Nobel laureate and economist Vernon Smith speaks in Vancouver. A sudden drop in housing starts seen as the first indicator of a recession.
- Dale Northey/ SFU
By Frank O’Brien
Housing bubbles have been a leading indicator in 11 of the 14 economic recessions since 1929, but based on a formula presented by a Nobel laureate and economist, British Columbia and Vancouver appear bubble-resistant.
Vernon Smith, awarded the Nobel Memorial Prize for Economic Science in 2002 for his work in empirical economic analysis, is a professor at Chapman University in California and president and chair in finance at the International Foundation for Research in Experimental Economics. He spoke to a packed crowd November 14 in Vancouver in an event presented by Simon Fraser University and the Bank of Montreal.
Smith, 87, who recalls his family’s Kansas farm being foreclosed in 1934, said a downturn in the housing market was precursor to the Great Depression, the 2007 “great recession” and virtually every other recession in-between. “It is nearly 100 per cent accurate,” he said.
The key indicator, Smith said, is housing starts. Homebuilders, he said, are much more aware and reactive to changes in the market than typical homeowners, home buyers or lenders. “They see what is happening first,” he said.
Early in 2006, starts of U.S. housing suddenly began falling from record highs while all other economic indicators were still increasing, Smith noted. A year later, home construction had virtually stopped, U.S. home equity had shed $500 billion in value and the world was in the grip of the worst economic crisis in 100 years.
However, in a follow-up interview with Western Investor, Smith noted, “all housing markets are regional.” Housing sales and prices in Prudhoe Bay, Alaska and North Dakota, for example, continued strong right through the 2006-2010 downturn, he said, because of strong job generation and high in-migration.
Using Smith’s formula for housing bubble-burst scenarios, B.C. and Vancouver do not appear threatened, despite record-high prices in the latter. B.C. housing starts this year are up 3.1 per cent from 2013 and forecast to rise a further 1.4 per cent in 2015, according to Canada Mortgage and Housing Corp. In Vancouver, housing starts are up 5 per cent from a year ago and are projected to dip slightly next year, but increase about 3 per cent into 2016.
As well, the B.C. unemployment rate remains low; the province is attracting about 39,000 immigrants annually and, for first time in four years, is seeing a net increase in interprovincial migration.
“We do not see a housing bubble in the Metro Vancouver market, nor elsewhere in B.C.,” said Bryan Yu, ?regional economist with Central 1 Credit Union, which released a fairly bullish outlook for the B.C. housing market earlier this year.
“Currently, inventories are in decline in both the existing and new home market, suggesting a well-balanced market. There are risks, particularly related to external shocks of a sharp increase in interest rates or another recession, but these are generally offsetting risk, and perceived to be low probability.”
Smith cautioned that a huge inflow of easy mortgage credit started the last housing bubble and he sees parallels today in low-cost mortgage money. The award-winning economist concedes experts were “blindsided” by the last recession and don’t know when the next one will appear.
“Prediction is impossible,” Smith said.
Our readers report on commercial real estate sales across the west
Done Deals is our monthly feature highlighting some of the major real estate transactions in Western Canada’s vibrant commercial real estate market.
Choices REIT closes super deal
Choice Properties Real Estate Investment Trust of Brantford, Ontario has completed the acquisition of a portfolio of 16 properties from subsidiaries of Loblaw Companies Limited consisting of 15 retail properties and one warehouse. The properties include Real Canadian Superstores in Winnipeg, Abbotsford and Whitehorse; Extra Food stores in Saskatoon, Devon, Alberta and Yellowknife; and a No Frills brand outlet in Peace River, Alberta. The total purchase price for the portfolio was $211.9 million, excluding transaction costs. Choice now has a portfolio of 472 properties comprising 459 retail properties, 10 warehouse properties, one office complex, one industrial property and one parcel of land, totalling approximately 38.9 million square feet across Canada.
From: Frontline Real Estate Services, Surrey. Frontline agent Garth White and buyer agent Jagjot Gill of Century-21 Coastal Realty Ltd. sold the following:
Deal: 6,800-square-foot industrial building, Scott Road, Surrey. Price: $1.12 million.
