Senakw, a First Nations-led development to be built on part of the traditional land of the Squamish Nation in Kitsilano, across the False Creek inlet west of downtown Vancouver. Builders expect the project will pull the market down even further as 1,400 apartments in the first three of 11 planned towers start leasing December this year, continuing through 2026.Tandem Studios/Supplied
When Vancouver developers ran into a slowdown in presales of condo apartments a few years ago, many of them switched over to rentals.
It worked, as rents that people seemed prepared to pay climbed steadily upward while the large pools of investor-buyers who had financed the early stages of many condo projects shrank.
Now, a number of builders are saying that even rental projects are uncertain, as demand has softened noticeably in the past six months.
That’s the result of a host of factors: big increases in supply in B.C., existing apartments being freed up because of provincial restrictions on vacation rentals, the federal cap on international students and people moving out of Metro Vancouver at high rates because of the housing costs.
So, at the moment, asking rents are down noticeably. Prospective renters are being enticed by some owners with promises of 13 or 14 months of rental for only 12 months of payments. Many ads stress that pets are welcome.
On top of everything else, builders expect that one of Vancouver’s biggest single rental projects of the decade – the massive Squamish-developed Senakw towers in the Vancouver west-side neighbourhood of Kitsilano – will pull the market down even further as 1,400 apartments in the first three of 11 planned towers start leasing December this year, continuing through 2026.
“It’s clear to me in the market we’re in that rents are dropping 10 per cent,” said Tony Hepworth, whose company, Pennyfarthing Homes, started building rental projects in Vancouver almost 50 years ago.
He, and others, predict that Senakw’s development team will do whatever they can to fill the towers as quickly as possible.
“The question is, how do they absorb it? They will need 50, 60 a month in move-ins. They will try to drive that by having very attractive rents.”
At Cressey Development, another rental developer with a half-century of experience, the apprehension is the same.
“When we model our lease-up program, you can only grab so much market share,” said Hani Lammam, executive vice-president at the company. “These are top-of-market rents. You can’t grab more than 25-30 units a month. How do you lease up and stabilize a 1,400-unit project?”
PC Urban’s development director Andrew Peterson echoes that: “Rents are coming down. Developers were pro-formatting close to $7 a square foot rentable. Now, it’s not even $6. That’s a material hit.” It means going from asking $3,500 a month for a small, 500-square-foot apartment to potentially $3,000 a month or less.
And Ryan Berlin, the vice-president of intelligence at the marketing firm Rennie, said he’s also not optimistic about the rental market these days.
“I’m fairly bearish on rental over the next few years because of the number of new homes under construction. The rental market is softening. Incentives are rife throughout the sector. I do think, from a monthly rent perspective, we’re near or at a ceiling for the foreseeable future,” he said. And incentives are not free. “When you rent out 13 months for 12 months’ rent, that’s shaving 6 per cent off the pro forma.”
Ironically, the anxiety permeating Vancouver’s rental-building sector comes after years of successful efforts by both local city councils in B.C. and the federal government to encourage more purpose-built rental, as a way to provide a form of housing that can be more accessible to people than buying an apartment or house.
Vancouver started offering incentives to developers to build rentals starting with the world financial crisis in 2008 and has continued to develop and offer new incentive programs.
The Justin Trudeau Liberal government promised to tackle housing in a big way when elected in 2015. One of its biggest programs was one that offered billions of dollars’ worth of low-cost financing to developers building rental. B.C. developers in particular jumped on that program.
The results seem self-evident looking at the numbers of purpose-built rentals that were started over the past decade. In all of Metro Vancouver, the numbers went from 3,810 in 2015 to 6,841 in 2016. Those high numbers continued in the subsequent years, with 9,867 starts recorded in 2022, the last year with statistics in the Metro Vancouver data book on housing.
