Raw Transcript
It's not often that these rules change and you kind of as operators it's very common to just get into autopilot right okay you're going to run you you set your procedures you set your ways now things are changing and and the mechanism has changed the tools are changing so it's always good to just make you know get the information you need adapt your procedures as you know to remain compliant and and continue uh continue the fun that is uh property management Hello and welcome back to the Espas Moral podcast, a show dedicated to commercial real estate right here in Montreal. It's a pleasure to have my friend Corey Freriedman back on the show. >> So, it's a pleasure to be back. Um, love to see the growth of the podcast with Espas Mariel. Love to be here. Looking forward to another great conversation. >> Absolutely. Me, too. So, um, a very important topic today. And before we jump into it, I just want to remind everyone this episode is going to be important because we're going to be talking about rent increases and the new rules. Okay, I spoiled the topic. There we go. Uh, so share this episode with a friend who could benefit from this conversation because you know people around you who are going to be starting or have started their rent increases calculations and this episode is particularly relevant to them. There you go. So, Corey, we it was announced what in 2025, middle of last year, that the the rules for rent increases were changing >> and um I thought it was particularly relevant you managing thousands of doors and years of experience to talk about it because you know this really well. So, can you give us a little bit of context as to what actually changed? Yeah. So, major reform on the multifamily renewal rules here in Quebec. Um, mainly being how to calculate the rent increase itself. Now, we're talking about multif family units that are uh not within the 5-year of new construction. Um, and this is the first time in I think 40 plus years that the framework used to make these calculations uh has changed. I think the goal here from the TAL and the government of Quebec was to simplify um the methodology of calculating to maybe bridge the gap between uh landlords and tenants and ultimately to reduce the number of cases that will go to fixation of rent uh to the towel. Will those objectives be met with this new initiative? >> Remains to be seen. Um, but there are some interesting nuances to the changes that I'm looking forward to discussing today. So, it's interesting like I didn't realize it was the first time in 40 years that the method is actually changed and and I mean it it'd be fair to think that it was appropriate maybe in the 80s but nowadays like it's the world has changed uh costs have changed um financial repercussions have evolved and so now they needed to modernize and I didn't realize that it was also out of and it totally makes sense to for the for the to maybe to reduce demand for TA services. M so I think that's a big part of it that kind of goes under the radar is the backlog in administrative demand for the towel services the time that it takes to actually get these hearings get these judgments get these process is too long for tenants it's too long for property owners and landlords and it's too long for the tow themselves. Um listen at the end of the day it's important to know these renewals they're they're agreements made amongst two parties. um whether you follow the calculation, you do your own thing, you you do a protenant increase, at the end of the day, you're looking to make deals. And I think what's most interesting outside of the calculation is the landscape um that that the market is right now with leasing um being slower than normal, vacancy rates being higher, rental rates actually dropping year-over-year, not only in Montreal, but across the country. So it becomes more important than ever to one be proactive on your renewal management and two be conscious of this of the growing spread between negotiating with a tenant versus the true cost of replacing that tenant between you know turnover paint plaster minor touch-ups vacancy >> vacancy commissions um you know so so it it really is um more important than ever for for multif family operators to be on the pulse with renewal fees in lum. >> Wow, very well said and yeah on on the cost of not only the vacancy but everything that goes with it. So okay to go into I was going to say into the heart of it before we describe what is the new calculation method can you summarize first like for those who don't know and haven't been through it how was it done before what were the variables and how did it come into account >> okay so how did the calculation work before and even how it works now to a certain degree but it's essentially a comparison of your expenses your actual operating expenses of the property and you're looking at, you know, let's say we're in 2026, you're looking at your last two years of expenses, so 2024 and 2025. Um, and we're looking at, it used to be expenses all across the board, property taxes, insurance, utilities, services, repairs and maintenance, management fees, etc. And every year the the TAL would come out with their prescribed rates for each category of expense. And you would have a calculation tool to say, okay, last year my my expense was X. this year it's y the difference would be multiplied by a prescribed rate that the tow would provide and you would add up all your different types of expenses to spit out some type of percentage at the end that said you're allowed x% um they've changed it pretty significantly in terms of two