Revisiting Michael Ferreira’s State of the Union UDI address has become an annual event on our podcast. And, in the first half of 2021, what better time to reflect not only on the year it was in 2020 but also where the Vancouver real estate market is heading in 2021? This week, Principals Michael Ferreira & Jon Bennest from Urban Analytics join Adam & Matt for a far-reaching discussion on the current market trends, how the market has shifted, the hot presale market, and their outlook for the 2021. Get the latest take from the go-to advisors for the development community. You won’t be disappointed.
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Please tell us about yourselves.
Michael: I’ve been in the industry for over 25 years and with Urban Analytics for the better part of that.
Jon: I analyze the market in Metro Vancouver and have worked with Michael for the last 10 years. Before that, I worked with developers like Polygon and Mosaic.
Let’s talk about your recent presentation, “2020 was so last year.” What are the key takeaways from your address?
We’re all fatigued for various reasons. In respect to the market, we’re over talking about what happened in 2020 and even 2019. We want to put the past behind us and look ahead to the promising future. Of course, we did still look back at 2020 in the presentation. In a lot of ways, it was a pretty remarkable year. There was a lot of uncertainty heading into the pandemic and in the first few weeks of lockdown.
Right from the beginning, the majority of people thought there was light at the end of the tunnel and that it takes forever to get a project approved in Metro Vancouver anyway, so they wanted to keep pushing. Developers who were already in the market took on the challenge and offered virtual tours. Everyone adapted very quickly, put their heads down and figured out how to make it work. In those first few weeks, we heard that people were still interested in making deals.
Did the rest of 2020 surprise you?
Yes, we were obviously impressed with the second half of the market. It became clear in the summer and moving into the fall that because many companies had to switch to remote working, there was a big emphasis on the home. The primary focus for buyers became affordable and spacious products, rather than being in urban environments with amenities. The pandemic really accelerated that desire for space. We saw that take off in the second half and we’re still seeing that today. Townhomes and single family homes heated up first but it’s trickling into condos now too.
Let’s talk about the condo market. Where do you see it going this year?
We’re already seeing the condo market pick up – it’s not just a prediction, it’s a reality today. We’ve had a number of successful high rise projects in Burnaby and Coquitlam. Developers are trying to get to market as fast as possible. The downtown market initially was the most negatively impacted – we didn’t see a major decline in prices but prices just haven’t appreciated as much.
We’ll see more congestion on the roads as universities and offices open up. Once that happens, the desirability of being in the core will improve.
It’s also a matter of affordability. If you can’t afford a townhome, a condo is your next choice. Townhome and single family prices have come up in the last year, so condos may be some people’s only option.
Is there a sense that looking for more space and a home office is the new normal? Or are those days numbered?
I think there are still people who recognize the value of having more space. But we don’t think the work from home thing is permanent – there are benefits and drawbacks to it. People like the flexibility of working from home but miss the personal interaction of the office. There will still be a need for people to come into the office.
Who is driving demand?
I’d say it was entry-level and move-up buyers throughout the market last year. The empty nesters, downsizers and investors were slower moving last year; there was more anxiety. But now that single family home prices have gone up so much, some of the downsizers are probably coming off the fence.
For most of 2020, investors seemed to be stuck on the fence. They had heard predictions about prices crashing so were sitting back and waiting. But after months of seeing sales go up and prices go up, they realized that someone called this one wrong. So investors started to come back into the market towards the fourth quarter. They’re much more active today than they have been for the last two years.
The pandemic also proved there’s a significant amount of end-user and local demand. Foreign buyers had a hard time buying real estate with borders being closed. So this proved there is significant demand from our local market.
The demand is strong today and mostly domestically driven. If you think the market is crazy now, imagine if we had the demand from new immigrants and foreign buyers. Once that demand comes back, are we prepared for it? What happens to pricing then?
Let’s talk about rents. What happened in 2020 and what do you think will happen in 2021?
The Vancouver rental market typically is one of the strongest markets in North America, if not across the world. We usually have a 1% vacancy rate across the city and a lack of options for the people moving here. So we expected the rental market to be more resilient than the housing market, but that wasn’t the case as the pandemic affected lower income earners and students.
