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episode # 222

Selling Vancouver’s Most Expensive Real Estate with Mark Goodman

Ever wonder what it’s like to put together some of the biggest real estate transactions in Vancouver? Mark Goodman, Principal of Goodman Commercial Inc. and coauthor of the popular Goodman Report, was behind a quarter of those transactions in 2019. Perhaps you read about Beach Towers selling recently for a modest 305 million dollars? Yeah, that was Mark and his team and yeah, we know your cousin used to rent there. Everyone’s cousin did! Mark joins Adam and Matt to dive deep into the fascinating world of multifamily real estate here in Vancouver, with case studies, calculations big and small, and stories fit for the big screen. It’s that multi-family primer that you’ve been waiting for and it doesn’t disappoint. Welcome to the Bigs!

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Episode Summary


 

Who is Mark Goodman?

Mark is a Principal at Goodman Commercial Inc., a commercial real estate firm, and a co-publisher of the Goodman Report. He has been in the real estate business for 18 years. Early in his career, he was employed at the Jim Pattison Trade Group, an export division of the Jim Pattison Group. In 2002 he joined his father David Goodman as part of Goodman Commercial Inc. They partnered with Cynthia Jagger, soon after.

Goodman Commercial Inc. has over 45 years of experience in multifamily apartment sales, commercial properties, development sites and land. Mark and Cynthia co-publish the Goodman Report, a popular, data driven real estate news source.

 

How did the Goodman Report come to be?

The Goodman Report was started by Mark’s father David Goodman, who has worked in real estate since the early 1970’s. Mark’s father worked in the clothing business early in his career, but decided to try his hand in real estate after moving to Vancouver from Montreal. In 1979, Mark’s father became the top salesman in real estate across Canada, working in Richmond and Shaughnessy. Shaughnessy was a very prestigious neighbourhood and Mark’s father became known in this neighbourhood by publishing a real estate newsletter. Eventually, Mark’s father left residential real estate to pursue the commercial real estate market, working with prestigious Vancouver businesspeople like, Nelson Skalbania. His newsletter has continued to evolve over the years into the Goodman Report that is published today. It was originally published on paper, and was hand delivered to every subscriber with a personalized note. The newsletter comes from humble beginnings into the success that it is today with over 15,000 subscribers and 30,000 connections on LinkedIn.

 

Is the commercial real estate that Goodman Commercial sells listed on the MLS system?

There is a commercial MLS system, but the product that we are selling is generally not advertised on the MLS system. The commercial MLS system is not geared towards the market for various reasons. If you list on the MLS system, it requires that you must show the property within 1 week of an enquiry from a licensed agent. There are logistics involving tenants and getting permissions that makes this timeline difficult. Additionally, you need to have a price published on the MLS system. In this market, there is not always a set price. Sometimes it is an open bid and the price depends on the timing and the type of asset that you are selling.

There are other systems for marketing commercial properties in the real estate world that are more useful than the MLS system, leading to the MLS not being used. Investors looking to purchase multifamily in the commercial real estate world would normally work with a firm like Goodman Commercial to break into the market.

 

Can you give us an update on the multifamily real estate market in Vancouver?

The Metro Vancouver multifamily real estate market is considered a small market compared to other cities in Canada. Greater Vancouver has 3,300 purpose built rental apartment buildings in Vancouver. The average age of the buildings are about 60 years old. These buildings are owned by 2,200 owners, which includes large developers like Hollyburn Properties down to small Mom & Pop investors.  The return on investment (cap rate) as of early 2019 was in the low 2% range for wood frame buildings. These rates have moved up toward 3% in the last 6 months, mainly due to changes brought about by the NDP government and their attempts to cool the real estate market. Generally, the average cap rate in 2019 was 3.12%; the average vacancy rate was 1.1%; volume was $1.1 billion dollars in sales – based on 77 transactions completed during the year.

 

Are you seeing the same cooldown in multifamily real estate market that we have been seeing in the residential real estate market since the introduction on the NDP’s policies?

Generally, there are some parallels between the two markets, but they are not always in tandem. There are different factors that affect the multifamily market, for example, in 2018/2019, we saw rent increases capped at inflation, tougher rules for tenant relocation, threats of vacancy control, ends to fixed term tenancy agreements and geographic rent increases. On the demand side, we saw government interventions including, increases in property taxes to 5% for properties over $3M, foreign buyers tax was increased to 20%, rental only zoning used to downzone properties in some municipalities and the addition of the school and speculation tax to development lands. All of these factors combined together have negatively affected the multifamily market. These government initiatives geared to make housing more affordable have actually done the opposite. They have discouraged developers from developing rental housing and year-over-year vacancy rates continue to go down and rental rates continue to go up. We have a demand-supply imbalance that is not going anywhere. There is simply not enough supply to house all the people moving here and rental rates will continue to go up.

