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episode # 338

A Jumbo Rate Hike & the Market Ahead with Mike Bucci

The Bank of Canada’s .75% interest rate increase is set to intensify Canada’s housing market downturn, but what will the fallout be for the fall market in Vancouver? This week, Mike Bucci, Vice President of Bucci Developments, joins Matt & Adam to discuss market trends, how to spot the opportunities, and why he continues to be bullish on Vancouver real estate long term. Will the fall market materialize? What are the fundamental factors that may prevent prices from coming down? And where does Bucci Developments go for a cash-flow hedge? All this and more on today’s episode!

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Episode Summary


 

What is Bucci Developments?

Bucci Developments is a mid-sized, fully integrated development team with 40-50 employees. We build everything from townhouses to high rises. We tend to build what we want to live in. 

The Bucci family of companies has been around since the 1970s. We were founded in Vancouver but have always had a foot in Alberta. When Vancouver is down, Calgary is up, and vice versa. By working in both cities, we can diversify and keep everyone employed.

Who is Mike Bucci?

I grew up in Vancouver and am a father of three. I currently live on the North Shore. I graduated out east in 2002, right after September 11, which cut off my options working there in finance. So I drove back west and worked as a financial analyst at CBRE Canada, learning about real estate and development. I realized I wanted to make the key decisions, so I transitioned to working at the family firm. 

How is the Calgary real estate market different from the Vancouver real estate market?

Calgary real estate is very different from Vancouver real estate. A lot of developers from Ontaio and BC are going into Calgary. The ones who are successful recognize how different Calgary’s market is and how difficult it is to crack open. 

But once you do crack it open, you have a lot of options. For example, the permit and approval process in Calgary is amazing. They treat developers like partners instead of piranhas. 

In Calgary, developers have to compete. Buyers have a choice between 50 different developers who all have products at the same price, available at the same time. In Vancouver, there are less options for buyers. Prices keep going up and supply is low. 

The Bank of Canada just raised the overnight interest rate by 0.75 basis points. What’s your take on the real estate market right now?

We’re in a period of flux right now. There’s an expectation that prices have to come down because purchasing power has eroded. The development community is sympathetic to that but we’re stuck in a hard place. Our costs keep going up. We’re not seeing opportunities for costs to decrease. 

What happens if a developer can’t move a project forward?

There are different types of developers in Vancouver. For those that use pre-sales, if you don’t hit your pre-sale target, you don’t move forward with construction. 

For developers with finished homes that didn’t pre-sell, they may have to sit on some of the product for a time until market conditions improve or turn them into rentals. It’s rare to not have pre-sales in Vancouver. 

What’s happening in Vancouver’s resale market? How does that impact your strategy? What’s the long term outlook on the real estate market? 

A lot of stuff is being flushed out of the resale market – and some of that stuff deserved to be flushed, so it’s great. 

But broadly speaking, we’re having a big conversation about real estate across Canada. On one side, there are people who don’t believe supply is a problem. They’re advocating for more government intervention and more government-built housing. But the government doesn’t have the trillions of dollars needed to do that. 

On the other side, there are people who believe the housing crisis is due to a lack of supply. There are too many policies and forces at work that limit our ability to meet demand. This group is arguing for less government intervention. 

Vancouver needs a lot of housing and most of it will come from the private sector. So if you’re looking at building in the Vancouver real estate market, you’re going to be fine in the long run. We simply need more housing. 

Vancouver is a robust city. We’re very lucky to live where we do. But we need more housing and it’s difficult to provide it in our current political environment. Interest rates and inflation are an issue, but they will soften. 

Do you always pre-sell a project?

Pre-selling is an attractive option and you get much better financing with pre-sales. So yes, we will continue to pre-sell whenever we can. It allows developers to put that extra level of care into their projects. 

How does Bucci Developments find development sites and deals? What areas are you excited about? 

We always look for places that we would want to live in – places like Trout Lake Park and Commercial Drive. I can’t be in the room for every decision so we encourage our employees to imagine they are moving in. What do you want in a house? 

We want every site to be near mass transit, have a great community of restaurants and coffee shops, and be close to schools and green space. We then start drawing circles around Vancouver that match our criteria. But every municipality in the Lower Mainland has their own process and rules, so we have to decide where to target.

