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episode # 145

Do Vancouver Presale Condos Still Make Sense? with Urban Analytics’ Michael Ferreira

The days of camping out overnight for that presale one bedroom are over! In fact, many developers are now offering buyer incentives just to get people through the door. What’s changed and how does this impact your investment strategy? Managing Principal of Urban Analytics, Michael Ferreira, sits down with Adam & Matt to highlight key factors for the recent slowdown in new construction sales as well as his recent advice to Vancouver’s largest development community. What does all this mean for the value of your home? Tune in to find out!

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Episode Summary


About Michael:

Michael started out as a radio DJ in 1987. When he realized his brother was paying more in income taxes than he was making in salary, he went back to school for real estate. Now, Michael is the managing principal of Urban Analytics, a market research and advisory firm that specializes in new, multi-family development data in Metro Vancouver (also in Calgary and Edmonton). Their analysts visit every actively selling, multi-family project (i.e. high-rise, low-rise, and townhome developments). They maintain a database with valuable information for industry stakeholders to subscribe to. As well, the information is used to provide advisory services to these stakeholders (which include developers, lenders, appraisers, and marketing companies).

On the common critique of lack of transparency in new construction (data and sales) and how keen developers are to provide data:

Most major developers subscribe to the product, as do banks and secondary lenders. Some marketing companies and individual realtors do as well. Developers realize the information is only as good as what they provide. Sometimes, when a project is in its initial launch phase, the company struggles to get all of the desired information. This is understandable, as some projects are worth hundreds of millions of dollars and there is a competitive element. This competition causes some developers to keep information private (they are not concerned about sharing it with the general public). However, usually within a month of the project’s launch, they get the information they need.

On the metrics Urban Analytics looks at:

It’s detailed, much like an MLS listing, in order to meet the needs of all stakeholders. They track general information like who the developer is, where their sales office is, and how long they’ve been selling. Other metrics include monthly absorption rates, incentives or realtor commissions being offered, construction status and expected completion, and general contractors and other project consultants. They also get more granular details like finishing specs, strata fees, amenities, and the unit mix (i.e. how many one-bedrooms), price ranges, sales, sizes, price per square foot ranges, and overall prices.

Subscribers use this information at different stages. For instance, developers have product development staff that share the information with their acquisitions team to provide expectations when they look at and choose sites. The data is further used in development (e.g. finishing specs to help determine pricing) and marketing stages (e.g. for unit pricing, buyer targeting, and messaging).

On the perception that new product in Vancouver is more luxury than locals can typically afford:

This is what makes the affordability discussion so complex. Land prices are a real challenge—because we’re such a constrained region for developable land, the competition is intense. As land prices go up, so does the developer’s requirement to design and create product that will sell high enough to justify their land costs. This is more of a concern in urban areas (e.g. downtown, west side, North Vancouver, Burnaby). There are also the municipality fees (for instance, the community amenity contribution that the City of Vancouver takes is bigger and bigger when properties are re-zoned and land prices go up). It’s a vicious circle.

On the sentiment that developers are making so much money that the City can charge them anything, and when it stops making sense for developers to build certain projects:

The market has allowed developers and municipalities to continue to make money in recent years. We are seeing a shift now where there is less urgency among buyers to get into the market; there is lower absorption, higher inventories, and stagnant pricing. This is good for the market, as it grew too much and too quickly. If it continues, construction costs still remain the same, we are still working at full capacity, and developers will have to pull projects off the market. This is when fees and the revenue from them would drop. What gets missed is the immense risk that developers take. There must be a reward that correlates with this risk. In 2008, there were single-digit returns on these projects. At this time, many developers took a hit just to keep things going and keep their staff.

