Vancouver mayor Gregor Robertson's aggressive initiative to provide incentives for rental housing construction has persuaded reluctant developers to build apartments in a market they say makes rental units otherwise tough to justify.
"There's definitely demand for rental housing, but the economics have not been there," said Hani Lammam, vice-president, development and acquisitions, for Cressey Development Corp., which is building 192 rental units on Porter Street at Victoria Drive as part of the city's Short-term Incentives for Rental Housing (STIR) program.
STIR received applications for 1,550 rental housing units before ending on December 15, 2011, after a 30-month run. To date, 1,023 have been approved; just one project, with 106 units, is built and occupied.
"Right now, if I were to buy a piece of land, I would be hard-pressed to say I'm going to do rental on it without some sort of inducement," Lammam said. "What the city does is provide enough inducements to go from condos into rental."
Without those inducements – including a waiver of development cost levies (DCLs), reduced parking stall requirements, increased density and faster permit processing – Lammam said developers would need the equivalent of free land to make such projects viable.
"It just wouldn't work," he admitted.
Cressey is incorporating 11 rental units in a project on Commercial Drive next year thanks to a density bonus provided because a rental covenant was instituted.
Robertson recently trumpeted the city's success in boosting annual rental starts to more than 500 since 2010 – but the rise is due largely to social housing projects on city-owned sites rather than market rental units. According to Canada Mortgage and Housing Corp. figures, social housing starts have exceeded market rental starts for the past five years – although this year promises to be an exception (see chart).
While multi-family rental properties offer a promise of steady cash flow given that vacancies are less than 1%, Lammam said the economics are tough to justify when annual rent increases are limited to inflation plus 2%.
"So long as we have rent controls, it's always going to be difficult to justify building rental without [a] subsidy of some sort," he said. "If we can't adjust rents to meet market conditions, and our escalating expenses, eventually – unless you have enough income appreciate to keep up with expenses – these assets essentially start to depreciate."
The economic pressures developers face is one reason why Kevin Hoffman, senior vice-president with Aquilini Development and Construction Inc., doesn't believe the current surge in rental construction will last unless the city implements some long-term rental housing policies. Aquilini is developing approximately 600 units adjacent to Rogers Arena in three towers on a site where it originally proposed 236,770 square feet of commercial space. The project will still have 215,000 square feet of commercial space, but Hoffman said rental construction also made sense thanks to low land, construction and financing costs.
"[It] was very site-specific. I don't think we're going to see a lot of other developers going and building private purpose-built rental buildings ... If it was profitable for developers to build rental buildings, they would be doing it."
STIR was helpful, but he said the response from developers "wasn't overwhelming."
Aquilini's own project is independent of city initiatives, but units will remain as rental for at least 60 years (similar to units built under STIR and Rental 100, which has garnered applications for 166 units since launching this past spring).
But in Hoffman's opinion, ongoing renewal of the city's rental stock depends on making land available at favourable rates and reducing taxes on developers.
"If there is a mandate, a need from all levels of governments – the federal, the provincial, and the municipal – they will have to provide incentives for the market to build rental units," he said.
Hoffman points to reduced DCLs and parking requirements, incentives that have already been tested in STIR. Other options, such as providing land at reduced cost, have typically applied only to social housing.
The City of Vancouver was unavailable for comment by deadline. •
