The week’s top stories focus primarily on multi-family sales in both B.C. and across the Prairie provinces, highlight a shift in buyer demand in both areas. While the Prairies are showing signs of a slow recovery, velocity of multi-family demand in Metro Vancouver is slowing. Meanwhile, a major office tower in downtown Vancouver secures a tech tenant, while Richmond finally limits home sizes on farmland, thanks to a little shove by the provincial government.
Here is Western Investor’s pick of the top commercial real estate stories published this week.
Confidence still strong as clouds gather over multi-family sales – Western Investor
Landlords could face higher vacancy rates and lower buyer appetite for apartment buildings as new regulations, higher inventory disrupt the market.
The signs are subtle so far but they may represent the first downdraft in Metro Vancouver’s multi-family rental market after years of record-snapping demand and prices.
But multi-family insiders remain confident of future performance.
The warning signals include a rush of new purpose-built rental buildings, an increase in rentals due to a housing sales slump that has shoved more rentals on the market and extremely skinny capitalization rates. And, of course, looming changes to the B.C. Residential Tenancy Act that many believe will tilt regulations in favour of tenants.
If a correction is coming, however, it has yet to show up in sales and prices of apartment buildings that have continued a sizzling pace this year.
During the first half of 2018, 89 apartment buildings sold in Metro Vancouver for a total dollar volume of $1.4 billion. This is up from the same period in 2017 when 87 buildings sold for a total volume of $1.3 billion. The most dramatic change is in the price per suite: this year it is an average of $494,723 per door, up 21 per cent from the first half of last year, according to the Goodman Report 2018 Mid-Year Review, published by David Goodman and Mark Goodman of HQ Commercial.
Older apartment buildings with a solid potential for land development have seen the most startling price increases. Examples: an aging eight-suite apartment building on Commercial Drive in East Vancouver that sold for $800,000 per door; and a 66-suite old-timer on Alberni Street in the West End that sold for an eye-popping $1.9 million per apartment.
But multi-family investors speculating on future land demand without the necessary zoning in place will face headwinds.
“We are seeing property sitting on the market because the vendor is wanting to achieve development values but there is not a subscribed redevelopment plan in place for the property; it is only speculation,” said David Venance, vice-president and multi-family specialist with JLL Canada in Vancouver. “[Such properties] are perceived as being overpriced.”
With an average multi-family capitalization rate of 2.8 per cent, most investors are unwilling to risk such low yields on a speculative play, Venance explained.
He said investors should check the local municipality’s official community plan and zoning parameters to know if there is a potential for a rental property to be developed into higher-density residential.
Another spook in the rental space is the spectre of an inventory spike in a market accustomed to the tightest vacancy rate of any major Canadian city.
In the city of Vancouver, the number of rentals available in July increased 15.1 per cent from the same month a year earlier to 5,319 listings.
“Summer is usually tight relative to the rest of the year for rental supply, but we saw more listings this July than any month in 2017,” said Louie Dinh, a data analyst at Quantitative Rhetoric. Dinh compiles his information from online rental advertising listings.
He added that Vancouver rent increases have stalled, albeit at nosebleed levels, since January. Current advertised rents in Vancouver are $1,950 for a one-bedroom, with two-bedrooms at an average of $2,650 per month.
Dinh suggests the increase in rentals is linked to the 30 per cent plunge in housing sales this year in Metro Vancouver compared with 2017.
Prairie multi-family recovery proves a slow process – Western Investor
Calgary is on a fragile mend, Winnipeg stays stable but Saskatoon sees per-door apartment building prices slip as vacancies hit double digits and rental rates tumble.
Edmonton condominium developers are switching projects to rental apartments as housing sales slip. Calgary is seeing the first substantial drop in rental vacancy rates in years, despite sluggish job growth and weak net migration to the city. Saskatoon’s rental vacancy rate remains in the double digits and prices for rental apartment buildings are falling.
Winnipeg, meanwhile, continues to reign as the most stable multi-family market on the Prairies.
Winnipeg
Winnipeg’s multi-family apartment market is benefiting from a growing population, including immigration, which has boosted the city’s population to nearly 750,000, according to the Conference Board of Canada.
The result can be seen in the rental sector, as experts outlined at this year’s Real Estate Forum in Winnipeg. The city has a rental universe of 57,407 units and it is increasing: last year 1,258 purpose-built rental units were started.
Despite this relatively high number of rental apartments, the overall vacancy rate has remained in the 2.8 per cent range for the past three years while rental rates have steadily increased. Average rents in the city are $970, according to Canada Mortgage and Housing Corp. (CMHC), up 4 per cent from a year ago.
The forum was told that sales of apartment buildings are increasing, as are average prices. The average price per door for existing buildings is in the $115,000 range, up 10 per cent from 2017, but prices vary widely: new concrete product can easily touch $250,000 per suite, agents say.
Saskatoon
Saskatoon is posting a rental vacancy rate of close to 14 per cent this year, among the highest on the Prairies, and – if a bankrupt apartment portfolio is removed from the calculations – the average price of multi-family buildings has dropped nearly 10 per cent from a year ago to $100,000 per suite, according to Colliers International.
Average rents in Saskatchewan’s biggest city have fallen 14 per cent, or more than $150 for a two-bedroom unit, with most of the cuts coming in older rental stock. The typical rent for a two-bedroom apartment is now around $1,075 per month.
