Suharu Ogawa
Credit: Suharu Ogawa

From residential and office to retail and industrial, here are the prospects for playing the local property market

“We weren’t those people who got into the real estate market early and who’ve managed to benefit from that. We are not those people who played the market, flipping homes,” Adam Bullied says, by way of explaining how he and his spouse, Juniper Ridington, ended up buying a heritage house in Nelson, sight unseen, in the middle of a pandemic.

On the cusp of their 50s, the couple had been living in a rented townhouse in East Vancouver for several years, and been outbid on other purchases in the city, when they started looking farther afield. Pre-pandemic, they drove to the West Kootenay city to check out a house for sale, but it sold before they even arrived.

Then COVID-19 struck. “We thought we’d better put this on hold until after the pandemic because maybe prices would come down,” recalls Bullied, a self-employed writer and director of video games. “That’s the opposite of what happened!”

So last year, when an attractive house in Nelson came up for sale, they pulled the trigger without so much as an in-person look-see. After being on the sidelines of B.C.’s property boom for most of their adult lives, Bullied and Ridington now find themselves with two rented investment properties. (Ridington also has a condo in Vancouver dating back to a previous marriage.) They plan to give up the townhouse once their younger son, now in Grade 11, finishes school, rent out the main-floor suite in the Nelson house and divide their time between that and the Vancouver condo.

COVID-19 upset many people’s plans and assumptions about real estate. Would city folk flee apartments for more socially distanced housing in the suburbs and beyond? Would office workers ever return to the office? Would shoppers return to the malls? Many of the fears and expectations back in the spring of 2020 turned out to be unfounded, but the pandemic’s impact on the sector is nonetheless profound. Here we separate some of the myths from observed trends, to give the investor a sense of where things are headed.

Full House

Early on in the pandemic, there was a notion that, fearing infection and enabled by telework, people would flee urban density for more socially distant suburbs and beyond. It seemed to be borne out for a while, as big-city apartment vacancies increased and condominium prices softened. Yet today, following the outbreak’s second anniversary, prices are up for virtually all residential property types across the province. What gives?

COVID put a lot of new demands on the home. It had to be a school, an office, a gym. People wanted outdoor space for entertaining, with its own external gate. “All of a sudden, your house has become all these different things and you need a bit more space,” says Brendon Ogmundson, chief economist for the British Columbia Real Estate Association. And since people weren’t spending money travelling or eating out and interest rates had dipped even lower than before, many buyers had more money to reach for it. But in an already high-priced market like Metro Vancouver, how that plays out triggers a ripple effect of opting for the next best, more affordable thing.

That thing, in the heady days of last spring when the number of home sales in B.C. set all-time records, was a single-family house in the Fraser Valley. The median price for this property type in this location (close enough to Metro Vancouver for a hybrid remote/in-office work arrangement) rose more than 40 percent in 2021.

The next best thing after that turned out to be suburban Metro and Valley townhomes, then single detached homes farther away, in Victoria, for example (up 28.3 percent year-over-year as of March), Powell River (41.8 percent) or even the Kootenays (27 percent). Now even condo prices have taken off. Have we forgotten what we were looking for in the first place? Or was the flight-from-density narrative flawed all along?

As Braden Batch, Vancouver market analyst for Canada Mortgage and Housing Corp., puts it, the region is a one-way gate: seen in terms of net migration, it attracts residents from out of province, both interprovincial migrants and immigrants, and loses them to the rest of B.C. When the onset of the pandemic caused mortgage rates to drop, urban condo owners took the opportunity to move up to single detached houses in Surrey, Langley and the Fraser Valley.

“It’s not because people wanted out of the downtown core” for fear of contagion, Batch says. Like Bullied and Ridington, they upgraded their housing outside the city because they could. Now, as the appreciation in Fraser Valley houses ripples through the B.C. market, Batch expects it to spur matching price increases in other locations and property types over the next five years, eventually rolling back to support urban highrises. He doubts you’ll see any one segment significantly outperform all the others in the long term.

If it feels as if the real estate market avoided the toll the pandemic took on the economy, Ogmundson says, it’s because of who homebuyers are. Since the start of the pandemic, the number of high-wage jobs in B.C. has actually increased 10 percent; these also tend to be the most portable. Middle-income jobs, by contrast, have only just recovered to pre-pandemic levels, and low-wage jobs are still down 5 percent from the start of 2020.

So if there’s lingering weakness in the housing sector, it’s mostly in rental, exacerbated by the closure of international borders that cut off the flow of immigrants and foreign students. This should concern investors who rely on renters for their income. As borders reopen, though, migration is expected to return to normal.

If you’re looking for long-term, secular trends in real estate, consider the twin peaks in B.C.’s demographic profile: in the 30-35 and 55-60 age brackets. “There are a bunch of 30-year-olds that really need housing,” Ogmundson says. They’re forming households, often making good money and will move up the housing ladder any way they can. The problem is the other group, whose nests are emptying but are still in the workforce and in many cases have no intention of moving. “People are kind of set.” The new housing supply could accommodate both groups, but it will take years to get built. If there’s one new wrinkle in the post-pandemic statistics, it’s the lengthening time to completion for housing construction.

For the foreseeable future, then, demand will be strongest in the Metro Vancouver suburbs—especially the relatively affordable ones like Surrey and Langley—for millennials, and Vancouver Island and the southern Interior for soon-to-be retirees. Still, price pressure in any one market segment will ultimately affect the others.

