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episode # 326

Why Real Estate Whales Believe in Vancouver with Zonda Urban’s Michael Ferreira & Jon Bennest

There’s a little known secret why wealthy insiders continue to play in our market and it’s the closest thing to a sure bet. Hot off Zonda Urban’s UDI Presentation, Michael Ferreira & Jon Bennest sit down with Matt & Adam to discuss the forces that drive our market and the structural realities that override market fluctuations. Will new housing supply shutdown in the near term? What do skyrocketing rents mean for the market? And what’s the greatest contributor to our future values? All these questions and more unpacked on this week’s episode.

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Episode Summary


 

What is Zonda Urban? Who are Michael Ferreira & Jon Bennest? 

Michael: Jon and I were former co-owners of Urban Analytics which was purchased by a firm in the US, Zonda, a year ago. We’ve now rebranded as Zonda Urban. They liked our urban platform here in Canada and saw an opportunity for us to grow. So Jon and I have stuck around and are helping the company grow. We’re heading to Toronto next week to launch our multi-family data project there. 

What’s the mood in the development community at the end of May 2022?

It’s tenuous in the development community. Our biggest concern is cost and the uncertainty around costs. Developers don’t know if they should purchase now or launch a project now because they don’t know what costs will be down the road. 

Some developers are pricing based on need rather than market, which is a risk. They’re pricing so that they can still have a margin after their contingency runs out. But who knows if the market will accept those numbers. 

One tactic developers are using is releasing product slowly. They’ll release five units at a time so they can match current pricing. In the other camp, some developers will get out as much product as possible while the market is active. They’re accelerating their launches. And then we have developers who are planning to not release at all. If the costs don’t work, they simmer down.

Does the current uncertainty around costs favour large developers? Are small and medium developers having a harder time?

Small to midsize developers definitely get more squeezed. Banks love larger developers who have the capital to get through roadblocks. So the smaller developers are getting squeezed by lenders and will be challenged. 

It will be challenging to make numbers work on land that was purchased in the last 12-18 months, especially if there’s an affordable rental component. 

How are developers dealing with supply chain issues? Do those also favour larger developers? 

Steel is one of the biggest supply chain issues – some say it’s gone up more than 50%. Some of the larger developers are able to purchase a big future supply of steel to keep costs down. But if you’re a smaller developer, you can’t do that. Companies with access to their own supply resources and space to store them are at an advantage.

If a rental project is underwater in Vancouver, what happens? 

In Vancouver, you have the benefit of time. If you have to sit on empty land for a few years, you have the safety net of land values going up over time. So people who can’t complete projects, they’ll just hold on until they can sell. 

Does new construction drag prices up or does resale pull the presale prices back down?

In some cases, presale will get pulled back down. In downtown Vancouver, the market has not recovered as well as it has in other submarkets. But in other areas, the presale market is detached from the resale market. 

In Surrey, it doesn’t matter how much a condo in a 15 year old building is going for. People are looking at presales and to the future that’s being built in Surrey. They’re looking at what prices will be 5-10 years from now.

How is the presale market in Vancouver?

We are seeing a little bit of softening but that’s compared to a record year in 2021. In 2021, there were as many presales sold as in 2018, 2019 and 2020 combined. So we did three year’s worth of sales in one year. 

Naturally, developers are wanting to push their projects into the market to capture this activity, but there is some fatigue. We’re not seeing projects sell out in a weekend. We’re finally starting to see some pushback from buyers based on pricing. We would define that as a healthier market. 

We’re seeing buyer psychology affecting the market. Interest rates have gone up, costs are going up, there are geopolitical issues and we’re starting to see negative movement on the resale side. As an investor, which most of these buyers are, you might be waiting to see what happens with so much negativity going on. You want to see if prices come down or at least flatten. 

I think the smart investor sees that with everything going on, they have more choice and more options to negotiate. Our market has proven that values go up over time. 

What were the key takeaways from your recent UDI presentation?

It was all about how exceptional 2021 was. There were over 21,000 new multi-family home sales across Metro Vancouver in 2021. The market did slow in 2019/2020 and developers were reluctant to bring new product to market. We’re now seeing the same thing where buyers sit back and see what happens. But this time, I don’t think it’ll slow down as severely or as long as it did in 2019/2020. 

How is the rental market in Vancouver? 

We have continuous demand for housing in Vancouver. If you ever see a lull in the ownership market, it’s just moved to the rental market. Since covid, we’ve seen rents go up dramatically. 

Right at the beginning of covid was when we saw some drops in the rental market. That would have been the best time to lock in a rate. But fast forward to today, and we have a 30-40% increase in rates in some areas with 0% vacancy. 

It’s not surprising that rents have gone up, given how little inventory we’ve added relative to our population growth. We should be flooding the market with rental units. The city should be approving as many rental units as possible. If you want affordable rentals, you need to be screaming at the city to approve more units. 

There are no investors or speculators in the rental market – the only thing impacting pricing is supply. The more you build, the more options there are and the more demand is softened. You have to flood the market and keep it supplied, because people keep coming to Vancouver. 

$6/square foot sounds ridiculous to us but there are people coming here who are willing to pay those prices. 

