BMO Real Estate Forum: BC Outlook
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BMO recently hosted a forum on the real estate outlook for BC. We brought together industry experts to discuss the trends driving the resiliency of the BC real estate market.
- Robert Kavcic, Director and Senior Economist at BMO, provided a high-level economic update.
- Michael Ferreira, Managing Principal at Zonda Urban (formerly Urban Analytics), discussed market trends in the BC region.
- Greg Vriend, BMO’s Regional Vice President, Real Estate Finance, moderated a roundtable discussion which included Mike Beg, Senior Vice President and Head, Real Estate Finance at BMO, Robert, and Michael, covering key topics including industry challenges.
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[00:00:13] Speaker 1: Welcome and thank you for joining us for today's live webcast and discussion. We invite you to be a part of the conversation. You'll see a chatbox located near the video window. Click Chat as a guest and enter your name. Feel free to enter your questions and our moderators will forward them to the panel. We'll repeat these instructions later in the show as a reminder. It is now time to begin and I will invite your host to take the stage.
[00:00:41] Mike Beg: Greetings, everyone. I'm Mike Beg, head of BMOs Canadian Commercial Real Estate Finance Team. Thank you all for joining us today. I think we can all agree this past year and a half has been a time like we've never seen in this industry. Banks entered COVID bracing for deeper impacts on the commercial real estate books, deferring mortgage payments to ease cash flow pressures, monitoring in the property, rent collections, and housing market trends, while continuing to support large development and financing demand by the industry.
I'll try not to steal our speakers' thunder but to say the commercial real estate segment has done better than expected this past year would be an understatement. The payment deferral programs that served their purpose so well largely wound down late in 2020. We have not had any losses or defaults in our commercial real estate book that can be attributed to COVID and that is generally true across the banks. Availability of capital across the segments remains strong. We had a veritable Z or nearly Z-shaped recovery because employment impacts were largely service sector impacting about 4% of GDP.
There is pain and ongoing adjustment in the retail and office sectors to be sure, but this is not your parents' or even our own prior commercial real estate recession experience but a unique pandemic one where low rates and strong demand continuing undersupply trends are driving borrowing and housing market activity. We expect that to continue through 2022 and beyond.
We have a lot to cover in the next hour. I'll walk through the agenda quickly and then we'll get started. We'll start with Robert Kavcic who will kick us off with an economic update. Robert has been with BMO since 2006 and plays a key role in analyzing Canadian regional economic fiscal and real estate trends. Following Robert, we'll be joined by Michael Ferreira, managing principal of Zonder Urban, formally Urban Analytics. Michael is regularly sought after to provide market intelligence and insight. During his nearly 30 years in the industry, Michael's experienced multiple real estate cycles and can effectively evaluate current and anticipated market conditions as they relate to new residential development opportunities.
We will then have a roundtable covering the topics and answer questions that were submitted. Moderating that discussion is BMO's great friend, my team leader for British Columbia. As regional vice president, he brings over 25 years experience in real estate finance, overseeing the teams that are managing our complex developer relationships.
Before I get started, if you are watching the event on a desktop or laptop, you will see a chat box next to the video screen. Please feel free to use it at any time during the presentation to submit questions to the panelists. Additionally, below the video screen, you'll see a link to a survey. We will welcome your feedback so that we can get better shape for future events like this one. With that, I'm going to turn it over to you now, Robert.
[00:03:57] Robert Kavcic: Great. Thanks a lot, Mike, and thanks, everybody, for coming on today. I'll set the macroeconomic backdrop, and then I guess following me, we'll drill down more into the specifics of the market. I guess just to see where we're coming from on this, we've spent the better part of this year arguing that demand is extremely strong, inflation is going to be stronger and persist longer than most are telling us, and that central banks as a result, maybe have their policy calibrated a little bit wrong and are falling a little bit behind the curve.
Sure enough, the Bank of Canada came out today and pretty much fully admitted that yes, rates are going to be moving sooner than we told you and probably moving faster than we told you. I'm going to get to that as we go through the presentation, but bottom line here is the backdrop is very strong and interest rates are on the horizon for the first time in quite some time.
When you look at our economic outlook, it really does ebb and flow with the pandemic curve. I think, for the most part, we can finally say we're at the point where we can put most of this behind us. You can see that Delta wave in Canada really has crested in terms of cases and has started to come down. Given where we are with vaccinations and how we in the economy have adjusted to the level of cases that are out there in the system now or potentially through the winter, we think the vast majority of the restrictions from an economic perspective that we've seen are going to be pretty much behind us at this point.
We know and we've seen that it's been a very gradual stop-and-go "reopening" of the economy, but as we go through the fall and the winter and especially through 2022, it's not going to come all at once, but we're going to wake up one day next year and say, "You know what? We're actually pretty close to normal at this point." From that perspective, we're quite optimistic on the growth outlook still.
