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Metro Vancouver land deals on hold as developers remain cautious

Tight financing, sale conditions slow deal-making but interest is steady
Justin Mitchell, an investment and development land broker with Goodman Commercial Inc., says demand for land is steady but residential developers are sharpening their pencils.

A precipitous decline in Metro Vancouver land sales last year could turn around this year, but developers are taking a long-term view with any purchases as market uncertainties continue.

“Developers need to replenish some of their inventory; that’s starting to happen,” said Justin Mitchell, an investment and development land broker with Goodman Commercial Inc. “The larger, experienced developers have been doing transactions and putting properties under contract.”

This marks a shift from last year, thanks in part to higher financing costs and land values that saw sellers reticent to lower price expectations in the wake of the post-pandemic surge in 2021.

A total of $3.3 billion worth of land changed hand in Metro Vancouver last year, according to Altus Group, including $1.9 billion transacted worth of residential land and $1.5 billion worth of ICI land.

Residential land sales slowed more sharply than commercial deals, falling 66 per cent versus a 55 per cent drop in ICI deals.

“There still pretty strong demand from industrial users to purchase and develop their own facilities, and a lot of that is driven by the fact that there’s still really good financing available to them from the banks,” Mitchell said. “[Residential] bank financing is still very difficult to get.”

Provincial pressure on municipalities to draft plans that show how they’re going to meet their housing targets underpin developer interest, with transit-oriented areas seeing a pick-up in activity.

But pricing is key.

While there’s been significant activity along the route of the Surrey-Langley SkyTrain line, the higher densities mandated for transit-oriented areas isn’t necessarily attractive to developers or the buyers they supply.

“When the transit line was announced, it freed up a lot of land,” said Neil Chrystal, president and CEO of Polygon Realty Ltd., a Vancouver developer with sites in the Fraser Highway corridor near the planned Fleetwood and Langley City Centre stations.

“[But] we’re focusing a lot on the woodframe as opposed to the highrise. Mostly we’re focused on the more attractive entry point for home buyers,” he said. “In today’s climate of higher rates, affordability becomes more of a challenge.”

With costs on concrete highrises typically about 15 to 20 per cent higher than for woodframe construction, the numbers don’t pencil out. This has pushed Polygon to seek opportunities beyond Metro Vancouver, such as a 1,400-acre tract in the Silverdale area of Mission it acquired in partnership with Madison Development Corp. in 2017.

Partnerships are also key to Vancouver-based Townline Homes Inc., which says high costs mean many sites aren’t viable even if land costs are nil.

“Our appetite is good, but cautious,” Townline president Daryl Simpson said. “But even with land at zero today, there’s a number of projects and a number of markets that simply don’t make sense given the significant environment of increasing costs that we operate in.”

These costs include government levies, as well as high prices for materials, labour and debt.

Townline hasn’t acquired any land recently, despite carefully scouting opportunities, but it is working with partners – both institutional groups and First Nations – to feed its development pipeline.

“In Metro Vancouver, South Vancouver Island and the Interior, you have institutional partners with a very low cost of capital that have land holdings and are looking for executional partners, and that’s an opportunity for someone like ourselves,” he said.

The challenges are familiar to Mitchell, who said developers are pursuing several strategies to make deals work.

“You can’t over-pay for a site at the moment,” he said. “Developers are definitely interested in purchasing properties if they’re priced really well – not just priced to market, but I think they need to feel like there’s a cushion if things are more difficult for longer.”

Some of the options include seeking out deals with longer completion timelines as well as distress sales that offer a hedge against future cost increases. A low price today promises to offset upward cost pressures down the road.

There are currently a lot of troubled sites on the market, said Tom Huang, managing partner with Tera West Properties Ltd. in Richmond, in part because of speculative buying by developers who now find themselves in a changed business environment.

On one hand, financing costs have increased significantly over the past two years, not only increasing developer costs but pushing residential buyers to the sidelines.

“With a market softening combined with record high interest rates for a record high duration, it’s been a deadly combination that together have killed a lot of developers,” Huang said.

Tera has been able to pick up several properties as a result. Earlier this year, for example, it picked up a site at West 28th Avenue in the Cambie corridor for $18 million. The previous developer had paid $23 million.

“The last developer paid so much for it, but that doesn’t mean we got a really good deal,” Huang said. “We simply got a project that works.”

And it will only work if the buyer demand doesn’t soften in the next couple of years.

The market today can bear a cost of about $1,400 per square foot for townhomes, Huang said, and if construction costs rise or the residential market softens, then the model breaks.

“We will very quickly be losing money,” he said.

Yet land remains in demand, simply because of the constraints facing the Lower Mainland. This has brought developers like Tera back, knowing that opportunities today are not likely to last.

“We know the market is likely near the bottom, so we’ve been active for almost a year now,” he said.

Signs of life are also being seen on Vancouver Island, thanks to a steady influx of buyers seeking more affordable housing options in a temperate climate.

While land is relatively plenty east of the Rockies, there is also optimism given the anticipated drop in interest rates.

This holds true for developments of all stripes, both residential as well as commercial.

“Rates have stabilized at or near the top, but as soon as we get a little bit of relaxation in rates, I think the buying activity will pick up quite a bit,” Chrystal said. “That will drive our purchase decisions.”

BMO Financial Group reported April 30 that 72 per cent of aspiring homeowners are waiting for the Bank of Canada to cut interest rates before buying, up four percentage points from a similar survey last year.

A drop in interest rates is also expected to drive investment in industrial properties in markets such as Lethbridge, where a conservative attitude has constrained construction.

“Land is going to notch up in its absorption here in the next couple of years,” said Josh Marti, a principal and senior associate in Avison Young’s Lethbridge office focused on industrial.

Lethbridge industrial vacancies are steady in the 4.1 per cent range, due in part to a lack of new construction and low appetite for the product that remains. New space is needed, but there was nothing to give tenants options. The only deals being done were for owner-occupiers.

Marti said that’s going to change, especially as interest rates start to edge down – something expected this summer, with the Bank of Canada’s next policy rate announcement due June 5. A lower financing cost will make it more economical for developers to move ahead, and help pull land deals forward.

“Pricing was getting more expensive, financing was more expensive … but those excuses are no longer there anymore,” Marti said. “There’s no inventory to be had, so you’re forced to build.”