Sale of apartment buildings show surge

Shortage of supply and low vacancy rate make it the best market since 1989. Sales of rental apartment buildings in greater Vancouver are up 30 per cent in the first five months of this year, compared to the same period in 2005, in a market realtors say they haven't seen since the late '80s.

A short supply of listings along with low vacancy rates are luring landlords into a buying spree unmatched since speculators snapped up buildings sight unseen in 1989.

However, realtors say today's buyers are in it for the longer haul, planning to remain landlords instead of flipping the properties for a quick profit. In many cases they are spending money on renovations to help bolster their revenue potential.

"The market peaked in '89 and this is the strongest we have seen it in the 17 years since," said David Goodman, a commercial realtor with Macdonald Commercial Real Estate Services and co-author, with son Mark Goodman, of the Goodman Report, an online publication and marketing service at that tracks market trends and sales in the greater Vancouver apartment market.

The average price per unit is up about 11 per cent so far this year in Vancouver, at $162,373 per apartment compared to $146,177 for 2005. In suburban Vancouver, stretching from Langley and Maple Ridge to West Vancouver, the average price per unit dipped to $92,707 compared to $101,047 in 2005. That drop was largely driven by a per unit price of $65,000 for Surrey sales this year.

There were 162 apartment buildings sold in the greater Vancouver area in 2005 and Goodman said about 60 were sold by this time last year. By comparison, 79 buildings have sold to date this year putting the year-over-year increase at around 30 per cent. If the pace continues, Goodman projects it will translate into sales of 189 buildings for 2006.

The activity comes despite rates of return that have dropped as low as 31/2 to four per cent, continuing a decline that has seen them dip from an average of six per cent in 2001. Known as the capitalization rate, it's based on the return an investor will receive on capital expenditures, before debt service and after taxes, insurance and other expenses. At a four-per-cent capitalization rate, a $1 million building would net $40,000 a year.

"Some sales in the west end were under four per cent yields, it's astonishing," said Goodman. "If the cost of money is five per cent and they are buying at a four per cent cap rate, it's not rocket science, they are feeding the building."

Buyers are boosting their returns by refurbishing suites and raising rents to market values. Goodman says upgrading apartments can raise monthly rents on one-bedroom apartments that were priced at $800 to $850, to $1,100 to $1,150 a month in prime areas like Vancouver's south Granville, Kitsilano and Kerrisdale.

"They'll go in and spend up to $10,000 a suite and they will move up their rents on turnover," said Goodman.

"It is very labour intensive. They'll do it a floor at a time or two to three suites at a time, whatever they are turning over."

Eugen Klein, president of the commercial division of the Real Estate Board of Greater Vancouver and a commercial realtor with Royal LePage City Centre in downtown Vancouver said the market is the best he has seen, despite low returns on investment.

"My phone rings probably 75 times a day and I even get clients calling from Alberta looking for product, very, very frequently," he said. "Usually 15 to 20 per cent of calls are from out of town, but now I think it is close to 40 per cent.

"They see an upside to the Olympics," he said. "They are anticipating it's going to rise. "And they are hedging themselves to position themselves to be in the market for the upcoming years."

According to the Credit Union Centre of British Columbia's housing market forecast for 2006-2007, the rental market is expected to tighten even further this year and next, due to strong job growth and worsening affordability for first-time buyers.

According to the report, the rental vacancy for apartments and townhouses is forecast to decline to 1.7 per cent this October and to 1.3 per cent in October, 2007.

Goodman said that while vacancy rates for greater Vancouver are 1.4 per cent, it is much lower in popular areas of the city. The west end, south Granville and Kitsilano all have an average vacancy rate of 0.3 per cent. Kerrisdale is at 0.2 per cent, compared to Surrey which is at 4.7 per cent.

Goodman said institutional buyers -- rental companies that have large portfolios with thousands of units across Canada -- are very active in this market. They are competing with local apartment owners who may own up to 25 or 30 buildings.

(prepared by Gillian Shaw/Vancouver Sun)

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SOME AREAS HOTTER

Vancouver rental apartment unit prices have surged during the first five months of this year as institutional investors from across Canada took a greater interest in the market, according to figures provided by the Goodman Team realtors. Some areas of the city are hotter than others.

City of Vancouver
Average price of units sold in 2005: $146,177
Average price of units sold to June 6, 2006: $162,373
Up 11%

South Granville
Average price of units sold in 2005: $153,691
Average price of units sold to June 6, 2006: $180,927
Up 17%

West End
Average price of units sold in 2005: $158,220
Average price of units sold to June 6, 2006: $182,346
Up 15%

Marpole
Average price of units sold in 2005: $100,210
Average price of units sold to June 6, 2006: $109,426
Up 9%

Source: Goodman Report

Forecasts for declining B.C. rental vacancy rates could be what's attracting those institutional investors to the West Coast apartment market.

2004: 2.5%

2005: 2.0%

2006 forecast: 1.7%

2007 forecast: 1.3%