There was a bit of a hiccup earlier in the year and around the turn of the year, especially with some provinces dealing with that Delta wave and bringing in new restrictions, but when we look beyond the second quarter, look at what we're seeing so far in Q3 and then especially out to Q4 and for the rest of this year, we see a pretty strong run rate of growth in Canada. Probably about four to 5% or so annualized through the rest of this year in the first half of 2022. A lot of that comes as the restrictions permanently back off and a lot of service-type activity reopens, people go back to work to some extent, and travel activity gradually comes back. It's obviously proving to be very gradual, but we do think it is coming.
Add it all up, you get 5% growth in Canada this year, probably 4.5% next year. A similar underlying run rate in the US, just the shape looks a little bit differently. Obviously, the US didn't have the same extent of restrictions that we did through the middle of this year. The takeaway here is both economies through the next year or so look like they're going to be running at a pretty strong clip, well above potential, and typically potential growth or trend growth in Canada would be slightly below 2%, so if we're running at three or four or 5%, we're running well above that. Well above that speed limit for the economy and that's certainly something that the Bank of Canada is going to be more mindful of. In fact, as of this morning, they are a lot more mindful of.
When you look across the country, what stands out here is that pretty much every region of Canada dealt with this COVID shock. Every region of Canada is now undergoing a pretty strong recovery. Obviously, there's a little bit of variation, depending on where you are in the country. Some provinces were hit a bit harder by restrictions like the Ontario's and Quebec's, others not quite as much. Just say that British Columbia here stands out. When you look at this relative to economic output as we have charted here, if you look at it relative to employment or most other broad economic indicators, British Columbia has really fared the best through the pandemic, partly because we just didn't see the same extent of lockdowns and therefore have the same in and out of reopening disruption that we saw across a number of the other larger provinces, especially somewhere like an Ontario.
From that perspective, you never want to say it's a good outcome when you see GDP in a province down almost 4% in a year. That's historically negative, but relative to the rest of the provincial field, British Columbia pretty clearly was one of the top performers through this pandemic. We think longer term, they still slot in here when you look at 2022 and beyond at the high end of the growth leaderboard in Canada, right up there with Ontario and Quebec driving economic activity in this country. From that perspective, we're quite optimistic on the region.
With that backdrop, I'm going to look a little bit at the labor market situation because it's driving the inflation situation, then zoom in a little bit on housing and then maybe wrap up with what it all means for interest rates and then go from there. On the labor market side, what we're seeing here is actually a very, very fast recovery in employment in the jobless rate in most measures. As an example, look at how quickly the unemployment rate has come down in this cycle versus post-2009, for example, where post-2009, we saw the unemployment rate jump to almost 9%. In Canada, it took us pretty much the next decade to tighten up the labor market to the extent that we saw a pre-financial crisis.
It could not be any different this time. We saw the unemployment rate obviously spike to a much higher level, but a number of sectors of the labor market actually came back extremely quickly. Anything really, anything outside of face-to-face service was fully recovered already by the second half of 2020. The last remaining sectors out there, which really account for all that's left in terms of employment losses versus pre-COVID, are effectively tourism and hotels and restaurants. The rest of the labor market has already recovered and started to move on. From that perspective, it's actually a pretty strong underlying story with the exception of a few areas that are obviously still struggling. As we go through 2022, those areas are going to quickly recover as well.
Then from a regional perspective, just highlighting the relatively strong performance of BC, employment in British Columbia is actually 1.5% above pre-COVID levels already, so significantly outperforming the rest of Canada on that front. We're quite optimistic on how quickly the labor market is recovering. Even the bank of Canada this morning, they put out a table and said, you know what? We were effectively, paraphrasing obviously, is we were concerned for a long time that this labor market recovery was going to be very uneven and take a long time to come back. The reality is it's coming back a lot faster and a lot more evenly than even they would have had expected.
Why this is important is when you look at the growth outlook from here, the household sector has a lot of firepower to drive economic growth. The employment recovery is one aspect of that. It's coming faster and it's coming more broadly than most had expected, but look at what has happened to household savings as well through this downturn. Partly because most of the economy from an employment perspective came back very quickly, especially higher-paying industries, and partly because the federal government, as we all know, pushed out just historic amounts of federal to household transfers.
A lot of that savings ended up on the household balance sheet. As it stands today, if you look at household savings in Canada versus some underlying run-rate consistent with what we would have seen accumulated had we not had this pandemic, we probably have an excess of somewhere in the $200 to $250 billion range. That's not savings in Canada, that's savings up and above what we would have otherwise saved had there not been a pandemic. Part of it is employment, part of it is transfers, part of it is that households had not been able to spend on things like travel and services.
