The week’s top stories focus on residential and commercial markets alike, with both waiting to see how the new government will help – or hinder – it’s current supply. The new NDP government in B.C. is making waves in the housing sector with a new, collaborative approach to Vancouver housing regulation, while the federal government has introduced changes to the capital gains tax that may cause homeowners to think twice about renting out their primary residences. On the commercial side, a major move to cancel the Pacific NorthWest LNG project may effect economic movement in northern B.C., while office space continues its downward vacancy trend as the growing number of tech companies in the city make The Exchange tower their home.
Here is Western Investor’s pick of the top real estate stories published during the week of July 24 to July 28, 2016.
BIV reports that Vancouver’s Urban Development Institute (UDI) has lauded the NDP government’s choice to merge municipal affairs and housing issues matters with a new, combined B.C. minster position. Meanwhile, housing isn’t the only real estate sector in need of intervention – rapidly raising rents and tightening supply in the office market may represent the city’s next real estate crisis.
Condo marketer Bob Rennie told the Urban Development Institute (UDI) last year that Vancouver’s lack of affordability risked becoming the region’s brand. And so it has, as these two conversations attest.
With the latest figures from Canada Mortgage and Housing Corp. indicating an 18% drop in housing starts across the Vancouver census metropolitan area for the first half of 2017 compared with the year previous, housing stocks remain tight. Blame slow approval times at the municipal level, say many observers, tagging Vancouver (where apartment starts dropped 73%) as emblematic.
This is why Anne McMullin, president and CEO of the UDI, hailed last week’s appointment of Coquitlam-Maillardville MLA Selina Robinson as B.C.’s new minister of municipal affairs and housing.
“We had been recommending [they] combine housing with municipal affairs because, under Rich Coleman, the housing file was really only about social housing and housing the hard to house,” McMullin said. “To see it combined … is a very positive step.”
Current estimates put the next wave of downtown office construction in Vancouver at 3.1 million square feet. Set to complete at 10 sites between 2019 and 2022, it will be the biggest addition of downtown space since 3.6 million square feet was added in 1984-87.
Given current market conditions, Ross Moore, senior vice-president in the Vancouver office of tenant representation firm Cresa Global Inc., believes the new space will drive rents higher in a market that’s seen little change in at least 15 years.
Back in January 2001, Sandy Cruickshank, now executive vice-president, Western Canada, with Triovest Realty Advisors Inc., told UDI’s annual forecast event that in the previous three years, effective rents had passed $20 a square foot, and even $30 at Waterfront Centre.
“We were leasing the project at effective rents in the mid-teens [10 years ago],” Cruickshank told UDI. “Today, as they are going through their renewal cycle, effective rents are up to 60% higher.”
Petronas have backed out of construction on the proposed natural gas facility in northern B.C., after a careful review revealed low gas prices that would not justify the cost of the building the infrastructure. The announcement comes after appointment of the province’s new NDP and Green-strong government – however, investors insist the provincial government did not factor in on its choice.
The $11.4-billion Pacific NorthWest LNG project approved last year by the federal government will not be going ahead, the company announced July 25.
Petronas and its partners have scrapped plans for the proposed natural gas export facility after careful reviews of the project revealed an alarming change in market conditions.
“We are disappointed by the extremely challenging environment brought about by the prolonged depressed prices and shifts in the energy industry have led us to this decision,” said Anuar Taib, chairman of the PNW LNG board.
The natural gas terminal was to be built in Port Edward on B.C.’s northern coast near Prince Rupert. The terminals would have ship liquefied natural gas to Asia, allowing B.C. gas to trade on the world market.
The LNG project was seen by some northern B.C. locals as a jolt of hope for the region's economy, Western Investor reported last October. However, the project garnered critisism from environmental groups and First Nations alike.
Clean energy advocates at The Pembina Institute were pleased to see the project axed and hope the move will inspire the province to green light more energy-efficient projects in the future.
"LNG demand and prices have fallen as the world transitions to renewable sources of energy," said Karen Tam Wu, acting director at Pembina. "We now have an important opportunity to ensure B.C. is not left behind as the global economy shifts and the costs of a changing climate begin to mount."
