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Episode 361 – March 3, 2023

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QuadReal Property Group is a global real estate investment firm that manages $67.1 Billion in holdings with a focus on global cities. And they are betting big on Vancouver. Vice President, Investment Management, Raul Jaime sits down with Adam & Matt to detail exactly why and his best investment tips will SUPERCHARGE any real estate portfolio! Where should you buy in the Lower Mainland? What separates a good deal from a bad one? And what strategy has kept QuadReal best in class (an easy strategy for every investor to adopt!)? This episode is as instructional as it is enlightening. Level up!

Guest Information

Raul Jaime

Raul Jaime is the VP Investment Management at QuadReal Property Group. Raul is an experienced real estate professional with excellent negotiation skills in acquisition and dispositions as well commercial leases and other partial interests in land. He has been directly involved in all the steps of development from site selection to development permit, rezoning, design, all the way to construction and sales. His experience also includes managing a portfolio of properties and ensuring optimum performance; managing budgets for capital projects and overseeing renovation projects in a wide variety of real estate assets across the province.

Episode Summary

In a post-pandemic world with high interest rates, are big global cities the right investment play? Raul Jaime thinks so. Raul shares QuadReal’s investment strategy for global cities, what he’d buy right now, and why Vancouver real estate is a great investment!

Who is Raul Jaime?

I have the most unorthodox real estate career. I grew up in Mexico and then came to Calgary for university. I studied political science at the University of Calgary and was a quarterback with the Dinos, but didn’t see much playing time. I then went to Spain to get my Masters.

When I returned to Mexico, I thought job opportunities would rain down on me but that wasn’t the case. Real estate was hot where I was living so I got into it by helping my mom with her real estate business. It eventually became my full time job in addition to working at the Canadian consulate in Puerto Vallarta. A lot of Canadians would come in and ask questions about buying property in Mexico but consulates don’t advise people on investments.

So my friend, who worked at the Mexican consulate in Calgary, and I decided to open a consultancy to help people invest in real estate in Mexico. I moved back to Calgary to open that business with him in 2008. Unfortunately, our timing was a little off. But there was a boom of North Americans buying in Mexico, especially those looking for retirement homes at a lower cost of living.

We noticed a lot of people would come to Mexico and tour properties, then return home to Canada and try to continue with the buying process. But it’s hard to buy property in another language and another country. So we thought having a physical office in Calgary would help people get the advice and confidence they need to carry through with the sale.

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How did the 2008 financial crisis affect your business?

We did all right for the first little while. But condo developers depend on pre-sales for financing. When pre-sales dried up in Mexico, developers had to delay their projects. So a lot of clients wanted their money back since projects were years delayed. My partner, Carlos, is a lawyer so our business turned into more litigation than consultancy.

How did you go from working on Mexican real estate in Calgary to global real estate in Vancouver?

I moved to Vancouver after my business in Calgary was struggling. I first worked with a business that leased out billboard space. I then worked at BC Housing and a not-for-profit before coming to QuadReal. My background in not-for-profits is actually very helpful in my current role.

Most developers today need to understand affordable housing. If they don’t, they’ll learn about it very quickly as most municipalities have a requirement that projects have purpose-built rental or other affordable rental components.

Was there a big difference moving from the not-for-profit world to QuadReal?

It was night and day. The demand base is very different. A not-for-profit can’t run a surplus so operating budgets are tight. QuadReal is a for-profit company and we want to see a return.

But we are a responsible company and contributing to the community where we invest is important to us. The background I have in not-for-profit work gives me the experience that’s needed.

Do you follow the real estate market closely?

I follow the real estate market very closely. A good percentage, maybe 40-60%, of new condo sales are sold to investors. At QuadReal, we operate apartment buildings and so our main competition is other apartment buildings.

But our secondary competitors are condos owned by a landlord and rented out to tenants. So I follow condo sales very closely because it tells me what rental prices will be. That impacts our new investments and what we charge for our apartments.

How is the real estate market today?

Right now, it’s hard to buy. There are less transactions happening because interest rates are higher. There’s been a lot of talk about cap rate expansion in our world, which is single title, purpose-built rental buildings.

In January 2022, the highest cap rate was probably 3.5-3.75%. Today, there’s more pressure on those rates going above 4%. But we’re still seeing transactions in the low 3%. We’re seeing some erosion of value but it’s not as bad as people thought it might be.

The fundamental driver of the Vancouver market is that there are more people moving here than there are houses for them to live in. We don’t build enough of all kinds of housing. That will continue to drive prices up until all levels of government realize that affordability issues are supply issues.

How do individual condo buyers affect QuadReal’s strategy?

QuadReal has a mandate to invest prudently and create a return. We have to acquire real estate that will allow us to create an acceptable return for our investors. So the economics of an individual buyer buying a single condo are very different from us buying an entire building.

For example, a couple of years ago we bought a building in North Vancouver with 200 units for about $550,000 per door. You can’t buy an apartment for $550,000 but you can if you’re buying 200; there’s a bit of a bulk discount. Even today you can buy newer product at $600,000/door if you’re buying the whole building.

