Evan Duggan, Vancouver Sun
September 4, 2018
Critically low apartment vacancy rates and investors hungry for redevelopment potential has the apartment building investment market remaining strong as other parts of the Metro Vancouver residential property market begin to soften, insiders say.
In the first half of 2018, there were 89 apartment building sales worth about $1.45 billion, according to the Goodman Report’s mid-year apartment building review.
In the same period last year, there were 87 deals worth $1.35 billion, the report said.
Over the first eight months of the year, there have been 105 sales, said David Goodman, whose firm HQ Commercial publishes the report.
Of those sales, 28 of the buildings are redevelopment sites, he said.
HQ Commercial recently listed a 23-suite apartment at 45 E. 16th in Mount Pleasant. The asking price for the 52-year-old building is $10,520,000. B.C. Assessment marked its most recent value for tax purposes at $8,824,000.
Goodman said the overall regional average price per suite increased to $494,000 in the first half of this year, up from $408,000 in the same time period last year.
“If the buildings are being sold strictly on the income approach, the price per suite is much lower,” he said. “A building might sell for $250,000 a suite, but if it turns out that’s it’s a development site, in many cases the land value well exceeds the value attributed to the income approach.”
There’s a proliferation of that type of activity, especially in Burnaby and Vancouver’s West End, he said.
Goodman said about seven or eight of the 15 buildings sold so far this year in the West End will be torn down and redeveloped.
But overall, there isn’t much new supply coming any time soon, he said.
“There’s only 1,500 suites in new purpose-built rentals coming out in 2018,” he said, referring to the City of Vancouver.
“It’s going to be 1,500 again next year,” he said.
“This represents to me a mere pittance of what is required,” Goodman said. “The suburban areas are not much better.”
Overall, there are 17,296 purpose-built apartment units in the pipeline across Metro Vancouver, according to Goodman’s report. About 35 per cent are being built now, 20 per cent have been approved and 45 per cent are under proposal.
He said it will take about five years for all of those units to complete.
Hundreds of existing units would be torn down in the process of development, he said.
Demand for apartment buildings by investors has been feverish over the past decade and shows no signs yet of abating, said Charlie Hughes, an associate vice-president and apartment specialist with Colliers International in Vancouver.
“It’s far and away the safest asset class,” he said. “It’s something where you’re essentially dealing with less than one per cent vacancy in … every neighbourhood of Vancouver, but even the surrounding areas (have) one per cent or less vacancy.”
He said the strongest markets in the U.S. are experiencing a three- to four-per-cent apartment vacancy.
“The yields have been pretty compressed because any apartment deal is receiving so much interest from buyers, but really it’s a reflection of how safe and stable that asset class is,” Hughes said.
“It’s something that we’ve had an incredible five-to-ten-year run and I think there’s a lot of owners with some very old buildings that require capital expenditures, and because the buyer demand is still there, it’s something that we’ve had a long enough run that some owners have decided to cash out,” he said.
Hughes said the sales and price reversal in Metro Vancouver has started to experience in condos and houses has yet to be felt in the apartment building market.
“The slowdown that we’re seeing in some pockets of this housing market really don’t apply to the income-producing properties,’ he said. “People buy apartment buildings here because there is a critically low vacancy, the cash flow and the yields are incredibly stable, and it’s a very safe, solid asset class to be in.”
Goodman added, however, that prices are beginning to plateau as interest rates move up.
He said there is also some apprehension among investors over any potential provincial government intervention in the rental market.
“Overall, it still feels like an upbeat market,” Goodman said.