The point here is that there's a ton of liquidity on the household balance sheet, corporate balance sheet as well, but we're looking at households here, and that's almost 10% of GDP. There is a lot of firepower here to sustain consumer spending and housing investment going forward, not only over the next year but beyond as well. Pretty clearly we're seeing a very strong demand side of the economy here. Employment's coming back, household savings are high, we've had record fiscal stimulus.
Then we look at the inflation picture, central banks are telling us this is a supply-side story. This is supply bottlenecks. Well, the trouble we have with this is that yes, supply is constrained and supply can't keep up to demand, but it's really demand that has risen well above pre-COVID levels, especially for goods and especially for things like housing. You combine the fact that demand is extremely elevated, supply has not been able to respond because how quickly can you build a microchip factory or how quickly can you put houses up? We all know that the response isn't instantaneous, you end up with this situation here, whereas you have a pretty acute upward pressure on prices.
A lot of the economic growth that we're seeing now, and going back over the last year or so, has partly gone into volumes, but a lot of it has gone into actual price increases. Nominal growth has run well ahead of real volume growth and hence why we're getting this inflation now. 4% core inflation in the US, we haven't seen this since the early 1990s. In Canada, the Bank of Canada looks at about five different measures of core inflation right now just to confuse everybody. The bottom line is when you sift through it all, is that we're seeing core inflation in Canada as well, the highest in at least a couple of decades. Headline inflation up above 4%, probably pushing up towards 5% by the end of this year.
This is a backdrop that is not something that is just going to magically disappear overnight. We've been saying pretty much all of 2021, going back to the turn of the year, that when you get such a significant economic shock like this, typically what you want to just assume is that the impact on say, and we're using inflation here, as an example, the impact is usually stronger than most people think at the outset, and it usually lasts longer than most people think at the outset. Here we are coming into the end of the year, and yes, inflation is still sticky, doesn't look like it's going away anytime soon and it's probably going to be persisting with us through the course of next year as well.
You can see in our forecasts here that we're not looking at some kind of double-digit inflation story, some kind of stagflation story like you might have been reading about, or '70s or '80s type of inflation story. This is really an environment where inflation has shifted up from 1.5% to 2%, to what looks like a run rate, for now, of maybe 3% to 4%. That doesn't sound like a whole lot, but it is still a doubling of the underlying inflation rate that we're going to have to deal with as households and businesses.
Then gradually, over the course of the next few years, if you wanted to project that forecast out a little bit further, we would expect interest rates to start rising maybe earlier than people think and quicker than people think. I'll get back to that, but as that happens, the demand side of the economy cools off, and I reiterate the demand side, and eventually, these price pressures start to dissipate. It's just going to take longer than anybody has been thinking. That's where we are on that front right now.
Take a look. One other link here is in the labor market. I mentioned how quickly job growth has come back. Interestingly enough, as much as the unemployment rate is still elevated, the biggest thing we've been hearing from commercial banking clients, biggest thing we've been seeing in business surveys, in the Bank of Canada's business outlook is that there's just simply not enough labor supply to meet demand. Again, it's demand, a lot of labor demand, not enough supply to fill these jobs.
Of course, what tends to happen here, and this is US data on job openings, you can see we're looking at record job openings in the US, well higher than anything we saw at the end of the '07-'08 cycle, well higher than anything we saw at the end of the technology boom. Record job openings tend to bring wage inflation along with it. Obviously, the easiest way to get jobs filled is to just say, "Guys, I'm going to pay you more." This tends to happen with a little bit of a lag.
You can see most measures of wage inflation in the US have been pretty well contained, but look at the right side of that chart there. That's one measure of inflation that the Orlando Fed used to consolidate all the different measures and put it on a relatively comparable basis. It is pushing up again to the highest we've seen since the end of the '05-'06 cycle and clearly there, the risk is that we see more of a run to the upside.
What this means is that if what is a very acute demand increase for various consumer goods and some supply bottlenecks starts to translate into upward wage pressure, then that starts to become more of an issue in terms of reinforcing inflation expectations, and is certainly going to catch the attention of central banks more than maybe like consumer prices themselves. The point here is that this is again, a very tight market for employment as well as goods.
On the building cost side. This is one area that has not come out of this unscathed. If you look at residential building prices in Canada, be it through the channels of steel or lumber, we've seen record increases in a lot of those commodities that flow through to building costs, not to mention the availability of labor, which we just talked about is still very tight. We have seen quite a bit of upward pressure on building costs.
Again, similar to the broader inflation story, we think that this is probably at the point where we're going to start to see the rate of inflation maybe peak, but we're not going to just certainly not going to see just pricing on all of these factors go back to where it was pre-COVID. It'll probably take some time for the inflation rate on a lot of these inputs that gradually settle back down to something that's more of a sustainable.
