Sold on opportunity: Real estate markets across the West
Provinces across the West have marked differences in their commercial, residential and recreational real estate investment environments. Whether you’re a developer looking to embark on a new project, or an investor contemplating where to invest your hard-earned dollars, it’s important to have a sound understanding of the market you’re entering.

While major markets across the country saw average annual price growth of 11 per cent* from 2002 to 2007, Western Canada was well above the national average. Let’s take a closer look at the real estate market in these provinces – and how they may impact your investment decision.

B.C.: A strong market - but for how much longer?
While rising currency and interest rates have taken a toll on B.C.’s resource-driven economy, the overall housing market remains very strong: in the Vancouver region, the Okanagan, and parts of Vancouver Island, prices are among the highest in the country.

Yet there is reason for concern. In November, a well-known condo developer, Vancouver-based Eden Group, announced it was cancelling two major condo projects, citing rising material costs and a decreased labour supply.

The sub-prime mortgage problems in the U.S. have prompted Canadian lenders to exercise more cautious lending principles, making it more difficult and more expensive to obtain credit. While financial institutions in Canada did not emulate lending institutions in the U.S. in lending to sub-prime borrowers, the impact can be felt in B.C. Funding for new projects now require significant pre-sales for developers to obtain construction financing.

There is also continued expansion of industrial park development in Vancouver, reflecting growth of mid-sized private companies. 

Continued participation by foreign investors in B.C. real estate is being fuelled by confidence in the quality of locations and the perception that it is a "safe” place to invest relative to other locations around the world. 

Despite the highest prices in Canada, Vancouver remains a destination of choice for many international buyers as it’s reasonably priced relative to other cities in the world. Compared to Hong Kong, Frankfurt, London or New York, Vancouver is relatively inexpensive. What costs $2 million here might cost $5-10 million in another city.  It is expected that the 2010 Vancouver Olympics will keep the city on the world stage and will likely lead to further investment by international investors.

While international investment remains strong, the rising Canadian dollar has sparked a noticeable decline from U.S .investors.

“There used to be a certainty of U.S. buyers coming in and purchasing recreational and residential properties, but with our dollar at par, that certainty no longer exists,” explains Charles Addison, a senior vice president and director with Tamarack Capital Advisors’ Vancouver office. Tamarack is the corporate finance subsidiary of Meyers Norris Penny.

“Developers are now considering the impact of a strong Canadian dollar on investment from U.S. buyers when assessing their projects.”

Charles notes “one of the trends we are seeing in Vancouver right now is the development of 40+ story buildings in the downtown area.”  A recent city bylaw change now enables developers to construct taller buildings, balancing the demand for urban living space while striving to keep sight lines to the ocean and mountains protected. These “hybrid” developments are being constructed based on office or commercial space making up the bottom one-third to one-half of the building, with the upper portion as condos. 

Alternatively, other projects are incorporating bottom sections as hotel units run by an international hotel operator such as the Ritz-Carlton, with the upper section as condos. 

“The advantage for investors is an assurance the project will be funded by the pre-sale of condos, while the completed project will be managed by a well-known international hotel management company,” explains Charles. This is an attractive arrangement for both lenders and investors.

While the focus in recent years has been on residential development in downtown Vancouver, this appears to be changing as well. Over the past ten years a number of Vancouver companies with head offices in Vancouver were downsized as a result of acquisitions by U.S. companies. This led to fewer office buildings constructed. In addition, a significant amount of office space was converted to condos. 

Yet a demand for more office space in Vancouver has now caught up with the lack of supply, resulting in successively higher office rental rates and renewed demand.

“It will be interesting to see how the development in Vancouver shifts in the coming years to meet this office space shortage,” says Charles.

Although there are many positives in the B.C. real estate market, “developers, lenders and investors need to do their homework on downside pressures that could affect the market before proceeding.”

Alberta: Developers holding their breath  
From Fort McMurray to Medicine Hat, the oil and gas industry has been a driving force in both the Alberta and Canadian economies. The impact on real estate prices has been profound, particularly in Calgary, Alberta’s boomtown.

While major price increases have become the norm in recent years, developers and investors are beginning to apply the brakes. The full impact of the American subprime mortgage crisis is still being analyzed; the effects of the province’s review of energy royalties are up-in-the-air; and increases in the value of the Canadian dollar are putting added pressure on material costs. 

