As Vancouver’s unrelenting real-estate story continues to hog headlines, now is a good time to step back, take a breath and ask a few big questions. How exactly did we get into this prolonged hot market? Where is it taking us? What are the consequences for B.C.’s economy?
With the U.S. economy slowing, our trade potential with Asia waxing and real-estate prices spiking, guessing the future isn’t a simple game. But two local experts help us get our bearings, sharing their thoughts on the major economic shifts that have transformed the Lower Mainland’s real-estate market and highlighting the trends that will shape the future of the region.
As private investors buttress neglected rental stocks, high-rise density transforms urban hubs and fleets of container ships put the squeeze on our precious industrial lands, there’s plenty to think about.
Cameron Muir is chief economist for the B.C. Real Estate Association, having previously served as the senior market analyst for B.C. and Yukon at Canada Mortgage and Housing Corp. Gurch Ollek is a 23-year veteran at CB Richard Ellis Inc. in Vancouver, where he’s a VP specializing in industrial real estate.
B.C.’s industry has been hit by the slowing U.S. economy and the high dollar, but finding industrial land is another big issue in Metro Vancouver. What’s the situation?
Gurch Ollek: The industrial market has always been tight. The biggest thing we have to understand about Vancouver is the restricted land supply: we’ve got an ocean to the west, we’ve got a border to the south, we’ve got mountains to the north, and on top of that we’ve got the agricultural land reserve.
And industrial land is typically really the least-valued land there is, so when you’re getting pressure from housing markets moving out [and] suburban office markets moving out, typically what they’ll do is take industrial land. So we’ve always faced a shortage, a so-called shortage, and that’s kept vacancies low.
But we’ve really seen a fundamental change in the markets, shifting from more of a manufacturing base – with sawmills and other secondary manufacturing – to distribution. What’s happening in the world is this shift in manufacturing from North America to Asia, and it’s really translating into a huge amount of container traffic. The logistics market has just boomed, and that’s expected to double probably in the next 10 years.
You take a look at some of the major ports like Los Angeles: I mean, it’s at capacity, and if that container traffic’s going to double, where’s it going to go? A lot of it has been funnelled into Vancouver. It’s now recognizable at the provincial level and at the federal level as a gateway to supply goods across Canada.
So what does this new demand do for industrial land?
Ollek: It puts a lot of strain on it. We’ve had some projects sitting around for a long time. Joe Segal had 90 acres on Nelson Road in East Richmond, for instance. About five years ago he decided it was time to develop it, and now he can’t build fast enough. Every building he’s put up in speculation has been filled up prior to its completion. The companies that have gone in there are all involved in the container business.
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I think the federal government has taken a lead on this. A project that I’m involved in with the Fraser Port Authority, which is a federal government agency, is in East Richmond. This whole parcel is about 1,200 acres, and they’ve actually earmarked it as a container-traffic distribution centre.
What had its use been prior to this?
Ollek: It was a garbage dump. And we just finished the first building; it’s 560,000 square feet, probably the largest distribution industrial building in Vancouver. These are big buildings. A typical tenant in Vancouver is between 50,000 and 150,000 square feet.
With industrial land getting rezoned for other purposes, how do we make sure that we keep some manufacturing jobs and industrial jobs?
Ollek: Well, if we really want to capitalize on the container traffic, I think the government has to get involved. And the federal government has identified it as not just a local benefit but a national benefit too.
The other thing you have to realize is that you can’t just put these distribution centres anywhere. There’s industrial land that is just not going to work for these guys. So I don’t think you can make a broad, brusque statement and say that every piece of industrial property should be preserved for distribution.
Is there any room for traditional manufacturing in Vancouver? We’ve never had much of it; will we ever?
Ollek: No we haven’t, but we do get manufacturing; the local manufacturers are all here. Not on a large scale, but producing stuff on a small scale for local industry. Cabinetry for the condo industry, for instance. But it’s not 200,000 square feet, a guy employing 700 employees. On that scale, it’s going to China.
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What are your thoughts on rising costs and low vacancies?
Ollek: Consensus by some of the people in the industry is that we’re going to see a levelling off on construction costs as some of the mega projects for the Olympics get completed in ’09. Having said that, we’re seeing a very sustained increase in rental rates with warehouses, so a lot of the developers in town are quite excited that the margins are going to be there to actually put some buildings up and make some money. So it’s happening.