This is not a three or six months story, this is a 2022 and beyond story, I think, by the time a lot of these input cost pressures really start to stabilize and come back down. The point here is even on the building cost side, I think builders and then a lot of businesses are probably if they haven't already, are going to have to get comfortable in an environment now that feels a little bit different than anything they've been used to over the last 10 or 15 years in terms of price pressures and labor market pressures.
I think that's the inflation story. Obviously, if there are questions on that, we can go back to some more of the details on that. Take a look at the residential side of the real estate market in Canada here. Again, just reiterating what a demand shock this has been. There's a lot of debate out there in housing circles that there's not enough supply and things like that. Yes, we can certainly sympathize with the fact that there are a lot of regulatory hurdles to bring supply to market quickly and the composition of supply because of various policy measures across the country that have pushed out of single-detached housing and into multis, and things like that have constrained supply from a longer-term perspective.
That is very much true, but look at what has happened to demand through this pandemic. That's home sales on the left. You can see just in British Columbia, we saw a very dramatic run-up in housing sales to a level that we have not seen historically. Even today, as much as sales have backed off, we are still looking at sales meaningfully above the 10-year average. Demand on the housing side is extremely strong. There are a lot of factors behind this. Record-low mortgage rates are obviously one, a big rebound in employment, especially at the higher end of the income spectrum has been another. A lot of that household wealth and savings that were built up because of federal the household transfers has also helped drive income growth.
We've seen a big shift in preferences from the core of the big cities to the perimeters of the big cities and a lot of areas that pre-COVID were off-limits because to take somebody working in Vancouver or Toronto, for example, and commuting into the city every day, typically they would be bound to within like an hour commuting distance of the core of the city if they're going in every single day, but now through the pandemic and expectations post-COVID that maybe we're not going to have to do that every single day, opened up a wider net of housing that realistically made sense to people.
The hottest markets in this country have been not in the big cities themselves but one to two hours outside of a big city. The smaller towns and slightly more rural areas outside the core of these big cities that have provided more space and have been really an affordability valve for a lot of people that have been struggling within the GVA or the GTA for a long time. That's one of the things the pandemic has actually maybe done positively for housing, is that it's opened up some of these other markets and by you, on a relative basis, allowing for a little bit of a repricing has actually allowed some households to pick up a bit more affordability.
Where this goes from here. I mean there's nothing stopping the housing market at this point. In fact, you can see that sales have come down and it's a BC story. It's pretty much a national story as well but even just within the last month or two, we've started to see some stability in sales and we've started to see the market tighten up again, and through the rest of this year and through the spring of next year, I suspect that this market is still going to remain very, very strong and there's not a whole lot to slow it down.
Federal government has tried to tweak a few things, [unintelligible 00:23:06] has tried to tweak a few things, we've said all along that these are token small changes that are not going to change the market. Ultimately, what we need to cool this market down is higher interest rates, been saying this for a whole year now and we are very close to getting to that point. Take a look at the market here is still obviously very, very tight. That's sales, new listings ratio, and again, just reiterating my point there that this is still a very strong market that's going to continue to move until we get some rate hikes.
On the demographic side, longer-term, we are actually quite positive. What we've seen through the pandemic was a bit of a slowdown and most of that coming through the international migration channel, especially on the non-permanent resident front, but demographically, we think we're actually in a still a very strong position. British Columbia, provincially, is still drawing people in from the rest of the country. Within the province itself, the millennial group is driving a lot of housing demand.
Really, the hiccup on the demographic side has been international inflows and especially those non-permanent residents. What we know for a fact is that as soon as it's reasonable to do so, the federal government as it stands now is going to bring those migration flows back to in excess of 400,000 per year, if not making up for some of the last time we saw during the pandemic.
One of the impacts we saw was on multifamily or on the rental property side where a lot of the rental demand eased off a little bit because these demographic flows scaled back down. A little bit more vacancy a little bit, not a whole lot of downward pressure on rent, but less upward pressure on rent. Those days are probably pretty numbered, and by late 2022 into 2023, I would fully expect those demographic flows to come back and that side of the equation to again look pretty strong. From a rent perspective and a vacancy perspective, we still actually look quite good.
What about interest rates? This is the crux of the story here. We know we have extremely strong demand, we have inflation that's persisting more than central banks thought. Central banks have been telling us, we're not going to see any rate hikes until 2023. We've been saying, "Yes, I don't think so." We're going to be looking at moves earlier and maybe a little bit more often.
What we're looking at now is actually the Bank of Canada starting to raise rates around the middle of next year. They actually came out this morning and more or less guided towards the same thing in their policy statement. It's looking like spring or early summer of 2022, where we're going to start to see rates rise. I suspect from that point, it's going to probably be about 25 basis points every meeting or so until we get that overnight rate back up to where it was pre-COVID. We think that is still roughly the endpoint for rates. It's just going to come a little bit quicker than you might have been thinking and the process will start a little bit earlier than maybe you might have been thinking.
