IN THIS WEEK’S FACTS BY EMAIL:
- COMMERCIAL CONDOS – HERE IS HOW AND WHERE TO INVEST IN METRO VANCOUVER
- CHINESE BUYERS STILL TRAIL CANADA IN U.S. CRE MARKET
AND CHINESE INVESTORS MAY BAIL OUT OF VANCOUVER (??!)
- FREDDIE MAC DEBUTS U.S. MULTI-FAMILY INDEX
- PRISON REITS CAN PAY OFF IN U.S.
- VICTORIA DANGLES RENTAL INCENTIVES
- ALBERTA REALTORS FACE MEASURING RULES
- WHY YOU CAN’T READ AN APPRAISAL YOU PAID FOR
- PRESIDENT TRUMP: GET USED TO IT
Q: The US is going to raise interest rates as early as next week. What does that mean to us?
A: Not sure what “us” implies. I think the rates will not go up next week, but at the planned meeting in June. If so, the US Dollar will go higher, the Canadian dollar lower. It will not affect the U.S. ECONOMY, but definitely will affect the rest of the world who cannot carry the higher interest costs as easily.
Spotlight: Commercial Condos – Here Is How And Where To Invest
Commercial condos are a coming trend, particularly in Vancouver, but remain a nascent sector for investors. Owner-occupiers buy most strata commercial, but we believe there is an opportunity for investors as well.
It is still hard to cash flow commercial condos, but that is changing due to a different client makeup, especially in industrial. There is a strong demand in the expanding Asian community for commercial stratas as well.
Primarily used in the office and (Asian) retail sector, stratas are also increasing in industrial real estate in Metro Vancouver, a trend pushed by skyrocketing industrial land prices and new, fancier, industrial space aimed at small manufacturers and high-tech firms.
From 2014 to 2015, $280 million in office condos were sold in Metro Vancouver – a record high – and some office condos are selling for more than their residential comparative.
An example is Broadway Central, a Cambie Street strata office project by Orca West that sold out 127 units in 2014 at an average of $922 per square foot. At the same time, new residential condos right across the street were selling for $710 per square foot.
In Burnaby’s Metrotown, meanwhile, the price of strata office space, at around $535 per square foot, is not much behind the residential condos at $600 per square foot in the mixed-use Metroplace and Silver towers by Intracorp. Metrotown’s Gold House mixed-use tower by Rize Alliance has near similar prices for commercial and residential strata.
The typical size of Vancouver downtown office strata is 1,710 square feet and the average price being paid is $700 per square foot for Class A space, which leases for from $34 to $36 per square foot.
The downtown numbers for landlords really pencil out only on long-term appreciation. We crunched the numbers from Colliers on buying 3,000 square feet of downtown Class A space. At a purchase price of $2.1 million with 20% down and at 3% mortgage interest, the mortgage cost per square foot is $33 and the net annual rent is $35 per square foot, so the annual income is neutral ($99,584 in mortgage costs and $105,000 in net rental income).
However, based on a 10-year, 3% compounding capital appreciation, the owner could gain about $722,200 in equity.
A better bet could be to buy in the suburbs, which already account for 160 of the 190 office strata sales last year in the Metro region. Suburban office strata are less expensive and there is a much wider choice than downtown.
Look for areas close to hospitals, such as Royal Columbian in New Westminster. Lions Gate in North Vancouver or near the expanding Surrey Memorial medical complex, since doctors and others in medicine are among the largest buyers of strata offices.
Sale prices: The average price per square foot for strata industrial in Metro Vancouver now is $180-$200 per square foot. Average industrial lease rates are $9.30 per square foot on an annual basis, works out much lower than residential space that rents for around $2.25 per square on a monthly basis.
Major Point: As per our OUTLOOK issue in January … here are some strategies to consider:
Selling strata assignments. This would likely work best in industrial properties. Metro Vancouver has the lowest industrial rate in Canada, at 2.8%, and there is a push on for strata industrial. The strategy is to purchase an industrial space during a pre-sale and flip the assignment for a profit prior to completion. (New stratas, as we noted last week, are exempt from the recent BC regulations regarding assignment sales.) Markets to look in are those with lowest industrial vacancy rates and transit. Municipalities with industrial vacancy rates of 1.4% or less include Abbotsford, Coquitlam, New Westminster and North Vancouver.