According to Doug Bedard, a vice president and director with Tamarack’s Calgary office, the market is tightening its purse strings. “On the bank and lending side, lenders with hefty real estate holdings in their portfolios and are applying diligent risk management and are being more cautious about what they’re approving for loans.”

This activity is generating a wait-and-see attitude, with buyers and investors taking a step back. Inventory is climbing and sales declining, pointing towards a market correction following the blockbuster year of 2006.

“With an inflated number of residential units on the market, there are probably some good bargains out there,” says Doug. “If you can invest to hold, the long-term outlook is positive because the fundamentals are good: there’s still a demand for jobs, we have the lowest unemployment rate in 33 years and our population is steadily increasing.”

Doug advises investors perform their due diligence when considering opportunities. “Look for quality projects with good operators, reliable track records and smart developers who know what they’re doing.” He warns it’s really buyer beware. 

The commercial side is a different story. The Calgary and Edmonton urban skylines are characterized by a pervasiveness of cranes, while commuters contend with endless construction detours.

In late 2007, Calgary’s downtown had an office market vacancy of just 0.76 per cent, far below the five to eight per cent considered healthy. Yet demands for more space are being heard:  12 office buildings are currently under construction, which will add nearly seven million square feet of space.**

In Balzac, a tiny community just outside Calgary, developers are set to embark on a $1.5 billion mega-project that will include a horse racing track, entertainment complex, shopping centre, new office space, hotel accommodations and residential housing. According to the developer, this is one of the few markets in Canada that can support such a large project.

Edmonton, Alberta’s international gateway to the oilsands, is also experiencing significant growth: the city’s ring road was recently completed, and an additional $41 billion in projects are planned.

Overall, Alberta’s market appears stable. Rather than speeding along a construction autobahn with a perpetual green light, projects are being approached at the speed of yellow.

Saskatchewan: The final frontier?
When the Saskatchewan government realized it was losing a major portion of its population to Alberta, the province embarked on an aggressive public relations campaign to lure back Saskatchewanites. Promises of cheaper homes, less traffic, and a higher quality of life appear to have worked: the province has recorded an increase in population for the first time since 1999, mostly through interprovincial migration from Alberta.

As die-hard Riders fans return to their homeland, they are stimulating the economy while driving up real estate prices. According to Ron Brown, a senior vice president and director with Tamarack’s Saskatoon office, the Saskatchewan market is slowly catching up with Alberta’s.

“Development is taking off in all sectors: residential, commercial and recreational.” The residential market has been particularly strong, with prices increasing as much as 50 per cent over the past two years.

While most other markets across Western Canada are beginning to cool off, Saskatchewan’s homebuilding market remains strong. An influx of out-of-province buyers has contributed to price inconsistencies and price increases, and even appraisers are finding it difficult to nail down values.

“There are so many buyers with varying expectations.  It makes it difficult to determine what something’s really worth,” explains Ron. “What someone from Alberta is willing to pay is not the same as what someone from Saskatchewan is willing to pay, so it’s hard to keep up.”

Another interesting phenomenon is investors who flock to perceived strategic centres in the West. As an example, Ron points out that North Battleford (Saskatchewan’s springboard to the oilsands) led the province in gains last year as investors try to position themselves where they think the next big play is.

With many investors attempting to acquire land with the fury of a modern day gold rush, Ron cautions taking a practical approach. “There are definitely some good deals available, but it’s important to ask the right questions.”

If you are investing in any real estate project, Ron recommends doing your homework by asking key questions such as, "Who is behind the project?" "Who’s raising the capital?" "What is the developer’s history?" "Are the returns realistic?" 

Up until a few years ago, Saskatchewan was never seen as a hotspot for development, but the resource sector has brought considerable opportunities. Combined with increasing interest in the production of ethanol and biofuels, Ron predicts steady growth throughout Saskatchewan.   

Making your move 
Whether you’re interested in retail property, residential developments, or recreational resorts, it’s important to be patient and take the time to know your market. Start by looking at your desired markets, researching developers, and considering other key influencers. Also, keep in mind that well-researched holdings can be a valuable component of a diversified investment portfolio - and will usually generate positive returns.

“Investing in real estate is essentially purchasing a non-renewable resource,” explains Doug. “Time is on your side, and the longer you can hold your investment, the more equity you’ll build.”

* Holt and Goldbloom, RBC Economics, September 2007.
**Avison Young, Alberta Office Market Report, Fall 2007.

For more information, please contact your local MNP advisor or Doug Bedard at 1.877.500.0792.

< back