On the longer end of the yield curve, and I show the 10-year yield here, we are still in this position where yields are gradually grinding higher. What that means for us in real estate is that there's already a pretty big gap that's opened up between, say, five-year GOC yields and five-year fixed mortgage rates. We've already seen fixed rates back up probably 20 or 30 basis points off of the lows. There's easily another 20 or 30 basis points coming at us just based on where five-year GOC yields are today. Then of course over the course of 2022, we think there's still a bit more upside there. We could see five year fixed mortgage rates pushing up towards, easily call it about 3% or so at which starts to look, again, a little bit more like it did in the latter stages of the last cycle. Again, that's going to come at us probably a little bit quicker than we were maybe preparing for.
What does that mean for housing valuations, just to wrap it up? Well, the trouble here is that housing valuations have already run a little bit as we can all figure out. This is just a rough estimation of mortgage payments as a share of household income. You can see where we are today. We're already probably at the richest housing valuation on this metric since the late '80s, early 1990s.
Question is if interest rates do back up to about 3% or so, and this is assuming the stable home prices, then again, there probably is a point where we start to run into a little bit of pressure on the price side. This also assumes that incomes do you continue to run at a very strong pace. The risk here is that if mortgage rates run a little bit quicker, a little bit higher, and say, we throw in a 4% on an average mortgage right here to stress test a little bit, well, then that's a scenario where home prices are probably going to start to look quite a bit rich and have to come down a little bit.
If we get a Goldilocks scenario here where the Bank of Canada is able to raise rates very gradually, and yes, we do go back to something that looks more neutral in a later cycle environment, like 3% but happens gradually over time, we have a very strong demographic, very strong employment fundamentals still, it does not necessarily mean we have to see a big correction of home prices, but we could very well see a period where home prices after a very strong run start to level off and move sideways or consolidate for a couple of years going forward. That's probably the most realistic and I would say, personally, probably the best-case scenario for the market and for the economy as well.
I will wrap it up there and I guess just a few points to summarize on my end before we drill into the market a bit more is that pretty clearly that we are of the view that the economy is quite strong. The demand side of the economy is very strong and as a result, the inflation pressure that we're seeing is probably going to persist longer than most have been saying. The flip side of that from a policy perspective is that central banks as we speak today are recalibrating themselves. I think we're probably going to start talking more seriously about interest rate hikes as we get into the early part of next year.
By the middle of next year, unless something totally goes wrong, I'll be really surprised if we're not looking at the Bank of Canada raising rates by the middle of next year and the Federal Reserve a little bit behind them later in the year. I will leave it at that. Obviously, we can touch on some of these things a bit more in the Q&A. I'll turn it over to Greg and we can move on to more of a market focus.
[00:29:56] Greg Vriend: Thank you very much, Robert. We appreciate your insights and your literally up to the second update. I'd now like to turn it over to Michael Ferreira who's going to give us an update on the real estate industry.
[00:30:11] Michael Ferreira: Thanks, Greg. Thanks, everybody for tuning in today. I'm looking forward to doing more of this in person at some point, hopefully, sooner than later. Zoom is great, but it certainly makes it nicer when you can actually see faces in front of you that you're presenting to. I'll try to get through these so that we have some decent amount of time for Q&A at the end of this. Just going back to March of 2020 when the pandemic hit and we were all wondering what was going to happen. There was so much uncertainty in the market, not dissimilar to what we were feeling in 2009 or 2008, but in some ways, it felt a little bit different.
My partner and I immediately upon going into lockdown, we started calling a bunch of our clients just to get a sense of what they were feeling within those first few weeks of the pandemic hitting. Probably over 90%, I would say, were still obviously not optimistic, but they were feeling better about things than we might have expected. The biggest thing was, I think there was a light at the end of the tunnel with the vaccines already being discussed in terms of being developed, and so there was an end in sight to what we're going through. We obviously were hoping that end would have come sooner, but it hasn't.
In any case, I think that got us thinking "Okay, well, this might not be quite as bad as some people might think." Sure enough, within a couple of months of the pandemic hitting, we saw that things had improved certainly for the for-sale side of the market. Rental side of the market clearly experienced a few more bumps and bruises than the for-sale market. We'll discuss those here. I'm going to give you just a background on the new multifamily home market in Metro Vancouver. In terms of geography, we cover from Squamish all the way out to Abbotsford itself to South Surrey and White Rock. The data that I'm presenting today basically encompasses all of those areas.