main areas one they've bundled a lot of these expense types and called it CPI and they're actually um reducing the amount of expenses that you have to report um and bundling it all into to a three-year rolling average of the CPI here in Quebec. So, >> and and just for those who don't know, CPI is the consumer price index. >> Exactly. So, this accounts for the change in the cost of goods across all different sectors within the region of Quebec. And for this year in 2026, they're looking at the average CPI from 25, 24, and 23, which came out to 3.1%. >> So, so that's that's number one. Number two, and I think what is most important and interesting for property owners is the new treatment of uh improvements and repairs and maintenance to your buildings. >> Capex, >> the capex. Exactly. So, so the TAL has come out with a list of eligible expenses um whether it's structural uh unit renovations, common areas, addition of services like lockers, storage, uh uh common amenities, um as well as anything to do with, you know, eco-friendly or efficiency or accessibility work, right? Um solar panels, uh flood prevention. Really, those are the three main buckets of of capex. And now landlords can actually take those costs and they can include them in their calculation and get now up to 5% of the cost which is um you know basically a 20-year amort and just historically speaking over the last 30 to 40 years um based on the prescribed rates of the old calculation you were usually getting a 40 to 50year amort on the capex. So, this is a way for landlords if you're investing, especially if you have older assets that require a lot of structural envelope uh uh not the pretty uh pretty work that gets you new rents, but but the very expensive work that just keeps your building >> operation, not sexy, but >> not sexy, but but you have to dig deep in your pockets to pay for those. Well, now operators, landlords, property management companies can actually include those costs in their calculation and get a significant uh money back in terms of allowable increase to the tenants. >> Okay. And Okay. So now if I understand this correctly, there is one group of variable which is uh the average of the last three years of consumer price index. Yeah. >> And then the second big v cluster of variable is all the capex that was done. >> Yeah. Um and so then did we we do the sum of all the work? >> Yeah. So so >> take 5%. >> So it's a little bit more complex because why would it be simple? You know the goal the goal was to simplify >> accountants need work you know. >> Exactly. So so so there's actually one I call it three main sections right number one is the CPI. That's straight cut and dry. Uh 3.1% next year will be a new rate. Um the second element we discussed is really the capex and major repairs and it's really going to be 5% of the cost divided by the number of units that it's affecting. Okay. So for example, if I have a 50 unit building and I redo a roof and some brick work and some masonry and and whatnot. Um the total cost times 5% divided by the 20 units. >> Okay. >> Let's say I was to do some other work. Maybe I replaced a common area corridor, changed the carpets, redid the lighting um for the fourth floor of the building. Well, then I would take that cost, times it by 5% and divide it by the units that it affects. So, on the fourth floor, >> on the fourth floor, and even one step further, let's say I did a unit renovation, right? I changed a bathroom, added pot lights, uh you know, uh changed a kitchen. Then I would take 5% of that cost, but just divided by that one unit that it applies. So in theory it makes sense but in practice it becomes a very difficult exercise for scaling landlords to actually execute because the tools that are available now you really have to calculate it on a unitby-unit basis. So somebody who has hundreds or thousands of doors um it's it's quite a long exercise to actually go ahead and do it. So there's a costbenefit analysis to be done of of how deep do I want to go and dive into the nuance of this calculation. >> And it really does put on the owner the onus of proper cost tracking >> and that's and and that's crucial because as you said you know it's too easy to say oh okay I spent 5k on that building but how was that 5k spent? Which units in particular? And what you described just you know just the fourth floor carpet for example that's a great one. Yeah, you know, you know me, my accounting background, I've been preaching uh strong bookkeeping practices as a core fundamental of scaling property management and real estate management. Um, and this is no different. And I kind of I think I've used this example before on the podcast, right? We want we want to train operators to spend you know 30 seconds more each time they process an invoice tagging the appropriate units having a mechanism to do proper unit costing so that at the end of the year they don't have to spend these hours reconciling right I think I I describe it as like you can go to class all year all semester do the homework read the lessons stay up to date or you can ignore it and then cram for the final and nine times out of 10 the person who stays up to date and has the better procedure throughout will be the one who can easily access their data and and accomplish these, you know, annual review tasks much easier >> and get the better grade >> and get the better grade 100%. >> Better price. >> That's it. >> Yeah. Now, there's a big cost to it, right, of of having proper unit costing, proper bookkeeping in place because there's real dollars on the line, especially when it comes to all