Like other residents of British Columbia, Michael Yeung, regional vice president, commercial financing, Western Canada at First National Financial, has watched as his province copes with back-to-back natural disasters and the cleanup. However, unlike his fellow residents, he leads a team that invests in B.C.’s commercial property market.
We turn to Michael for an assessment of the damage and possible long-term implications.
Q: Michael, this has been a difficult year for your province.
A: True, we’ve seen unprecedented natural disasters disrupt what I consider the best place in Canada to live and invest. From late June to early July, a heat dome hovered over B.C., killing 600 people. With the highest temperatures ever recorded at our part of the 49th parallel, over 1,580 wildfires burned 868,619 hectares of land. This event was the third-worst forest fire season on record. Then in October, we were hit by a storm with the lowest central pressure system ever recorded in the Pacific Northwest, which knocked out power to parts of Vancouver Island and the mainland. Then, two tornados touched down in Vancouver. If that wasn’t enough, in November, massive rainfall, including atmospheric rivers, smashed more than 20 records and led to mudslides, rockslides and extensive flooding.
Q: Do you believe coverage of these stories has captured the true devastation?
A: You have to be here to really understand. Atmospheric rivers damaged an estimated 200 area highways in the Interior and south coast. Farms in the Sumas Prairie area of Abbotsford found themselves five feet underwater, leaving livestock imperiled. Power has been knocked out in many areas more than once, supply lines have been cut, gas and groceries rationed, and we saw hoarding of eggs, milk, and bread.
Q: First National has many customers in B.C., how are they making out?
A: We’ve made a point of contacting everyone and, so far, so good. But let’s be honest about this. There are knock-on effects, particularly for developers building new apartments, condos, homes, and industrial spaces. Building material supply chains were already under stress because of COVID-19, and now there are additional complexities because shipping routes have been disrupted by flooding and landslides. Poor conditions and road closures have made trips through B.C. longer for truckers, with detours adding fuel and labour costs. Restrictions have been placed on truckloads, which means it will take longer for heavy machinery to make it to construction sites, including dewatering equipment. Excavations completed before the flooding may have to be redone. And there is the impact on construction workers: getting to work in some areas can be difficult. These are inescapable realities.
Q: What do you see as the long-term implications of these natural disasters?
A: Everybody in B.C. is talking about climate change and wondering what more can be done to protect us and why we didn’t, as a society, pay more attention to past reports about climate risk and mitigation measures. Sustainability and the initials ESG are making their way into the mainstream of our society, which is a good thing. There is also a lot more concern about insurance, such as, “will I be able to insure my property in the future?” and “how much will it cost because of climate-change-induced flooding risks?” What we thought was a once-in-a-100-year storm frequency may be once in 50 years or once in 20 years. This also shines the spotlight on what type of land is truly suitable for development. I think you will see people gravitating more and more to areas that are not susceptible to flooding, which reduces the already tight supply of land for future development. Taken to their logical conclusion, these outcomes will mean higher costs, but should also have some positive impacts.”
Q: Let’s talk about the costs first.
A: If we agree that we need to put more emphasis on building resiliency into the province’s physical infrastructure – and doing it a lot faster because of climate change – then money must be spent, and it must come from one or more sources. The readily available ones are higher property taxes, higher utility rates and higher development charges. In Richmond, where I live, scientific forecasts suggest that, by the year 2100, sea levels will rise by one metre. Coastal areas like mine will need to spend substantial sums to upgrade dyke and pump systems, and we can’t wait for 75 years to do it.
Q: The B.C. government has shown leadership on climate risks with measures like carbon taxes. Has it taken other measures specific to building codes?
A: In 2017, it introduced the B.C. Energy Step Code. As the name suggests, it’s a five-step path to achieve a level of energy efficiency in new construction that goes above and beyond the requirements of the building code to get B.C. to net-zero by 2032. If a new build meets Step 2, it has achieved a 10% improvement in energy efficiency over the standard building code. Step 3 is a 20% improvement. Step 4 is 40%, and Step 5 is achieving net-zero emissions. In Greater Vancouver, most municipalities are trying to implement Step 3, recognizing that buildings produce something in the neighbourhood of 30% of all GHG emissions.
Q: Presumably, there is a cost to this type of program.
A: I’ve seen estimates suggesting that, for a large single-family home, the cost to achieve Step 5 can be over $50,000, and in some cases, $100,000. Homes here are already very expensive and building according to this escalating code certainly has an impact on the development industry, both in terms of cost and complexity. On the other hand, the intention is to improve comfort for building occupants, reduce energy bills and GHG emissions, so very practical implications.
Q: Could programs like this influence the direction of the housing market?
A: Yes. It means building design improvements, but also that the barrier to single-family homeownership will get higher. With that, demand for rental units should get stronger. If you own a multi-family residential property, it is a positive for occupancy and rental rates. It should also reinforce government policies meant to incent additional apartment and condo construction.
Q: After this year’s natural disasters, has it become harder to argue with measures that protect the environment?
A: It’s no longer a question of if we need to take action - it’s a question of when, what and how much. Think of the risk that will be avoided when homes are not built on flood plains and when landscaping with trees and grass and tree-planting generally gets more attention because of water absorption. When more emphasis is placed on building resiliency into our infrastructure and doing it faster, it’s a win.
Q: You mentioned ESG as a positive theme. What did you mean?
A: Environmental, social and governance, or ESG, is essentially a way of thinking about methods for making our society more resilient, our institutions more responsible, our neighbourhoods cleaner, and our building materials greener. Events like the COVID-19 pandemic and now the natural disasters in B.C. provide us with opportunities to learn from experience and take a serious look at what we’re doing, how we’re doing it, and where we’re sourcing supplies. Creating stronger supply chains for everything from food and fuel to building materials alone will help us to deal more effectively with future pandemics and future storms. Better environmental management also holds the promise of reducing the frequency of storms. If we are smart about this, we can all benefit.
Q: As a lender, does ESG matter to you?
A: Very much so. It is an inherent part of managing risks and protecting our investments. I also think awareness of ESG will be helpful to our clients as they secure public incentives and realize cost reductions by taking measures to improve building efficiency and shoring up properties against potential storm damage. It will certainly help to combat the potential for higher insurance premiums. A landlord who takes ESG measures may also find tenants more willing to pay higher rents because units have been designed with the environment and risk in mind.
Q: Final question: is First National still committed to investing in B.C.?
A: Absolutely. This year has been our most successful year yet, based on lending volumes – core conventional, insured and construction – in B.C. As a sign of confidence, we added to our west coast teams, and with superior expertise, we hope to grow again in all directions in 2022. We are here for the long term as businesspeople and as residents.
Michael Yeung is recognized for his expertise in real estate financing, including high-value commercial construction lending. If you would like to speak to Michael or any member of the western commercial team at First National Financial, you can do so by calling 778.887.8433 or emailing Michael at Michael.Yeung@firstnational.ca.