Looking at first of all the-- I'm going to go through the condo market first and then touch on the rental market shortly thereafter. Through the first half of this year, we're just compiling our Q3 numbers. We're still waiting for a couple of stragglers to provide us with some info on their third-quarter results so I didn't want to present you incomplete data for the third quarter. For the first half of the year, as you can see, over 13,100 sales, which is more than the first half of 2016, which was what we would classify as the last peak of the market in 2016 when the market was going absolutely bonkers and you're seeing some pretty steep price increases while sales were also climbing.
The sales so far this year in the first six months is also more than what we had in all of 2019 and all of 2020. Of course, we recall 2019 as being the year that we really felt those provincial government policies that were brought in to cool the housing market. It's really not a huge surprise that we saw that drop in sales in 2019 when the government comes out and essentially says, "We're bringing these policies in to cool the housing market, bring prices down."
If you're an investor looking to purchase a presale condo, and the government is suggesting that they're going to try and bring prices down, well, you're going to wait to see what happens with prices, if they do, in fact, come down. We can see that through the first three quarters of 2019. We started to see some momentum building in the fourth quarter of 2019 and into the first weeks of 2020, and then, of course, the pandemic hit in March and everything came to a complete stop for several weeks. Then, as you can see in the chart line that we're showing here, starting in later part of the second quarter of 2020 and then through the rest of the year and into this year, we've seen a steep incline in sales as people realize that maybe things weren't going to be all that bad.
Looking at where the sales are happening, and this is quite a big story as Robert was referring to across the country with demand really increasing in some of the suburban markets and this shows it as well, the orange line are more suburban markets, so the Fraser River, the green line are the sales in the more urban parts of the market. We saw this trend start in 2019. It was really more a function of a lack of sales in the high-rise sector in the urban submarkets of the region as opposed to any-- We did continue to see reasonably strong demand in the suburban markets but it was really the drop in the demand for the product in the urban markets that brought the sales for those two products [unintelligible 00:35:36] in those two areas together a little bit more.
Typically historically, the suburban submarkets have made up about 20% to 25% [unintelligible 00:35:44] sales. Since the start of 2019, they comprise about 40% of sales and that's even in spite of a return of investors late last year and into this year driving up the sales in the urban markets, again, the suburban markets are certainly kept up to that.
When you look at sales by product type, and this just further supports the slide that we just saw in terms of where the demand lies, with a big increase in demand for a ground-oriented product, particularly townhomes, as well as low rise condominiums. We did see, as I mentioned, a return of the investors earlier this year into the urban markets so that's where we're seeing the concrete sector, sales in that sector really start to spike up towards the end of last year, and this year as well.
Those investors are back but they're still being quite selective is what we're seeing, so whether it's price or whether it's product. They do also have a little bit more selection where we've seen a number of developers that were holding off from releasing new projects in 2019 and of course, in 2020, those projects have been closer to being ready to launch, so we've seen a lot of projects come out around the same time so these investors do have a little bit more to choose from.
In terms of percentage increases, we've seen concrete condo sales increased by over 300%, low-rise condo sales, an impressive 276%, and then the townhome sales, still strong, they're up 131% in the first half of this year, and they'd be higher. That trend line with the townhomes dropping in the second quarter of this year is really the result of much of the supply that was in the market being absorbed and not enough new supply being approved and brought onto the market to backfill that product that was absorbed.
Just taking a look at inventory, this illustrates the shrinking supply of that ground-oriented product. There's 40% fewer low-rise condominiums available to buy this year relative to last year. Then townhomes, about half of the number of townhomes still available in the market to purchase.
This is a chart we always like to show, it represents the spread between the number of sales in a given quarter and the number of units that are available to purchase, so unsold inventory that's been in the marketplace. You can see how this has fluctuated over the years to the point where we were seeing the number of quarterly sales exceeding the number of units that were remaining unsold at the end of that quarter, back towards the end of 2016, and right through until the middle of 2018. Since then, through 2019, we've seen that reverse again where supply is exceeding quarterly sales. Again, with the throng spike in demand that we've seen over the last three, four quarters, we've really seen that thread start to narrow again to the point where it's just over 1200 units between the two.
This is illustrated further by the fact just when we look at the number of projects that were released so far this year, in the first two quarters of this year, there were 102 new projects that were released into the marketplace, with a combined total of over 10,322 units released. In that period of time, as I mentioned earlier, we saw over 13,000 sales. The number of sales are actually exceeding the number of new units that are coming into the marketplace.
Sorry, just distracted a little bit by the chat going on just making sure that I'm not [chuckles] missing something. Taking a look at standing inventory. Again, this trend reflects, again, the dwindling supply of inventory and the fact that it's held steady in spite of what we saw through 2019/2020. I think the fact that we had developers pull back on their plans to launch new high-rise projects into the marketplace in 2019 and the first half of 2020 sort of kept the supply of unsold inventory. These are completed and unsold move-in ready units that are available for purchase and move into right away in the marketplace.
