The Altus Report Fall 2018 Header Image

as published in Informa’s Canadian Real Estate Forum Magazine – Winter 2019

 

By Kruti Desai, Manager, National Research Insights & Raymond Wong, Vice President, Data Operations

 

Viable Transit and Sustainable Development Vital to Future of Vancouver and Toronto

 

In this issue of The Altus Report, we discuss real estate trends in the Vancouver and Toronto market areas.

The Canadian economy seems to be weathering the storm while the global economy continues to weaken. Ongoing uncertainties in trade, disruptions in the energy sector and geopolitical conflicts weigh heavy on the global economy, and Canada’s economic resilience may be tested as it prepares to withstand any economic downturns. As a response, the Bank of Canada maintained its target overnight interest rate at 1.75% for the eighth time in a row in October. Bond yields sit at historic lows, and the Canadian dollar has shown some signs of modest gains against the US dollar even as commodity prices have fallen.

However, growth is still expected to slow below its potential, and high personal debt levels, high consumer spending, and housing affordability still remain a  concern. Meanwhile, Canada boasts strong population growth, a notable lift in income levels and gains in employment, particularly in the tech sector, all of which may further strengthen demand for more affordable and available housing and quality office space.

In major cities like Toronto and Vancouver, space is at a premium and supply continues to remain tight. According to Altus Group’s Q3 2019 results, downtown vacancy rates for Vancouver were at 2.2%, a drop from 3.9% in the same quarter last year, and in Toronto rates remained unchanged at 3.4%. This means that such cities may be highly vulnerable to even the slightest changes in demand, putting pressure on both the private and public sectors to seek innovative strategies and scaling up their efforts to accommodate future growth through sustainable development and investments in transit and transportation networks.

 

Low bond yields moderately compress cap rates in Vancouver and Toronto

Chart 1 - The Altus Report - winter edition

Downtown office vacancy rates in Vancouver and Toronto among lowest in North America

Chart 2 - The Altus Report - winter edition

 

New Housing Initiatives Aim to Address Housing Needs

Many cities across the country are investing in infrastructure and moving ahead with densification along transit routes, which may point towards a more robust future for the Canadian real estate market. With skyrocketing housing prices in the last few years, many have been edged out of the real estate market in urban neighbourhoods. However, cities like Vancouver and Toronto are looking to address these challenges.

Toronto’s Housing Now initiative, which was approved last year, aims to activate 11 City-owned sites for the development of affordable housing within mixed-income, mixed-use, transit-oriented neighbourhoods. The plan would create a mix of affordable rental, market rental, and ownership housing options for middle-class households. This initiative is one component within the City of Toronto’s emerging HousingTO 2020-2030 Action Plan to address housing issues. Investors also see opportunities in the rental market due to the changes in Canada’s housing dynamics. According to Altus Group’s Investment Trends Survey in Q3 2019, Suburban Multi-Unit Residential remains one of the top 5 favoured asset classes in both Vancouver and Toronto.

 

Top 5 and bottom 5 favoured real estate segments

Chart 3 - The Altus Report - winter edition

 

 

Vancouver is moving in a slightly different direction. Last year, Vancouver councillors voted to allow “ gentle density” or “duplexes” in traditional single-family neighbourhoods. The policy change means permitting duplexes on approximately 67,000 single family lots and aligns with zoning around expensive, less crowded neighbourhoods such as Kerrisdale, Dunbar and West Point Grey, and with regulations in crowded areas such as Kitsilano and Strathcona.

However, according to a poll from Research Co., some residents still believe that the preservation of heritage buildings must be practiced even at the expense of no new rental housing or may be more resistance to more extensive projects of higher density in general. The change came as a result of the need for more affordable housing, yet while duplexes may now be allowed in Vancouver, only a handful of applications (mostly in East Vancouver) have been submitted from October 2018 to March 2019 compared to new single-family homes. Duplexes are also only an option for new construction, and an increase in floor area over what’s currently permitted isn’t allowed, nor does it allow duplex in conjunction with a laneway house. The change provides an alternative to those already considering demolishing and building a new house, and the allowable density was kept low to avoid triggering significant redevelopment.

