First National Financial LP

Canadian Pacific Perspectives with First National’s Michael Yeung

  • First National Financial LP

COVID-19 has forced many changes on the property industry in British Columbia, but it has not altered the fundamentals that are driving long-term demand for land and certain types of assets. In fact, in the case of purpose-built rentals, the economic by-product of the pandemic may accelerate interest in this asset class. To learn more, we interviewed Michael Yeung, First National’s Regional Vice President, Commercial Lending in advance of the Vancouver Real Estate Forum that was scheduled for April 2020. Although that Forum was postponed, Michael’s insights on the market remain just as relevant today.

Michael, what is the most attractive asset class in B.C and what’s driving demand?

Let me start with some context. Vancouver rivals Toronto as the most sought-after commercial office market in Canada. Apple, Microsoft, Shopify, Mastercard and Amazon have all chosen Vancouver because of our highly skilled workforce and our proximity to US west coast technology centres such as San Francisco and Seattle. On our own, we have some great universities and a very strong labour pool that’s attractive to these tech giants. But we also have very friendly immigration policies. Compared to many places in the world, it’s very easy to obtain a work Visa.

What are the implications?

It means that these industry leaders aren’t just recruiting locally, they are going to Europe and Asia to attract the top talent to their companies. Just to put some data around hiring plans, Shopify alone announced they were hiring a thousand people in Vancouver. Mastercard and the Canadian government recently partnered on a plan to open a $550 million cybersecurity centre in Vancouver that’s projected to maintain 380 new jobs. Amazon plans to increase its local workforce by 3,000 and Microsoft is opening a brand-new building. And when these companies grow locally, it’s likely that their suppliers will also grow in Vancouver. In practical terms, these companies have created demand for office space that’s being fulfilled by the construction of about four million square feet of new office product, most of it pre-leased. But employment growth is also creating substantial demand for purpose-built rental apartments and that is area that’s very exciting to us at First National because we are Canada’s leading apartment lender.

Why does office space demand lead to demand for purpose-built apartments?

When you think about it, these companies are hiring well-paid engineers, developers, website designers and product managers. These are young professionals who, for lifestyle and mobility reasons, want, need and can afford high-end rental accommodation. More than 50% of pre-leasing activity is now driven by people in the IT sector. That’s a big change from the past when Vancouver market activity was influenced by the natural resource sector.

How does the current level of demand for purpose-built rental compare to the past?

All of this employment is driving demand to a whole new level. Again in context, home ownership in Vancouver is out of reach for many people. Apartments, on the other hand, are becoming a much more accepted way to live and in fact offer a number of advantages over home ownership. However, what we find is that demand is most acute for higher-end product. And there is little of that product at the moment, which is reflected in an apartment vacancy rate of about 1% in Vancouver. Most purpose-built rental stock in Vancouver is approaching 40 or 50 years of age and is what I would call cookie-cutter in design and layout. That’s not what high-tech professionals want. They want custom-designed properties with a real sense of community. They want amenities, they want co-working space, they want wi-fi, a place to store their bikes, swimming pools and so forth. Old stock doesn’t work for them; they want new apartments that are built for their lifestyles.

Are you seeing this type of product come to market?

At long last, after four decades of under-supply, the answer is yes. We are starting to see significant new purpose-built rentals coming to market and I’m proud to say First National is playing a major role in financing these construction projects and providing owners with term financing when they’re built. We’re doing this not only in Vancouver, but across the Lower Mainland, the Interior and Vancouver Island because all of these regions need new apartments.  At the same time as new units are being added to inventory, we’re also seeing older apartment buildings, well beyond their economic best before dates, being demolished which is keeping pressure on vacancy rates, opening the door to higher rents and leading to even more demand for new stock that will take years to build out. As an owner, developer or lender like First National, it’s a great time to be in the apartment market with a lot of tailwinds.  We’re also seeing support from different levels of government.

In what form?

Municipal governments and at the provincial and federal levels are supporting the creation of rental stock, affordable rental and community housing. That’s good for tenants and for apartment developers. There’s also a rotation underway from condo construction and into apartment construction because of new taxes placed on condos and changes in zoning. For example, in Vancouver the city has decided to limit the opportunity to build market condos along the route of the Broadway subway corridor by giving preferential treatment to apartments, affordable housing and community care facilities. These policies and moves by government to funnel cash raised from the foreign buyers’ tax and speculators’ tax into affordable housing formation are very supportive of apartment construction.

What are these policies doing to land values?

Any time there is a shift in priority by government favouring one type of land use over another means a potential shift in land values. If you are buying land or thinking about developing, it’s best to first understand the community’s mandate and how it will affect the subject property and its underlying value. If the eventual approved use means the land should be valued at $175 a square foot, don’t pay $200. There’s a well-known project in Burnaby caught up in this very issue that is the subject of a significant lawsuit. The land was originally zoned for one type of housing and then the municipality changed the requirement and asked for 20% of the units to be affordable. This fundamentally altered the economics. And it’s not just this one project; this is happening elsewhere in the Lower Mainland. The developer bought the property thinking they could do A and then government said no you have to do B. The bottom line is government policy has a significant impact on the viability of any development project, and when governments change, policy often changes with it. So it pays to monitor this closely. 

How do you think COVID-19 and its aftermath will affect interest in purpose-built rentals?

In my view, it will absolutely accelerate the trend away from condos in favour of apartments. At present, many condo developers are having difficulty selling units, which is partly a reflection of the economy and partly because normal condo sales centre activity has been disrupted. Rather than sitting on the land with now limited prospects for condo unit sales and no cash flow, developers are thinking about switching to purpose-built rental. While there is an impact on land value from making this switch, the upside is easier lease up and with it, strong cash flows.

Are you helping developers to make this switch?

First National is now being called on regularly to model the economics involved in creating what I would call a positive cash flow building and developing financing strategies that may include bridge financing, insured construction loans and term loans for purpose-built apartments. We have a number of great options available in our toolkit.

The current economic environment is pretty fluid. Can you address how the pandemic is affecting construction costs, construction supply chains as well as the success local landlords are having in collecting rents?

Average April rent collection numbers were positive, but I simply don’t have enough current data to make definitive statements about these topics. By late May, we will have additional insights from the field and I’d be happy to discuss all of these items at that point. What I would say to complete this conversation is First National remains bullish on the purpose-built apartment sector in B.C., continues to have meaningful liquidity tools at the ready for our customers and is open to consulting on all property purchasing and refinancing strategies.


Michael Yeung is recognized for his expertise in real estate financing including high-value commercial construction lending. With an undergraduate degree in Finance & Economics from SFU, an MBA from Dalhousie, and professional designations (Personal Financial Planner and Specialist, Trust Institute), Michael is passionate about sharing his expertise. If you would like to speak to Michael or any member of our B.C. commercial team, you can do so by calling 778.887.8433 or emailing Michael at