With respect to the inventory by product type and construction status, when we see inventory numbers start to climb a little bit, we always look closely at what stage of construction, are they at? When might they be completing and when could they become that standing inventory on that chart that we just showed you. This shows you how there's not a whole lot of reason to be concerned on the inventory front. 95% of concrete condos are under construction or in sale. As you can see the majority of those still in the pre-sale phase. 87% of low-rise condos are either under construction or for sale.
Again, there's almost twice as many low-rise condos that are yet to start construction that are actually under construction still. Then of course for townhomes, it's over 96% of the supply and the unsold inventory that's either under construction or in the presale phase. Again, not a whole lot of concern here with respect to that unsold inventory number climbing.
Then when we look a little more closely at the concrete sector, and whether we should be or have any concerns over an increase in unsold supply in the marketplace, this is actually a chart that we produce for Greg on a quarterly basis and essentially, it's showing of the concrete condominium units that are scheduled to complete within any given quarter up to 2025, how many of those units are sold and how many are still unsold. When you combine all of these units, we've got 85% of the concrete condo units completed between now and the end of the second half of 2025 are already sold. Again, no concern really with respect to unsold inventories.
With respect to what we're watching and on the pricing side of things, as everybody knows, pricing never really dropped anywhere in Metro Vancouver as a result of the pandemic. They certainly softened more. In 2019, there's a result of some of those policies that the government brought in but we didn't see any significant declines certainly. Some submarkets, some product sectors certainly we saw a little more softening than others, but certainly nothing significant, perhaps outside of downtown.
In terms of where most areas are, we've seen they've either recovered or certainly surpassed by far some of the pre-2019 pricing. While the downtown market of Vancouver is still struggling a little bit and still a little less certain, we've seen the west side of Vancouver bounce back. We're seeing condo prices there now for townhome pricing is now in the 1400s per square foot, your mid-rise concrete product is now bumping up over $1500 to $1,600 a square foot. It's interesting to see that and of course, out in the suburbs, some of the price increases have been significant, maybe edging towards concerning territory. At this point, we continue to see strong absorptions there.
With respect to demand in the condo market, the market has flattened somewhat in the second half of this year. I think Robert even mentioned that when we were looking at the resale market. The same is happening on the new home market. We've seen pockets where demand is still been quite strong, certain project launches where we've seen very strong absorptions. In general, across the market, we've seen a bit of a softening in the third quarter of the year. Probably partly due to some fatigue from what was going on through 2020 and the first half of this year. Then in some sectors as I mentioned, townhome product out in the suburbs, a lack of supply for some product types that is moving demand down a little bit.
We're still continuing to see municipal planning delays continue to be a big drag on the market. It was nice to see a story from last night actually from the provincial government where they're starting to provide municipalities with some tools to try and speed up the approvals process. Hopefully, most of the municipalities take that or make use of those tools so that we can see faster approval times and increase supply into the market.
The challenge that I think the market might have even despite the increases in supply we do see approvals speed up and more supply come out in the market faster is whether we actually have the supply of labor and materials to build that product. Referring back to what Rob was saying with respect to the immigration targets that the federal government has, they had increased those targets for 2021 through 2023. Obviously, that's going to be moved up but we're basically looking at over 1.2 million immigrants that they're going to allow into the country over the three years following when they opened the borders again.
Again, as the last two years have shown, we're having trouble supplying the domestic demand, let alone international or new immigrant demand. It'll be interesting to see what happens when we do open the borders again, the immigrants come back in, and what pressure that puts on the markets and on real estate.
Quick look at the rental market in Vancouver and just show what's happened during the pandemic and during the first six months of this year. We look at newer rentals and new purpose-built rentals in Vancouver in two ways. We have all projects which include those projects that have more recently been released to the market, so they're still going through their initial leasing campaign. The orange line would include those projects.
Then we continue to monitor rental projects after they complete the initial leasing campaign become fully leased. We'll continue to track the turnover so [inaudible 00:46:53] they can see rates have come down quite substantially since the fourth quarter of last year, and in particular, since the first quarter of this year and really to where we saw that the majority of the softening or the biggest impact on vacancies during the pandemic was in any of those areas that were influenced by post-secondary [inaudible 00:47:15] with the remote learning being the case all of last year, it really did have an impact on rents and vacancies in those areas.
This chart shows you quite clearly, this is for rental projects in the UBC neighborhood, how dramatic that increase in vacancies were, and equally, how dramatic the drop in vacancy has been since the first quarter of this year when it was announced that they would be going back to in-person learning early this summer, the majority of the supply got absorbed very quickly.