Frontline agent Garth White and buyer agent Willams Hobbs of Cushman Wakefield Ltd. sold the following:
Deal: 1-acre industrial lot, 154 Street, Surrey. Price $1.32 million.
Frontline agent Garth White and seller’s agent Terry Stephenson of Royal LePage Wolstencroft Realty, sold the following:
Deal: 0.88-acre industrial land, 192 Street, Surrey. Price: $1.8 million.
From: Avison Young, Vancouver. Avison Young agents Chris Wieser and Rob Greer sold the following:
Deal: 37-unit rental apartment building, Manchester Road, Victoria. Price: $4.75 million.
From: Canadian Apartment Property Real Estate Investment Trust (CAPREIT), Toronto. CAPREIT reports the following acquisition.
Deal: 125-unit rental apartment building, Regina. (This brings CAPREIT’s Regina apartment building holdings to 234 units.) Price: $17 million.
From HQ Commercial, Vancouver. HQ agents David and Mark Goodman report the following sales:
Deal: 12-unit rental apartment building, Knight Street, Vancouver. Price: $1.82 million.
Deal: 11-unit rental apartment building, built in 1955, East Boulevard, (Kerrisdale), Vancouver. Price: $4.71 million.
Deal: 10-unit apartment rental building, built in 1951, East Boulevard, (Kerrisdale),Vancouver. Price: $5.07 million.
From: Acquire Realty, Phoenix, Arizona. Acquire broker Dave Futcher reports the following investment sale:
Deal: 1,446-square-foot, 3 bedroom rental house, Surprise area, Phoenix, Arizona. Price: $154,900.
From: Re/Max Penticton Realty, Penticton. Re/Max’s Team Green report the following sale:
Deal: 3.57-acre serviced industrial land with office and workshop, Commercial Way, Penticton. Price: $1.4 million.
From: NAI Commercial, Vancouver. NAI agent Rick Lui sold the following:
Deal: 100,000-square-foot retail centre, No. 3 Road, Richmond. Price: $24.9 million.
NAI agent Aleem Thaver sold:
Deal: 9,000-square foot condominium development site, Coal Harbour, Vancouver. Price ($1,455 per square foot): $13.1 million.
NAI agents Gary Haukeland and JD Murray sold:
Deal: 11,298-square-foot office building, Mill Lake Road, Abbotsford.
Price: $1.85 million.
NAI agent Peter Seed sold:
Deal: 23,000-square-foot Westview Plaza shopping centre, Powell River. Price: $1.37 million.
Closed a commercial real estate deal? For a free listing in Done Deals, send information to
By Frank O'Brien
Metro Vancouver's startling multi-family land prices are creating a “disconnect” in a high-rise condominium market that increasingly must rely on immigrant buyers to survive, according to a noted real estate consultant.
“Without Chinese buyers, there won't be much local demand to support the Vancouver high-rise market,” said Frank Schliewinsky, principal of Strategics Marketing, which publishes the Vancouver Condo Report, a long-running industry newsletter.
A recent study shows that, at current “buildable-per-square-foot” prices, a typical new 750-square-foot condo has to have a baseline price of $112,000 just to cover land costs. On the West Side of Vancouver the same price is closer to $187,000, according to numbers provided in Colliers International’s recent Land Share report.
The report calculated what Metro Vancouver developers are paying for multi-family land based on the allowable floor space ratio (FSR), basically how much residential real estate can be achieved on the land.
As an example, Care Pacific Holdings Ltd. paid $13.9 million this year for a 36,000 square feet (0.8 acre) site on King Edward Avenue in Vancouver’s Kitsilano neighbourhood. The site has a 1.75 FSR, equating to a cost of $220 per buildable square foot, before any construction, finishing or marketing of the site is even started. In downtown Vancouver, such prices approach $250 and average more than $150 in East Vancouver.
This level of prices exposes a disconnect from the Vancouver economy, Schliewinsky warns. “ In the past year, the new high-rise condo market has shifted so much away from its historical basis that it really can't be considered as a ‘Vancouver’ housing market anymore,” he said.
Over the past 12 months the average asking price for new high-rise condos in Metro Vancouver has increased by 26 per cent and the average price per square foot by 16 per cent, according to Strategics. And, based on what developers are paying for land, future condominium prices appear destined to keep rising.
