IN THIS WEEK’S FACTS BY EMAIL:
- BOB RENNIE GETS FRANK ON FUTURE HOUSING PRICES
- GET INTO VANCOUVER INDUSTRIAL STRATA RIGHT NOW
- SIMPLE MATH: VANCOUVER LAND FOR CONDOS: $500 PBSF; SURREY LAND FOR CONDOS: $65-$90 PBSF
- OK, GAMBLERS, LET’S LOOK AT CALGARY RENTALS
- CLOSEUP REPORT FOR INVESTORS: NANAIMO
- U.S. MAY REDUCE MORTGAGE TAX DEDUCTION
• Canada •
OK, Gamblers, Let’s Look At Calgary Rentals
Killam Apartment REIT just bought a 66-unit apartment rental building in SW Calgary for $12.8 million, or around $193,000 per door, the largest apartment deal in the city so far this year. Crazy? Maybe, but maybe crazy like a fox.
We cautioned investors last year to steer clear of Calgary, but some of you more daring speculators may want to test the market in anticipation of an increase in oil prices (which we don’t see happening this year, but we are not oil experts).
So let’s take a look at the Calgary apartment market. First of all, ditch the CMHC official apartment vacancy rate of 7.7% from October of last year (which the agency said was the highest in 25 years): the true vacancy rate is at least three times higher than that if you count all the secondary units (duplexes, houses and condos) on the market.
Also, a lot of new condos are switching to rentals mid-stream, adding to the 37,000 purpose-built rental units now hitting the market. As well, rental rates have dropped at least 8%-10% over the past year to less than $1,200 per month for a two-bedroom.
If you believe in Calgary’s rental recovery, there are apparently deals to be had in the smaller apartment properties (18 units or so). The average price-per-door as of the first quarter had dropped to $180,000, down from the $254,000-per-door peak in early 2015, according to some fine research from Calgary’s Barclay Street Real Estate.
Barclay also notes that residential land prices have recently come off the floor, rising to $400,000 per acre in Q1, up from the recent trough of $100,000 per acre in mid-2016. But when you dig down, a recent single sale of 1.4 acres in the Beltline (near downtown) for $40.7 million skewed the stats higher. Take that out and the price per acre, and apartment building sales, are half what they were a year ago.
Major Point: The latest industry forecasts are for oil prices to average US$54 per barrel this year and US$57 per barrel in 2018. JREI stays with Josef Schachter (buy his great new newsletter) who sees oil at around $40 by year end. Whatever the correct number is … this is not high enough to spark any immediate employment and rental boom in overbuilt Calgary. Some may want to get into Calgary now for the long-term – nothing wrong with that – but we think its apartment building prices have yet to hit bottom. For individual investors make offers, schuss opportunities but only buy the deal of the lifetime. We are looking at Alberta opportunities but believe there is a leg down yet (for the investor).
• British Columbia •
The Numbers, The Numbers – Vancouver
I put the numbers for Vancouver and the Fraser Valley on the Hotline last Tuesday. Here is a brief recap:
|VANCOUVER||Apr. 2017||Apr. 2016||%|
|Active Listings||2,137||3,323||-36% (!)|
Major Point: The market between condo activity and prices has decoupled from the SF home market activity. Condo prices 20% higher, SF lower. More importantly condo listings down 36%, SF home listings up 8%. Also the SF home on the market is up to 45 days (up 69% from last year) and the time on market for condos is 19 days or -30% over last year. Last year April was the best month, it remains to be seen whether the pattern repeats … this year there is an election in between. We predicted a few months ago Ms. Clark to win, if we are right … back to normal, if not – hang on to your hat.
The Fraser Valley Experienced Similarly Strong And ‘Decoupled Markets’ In April
The Fraser Valley real estate market reached the highest sales level for the region in the past ten months. 2,230 sales of all property types represented a decrease of 25 per cent compared to the 2,969 sales this time last year. Of the 2,230 sales processed in April, 438 were townhouses and 567 were apartments.
