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.
Vancouver has the second-lowest commercial property tax rate and the lowest residential property tax rate in Canada, based on a study of 10 major cities by the Real Property Association of Canada (REALpac), but what appears a good news story has a dark side, a local tax expert said.
“Seven per cent of the property owners in Vancouver – commercial building owners – pays 47% of all the property taxes,” said Paul Sullivan, senior partner with Vancouver appraisers Burgess Cawley Sullivan & Associates Ltd.
In Vancouver, the commercial-to-residential tax ratio is 4.33 meaning the tenant or owner of a retail storefront or an office building, for instance, pays more than four times what the owner of a residential property pays. This gap is second only to Montreal, REALpac reports, and much wider than in the major western cities of Edmonton or Calgary, where the ratio is 2:46 and 2:63, respectively.
Vancouver’s ratio is down 0.4 per cent from a year ago, and while Sullivan praised the “positive” direction he said it remains worrisome.
“It is stunning how low the residential property tax rate is in Vancouver,” he said.
The Vancouver residential tax rate is $3.68 per $1,000 of value and the commercial tax rate is $15.91 per $1,000 in value. The Canadian average residential tax rate is $9.51 and the average commercial rate is $24.25.
Vancouver can charge a lower tax rate largely because it has the highest residential property values in the country.
In Regina, for instance, homeowners pay a rate of $13.69 per $1,000 in value, or nearly four times higher than in Vancouver. But the average home price in Regina is $290,000, compared to $760,000 in Vancouver, according to respective MLS statistics for August. Therefore the Regina homeowner pays about $1,400 more in property taxes that his or her Vancouver equivalent.
Vancouver also has among the highest commercial real estate values in the country, Sullivan noted.
Sullivan said the push by owners to upgrade Vancouver land to its highest and best use invariably favours residential development at the expense of commercial use. The result, he said, is a transforming of retail areas into condominiums and a greater tax weight on the remaining commercial property.
As well, Sullivan noted, Vancouver’s ubiquitous single-floor retail strips are assessed for city property taxes based on the allowable floor-space-ratio, often for four storeys of commercial space. The result, he said, is many retail tenants are paying a much higher tax rate than the actual space they rent would suggest.
Land value works out to $83,000 for each condo in the new Vancouver House tower.
“Something out of whack here,” real estate consultant says
The 2.2-acre site of the new Vancouver House residential tower cost the developer, Westbank, $32.4 million, or more than $15 million per acre and it was not the most expensive residential land sale in Metro Vancouver so far this year. That would be the $83.5 million paid by Wall Financial for a site on Alberni Street in Vancouver’s West End that measures less than acre.
“[Residential] land remains the most the most sought-after commercial real estate investment in British Columbia,” notes Avison Young in a mid-year report on commercial real estate sales.
But one real estate commentator believes the white-hot demand for residential reveals an economic fault line, because much more is being spent building condominiums than on places for people to work or learn.
Residential land is clearly leading B.C.’s investment curve. Just the top five residential land sales across Metro Vancouver in the first half of this year, at a total of $255.6 million, were worth more than all B.C.’s industrial property sales, at $163 million, and accounted for 30 per cent of the total commercial property transactions in the province.
Other notable sales of residential land, all aimed at high-density development, include $69 million paid by Canada Sunrise Development Corp. for 4.91 acres on Number 3 Road in Richmond and the $20.7 million sale of 1.1 acres in Burnaby's Metrotown area. In what is seen as a long-term residential land banking hold, Wesbild Holdings and two partners paid $50 million for 87.4 acres in Coquitlam.
The higher land values may signal rising prices for future multi-family housing units. The land costs for Vancouver House, for example, translates into $83,000 for each of the 388 condominiums in the twisting tower that will rise at the north end of the Granville Street Bridge.
Real estate buyers pay much less for non-residential land, the Avison Young report reveals. Metro Vancouver industrial land, for example, sold for between $1 million to $2 million per acre this year, while the biggest sale of commercially-zoned land pencils out to $1.45 million per acre for a 40-acre site near Burnaby’s Brentwood Skytrain station.
“There is something out of whack here,” commented real estate consultant Ozzie Jurock, who hosted a Real Estate Outlook 2015 conference in Vancouver Sept. 13. Jurock noted that in the first seven months of this year, Metro Vancouver residential permits reached $2.9 billion, while total non-residential construction was $1.2 billion. Across the province, home building permit values are currently outstripping non-residential permits by a ratio of four to one.
“Residential construction this far ahead of non-residential reflects a weak pattern of business investment that could stunt economic growth,” Jurock said. “In a truly robust economy, more investments would be made in commercial buildings and infrastructure than in condos.”
Tsawwassen Commons completes in 2016 as part of B.C.'s
second-biggest retail complex
Backers of a retail complex that will help form the second-biggest shopping centre in British Columbia have taken on a 50 per cent shareholder.
GVest Private Equity LP, managed by Calgary-based Gracop Capital Advisors, has forged a partnership with Toronto-based Forgestone Capital Management to help finance and complete the 550,000-square-foot Tsawwassen Commons, which is now under construction in South Delta.
PDG Investments is developing and managing the leasing of the project with FORM Retail Advisors, a Vancouver-based retail broker.
Located on 52 acres of Tsawwassen First Nation lands on Highway 17, Tsawwassen Commons will provide outdoor retail space and include a blend of national, regional and independent retailers, big-box outlets, restaurants and financial services.
Tsawwassen Commons is being developed adjacent to Ivanhoe Cambridge's
1.2 million–square-foot Tsawwassen Mills, which will have 16 major anchor retailers, smaller retail shops, a 1,100 seat food court, restaurants and retail kiosks. The Tsawwassen Mills project is modelled on the CrossIron Mills and Vaughan Mills in the Greater Calgary and Greater Toronto areas.
When complete, the two Tsawassen malls will represent the second-largest shopping centre complex in B.C., just slightly smaller in leaseable retail space than the 1.71 million-square-foot Metropolis Metrotown complex in Burnaby.
While the cost of Forgestone’s equity stake has not been released, the total development cost for Tsawwassen Commons is $160 million, according to GVest.
The project will be complete in spring 2016.
Toronto-based MacKenzie-Goulais Inc. has been retained by the partnership as retail advisors overseeing the leasing program. In addition to confirmed tenants Walmart and Rona, the project is already 50% pre-leased, with 78% of the retail area under letter of intent or offers to lease, according to GVest president Tim Heavenor.