The Vancouver rental market is strongly supported by post-secondary institutions and international students. The rental market relies on those renters. So when you tell those students that the borders are closed and classes are online, there’s no motivation to want to rent. A lot of students who would have rented in Vancouver are living at home with their parents. So we saw a big spike of vacancy in places like UBC and downtown Vancouver. Other locations across metro Vancouver were not as affected.
We track newer, purpose-built rental and in those locations, the spike went up as high as 10% near UBC and probably 5% downtown. In other places like Surrey and the Tri-Cities, we didn’t see that spike in vacancy; it was still below 5% for newer, purpose-built rentals. We see this as a short term thing. Prior to the pandemic, there would be no vacancies in places like UBC. With the announcement that schools will be opening in September, we have no reason to believe those vacancies won’t be absorbed.
The pandemic did impact vacancy but across the board, it wasn’t as severe, and is still quite low across Metro Vancouver.
What about rent prices?
In the newer, purpose-built rental market, we’re seeing that government interventions and other factors are impacting price. We’re seeing developers offering incentives like 1-3 months free in order to charge a higher face rent. So rents are not any lower than what they would have been, but the landlord is more amenable to a slower absorption period. We used to see a 100-200 unit building leased up in less than three months. Now it’s more like five units a month, but the rental rates are still high, if not higher. This could be a function of those government measures, like the rent freeze.
Where we have seen lower rental rates is when you have an individual owner of a unit who is more willing to negotiate a lower rent because they can’t afford to sit on a property.
What are your thoughts on the market moving forward?
We’re still seeing townhomes selling extremely well and prices moving up. As that happens, you’ll see people going back to the condo product when they get priced out of townhomes. I expect we’ll see more balanced demand across the province. We’re already starting to see more demand in the high-rise sector, mostly due to investors coming back into the market.
What are your thoughts on pricing?
I think prices will see some appreciation but there were so many projects put on hold in 2019/2020, which will result in a lot of new supply. I see more appreciation happening into 2022 when borders reopen and immigration comes back in. The pace of approvals in Vancouver is slow and will tamper any new supply coming in. We’ll see upward pressure on pricing in 2022 and beyond.
What challenges lie ahead?
Our hope is we’ll continue to have a more normal environment as we get past the pandemic. The big concern is if that doesn’t occur and it’s a longer process before immigration returns.
Another challenge is the cyclical market; long term the trend is up but in the short term, it can come down. Looking at the single family market, there’s a lot of hype right now and sales above list price. There’s a fear of missing out and that can attract people who are trying to make money quickly on a flip or stretching themselves too thin to get into the home. That’s the only concern I have with that market getting heated too quickly.
It’s the same old problem in Vancouver: We don’t have enough supply and people will always want to move here. The fundamentals are good but we could have short term issues.
On the policy side, if we have the same frenzy as we had in 2016/2017, can the government resist putting demand-oriented policies in place? So far they haven’t acknowledged that supply is an issue. That’s a big concern. We need to find a way to get more projects approved more quickly.
There’s also the challenge of new building codes and lack of trades – costs being put onto the market.
What areas in the Lower Mainland are you most excited about for growth and opportunity?
Jon: I’m keeping a close eye on Mission. Polygon is starting a massive community up there, which is interesting to see. There’s a lot of smart minds at Polygon so I’m sure they saw the opportunity. I’m also looking at downtown Vancouver. Whenever you see a sector of the market that is down, there are attractive opportunities there. Downtown is still expensive, but I think there are options there. As the market for condos continues to pick up pace, I can see the resale product getting absorbed and no new product coming in, which will put pressure on pricing.
Michael: There are some projects I’m watching, like Harbourside Waterfront in North Vancouver, that have been in the works for a long time. I’m excited to see how that shapes up. There’s also another big project, Southlands Tsawwassen, that has been in development for a while that I’m excited about.
What about across BC? Or Calgary and Edmonton?
I’m from the Okanagan so I’m excited about that area. It sounds like Kelowna is just exploding, especially the downtown area.
We’re pretty bullish on Calgary and Edmonton too. We’ll see more immigration returning to Canada with the goal of home ownership. The single family market across all Canadian cities is increasing. Even markets like Ottawa are beginning to heat up.
If your end goal is to own a single family home and you’re moving to Canada, Calgary and Edmonton are some of the most affordable cities we have. Calgary has a lot of young energy and they’re beginning to diversify away from energy and gas.
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