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episode # 162

Where Does the Presale Market Go From Here? With MLA Canada’s Ryan Lalonde

The Vancouver presale construction market has been red hot for years, but the times have changed. No longer can we expect tents pitched in front of display centres to hold places in line, buildings to be sold out during frenzied opening weekends, or double digit returns to be made seemingly overnight by lucky buyers. The long Vancouver presale party, it would seem, is over for now. But for how long? Why? And does less overall interest in preconstruction spell a big opportunity for you? Ryan Lalonde, the President of Western Canada’s largest real estate marketing company, MLA Canada, sits down with Adam & Matt to discuss the current state of the presale market, the interplay between the presale and resale market, and where the opportunities are moving forward. Not to be missed!

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Episode Summary


 

About Ryan:

Ryan is a Partner at MLA Canada. He grew up in Penticton and lived there until university, when he went to Kelowna for his first year at Okanagan University, then moved to the University of Victoria where he completed his bachelor’s degree. Around that time (in 2003), he met his wife and moved to Vancouver.

At first, having come from a small town, Ryan felt like an outsider in a city as big as Vancouver. However, within a few years, it started to feel like home. Relationships helped with this, but so did understanding the opportunity that was here for him. Ryan remembers getting his real estate license and within a few days having multiple job offers and considering his direction within the industry. He’s been thrilled to call Vancouver home and raise his two young girls here.

On why he chose real estate:

Ryan’s parents always played an active role in homebuilding. Ryan recalls his father and grandfather building all of their family homes. Even at five years old, he remembers sitting on jobsites with his dad. The banter over coffee breaks with his dad and grandfather, the sound and smell of the worksite – these were some of Ryan’s best childhood memories. As he grew up, he played a more active role in building the homes, and when he moved to Vancouver he knew real estate was his passion. Ryan was fortunate enough to be in a city that was starting out an amazing run for the next 15 years. It seemed meant to be.

On how he met his business partner, Cam McNeill:

Ryan’s first real estate job was working with MAC Marketing as a contract writer. Shortly after this, he transitioned to work for Ken Leong and Mary Porohowski with KLM Marketing where he was from 2004-2006. Ryan liked how Ken and Mary approached boutique developments—he believes homebuilding is a function of the communities around it and doing details really well.

On MLA Canada:

MLA is a full-service sales and marketing organization. They are involved in the whole development lifecycle, from early understanding of marketplaces, to envisioning and positioning of the offering and homes all the way through to sales and completion turnover that happens from 36 to 60 months from the time they’re engaged.

At any given time, they’re active on 70-90 development projects at different points in their lifecycle. The majority of their work is in BC; they’re active in the Lower Mainland, Vancouver Island, and Squamish. They’ve played a considerable role in Edmonton and Calgary communities, as well.

On what he’s seen over the years:

Ryan has seen 15 years with lots of changes. During the recession in 2007-2008, he was practicing resale, not project marketing (he’d gone out on his own in 2006). The intention was never to stay in resale, but to come back to sales and marketing. However, he found success and built a great team. This was in 2008, around the time the market was compressing. Ryan learned more than he ever thought possible, such as the importance of details, setting fair expectations, and working closely with colleagues and partners to progress every day in a way that everyone can celebrate. A lot of what they have today is a function of going through those times. MLA would not have half of what they do if they hadn’t learned through those four years.

On how the market will play out this year:

MLA Advisory Market Intel is a biannual piece which is meant to give perspective of how they see the market. Hundreds of hours each year goes into the report, which is meant to be more digestible than many of the articles and reports out there—many of the voices we hear are very credible, and many are simply personal opinions. The connectivity between purchasers and what they read in the media means that the ability to influence is strong. There are a few “guiding lights” that can shed light on what we’re seeing in the marketplace. The report looks historically at the last 12 months, in terms of micro and macroeconomics, and the indicating factors that will influence the future. It includes everything from development timelines to cost of construction, inventory, and supply and demand. MLA evaluates property values and trends for the next 12 months and predicts expectations of certain markets.

The marketplace as a whole is shifting. Some markets in the Lower Mainland perform beyond their expectations, while others are underperforming. There are a lot of media conversations that talk about a pullback. What Ryan finds interesting is when you look at the stats and monthly reports, you see strong demand for apartments, single-family, and townhouses, but the difference between now and a year ago is the sense of urgency has changed. In some markets, the urgency is more moderate now. This means we have more time to make better purchase decisions. There seems to be an overwhelming sense among Vancouverites that “the sky is falling”; but, that’s not true when you look at transaction reports. Though we’re not at the peaks we used to see, we’re moving in the right direction. Last fall was tough for many neighbourhoods, but we’ll see a strong spring market. The market we’re in right now is what Vancouver needs. Affordability is everywhere – all over the news. If we want this and we want a balanced market, then we should hope today’s market stays for the next decade.