Of these Coquitlam would be the first choice (transit and new strata), followed by New Westminster (transit and lower industrial prices). North Vancouver is the third choice, for, while it has no direct SkyTrain links, lease rates are higher and strata is more popular there than in most industrial markets.
Lease to tech and film companies: As an industrial landlord, target the film industry and tech firms as tenants. Film and TV production companies are now signing some of the biggest industrial leases in Metro Vancouver. Film companies also pay premium lease rates to secure short-term leases, but lately have been offering higher rents for longer terms to secure space as the vacancy rate falls. (Film types prefer Vancouver and North Vancouver but have recently been also leasing industrial in Surrey and Coquitlam.) High tech firms are paying up to $30 per square foot for industrial/office leases in Mount Pleasant, where some strata are available. A project to watch is in South Vancouver, near the Marine Station/Cambie SkyTrain, where the new PC Urban IntraUrban (under construction/pre-sale) is selling trendy strata industrial space for $299 to $314 per square foot.
Another is 9017 Shaughnessy Street close to the south Vancouver Canada Line Station. High-end, two-storey, corner-unit industrial space is offered at $340 per square foot in a Colliers listing.
Chinese Buyers Still Trail Canada In U.S. CRE Market
AND CHINESE INVESTORS MAY BAIL OUT OF VANCOUVER
It is irony upon irony. A new study by the Asia Society points out that Canada is still a bigger source of buyers of U.S. commercial real estate in the United States than China, but that Canada, particularly Vancouver, could help to drive more China-based buyers out of Canada and into the more welcoming arms of the United States. See full report.
Last year, Canadians purchased $24.4 billion worth of U.S. commercial real estate, representing 26% of foreign buyers. Singapore buyers were second, at $14.6 billion, while China was third at $8.5 billion, or a 9% share of foreign buyers of U.S. commercial property.
(China leads in U.S. residential buys, spending $28.6 billion in 2015, 26% of all foreign buys, compared to Canada at $11.2 billion, an 11% share.)
The Asia Society report details how Vancouver has become popular with Chinese investors, but warns that the love affair could be fading.
The Asia Society said about Vancouver:
“The current wave of Chinese investment into Vancouver, like the wave from Hong Kong 25 years before, has caused intense public outcry against what many Canadians believe is speculative real estate investment by wealthy Chinese that is contributing to bubble-like conditions of inflated home prices and pricing out many local residents.
“Moreover, there are some legal concerns about the origin of Chinese funds; protestations that nonresident, property-owning Chinese evade Canadian taxes; and allegations of empty investment homes exacerbating the housing crisis.
“Canada has made onerous changes to its immigrant investor program. Consequently, the backlash to increased levels of investment, whether warranted or not, has driven some Chinese investors to invest in the United States [instead of Canada]. The sheer size of the U.S. real estate market, coupled with the openness of the investment culture, makes the United States particularly attractive in a global context.”
Note: Founded in 1956 by John D. Rockefeller 3rd, Asia Society is a nonpartisan, nonprofit institution with headquarters in New York City.
Major Point: It is hypocritical, we believe, for Canadians to be bashing Chinese investment in our real estate while we are among the biggest buyers of real estate around the world. Say what you want about Chinese investment, but for many Canadians it has helped increase the value of property stupendously and created great opportunities for thousands of Canadians, whether they own property or not. Indeed, we would miss them if they decide to scratch Vancouver off the ‘most wanted’ list.
Freddie Mac Debuts U.S. Multi-family Index
Freddie Mac has just launched a U.S. multi-family index that measures how the relative value of investing in multifamily properties changes over time both nationally, as well as in certain markets.
The Multifamily Apartment Investment Market Index, or AIMI, combines of three measurements – rental income, multi-family property price growth and multi-family mortgage rates – to create a single number that represents the relative value of investing in the multifamily sector at that point in time. Specifically, the rental income is estimated based on Axiometrics rent and vacancy data. Property price growth is estimated based on Real Capital Analytics Commercial Property Price Index and National Council of Real Estate Investment Fiduciaries Property Index Returns. Multi-family mortgage rates are compiled from the American Council of Life Insurers.
The 13 metro areas AIMI tracks are Atlanta, Austin, Chicago, Dallas, Houston, Los Angeles, New York, Orlando, Philadelphia, Phoenix, San Francisco, Seattle and Washington DC.