In the City of Vancouver by itself, the numbers went from 1,088 in 2012 to 3,207 in 2022. (Those numbers indicate the 1,400 apartments coming onstream at Senakw represent about half of the current start numbers for purpose-built rentals in Vancouver and about 15 per cent of the total region’s production.)
Now, the market is slowing down and there’s still the last of the big wave of starts from the past two years coming onstream, Mr. Berlin said.
What happens next could be complicated.
One of Vancouver’s senior planners, Matt Shillito, said that what’s happening is, in a way, what everyone has wanted – rents coming down.
“I can understand developers being nervous. But from a city perspective, we are making efforts to increase supply. And that’s the tipping point we want to get to, where land prices start going down.”
As developers understand they’re not going to get $7 a square foot or even $6, that should start getting reflected in the prices they’re willing to pay for land.
“We need land values to reflect the realities of economics now,” he said.
The problems with that long-term view are twofold. One, there will be people stuck in a bad place because they paid high and now can’t get rents that can cover that cost. Two, no one can really predict how land prices might evolve, especially in Vancouver.
Tsur Somerville, a University of B.C. Sauder School of Business professor with a specialization in housing, said in a normal market, the conventional pattern is known.
Developers and owners are struggling to find people to rent their properties. Some have started to offer rental incentives.Supplied
“The way it should work is, as rents come down, developers will pay a lower price for land. It holds that if sales or rent prices go down, land prices go down. And rents falling is a good thing.”
But, he said, “that’s a little challenging here.”
Vancouver has been somewhat of an outlier because there has been a long line of people willing to pay high prices for single-family housing, which keeps the cost of land high over all.
“If there are people with enough wealth to pay a high premium, it becomes harder to buy lots for development.”
As well, policies in most cities, even Vancouver, require developers to assemble a minimum of two single-family residential lots and often as many as five in order to propose an apartment building.
As soon as owners know that someone is trying to assemble land, the price goes up.
When developers started building rentals again in Vancouver, after a long hiatus that started in the 1970s when federal-government incentives were axed and condos became the preferred product, it wasn’t because land prices went down.
They started building because rents were going up steadily. That, combined with the new Trudeau-era federal incentives and, in some cities, local incentives, spurred the rapid increase.
Even if those barriers didn’t exist, it takes time for prices to adjust downward, Prof. Somerville notes. “If no developers are going bankrupt, if there are no forced sales, it can take a really long time.”
Canada has a particularly long cycle, he said, because the more restrictive bank regulation here means there aren’t the same kinds of bursts of overbuilding that various American cities have experienced at times.
As for the Senakw developers – well, they’re looking at the market, too, and seeing the softening. They’re a bit less alarmist about how many units are coming into the pool, pointing out that 20 per cent will be rented at below-market costs, part of an effort to create a new, modern Indigenous community. But they’re making some changes to their plans, they acknowledge.
“As market participants, we, like other developers, are adjusting our expectations to reflect current market conditions within our leasing plans,” said a statement from Jenn Podmore Russell, the chief development officer at Nch’kay Development Corp., the development arm of the Squamish Nation. There are also indications that the Squamish may slow down future phases of the next eight towers until the economic picture for housing construction improves.
But Ms. Russell, a savvy housing analyst who has been in the development world all her life, sees beyond the current situation to what the next cycle will bring.
“While the increase in new housing supply has offered consumers some much-needed relief, these gains are likely to be temporary,” she said in a statement to The Globe and Mail. “The recent decline in housing starts throughout 2024, combined with the challenges facing new construction amid economic uncertainty, suggests that the current relief may not last.”
And she delivered a warning that likely every developer in the Lower Mainland would agree with.
“The reality of construction in this region is that, without critical support from all levels of government, the cost of delivering housing makes it impossible for market developers – including us – to provide homes at the affordability levels needed by a broad segment of the population. Now is the time to actively encourage investment in housing while recognizing that even long-term developers like Nch’kay must meet minimum return thresholds to move projects forward.”