Low vacancy rates, high real estate prices and an aging building stock in British Columbia’s Lower Mainland are driving a so-called renaissance in new purpose-built B.C. rental properties.
Those were some of the factors cited by a panel of industry experts on Feb. 20 at the 2014 Vancouver Real Estate Forum regarding the opportunities for new rental construction.
“For the past 40 odd years, the only development we’ve seen in this city and throughout the Lower Mainland has been the condo market,” said David Goodman, founder of apartment resource The Goodman Report.
For the past 10–15 years, the investor condo market has been serving as secondary rental units, filling the need for new rental stock. But as the condo market slows down, it is creating opportunities that were not there before, Goodman noted.
According to the most recent CMHC rental market survey, 60 per cent of units in Vancouver are secondary rental units. Out of the 4,300 new rental units that came to market in 2011–2012, only 11 per cent were purpose built.
“The result is purpose-built rentals have been very flat for the last decade,” said James Paleologos, senior associate at Realtech Capital Group and moderator of the session.
With a growing population and limited new supply of purpose-built rental housing, the demand for rental housing choices for low- and moderate-income homes has grown significantly.
These factors have created market conditions that are seeing many developers considering purpose-built rental projects.
For 2014, there is an unprecedented 49 new purpose-built projects representing almost 6,000 new suites on the drawing board throughout Metro Vancouver.
Goodman credited the City of Vancouver for adopting a number of programs and strategies to protect and increase the number of market rental homes.
The STIR (Short-Term Incentives for Rental Housing) program ran for more than two years and ended in December 2011. Its successor is the new Rental 100 initiative, which encourages the development of projects where 100 per cent of the residential units are rental.
“We are in an era of low interest rates. It’s easier to make the numbers work and interestingly some major developers like Bosa, Cressey and Wall Financial — they have been building rentals and holding onto their rentals,” Goodman said. “They are attracted to the idea of having new concrete buildings extremely well located at a 4.5 cap plus and feel these are assets that should be added to their portfolio.”
The panel also discussed what rents can be achieved, suite sizes, the level of finishes required in new rental units, as well as the factors that affect whether developers will build rental or condo units.
Location is a key factor when it comes to rental income, according to Michael Oord, real estate appraiser at Grover, Elliott and Co. Ltd.
“It’s important to understand where the property is, what the size of the unit and what level of finishes, and that can vary…each project will be different,” he said, adding that he believes unit sizes should be small.
“Many people are fixated on rent-per-foot, but there are price ceilings in the market. Renters are very sophisticated,” said Daniel Sander, director and vice-president of Hollyburn Properties.
According to CMHC and The Goodman Report, the average rent for purpose-built buildings in the Vancouver census metropolitan area was $1,067 in 2013.
Oord noted that the majority of the proposed purpose-built rental projects are located along busy corridors. Repositioned properties that are not on busy corridors may be able to achieve similar rents, he said, adding that new and renovated purpose-built rentals mean increased competition for rental condo apartments.
Oord said that it is still a challenge to determine market value, as there is little comparison. In general, the average capitalization rates for Vancouver rental apartment buildings range from four to five per cent, depending on a number of factors. For example, Oord said that larger projects would sell at a larger cap rate.
A key market driver for rental development is financial incentives. Goodman noted that up until the 1970s, there were federal tax incentives for developers building rentals. When those tax incentives and other programs were phased out, apartment building construction decreased substantially across the country.
As an example, Michael Deighton, vice-president of acquisitions at Bosa Properties, cited the fact that Vancouver once offered a 10-year tax exemption in Gastown, which had a major impact of the redevelopment of the neighbourhood.
While many factors have created the market conditions that currently have many developers considering purpose-built rental projects, the general consensus is that developers are taking a cautious and long-term approach to building rental units.
Cheryl Mah is managing editor of Canadian Property Management Magazine’s B.C./Alta. edition.