of this capex because uh it's not cheap out there. Rising costs are everywhere. um whether it's trades, utilities, taxes and insurance. Um this is a mechanism for operators to recoup some of that money. >> So you just touched actually on on on a very good point like uh in the old calculation method the increase in insurance was reflected the insurance in taxes was reflected. Is it still the case now? >> Yeah. So it is still the case. So I did I mentioned that there's three buckets, right? So we took look at the CPI. We went in depth about the repairs and capex. And the third bucket is once again taxes and insurance. Okay. So the nuance here is really it's the increase in taxes and insurance in excess of the prescribed CPI rate for the period. So we said the CPI this year or the three-year rolling average of CPI is 3.1%. So now if my taxes or insurance increase greater than 3.1% I'll be able to use that difference into my calculation. >> Okay. >> If we get our tax bill which is coming uh this week or last week. Yeah. >> And we see that the taxes increased by 2.8%. Well then my taxes are not going to contribute any increases on my renewals. But if my taxes went up 3.8% I get that 0.7 difference. The 3.8 minus the 3.1 to add to my calculation. >> Okay, that's actually very straightforward. >> Yeah. Yeah. No, it's all straightforward. The difficulty and the nuance really comes in that repairs and maintenance bucket. It's knowing which expenses are eligible because it's not your pull, you know, your trial balance or you know your your balance sheet or P&L and just drop all the numbers now because you have to actually have proper categorization of the expenses and they have to meet these specific buckets that the TAL has you know given out as reference. So um that that's really the complication >> in setting the background. You mentioned that you know this was the first big reform in about 40 years and I kind of want to go back on okay over the last you know three four years we saw some huge rent increases like we saw some 6% at some point whereas in the past it was more around >> I would say two and a half to four um so to to have a bit of a conversation on the predictability >> um where do you think this is going in terms of the long-term trend given in um the world's uncertainty and so to speak like yeah over the last 2 three years we saw some 5% 6% 5% do you think in the future we'll have that much fluctuation or the new method kind of ensures more of a a flatter line yet increasing >> so so for sure with the three-year rolling average of the CPI it's it's going to flatten that you know the peaks and the valleys that we've seen in the last couple years you know since uh you know in the last 5 years we'd had we've had crazy fluctuations in terms of inflationary period and as well you know changes in macroeconomics um you know when it comes to immigration politics uh new development of new housing right the supply and demand has really shifted um so there's a lot of things that have created this uncertainty um >> you know what I always say and when it comes to real estate is you do have these peaks and valleys But when you zoom out, your your line looks pretty consistent and flat. So So I don't see that changing. And I know, you know, just kind of going on to this, like we're in a period now, especially here in Montreal and across Canada, where where leasing is harder, renewals are harder, um vacancy rates are up, um rental rates are down, you know, everyone is kind of in panic mode. Um but everyone you know who has been in this business and understands you know the law of gravity and real estate can can take a deep breath right they can realize that when we're going to zoom out here um you know the asset class is still garnering tons of investment. You see developers who were in condos go into multif family. You see developers who are in retail and and commercial go into multif family. There's a reason why people are are betting on this asset class and and in partly it's it's due to just a major uh disconnect in supply and demand, right? There's not enough housing for the amount of people that that exist in our country, in our cities, in our in our towns, in our suburbs. Um so, in the long term, >> I do think we're going to get over this hump and get to a more stabilized, you know, macro environment. Will the renewal rate be a big far part of this? Probably not. Yeah. >> Will it help a small of you know for existing tenants and operators? >> Definitely. But but there's a lot of macro at play here that is really going to drive um how quick you know this this valley turns into a peak. Right. And >> you're right there there's so many other stronger variables that will determine before >> before the method of calculation whether that still makes the asset class interesting. >> Yeah. Nonetheless, it's still important to know, you know, um it's not often that these rules change and you kind of as operators, it's very common to just get into autopilot, right? Okay, you're going to run, you set your procedures, you set your ways. Now things are changing and and the mechanism has changed, the tools are changing. So, it's always good to just make, you know, get the information you need, adapt your procedures as, you know, to remain compliant and and continue uh continue the fun that is property management. Yeah. Now, this was announced back in 2025. Um, it's the first renewal season with this with with this new method. Uh, I mean, given the the size of the portfolio that you manage, um, are you already starting to see uh a difference in responses and like have