Yet “[there has been] no big increase in average household income,” Schliewinsky said.
In fact, Vancouver ranks dead last in median incomes for university-educated workers among Canada’s 10 largest cities, according to Statistics Canada. The median income for a Vancouverite with a university bachelor degree is $41,981 compared to a Canadian average of $50,981.
Strategics and MPC Intelligence, which also tracks new condominium developments, report that 27 high-rise projects began marketing in Metro Vancouver this year, with an average price north of $625,000 per unit.
“Based in interviews with sales staff in these projects, 60 per cent are targeting investors and 70 per cent are targeting immigrant buyers,” Schliewinsky said. At the end of September, there were an 5,600 unsold high-rise units in new projects and another 1,460 units still to be released in projects now marketing, according to Strategics.
Aberdeen Centre in Richmond, B.C., city picked as our top destination for real estate investors
This is where Western Investor believes real estate investors have the best chance to make the most money over the next two years
By Frank O’Brien
Welcome to Western Investor’s second pick of the top towns and cities in Western Canada where, in our opinion, real estate investors in both the commercial and residential sector have the best chance to profit. We compile this list every two years and our outlook is based on a two-year horizon, though many of these top markets should also perform long-term.
No. 1: Richmond
Richmond catapults to the top of the list due to its underlying economy and startling demographics. In many ways, the city represents the future for Metro Vancouver.
Richmond is North America's most Asian city – 50 per cent of residents identify themselves as Chinese, and the influence has created the most diverse and unique – and potentially deep - real estate market in the West.
It is in Richmond where retail real estate space in Asian-flavoured shopping centres sells for more than $1,000 per square foot, the highest in Western Canada.
It is where a 4.9-acre residential site on No. 3 Road, the city’s main thoroughfare, recently sold for $69 million. [Yes, that pencils to nearly $14 million per acre.] Richmond is home to the largest industrial buildings in B.C. and where Canada Post has just opened a 700,000-square-foot processing facility.
Richmond is where U.K.-based retail giant McArthurGlen is building a 240,000-square-foot outlet mall, the first in the province. Joan Jove, director of development for McArhurGlen’s first Canadian project explained why Richmond was chosen over, say, Toronto. “There is a strong Asian demographic [which he said are brand conscious] a lack of outlet malls and a strong tourist industry.”
McArthurGlen’s new mall is being built next to a Canada Line transit station, just two stops away from North America’s Number 1 ranked airport, Vancouver International which itself generates nearly $12 billion a year in economic activity.
Richmond’s population is now over 200,000 residents and expected to grow by 40 per cent in less than 30 years.
And Richmond is where the average detached house price has soared 38 per cent in the past five years, to just shy of $1 million.
No. 2: Calgary
Last year Calgary had more new office construction than Toronto and its residential real estate market is considered to have the strongest upside in the country. A caution on oil prices – now at their lowest level in two years – is all that kept Alberta’s biggest city out of our No. 1 real estate ranking for 2014.
That said, Calgary remains an impressive real estate play. Nearly 3,000 people are moving into the city every month – the 2014 influx is the highest on record – and the rental vacancy rate is a tight 1.4 per cent. There are no rent controls – and apparently no end to bold real estate speculation.
In suburban Calgary, Qualico Communities is building the instant community of Harmony, with 3,500 homes on a 1,700-acre site with a 135-acre lake, a 138-acre commercial campus and a 72-hole golf course, the largest in southern Alberta.
Downtown, Vancouver-based Concord Pacific has launched a high-end residential development on the banks of the Bow River with 200 residential units at record-breaking – the penthouse is $13 million - prices.
Calgary’s commercial investment market is on track to top $1.2 billion this year. Land prices are startling. This year a 12-acre retail site sold for $70 million and a high-density, one-acre residential site on 11 Avenue SW sold for a $30 million. House prices are up 9 per cent from last year and Royal Bank echoes other analysts is forecasting continued price acceleration across the real estate spectrum.
No. 3: Surrey
Surrey, B.C.’s fastest-growing and second-largest city, remains in our top five. The city has seen seven consecutive years of record-breaking construction, with value now exceeding $8 billion.
