Toronto real estate prices are so high, they drove Josh Wynn and his two local real estate partners right out of the country, prompting them to buy an apartment building in Buffalo, New York, for 1.2 million U.S. dollars.
The 22-unit building, in the Rust Belt town of roughly 250,000 that's America's 50th-largest market, cost them about the same as an average detached home in Canada's most-populous city, an amount the Toronto Real Estate Board estimated to be 1.3 million Canadian dollars in 2019.
It is not just residential properties that can be expensive in Toronto. Commercial property prices have soared for all asset classes as investment activity in Toronto and its surrounding communities attract global capital willing to pay record valuations. The surge has now expanded to what is called the Golden Horseshoe, a region of southern Ontario with more than 9.2 million people that stretches to the U.S. border at Niagara Falls, the longtime hot spot for tourists and honeymooners.
Demand for apartments in the Greater Toronto Area has forced investors to accept returns of 4% on average because they pay a higher price, according to CoStar data. Even heading to outlying areas, yields are not much higher.
One of the largest multifamily portfolio sales in Toronto history closed in December with 44 Continuum Residential REIT buildings selling for 1.7 billion Canadian dollars. The deal was based on a capitalization rate of 3.5% indicating the property’s returns as a percentage of its price.
This market condition has convinced some Canadian investors to look even farther afield, crossing the border into the United States, where yields for multifamily property are almost 2 percentage points higher, according to CoStar.
In Buffalo, Wynn and his partners, Mark Beider and Jennifer Daechsel, followed familiar footsteps in buying an 1890s apartment building. Wynn's father Les and uncles Paul and Jeffrey run a family-owned firm with Toronto roots called Gold Wynn Residential that has amassed a sizable portfolio in the upstate New York city.
Gold Wynn is now ninth in the region among multifamily property owners after an 841-unit portfolio purchase from Buffalo-based Anthony Kissling's interests last year.
Gold Wynn’s parent company, Wynn Group, has been looking to diversify across the United States after the family sold more than $1 billion of multifamily assets to Timbercreek Asset Management in April 2018, a deal first reported by CoStar News.
Through Gold Wynn, the family had already acquired about 300 apartments in the Buffalo region, turning some heads when it bought the original Buffalo Athletic Club building at 69 Delaware Ave. for 5 million U.S. dollars in 2017.
Wynn’s firm, Blue Dawn Properties, was mostly priced out not just of Toronto proper but the entire region. Against that backdrop, he and his partners are anticipating at least double the return of what they could achieve in Toronto by investing about 160 kilometres, roughly 100 miles, away in Buffalo. It's also a city where they hope to be able to buy more buildings.
"We looked outside Toronto, but really throughout Ontario, you are up against bigger players with money," said Wynn, knowing those competitors will accept a lower projected rate of return because they can get efficiencies of scale from owning thousands of units in apartment buildings.
‘Unprecedented Development’
Canadian investors have been paying more attention to Buffalo. Invest Buffalo Niagara, a nonprofit, privately funded economic development organization, estimates more than 80 Canadian firms have set up shop in the region since 2005 and have invested more than 589 million U.S. dollars.
"Our organization was founded in 2000 when we were doing poorly in terms of job creation, population growth and investment. All of it was not good," Thomas Kucharski, chief executive of the organization, said in an interview from his Buffalo office where he can see Canada across the water. "We started thinking about how do we build, and we looked north [to the Toronto region] and saw 20 cranes in the air. You had [the North American free trade agreement], and you also had people with season tickets to the [Buffalo Sabres and Buffalo Bills.]"
The shopping centers of Buffalo, such as Walden Galleria in suburban Cheektowaga or the Fashion Outlets of Niagara Falls are frequented by Canadians who have crossed into the United States with their threadbare rags on and sporting worn-out sneakers — all to be ditched in mall dumpsters and replaced by American-discounted new clothes that can be worn back home on their person without paying duty charges.
