Vancouver rental builders, facing slowing demand, say government support needed

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Vancouver’s condo market is all but dead, and developers of purpose-built rental apartments are concerned that the rental market could also slow to a crawl if demand drops off.

Several factors are at play, including a drop in immigration levels and job uncertainty. That, combined with the high cost of construction, means that many rental developers need government support to continue to build rental housing.

“For the last six months, eight out of every 10 calls that we’re getting from property owners are developers that are in trouble, that are pivoting,” said Mark Goodman, principal broker at Goodman Commercial and publisher of The Goodman Report. “We’re getting a lot of these calls where they’re underwater. And they’re not sure; maybe they’re going to pivot from condo to rental or from rental to condo. Or they’ll say, ‘We may consider renegotiating with the city for higher density; we’ll build some inclusionary housing,’ something along those lines.

“It’s very difficult to make a rental site pencil out.”

A new report from Desjardins Economics said rental demand in B.C. is expected to soften more than in other provinces, owing to factors such as decreasing numbers of non-permanent residents and greater supply.

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Mr. Goodman said requirements for below-market rental housing are making development especially difficult because it’s costly to build. And with many developers pivoting from condo to rental construction, there is increased competition. The massive 6,000-unit Senakw development at Kits Point begins marketing for the first building in December, according to a spokesperson.

“There is a lot of supply being delivered at the moment,” said Jordan MacDonald, chief executive officer of the developer Fabric Living. “This is in tandem with a time in which the federal government has significantly decreased the number of temporary foreign residents and cut back immigration targets.”

As a result, rents are dropping and it’s taking longer to find tenants, even with incentives, he said.

The developer entered into a deal this year to sell a nearly complete apartment building to BC Housing, for $50.6-million, contingent on the city giving BC Housing a grant of $1.4-million to cover fees that the developer had paid to the city. The 81-unit project, at 3077 Maddams St., off Knight Street on the city’s east side, was originally intended to be market-rate rental housing. Developers routinely pay development fees when the project is market rate, and they wouldn’t normally be refunded.

The need for the grant money to close the deal rankled ABC Vancouver Party councillors earlier this month at a council meeting. They questioned why the city should help finance a BC Housing deal when they weren’t privy to the deal or the terms.

BC Housing proposes a rental building that would be comprised of 70-per-cent market-rate rental and 30-per-cent affordable housing (based on income), to be operated by the YWCA.

A city staff person who spoke at the council hearing said it’s a good time for government bodies and non-profits to purchase these newly built apartment buildings that make less financial sense for the for-profit developers.

After a lengthy debate, the majority of city council voted against the request for grant money.

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Councillor Sarah Kirby-Yung, with ABC Vancouver, questioned the lack of transparency around the request, and the developer’s change of plans.

“I think council only gets a partial picture, quite honestly, of what the intentions are around some of these projects at these public hearings,” she said.

“This process really gets my spidey sense up. It just doesn’t feel right,” she said. “None of it adds up to me. We are being asked to give a grant to BC Housing to help with their acquisition into this opaque process … that to me is not good governance. I’m very uncomfortable and very concerned about the process and how it’s rolled out.”

Mayor Ken Sim and councillors Peter Meiszner, Mike Klassen, Brian Montague and Lenny Zhou also opposed approving the grant money. Councillors Pete Fry, Sean Orr, Lucy Maloney and Rebecca Bligh voted in favour of the grant.

In an e-mail, Mr. MacDonald said the project was always intended to be sold upon completion, as far back as 2019, when Fabric Living had first approached the city. He said he’s still in discussions with the city.

Asked whether he would make a profit from the sale to BC Housing, he responded: “If we can find a pathway for the grant to be funded, we would achieve an acceptable risk-adjusted return relative to the six years of investment.”

Although it appears as if a lot of rental housing is coming online in the next couple of years, he believes much of it will sit “on the sidelines” until the market improves and it makes financial sense for developers to move forward. He believes construction starts for new rental units will decline in the next 24 months and create a supply issue by 2028.

The situation has “stressed many development pro formas to a point in which the bottom line is red,” Mr. MacDonald said.

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Like many Canadian rental developers, Fabric Living built the project using a Canada Mortgage and Housing Corp. financing program that offers a low-interest rate and longer amortization. Developers say that government support is currently the only way to make these projects viable, whether through financing or removing layers of bureaucracy.

“Definitely those kinds of financing programs are what really made the purpose-built rentals seem viable,” said Barrett Sprowson, senior vice-president of residential at Peterson Group, who is leasing up a 139-unit apartment building on the east side of the city, called Revolve. They started renting out units in June and are about 80 per cent occupied.

He said there are a dozen other buildings actively leasing on the east side.

“It’s really competitive, and what that does is it gives the tenant choice, which is something that they haven’t had forever,” said Mr. Sprowson, who called it a healthy rental environment.

After a period of “deep discounting,” they have reached what he called “stabilization.” The buildings are leasing up, units are getting “absorbed,” even the tall ones.

“Does that mean it’s easy for me to rent homes? No,” he said. “But the question is, should it be?”

Out of his portfolio of apartment buildings, the older ones have seen a rent drop of around 5 to 10 per cent, he said. The sweet spot for a new studio is around $2,100.

Developer Greg Appelt’s Toronto-based company Appelt Properties specializes in residential rental housing and medical buildings. The developer just broke ground on the 463-unit 41-storey mixed-use project Atlas tower across from Surrey Memorial Hospital, its first in Metro Vancouver. But the Surrey market is short enough on rental supply that he’s not worried, said Mr. Appelt, who started out in Kelowna. His new project also depends on CMHC financing.

“It always makes me nervous when you see the rents come down because you don’t know how far they’re going to come down. However, this is a 45-month build, so we’re not renting them out today or tomorrow. We believe those rents will near-term soften but then long-term begin to pick up.”