Much of the spending has been in public projects, including a new city hall, a new library, the half-a-billon dollar expansion of the Surrey Memorial Hospital and expansion of Simon Fraser University and the RCMP headquarters.
While the industrial market remains strong, Surrey has slipped in our real estate ranking this year due to a glut in the office and multi-family markets, both of which we believe will cool real estate returns over the next year.
Surrey’s office vacancy rate has soared to 23.2 per cent as of mid-year, the highest level in Metro Vancouver, and there is still 164,000 square feet of new office space to be delivered by 2015. Returns on office property, therefore, are expected to be low.
Ditto for the condominium and townhouse sectors, which account for half of Surrey housing’s market. Condominium sales were down 12 per cent in August compared to a year earlier, with townhouse sales off 7.7 per cent, and prices have fallen or flatlined in both markets from 2013. Meanwhile, 1,022 new high-rise condominiums have begun marketing in North Surrey alone in the past year.
Alberta’s capital is in the midst of the largest development cycle in years, marked by the Edmonton Arena District that will include a new hockey arena and the second tallest office building in Western Canada. Building permits through the first half of this year were $3.5 billion, just behind Vancouver.
Posting the highest gross national product of any Canadian city, Edmonton offers a sterling advantage for real estate investors: relatively low prices with strong upside potential.
Edmonton’s median home price, at $368,000, is far below Calgary or Vancouver, and the average price per-suite for a rental apartment building is $122,400, the lowest among Canada’s top-tier cities. The rental vacancy rate is a tight 1.4 per cent.
The industrial market also has potential. Spec developers have had difficulty keeping pace with demand, which now equates to 400,000 square feet being leased up every quarter. Industrial land prices from $350,000 per acre are among the lowest in major Canadian cities.
No.5: Cold Lake
Cold Lake, often called “the second Fort McMurray” because of its proximity - and potential - comparable to Alberta’s oil sands centre has matured into a stand-alone economic powerhouse.
The city is preparing for the annexation of more than 3,000 aces of land in the face of white-hot real estate demand and a soaring population. The unemployment rate is 3.4 per cent, about half the national average.
About 550,000 barrels of oil per day are generated in the region and planners see that doubling over the next 30 years.
We believe the potential for real estate returns over the next year are positive. The average price for a house shot up over $50,000 in 2014 to $276,515 and the rental vacancy rate is near zero; and there is strong demand across the commercial and industrial real estate sectors.
Since we placed Estevan in our real estate rankings two years ago, property values have soared and bigger investors have taken a position in this small city close to the Bakken oil fields. There are generous incentives – up to $10,000 “per door” for eligible rental investments and three-year tax holidays for qualified commercial projects.
Artis Real Estate Investment Trust recently bought Estevan’s major shopping mall for $10.1 million as one indication of the action.
Estevan is one of the largest cities in oil-rich Southeast Saskatchewan, responsible for 40 per cent of provincial oil sales.
It is also the site of the world's largest carbon capture storage facility. While the residential rental vacancy has risen due to a rush of new home building, we believe Estevan will prove a prime investment in the commercial and industrial market over the next two years.
No.7: Fort St. John
The second-largest city in Northern British Columbia, Fort St. John is the centre for the giant Montney Basin natural gas fields and BC Hydro’s proposed $7.9 billion Site C dam, which is nearly on its doorstep.
Shell Canada and the Oil & Gas Commission have opened offices, a new car dealership is complete, a Holiday Express hotel has opened, a second hotel is under construction and the Totem Mall is expanding, as is Walmart.
There is a shortage of serviced land in Fort St. John, meaning that 4.5-acre industrial lands outside of town are selling for an average of more than $760,000. With a projected doubling of the region’s population, Fort St. John offers real estate investment opportunities, especially in retail and rental housing.
Okotoks, just outside of the city of Calgary, is a residential real estate play. The second quarter of 2014 saw a new high for home sales, a 35 per cent increase from the same time last year. There are only 300 serviced residential lots ready for construction at the moment, which is less than half of what was available at this time in 2012. House prices are up 5 per cent since 2013, to $403,500, and we forecast they will ramp higher over the next two years. Okotoks is moving to annex 33 quarter sections – more than 5,000 acres –, which would set the stage for a new power centre in southern Alberta.