When the NDP policies were put in place, the multifamily market dropped significantly. The volume dropped by 50%-60% in transaction and dollar volume. This hasn’t made our city more affordable; in fact, it has made everything more expensive because there is nowhere to live and no incentive for developers to build buildings. COVID-19 has introduced more challenges to the market, but people are continuing to do business through new methods, including longer close periods, physical distancing and electronic methods.

 

Where are buyers of purpose-built rental buildings coming from? How is purpose built rental value established?

A building like Beach Towers, sold in Q1 2019, was listed off market. The ownership group entertained outside offers, but eventually one ownership group bought out the full ownership share from the other party.

Generally, people bringing offers for purpose built rental buildings are local. Even before the foreign buyer’s tax, the buyers were mainly local or from other places in Canada. When we examined at our last 200 transactions, only 2 of those buyers would be considered foreign buyers (one from Austria and one from Shanghai).  Now that the foreign buyer’s tax was introduced, the purchasers are all from Canada.

Buyers include mom and pop investors, professionals like Dentists and Lawyers, REITs and pension funds, and other institutional investors.

Establishing value for rental buildings is usually based on the capitalization rate (return or yield that the investor can achieve buy buying the building). To calculate this, you would take the rental income revenue and minus the expenses you would incur, including tax, insurance, utilities, repairs & maintenance, and a nominal vacancy rate of 0.5%. This gets you your profit, which is divided into the purchase price to determine the return / yield percentage. This number is before debt service for your mortgage. 18 years ago, cap rates were 6.0%-6.5% in the City of Vancouver. Recently, in 2018, the market was hot and cap rates were hovering at 1.8%-1.9% range. People were putting 50%-60% down to by these buildings to get such a low yield on their money, but there was a reason for that. These investors knew that the buildings were older and in need of repairs. A quick and cheap renovation of the suites could lead to a doubling of the cap rates up to close to 5%. This greatly increased the investment return for a small effort.

This business model is more challenging now because the NDP Government has put some policies in place that makes this rejuvenation of buildings more difficult – mainly because it may lead to evictions. This is causing some of the older rental buildings in Vancouver to remain old with no renovations or improvements.

For new purpose-built rental buildings coming online today, there is generally a higher cap rate associated with them of 5%-6%. The reason for this is that these buildings are immediately rented at market and there is no improvement to be had for a number of years. Therefore, the lift that older buildings are seeing has already been built into the price for a new rental building. The new purpose-built rental is a phenomenon that is currently happening, but unfortunately, it is not happening fast enough to meet the demand for housing. This suggests that this asset class will be a very safe investment for a long time to come.

 

Is the Multi-Family market in Vancouver unique when compared to the rest of Canada?

Yes, it is unique because it is a smaller market in Vancouver than in other cities and it is a highly politicized asset class. Vancouver effectively has a moratorium on the demolition of apartment buildings, undertaken to ensure supply of rental stock. The intentions were good, but of course it has created problems. These rental buildings are all sitting on RM zoned land, zoned for multifamily residences. Because these buildings cannot be torn down, it prohibits developers using this land to make newer, larger, more efficient buildings. This has a negative effect on the rental supply overall. There is a tug-of-war to make sure people living in these existing buildings are not displaced, while freezing the rental stock and restricting rental supply for everyone else.

The philosophy at City Hall and our province focuses on the demand side of the equation when thinking about affordability. They should be focusing on the supply side, allowing people to compete and build rental housing. This would increase affordability and provide housing. This is not as expedient for politicians as limiting demand and that is why it is not being tackled with the same enthusiasm.

 

How is COVID-19 (Coronavirus) impacting the multi-family real estate market?

Over the last 6 weeks, it has been more challenging as a broker to function, but we have adapted very quickly. We have moved to working remotely and digitally. The hardest part for the rental housing business is that we cannot enter into suites right now. Deals are still happening, and buyers are still performing due diligence. We have been extending the building inspection timeline for our current deals, hoping to get building inspections done after the COVID-19 restrictions are lifted. In certain owner/occupied situations, we are able to view units as long as we are wearing face masks and gloves with rules that included no touching of anything in the unit. Business is adapting as we go along. Some of our recently contracted properties were seeing multiple offers, even when COVID-19 was on the horizon for Canada. COVID-19 seems like a short snowstorm in an otherwise healthy real estate sector. There should be no long term worries about the market due to this crisis.

 

5 wire

Favourite neighbourhood: Fairview / South Granville or Douglas Park

Favourite bar or restaurant: West on South Granville (now closed unfortunately) or Published on Main

One book you would recommend to listeners: Rise Up and Kill First by Ronen Bergman or something by Eckhart Tolle

One piece of advice you would give your 18-year-old self: Don’t smoke cigarettes!

Something you have purchased for under $1,000 that has positively changed your life: All the meal delivery apps are great (Skip the Dishes, Door Dash)

Find out more about Mark Goodman and the Goodman Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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