We need to beware of what’s happening in the rental market, too (Urban Analytics tracks data on purpose-built rentals from the past seven years). Here, they encourage municipalities and industry to work together to generate as much new supply as possible because there are no investors or speculators. The more supply you build, the more direct impact it will have on rents. In some US markets like Seattle, they have built a lot of new rental product, and rents have dropped. If you sustain the new supply coming into the market, you see rents sustain at a steadier rate instead of grow, as they have in Vancouver over the past few years. Too many restrictions and rent controls (e.g. restricting increases to cost-of-living instead of inflation-plus) make many projects unviable for developers. If the Federal Government eliminated GST on the capital cost of new rental projects, it would generate many more rental projects.

On how likely the City’s promise of new purpose-built rentals and condos over the next five to 10 years will be in reality:

Michael is not optimistic, one reason being we don’t have enough capacity to build that much product—we’re already at full labour capacity now. There is still too much distrust between the municipalities and industry; they need to come together for this to happen. It is easy for politicians to side with the populist chatter in terms of “the greedy developer”, but there needs to be meaningful discussion with both sides.

On the general mood of the development industry:

Michael uses the term “cautious optimism” to describe the Calgary market these days. Vancouver is more cautious – and not optimistic. Last year he said we had headwinds; this year, they’ve turned into storm clouds. The industry is being forced back into the fundamentals of solid development principles: ensuring they can tell their stories as established, local developers with good reputations and qualified salespeople. Most importantly, they need to read the market accurately and position pricier product appropriately. Developers are doing this now and achieving success.

On how their research in new construction relates to the resale market:

Resale reflects what’s happening in the market today. If there’s a lot of inventory and sales have slowed, prices will likely come down. Buyers wait around for this. From an investment perspective, presales are so successful because completion is usually three to four years away, which is long enough to come out of a sluggish cycle. From an end-user perspective, if your lifestyle changes over this time period, you can rent out the property or sell it.

On highlights of his state of the market presentation to the Urban Development Institute:

Michael’s presentation gave perspective and context on today’s market. He went back to 2006-2007 – as the downturn was in 2008 – and described how the market rebounded, and how we got to where we’re at today. He described trends in lending rates, inventories, sales, and other factors like immigration. Then, Michael spoke of the “storm clouds” that cause things to slow down. A year ago, developers had to allocate a minimum number of units to realtors coming in with their buyers. Now, it’s completely different and they’re offering realtors bonuses on top of commissions. The development fundamentals need to be practiced again before we’ll see success. Rising interest rates and the stress test rules have a huge impact on end users (this part of the market has been most negatively impacted). The stress test has resulted in about a 20% drop in buying power, and for every 0.25% increase in lending rates, a 2% drop in buying power results.

On what the next few years hold:

Besides the storm clouds, there are still many positive factors at play, mostly economic. BC is still in the top three to five provinces in terms of GDP and is projected to stay there. We have incredibly strong migration numbers, internationally and interprovincially (the latter of which will likely drop as Alberta’s economy continues to improve). Unemployment is very low at 4.1%. Some people think we’ll see a lower and longer drop in prices than we did in 2008, which Michael does not think is unrealistic. There is a lot of room for prices to drop, given the huge increases from 2015-2018 (about 60-70% in new multi-family homes). Some people will be hurt, but those in the market for the long-term will still be fine. The end-user (resale) market is more challenged, as those people will likely wait to sell if they can’t get the price they need to get into their next home, whether it’s upsizing or downsizing. The presale market is still chugging along; investors are still active.

On where Michael would buy, if given $1 million to spend on new construction in Greater Vancouver:

You won’t get much for $1 million in many markets! For investment, Michael is a big fan of convenience which means transit-oriented locations. You can’t go wrong anywhere on a transit or SkyTrain route, or close to a station. Master-planned, core community developments as well. From an end-user perspective, it depends on what’s important to you.

On the Calgary and Edmonton markets:

Michael is more optimistic about Calgary, as Edmonton has a stagnant inventory issue right now. The rental sector in both markets is strong, and Calgary’s rents have been stable so it’s a good time to buy resale there. For presale, be aware there is a lot of rental under construction or proposed to start. If the economy remains stagnant, conditions may be soft over the next few years.


Click here to learn more about Urban Analytics.

You can also email through the website or call 604-569-3535.

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