This week’s top stories focus primarily on B.C.’s rental real estate market and lodging industry. While single-family home prices are taking a dip, investors would be smart to continue considering hotel and multi-family investments, which are likely to have strong showings into the new year. Cities outside the Lower Mainland may provide the best returns for multi-family investors, downtown Vancouver hotels lead the charge in the lodging sector.
Here is Western Investor’s pick of the top commercial real estate stories published this week.
Revenue per available room (RevPAR) is up 11.6 per cent this year, shocking lodging market analyst.
Vancouver is a bright point among Western Canada’s hotel markets, one that continues to surprise Carrie Russell, managing director of HVS Canada.
Downtown hotel occupancy is averaging 79.4 per cent this year, and downtown hotels are posting some of the strongest revenue growth of any in the country. Revenue per available room (RevPAR) is up 11.6 per cent this year, and average daily rates are up 10 per cent. A more modest growth trend of 7 per cent is expected for both measures in 2019, moderating further to 5.7 per cent in 2020 – assuming the forecast is right.
“I have been wrong on the projections for four years now, to the low side,” Russell said while reviewing the hotel sector with Scott Duff, vice-president of CBRE Hotels, at the annual Western Canadian Lodging Conference in Vancouver on November 20. “RevPAR growth at 11.6 per cent this year with a brand new hotel in the market is shocking, in some ways.”
The new hotel stock includes the 329-room JW Marriott Parq Vancouver – the conference venue – and, more recently, Executive Hotels & Resorts’ 202-room Exchange Hotel.
Perhaps the most amazing detail in Russell’s review of the market was that downtown Vancouver, for all its strength, has just 118 units set to open in 2019 and zero planned for 2020. An additional 55 rooms at the airport in both 2019 and 2020 will do little to alleviate the pressure there, driving more guest traffic to Fraser Valley properties.
“Without significant new supply coming into the city, how much can rates continue to grow?” Russell asked.
The loss of two West End hotels, the Empire Landmark and Coast Plaza Stanley Park, removes 626 rooms from the market, and the closure of the Four Seasons Hotel Vancouver will eliminate another 372 units.
With supply falling and steady demand, chances are good that rates will continue to rise.
Vancouver is off limits to hotel developers like Hugo Germain, development director with Montreal’s Groupe Germain Hotels. Speaking as part of a panel that discussed the phenomenon of “peak asset values,” Germain said that Vancouver simply wasn’t accessible for hotel developers like him.
“We’re completely outside the game,” he said, calling Vancouver land values “crazy” (he won’t be the last, either). “The numbers don’t add up.”
With some opportunities drawing 20 or 30 bids, Germain said partnerships with entities like KingSett Capital Inc., represented by executive Justin Walton, are the only option.
With so much institutional capital going after industrial and multi-family investments, Walton said, hotels are an “alternative investment strategy” KingSett is pursuing.
“We’re always looking for premium risk-weighted returns,” he said.
Residential Investor Outlook 2019: Investors should scout opportunities outside of the Lower Mainland for best returns on home buying and rental plays.
With a near free-fall in Metro Vancouver, British Columbia housing sales will plunge 23 per cent this year, according to the BC Real Estate Association (BCREA), and the projected 2019 recovery will be led by centres outside of the Lower Mainland, particularly in the Kamloops region and the north.
In Metro Vancouver, the real winners in 2019 will be existing residential landlords who can expect high demand, less competition and low vacancy rates, based on Western Investor's analysis for its annual residential investment outlook.
Despite a 35 per cent plunge in Lower Mainland housing sales this year, home prices remain the highest in Canada while rising mortgage rates will also help to keep buyers sidelined. As of October there were more than 20,000 homes for sale through the Real Estate Board of Greater Vancouver (REBGV) and the Fraser Valley Real Estate Board, up 42 per cent from a year earlier, as sales cratered in both markets. Yet the composite benchmark home price in the Lower Mainland is $995,000 – nearly twice as high as the national average and up 2.9 per cent from October 2017, according to the REBGV. The benchmark detached-house price, now at $1.28 million, is down 2.7 per cent from the same period last year.
The Metro region will welcome 59,300 new residents this year and another 61,000 in 2019, more than 90 per cent of whom will move into the Lower Mainland. The majority of the newcomers will be renters, because Metro Vancouver has the least affordable homes in Canada, based on home prices and incomes, according to both the Royal Bank of Canada and Zoocasa Realty Inc.
The BCREA is forecasting that, after falling to 80,000 sales this year, total residential transactions through provincial real estate boards will increase 12 per cent in 2019 to 89,500 units.
Dane Eitel, a Vancouver residential real estate agent and president of Eitel Insights, however, contends that the Metro Vancouver detached-housing market will not bottom for three years. His advice to speculators: sell now and begin buying back in during the fourth quarter of 2021, which will be the bottom of the market. The breakout will begin then with a new price peak reached in mid-2023, Eitel forecast.
Steve Saretsky, a Vancouver real estate agent who publishes the monthly Saretsky Report, said the benchmark prices used by real estate boards disguise the extent of the price declines across the Lower Mainland. He noted that average Vancouver detached- house prices have fallen 20 per cent in the past year.
