Outlook Real Estate
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Real Estate Strategy
February 2025
Dancap has over 30 years of track record investing in real estate through third party funds, co-investments, and direct investments in major cities across North America. This market overview focuses on Dancap’s current real estate holdings based on type of investment and location and looks to provide an update on current market dynamics, outlook, and future risks.
The vast majority of the Dancap real estate portfolio is now comprised of co-investments in B-class, US multifamily value-add properties in high-growth cities. Our real estate portfolio focuses on US multifamily value-add opportunities because of the strategy’s strong risk-adjusted returns coming from cost-effective CAPEX programs, organic rent growth, stable operating expenses, and strategic exit timing. We are a passive limited partner and target a minimum net 15% IRR and 2.0x MOIC over a five year hold for value-add opportunities. A smaller portion of our real estate portfolio holdings are invested in multifamily residential high-rise condo developments in the Greater Toronto Area; we are also a passive limited partner and target a minimum net 20% IRR for new construction developments.
US Real Estate Strategy
Vacancy Rates & New Supply across Real Estate Strategies
Vacancy rates in the US tend to be closely tied to the strength of consumer activity, particularly the labor market. As illustrated in the chart below from CBRE, since 1990, vacancy rates across various real estate sectors – including multifamily, office, industrial, and retail – have closely mirrored trends in US unemployment. With the US economy projected to grow by over 2% in 2025 and unemployment expected to stabilize around 4.2%, strong tenant demand is likely to contribute to declining vacancy rates across sectors in this real estate cycle.
Source: CBRE 2025 US Real Estate Market Outlook
According to JLL Research, a significant drop in new supply is anticipated to affect nearly all commercial real estate sectors across North America. The most pronounced declines in new completions are expected in the US office sector (a 73% reduction from peak levels, particularly in cities such as Boston, Chicago, and New York) and the industrial sector (a 56% decrease). Investors should carefully evaluate how this contraction in new supply might influence vacancy rates and the performance of their investments.
Source: JLL Global Real Estate Outlook 2025
US Multifamily Cap Rates
Cap rates in the US multifamily sector tend to be strongly influenced by borrowing costs, with a notable correlation to CMBS (Commercial Mortgage-Backed Securities) spreads. When CMBS spreads widen, borrowing costs increase, leading to higher cap rates and a decline in property values. Conversely, narrowing spreads lower borrowing costs, which often results in reduced cap rates and higher property valuations. The historical relationship between CMBS spreads and multifamily cap rates is evident, as shown in the accompanying chart, focusing on key US cities where Dancap has multifamily real estate holdings. According to CBRE, US 10-year Treasury yields are projected to decrease by approximately 25 basis points to 4.0% during 2025 and this may lead to lower multifamily cap rates. Furthermore, if CMBS spreads continue to decline from their 2023 peaks, additional cap rate compression could further support valuations.
Source: missing
US Multifamily Rent Growth
According to CBRE, the US multifamily sector is projected to remain the most favored asset class among investors in 2025. Despite challenges such as elevated interest rates and a record influx of new supply in 2024, robust renter demand is expected to drive higher occupancy rates and rent growth in 2025. Certain regions in the sunbelt, including Atlanta, Phoenix, Fort Lauderdale, and Fort Worth, are expected to see continued new developments in 2025. However, many of these markets appear to have passed their peak delivery periods, with vacancy rates already beginning to decline. By the end of 2025, national average rent growth is forecasted to be 2.6%, slightly below the 2000-to-2023 average of 2.8%. A key risk to rent growth is always the possibility of an economic recession; if economic conditions deteriorate rapidly, the multifamily market may experience significantly weaker rent growth, particularly given the high level of new supply entering the market.
Source: CBRE 2025 US Real Estate Market Outlook
US Multifamily Outlook
Dancap continues to see opportunities in the multifamily real estate sector and our outlook remains generally positive. Demographic trends, such as continued population growth in key markets, robust job creation, and steady household formation, provide strong support for the multifamily sector. While cap rates and interest rates have risen in recent years, leading to a decline in multifamily property valuations, the market is showing signs of stabilization. Looking ahead, we believe that cap rates may face downward pressure over the next few years, although this will be largely driven by property class, location, and specific attributes. Historically, our minimum target for multifamily value-add has been a net 15% IRR and a net 2.0x MOIC over a five-year holding period. However, considering the current higher interest rate environment, we are now targeting returns closer to net 20% IRR, reflecting both the challenges and opportunities in today’s market.
Greater Toronto Area (GTA) Strategy
New condominium prices for multifamily residential high-rise developments in the GTA softened in 2024, reflecting ongoing market challenges. Average prices for new condo launches declined to $1,130 per square foot (psf) in Q4-2024, the lowest since Q2-2021 and down 15% from Q4-2023 ($1,334 psf). This price adjustment comes as unsold inventory reached a record 24,277 units by year-end 2024, a 6% increase from 2023 and 50% above the 10-year average. The current sales pace would take 64 months to clear unsold inventory, far exceeding the balanced level of 10-12 months. Condo sales in 2024 totaled 4,590 units, marking the slowest year since 1996 and reflecting a 64% decline from 2023 (12,696 sales). Q4-2024 recorded 802 new condo sales, up 12% from Q3 but down 71% annually, the lowest Q4 total since 1993.
Despite some price reductions and incentives, demand for new projects remained weak, with only 10% of units selling across six new developments launched in Q4. Increased construction costs, higher interest rates, and financing challenges have further strained developer activity. New condo starts fell to 9,258 units in 2024, the lowest annual total since 2002 and down 51% from 2023. Meanwhile, completions hit a record high of 29,800 units in 2024, 24% above 2023 levels, with another record of 30,793 units anticipated for 2025. However, this surge in completions is expected to taper significantly in the following years due to declining starts.
GTA Mutlifamily Outlook
The rental market in the GTHA experienced adjustments in 2024 due to a record influx of new completions. Average condo rents for leases signed in Q3-2024 decreased 3.8% year-over-year to $4.04 psf, while average monthly rent declined 5.7% to $2,762. This trend was more pronounced in the City of Toronto, where average condo rents fell 4.8% annually to $4.18 psf ($2,805 for 671 square feet). New purpose-built rentals mirrored similar trends, with average rents for recently built units declining 2.2% annually to $4.09 psf. Vacancy rates edged higher to 2.7% in Q3-2024, unchanged from Q2 but up from 1.8% in Q3-2023. Rental construction starts fell sharply, with only 585 units breaking ground in Q3-2024, a 40% year-over-year decline. No rental starts were recorded in Toronto during Q3, further contributing to the year-to-date drop in rental construction.
Despite the current challenges, developers are expected to hold back supply to stabilize prices, and demand is likely to rebound with easing interest rates. However, the significant decline in starts will constrain new supply beginning in 2026-2027, potentially leading to renewed upward pressure on prices and rents.
To see the Dancap Real Estate Investment Criteria and Portfolio, please click here.