 

Canada’s Largest First Nation’s Development Proposed in Vancouver

The large-scale $3 billion, 4.7-hectare rental housing project by the Squamish Nation in Vancouver doubled in scope this Fall. The proposed project would bring close to 6,000 units within 11 towers, which would be predominantly rental. This number doubled from the original plan back in April as a way for the Squamish Nation council to increase its potential value. The project, named the Senakw development, would be situated on land that is owned by the First Nations group and located next to the Burrard Street bridge in Kitsilano.

The reserve land is not under the control of the City, therefore not subject to public consultation or local zoning or bylaws. The nation’s planning team is marketing the project for people who don’t own cars and want to live downtown by adding limited parking spaces for only 10% of the rental units, below the typical minimum. About 80% of the land would be publicly accessible space such as parks. Revery Architecture firm will design the towers, and private Vancouver developer Westbank will be responsible for the project’s construction, who will also receive 50% of revenue.

The nation also plans to collect taxes on all of the units, including the 50% owned by Westbank as a way to fund infrastructure services such as water, sewer and waste removal. This development would be the largest private First Nations development project in Canada. The project would still need to be approved by the Squamish Nation’s members including whether the nation can enter into a partnership with Westbank in a referendum to be held on Dec 10. If approved, construction is expected to start in 2021.

 

Transit-Oriented Development is the Name of the Game

Growing housing affordability constraints, gridlock and congestion, population and employment growth and a new generation of lifestyles are part of why both the public and private sectors are working collaboratively to design communities anchored by transit. Improvements in transit and transportation networks are helping to advance these types of developments across the country. As commuters rely more on transit services and as lifestyles shift towards more higher density urban-style living, partly due to preference and partly due to affordability, transit-oriented development is becoming more common.

These types of mixed-use designs aim to transform neighbourhoods and maximize land use for multi-uses and investors are doubling down. Larger types of mixed-use development complexes have already been quite successful across the globe in highly dense cities such as Paris and New York City. Toronto’s population is projected to grow from 2.96 million in 2018 to 4.27 million by 2046, an increase of 44.5%, according to the Ontario Ministry of Finance. Metro Vancouver projects its population to grow to 3.6 million by 2050 from 2.6 million in 2016. Therefore, expansions in transit and rapid transit along busy corridors, and ensuring systems are in a good state of repair are significant investments to ensure regions such as Vancouver and Toronto remain connected, efficient and economically viable for years to come.

 

Investors continue seeking opportunities in Vancouver and Toronto

Selected major markets

Chart 4 - The Altus Report - winter edition

 

Transit expansions in Vancouver and Toronto are already making headway to improve the lives of daily commuters and accommodate future residents.  The federal and BC government and TransLink are funding over $9 billion in transit and transportation investments across Metro Vancouver as part of the region’s 10-Year Vision for Transportation. In September, the BC government announced six new stations for the Millennium Line Broadway Extension in Vancouver. Construction on the first phase of the Broadway Subway Project from VCC-Clark Station to Arbutus Street is expected to begin in late 2020 and completed by 2025. Future phases would connect the line to UBC’s Point Grey campus. The proposed $3.1 billion, 16-km Expo Line Fraser Highway Extension from King George Station to Langley Centre has moved ahead into the public consultation phase and will focus on the proposed station locations and the elevated SkyTrain guideway alignment.

The full extension would include eight stations, three bus exchanges, park and ride spaces, 55 new vehicles, an operation and maintenance centre and supporting system upgrades. Surrey would receive six new stations, Township of Langley would receive one station, and one in the City of Langley with the new Expo Line terminus station. Funding of $1.6 billion is currently available to complete Phase One of the Surrey-Langley extension of four of the new stations and 7 km of the new guideway to Fleetwood. These funds were previously allocated to the Surrey-Newton-Guildford Light Rail Transit Project, however due to soaring project costs, the project was suspended, and funds were reallocated. Construction for Phase One is slated for 2022.

About $1.5 billion of funding still needs to be secured to complete the remaining four new stations and 9-km of new track to Langley Centre. In July, a proposed gondola public transit line between a SkyTrain station and Simon Fraser University atop Burnaby Mountain received unanimous approval and support from Burnaby city council to move forward with planning works for the project. The project was initially proposed ten years ago.

In Toronto, transit talks have been slightly more controversial with the recent announcement of a new partnership to construct four new subway system expansions. The City of Toronto and Province reached a tentative deal in October for the Province’s plans of the Ontario Line and the three-stop, 8-km Scarborough Subway Extension instead of the two council-approved projects for a relief line subway and a one-stop Scarborough extension.