A building blitz of new rental properties has added nearly 1,500 new units in the past eight years, with another 172 rental apartments completing this year.
Colliers does not see a quick recovery in rental income for older properties, noting that “market conditions remain historically weak.” But, the agency is quick to add, “this phenomenon is unique to Saskatoon and is not occurring on the same scale throughout major markets in Western Canada.”
Some landlords may disagree.
Calgary
After four brutal years that saw vacancy rates increase, Calgary’s multi-family sector is on the mend.
“However,” cautions Avison Young in a first-quarter market report, “it is not anticipated that it will be a rapid recovery.”
Dragging on the rental market performance is the profusion of new condominiums now being rented. A CMHC survey estimates that 34 per cent of Calgary’s condos are rented, up from 31 per cent a year ago. Adding to the inventory are new purpose-built rental buildings, which are seeing the highest annual increase in 25 years. In 2017, for instance, 1,637 new rental units hit the market.
But the pace of construction has slowed and the vacancy rate has started to come down. CMHC, which counts only private rental buildings with at least three units, says the vacancy rate is now in the 6.3 per cent rage, down from 7 per cent a year ago. Modest as it is, it is also the first decrease in Calgary vacancy rates in five years.
GWL Realty lands U.S. tech tenant for Vancouver Centre 2 – Business in Vancouver
GWL has reportedly signed a deal with a U.S. technology firm for approximately 105,000 square feet of the 33-storey triple-A office tower being built at 753 Seymour Street.
“GWLRA does not have any announcements to make regarding Vancouver Centre 2 tenants at this time,” replied Simone Abt, managing partner of Elettra Communications in Vancouver.
Vancouver Centre 2 is owned by Healthcare of Ontario Pension Plan, Great-West Life Real Estate Fund and London Life Real Estate Fund. Built on a speculative basis, it will be one of the first of the next wave of towers to be completed when it opens in 2021.
That next wave is massive, Avison Young reports, delivering 4.3 million square feet by the end of 2022. This represents a 19% increase to the existing downtown inventory.
Yet the space is coming with little room to spare. Towers announced to date have slowly but surely leased up, and strata space remains a fraction of the market.
“Tenants seeking large blocks of space will likely have few options,” Avison Young opines in its mid-year review of the Metro Vancouver office market.
Strata prices rising
September may be in sight, but when commercial real estate association NAIOP held its final breakfast of the spring in June, moderator Mark Hannah, managing partner of Nicola Crosby Real Estate in Vancouver, singled out strata office space as a niche where Vancouver is “absolutely leading-edge.”
“Despite the early successes of the Bosa Waterfront Centre and Burrard Place,” to crib from Avison Young’s latest report on the Metro Vancouver office market, its influence has largely outweighed its scale.
Hannah said that influence is mighty, however, and is playing out in areas like Mount Pleasant.
“I remember when Reliance [Properties Ltd.] was selling at $1,100 a [square] foot on Burrard, [thinking] ‘That’s an interesting number,’” Hannah said. “Now there’s a number of projects going on in Mount Pleasant, we’re involved in a few, and they’re selling for over $1,000 a [square] foot.”
Province to limit house sizes on farmland – Delta Optimist
B.C.'s agriculture minister needs to make scope of rules clear, as they come just months before municipal elections, says former Delta councillor.
The City of Richmond will finally be catching up to Delta but only due to a push from the provincial government.
Richmond has been mired in controversy over mansions being built on farmland and the city’s seeming reluctance to impose tougher regulations to limit their size.
That’s about to change thanks to the province indicating it will enact one of the recommendations in an interim report from a special committee that limits house sizes within the Agricultural Land Reserve.
The committee reviewing the ALR and Agricultural Land Commission recently submitted its interim report calling for “immediate legislative and regulatory change” and Agriculture Minister Lana Popham has confirmed those changes can be expected this fall.
The report notes that as urban land prices increase and the population grows, the pressure to develop agricultural land continues to build. Farmland is being taken out of production and investors and speculators are being allowed to exploit tax system incentives intended only for those who farm, the report warns.
The report states there are few, if any, limits on the size and scale of houses on farmland which contributes to the perception the ALR is open for development.
Delta is well ahead on the mansion issue, having already passed rules to prevent farms from being used as cheap land for mega homes.
Delta South Liberal MLA Ian Paton said he’s supportive of municipal action to limit the size of homes on agricultural land which should be farmed, not turned into sprawling country estates.
“Our former government initiated the Minister’s Bylaw Standards with regards to farmhouse size and siting, and we are proud of that fact. I am also proud that the City of Delta acted years ago to limit the size of houses on agricultural land and curb speculation,” said Paton, a former Delta councillor.
In 2006, Delta took the lead to prevent speculators and would-be mansion owners from purchasing farmland to build their estates without intention of farming, limiting house sizes and defining a farm "home plate" on agricultural properties.
The maximum farm house floor area for properties less than eight hectares (20 acres) is 3,552 square feet and for properties eight hectares or greater it’s 5,005 square feet. The maximum area for an additional farmhouse is 1,937 square feet on a lot of less than eight hectares, while it’s 2,507 square feet) on a lot of eight hectares or greater.
Richmond council this year, under pressure from landowners, agreed to keep the maximum size at 10,764 square feet, while second homes can be built at 3,229 square feet without rezoning.
