Rising construction costs, elevated interest rates and a tangle of government-applied costs and restrictions are making it tougher to redevelop Greater Vancouver properties to higher and better uses.
With redevelopment profits lagging, more sellers are opting to sit on the sidelines to await higher offers and better market conditions, local property brokers say.
However, despite the challenges, there are solutions available that would help to repair the market and maintain the much-needed pipeline of new homes and commercial business space.
Moreover, many attractive, urban sites ripe for higher-density redevelopment are available on the market — if potential developers can find ways to make the numbers make sense.
Vancouver redevelopment market facing several headwinds
There are several headwinds facing the redevelopment market in Metro Vancouver, according to Mark Goodman, a principal with Goodman Commercial, a property marketing and brokerage firm in Vancouver.
"Namely (the challenges are) interest rates and rising construction costs," Goodman said.
"There's no doubt that it has had an effect on the market."
While demand for homes will continue to intensify due to record-high immigration into Canada and the Lower Mainland, there are obstacles preventing developers from unleashing the necessary torrent of new housing starts by redeveloping land or properties to higher and best use, Goodman and others say.
Overzealous tenancy protections, taxation and permitting delays are adding to the pile of challenges to convert lower-density sites into new homes and businesses.
Developers who acquired their sites several years ago and who are well-capitalized will be able to weather these storms, Goodman said, but those who are just now trying to arrange financing and get projects through the proposal stage will struggle.
"I would categorize it perhaps as a bit of a choppy market at times," Goodman said. "The sentiment has changed, but we are getting a lot of interest in our properties . . .
"We are getting offers, but the pricing has come off from a year ago and before we saw this unprecedented increase in interest rates."
Buyers and developers need more certainty for big decisions
Ronan Pigott, an executive vice-president with Avison Young in Vancouver, paints a similar picture.
The cost of debt and access to capital are major challenges, but developers are also cautious due to municipal permitting delays, Pigott said. "Because of that caution, we're seeing that transaction volume is down."
The current conditions have buyers taking more time to make a decision on redevelopment sites while deepening their commitments to due diligence. There needs to be more certainty for developers as they plan their timelines and pro formas.
Additionally, developers are facing development cost levies (DCL) and community amenity contribution (CAC) costs, while financing and construction costs continue to rise, making development viability a challenge, Pigott said.
For example, a 110-unit mixed-use residential and commercial building would have municipal charges in the $4-million range, Pigott said.
"And that's for a rental building that's without a CAC," he said. "It's a significant cost to the developer."
Pigott said he is starting to see examples of price regulation. But he noted up-zoned land has seen stickier pricing: "A lot of vendors are in a situation where they can wait it out for a more favourable climate."
Market has redevelopment sites available
Here is a sampling of sites in Metro Vancouver marked for higher-density redevelopments, selected by RENX, that are listed for sale by Goodman and Avison Young. The list is not intended to be comprehensive, but rather to illustrate the types of properties which are available:
- 20596 Dewdney Trunk Rd.: A 2.62-acre development site with RS-1 zoning in Maple Ridge. The land, listed for $13.9 million, includes one single-family home. The property is designated as commercial in the OCP and identified as flexible employment in the draft Lougheed Transit Corridor Area Plan. Options could include building a commercial project in an established high-traffic corridor, or potentially, a mixed-use residential building.
- A building permit-ready tower site in Metrotown: Listed for $19.8 million, at 6677 Silver Ave. in Burnaby, the mixed-use development site is zoned CD on a 0.46-acre site permitted for a 24-storey tower with 91 market strata units, 29 secured rental units, and 11,924 square feet of commercial space above five levels of underground parking.
- 325 - 333 West 7th Ave. in Vancouver: An 18,186-square-foot redevelopment site with the potential to build up to 109,116 square feet within I-1 zoning. The site has nearly 149 feet of combined frontage along West 7th Avenue, in Mount Pleasant.
- 200 Block in Mount Pleasant: A 33,980-square-foot redevelopment site with the potential to build up to 203,880 square feet within I-1 zoning, with roughly 280 feet frontage along West 7th Avenue, also in Mount Pleasant.
Redevelopment system is broken, but there are fixes
The redevelopment system in Greater Vancouver is broken and the issues are preventing much-needed housing from getting built and most of the blame falls at the feet of all three levels of government, Tony Quattrin, vice-chairman for CBRE’s national investment team, said.
From March 2022 to July 2023, the Bank of Canada’s key lending rate climbed from 0.5 per cent to five per cent to curtail runaway inflation caused partly by government stimulus during the pandemic.
This affects new financing but also impacts developers’ carrying costs and the cost of financing during construction, Quattrin said.
Meanwhile, hard construction costs in Vancouver have touched $485 per buildable square foot, according to numbers provided by his firm.
"When we run these pro forma(s) in Vancouver, we show a 15 per cent residual profit to developers, which I can tell you would get loud, hysterical laughter if I presented that pro forma in New York City, Seattle (or) London, England," Quattrin said.
"Developers typically want 25 per cent or more to compensate for the massive risk in the market.”
That reality has reduced the purchasing appetite of local developers, slicing offers substantially and pushing many sellers to the sidelines. "The numbers just don't work,” he said.
How to solve the problems
There are a few solutions, Quattrin added.
One idea would be to eliminate capital gains taxes for sellers of certain redevelopment properties sold within specific zones — say Vancouver’s Broadway Corridor, within a certain timeframe, or “opportunity window.”
That would encourage owners to make deals and sell properties into the development pipeline instead of riding out challenging markets, Quattrin said.
Second, policymakers need to find a way to inject equity into the development market to battle rising borrowing costs and a shortage of third-party investment.
Quattrin said the market could benefit from the return of something like the federal Multi-Unit Residential Building program (MURB), which during the 1970s incentivized investors to invest as limited partners in housing projects by allowing them tax write-downs based on the costs related to the investment and project.
"Money literally flew into the multi-unit residential building program and equity was freed up and thousands of (homes) got built across Canada,” Quattrin said.
Tenant residency laws should also be updated to allow landlords more ability to negotiate with tenants to arrange exits fairly and efficiently, Quattrin said.
“Those are simple solutions. They're easy. They're foolproof, but maybe impossible to enact.”