Buffalo Niagara's research indicates that Canadians make more than 3 million cross-border trips per year to western New York, spending more than 900 million U.S. dollars on those trips.
Kucharski said a larger investment can start with one of those shopping trips.
"It's so collegial that it's not unusual for people to just show up in our lobby and say, 'Do you have any information? I'm just in town because I'm going to the game tonight,'" he said, adding they are looking for investments on the "clearance rack" or decent "sites for sale" they can buy.
Richard Schechter, an associate real estate broker at Pyramid Brokerage Co., an affiliate of Cushman & Wakefield, said about 20 billion U.S. dollars has been invested over the past seven or eight years in Buffalo through various enterprises, some of it government money, some of it real estate investment with Canadians in the mix.
"There has been unprecedented development here. You might see two dozen cranes in a place like Toronto, but we never had that. When people said, ‘Did you see the crane?’ people thought you were referring to the bird," Schechter said in an interview.
Most of Buffalo qualifies as an opportunity zone. Schechter said funds are being created for real estate investors looking to take advantage of the U.S. federal program that allows them to reduce taxes on capital gains. It is less likely to be a factor for Canadians who made money north of the border, he said.
"Being right near the Canadian border helps us, but we are a 10-hour drive to a third of the entire U.S.," he said, adding the land is relatively cheap next to the rest of the country. He estimates multifamily properties can have projected rates of return of about 7% in Buffalo.
Buffalo is also within 40% of the Canadian population, notes Garrick Brown, vice president of retail intelligence with Cushman & Wakefield. "You've got those limitations on development in Toronto around the [government-mandated Greenbelt that rings the city], and the demand has created a huge backlog. The city's industrial options are limited."
While Buffalo's industrial market has tightened as e-commerce companies take advantage of the relative affordability, its 3.8% vacancy rate creates a little more breathing room compared to the 1.2% rate in Toronto, according to CoStar data. Market rents for industrial in the Greater Toronto Area are 10.80 per square foot in Canadian dollars. Even factoring in exchange rates, similar rents are 30% cheaper in Buffalo.
Buffalo Portfolio Grows
For Wynn and his investors, the reasons to consider multifamily were just as compelling as an industrial investment. And Wynn said financing in the United States is so much easier to attract compared to the tightly regulated Canadian loan market dominated by five major banks.
Blue Dawn had to provide personal guarantees but was able to buy the building at 2803 Main St. based on a loan-to-value ratio of about 80%. The equity is valued at about 250,000 U.S. dollars, which is shared with an unnamed private investor. Wynn’s group maintains a control position in the property.
It's Blue Dawn’s second investment in Buffalo. The first, at 1225 Hertel Ave., has two commercial units and 12 apartments.
On the Main Street deal, Blue Dawn was able to add a construction loan worth 400,000 U.S. dollars onto the property that doesn't require interest payments for two years and can be tacked on top of the mortgage afterwards, all at a combined rate of less than 5%.
"You need a plan and show you can execute, but they are willing to be creative on smaller projects," said Wynn, emphasizing the deal was done without any family support. "It's not due to some connection. We found our own financing."
That's not to say that his family didn't influence his thinking. "We've always had relatives in Buffalo," said Wynn. It wasn't a surprise that his father and uncles bought property in the city. "We were always down there. They dipped their toe in the water a bit, first."
Now, he and his partners are making their way in a city known as the home of some of America's greatest architects' work, including Frank Lloyd Wright, Louis Sullivan and H.H. Richardson. Frederick Law Olmsted, considered the father of landscape architecture in the United States, is responsible for a system of parks in Buffalo that was the first of its kind in the country.
"It's interesting because you've got so many turn-of-the-century buildings. In my world, almost every building I look at was built between 1890 and 1920," said Wynn. "After there was this long period of stagnation and decline where nothing was built, so you've got this interesting building stock. There is almost no brutalist or modern architecture."
Spoiler: Bad Boiler
The purchase has been a learning experience for Wynn, Beider and Daechsel, who have educated themselves on the nuances of being landlords in Buffalo, like the fact that the common areas of their buildings don’t have to be heated.
