By Mark Hannah
Entering the housing market in Vancouver is, in a word, expensive. Not only do potential homebuyers face high costs of properties, they are also increasingly met with the twin barriers of high interest rates and challenging mortgage stress test levels. As a result, the Vancouver market is largely inaccessible, encouraging many home seekers to delay their ownership aspirations and pivot to rentals.
Vancouver’s rental market is extremely competitive, due to a combination of high demand and low supply that is forcing the vacancy rate to remain at alarmingly low levels. According to Canada Mortgage and Housing Corp. (CMHC), Vancouver has one of the lowest historical vacancy rates in Canada – sitting below two per cent since the early 1990s.
As a result of Vancouver’s traditionally low vacancy rate and exponential population growth, rent prices have skyrocketed. Historical data from CMHC shows that average rental rates in the Greater Vancouver Area (GVA) have increased 42 per cent in the last 10 years. In the last three years alone, prices have increased 20 per cent, making rent almost as inaccessible as homeownership. For example, a one-bedroom apartment in downtown Vancouver costs approximately $1,800 to $2,200 per month and a two-bedroom is roughly $2,500 to $3,000 per month.
On paper, the clear solution to alleviate the vacancy problem is to build new rental developments. However, the high cost of land in British Columbia – particularly the GVA and Victoria – in addition to misguided government intervention discourages these new builds. The elevated costs make it difficult for rental apartments to be profitable for developers, with build-to-sell developments becoming the more enticing option.
Government support is necessary
The City of Vancouver implemented several incentive programs in the past to help alleviate some of the financial stress of living in the city. Despite good intentions, the incentives were not properly aligned with developers and thus produced limited positive outcome.
One example of an existing program is the Rental 100 Policy, which encourages projects to secure 100 per cent of the residential rental housing units for 60 years or life of the building by offering incentives such as waiving development cost levies, reducing parking requirements and expediting rezoning processes. Rezoning can be a particularly difficult barrier to development considering that the journey from application submission to public hearing takes approximately 20 months in Vancouver, when compared to a national average of six to 10 months.
Over the last few years, incentives from the City of Vancouver produced roughly 8,700 units. While the scope of government programs has been limited, collaborating more effectively with developers to motivate builds is essential. The financial margin on these projects appeared to be very slim, underscoring the need for additional, more impactful incentives to bolster supply. By making these permit application processes more efficient, the government can help make the building of more affordable apartment rental housing in Vancouver more attractive to developers.
Clearly, the balance of supply and demand is grossly weighted toward demand. The combination of high land prices and a lack of government incentives still does not make build-to-rent projects financially attractive enough to solve Vancouver’s rental woes.
Despite the challenges, the outlook for future employment growth in the GVA and further afield is extremely positive. Apartment rentals should be considered a relatively safe asset class, and opportunities remain within the rental market for investors and developers.
Repurposing existing properties is a way to help satisfy the demand for rental housing in areas with almost no vacancy, such as transitioning a hotel into a residential property.
In Victoria’s oldest neighbourhood, James Bay, Nicola Wealth Real Estate changed a 196-room hotel into a 220-unit rental apartment building, which provides new units in an area with a near-zero per cent vacancy rate. These kinds of transitions can add much-needed inventory to markets through already-established buildings.
A combination of high living costs and low vacancy rates is forcing residents to look beyond the City of Vancouver and consider living in areas like Burnaby, Langley and Coquitlam that are experiencing a rise in real estate market activity due to the development of appealing amenities. For investors, these areas can be attractive as worthwhile regions for new build-to-rent developments. Nicola Wealth Real Estate has invested in various projects in both Abbotsford and Sidney to provide nearly 300 new units for renters.
Until all levels of governments can align with developers to allow for appropriate incentives that balance the supply/demand scales, Vancouver’s rental market will continue to strain. For the creative and dedicated investor, however, opportunities remain to meet much-needed vacancy needs in creative, innovative ways.