On supply issues, and where we’ll find ourselves when the market ramps up again:

We have to be careful right now. We went from 26,000 housing starts a few years ago to about 19,000-21,000 starts this year. Ryan fears that if we don’t bring more homes to the market in the next 12-24 months, the market may run away from us again in 2021-2022. Demand may return—think of foot traffic through resale listings, traffic through sales centres. It’s all trending upward. The biggest challenge is overcoming the stress test: so many people want to buy but simply can’t complete the transaction they could have 12 months ago. It becomes a perspective change, maybe moving further east in order to go from a one-bedroom to a two-bedroom or a two-bedroom to a townhouse. If we don’t increase supply, appreciation levels in 2021-2022 may come back to what we saw in 2015-2016 and what we don’t want to see again. We’re seeing people leave for further east as a result of the City’s process – how long it’s taking to add value to land and get density out of the ground.

On some of the biggest challenges facing the development community:

In the past two years, it’s been City timelines. This is the most common conversation Ryan hears in the boardroom. So many developers are anxious to move their programs forward. They run up against approval processes that add value and make sense—public consultation is so important, and we need to ensure the right decisions are made for the right communities. But, how do we check those boxes while keeping up with housing needs that the city demands? Those who are left behind can’t keep up with rising purchase prices and need to consider alternative housing. In many cases, this means leaving the city.

Another challenge is the escalation of construction costs throughout all development forms over the last two years. For instance, about three years ago we could build wood-frame buildings on Cambie Street for about $180-220 per square foot. Today, it’s anywhere from $350-450 per square foot. Concrete buildings are coming in at around $500 per square foot. Ryan suspects we’ve reached the peak and are beginning to recede from rising costs, but to make these projects work you have to anticipate rising purchase prices – which have been increasing from 15-25% year-over-year. As prices level off and supply pulls back, construction costs should recede, too. The developers’ challenge is managing that tolerance for risk. We likely don’t have enough skilled construction labour, as the increased costs don’t come from the materials (e.g. wood or concrete) but from putting trades on job sites. Ryan has heard it’s been a huge challenge for developers.

On if the red tape will get better:

We need it to get better and it has to start in city hall. Every municipality is going through this problem. We are a city that loves to talk about affordability and rentals, yet we’re not willing to make the sacrifices in our own backyards. Public consultation and the ability to share is huge in BC, yet people want distance from these changes. Strong leadership at all government levels needs to understand the varying interest in given neighbourhoods and make recommendations to push progress forward. This may mean things that sometimes aren’t what everyone in a neighbourhood wants.

The market can’t sustain such high rents if you build enough supply to begin with.

Last November, our provincial government said they would build 114,000 affordable rental homes in the next 10 years. In the first three years, we’re expecting under 5,000 homes to be delivered. How are we making up the difference? The average project in Vancouver takes about 24-36 months to complete; some even exceed three or four years. Ryan believes with increased relaxations and support to developers to make the projects viable, we can do it. But the problem is well outside of a five-year cycle.

The same challenges exist in for-market housing. Look at all the major corridors in the city. Look at the District of North Vancouver and what happened in Edgemont: Council pushed forward a development all the way to fourth reading, and what seemed like a brilliant project to add affordable housing to the area didn’t go through. The formats were too large; the end price point was going to be too high. Yet, many City policies require certain allocations of two and three-bedroom homes. So, policy needs to be changed if we want to move forward with more affordable housing. It’s challenging to build housing that supports a wide variety of family types (young couples, families, downsizers, etc.) We need options for all family types throughout the city, not just centralized in one neighbourhood or another. Ryan believes in a free market, and ultimately the development partners and market should share that voice. It’s challenging and prescriptive when you build three-bedroom apartments in the downtown core that need to sell at $1,800-2,000 per square foot to justify a pro forma statement, just to create density.

On the “missing middle”:

As an organization, MLA fights hard for this and collects feedback from past purchasers on their homes and communities. In any one project, they have a mix of one, two, and three-bedroom homes ranging from 500 to 1,800 square feet. They get students, couples, young families, and downsizers buying into their projects. The “missing middle” in some neighbourhoods is the townhouse. So many projects in the Cambie corridor have to be priced at $1,300-1,500 per square foot to make financial sense because the cost to build townhomes in the Lower Mainland (not just the west side) is so high: land, construction, financing, community contributions, development application fees, and management and property transfer tax fees all add up. The pricing is just too high for the market of people who want to live in that type of community.

It would be hard to be a city official right now, too. Your platform is based off doing the right things for all residents. Developers are hoping to be a part of that solution, but their projects need to be viable. Some of this is timelines; some of it is sharing costs more efficiently. Leaders in the industry need to show that just because it’s popular doesn’t mean it’s the solution. They need to step back and evaluate what a neighbourhood truly needs in the next 25 years to grow and mature appropriately.

On what developers do when projects aren’t viable:

With rising land costs that account for 30-40% of the total purchase price, you need to take a step back and assess which marketplaces pose the least amount of risk and the fastest timelines to move from acquiring land to handing over the keys. In many municipalities, it could take 24-36 months of holding onto land before you have the necessary approvals to begin the sales process. For construction financing, the majority of programs have recently needed a 20-40% presale test threshold. Today, these numbers are over 70%. Even with all that risk, it’s tough to get projects started. We need more of a middle ground with lending partners and the City to not have the projected 19,000 housing starts in 2019 drop. Developers will likely be very careful, going forward. They will look at the balance of costs and what neighbourhoods need. The market changes over the past six months are a really important part of this process.