The Province’s transit plan also includes the Yonge North subway extension and the Eglinton West Crosstown LRT Extension. The Province agreed to waive a portion of the city’s share of the cost of the projects ($6 billion) on the condition that the funds are used for TTC capital repairs or to help pay for new lines such as the Waterfront LRT or Eglinton East LRT. The City currently only has funding for about $1 billion, and the estimated repair backlog is about $33.5 billion.

An assessment report for the Ontario Line noted that the project would help better service low-income communities, other areas designated for population and employment growth, as well as connect to other transit lines. However, station locations and routes (whether surface or underground) are still under review and have the potential to be altered. The proposed completion date for the Ontario Line is 2027, the Scarborough subway extension would be 2029-30, and the Yonge North Subway and Eglinton West Crosstown by 2030-2031.

 

 

Featured Vancouver and Toronto market sales transactions 2019

Chart 5 - The Altus Report - winter edition

 

Notable Opportunities for Mixed-Use Development:

Onni Group’s Pearson Dogwood 25-acre mixed-use project redevelopment in Vancouver’s Cambie Corridor moved into the development permit state in July. The site is also the location of a potential Canada Line station at 57th Avenue, which would be beneficial for this type of density.

For developers who may not want to deal with the pains of rezoning, a site in East Vancouver which has been pre-zoned for mixed-use development may be worth a look. The site is also in close proximity to the Commercial-Broadway Station and local amenities.

PCI Developments has plans to create a transit-oriented, mixed-use oriented urban centre in the South Granville region. The developer has filed a permit application for a five-storey office mixed-use development located next to the new Broadway subway extension at Broadway and Granville.

Cadillac Fairview’s acquisition of a 38-acre site in Toronto’s East Harbour is another example of a transit-oriented development strategy. The proposed development would be one of Canada’s largest commercial developments and would connect and travel past the Lakeshore and Markham/Stouffville GO Train lines, as well as the future Ontario line subway, SmartTrack services and TTC light rail transit.

Another proposed mixed-use development near transit in Toronto is 88 Queen East in the east-end of the city, a partnership development between St. Thomas Developments and Fitzrozia. The plans are to build a two-phase multi-tower development with residential units, a boutique hotel, office space, and a mixed-use podium-level retail component and would replace a former surface parking lot.

Oxford Properties recently unveiled its massive plans for a $3.5 billion 4.3 million square foot mixed-use development project named Union Park. Originally plans for a casino was proposed at the Metro Toronto Convention Centre (MTCC) site but was eventually turned down by City council. However, the new plan now includes a 4-tower development located on Front St. between John Street and Blue Jays Way and stretching south across the rail corridor from Roger’s Centre. The proposed plans for the complex would contain a mix of two office towers spanning 44 and 45 storeys, residential and rental apartments, a public park built over top of the rail corridor connecting to the Roger Centre and CN Tower, as well as three floors of street retail space.

Other plans include possibly adding a daycare centre and extending the PATH network to the SkyWalk, which will connect to Union Station. Oxford’s future plans for the site may expand to 11 acres and eventually include a redevelopment of the MTCC. The Design Review Panel recently voted in support of the project on the condition of several elements to be redesigned. The proposed vision of site would be one of the largest redevelopment projects in Toronto with expected construction to begin by 2023

 

Growing Pains: Thinking about Current and Future Generations

According to Statistics Canada, Canada has the highest population growth among the G7 countries. As more jobs and residents get added to Vancouver and Toronto increasing density in many urban centres, the public and private sector are recognizing the need to create a different built form and limit sprawl by designing more connected, livable communities and workplaces that are accessible and habitable.

Investment into transit improvements, carefully planned transit expansions, as well as affordable and well-designed complexes around transit nodes would be essential to a sustainable future for these cities. With all three levels of government working together to upgrade and expand transit networks, new development projects along these routes are being envisioned as investors continue to see opportunities in these markets.

More developers and planners can be seen integrating inclusive sustainable development strategies into project designs as a way to meet the needs of both current and future generations, creating more community hubs and designing neighbourhoods that connect people to and from other areas across the region. If planned correctly and within a timely manner, residents, along with companies may consider moving into or staying within city walls rather than seeking alternative space outside the urban core, which may further facilitate the effects of urban sprawl.

 

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