Doubling Down During The Recession
When you’re faced with a challenge, it never hurts to ask for advice. One conversation I had during a time of turmoil not only changed my perspective, it resulted in sage advice that still holds true to this day.
My business mentor is a titan in real estate and a highly regarded CEO in Canada. He is someone I respect tremendously, and was lucky enough to be able to call on in a period of economic uncertainty.
Until the price of oil began its sudden, shocking decline in the summer of 2014, we’d been aggressively purchasing multi-residential properties across the Prairies for years. But now, faced with an economy in Western Canada that looked like it could get a lot worse before it recovered, it was time to reconsider my strategy – especially since we currently had no takers on a $35 Million equity raise.
My mentor advised me to use this moment in time to prove my business model. Secondary and tertiary markets are generally recession-proof, but this current downturn was different from the global crisis in 2008 – the current negative spiral was regionalized to Western Canada, which meant the investor support we’d received in the past might evaporate.
He encouraged me to focus on stabilizing our assets, to be proud of what we own, and overall, to go slow. Then he gave me a glass turtle, to remind me of our conversation.
I took that advice – and that turtle – to heart. I decided to change how I’d go to work everyday. I assembled the management team at Avenue Living and told them from now on, we were not going to write any new offers. We had 6124 apartment units across three provinces, and we were sticking with that number for the foreseeable future. We were not going to be researching anyone else’s business from now on. We were going to concentrate on our own.
In short, we were doubling down. We already had one of the largest private portfolios of B and C Class buildings in Canada. But now our goal was to have the best of the Bs and the best of the Cs. We would complete the highest level of renovation that those markets could support.
We expanded our staff from 250 to more than 425 people. As we vertically integrated to do the upgrades in-house, we were Home Depot's largest Canadian customer two years running. To achieve economies of scale, we did it all at once, in 14 different centres. This wasn’t the turtle part of the plan.
Over the next two and a half years, we spent $85 Million in renovations and upgrades to common areas, rooflines and balconies. We also completed 9,000 in-suite renovations. If you’ve noticed that the number of apartment renos was substantially higher than the number of the units we owned, you’re reading it correctly. Some units were renovated twice, upgraded from C to B in the first round, then brought up to Class A level.
While those units were empty, we were forgoing cash flow. However, once an apartment was upgraded, a new tenant soon appeared, ready to sign a lease. Despite media coverage about low residential vacancy rates during this time period, our occupancy climbed.
Our disciplined approach caught the eyes of new investors, who wanted to be a part of it. We were able to close our limited partnership by early 2016.
With our equity raise complete, we were able to keep going, continuing our cap-ex program until it was finally finished in the third quarter of 2017. In the meantime, in the spirit of that glass turtle occupying prime real estate on my desk, we wouldn’t acquire another property for two years.