On his response to buyers’ challenges with the presale sales process and its transparency:

This resonates with Ryan and is close to many developers’ hearts. Over the past three or four years, regardless of the community a project is being launched within, demand has far exceeded supply. Where there may be 100-200 units in a building, there are 600-700 people waiting in line for them. So, it’s hard not to have some people who don’t feel let down in the process. MLA does its best to manage the interests of all parties involved, but it’s a very difficult thing to do well. They debrief after each launch or campaign and tweak them every time to improve. A lot of this is leveraging technology wherever possible to ensure that engagement is faster, and people understand the process and where they are in the queue.

On the interplay between the resale and presale markets:

Over the past five years, it seems there’s been fracturing between resale and presale values. Ryan recalls from when he worked in resale that those prices would be used to set pricing for presale—very rarely would you see a premium of presale over resale values (the difference would be maybe $20-50 per square foot). That gap has grown incredibly over the past two years—it can be $150-250 per square foot in some marketplaces, which is unique to Vancouver and unusual. Ryan feels there is a strong link between this gap and the timing of policies over the same time period: the foreign buyers’ tax implemented in 2016 changed many purchasers’ perspectives who would have otherwise invested in single-family homes. Instead, they bought into apartments to defer the tax, causing apartment demand to increase. The end result of that is a big price difference between resale and presale.

So, the attention diverted from single-family (which most people can’t afford anyways) to condos led to the explosive price appreciation we saw in 2017.

Ryan agrees with this for some marketplaces. Anytime you change the cost of a product by 15-20% overnight, you have to expect investors or residents will look at their transaction, evaluate, and maybe make another decision. The same goes for the stress test at 15-20%. This is all marketplaces—even cities like Coquitlam have gone through a considerable adjustment. You have a 20% reduction in affordability as a result of the stress test, a 20% increase in costs if you’re a foreign buyer, plus the additional taxes related to speculation, vacancy, school, etc. It makes sense that investors would look elsewhere.

On Vancouver’s market for the rest of 2019 and the next five years:

The next 12 months will be exciting for Vancouver. Ryan has heard over and over, in the boardroom and on the sales floor, that so many residents and purchasers over the past two to three years have wanted to get into the market with more time to find the right home. They want more incentives. This is that time—there is incredible value in many of the presale centres as well as resale locations in the Lower Mainland, whether apartments, townhomes, or single-family. A lot of what the city has asked for in the past three years is now in front of us. Prices are now levelling off: February statistics showed an improvement in sales from January. All of MLA’s sales centres were active with prospective buyers. Even just a few weeks into March, they’re noticing a change from the past four months’ pause. Many local agents they work with share the same enthusiasm, with lots of listings activity and increasing sales.

For prices in the longer-term, we need to take a step back and look globally. In BC, we likely have about 20,000-21,000 housing starts. We have close to 50,000 [people] who will immigrate interprovincially and internationally. When you take that, along with our low interest and unemployment rates and probable GDP growth, along with the relaxation of capital markets overseas, Ryan has to believe the next two to three years will be very prosperous for many homeowners and landowners in the marketplace.

On the areas of Metro Vancouver Ryan is most excited about:

Ryan is really excited about areas that have growing town centres or very active rapid transit nodes. Many neighbourhoods have so much potential: MLA has been more active in the Fraser Valley and areas like Langley and Abbotsford. Any area with strong developer brands going in and listening to the residents and shaping product for those communities have a lot of opportunity. This is new in the past three or four years, where you see new, boutique micro-projects happening off of transportation and what will eventually be built there is woven into the fabric of the neighbourhood. We need just as many new high rises near transit as we do infill projects and townhouse communities that provide greater affordability to a wider range of people.

On what Ryan would buy in Vancouver if money were no object:

Similar to what he just shared, Ryan would look near transit. Some markets, such as the west side, West Vancouver, and single-family on the North Shore, are down 10-25% in the past few months, so he’d look at those areas. As well, markets like Langley and Surrey that have largely been driven off affordability are worthwhile, as they’ll likely still be affordable five years from now.

The five-wire:

  1. Favorite neighbourhood in Vancouver: Commercial Drive
  2. Favourite restaurant or bar: Havana on Commercial (favorite sports bar is Score on Davie)
  3. Downtown penthouse or west-side mansion: Downtown penthouse, as long as his wife comes
  4. First place Ryan brings someone from out of town: The seawall
  5. Something he’s bought for under $500 in the past year that impacted his life: The most life-changing experience Ryan had in the past year was seeing his daughter learn how to ride a bike. Also, the Strava Pro running app membership has fantastic analytics and the community is amazing. You get nudged every day by someone to run or cycle.

To find out more about Ryan and MLA Canada, check out mlacanada.com or visit one of their presentation centres. Visit MLA Advisory Market Intel for a copy of MLA’s 2019 forecast.

This Post Has 3 Comments
  1. Thanks for this great interview with Ryan and for the opportunity to learn more about the pre-sale market. I really enjoyed listing to him!

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