The largest city in Saskatchewan is drawing record-levels of in-migration, which has resulted in a strong retail and housing markets. The retail sector has a 10.8 million square feet but only 2.5 per cent is vacant. So far this year, lease-up has hit 166,000 square feet, up from 64,500 square feet of a year ago. According to recent studies, the city needs at least 600,000 square feet of new retail space.
This year, 3,400 new homes will break ground in Saskatoon, up 5.3 per cent from 2013 and this is expected to surpass 7,000 units annually in 2015 and 2016. Still, with an average price of $345,000, Saskatoon has among the lowest housing prices of any major city in Canada. The city offers generous incentives to builders of rental housing, yet the vacancy rate is a fairly right 3.3 per cent.
No. 10 Red Deer
Red Deer is halfway between Calgary and Edmonton and smack in the headlights of real estate investors. The city is forecast to see economic growth of 3.5 per cent this year and next. With an average household income of $94,000 and one of the fastest growing populations in Alberta, the city is a magnet for residential investors, but the industrial sector also holds potential. The industrial vacancy rate is a tight 3.6 per cent and space is leasing at a pace of nearly 30,000 square feet per month.
OUR TOP TEN TOWNS
5 Cold Lake
7 Fort St. John
10 Red Deer
Coast Health has called for bids on its 22-acre parcel on Cambie Street, Vancouver.
By Frank O’Brien
Vancouver Coastal Health (VCH) is expecting bids from developers to top $16 million per acre for approximately 22 acres of land it owns on Vancouver’s West Side. But both VCH and a real estate consultant say City of Vancouver community amenity contributions – which could potentially total ten of millions of dollars once the medical site is rezoned for higher density development – could play a key role in the bid process.
VCH issued a request for proposal (RFP) September 9 for the sale and redevelopment of two parcels within the 25.4-acre Pearson Dogwood site on Cambie Street between 57 Avenue and 59 Avenue. One parcel, measuring just under six acres, is currently home to the 116-unit Dogwood Lodge Residential Care Home. The second, approximately 16 acres, houses the George Pearson Centre, a 114-unit extended care facility. VCH will retain 3.2 acres for proposed health care and community uses.
Developers can bid on the 5.8-acre Dogwood site separately or on the entire site, according to the RFP, which is being handled by Cushman & Wakefield Ltd.
According to VCH, their appraisal estimates the value of the Dogwood site alone at between $100 million and $120 million.
Vancouver Council approved the redevelopment of the site in February. The city’s approval supports increasing density by proposing a floor-space-ratio increase from the current 0.75 to 2.8, which translates to 3.29 million square feet of potential development on the entire site.
“This is a huge project,” said real estate consultant Michael Geller, “as a comparison, it is three times the size of the Bayshore site at Coal Harbour.”
The Pearson Dogwood sale would require the winning developer to have the property rezoned. This is where the city would apply the community amenity contributions, which are typically based on 75 per cent of the increased value of the land as a result of the re-zoning, and must be paid by the developer.
Coastal Health argued that the city should waive or reduce the contribution charges because the redevelopment would include medical facilities and other community amenities, including child care spaces, park improvements, a new Canada Line transit station, a new YMCA and social housing.
However, Coastal Health has been told that health care facilities do not qualify as a community amenity because they are a provincial responsibility, according to Brad Foster, external affairs and communications, land and development with VCH.
“We found this dubious, but the city would not move off this position,” Foster wrote in an email to BIV.
It is difficult for developers to know what the eventual community amenity contribution costs would be, and this could have an effect on the bid process, Geller noted.
Recent re-zonings of smaller parcels in the Cambie corridor into higher-density residential have seen community amenity charges equal to about $55 per square foot, Geller said, but the contributions are negotiated with the city on a project-by-project basis.
The deadline for applications to purchase the VCH lands is October 28 and a host of bids are expected “from an A list of developers for this legacy project,” said Edgar Buksevics of Cushman & Wakefield.
A decision on the winning bid is expected by the end of this year.