“We are seeing more forced sales as a result of Vancouver’s vacancy tax and B.C.’s proposed speculation tax, which is slated to begin starting January 2019,” Saretsky said.
Vancouver’s empty-home tax is 1 per cent of a home’s assessed value. The B.C. speculation tax, which covers all of Metro Vancouver, the Victoria capital region, Nanaimo and most of the central Okanagan, is 0.5 per cent of the property value for Canadian residents and 2 per cent for foreign buyers.
Canada Mortgage and Housing Corp. (CMHC) is expecting Metro region home prices to drop across the board. In its recent housing outlook for B.C., the federal housing agency forecast that the composite average home price in the Vancouver Metropolitan Area, which includes much of the Fraser Valley, will decline 9.8 per cent by 2019 and 14 per cent by 2020.
Outlier cities will lead
It is cities outside of the Lower Mainland that are expected to be the star performers for residential investors next year.
Kamloops, the second most affordable city for housing in B.C. and biggest city exempt from the provincial speculation tax, is among the bright spots for 2019, according to the BCREA.
Kamloops will see a 3.6 per cent increase in average home prices and a 2.3 per cent rise in housing sales next year, the association said.
With a median household income of $73,822 and an average home price of $407,000, the city is among the most affordable home markets in B.C., according to a study by Zoocasa.
However, it is Prince George, ranked No. 1 for affordability by Zoocasa and the biggest city in the suddenly booming north, that may rank highest for rental investors next year. Prince George’s average home price is $315,400 and the median household income is $78,422 – higher than in most of the Lower Mainland, including the city of Vancouver, where the median household income is a relatively paltry $65,327.
Residential vacancy rate loosens from 0.9 to 1.0 per cent, but average rent is up 6.2 per cent from last year, reports CMHC.
The residential rental vacancy rate has eased slightly across Metro Vancouver, but that was not enough to slow average rental price growth, according to new annual data released November 28 by the Canada Mortgage and Housing Corporation (CMHC).
Metro Vancouver’s rate slackened to 1.0 per cent from 0.9 per cent last year, as new rental supply came on stream in some suburban municipalities. But this increase in supply was too meagre to affect prices, as the average rent in the region – all apartment sizes combined – rose 6.2 per cent to $1,385. The elevated prices seen in new-build rental stock also contributed to this overall price jump.
Within Vancouver’s city limits, rental vacancies headed in the opposite direction. The federal housing agency said that, after easing slightly to 0.9 per cent in 2017, vacancies in Vancouver proper over the past year declined again to 0.8 per cent of total rental stock.
The average rent in Vancouver proper rose 6.1 per cent to $1,478 over the past year, said CMHC. One-bedroom units also rose 6.2 per cent to $1,411 on average, and bachelor/studio apartments also increased by 6.2 per cent to $1,198 on average.
Elsewhere in Metro Vancouver, a flood of new rental units in Burnaby pushed that city’s very low 2017 vacancy rate of 0.6 per cent all the way up to 2.0 per cent this year, making it the biggest driver of the region’s overall rate increase. The average rent in Burnaby rose 5.3 per cent to $1,238.
New Westminster also saw rates ease from 1.1 to 1.6 per cent, although average rents rose a considerable 8.1 per cent year over year to $1,206, with high-priced new-build apartments coming on stream.
North Vancouver (District), West Vancouver, Richmond, Maple Ridge/Pitt Meadows, White Rock and Delta also saw slight vacancy rate increases this year, but average rents continued to rise well above inflation.
Surrey and the Tri-Cities, on the other hand, joined Vancouver in a tightening rental market. Surrey’s rate fell to an incredibly low 0.4 per cent compared with 0.6 per cent last year. Surrey has recently seen the launch of the first new rental purpose-built building in the city in more than three decades.
The Highrise proposal comes up short on parking, and council is concerned the developer's offer to make up for it still not enough.
A 29-storey tower proposed for Burquitlam not only comes up short in providing the required parking spaces, but city councillors think its offer to make up for it does too.
Ledingham McAllister plans to build the 251-unit, highrise at 520 Cottonwood Ave on the southeast corner of Whiting Way. It would replace an existing three-storey condominium building.
Plans call for the four levels of underground parking to have 310 spaces, although the city requires 330. To make up for being 20 spaces short, the developer is proposing to provide transit passes valued at $340,000 and $60,000 as payment in-lieu.
But Coun. Craig Hodge commented at Monday night’s council meeting that council is consistently told by developers a parking space costs between $50,000 and $60,000 which value the 20 spots at $1 million or more. “So why so low?” he asked.
“Seems rather light in terms of the market,” said Coun. Dennis Marsden.
In addition, Couns. Chris Wilson and Trish Mandewo wondered why no child care space was included. Wilson pointed out its the fourth tower going up in the area.
“I’m hoping that pretty soon we figure out our whole daycare issue and strategy and that’s something to keep in mind for this area,” said Wilson.
Manager of planning and development Jim McIntyre said another application for a larger project just east of the site that might be more appropriate for a daycare, but “we’re not blind to that need.”
Despite the concerns, council approved going ahead with a public hearing for the rezoning application.