Although the demand for residential land still exists, the intensity has cooled. The issue of affordability and supply has made purchasing more difficult for buyers. Many are reluctant to move forward with the higher prices that Vancouver real estate has seen in the last few years.
Unfortunately, rising land prices and construction costs mean that developers are also finding it more difficult to fund projects when selling at lower price points. Presale campaigns have always been a fundamental part of new development projects, but the measure of their success now has a huge impact on attaining project financing stage.
These issues are complicated by the increasingly long time it takes for a project to go through the approval process. Not only does this drive up the costs of pre-development, it also creates uncertainty in the deliverability of projects — many buyers and investors are left wondering whether they will really see the completion of their development. Low trust from buyers, slim margins, and rising costs of construction paired with unaffordability have created a situation where developers after often forced to shelve projects for lack of financing—adding to the issue of lack of inventory.
New household formation will speed up residential recovery.
Vancouver’s market slowdown in no way indicates that a housing bubble will ‘burst’. Instead, Eric Carlson stresses that the market is simply moving through a natural cycle in response to influences on the industry, including the availability of space, inventory supply, and inflation.
With slightly higher interest rates, property taxes, and negative headlines around affordability in Vancouver real estate, this phenomenon of lower residential sales is expected to play out through 2019.
But it’s important to note that this slump is not expected to last. Carlson looked at numbers around new household formation, which occur continually as a result of the population naturally aging out of parental households, and new immigration.
“We estimate 15–20 thousand new households are formed every year, and they all need housing of some form,” Carlson said at the forecast.
In addition, the MLA’s Market Intel report indicates a stable worldwide GDP growth rate of 3.7% in 2019. In BC, there’s a forecasted 2.7% growth. A fundamentally strong economy, encompassing growing employment rate and sustained population growth through normal birth rate and immigration means that demand for new housing will continue, allowing the market to more quickly return to equilibrium.
A difficult market for smaller developers.
Although bigger players like Anthem and Polygon will be able to bounce back from the relatively slow market, it’s newer developers, and smaller boutique ones, that will have a hard time given the higher costs of construction, and lower sale points of inventory.
“Given the pricing,” Todd Yuen of Beedie commented, “Smaller players will have a hard time competing.
Chrystal suggested that many members of the development community are already “doing less”, with fewer proposed starts as early as last year. As for 2019, the Vancouver real estate market is looking largely at the success of presales, which inform the bottom line. For Polygon Homes, initial presale data gives them the information they need to do a full predictive calculation, taking into account the more expensive construction process.
“And if the numbers don’t add up,” Chrystal said at the Forecast, “We just don’t move forward.”
At Anthem, Eric Carlson looks at things differently.
“If the costs of a start are the same, or higher, than 6 months ago, then we’ll do it for a smaller margin,” he said. The company takes a years-long view of development. “It takes at least four years to build a medium high rise— a twenty-storey — between financing and preconstruction and presale. We don’t look at it from quarter to quarter. We’ll do the project for less than we wanted or thought a year ago. But we still drive it forward.”
However a developer chooses to approach starts in 2019, the higher-cost, lower purchase price of the current market definitely creates cause for consideration.
Industrial real estate is on the rise.
For perhaps the first time, industrial real estate is topical, relevant, and trendy.
“Look at Amazon warehouses,” Beedie Industrial’s Todd Yuen brought up as an example. “Industrial used to be boring, but now we’re looking at increased demand as the warehouse market grows. So much that it’s outstripping supply; and the trend is just going to continue. Canada has a lot of untapped potential in this market.”
As land value pricing goes up, so will the industrial value of sites. Although some retailers can no longer afford the rising land prices, it’s the big organizations that are buying up huge amounts of industrial space, for warehouses, distribution, and manufacturing. These include Blackstone and Amazon, among others.
As a result, Yuen expects that we will see more and more big deals in 2019 and 2020 to accomodate these retail giants that require massive fulfilment warehouses—which means bigger sites and bigger, taller, more complex buildings.
Vancouver Real Estate in a Nutshell
Affordability is a major concern for both buyers, sellers, and developers working in Vancouver real estate. There is a combination of factors around the rising costs of land and construction, the need for additional residential inventory, and uncertainty around new building starts. Together, these catalysts have created a slow residential market where profit margins and guarantees of completion increasingly become increasingly slim.
In other areas of Vancouver real estate, industrial inventory is picking up stream. Between huge retailers such as Amazon and Blackstone, a slowdown is not expected in this sector in the new few years.
And between the residential market prices ‘resetting’ over this year, and a strong economy in BC with a growing need for new housing, residential real estate is expected to make a quick comeback.
In the meantime, developers such as Anthem, Beedie, and Polygon stress that concerns around new development in Vancouver can be mitigated by longer-term planning, data analysis, and collaboration with municipal governments. Better informed projects on every level are the most likely to succeed.
Successful development companies need to do more than sell—they need to understand why their developments are selling.