We’ve heard a lot about purpose-built rental in Seattle. What did they do right? How does Seattle compare to Vancouver’s rental market? 

Pre-covid, Seattle had built around 18,000 new rental units in a single year. That’s way more than Vancouver has ever built. The best we’ve done is 3,000 units of purpose built rental per year. That won’t cut it when 100,000 people are moving to BC each year. 

A lot of the rental policies the City of Vancouver has implemented are in good spirit, but they’re challenging to realize. For example, if the city is telling a developer they need to have a certain number of three-bedroom units, those numbers don’t always make sense. It devalues the land. There’s little recognition from the city on the impact of these policies and viability of these projects.   

Profit is not a dirty word – it’s a necessity for this industry to operate. Yes, some companies will hit a windfall on a project. But more often than not, it’s a tight margin that some of these developers are receiving. 

What is the relationship between the rental market and the ownership market? 

The rental market is a function of the job market and immigration. Those factors drive the rental market, whereas other factors, like interest rates, impact the ownership market. I don’t see rental demand going away in the next 3-5 years. When the rental market was subdued temporarily, it was a function of covid when international renters couldn’t show up and many students moved back home. 

The foreign buyer ban will put more pressure on the rental market. If you move here and can’t buy, you’ll rent. The interest rate increases could also put more pressure on the rental market. People on the fence may switch from the resale/presale market to the rental market so they can be in a better location. 

Is it just an issue of rental prices going up or also rental availability in Vancouver?

Despite how high rental prices are going, buildings are still getting leased up. So it’s not even a concern of how high prices are going, but the fact that people can’t find units. That’s causing a societal issue in Metro Vancouver. We’re seeing people leave the region to find housing elsewhere. 

We’re just shy of 40 million people in Canada but there’s a strong demand to live here. It doesn’t seem like we can build the housing to accommodate the newcomers quick enough. 

People who have lived in Vancouver are moving to the Island or the Interior and international people are moving to Vancouver. A similar thing is happening in Toronto with people moving to smaller cities for affordability and lifestyle. It’s a problem across Canada.

Where are the new building sales happening? 

Your urban cores are where the majority of building and sales are happening. Transit-oriented locations are booming. That’s where we see the growth and the demand. 

It seems like a pretty negative story in Vancouver. What are the silver linings to Vancouver’s real estate market? 

All of this talk about affordability is making its way to the younger generation. Younger people are fighting back and pushing for more housing supply in Vancouver. There’s less NIMBY-ism and more advocacy. People are feeling the squeeze within their own network. Their own friends and family are leaving the region. 

We have an opportunity this year with municipal elections coming up. The tide is starting to change. People have realized this is a serious issue and we need our leaders to address it. 

If you care about this issue, you need to talk to your network and elect councillors who also recognize this crisis. We need people who can think about the long term growth of Vancouver. How will we supply housing for the 450,000 people coming into Canada every year? 

What are you seeing in the Alberta real estate market?

The Alberta real estate market has rebounded for sure. Housing is so affordable there. The extended slump in the energy sector forced Alberta to diversify their economy. The movie industry, health sciences, tech and more are all booming. The job market is starting to boom and more people are moving to Alberta.

For the longest time, the Alberta condo market was dead. But it has started to rebound. The condo market is driven primarily by investors, as most end-users are targeting townhomes. 

Would you invest in real estate in Calgary or Edmonton?

Edmonton is more affordable than Calgary. So if you want a higher cash flow, you could look to Edmonton. But if you’re looking at long term appreciation, I’d look to Calgary. 

Calgary has a more concentrated downtown whereas Edmonton feels more spread out. The planning in Calgary seems to be better thought out. The Calgary market seems younger with higher incomes. 

In Portugal, they say that Porto is where you make the money and Lisbon is where you spend it. It’s similar in Alberta: Edmonton is where the money gets made and Calgary is where it gets spent. 

If you were an investor looking to purchase a property for $1 million, where would you buy in 2022? 

Michael: Despite everything, I’d still say the best move is to invest in real estate in Metro Vancouver in 2022. 

I think one of the sleeper submarkets is Coquitlam Centre. There’s been very little development there in the last few years but there’s good transit access, commuter access and development in the planning stages. People tend to forget about it, but I think Coquitlam Centre will see its day soon. 

Jon: I would say to invest in real estate in Port Moody in 2022. A lot of the Fraser Valley has come up quite a bit in the last few years. You now have to pay more to live in Fleetwood or Langley than you do in Port Moody – whereas it was the opposite four years ago. So I think there’s good value in Port Moody. 

I’ve had more success in Vancouver than any other location. So I say, stick with the winning formula! 

On the opportunity for buyers in Vancouver real estate in 2022: 

Right now, things look negative and there are a lot of challenges in the Vancouver real estate market. But if you’re a buyer, now is a good time to explore the opportunities that are out there. You have the luxury of time; there’s not a frenzy out there. So you can look at the product available and maybe have some leverage to negotiate. 

A down housing market doesn’t result in better prices, but it does give you the opportunity to buy. That’s where we’re at right now in Vancouver. 

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

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