PNW LNG says it's invested $400 million on the site so far. The project's cancellation will impact 44 current jobs, Taib announced at a press conference following the announcement.
Changes to the capital gains tax will now require homeowners to report any rental activity on principal residence lots, such as renting of laneway homes. This will require them to pay more taxes when the home is eventually sold. The change contradicts a push by Metro Vancouver municipalities attempting to encourage rental density in single-family neighbourhoods, BIV reports.
Vancouver, North Vancouver, Coquitlam and Port Moody are among the municipalities that now or will soon allow two to four rental suites to be contained on a detached housing lot, through rental suites and laneway houses.
The move is meant to increase the rental inventory through low-impact density and allow house owners to tap rental income to support mortgage payments on the most expensive housing in Canada.
But in 2017 the Canada Revenue Agency (CRA), for the first time, will require the reporting of sales information on principal residences, which are exempt from capital gains taxation. However, the portion of a principal-residence lot, such as a detached laneway house, used to generate rental income could be subject to capital gains taxation when the property is eventually sold.
A Vancouver house with a laneway home and two other rental units, valued for a total of $3.6 million (the current benchmark detached-house price on Vancouver’s west side), could be subject to capital gains taxation on $1 million, if the regulations are strictly enforced.
“If we assume the taxpayer is at the top marginal rates payable in B.C. of $200,001 and over, the marginal tax rate will be 23.85%, so the taxes would be $238,500 on a $1 million capital gain,” explained William Cooper, a tax lawyer with Boughton Law.
Cooper said CRA’s closer look at principal-residence taxation goes beyond foreign speculators.
“The principal-residence exemption is one of the biggest tax loopholes in the history of the Canadian Income Tax Act. It has likely resulted in billions of dollars in lost tax revenues. Ordinary taxpayers played fast and loose with the reporting of taxable gains on the sale of their residences,” he said.
No reporting of a sale of a principal residence was required by the CRA until the changes were announced in October 2016.
“While this change was justified on the grounds of abuse by foreigners, the real problem was with house flippers, estates and rental properties owned by everyday Canadians that did not fully qualify for the principal-residence exemption and were never reported,” Cooper explained.
Vancouver Class AAA office space is experiencing high demand as downtown Vancouver continues to draw in more tech talent. The iconic Vancouver Stock Exchange building in the heart of downtown is currently under construction and will add 31 stories of office space – however, half of that space is already spoken for.
The Exchange office tower in downtown Vancouver is under construction until late 2017 but 50 per cent of space has already been spoken for.
In May, Western Investor reported the former Vancouver Stock Exchange building would be converted into a 202-room Executive hotel. Executive Hotels & Resorts will absorb approximately 110,000 square feet of office space over ten floors.
“When Credit Suisse Asset Management embarked on this ambitious project, we were confident that The Exchange would be able to fill much-needed demand for quality office space,” said Herbert Meier, project manager at Credit Suisse. “We are pleased that The Exchange is now also delivering additional hotel space to Vancouver.”
The hotel will have its own entrance and elevators, separating it from the 31-storey office tower.
“The Exchange is arguably the best example of collaborative modern and historic architecture in Canada, and it boasts a world-class location,” said Salim Sayani, president of Executive Group, which recently opened hotels in New York and Toronto.
A Vancouver accounting firm and a local fintech company will tenant over 50,000-square-feet of Class AAA space at The Exchange. The companies joins anchor tenant National Bank, who will lease over 45,000-square-feet. Lindt chocolatiers will operate a small retail store on the ground floor of the tower.
“Tech companies represent about 40 per cent of tenant demand in Vancouver, but there is also a resurgence in demand from traditional office users who see this building as an opportunity to refresh their premises and their brands,” said Mark Chambers, JLL Vancouver’s executive vice president of office leasing. “With the upcoming completion of The Exchange, the newly-signed tenants have a chance to be in the heart of Vancouver’s financial district, while also close to other smart, innovative technology companies.”
The Exchange tower is slated for completion by the end of the year. More than 205,000 square feet is already leased, with an additional 165,000 square feet up for grabs.