East Vancouver is a no-brainer for us. It’s an established area with families that we would want to live in. We go up and down the street, meeting brokers and getting to know the community. It’s a long process. 

What was the process of getting your Garden Drive project up and running? 

The Grandview-Woodlands plan started in 2008/2009. But here we are in 2022, and the Garden Drive project is the first one to be delivered under than plan. 

It was a rough entitlement process and as the first developers through the plan, we knew we’d be going through the ringer. We got sued by a neighbour and had to change the design seven times with 35 different floor plans. But we’ve made it easier for other developers to come through after us. 

As developers, we are agents of change. We need to envision what a community will look like when we’re done. 

The organization against the Garden Drive project was staggering. We’re not on a main arterial, so we got a lot of NIMBY pushback saying we should be on Broadway or somewhere busier. But my response is, “Why do people who live in condos not deserve to live on a quiet street? Why should they shield you from traffic pollution?” 

Is Bucci Developments changing their strategy with the current market conditions?

No. We have two projects similar to Garden Drive in the works that we’ll be pre-selling next year and I think they’re going to go pretty fast. We’re still in acquisitions mode. We still believe that in the long term, we need to supply housing. 

We have 1100 homes coming up in the Fleetwood area of Surrey, where more transit is coming in. I think we’ll be fine for the long term. We’re still buying sites and we’re still building. 

On the two new projects near Garden Drive:

These projects are on Broadway, two blocks west of Garden Drive. We’ll use Garden Drive as the pre-sale model so people can get a good feel for the buildings. 

Can you tell us more about the Garden Drive project?

Garden Drive has 69 homes with studios all the way up to three bedroom units. The three-beds are great with rooftop patios and insulated bedrooms – perfect for family living. It’s a wood frame building but there are, on average, 18,000 lbs of concrete in every single suite in order to stop the transfer of noise. 

We’re starting to have open houses for industry professionals so they can see what we’re doing at Garden Drive. Sales get going at the end of September 2022. 

We’re resetting our expectations. We’re assuming 3-4 units will be absorbed each month and that buyers will need time to think things over. It’s going to be a different sales process than is unusual for Vancouver, but very similar to Calgary. So I’m glad we have that Calgary experience. 

Why are you excited about Calgary real estate?

We actually almost left Calgary because the volatility of the oil and gas market is so tiring. But there is a sustainable need for housing in Calgary, so we’ll be there. 

The business culture in Calgary is very entrepreneurial on a small scale. But the ability to jump from small to medium gets stalled out because so many resources are dedicated to oil and gas. That needs to change. 

What advice do you have for developers moving into Calgary?

You can’t think like a Vancouverite in Calgary. A Calgarian doesn’t have the same job security because of the volatility in oil and gas. They have lived through flat housing prices for the last seven years. So why would they take on a 25 year mortgage? Some don’t. So there’s a huge group that wants to rent. 

Calgary has a donut around downtown that developers want to be in. You’ll have a huge pool of renters in that area and be able to cash flow positive. There’s also attractive rent controls in Calgary for owners. 

There are no height restrictions and lots of competition in the Beltline area. But in some other areas in the donut, you can be really successful with a bit of diversification. I really like the Bridgeland area. I find it very walkable and we’re on our seventh project there. I like the Mission area as well, with lots of great restaurants, and Kensington, which reminds me of Kitsilano. 

Are there other areas in BC that Bucci Developments is interested in?

We recently made the decision to not go into Kelowna. This is the first time we’ve made an investment decision based on climate change. Kelowna is on fire – literally and figuratively. It’s had five forest fires in the last seven years, a highway that was flooded out recently, and their winters suck. Climate change is becoming a bigger concern, which is keeping us out of Kelowna.

Vancouver Island seems to be more stable and more resilient to climate change. It has the international airport, tech scene and government. So if we do open another market in BC, I think it will be on Vancouver Island. But I have to ask myself if it’s worth it. 

We’re also exploring diversifying by product type instead of by geography. So we’re looking at industrial real estate. It’s disconnected from the residential market, which is a great diversification, and a sub-market that is really paying off. 

Find out more: https://bucci.com/

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