Apartment Building Market Remains Strong Throughout Region
Prices and total sales are up, but the number of transactions is falling. That’s the picture of Vancouver’s apartment building market, according to the Goodman Report, produced by David and Mark Goodman.
In 2012, both over-all dollar volume and the average price per suite hit record highs, David Goodman said in the report. The number of building sales is down 17 per cent in 2012 from 2011, but Goodman said this is not for a lack of buyers.
“Major apartment offerings in Greater Vancouver continue to garner widespread investor interest,” said Goodman, a realtor at HQ Real Estate Services Inc. “Spurring demand have been the endlessly low mortgage and vacancy rates, the solid economy, high housing costs, the scarcity of supply, and Vancouver’s world-class image.”
Anthio Yuen, senior research analyst at CBRE commercial real estate advisory firm, agrees.
“There is a lot of demand for rental apartment buildings in Vancouver, but not a lot of active sellers,” Yuen said, adding that there is not much new supply either.
In Metro Vancouver, a total of 92 rental apartment buildings changed hands in 2012. The sales were evenly split, with 46 buildings selling each in Vancouver and the suburbs, the Goodman Report found. Those buildings sold for a total $683.7 million, up 17 per cent from 2011, while the average price per suite in those buildings went up 16 per cent to $264,980 in Vancouver and increased 14 per cent in the suburbs to $202,224, the report found.
Goodman said investors are reluctant to sell apartment buildings because they are a safe investment.
“The conundrum is: Now that I’ve sold my asset, how do I replace this with a conservative investment where I can sleep at night?” Goodman said.
Scott Brown, senior vice-president of residential project marketing at Colliers International, said potential buyers outnumber sellers for many types of property.
“Vancouver certainly has more prospective buyers for A-Class locations than sellers,” Brown said. “This is true for land and development sites in great locations too.”
The typical apartment building investor is in it for the long haul and will keep the building 15 to 30 years, Goodman said.
“It’s typically patient money that goes into apartment buildings. These are not people who are looking for instant gratification,” Goodman said.
Yuen agreed, saying that small swings in the residential real estate market would not influence investors in apartment buildings.
There were three major sales in 2012, worth more than $55 million each, which bolstered the annual numbers, Goodman said.
“There is growing evidence — from an inconsistent and varied range of 2012 pricing patterns — that the year-to-year average price trends showing constant and predictable increases over the past 10 years may no longer be sustainable in the near future,” Goodman said in the report. “In view of an 11-year ‘bull run’ behind us, the likely return of an NDP government in B.C., and the probability that interest rates may increase in the near future, we shouldn’t discount the possibility of a pricing plateau.”
Goodman said he expects interest rates will stay low for another 12 to 18 months. He said the typical annual yield for an apartment building is between 2.5 and 4.5 per cent, not accounting for mortgage payments, income taxes or capital gains that would be realized if a building is sold.
The vacancy rate in Metro Vancouver is about 1.8 per cent, while during the financial crisis of 2008, it fell to just 0.7 per cent, Goodman said.
“The rental market strengthened and more people stayed put in their rental apartments because they were afraid,” Goodman said. “There’s a direct correlation between the fears of a financial meltdown and an individual’s desire to buy a house or a condo.”
Meanwhile, as sales of single condominiums and single-family houses slow, and cities provide some motivation to builders, developers are starting to build purpose-built rental suites, a trend Goodman expects will continue into 2013.
“If the rental income is higher and the cities are granting some concessions with density or parking, the combination is allowing for the development of rentals where the numbers are actually beginning to work,” Goodman said. “This is unprecedented and breathtaking to imagine that in Vancouver, you could actually make the numbers work. But the cities are finally coming around — they’ve always been reluctant to grant any type of incentives. Now they’re saying we better do something about rental housing, so they’re lightening up a bit.”
Yuen said he doesn’t expect a boom in purpose-built rentals, but that each developer will decide on a site-by-site basis. “Building purpose-built rentals in Vancouver is quite tough ... because the numbers don’t always make sense,” Yuen said.
Examples of purpose-built rental projects include on at 275 Kingsway by Edgar Development Corp., Orr Development Corp.’s five-storey building of 83 suites plus commercial space at 3002–3036 West Broadway and Yenik Realty’s 41 suites at 4320 Slocan. There are many others incorporating some rentals into their projects.