absorb a weaker rental market.
“If you have compression in market rents and market rents are a driver in calculating that gap, let’s say you’re at 40 and they compress by 10 percent, and now you’re at 30, you still have room and availability left to unlock value at the building,” Levy says. That leaves Pier 4 with some embedded rent growth even if market rents move against it.
Levy says annual increases and other permitted measures can gradually narrow the gap while residents remain in place, but the larger reset generally comes when a unit becomes vacant.
“Patience is really operating the building the same,” he says. For investors, that means a 40 percent gap should not be read as 40 percent of rent growth waiting to appear next year. Some of it may take years. What matters is that the spread exists while the property continues producing income.
A large gap to market can make an acquisition look appealing, but it does not override the physical condition of the asset. Lucic says the firm has walked away after due diligence uncovered structural or environmental issues that were not obvious at first.
Scale without needing a large building
Pier 4’s willingness to buy outside major metropolitan markets also changes the set of properties it can pursue.
Lucic says the firm can take on a 12-unit building or a 550-unit complex. Some competitors concentrate on one end of that range because smaller properties are difficult to justify once institutional overhead is added. Pier 4 sees the smaller end differently.
“We look at secondary markets and we look at value-add,” Lucic says. “Many competitors may only buy or focus on certain building types. We buy everything.”
Levy says softer rents have been more noticeable in Ontario, while Pier 4’s properties in New Brunswick and Nova Scotia have held steadier, with vacancy around two to three percent and continued demand for available units.
Levy’s point is that a wide gap to market gives the portfolio room to absorb some weakness without giving up the opportunity to improve income over time. The value is not dependent on rents moving in a straight line.
That brings the argument back to operations. Pier 4 is buying properties where there is already room between in-place and market rents, then looking for additional gains after acquisition through the way the building is used and managed.
For advisors, that is a more useful way to read the strategy than as a simple bet on Canadian housing. Scarcity may support multifamily over the long term, but the returns still have to be produced property by property. In a softer market, there is much less room to confuse a rising tide with good execution.