Total active inventory for the Fraser Valley last month was 4,913 listings, the lowest seen for an April in ten years!
Inventory levels decreased 14 per cent when compared to April 2016. For the Fraser Valley region, the average number of days to sell a single family detached home in April 2017 was 26 days, compared to 15 days in April of last year.
Major Point: Condo prices are higher by over 20%
Bob Rennie Gets Frank On Future Housing Prices
Speaking at the annual Independent Contractors’ Association of BC business outlook conference in Vancouver last week, uber real estate salesman Bob Rennie said there is no way to kill rising house prices in Vancouver without a massive increase in supply.
And, Rennie warned, that is not going to happen soon enough to meet demand fuelled by two huge capital flows: foreign buyers and senior homeowners who hold more than $220 billion in tax-free, paid-for equity in Metro Vancouver houses. “They are going to help their kids buy. We’re Canadians.”
Rennie, president of Rennie Marketing, has probably sold more homes than anyone in B.C. and he conceded that his call for more condos looks self-serving. But, he said it is also a reality that politicians and the public aren’t facing. What is needed, he said, is a dismantling and rezoning of much of the 150,000 acres in Metro’s Agricultural Land Reserve rental housing; and wholesale higher-density re-zoning of single-family neighbourhoods from Main Street to Boundary Road and Howe Sound to the Fraser River, neither of which will ever happen.
So what will happen? Average Metro condominium prices at $1,000 per square foot and rentals at $4 per square foot, which is already the norm in much of Vancouver, he said.
“We will never see a new condo sold downtown for less than $1,500 per square foot,” he said. (In fact, based on recent sales we’ve tracked, it is already closer to $2,000 per square foot.)
As for foreign buyers, Rennie said, “first the money comes, and then the people.” He noted that 21% of SFU and UBC students are foreigners and their parents are among a worldwide wave of people – from Asia to Europe to the Middle East – seeking security and yield. Metro Vancouver is already welcoming about 40,000 immigrants a year but the federal government wants to nearly double immigration to 500,000 annually.
As for Chinese currency controls: “When there are no restrictions, the Chinese money is flowing; when there are restrictions the money really starts flowing,” Rennie said.
Major Point: When land is selling for $600 per square foot, as it already is in much of Vancouver, we will never see $500 per square foot new condos. As residents of one of the great places in the world, and lacking political will, we will have to live with rising home prices. As real estate investors, we have a duty to take advantage of it to protect ourselves, and our families.
Get Into Industrial Strata Right Now
Parallel with the Metro Vancouver residential market, this year it is the industrial sector that offers the best chance in a lifetime to make some serious money as a real estate investor. If you don’t know much about industrial real estate, get up to speed. Basically, in Vancouver, new industrial strata space is selling for $500-$700 per square foot and renting for from $10 to $25 per square foot (annually, which is from $1 to $2.50 per square foot monthly). And there is no fancy kitchens or bathrooms and no Residential Tenancy Act or rent controls for landlords to worry about.
The industrial vacancy rate is 2% across Metro Vancouver, which has 198 million square feet of industrial space. Most industrial sites are in the hands of big developers, but there is room for the little guy. The idea is to buy existing strata, or, if you can swing it, older buildings in outlier industrial zones.
There are two new high-paying tenants: movie and TV production companies, which grabbed nearly a third of all the leased Metro industrial space last year; and marijuana growers who are trying to find older industrial sites that can be used for grow-ops. When Colorado legalized marijuana four years ago, growers became the dominant industrial tenants within a matter of weeks. Canada plans to legalize it in July 2018.
So where to buy?
The City of Vancouver is expensive, but recent zoning now allows what we call “yuppy industrial”: architects, video game designers and other high-tech firms as industrial tenants. This has broadened the market and driven lease rates higher, especially in the Mount Pleasant and Hastings area east of Knight Street and the Marine Drive area east of Cambie Street.