you started to get a little bit of market feedback? Um so on this new calculation not yet because you know we've been waiting for the municipal taxes to come in before executing and delivering. So in the next two weeks we'll we'll start getting that market feedback. But I will say that um >> over the last two 3 years you can already see what the trends have been. Um and it really depends on the asset that you're talking about. Uh when we look at and I'll kind of split it up into two cases. you know, you have your new construction assets and then maybe, you know, your BNC class multif family assets. When it comes to the BNC class, it's not changing much. You people, you know, if you're at at market or a little bit below market or, you know, a little bit higher than market, people don't have many alternatives to go and get other affordable housing at market. So, more more often than not, you're seeing higher retention, higher negotiations across the board, higher year-over-year increases. >> Mhm. >> On the new construction, and that's where you're seeing big struggles in retention, mass exodus, 30 40% of your tenants leaving year-over-year, uh increases coming in at, you know, zero if if anything. Sometimes you're even extending, you know, promotions that were, you know, included on the original lease up of the units. So, um I I I don't think that this new mechanism is going to change that. Right. Like I said, it's coming back to there's a lot of macro at play here that is dictating um the the terms this year for the renewal negotiation. >> You you you bring a very good point in terms of um segments in that within that asset class and on the new build. Um for those who are listening for the first five years there is no I don't want to say there's no rules but >> yeah you know you're not subject to any rent control laws right so so you have the right to in the first 5 years after the first occupancy of a new construction dwelling you have the right to increase >> um you know whatever amount um you know >> the the reality of the situation is is um this first five years it's designed to be your stabilization period Right. So, you have a lot of developers that are building these assets and and you know, they want to convert their construction loans into conventional financing. Um, and in order to do that, it's it's speed to occupancy. >> And what ends up happening is, you know, you you sign all these leases, you offer all of these uh promotions on this on the original lease up to expedite, you know, the leasing, >> the absorption. >> The absorption. Exactly. And those >> Yeah. you end up having to play with those terms for for several years. Um, and the fact that there's the most new construction uh in terms of new units being brought to the market year-over-year um it's highly competitive space in this new in these new assets. So, um you have what we call like our promotion hoppers that will go from new build to new build just getting the best deal on net effective rent with the highest uh offerings and discounts. So, um, >> it's part of the game. It's it's it's >> part of the cycle. >> Yeah. Exactly. >> Um, and just to finish on the new build and because we did almost a full episode on that last year on the new build, but are you seeing within the portfolio that you manage um some buildings struggling to stay full? >> Yeah. Listen, it's it's not only my portfolio, for sure. Yeah. Listen, it's it's no it's it's no surprise. Well, it's not not a surprise, but vacancy is up across. And it's not even just the new builds. It's even, you know, some of the uh older stuff where we're retrofitting and renovating and it's just slower to rent. Especially, listen, we're we're going to get into we're going to see we're already seeing the last 3, four weeks start to pick up. But uh if you looked at the last six months uh you know really after that July 1st rush it was a pretty quiet it was a pretty quiet fall and it was a pretty dark and cold winter. So, so in many ways, um, so now we're starting to see it pick up again, but um, the results were just people are sitting with more units, um, vacant, and people are going to have this once again a mass exodus of the renewals that are coming in a few months. >> Yeah. >> And there's just not enough people who can afford these high-end units um, to to fill it at levels that we saw 2, three years ago. >> Mhm. Wow. Yeah. But like I said, you zoom out. >> You're right. >> And it's people are nervous and and and concerned in the moment, right? But but that's not really what real estate is about. Real estate's not about in the moment. It's about uh generational uh long-term equity, tax deferral. There's a lot of different elements at play here. So, um to to be kind of shortsighted and say, "Oh, the the world is falling." is is not the not the mentality at all. It's it's have conviction in you know your thesis in in your investment assumptions and in your strategy and and in the long term you will you know just like the last 150 years you you will be a winner. Exactly. >> That leads me to being organized >> to be able to properly um account for all the costs involved in in in rent increases. um a a you know a good accounting system. Um you are also the founder of uh Compass property management system. Um and as you said in the past for owners by owners um how uh how is the endeavor and the entrepreneurial journey? >> Yeah, it's been really exciting. Obviously, uh my domain expertise and industry experience has really, you know, led us, uh to build something of substance that that we're now supporting quite a few landlords and