Apartment real estate investment trusts in Canada are continuing to realize major rent increases as the country grapples with an increasingly undersupplied housing market.

Toronto-based Canadian Apartment Properties REIT, which owns and manages about 65,000 apartment suites in Canada and Europe, said rents across its portfolio averaged $1,490 per month for the third quarter that ended Sept. 30 in a nearly 99% full portfolio. An increase from a year ago when the REIT's average was $1,387 per month.

"This (increase) reflects the tight rental conditions we are operating in today," said Mark Kenney, president and CEO of CAPREIT, in a conference call with analysts last week. "Our rent growth was strong enough to offset higher property operating costs, which resulted from inflationary pressures and increased repairs and maintenance expenses."

CAPREIT, the country's largest apartment landlord, has been actively lobbying for more housing supply to improve affordability, which continues to erode across the country. Rentals.ca says average asking rents reached $2,149 nationwide last month, an 11.1% jump from a year ago.

The REIT continues to focus on modernizing its portfolio and has sold $450 million worth of properties during the first three quarters of 2023 while acquiring $208 million of newer vintage properties. The percentage of its portfolio classified as new builds is now 11% versus just 1% a few years ago.

Like other REITs, Canadian Apartment Properties is facing an environment of higher interest rates and capitalization rates, ultimately causing it to write down the value of its assets under International Financial Reporting Standards.

The REIT said the fair value of its portfolio was $16.48 billion at the end of the third quarter, down from $16.89 billion a year earlier. The company recorded a net loss of $357.5 million for the third quarter versus a profit of about $63.2 million a year earlier.

CAPREIT's Kenney was asked by an analyst where he sees interest rates going. "What we're seeing is a little bit of a relaxation on the long end of bond yields, and that speaks very well for future acquisitions. I think that most would agree that the tightening cycle is at least plateauing at this point and is not expected to get much worse. With that in mind, we see a real strong recovery in values," said the chief executive.

In a note on CAPREIT's earnings, Sam Damiani, an analyst with TD Securities, said apartment fundamentals are strong enough that Canadian Apartment Properties is seeing a 27.2% average increase in rents on units that are vacated and re-leased. CAPREIT operates in several jurisdictions with rent control rules that only allow rent increases above inflation when a tenant moves out and a new one moves in.

"Going forward, we expect a similar phenomenon with the flow-through from elevated uplifts being somewhat limited by low turnover," said Damiani. "We expect CAPREIT to stay the course of its current capital allocation strategy, disposing of lower quality assets and redirecting proceeds to new-builds, paying off debt" and potentially buying back its units.

Calgary-based Boardwalk REIT, which has more than 33,000 apartment suites and a heavy presence in Western Canada, reported a similar trend of a significant uptick in rental rates across its portfolio.

"The market rent growth has been quite consistent," said James Ha, president of Boardwalk, on a call with analysts last week. "We are strategically moderating the pace of adjustments with those market rent adjustments. To date, we have been accomplishing leasing spreads inside of that targeted range, specifically in Alberta, between 10% to 15%."

Rental rates are rising fast in Alberta's booming energy economy with rents up 13.2% in October from a year earlier, according to Rentals.ca. Still, monthly rent for a one-bedroom unit in Calgary averaged $1,730 last month, cheaper than a one-bedroom unit in Toronto that averaged $2,614 in October, according to Rentals.ca.

"Affordability continues to be the best in the country right here in Alberta," Ha said.

Boardwalk reported a profit of $39.4 million for the third quarter compared to a profit of $47 million a year earlier. Boardwalk's fair value of its investment properties as of Sept. 30 increased from the previous quarter due to the rise in rents driven by market conditions, low occupancy across its portfolio and a reduction in lease incentives. This was despite the REIT raising its stabilized capitalization rate to 5.05% in the third quarter from 4.90% in the second quarter.

Ottawa-based Minto Apartment REIT, which has almost 8,000 units in major Canadian markets, also reported rising rental rates with the average monthly rent up by an average of 7.2% across its portfolio.

Michael Markidis, an analyst with BMO Capital Markets, said Minto REIT had a solid quarter and noted a 3% increase in its distribution.

"Operating momentum in the majority/remainder of the business is expected to remain strong and Minto is rewarding investors with a prudent distribution increase," said Markidis in a note to investors. "The 17% average increase captured on the 510 new leases signed during the quarter represents an all-time high."