Vacancy rates are low, but builders say rents aren’t high enough to cover costs

Fiona Anderson
Sun

Few developers want to build rental buildings because rents haven’t gone up as quickly as housing prices. VANCOUVER SUN FILES

The number of rental properties being built in British Columbia is increasing, but the numbers are a far cry from what they were a decade ago. And a surge in apartment building construction is unlikely in the near future.

In 2008, 748 new rental units were started in Vancouver, and 1,449 were started in B.C. That’s a steady increase from the 509 starts in Vancouver and 1,096 starts in the province just two years ago.

But those starts represent only about four per cent of total residential construction in both the city and province, well below the 25 per cent level reached in 2001, and the 10 to 11 per cent in the early 1990s, said Carol Frketich, B.C. regional economist with the Canada Mortgage and Housing Corp.

The problem is that building rental units is not financially viable, Frketich said.

“We’ve had a very strong housing market in B.C. where land prices have risen significantly and land is a large component of the building of a rental,” she said.

And while the rental market is tight — with vacancy rates of 0.5 per cent in Vancouver in the fall — rents have not had the double-digit increases land prices have.

“So financially for someone to build, it was more viable to build a condo and sell it than it was to build a rental unit,” Frketich said.

Brian McCauley, executive vice-president of Concert Properties, and a speaker at an Urban Development Institute seminar on rental housing Tuesday, said new rental residential construction in Vancouver is not going to happen “without significant concessions from various levels of government and a continuing softening of constructions costs.”

Between 1990 and 2001 Concert built about 2,700 rental units in the area “but the fundamentals were dramatically different,” McCauley said.

Land values and construction costs were about a third of what they are today. And while rental rates have increased, they have not risen enough to cover the increased costs, he said.

Marg Gordon, CEO of the B.C. Apartment Owners and Managers Association, attended the seminar and is not optimistic that new rental units are going to be built.

Despite a decision earlier this year by Wall Financial Group to turn its 414-unit Wall Centre False Creek condominium project into rental apartments, Gordon said there is no trend toward rentals.

“There are one-offs, but is there a move toward purpose-built rentals, and is this something that is looming on the horizon? Unfortunately not,” Gordon said.

Last summer Grosvenor, an international property development company, completed building The Rise on Cambie Street in Vancouver and, rather than selling the artist lofts, decided to rent them out.

Renting the units was financially viable because the company bought the land when land prices were reasonable, said Michael Mortensen, senior development manager with Grosvenor.

Helmut Pastrick, chief economist for Central 1 Credit Union, believes conditions for rentals are improving.

There is a low vacancy rate in B.C. and financing costs are down, Pastrick said.

“And we’re now in an environment where building costs are coming down, land prices are coming down, so the cost side is favourable as well,” he said.

But what is also needed is an investor with a long time horizon, Pastrick said.

“It’s not like building a condo where you assemble land, build and sell all in the space of a year or two,” he said. “In a rental the payback isn’t until a minimum five or ten years.”

© Copyright (c) The Vancouver Sun

This entry was posted on Wednesday, March 4th, 2009 at 12:00 pm and is filed under Real Estate Related. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.