We’re seeing rental rates on these distribution warehouses exceeding $7 a square foot, which was unheard of four or five years ago. But we’re also seeing that the warehouses being built now are a lot more efficient, and they’re just cheaper to operate, so companies are finding that they can pay higher rates.
We’re seeing more densification on industrial properties these days as well. I mean, you take a look at some of the sawmills that are shut down and selling. Western Forest Products in Queensborough: 50 acres, they had one operation up. Now they’re probably going to put two million square feet of industrial warehouse on it. We’re seeing companies that used to be very large-scale manufacturers selling to the developers, who are turning that into more dense industrial sites.
But there’s no easy solution. I mean, maybe the answer is multi-storey warehouses. Maybe you have to look at how you use 20,000 square feet more efficiently instead of going out and renting 40,000. I think we’ve got lots of land. People just aren’t willing to think out of that box; they want an easy solution.
The story we’ve all been hearing around Vancouver is that the real-estate markets are tight, vacancies are low and prices are going up. How did we get here?
Cameron Muir: Well, we certainly are several years into a very strong business and real-estate market cycle. We’ve seen prices go up substantially on the residential side over the last five, six years – most markets seeing more than a 100-per-cent increase since the beginning of the cycle.
We’ve seen two waves of housing demand. The first wave came on as a result of very low interest rates in the winter of 2001-2002. We saw rates plunge to levels we hadn’t seen since the 1950s. If you remember, during the late 1990s we saw tens of thousands of people leaving the province in search of jobs, we had an economy that was in the doldrums, we had unemployment twice what it is today, and we had every second or third building with a giant green tarp on it, which was certainly not a good incentive for homebuyers to get into the condominium market.
Since that time, we saw that pent-up demand translate into very strong first-time homebuyer activity as well as very strong investor activity, because at that time an investor could buy a condominium and get a positive cash-flow out of it.
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Is that part of what’s driving this demand? How much of it is investment as opposed to primary residence?
Muir: Well, that was then; this is now. Today the price of real estate has gone up dramatically and those kinds of investment scenarios are no longer there. Rents are rising because vacancy rates are very low. But over the past decade, the purpose-built rental stock has remained about the same.
The important thing, compared to 10 or 15 years ago, is the private small investor who’s providing valuable additions to the rental stock by buying condominiums and renting them out. The purpose-built rental building from a developer is simply not very viable today, given the high cost of land and high cost of construction.
I think the change we see in rental housing is paradigmatic, that the small private investor is really taking over what the large company used to do here in terms of providing rental housing for the region.
How are we doing on affordability, especially for young, first-time buyers?
Muir: Well, home affordability for certain housing has eroded significantly over the past several years. But the housing stock is much more diverse than it was 10 or 20 years ago. You have your $10-million homes in West Vancouver, for example, but you also have a big whack of condominiums that are in that lower price range.
Sixty per cent of home sales in Vancouver are multi-family, and about 80 per cent of housing starts are multi-family. Those are certainly enabling first-time buyers to get into a more affordable product. The other thing is the introduction of 40-year amortizations, which is certainly helping the first-time buyers lower their overall monthly carrying cost.
The culmination of those two things has really kept first-time homebuyers buying. The single detached home in Vancouver is rapidly becoming a product for those who are moving up or trading up a few times.
Densification has also been going on for a couple of decades now, and it’s intensifying. It’s perhaps a perfect storm where you have both the profit imperative for developers to cater to large-enough markets and an overall density-planning perspective. Certainly the planners have been looking at high density for decades to save money, in terms of pipes in the ground, servicing and transportation, plus the more recent impetus toward sustainability and green housing.
I think they’re all coalescing together to elevate high-density housing as really the trend of the future, and that’s not going to change over time. The single detached home is going to be a smaller proportion of the housing stock as the years go by.
So what’s in the future for us?
Muir: Our economy has been doing well, but when we look at our neighbour south of the border their economy is certainly not firing on all cylinders. The longer that goes on, the more chance that’s going to filter down onto the consumer side.
The impact of the high dollar on our export activity in B.C. here is going to operate as a drag on the overall economy, and we expect housing markets in 2008 to start to moderate. We’re looking at prices climbing six to nine per cent, compared to double digits in 2007.
In terms of demand sites, over the last couple of years we’ve seen the thin end of the wedge of the baby boomers buying second homes in a very large way. That’s one of the reasons we’ve seen this current cycle remain robust for much longer than most other housing cycles we’ve seen in our lifetime. That market’s going to continue. The fastest-rising prices in the province right now are for recreation properties in areas like Kamloops, the Okanagan and the Kootenays.
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