“All these markets trade at a long-run ratio to each other,” Batch says. “Those ratios are pretty stable over time.” The upshot for investors in residential real estate? Assuming you’re not simply a flipper and intend to hold the property for five years or more, don’t overthink the type of property and location. Buy neighbourhoods you know and property types you understand—and can afford. Look for unrecognized value. Think about how you’re going to attract and retain good tenants. That, and any broad-based market appreciation, is where your return will be made.

The never-ending bubble watch

It seems like the predictions of a great Canadian housing crash are less reliable than a broken clock—they haven’t been right in 20 years, let alone twice a day. But as economist John Maynard Keynes mused in the depths of the Great Depression, markets can stay irrational longer than you can stay solvent. The same head-scratching longevity can apply to booms in asset values as it does to busts. In October, Vancouver moved up to sixth among global cities on Swiss bank UBS’s Global Real Estate Bubble Index tracking dangerously overvalued property markets. Before you sign that offer sheet, take a moment to consider the worst-case scenario and how you’d deal with it.

Suharu OgawaSuharu Ogawa

Reinvention or Rearguard Action?

Last August, Cadillac Fairview, owner of Pacific Centre and Richmond Centre, among many retail properties across Canada, announced the rollout of home delivery services CF Eats and CF Delivery, as well as ReturnBear, a single mall-front depot where shoppers can return items from multiple stores. The mall landlord, owned by the Ontario Teachers’ Pension Plan, aims to help its tenants compete with e-commerce operators and provide a “frictionless shopping experience” for consumers.

#Don’tHaveAMillion

5 ways to invest in real estate for a relatively modest sum (without having to find tenants or manage property)

$20 and up

1. Real Estate Investment Trusts

What’s that, you want to own a stake in the historic Dominion Building on Victory Square? Oh, and you only have a fiddy? You’re in luck! The Vancouver landmark, once the tallest building in the British Commonwealth, was just bought by Toronto-based Allied Properties Real Estate Investment Trust (REIT) which, last we checked, was trading for around $45 a unit on the Toronto Stock Exchange. Allied has a thing for heritage office buildings, also owning the Sun Tower on Pender Street and The Landing in Gastown.

If you’re not so picky, there are scores of REITs in Canada and hundreds in the U.S. offering low-cost entry points to any number of real estate niches and annualized income distributions between 2.5 and 6 percent. For an extra layer of safety, pick a low-fee exchange-traded fund (ETF) invested in REITs, like the iShares Canadian Capped REIT Index ETF (TSX:XRE), with broad exposure to the sector. Don’t expect REITs to provide a counterweight to your stock holdings, though. As publicly traded securities, they’re still pretty highly correlated to equity markets.

2. Real estate crowdfunding

Financial technology companies such as Vancouver-based Addy Technology Corp. and Toronto’s BuyProperly, NexusCrowd and Willow Real Estate Technologies have taken up the challenge of making real estate investment, with its relative safety and income-generating characteristics, available even to those of modest means. After paying an annual membership fee of $25, you can participate in any one of Addy’s newly acquired properties for anywhere between $1 and $1,500. For a minimum investment of $2,500 and 2.5-percent management fee, BuyProperly lets you partake in the rental income stream and eventual sale of selected properties in Ontario. All require minimum lock-in periods, similar to a guaranteed investment certificate (GIC). Keep in mind this is a very new business model without a track record over a complete economic cycle to look back on.

$25,000 and up

3. Real estate pooled funds

There are a number of private real estate investing pools that investors can participate in, and B.C. has its share. More liquid than owning property directly, these limited partnerships let you buy and (with some restrictions) sell units fairly readily. However, many of the general partners of these funds impose substantial minimum investment thresholds of $100,000 or more along with a hefty management fee, so it’s worth shopping around. Vancouver-based CPI Investments, which invests in garden-style rental communities in the southern U.S., broke into the market last year with a relatively affordable minimum investment of US$25,000.

4. Mortgage investment corporations (MICs)

Partnered with a mortgage broker to feed you clients and a lawyer to draft your agreements, you can become a lender to buyers rejected by the banks all on your own. But an easier option is to invest in a private mortgage pool like those offered by AP Capital, Arise Mortgage Corp., Cambridge Mortgage Investment, Nicola Wealth and others. Understand that mortgages represent a different asset class than real estate itself. They’re income investments, albeit high-yielding ones, without the potential for capital gains that owning property comes with.

$100,000 and up

5. Strata title

OK, you get buying a condominium, which in the Lower Mainland will set you back at least a few hundred thousand dollars. But did you know you can buy strata offices, storefronts and even industrial sites within larger developments, too? In many cases, the ready market is owner-occupiers such as dentists or mortgage brokers who want to lock in their overhead costs. But the niche also increasingly attracts investors, with cap rates (the property’s annual net income as a percentage of market value) typically in the 3.5- to 5-percent range. See commercial real estate brokerages for listings.

Caveat emptor

As with any investible asset, there exist shady promoters of exempt market real estate investments, looking for any opportunity to separate you from your money. Red flags include high-pressure sales events, promises of suspiciously high and/or “guaranteed” returns and the absence of financial statements. Always do your due diligence on the general partners, including checking the B.C. Securities Commission’s Investment Caution List for recent unqualified solicitations and the Canadian Securities Administrators’ list of disciplined persons and organizations going back decades.