Weekly Buzz: Building permit delays and market contrasts

Western Canada's top commercial real estate stories, featuring developers' frustrations with the building permit process, and B.C. vs. Alberta market analysis

Western Investor
August 25, 2017



This week’s top stories look at the commercial real estate from a variety of lens. The building permit process at the City of Vancouver is affecting both developers and renters looking for available housing, while continuously limited supply also affects sellers. Investors, of course, are also impacting by an unbalanced market – so much so that property taxes are often an after thought, diminishing returns. Of course, this has been the situation in B.C. for some time. Alberta offers a vastly different perspective on commercial real estate – where limited demand is the issue, rather than limited supply.

Here is Western Investor’s pick of the most buzz-worthy stories published this week.


Seeking permission to build homes – Westender

Developers are citing building permit delays as a contributing factor in the very continued limited supply of affordable housing. Submissions to The City of Vancouver now take up to three times longer to get approved than they did a decade ago, The Westender reported.

While it might be hard to feel sympathy for development companies that continue to generate profits from Metro Vancouver’s booming housing market, there is a trickle-down effect to the stymied development process, and it’s hitting low- and middle-income residents and small businesses hardest.

Timelines for office building permits – such as putting in a new boardroom or a kitchen – have gone up by about 400 per cent in the past few years, Stovell says.

“It’s a constant area of activity … and sometimes small business really suffers as a result of not being able to get their business open in a timely fashion.”

At the residential level, too little housing stock on the market and a huge amount of demand is one reason why it has become very expensive to live in Vancouver. 

“There are so many areas and neighbourhoods … where we’re just not using the land base properly,” says Anne McMullin, president of the Urban Development Institute, a non-profit association of the development industry and related professions (Stovell is chair of their board of directors). McMullin says it comes down to looking at areas that can be rezoned to allow for new homes and greater density.

A limited residential land base in Metro Vancouver means that the “demand is high, the supply is low, the prices go up,” says McMullin. “In the last five years, condo prices have gone from about $500 to $700 a square foot to about $1,500 a square foot.”

The city’s tendency to focus on developing one area at a time is also problematic, she adds, as developments such as those found in the Cambie corridor plan are putting new housing on the market, but there isn’t enough equivalent competition from developments in other areas to lower prices.

The City of Vancouver received 8,300 permit applications in 2016 – the second highest volume of permit applications to date. Managing that flow will be key to getting more units online and available to residents.

“There’s no doubt that the city is busy,” says Michael Geller, an architect, planner, real estate consultant and property developer. “But, the fact is, there are thousands of units held up in that [City of Vancouver development] process.”



Investors lose money by not heeding property taxes – Western Investor

Investors are known for being diligent when purchasing assets – however, Western Investor editor Frank O’Brien found that some investors neglect to factor in property tax expenses, much to their detriment.

 Many companies view their property tax expenses as a fixed cost and are therefore reluctant to invest the required resources to manage the expense “unless they get into a crisis situation such as a property with a really high assessment,” Bishop said.

“Those firms that are focused more on cost rather than return on investment, in our opinion, are leaving money on the table by not proactively reviewing the property tax assessments for their portfolio.”

Paul Sullivan, an appraiser who specializes in property tax consulting with Burgess Cawley Sullivan in Vancouver, said only 1 per cent of B.C. property owners appeal their assessments each year.

Yet, Sullivan noted, his company saved clients more than $2 million in property taxes in 2015, either through assessment reduction or by having property reclassified.

Altus noted that investors who leverage tax planning strategically can unlock even greater asset value beyond property tax savings.

“Not managing your property tax expenses leads to downward pressure on net rents and results in reduced valuation,” Bishop cautioned.

Fifty-two per cent of Altus survey respondents said they lack the tools to analyze property tax information, and 44 per cent said they lack the expertise and resources to identify property tax data sources.

Many firms haven’t invested in the tools and resources needed to produce accurate forecasting of property taxes.

“A lot of them are into bidding situations on properties and they’re not sure that they’re going to be successful, so they’re cautious about how much they invest in the initial due diligence phase,” said Bishop.

Forty-one per cent of survey respondents said they periodically review property tax assessments only to identify appeal opportunities.

But firms might not be aware of how potentially lucrative successful appeals can be.

“Our experience is that the return on investment through reviews of commercial real estate portfolios is typically in the range of 500 per cent to 1,000 per cent. Oftentimes it’s higher than that, so it’s definitely worth the expense that goes into it,” Bishop said.

He said smaller or new commercial investors should take three basic steps to make sure they have a handle on their property tax exposure.

First, outsource the tax consulting and appeals to experts. Second, owners should make sure they react promptly to requests for information from assessment authorities, and, third, make sure that the tax clauses in their leases provide for 100 per cent recovery of property taxes from their commercial tenants.