Major Point: To give one example, the current value for Phoenix is 120.66, down 3% from the fourth quarter 2015 and down 7.2% from the first quarter of 2015. Summary from Freddie Mac: The cost of investing in Phoenix rentals is more expensive, “indicating it may be more difficult to find attractive investment opportunities.”
Atlanta is 111; it was 131 in the first quarter of 2011. Ergo, the relative value of investing in Atlanta’s multifamily properties is less favorable now than it was in the first quarter of 2011.
The National index debuts at 106.9. Thus means that apartment prices are rising faster than revenues or net operating incomes, the index found.
Prison REITs Can Pay Off In U.S.
The U.S. has a lot of privately-owned and run prison facilities and real estate investment trusts (REITS) are active in the sector. There is some concern in the industry that the upcoming U.S. federal election could have some effect. Basically, the feeling is that if the Republicans win, there will be an increase in prison populations and if the Democrats win there will be a decrease in prison population due to a widening of initiatives such as the passed California Proposition 47, which reduces drug possession felonies to misdemeanors (which means no prison time and those in prison can petition to get out). In California, the state prison population has dropped 3.2% to 127,365 since Prop. 47 passed in 2014.
We got our hands on Canaccord bulletin on U.S. Prison REITS and those of you investing in this niche can apparently rest easy. Notes Canaaccord:
“The private prison sector offers a unique blend of very defensive fundamentals with significant and accretive external growth potential. Investors have been growing increasingly worried about the upcoming election, as well as the impact of immigration and sentencing reform on operating performance. However, it is our view that these are unwarranted concerns from an operating perspective.”
Major Point: We are not making any stock recommendations based on this … but … Canaccord issues a “buy” call for GEO REIT, one of the largest private prison plays, and a “hold call” on CXW-REIT. GEO is paying a higher dividend, at 8%, and Canaccord also sees its NYSE-listed shares rising from $32.60 to $37.00 this year.
Victoria Dangles Rental Incentives
The Victoria capital region and the province of BC are investing up to $60 million in incentives for developers to build rental housing.
Victoria Mayor Lisa Helps said a call for project proposals will go out in the fall based on the most pressing needs in the region. Top priorities likely will include affordable housing for youth at risk and the chronically homeless who suffer from mental health and addictions issues.
Based on the experience in housing “the most needy” in Vancouver, it will cost about $425,000 per unit to build the housing, which is about twice the price of building a new Victoria condo.
Right now, though, a lot of homeless people are camping on the BC Legislature grounds in Victoria, and in city parks, so the political pressure is on to do something.
Alberta Realtors Face Measuring Rules
The Real Estate Council of Alberta has announced new guidelines for home measurement by real estate agents. The council approved a new “residential measurement standard” that real estate agents will be required to follow when listing the size of a home. This follows consumer complaints that homes they purchased were smaller than they were told, in one case 20% smaller.
Misleading condo measurements led to more than 1,000 complaints in Edmonton alone over the past two years.
The Real Estate Council of Alberta said it has been working on the new standards since 2013. It is the first regulatory body in Canada to introduce such a requirement.
Here is how Alberta realtors (and perhaps all of us) are told to measure:
- For single detached properties, measure the outside surface of the exterior walls at floor level.
- For properties with common walls, such as half-duplexes, townhouses, and apartments, measure the interior perimeter walls (paint-to-paint) at floor level. An additional area representation may be made assuming exterior measurements.
- Include floor levels that are entirely above grade and exclude floor levels if any portion is below grade. Below grade levels may be measured, but the area must not be included in the RMS (residential measurement standard) area.
- Include all additions to the main structure and conversions of above grade areas within the structure if they are weatherproof and suitable for year-round use.
- The property must have a minimum floor-to-ceiling height of 2.13 metres (7 feet). If the ceiling is sloped, the area with a floor-to-ceiling height of at least 1.52 metres (5 feet) is included in the RMS area, provided there is a ceiling height of 2.13 metres (7 feet) somewhere in the room.
- Include extensions from the main structure that have a minimum floor-to-ceiling height of 1.5 metres (5 feet), such as cantilevers, bay and bow windows, and dormers.
- Exclude open areas that have no floor, such as vaulted areas.
