British Columbia Multi-Family Investment Report - Avison Young

British Columbia Multi-Family Investment Report Spring 2015

Private investors dominate in tight market as demand surges for BC multi-family assets

H

eightened demand for BC multi-family assets was a prevalent theme in 2014 even as a lack of investment-grade assets relegated most institutional buyers to the sidelines and private investors leveraged low-cost debt to acquire properties at highly compressed capitalization rates. Multi-family investment activity started strongly in 2014, but faded significantly in the back half of the year. After recording 23 deals valued at $396 million in the first six months of 2014, investment dropped to 19 transactions totalling $171 million. In total, 42 multi-family transactions valued at $567 million occurred in the province in 2014. Avison Young only tracks multi-family investment deals valued at more than $5 million. There were no significant multi-family acquisitions in BC in the second half of 2014. The largest deal was the $18.25-million acquisition of Fraserview Court in Surrey. Only four deals exceeded $10 million in the back half of 2014. This was in contrast to the first half, which recorded almost $400 million in sales including the institutional acquisition of Boardwalk REIT’s BC apartment portfolio for $140 million and the City of Vancouver’s disposition of its remaining

MARKET TRENDS

Multi-Family Investment Sales (> $5 million) January 1 to December 31, 2014 Number of Transactions

Total Dollar Volume

Average Price

2014

42

$567 million

$13.5 million

2013

33

$388 million

$11.8 million

2012

43

$630 million

$14.6 million

2011

35

$377 million

$10.8 million

2010

20

$264 million

$13.2 million

Sources: Avison Young and RealNet Canada

Partnership.Performance.

interest in the Olympic Village residential development to a well-known Vancouver-based business group for $91 million. While deal and dollar volume were both strong in the first half of 2014, stripping out the portfolio sale and the Olympic Village transactions revealed a more telling portrait of market activity. Fifteen of the remaining 19 transactions in the first half were for less than $10 million. This pattern was repeated in the second half with 15 of 19 transactions selling for less than $10 million. All multi-family transactions in the second half of 2014 involved private vendors and purchasers, which highlighted the extremely tight supply of significant multi-family assets in terms of both price and size. The total absence of REITs and institutions in the second half was not due to lack of demand (which remains extremely strong), but rather a lack of available quality assets. The absence of these types of buyers did not affect pricing, which remained at or near peak, and capitalization rates continued to compress as private buyers were able to take advantage of the low-interest rate environment to finance the acquisition of properties while still maintaining a cash positive or neutral position.

Underlying land value driving pricing Underlying land value and redevelopment potential have emerged as a significant factor in determining asset price. Upwards of a dozen multi-family assets, located primarily in Vancouver’s Kerrisdale neighbourhood and the area surrounding Burnaby’s Metrotown mixed-use complex, were acquired in the second half of 2014 with the express purpose of redevelopment – and the pricing reflected that higher and better use. These future development sites were not included in the list of multi-family transactions and were instead classified as land deals. With rental accommodation vacancy at 1% in Metro Vancouver, according to Canada Mortgage and Housing Corp. (CMHC), the need for rental units remains high. While the development process for new rental buildings remains a slow and arduous process at the City of Vancouver despite a stated intention otherwise, the City of Burnaby has approached the issue very differently by amending its official community plan for the Metrotown area and permitting the unimpeded demolition continued on page 2 I 1

of existing rental apartment buildings. Subsequently, all of the Burnaby development site transactions in 2014 were considered land deals and, subsequently, were not reflected in our multifamily statistics as the pricing achieved did not reflect the asset itself, but the potential of what could be built instead.

Rental vacancy tightens further across BC BC’s apartment vacancy rate declined almost a full basis point to 1.5% in fall 2014 compared with 2.4% a year earlier, according to the CMHC’s Fall 2014 Rental Market Report: British Columbia Highlights. Three of four of the province’s census metropolitan areas (CMAs) – Vancouver, Kelowna and Victoria – recorded lower apartment vacancy this fall compared with fall 2013. Vacancy in the Abbotsford-Mission CMA remained relatively unchanged compared with 12 months earlier. Rental vacancy in Vancouver and Kelowna declined to 1% from 1.7% and 1.8%, respectively, and 1.5% from 2.8% in Victoria. Abbotsford remained virtually unchanged at 3.1%. “In 2014, demand for rental accommodation generally outstripped additional supply. On the demand side, the lower average vacancy rate for British Columbia resulted from a number of factors including an increase in international migration, improving labour market conditions among the younger segment of the population who tend to rent, and growing populations of younger and older British Columbians,” according to the CMHC report. “Interprovincial migration also turned positive in 2014, adding to the provincial population and contributing to rental demand.” CMHC also noted in October 2014 that the number of purposebuilt rental apartments in BC increased by just more than 1,200 units, with the largest annual net increases in the Vancouver and Victoria CMAs, as well as Campbell River. According to the CMHC, the largest addition to supply occurred in the Vancouver CMA with an increase of 564 units between October 2013 and 2014.

