Vancouver developers fear 'alarming' land prices hinder profit: by Frank O'Brien Western Investor November 30, 2017

Before you read the story below, some background might be helpful.

I first met Frank O'Brien in the 1980s when I was president of UDI Pacific Region. In 1988 I was elected president of UDI Canada and I was allowed to engage a speech writer to assist me in preparing some of the many talks I would be expected to make. (Some Toronto developers thought I should be required to engage a speech writer.)  I started to work with Frank and we have been in touch with one another ever since. Frank has often called me for background on stories and occasional fact checking, etc.

This story arose from a discussion Frank and I had a week or so ago when the federal housing strategy was being announced at the top of the Woodwards building. While there was much optimism about the fact the feds were back in the housing game, I did mention to Frank that I had recently been shocked at how much many developers, especially developers new to the city, were willing to pay for land. This was triggered in part by a potential new assignment for a property along the Cambie Corridor where I was being told $450 a foot buildable was a good price. Based on some proformas I prepared, I could not create a viable project at a sales price of $1400 a foot. 

Many people seem willing to pay these prices and more, in some cases much more. Others are buying assignments at even higher prices. When I remarked to a realtor active in the Burnaby market that I was surprised to see pre-sales at higher prices than what completed product was selling for, he told me not to be surprised, adding that in some cases, new condos are like new cars. They depreciate when they are taken off the lot. He had seen a number of units selling for less than the pre-sale prices.

As it happen,s he was referring to units at SFU's UniverCity, not Metrotown. However, Frank says I specifically mentioned Metrotown to him. At any rate, I stand by the belief that pre-sale marketers are selling dreams, which are often years off in the future, with payment not required until some time in the future....while the final product does not always live up to the dream. 

Pre-sale marketing really came into its own in the mid- 1980s. The concept of 'Priority Registration' and other finely tuned marketing techniques was created by Stan Kates, a brilliant marketing consultant. When I became president of UDI, I publicly expressed concern about how some very high pressure Toronto pre-sale programs were being orchestrated and suggested that if we weren't careful, pre-sales could become like high school chain letters. The people at the beginning might do well, but those buying in at the end could lose out.

So far, everyone who has been buying over the past few years has generally done well. However, as more and more Vancouver projects are starting with land costs over $450 a foot, which means they must sell at $1400 a foot or more in Vancouver, or land costs well in excess of $200 a foot  in Burnaby which means they must sell for over $1000, I do worry about how long the ride will continue. We certainly can't build affordable housing at these land prices.  

Here's Frank's story. I should add that while I was referring to price paid per square foot of buildable area, Frank sometimes refers to land prices per square foot of land area. Depending on the FSR permitted, this price will be reduced. I should also note that construction costs along the Cambie Corridor and elsewhere for concrete buildings is well in excess of the $350 a foot referenced in the article. In some cases, very high quality mid-rise buildings are approaching $440 a foot.

Vancouver developer and architect Michael Geller warns that land has been selling at such high prices that some condo developers – and new condo buyers – fear they won’t be able to profit on the final product.
      “I am seeing land sales now in excess of $500 a [square] foot buildable in the city of Vancouver and these are not in any way special sites,” Geller said.
      “This is alarming. For a new 800-square-foot condo you are approaching $480,000, just for land.”
      City land values are now worth more than the construction costs of a residential tower, which Altus Group pegged at from $315 to $350 per square foot in a 2017 survey.
      When all soft costs, such as design and landscaping, city fees, community amenity contributions, legal fees, marketing and commissions are piled on, Geller said a developer would need to sell new condos at well above $1,400 per square just to achieve bank financing, let alone a profit.
      There are now 30,000 strata units under construction and a total of 120,000 in various stages of the pipeline across Metro Vancouver, according to industry estimates.
      Yet prices for residential land – much of which already has a building on it – continue to soar.
For example, a Vancouver land assembly of four housing lots near Langara Golf Course was sold a year ago for $12 million and then quickly flipped for $13.2 million for a townhouse project.
That now looks like a bargain.
      This month, HQ Commercial sold a 5,400 square foot residential lot in Vancouver’s Marpole area for $3.8 million, or $704 per square foot.
      A 30,000-square foot strip mall on East Hastings, with just the potential of residential development, was recently bought for $712 per square foot.
      “Currently the strongest multi-family market in the country, Vancouver is witnessing an unwavering insatiable investor appetite,” said James Blair, vice-president, multi-family for JLL Canada. But Blair suggests there could be a limit, something that we have heard before.
      “We foresee that costs per door in certain regions will continue to go up, but not dramatically. We are already at very aggressive door costs.”
      The question is whether the land costs that developers are willing to pay will match what future condo buyers are capable of buying.
      Some buyers of newly completed condos are already re-selling their units for less than they paid at pre-sale during construction, Geller said, citing a new concrete tower in Burnaby’s Metrotown area as an example.
      Meanwhile, the City of Vancouver is trying to put the brakes on runaway land speculation in an effort to lower prices. Its Housing Vancouver strategy, outlined November 28 and which may come into force in 2018, is meant to “reduce over-inflated values for future development.”
      “The effects of speculation have caused significant consequences for housing in Vancouver, and has hindered many of our attempts to build affordable rental housing as the high cost of land make projects unviable,” said Gil Kelley, Vancouver’s general manager, planning, urban design and sustainability.
      Among its proposals, the city policy is considering making some neighbourhoods “rental-only zones” to calm residential land speculation, and said it is working with senior government in “implementing a speculation or flipping tax” on residential land sales.