In the immediate suburbs, target on Delta and Richmond, where the new South Perimeter Road, a four-lane freeway that runs to Highway 1, and the upcoming new Massey Tunnel replacement bridge that will drive more industrial demand into what is already a record-setting sales pace. Industrial property in Delta is selling for around $200 per square foot, and is about the same in Richmond, both of which have industrial vacancy of less than 3%.
Look at Abbotsford and Mission – even Merritt and Williams Lake – where industrial property prices are much lower and which could be ideal for the emerging legalized marijuana market, which treasures large space in remote, secure locations.
Major Point: The average price of an acre of industrial land in Metro Vancouver has shot from $1 million to $1.4 million an acre in the last two years. And, like residential prices, they will keep climbing. Get in this year and get in as big as you can.
Simple Math: Vancouver Land For Condos: $500 BSF, Surrey Land For Condos: $65-$90 BSF
The future for residential development and sales in Metro Vancouver is in Surrey, the second-largest city in B.C. More than 20,000 new condos are already approved in the city, and about 1,000 people are moving in every month.
But it is land values (we have an early copy of the much-anticipated LandShare Report Spring 2017 from Colliers International) that show why Surrey will be action central for residential over the next few years.
Colliers breaks down the cost per buildable square foot (BSF) in municipalities across Metro Vancouver. BSF takes into account the density zoning, floor space ratio, on a site: for example, 10,000 square feet of land with a 3 FSR equates to 30,000 square foot buildable. We have pulled out only the stats on low-rise wood frame condos and high-rise concrete condominiums. (The report will be released next week.)
In downtown Vancouver, Colliers tracked only concrete high-rise condos, because that is what is being built: the record-setting average as of March is $500 per BSF. On Vancouver’s west side, the land cost to build a low-rise condo building ranges from $350 to $450 per buildable square foot, and $400 to $500 BSF for a concrete condo tower.
On the East Side of the city, land for a wood-frame condo building is $200-$275 BSF, and it is $250 to $325 BSF for a concrete condo tower.
This means a developer in East Vancouver must cover up to $325,000 in land costs alone for a 1,000 square foot condo before he even starts financing, building or marketing it.
Now let’s look at affordable Surrey. Residential land sales in Surrey increased 221% from the first half to the second half of last year and Colliers forecast sales will rise further in anticipation of the Surrey to Langley Light Rail Transit system.
In the meantime, Surrey residential land is a relative bargain. Based on recent land sales, the price per buildable square foot for a low-rise wood-frame condo building in Surrey ranges from $25 to $60 in City Centre to $30 to $40 BSF in South Surrey. The land price for a concrete condo tower is $20 to $60 BSF in City Centre to $65 to $90 BSF in South Surrey.
Raw prices for Surrey residential land zoned for townhouses rangel from $1.1 million to $2.2 million per acre.
Here is a concrete example: Westone Properties and Bonds Group recently bought a nine-lot residential land assembly near 104th Avenue and 133 Street, which totalled about 94,000 square foot and was up zoned for 5.5 FSR. The BSF pencils out to $64, or about one-tenth the cost of a prime site in Vancouver.
Major Point: The price spread between Vancouver and Surrey – B.C.’s two largest cities – is so vast that investors should be confident that the Surrey values will be playing catch up for years and probably faster than most believe. It also means that Surrey’s existing pre-sale condos (approved, under construction) offer a good investment opportunity because most are based on pre-2016 land values and offer some of the best values in the Metro housing market.
Close-up Report For Investors: Nanaimo
A lot of older homeowners – and young renters and wannabe owners – are bailing out of pricey Metro Vancouver and we have been looking at the key B.C. cities they are heading to. Last week was Kelowna: this week we take a close-up look at Nanaimo.
Nanaimo is almost directly across the Georgia Strait from Vancouver and can be reached by plane or ferries. A $100 flight takes less than 15 minutes, harbour to harbour, making it a potential commute option for well-paid workers.