CMHC identifies foreign condo ownership levels For the first time in its history, CMHC asked property managers in its October 2014 survey to provide information on the total number of condominium apartment units owned by people whose permanent residence is outside of Canada. The results of this additional question indicated that the percentage of foreign investment in condominiums in Vancouver and Victoria were 2.3% and 1.1%, respectively. Toronto had the highest rate of foreign investment at 2.4%. City cores experienced higher levels of foreign condominium ownership with Vancouver’s Burrard peninsula registering a foreign investor rate of 5.8%. (CMHC however rated its estimate as “fair (use with caution)”, the least reliable of its four estimate reliability ratings.) Toronto Centre was 4.3% (estimate rated “good”) while Montreal and Nun’s Island were the highest at 6.9% (estimate rated “good”). continued on page 4 Partnership.Performance.

Q&A

Avison Young speaks with Mukhtar Latif, Chief Housing Officer for the City of Vancouver, on the role that the Vancouver Affordable Housing Authority (VAHA) has to play in encouraging construction of purpose-built rental buildings. How is the VAHA structured and what are its primary functions? Is it independent from city council? The Mayor’s Taskforce on Housing Affordability recognised that housing affordability was impacting people on moderate and middle incomes as well as those with lower incomes. One of the recommendations was to set up a housing agency to act as a catalyst in leveraging city-owned land to enable more affordable housing to be built. The Vancouver Affordable Housing Agency (VAHA) acts as the agent for the City in bringing forward city-owned land and enabling partners such as non-profit and faith-based organizations who wish to develop land in their ownership. VAHA is an arms-length company which has an independent board of directors who are appointed by Council to deliver agreed objectives. Council approves the capital and operating budgets and VAHA will report back on progress on a regular basis. VAHA has been set clear targets of 2,500 new affordable homes by 2021. These new affordable homes will meet a range of needs such as for working families and people on moderate incomes as well as those on low incomes, seniors and people with disabilities. As a separate company, VAHA has the flexibility to develop new ways of working to be more nimble while meeting Council-set priorities. Will VAHA behave like a developer? VAHA will facilitate partnerships which utilize the skills and expertise of individual partners to deliver on the each aspect of the development and operating process. We recognize the value and experience each partner has in optimizing land and building efficiency, enabling low-interest financing and efficient housing operations. This will help embed affordability at every stage of the process and therefore require lower levels of subsidy to deliver housing affordability. VAHA will enable I 2

How is VAHA different from the Surrey City Development Corp. and how does it protect itself from potential accusations of market interference?

Mukhtar Latif, MRICS As Chief Housing Officer, Latif is responsible for identifying, appraising and delivering more affordable housing in the City of Vancouver. He works with developers, notfor-profits, provincial and federal agencies to meet housing needs and help implement the recommendations of the Mayor’s Task Force in providing an array of housing types.

developments on City-owned land and work with partners to bring forward other affordable housing opportunities. The acquisition of the lots on Southwest Marine by the City was part of the Cambie Corridor Policy to utilize the affordable housing community amenity contributions (CACs).

VAHA is clear that its role is to facilitate partnerships and act as a catalyst to enable new affordable housing to be built. We will be working closely with developers, funders, housing operators and other partners to create the greatest affordability by using their specific skills and expertise. We will be engaging with communities throughout the development process to ensure that we are meeting local needs. As with every development, there will be public consultation and due council process, including public hearings where required.

Are all funds used to acquire properties to be received via community amenity contributions (CACs)? Will CACs also be used to cover the cost of construction and development of affordable housing? Development projects will be funded through a variety of sources including the Council-approved capital budget. The housing being built will meet affordable housing targets and comply with appropriate council policies. Where projects generate community amenity contributions (CACs) or development cost levies (DCLs), these will be used in a similar way as those paid by developers as determined by Council priorities. 

MULTI-FAMILY INVESTMENT SALES (>$5m) JULY 1, 2014 TO DECEMBER 31, 2014 PROPERTY

MUNICIPALITY

PRICE

New Westminster

$6,000,000

$142,857

Private

Private

December 2014

Vancouver

$6,200,000

$258,333

Private

Private

December 2014

1081 Martin Street

New Westminster

$5,380,000

$206,923

Private

Private

December 2014

The 950 Apartments 950 Jervis Street

Vancouver

$14,083,000

$343,487

Private

Private

November 2014

The Garth Apartments 1133 Barclay Street

Vancouver

$9,225,000

$297,581

Private

Private

November 2014

El Toro Apartments 310 East 2nd Avenue

North Vancouver

$9,900,000

$206,250

Private

Private

November 2014

Vancouver

$9,200,000

$317,241

Private

Private

November 2014

Montego Apartments 319 Knox Street Simco Manor 1275 Comox

Second Vista Apartment 2086 West 2nd Avenue

PRICE PER UNIT VENDOR TYPE BUYER TYPE

DATE

Will those proponents selected to work with VAHA have to meet the same standards as developers building purpose-built rental outside of VAHA’s purview?

