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Developers’ Perspective & Government Policies
In the recent years, the softened residential market combined with rampant demand from institutional investors has more developers considering building purpose-built rental buildings as a financially feasible and safer alternative to strata condos. With developers battling higher land prices in Vancouver, attention has been turned to growing secondary markets like Langley and Surrey, where land is more affordable and access to Downtown Vancouver will become easier following the future Fraser Highway Expo Line SkyTrain extension.
There are certain municipalities that have begun implementing initiatives & policies aimed at growing the rental stock, which bodes well for developers. For instance, Burnaby began enforcing a new policy this year that requires all new residential development projects to be composed of at least 20% rental units.
Currently, the City of Vancouver is beginning the largest urban and socioeconomic planning exercise in the city's history that will span over the next three years and will be addressing the housing supply framework. The official community plans that have been approved over the past decade, such as the West End Plan and Grandview-Woodland Plan, could see some enhancements and updates to various policies, some of which may include potential densification and future re-development opportunities throughout Greater Vancouver.
Industry experts believe we need 30,000 new rental units over the next two years to meet with the high demand caused by increasing migration. From a planning and rezoning perspective, this is typically how long it takes to approve new purpose-built rental projects in Vancouver. With less than 3,300 rental units set to complete this year, local leaders must work together with developers to make this process more efficient and effective for everyone.
[vc_row][vc_column width="1/2"][vc_column_text][/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]Interest Rates: Despite subdued projections for global economic growth, derived from trade uncertainty and political instability in important markets such as the US and UK, the Bank of Canada recently decided to hold firm on their benchmark rate at 1.75%. The BoC attributes the main driver behind this decision being the “resilience of the Canadian economy”. As reported by the CBRE Canada Monthly Mortgage Commentary, "a recent study by the central bank found that Canadian firms actually expect moderately stronger sales over the next 12 months.". In the short term, interest rates are likely to hold steady, but it will be intriguing to see how that will be impacted by the state of global affairs come mid-2020.
Investment Yields: Like the interest rate, cap rates for multi-family assets in Metro Vancouver have remained relatively stable over the last 12 months. From an investor’s perspective, deals with a lower initial-yield will only continue to be possible as long as financing rates are accretive, which we anticipate being the case given the predicted trend for interest rates. Fortunately, drastic increases in average rents throughout Metro Vancouver have allowed investors to grow their yield rapidly despite the lower initial cap rates. This strategy has generated sizable returns for multi-family investors, which should provide greater confidence in the marketplace moving forward.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column width="1/2"][vc_column_text][/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]A Building Condition Assessment (BCA) is a systematic inspection, review and report of a commercial building’s structure and systems. A BCA can assist you in maximizing the life of your multi-family building, with efforts to reduce repairs and maintenance costs.
This gives an owner the opportunity to develop a long-term capital budget for major expenditures, such as a new roof, boiler, windows and other building components and equipment.
A proper BCA will include the following components:
Inspection of building envelope, interior finishes, mechanical and electrical systems, and accessible structural components
Review of repair and maintenance histories and noted deficiencies & assessment of fire and life safety systems and exterior site features
A formal written report including observed deficiencies, estimated lifespan of building elements and systems, and a list of recommendations for repair or replacement with estimated costs.
[vc_row][vc_column width="1/2"][vc_column_text][/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]From an investor’s perspective, an accurate appraisal is crucial for any multifamily investment.
The process of developing an adequate multi-family property appraisal is unique because every rental apartment building will differ in location, interior & exterior renovations, parking availability, suite mix, layout and sizes, zoning & re-development potential.
All these factors will combine to result in differing appraised values of the asset.
It is important for an appraiser to clearly & concisely communicate what they know about the current market and the specific multi-family property they are assessing.
Experienced appraisers mirror the actions of buyers and sellers in the market in order to give their opinion of the most probable selling price for the multi-family property.
To support their market value, an appraiser should provide comparable sales, while also emphasizing a realistic range for the capitalization rate.
In addition to getting an unbiased opinion of value, the appraisal will ultimately dictate the financing one may achieve in a transaction, as financial institutions rely on appraisals to base their loans on.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column width="1/2"][vc_column_text][/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]Environmental site assessments, which involve identifying potential or existing environmental contamination liabilities, are one of the most critical steps in the due diligence process for a commercial real estate investment.
Below are a few reasons why it is incredibly valuable to compile accurate environmental reports for your potential investment:
1. Identify Environmental Risks: A major component of the due diligence process is to identify and assess the potential for environmental risk associated with the investment. Common environmental concerns are associated with Underground Storage Tanks, used for storing oil for heating purposes. These tanks may have been decommissioned over time, but it is necessary to identify if they still exist on the property and if they have leaked oil. Other causes for concern are gas stations and dry cleaners that may have operated on or near the site, which may have caused potential contamination.
2. Identify Hazardous Materials: Hazardous materials, such as asbestos, can be found anywhere from drywall compound to vinyl flooring, posing potential health risks when it is disturbed and becomes airborne, specifically during a renovation. It’s important to identify this for both health purposes and for any costs that would be associated with demolition & disposal if an investor is considering renovating the property.
3. Remediation & Risk Assessment: When you learn early on that you will have a higher cost associated with removing harmful contaminants on your property, you can budget accordingly to help remove your environmental risk & liability.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column width="1/2"][vc_column_text][/vc_column_text][/vc_column][vc_column width="1/2"][vc_column_text]Due Diligence is one of the most vital parts of the transaction process in a commercial real estate investment. One way our Team differentiates itself from the competition is the level of detail we are committed to during the due diligence process.
To assist our clients, it is our goal to understand every detail of the transaction so we can accurately identify opportunity or risk and advise our clients accordingly.
In the end, we deliver a highly organized due diligence package to our clients via an electronic data room and a physical binder, conveniently containing the due diligence documents requested within the contract.
Top 5 Benefits of “The Due Diligence Binder”
Organization: You will have access to all the Due Diligence documents in one convenient location which will save you time.
Accuracy: We vet the leases / tenancy agreements and rental increase notices to verify the revenue and confirm operating expenses against actual utility bills to ensure accurate income and expense details for our clients, and identify any potential discrepancies prior to removing subjects.
Efficiency: One of the benefits of our assistance is it allows our clients to be more efficient in their due diligence periods, reducing the risk of extensions and allowing them to possibly be more competitive in their offers regarding due diligence timing.
Convenience: We regularly receive positive feedback from our clients who find it convenient to refer to our due diligence packages when either lenders or lawyers request supporting documents, or even after closing when they need to reference documents.
Confidence: Our detailed due diligence process allows our clients to proceed through their transaction with confidence that they can rely on revenue and expense figures and identify and calculate any risks.