A key factor developers of all stripes must attend to this year is competition.
Speakers addressing the annual development industry outlook luncheon the Urban Development Institute hosted on January 20 repeatedly noted the pressure renewed activity is putting on a limited supply of product, and in turn prices and yields, and – potentially – the quality of new construction.
Panellists Ryan Beedie of the Beedie Group, Eric Carlson of Anthem Properties Group and Neil Chrystal of Polygon Homes Ltd. chewed over the state of the province and its economy, and – notwithstanding questions regarding the province’s political leadership and the fate of the HST – came off sounding optimistic.
Chrystal, for one, is happy with the positive conditions low interest rates and steady immigration are creating for home builders, but he ranked a surge in competition from novice developers as a risk right behind that posed by the political limbo in which the province hangs.
Buyers are also savvy, opting for smaller homes and lower price points where possible to achieve the dream of ownership. Developers, in turn, are challenged to meet the demand by competition for development sites, which are in short supply and expensive. This conspires to boost development costs. Throw in the prospect of an uptick in interest rates late this year and rising municipal levies and charges, and developers have little room to manoeuvre on pricing.
The mix of circumstances will make for a competitive year ahead, Chrystal believes, one not without risk to new developers and a challenge even to veterans.
One segment of the real estate market where competition is extremely high right now is industrial.
CB Richard Ellis managing director Mark Renzoni described January as the busiest for sales of industrial properties in several years while setting the stage for panellists at the recent breakfast of commercial real estate association NAIOP.
The activity follows a year in which sales transactions approached the peak reached in 2007, when 567 deals were completed. CB forecasts expect the number of deals done this year to approach 500 and top $700 million, up from 474 in 2010 valued at $680 million.
Strata sales have been a particularly strong element in the market, while the industrial land market is staging “a very slow and cautious level of improvement,” Renzoni told his audience.
A flight to quality will mean only the best and newest assets will be favoured, while owners of lower-tier assets will have to be patient until demand recovers – which it will, with vacancies projected to dip from a year-end rate of 5.1% regionwide to less than 5%.
The abundance of space, especially south of the Fraser River where vacancies are running (according to CB Richard Ellis’ stats) at 6.9%, will keep new spec space in check.
“We’re not going to see a lot of supply, and cap rates are going to continue to compress,” Darren Cannon, senior vice president with Colliers International, told NAIOP members even as he acknowledged, “It’s going to take a while to clean up this mess the leasing market is in right now.”
While less-desirable assets may languish for a while, their time will come so long as demand for industrial product continues to be strong, said Rob Gritten, a principal with Avison Young. An ongoing supply of cash at 4.5% to 4.65% will help keep transactions moving, which will favour investors.
“There are deals being done, and at prices higher than you might think they are being done at,” he said.
Hotels are not out of the running, either, when it comes to investor interest.
Speaking to NAIOP in October, Cushman & Wakefield senior vice-president Kevin Meikle pegged hotels as the next hot class of investment real estate.
“[It’s got] the higher yield curve; I think people are going look to that,” he said. “There are a lot of private guys looking to buy hotels.”
The year-end reports from other major brokerages bear this out.
CB Richard Ellis Hotels reports that per-room pricing strengthened 24% in 2010 from 2009, rising to $86,000 from $69,000 nationally. It expects strong sales activity in this year’s first quarter, tying growth to the quality of asset being brought to market and “more aggressive purchaser underwriting.”
Colliers International Hotels reports the sale of the Pacific Palisades Hotel for $47 million and the Ocean Village Beach Resort in Tofino for $7.4 million among the biggest hotel deals in B.C. last year.
A recent survey of hotel investor sentiment for Colliers indicates that 77% of investors plan to expand their properties or acquire new ones in the next 12 months. B.C. and Alberta collectively rank second as the most favoured part of the country for investment.