property owners, property management companies here, uh in Quebec with our software. Um I think our mission has always been clear. It's to really connect operations and accounting and to have them work as one. And the renewal is a perfect example of where the intersection of ops and accounting meet and often falls short. Yeah. Right. Um a lot of the things that we're talking about uh corridor renovations and capex and unit renovations, right? Is ops is driving that >> and oftent times accounting is missing a piece uh as far as context and documentation and recordkeeping. So uh at the end of the year when ops goes to accounting and says hey give me the numbers for the increase. Well, that's where the disconnect lies. So, our our vision and and really my vision with Compass was to have one unified system that really focused on accounting and bookkeeping and reporting and banking and payments being the core um and being directly connected to all of the operational needs, lease and renewal management, both multif family, commercial, industrial, retail, um maintenance, communication. So, it's the connection of of the two parts of the business that often have the most friction in terms of just being on the same page. I love how you how you put it in terms of exactly the contrast between those two domain, but that's the backbone of of real estate investing. And if you don't keep track of that, then you fall short on everything else and you make your life harder. >> 100%. >> And so, I I had seen because you're very active and you post quite a bit on on LinkedIn. Thank you for keeping us up to date. You've also had some new hires. >> Um you've added some new some new accounts. Um you have steady growth. >> Yeah. You know what it's we launched this thing uh you know less than a year ago, right? And there's obviously growing pains bringing a new market to to the bringing a new product to the markets. Um and it feels like we're kind of busting out of that growing pain and now starting to you know execute and scale. Well, I said if 2025 was about, you know, validation and and fit, 2026 is really about, you know, execution and scale. So, um, our goal, you know, over the coming months is to continue to expand our team, expand our customer base, uh, not only in Quebec, but across the country. And we really feel that Canada is where we want to >> plant our flag because it's an underserviced market. you have some great technologies out in the US um that just don't care to support Canadian operators don't want to especially here in Quebec like what I call jurisdictional nuance right so we want to be uh in Canada for Canadian operators um so that's really what our goal is hopefully you know the next time I'm on the podcast we're talking about you know national expansion and uh >> I look forward to it Yeah. Yeah. So, so and and I will say I I probably won't tone it down on LinkedIn. It's so so if ever, you know, it's it's a little much, you put the mute button on me, but I do it's kind of been my MMO of like building out loud the good, the bad, um the the highs and the lows cuz it is right. Uh any entrepreneurial journey is is going to be filled with days that you feel on top of the world and days that you feel, you know, you're you're not enough or you're not meant to do this. So, um I think it's important to >> highlight the reality and the duality of this journey. So, um that that's kind of what I use LinkedIn on for. But, uh yeah, no, it's uh it's been an amazing ride so far and we're just we're really just getting started. >> Just getting started. And as you said, I look forward for you to to come back and uh to share on the on on the evolution and how things are going. Congrats, man. You you've you've you know, built this tool inhouse. Now, you've taken it to market and uh you're already quite successful with it. So, as we said before we started, you know, imagine when 5 years from now when we'll be continuing to have these conversations, how proud you'll be. >> Yeah. you know, and and the same goes to you because when we first started speaking, right, I was just getting started and and and you had your podcast and you if we look at the growth and the trajectories that we've both been on, it's it's been it's been fun to, you know, uh be a part of it and to be a fan and to to to you know, be involved being on the show, you know, several times. So, uh congrats to you as well. And as you know, you continue this expansion with HPAS morale, Espas Quebec, like you guys have a ton of momentum and uh you know, I'm I'm just privileged to be able to uh continue to talk about what I love and and what I'm passionate about with you. >> Well, thank you. The the the feeling is shared. And for those who are listening, if they want to find out more about you, Compass, and property management, what's the best way to get in touch? Yeah, come visit our website, compasspm.com. Also, if you have specific questions or looking for resources about the renewals, um, hit me up on LinkedIn or or send a message on our website. We have a bunch of free tools and information that we're we're handing out uh to support our our growing customer base and we would be happy to share it. >> There you go. If it wasn't clear, just get on LinkedIn. Okay, >> Cory, thank you very much for your participation today. It's always a pleasure. >> Yeah, likewise. And I love those conversations cuz uh they for me it's always a bit of an awakening and um thinking about other other things. So >> amazing. >> Uh for all those who are listening, share this episode with a friend. I'll talk to you next week. Thank you.