Greater Nanaimo’s population is 104,936, the fifth-largest population centre in B.C. The city’s population is 90,504. Overall, the region’s population is expected to grow by 30% over the next 25 years.
Located at the centre of Vancouver Island, Nanaimo is a regional service hub. It’s also an industrial centre, with the island’s largest port and significant pulp and paper and wood products manufacturing operations. The city’s economy grew 11% between 2011 and 2015, according to the city. Overall, Nanaimo’s GDP comes in at $4.2 billion, and accounts for 2% of the B.C. total. Major employers include Coastal Community Credit Union, with 600 workers; BC Ferries, 457; and Department of Fisheries and Oceans, 300, Harmac Pacific with 340 workers and Coastland Wood Industries, which employs 300. Nanaimo is also home to one of B.C.’s major licensed marijuana producers, Tilray, which employs 140 people. There is also a growing high-tech sector.
Nanaimo has seen double-digit escalation in home prices but the sales pace has slowed recently. The average detached house sales price in April was $497,000, down from $502,458 in March 2017, but nearly $60,000 higher than in April 2016. April sales also tracked lower, down 25% from a year earlier, but local agents say it is due to a lack of inventory. “Properly priced homes are selling in multiple offers within 48 hours for well over the asking price. Sellers are reluctant to put their home on the market for fear they will not find a suitable new home in the area,” explained Steve Pakozdy, of Royal LePage Nanaimo. Prices for condo apartments increased 23% in the past year, to $260,900, but condo listings have dropped 36%.
CMHC says Nanaimo’s vacancy rate for apartments is 1.5%.
Major Point: Nanaimo is ripe for condo investors. In a quick search this week, we found 17 Nanaimo area condo apartments for less than $175,000, including six for less than $125,000. Examples: MLS: 420448, a one-bedroom condo, central Nanaimo. Rented for $695 per month. Asking price: $114,900. MLS 423231, a one-bedroom near the Nanaimo hospital, rentable. Asking $104,900. (We are not recommending these, you will have to check them out yourself.)
U.S. May Reduce Mortgage Tax Deduction
The tax deduction of mortgage payments has been a mainstay of the U.S. housing market, but there are apparently plans afoot to change that, according to reports in the New York Times and the Washington Post.
Why should you care? Because it may spark sales of some U.S. homes in hot markets like Phoenix and Portland. (In Canada, we are concerned about moves to restrict the tax exemption on principal residences: watch for our in-depth report on this next week.)
At this point, neither the White House nor Congressional Republicans are talking about eliminating the mortgage interest deduction. But talk has circulated about lowering the cap on the mortgage interest deduction, which currently stands at $500,000 for individuals or $1 million for couples, but no serious numbers have emerged.
However, provisions in a new U.S tax reform blueprint could effectively eliminate the mortgage interest deduction for millions of homeowners. The plan proposes basically doubling the standard deduction (from $12,700 to $24,000 for couples, $6,350 to $12,000 for single filers) while a plan from President Trump does double it to $25,400 for couples and $12,700 for singles. Either would end the incentive for the vast majority homeowners to itemize their deductions. Both plans also eliminate the tax deductions for local and state taxes, meaning homeowners would no longer be able to deduct property taxes.
Kenneth R. Harney, a real estate reporter for the Washington Post, reports that tax experts say 84% of 45 million taxpayers who itemized in 2017 would switch to the standard deduction.
Major Point: It would take a long time for such a big change to work through and, judging from the first 100 days of the Trump administration, perhaps longer, if at all. But watch for this, it could lead to more listings of owner-occupied homes into a strengthening U.S. housing market.
More Words (And Phrases) I Hate
At this point in time. The right word is “now”.
Going forward: As in, we will do that going forward. The right phrase is “later” or “in the future.”
Truly. Just don’t use it.
Breathtaking. Jumping out of plane naked with no parachute is breathtaking. The view from your condo balcony is not.
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