There are enough buyers out there who buy individual condos to rent them out and are happy to be cash flow neutral, because they’re relying on appreciation. We can see what condos are selling for and what they’re renting out for to gauge how our secondary competition is doing. We have our ear to the ground constantly to see what the market is absorbing. That helps us make decisions.

What type of rentals does QuadReal supply?

Currently, we’re only doing unfurnished, long term rentals. We are exploring shorter terms and furnished rentals but it’s tricky because different municipalities have different rules. We do partner with short term stay companies within our buildings and we are exploring this option further.

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Are there opportunities in multi-family real estate right now?

We still see opportunities but we do hear the negative press that is out there. There’s a lot of negative rhetoric from politicians about rental housing and we resent it. We see ourselves as part of the solution, not part of the problem. We want to provide rental housing and we do it well.

Only a diligent steward can provide quality housing and exceptional customer service. Yes, there’s a cost to that, but it improves the quality of life for people in our buildings. We wish housing wasn’t so politicized but there are still opportunities.

Vancouver is a global city. It’s a place where people want to be. We still see a long runway here and we have investments that back that up. QuadReal is Vancouver based and we will be here for a while.

Why does QuadReal focus on global cities even if cap rates and yields are low?

In residential real estate, trades can be as low as 2.9% but now they’re closer to 4%. That’s still a pretty low cap rate, especially with the cost to borrow these days. But there are still options out there if you’re creative in your deal structure. We’re able to squeeze the most juice out of our assets.

QuadReal has $67 billion of assets under management, starting mostly in Canada but now growing on a global scale. I’m not involved in our international portfolio but our big cities in Canada are Vancouver and Toronto. Both attract a lot of skilled immigration which encourages us.

When we see global companies, like Amazon and Microsoft, betting on the cities that we invest in, it reinforces the idea that our strategy is aligned with what the global economy is moving towards.

We look at cities that have a long runway of economic prosperity and options. For example, we love Calgary but we struggle with the fact that the Albertan economy is so dependent on oil and gas.

Calgary is currently resurging but I believe it’s because of Russia’s invasion on Ukraine which disrupted the oil and gas market. So things could flip the other way for Calgary. We’re cautious of cities that may not have a diverse economy. We prefer steady, flat growth over spikes.

They say in Vancouver you pay for the low vacancy rate. Do you agree?

We operate at about 96% occupancy. That means you constantly have money coming in. Through the pandemic, everyone was concerned that residential tenants wouldn’t pay rent. But we saw more resiliency with our residential tenants than with commercial ones. Our tenants recognize the quality we provide and want to pay rent.

Now that we’re back to pre-pandemic occupancy levels, we’re still seeing those strong rents. It is easier to make operations work when you have 96% occupancy rates.

Did QuadReal’s investment in global cities change during the pandemic? Did you have to pivot your strategy?

Our fundamental belief stayed the same through covid, though our asset class strategy shifted a bit. We invested more in industrial real estate. But our core cities stayed the same and we’re confident we’re doing the right thing there.

Triumph of the City by Edward Glaeser is a great book that talks about why cities rise and fall, but mostly rise. It looks at places like New York and why it continues to thrive. There’s even a small section on Vancouver!

I’m a firm believer in big cities as places where big ideas thrive and move us towards progress.

If you grow up in a small town, the opportunities are limited. There are way more options for you in a big city. That’s why we continue to bet on big cities at QuadReal.

What makes a good deal?

For us, a good deal has to be located in a thriving city that has a good runway. To determine that, we look at immigration. Who is moving here and what companies are setting up shop?

We look at TOD (transit-oriented development). We believe that driving a car is a thing of the past and public transit is more convenient. So we try to make sure our projects are close to transit. We also look at environmental factors. For example, the sea level rise in Richmond could impact a project.

We’re a best in class operator. It’s hard for us to roll out our model if there are less than 100 units in a building.

We also don’t like projects with a lot of capital demand; we prefer buildings that are fairly new. We pride ourselves on being stewards of our assets, which means buying and keeping our projects in great shape. If we’re developing ourselves, we go all out in terms of location, scale, materials, etc.

We also look at IRR (internal rate of return); we do a 10 year analysis for our buy and hold strategy. We attach a significant amount of leverage to all of our investments. We’ll try to project what cap rates will be 10 years down the road.

But we can’t just rely on a compressed cap rate at the exit. It’s not just IRR, yield, etc. It’s a combination of factors that we look at. If there’s not substantial support for a deal from our team, we’re not buying. We don’t take decisions lightly.

How do you make a 10 year projection?

For some areas, we have a lot of supporting data. For example with rent growth, we have historical trends and economic trends that help us determine how much market rent will increase year over year. We try to forecast more conservatively – we’re optimistic but our feet are firmly planted on the ground.

With market rent growth we also have to factor in turnover. If people stay in units for a long time, we have less ability to catch up to market rent due to rent control. So if only 25% of our building will turnover, then only 25% will catch up to market rent. One of my criticisms of rent control is that it forces us and other landlords to more severely raise the rent of vacant units in order to offset units that are occupied for below market rates.

