First National Financial LP

B.C.’s multifamily residential real estate market is changing. Are you ready?

  • Michael Yeung, Regional Vice President, B.C. Region, Commercial Financing

As we prepare to close the books on 2020, I would like to take this opportunity to sincerely thank you for your business and update you on emerging trends and developments in the B.C. multifamily property market.

Some of the changes noted below are COVID-19 related and some took shape well before the pandemic struck. All are worth noting as you prepare for the future.

Local preferences now come first

Prior to the pandemic, foreign property buyers were dissuaded from investing in B.C. because of new taxes. Since the borders were closed in March, a diminished international student population has taken away another driver of housing demand. As a result, and for the first time in years, the Lower Mainland is moving to a more balanced state of supply – which is increasing – and demand. Local buyers and tenants are the beneficiaries. In the near term, residential developers and apartment landlords must consider the lifestyle and affordability needs of local residents to be successful.

The trend is to bigger not smaller units

In past, 1-bedroom condos and rentals were favoured because they offered better economics for developers and an economical entry point for buyers/tenants. Buyers/tenants now want larger suites to accommodate work-from-home. This has manifested itself in higher demand for 2- and 3-bedroom suites on some of our most recent financings and lower uptake for 1-bedroom units. This trend has implications on building design/configuration.

Migratory patterns are reversing

For decades, downtown residency was in high demand as buyers and renters fought over scarce residential real estate. More recently, this trend has reversed as residents, enabled by telework, move outward to the suburbs in search of larger accommodation. On higher demand, suburban apartment occupancy and rental rates are holding their own, and in some cases, improving. Conversely, occupancy and rental rates for downtown properties are under pressure as are downtown land values.

A pivot to apartment construction is underway

In past, many developers chose to build market condos over rental apartments because the internal rate of return was higher. Now, because of uncertainty in market absorption, more developers are pivoting to rental for its attractive income-producing potential and superior ability to finance.

The green movement is coming

The electric vehicle population is expected to increase. Future development will need to account for the installation of EV charging stations and the green movement overall. Separately, the rise in online shopping is bringing focus to apartment/condo parcel-receiving capabilities. On the transportation file generally, Vancouver City Council recently voted to introduce congestion charge tolls for those driving downtown after 2025. When this happens, downtown living/working – with a car – will become that much more expensive.

Construction costs continue to rise

Shortages of lumber resulting from closure of mills in B.C. along with a pickup in U.S. construction activity is making it more expensive to build. In response, some developers are pre-buying materials to avoid disruption in the global supply chain and future inflation.

Future rent increases are tied to inflation

The new B.C. government has extended a rental-rate freeze until July 10, 2021. Over the past decade, allowable annual increases ranged from 2.2% to 4.3%. Government policy is to set the maximum allowable rent increase based on B.C.’s consumer price index over each 12-month period ending in July. As long as inflation remains low, it would appear that rental rate increases will as well.

Optimism is increasing despite second wave challenges

Interest rates are at all-time lows while stock markets have flirted with all-time highs on news of COVID-19 vaccine developments.  Any change in the yield curve resulting from greater optimism will have an impact on real estate projects. In the future, it may pay to investigate First National’s Rate Lock options.

First National lending capabilities are now bigger  

Recent strength in demand for financing is expected to continue in 2021. To address record demand, First National recently added analytical resources to our team in B.C.. Just this month, we also expanded our lending portfolio by adding a new conventional term product. It is ideal for all commercial property types, not just multifamily. In combination with our insured term, insured construction, bridge and conventional construction loans, First National is now fully empowered to address every market need.

We believe that the trends and events of the past few years have ushered in a new way of thinking about property development here in B.C. and across Canada. As a national commercial lender, we are well positioned to provide indispensable market intelligence as one part of our service to you.

In closing, I want you to know that no matter what happens in the economy and in the market, First National will be here for you in 2021. With a strong balance sheet, diverse funding sources and more human resources than ever, we are ready and able to support your growth and success.

On behalf of my colleagues at First National, I wish you a healthy, happy and prosperous New Year.