Check Ceiling Height In Mixed-use Condos
If you’re buying a condo in a low-rise, mixed-use building in Metro Vancouver, check that the ceiling eight is really the nine-feet the developer (or realtor) said it is.
This is because the ground floor retail or restaurant tenants will demand ceiling heights higher than 12 feet, which can squeeze the condos above in four or five-storey buildings.
“Squeezing [in] three levels of residential do not leave enough ceiling height for the retail level,” explained Derick Fluker, a principal with Form Retail Advisors.
There are a number of factors that architects and buyers need to consider in mixed-use projects. This includes loading access for suppliers delivering products as well as ample parking for customers. Plumbing is also a big concern, as is lot size and exposure for retailers. Additional problems often arise for condo residents, including access, trash, smells, and noise, which must be addressed in the overall design.
Why You Can’t Read An Appraisal You Paid For
A mortgage broker’s job comes with its share of uncomfortable moments. Telling a client that you can’t provide them with the appraisal they just paid for is one of them.
It’s an issue that comes up time and again, but one that’s frequently misunderstood. Appraisers and brokers cannot simply hand over appraisals to clients, despite the client being charged for them. Here’s why.
“It’s actually a fairly simple answer to be honest with you,” said Keith Lancastle, CEO of the Appraisal Institute of Canada (AIC), whose 5,000 members make up 80 percent of certified appraisers in Canada. “It’s one of those things where our members’ obligation is first and foremost to his or her client,” he said, and the “client” is almost always the lender, whose guidelines the appraisal is prepared under.
“If the [lender] wants to share a copy of the appraisal with the prospective homeowner that’s fine, but the appraiser cannot provide it because the [borrower] is not their client.”
Lancastle says it’s an issue that triggers ongoing inquiries to the AIC. Prospective homeowners are routinely trying to get their hands on a report, he says. But the association’s response is generally not what people want to hear: “It’s up to the member’s client if they wish to share the report with someone else.”
Aside from the fact that the lender is the appraiser’s client and therefore retains ownership of the report, Lancastle says there’s another reason appraisal reports aren’t freely distributed. “More often than not, lenders are reticent to give prospective homeowners a copy of an appraisal report because they could … [shop] it around” with other lenders.
Major Point: We disagree. It is a silly practice. The buyer pays for the appraisal. He should know what it is. There is absolutely no reason for the appraisal that the buyer pays for not to be shared with him. If the bank wants to have one that does not want to share, it should pay for it. The only reason that neither the appraiser not the bank wants to give a copy to the buyer, is that if the buyer disagrees with the appraisal they have to defend it.
President Trump. Get Used To It
I predicted that Trump would be president at the World Outlook conference in January. Of course it is self-serving since I have a chapter in Mr. Trump’s Real Estate Book: “The best real estate advice I ever received”.
I want to be able to say: “The Pres. and I – and our book” or “The President of the US said he got the best advice from me….”. I just love that possibility.
But I am not alone:
Derek H. Burney was Canada’s ambassador to the United States from 1989-1993. Fen Osler Hampson is a director of Global Security at the Centre for International Governance Innovation and Chancellor’s Professor at Carleton University.
Here is their take on why Donald Trump will be the next U.S. president.
“What many fail to recognize is that Donald Trump is rewriting the rules of American politics. He is riding a tidal wave of profound dissatisfaction among ordinary American voters (and not just aging, white, middle-aged males, for that matter) that is driven by a volatile mix of xenophobic nationalism, falling wages and living standards for the middle and lower classes, a yawning and ever-widening gap between rich and poor, and an acute sense that America under President Barack Obama has taken a backseat role in world affairs, has mismanaged major issues and is no longer the leading great power it once was.
“Donald Trump understands the angry mood of America better than his Washington-based Republicans, which is why he is the last man standing.”
A just released Reuters online poll puts the race between Ms. Clinton and Mr. Trump as neck and neck. That is just one poll and a lot can happen between now and November. But Canadians and their government should nevertheless ready themselves for the possibility of a Trump presidency.
1. Nanaimo: Two-year-old home, 5 bed/3 bath including 2-bedroom suite rents for $1000 a month. Price: $499,000;
2. Nanaimo: 3.96-acre development property in the city. Up to 20 lots and already zoned single family, flat and easy to build. Price $1,495,000;
3. Nanaimo: Full Duplex rents for approximately $3100 a month for both sides. Recently Renovated, Price: $449,900.
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