Our calculation looks like this: We buy a property for X and calculate our yield as Y. What strategies can we put in place to increase those yields?

For the mom and pop condo investor, I’d recommend buying a smaller unit over a larger one. Smaller units see more turnover which gives you more opportunity to achieve market rent.

It’s the same for us when we’re looking at a building. We don’t like to see too many 3-bed units because they sit vacant longer and when they do get rented out, the tenants never leave.

It’s hard to calculate cap rates 10 years out. With an IRR model, the terminal value drives a lot of the return. We don’t want to be too optimistic and ruin our calculations, so we try to keep things more flat.

What other cities in Canada are you excited about?

You have to understand that capital is global and capital chases opportunity. Canada only has a few cities that have more than a million people and they’re mostly on the border.

There’s been some chat about Kelowna but the issue is scale. A few large buildings may be enough to absorb all of the demand and erode opportunity. But it is a market we’re keeping an eye on.

What about cities in North America?

As I mentioned, I don’t get very involved in our international portfolio. But we do look at proxy cities for Vancouver. For example, Seattle is a proxy for Vancouver. We analyze what’s happening there and see what conclusions we can draw. Not only are Seattle and Vancouver geographically similar but demographically too.

We also look at San Francisco. The cost of living in San Francisco was going crazy, which made it difficult for companies to attract workers since they couldn’t afford to live in the city. Companies need to find a city that is attractive to international talent but still somewhere they can afford to live.

We have activity in Austin, Texas, which is another strong tech sector. It’s the profession of the future.

If someone had $2 million to invest in Vancouver, what should they buy and where?

I’d say they should buy more than one property! I like the area around Emily Carr University, False Creek Flats. Olympic Village is very attractive. It has to be an area with stuff to do.

Personally, I would recommend staying away from single family homes. When you own a single family home as an investment, you’re on the hook for all of the repairs. They’re not an efficient way of living. It’s more efficient to share heating, a roof, building envelope, etc.

Also if you buy two properties, you’ve cut your risk in half in terms of vacancy versus buying only one property. I’d also recommend buying as new as possible to decrease capital costs. Make sure the strata is properly funded. If you’re going to be managing the property yourself, make sure it’s not too far from where you live.

What happens in the Vancouver real estate market in the next 1-5 years?

The fundamentals of Vancouver continue to be strong; more people will be moving here than homes will be delivered. The result of that imbalance is increasing rents and increasing home values. I continue to be bullish on the Vancouver real estate market.

Matt & Adam recap Raul Jaime’s top 4 tips to supercharge your investment strategy:

  1. Focus on transit-oriented development (TOD). High quality transit is the future of the Lower Mainland and TOD results in vibrant, walkable, amenity-rich communities.
  2. Buy in newer, large, concrete developments. This limits your exposure to major capital demands and keeps unit entitlement low for increased cost-sharing.
  3. Don’t buy older, detached homes. You’ll end up being your own plumber on Christmas day!
  4. Small units are better than large units. Don’t buy one 2-bed or 3-bed condo when you can buy two 1-bed condos. This way, you can get more rent per square foot, greater tenant turnover which lets you keep up with market rent, more diversity in your portfolio, and multiple units allow you to offset potential vacancies.
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The 5 Wire: Getting to Know QuadReal Vice President, Investment Management, Raul Jaime

What is one book you’d recommend to listeners?

Anyone who wants to understand real estate should read Triumph of the City by Edward Glaeser. It’s a great book!

In the last few years, what new belief, behaviour or habit has most improved your life?

I started doing overnight fasting and have lost 30 lbs over the last couple of years. I also used to eat a double-smoked bacon sandwich from Starbucks every morning and now I’m having overnight oats, which helps.

What have you been binge watching lately?

I’ve been really into Unbreakable Kimmy Schmidt, which is a comedy on Netflix that Tina Fey produced. It’s hilarious.

Favourite band?

Pearl Jam! I’ve been trying to expand my musical horizons but mostly I’m into alternative rock.

What is something you’ve purchased recently for under $1500 that has improved your life?

I bought an Echelon Bike, which is a cheaper version of the Peleton. It’s a little unsightly in my living room but having it in front of my TV makes me actually get on it for a 30 minute show.

Keep your finger on the pulse of Vancouver’s real estate market with our Live Wire email newsletter.

Episode Host

Adam Scalena

adam@scalenarealestate.com

778-866-4574

Adam is a full-service realtor, specializing in Vancouver’s best areas. His systematic approach to real estate and dedication to his clients has consistently placed him within the top 10% of realtors operating within Greater Vancouver.

Matt Scalena

matt@scalenarealestate.com

778-847-2854

Matt is real estate obsessed and considers himself a lifelong student of the Vancouver real estate market. As a co-manager of the Scalena Real Estate team, Matt prides himself on expertly advising buyers and sellers on all aspects of the fast-paced, dynamic Vancouver real estate market. He is present at every stage of the process, from that first phone call or email right through to when keys are exchanged between sellers and buyers.

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