Investors cool to apartment market

Sales of rental apartment buildings have plummeted in the Lower Mainland this year, but not their price tags.

Commercial realtor CB Richard Ellis counted 24 transactions worth $99.9 million in the first quarter of 2008, with the dollar value falling 55 per cent compared with 54 transactions worth $220.3 million in the same quarter a year ago.

Dan Sander, recently a broker with CB Richard Ellis who has since moved to Hollyburn Properties, said buyers are having a harder time borrowing money in markets that have tightened their lending following the U.S. credit crunch.

And the rates of return that buyers can expect to earn have shrunk as apartment-property values have skyrocketed as much as 100 per cent, Sander added.

"Buyers are a little bit more reluctant to jump into those kinds of deals," he said.

David Ho, one of Sander's colleagues at CB Richard Ellis, added that sellers don't want to sell at prices lower than their expectations even though buyers are reluctant to pay more.

He added that if you combine that factor with weaker investor confidence and tighter lending, "the decline in sales was inevitable."

David Goodman, a broker with Macdonald Commercial Real Estate Ltd., said that for the first time the market is slowing while interest rates remain low.

Previous slowdowns, he added, occurred when interest rates rose to 10 or 11 per cent from eight per cent.

"When we have properties well priced, we're getting tremendous activity," Goodman said. "That being said, there is probably a growing gap between buyers' expectations and vendors' expectations."

Sander said the summer of 2007 was probably the peak for the apartment investment market. A year ago, he said sellers might expect up to 12 competing bids.

"This year, you're lucky to get one or two," he added.

Sander added that commercial realtors have seen listings of apartment properties climb, but prices have yet to follow sales in decline.

"I can definitely say with a lot of comfort that the market is flat in terms of what people are achieving in terms of price," he said.

However, Goodman said that average per-unit prices in sub-markets within the region are still buoyant. On Vancouver's east side, for instance, Goodman estimated an average per-unit price of $149,776 so far in 2008 compared with $127,281 during all of last year.

In Burnaby, Metro Vancouver's hottest market in 2007, Goodman added, the average per-unit price is $135,368 so far this year compared with $125,496 during all of 2007.

Sander added that the Lower Mainland's extremely low apartment vacancy rates and the rising gap between the cost of home ownership and the cost to rent help support current prices.

Robyn Adamache, a Canada Mortgage and Housing Corp. analyst, said her forecast is for Metro Vancouver vacancy rates to hit 0.8 per cent this year, up just slightly from 0.7 per cent last year.

That includes purpose-built rentals, in the market that Sander and Goodman track, as well as among investor-owned condominiums, Adamache added.

Adamache said that the cost of home ownership has risen two-to-three-times higher than the cost of renting, which pushes up demand for rental housing, although in recent years builders have only put up about 500 units per year of purpose-built rental housing.

She added that investor-owned condominiums have provided the bulk of new rental stock. Across Metro Vancouver, 22 per cent of new condos are turned over as rentals, Adamache said. In downtown Vancouver, that number is closer to 45 per cent.

(prepared by Derrick Penner/Vancouver Sun)