They can't actually fix anything themselves because they do not have a labor certificate to work in the United States. An ongoing task for them is managing contractors.
"We've been doing this for almost four years,” said Daechsel, about the trio renovating buildings together. "We had never done anything this big before. What scared me the most about this [investment] was the expenses we didn't estimate."
Sure enough, water damage from the leaking roof was impacting every unit at the Main Street building, making it priority No. 1. And they got hit with another massive project within six weeks of buying. The aging steam boiler needed to be replaced, costing 42,000 U.S. dollars.
Rents were ranging 550 to 700 U.S. dollars per month when the trio bought the building. Most of the tenants are covered under Section 8 housing or equivalent. That ultimately means rents are subsidized by the U.S. government as long as each tenant is eligible.
"I think there is a lot of inpatient money in Canada," said Beider about the competition for property that is driving valuations higher.
Daechsel said they looked as far as Windsor, Ontario, across the border from Detroit, but couldn't find an investment with a return they liked. "I didn't know Buffalo. I knew the Walden Galleria. Coming down for Black Friday sales," she says.
Her trips to Buffalo now involve improving hallway lights, putting runners on stairwells and stripping down run-down units to get them back on the market and rented.
Two Redevelopment Projects
Toronto developer Harry Stinson, 66, regularly winds his way along Queen Elizabeth Way, the Canadian highway that links Toronto with the Niagara Peninsula. He's come to the same conclusion as Blue Dawn about his country's largest market.
Now based in Hamilton, Ontario, along that QEW route, Stinson spends almost as much time in Buffalo as he does in Toronto.
He purchased the Adam's Mark hotel in July 2018 for $17 million and is taking the model he developed in Toronto at 1 King St. W to Buffalo, turning the 486-room hotel into condominiums where individuals own the units for income.
"It's a better location than ever with what is going on downtown," said Stinson, acknowledging the hotel needs some work.
He said the units would be sold in the 100,000 to 150,000 range in Canadian currency, but investors could come from either side of the border.
"The process is a little different. You need all your approvals before you can sell any units to the public," said Stinson, who wouldn’t disclose the borrowing rates he was charged on the project. He maintains he's not connected enough for any deals.
Stinson said the opportunity was just too good in Buffalo. He bought a 7-acre parcel of land on the waterfront of Lake Erie with hotel rooms, 72,000 square feet of function space and a 117-car garage. He couldn't even get something close to that even in Hamilton, 70 kilometres, or about 43 miles, southwest of Toronto.
"You know what [17 million U.S. dollars] in Toronto gets you? That gets you a house in Rosedale," Stinson jokes about the city's most affluent area. "You couldn't find a site like this in Toronto south of nine figures."
The project reminds him of a time decades ago in Toronto when he sold to a developer a piece of land on the waterfront, an area now surrounded by a forest of condos.
"It ended up being [2 million Canadian dollars] on which he built a 350-unit condo back when Toronto waterfront was a wasteland. It was just before things were turning, and I get that feeling about Buffalo," said Stinson, who plans to spend at least 10 million U.S. dollars on the hotel renovation.
Stinson also has a site under contract in Buffalo that once produced Wonder Bread and Twinkies. He plans to convert the building, which was listed for 895,000 U.S. dollars, into a condo development like his Candy Factory at 993 Queen St. W. That Toronto project was completed in 2000 where rents are now 3.57 per square foot in Canadian dollars to rent and as much as 1,057 Canadian per square foot to buy, according to the website condos.ca.
Wynn said it comes down to looking at the opportunity, as opposed to getting wrapped up in the fact that his investments are in Buffalo.
Toronto has an appeal for sure, according to Wynn. "You don't walk into a bar and try and impress people saying I work in cruddy multiresidential in Buffalo," he said with a laugh.
The adoption of Buffalo will only go so far for him. His favorite hockey team is still in Canada. "I'll always be a tortured, tortured Leafs fan," he said.