[Western Investor]


Tight real estate supply discouraging upward market movement – Business in Vancouver

New stats from The BC Real Estate Association reveals home sales are evening out and listing are increasing – however, buyers are still facing extremely low supply, which is stalling market stability and affecting sellers attempting to downsize in Vancouver’s current market conditions. Peter Mitham has the story.

“Instead of 20-year lows, we’re at 10- or 12-year lows,” he said last week. “That trend will have to continue some time before we see any balancing in the marketplace.”

But if misery loves company, the world has plenty to offer local buyers wrestling with local realty.

Reports from south of the border indicate a similar dearth of listings across the U.S.

Resale listings hit a 17-year low earlier this year, and Lawrence Yun, chief economist with the National Association of Realtors, continued to express concerns at the end of July.

“Low supply is an ongoing issue holding back activity,” he said. “Housing inventory declined last month and is a staggering 7.1% lower than a year ago.”

While every market is different, supply and demand play a role, said Tom Davidoff, director of the University of British Columbia’s Centre for Urban Economics and Real Estate. On the one hand, strong demand might eat into listings; on the other, people might opt not to replenish listings.

“One thing I heard is that high prices are preventing trade-up,” he said of local markets.

This isn’t typical, however, because higher prices should make it easier for owners to trade up, freeing more affordable properties for first-time buyers. But price escalation could be leaving everyone behind.

“When markets are extremely tight, home sellers, if they’re going to sell and buy in the same region, they’re going to be faced with the same tight supply,” said Muir.

[Western Investor]


B.C. and Alberta: Q2’s Tale of Two Markets – Western Investor

Western Investor guest columnist Curtis Scott of Colliers International analyzed second quarter 2017 results in both the B.C. and Alberta markets, emphasizing diverging trends highlighted by a major contrast in demand, brought on by differences in economy.

The Office Market

Of the three major markets, Calgary has a slightly larger inventory at approximately 70 million square feet. This is followed up by Vancouver at 63 million square feet and Edmonton at 29 million. That being said, of the two Albertan markets, Edmonton is just under 18 per cent regional vacancy rate and Calgary is nearing 23 per cent, whereas Metro Vancouver has experienced a significant decline since the last supply boom, resting at a 6.3 per cent regional vacancy rate.

The demand in the Vancouver market is largely driven by the technology sector, which currently represents 18 per cent of the downtown market, and the current demand for space is nearly one million square feet (based on mandates tracked by Colliers internal reporting and understood as a proxy to the market). The decline in vacancy and solid market fundamentals is a result of the Vancouver market maturing and diversifying over the last couple decades, moving away from predominately mining and forestry related industries to professional service firms, health care, education, consumer goods, and, of course, technology.

The Calgary office market is still largely energy focused, with nearly 77 per cent of the downtown office market involved in the energy market: 55 per cent in oil and gas exploration, 10.66 per cent in engineering and energy services, and 10.89 per cent in pipeline midstream. That being said, Calgary is starting to see more technology related industries absorb high quality office space due to the opportunities with high vacancy and lower rental rates. With the market still recovering since the drop in oil prices, different industries within Calgary have seen this as an opportunity to attract talent from the Energy sector and grow their organizations within the market.

The Edmonton office market, albeit much smaller than Calgary and Vancouver, holds approximately 62 per cent of the inventory within its downtown area. This is further divided by the financial district (69 per cent) and government (31 per cent). The financial district is currently holding vacancy levels above the regional level at 20.4 per cent, where the government market is at 13.3 per cent.

Looking at the regional office market as a whole, the vacancy has seen steady increases since Q1 2014 where it was 9.83 per cent, moving up to 17.79 per cent as of Q2 2017. The Edmonton market is largely driven by demand from the Financial Services industry and the local and provincial governments.

The Industrial Market

Vancouver, Calgary and Edmonton are home to nearly 483 million square feet of industrial space, of which Vancouver (around 199 million) holds the most inventory at 41 per cent (around 199 million square feet), followed up by Edmonton at 30 per cent (144 million) and Calgary at 29 per cent (140 million).

From vacancy standpoint, the Vancouver industrial market is dealing with far more issues on available space with a vacancy rate of 1.9 per cent, versus Calgary and Edmonton at 6.4 and 7.8 per cent, respectively. The combined vacant space between the three markets equates to just under 24 million square feet.

One of the major contrasts between the three industrial markets is geography. The Vancouver industrial market is not only dealing with zoning and policy issues, but is constrained by a variety of geographical barriers. In contrast, Calgary and Edmonton have the ability to continue to expand development outward, benefiting from a sprawling geography – however, this type of expansion does require investment into infrastructure to support the movement of people and goods.

A further distinction between these industrial markets lies in the types of industries that occupy space. Both Calgary and Edmonton have a much greater reliance on the energy sector, where the predominant industries in Vancouver are logistics, distribution and consumer goods. With the direct connection to Asia and two active water ports and an international airport, the traditional industrial industries in Vancouver largely rely on “last mile” distribution, and thus the necessity of highway infrastructure is crucial.

[Western Investor]

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