Avison Young noted that a widening bid-ask gap was already becoming apparent in the last half of 2018 as both investors and lenders began to “recalibrate investment objectives.”
This could be related to rising interest rates and a near collapse of Metro residential sales, since many large land deals last year hinged on the potential for lucrative, high-density residential development. “A substantial decline in the number of deals completed is forecast for the first half of 2019,” according to Avison Young's Year-End 2018 BC Real Estate Investment Review.
The report suggest prices will remain high for prime office, retail and industrial assets, but buyers and lenders will be costing out the yields “with less emphasis on the speculative aspects” of redevelopment.
At least seven of 2018’s biggest deals were based on residential development speculation. These include:
U.K.-based Harlow Holdings Ltd.’s $164.7 million purchase of a one-third-acre multi-family site in Vancouver’s West End;
two “strata windups” in Vancouver with a total value of $324 million; and
the sale of a parking lot on Seymour Street in downtown Vancouver to mixed-use residential developer Reliance Properties Ltd. for $131.3 million.
Industrial transactions, which accounted for 40 per cent of 2018’s big deals, were worth almost $1.2 billion, just down from the peak of 2017.
In 2018, Metro Vancouver residential land sales hit $627 million, which would be an all-time high were it not for the spike during 2016 and 2017 when sales crested the $1.1 billon mark for the first time.
The downward shift began in 2018’s last half, as an avalanche of government policies, interest rate hikes and a subsequent 40 per cent plunge in housing sales hammered developer and consumer confidence, said Casey Weeks, senior vice-president of investment at Colliers International.
Weeks added that the mortgage stress test and other regulations have also slashed the pre-sales that condo developers depend on for financing.
He forecasts that some planned condo projects from smaller developers won’t proceed, which in turn could affect speculative sales of potential development sites this year.
The average cost for every buildable square foot for a residential development in Vancouver is now between $450 and $550. Vancouver has by far the highest combined per-buildable-square-foot costs and construction costs in Canada, according to Altus Group’s 2019 Construction Cost Guide.
Sales of all types of land, including commercial holding property and residential land assemblies, started slowing late in 2018, reported the Real Estate Board of Greater Vancouver. Tracking transactions through B.C.’s land titles, the board found that land sales in the third quarter of 2018 had fallen 34.8 per cent from the same period a year earlier and the value of total land sales had dropped by nearly 15 per cent, to $2 billion.
BIV lists the $248.7 billion transaction of an industrial portfolio by the Vancouver Fraser Port Authority as the biggest industrial deal last year.
Much of the industrial action, however, is in speculative warehouse and distribution tied to the retail sector, including the 1.1-million-square-foot Xchange business park in Abbotsford by Hungerford Group and QuadReal Property Group, developed on speculation and proposed for completion late next year.
But a “major deceleration of retail sales growth” from nine per cent in 2017 to two per cent last year is among the reasons the B.C. Real Estate Association (BCREA) cites for an expected “flattening” of commercial and industrial real estate investments in 2019.
The BCREA also points to a fourth-quarter drop in manufacturing shipments and employment as red flags for industrial real estate. The association’s much-watched Commercial Leading Indicator index saw its first drop in nine years as 2018 ended, down one point from a year earlier.
The Bentall Centre office and retail portfolio has been purchased by Hudson Pacific Properties Inc. in a joint venture with an affiliate of Blackstone Property Partners. Hudson Pacific will own 20 per cent of the joint venture and serve as the operating partner responsible for day-to-day operations and development. Blackstone will own 80 per cent and serve as the managing partner.
The 1.45-million-square-foot transaction is expected to close in the second quarter of this year. CBRE in Vancouver was the broker agent on the transaction, which is rumoured to have topped $1 billion.