321 East 2nd Avenue

North Vancouver

$7,926,000

$220,166

Private

Private

November 2014

Rosewood Manor 2345 Dundas Street

Vancouver

$8,120,000

$172,766

Private

Private

November 2014

15915 84th Avenue

Surrey

$6,200,000

$187,879

Private

Private

October 2014

Sussex Lodge, Hillside Manor & Lynn Park Manor

North Vancouver

$13,500,000

$300,000

Private

Private

October 2014

VAHA is one of the tools that the City now has to enable more affordable housing to meet growing housing need. The Request For Qualification (RFQ) is an exciting opportunity for partners to be shortlisted and over the next two to three years to work with VAHA to develop a wide range of homes to help sustain a vibrant and affordable city. VAHA, with its selected developer partners, will work with the City to optimize the number of affordable homes that can be built in accordance with council policies, including those under the Rental 100 and social housing policies.

Fraserview Court 10138 Whalley Boulevard

Surrey

$18,250,000

$118,506

Private

Private

October 2014

Partnership.Performance.

1530-1600 Albatross Avenue

Kitimat

$5,200,000

$65,000

Private

Private

October 2014

West Vancouver

$8,925,000

$557,813

Private

Private

August 2014

Hoffman Manor 1168 Pendrell Street

Vancouver

$5,890,000

$256,086

Private

Private

August 2014

Quadra Villages 2835 Quadra Street

Victoria

$11,000,000

$171,875

Private

Private

July 2014

Maple Manor Apartments 20117 56th Avenue

Langley

$8,732,000

$99,227

Private

Private

July 2014

North Vancouver

$8,900,000

$211,904

Private

Private

July 2014

Vancouver

$8,100,000

$245,454

Private

Private

July 2014

425 6th Street

Citadel Apartments 163 West 5th Street Winston House 1137 Bute Street Total Deals/Investment

19

$170,731,000 Sources: Avison Young and RealNet Canada

I 3

continued from page 2

SNAPSHOT OF BC VACANCY RATES

Bond market decline triggers mortgage renewals “This year began with an unpredicted drop in the bond market which saw Canada’s bonds drop well below their previous all-time lows,” says James Paleologos, a senior associate with Realtech Capital Group. “For example, the five-year Government of Canada bond, which had a previous low of 1.06% fell to 0.59% on February 2 of this year and currently sits at 0.79%. Lender spreads – their profit – have remained relatively unchanged during this time, passing all of the savings on to the borrower. For this reason, many borrowers with remaining terms of greater than one year are pre-paying their current mortgages and committing to new mortgages at today’s record rates giving them longterm security. Current CMHC-insured interest rates are as low as 1.65% for a fiveyear term and 2.35% for a 10-year term.” Off-market deals will remain key to sales activity in 2015 and transaction volume is expected to remain on par with what was recorded in the second half of 2014. Dollar volume should rise in 2015 as reluctant vendors remain under pressure to capture peak pricing for their assets, and unrelenting demand from local and international buyers compresses cap rates to an almost negligible yield. Significant rental property portfolios will increasingly be built in the next three years by those developers building new rental stock as opposed to investors acquiring scale by purchasing older buildings. 

Area

October 2014

October 2013

% Change

Vancouver CMA

1.0%

1.7%

-0.7%

Abbotsford CMA

3.1%

3.2%

-0.1%

Chilliwack

3.5%

4.2%

-0.7%

Victoria CMA

1.5%

2.8%

-1.3%

Nanaimo

4.4%

5.3%

-0.9%

1.0%

1.8%

-0.8%

Kelowna CMA

Source: CMHC; CMA: census metropolitan area

Multi-Family Team Rob Greer,* Principal 604.647.5084 [email protected] * Robert Greer Personal Real Estate Corporation Chris Wieser, Vice-President 604.647.5089 [email protected] Amanda Payne, Senior Analyst 604.646.8389 [email protected] For more information please contact: Michael Keenan, Principal & Managing Director Direct Line: 604.647.5081 [email protected] Andrew Petrozzi, Vice-President, Research (BC) Direct Line: 604.646.8392 [email protected]

Three North Vancouver apartments - Sussex Lodge, Hillside Manor (above) & Lynn Park Manor - were sold in 2014 as a portfolio for $13.5 million.

2015 Market Outlook pricing

vacancy rate

sales

new listings

cap rates

Avison Young Commercial Real Estate (B.C.) Inc. #2100-1055 W. Georgia Street Box 11109 Royal Centre Vancouver, BC V6E 3P3, Canada

• Demolition of old and dated rental product accelerates in municipalities outside of the City of Vancouver • Vancouver Affordable Housing Agency (VAHA) begins operations • Sales volume in 2015 expected to remain similar to 2014

avisonyoung.com

• Private buyers dominate multi-family transactions as capitalization rates remain highly compressed

© 2015 Avison Young (Canada) Inc. All rights reserved.

• Purpose-built rental buildings constructed by merchant developers and sold to institutional purchasers

E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young Commercial Real Estate (B.C.) Inc.