Looking at quarterly vacancy versus net rents, again, no big surprise here in that as vacancies increased, we saw rents start to drop, and then as vacancies dropped, rents have gone back up again. We've seen this trend across the region. Rents are up about 21 cents per square foot, we've seen incentives get removed from the offering to renters, and a lot of the increase is also due to new rental projects coming on the market and establishing a high overall average rent per square foot.
That's really a function of the rent controls that we've seen the provincial government bring in a few years ago, which limited the annual increase in rent to the cost of living when the inflation where it is, that'll be an interesting conversation next year when it comes around to announcing how much owners can increase rents by but nevertheless, the fact that they were limited to that earlier lower inflation rate causes many owners when they were launching their leasing campaigns to sacrifice absorption for a higher rent.
Even recently, an example of that is a project in downtown Vancouver by GWL, that they came out at an average of 480 per square foot, and we're hearing that they'd like to try if they can and push that up to $5 a square foot, and we're hearing other new projects that are coming in behind them are trying to achieve the same thing.
Rent by submarket, I'll just let you have a quick look at this. No huge surprise here in the sense that we're seeing the highest rents closer to the urban core of Vancouver. Squamish is a strong rental market, that's reflected by the rents that we're getting there. Obviously, its proximity to Vancouver as well as Whistler helps that market and surprisingly, Abbotsford is a strong rental market as well, as far as relative to other Fraser Valley submarkets.
In terms of what we're watching with respect to rents in the market, we'll continue to see them move up as long as municipalities continue to drag their heels in terms of the pace of approvals. This is one sector of the market you would expect municipalities to be fast-tracking wherever they can. We don't have investors in the rental market, so the more supply you put out there, it's going to have an immediate impact on rents. Hopefully, municipalities get the message and we start to see an increase in supply on the rental side of the market.
Just to put it into perspective, we're tracking right now in terms of units that are going to start leasing over the next six months. We've got 1700 new rental units that are scheduled to start leasing between now and the second quarter of next year. Compare that to Calgary where I am today and we're anticipating 3000 units to start leasing in the Calgary market over that same year. We're quite always behind a city that doesn't have as much going on economically as Metro Vancouver, and as a result, we have seen rents stay pretty flat in Calgary as well. It'll be interesting to see if some of these tools that the provincial government announced yesterday that they're providing municipalities will be taken up and given to the market to try and speed up this process.
Demand, we don't see any slowdown on the demand side for rentals with a lot of the new employment coming into the city. Amazon's a perfect example with 4500 employees slated to start working out of the post office redevelopment, and many other companies like that. We're seeing that demand not just in the core of Vancouver, but we're seeing it spread throughout into the suburbs as well where are we seeing some pretty quick absorption of new rental projects that are being released there as well, but we don't see any let-up on the demand side for rental. With that, I'll hand it back to Greg and hopefully, there's still some time for some questions.
[00:52:16] Greg: Thank you very much, Michael. That was an excellent presentation. As Michael mentioned, we'll move into the roundtable portion of our discussion. We got a lot of questions from people, so thank you very much for those and we're going to try and get to as many as possible. I'm going to start off with a question for Michael. Michael has been detailed in the two presentations, we've seen the suburban markets perform much better than the urban markets since COVID. Do you expect the urban markets to catch up and then more specifically, what is your outlook for the downtown Vancouver condo market?
[00:52:50] Michael: Yes, I don't see any reason why the suburban markets won't continue to perform strongly. I'm not sure if everybody's heard, there's the first high-rise tower to be launched in Langley was released in the last month or so. They sold out of 280 units in a weekend and they were oversubscribed for the second tower. I think they had 1100 sweep requests for the second tower of that development for around 300 units, so that market is still strong.
We saw another high-rise development in Surrey recently sell out. The ground-oriented product in the Fraser Valley and other surrounding markets I think will continue to be strong regardless of whether we return to the office or continue to work from home. As we were seeing before the pandemic, it's really a function of affordability, getting a little bit more value for the money. Where downtown Vancouver is concerned, it will come back. It's still slow to come back. What needs to happen there is narrowing of the values in the resale market for condos and the new home market.
A lot of the clients that we talked to who have land in downtown that they'd like to launch a project on, they're still needing in the range of $2,000 or $2,100 per square foot. As we've seen with a couple of the recent launches in the market downtown, the market is probably closer to the $1,800 square foot range. It's certainly closer to where it needs to be but still not where we were pre-2018 or 2019.
It is encouraging and when we chatted with Bosa Properties who just recently launched their Fifteen Fifteen projects at-- They're being pretty tight-lipped with specific numbers, but they're in the mid to high $2,700 per square foot range. I think they'd like to close in on $2,800 a foot. The response they're saying has been positive. Again, they haven't shared any numbers with us, but they'd like to get through the recession period for some of these initial sales. Obviously, with COVID, it's taking a little longer, they're not able to get a lot of people in the door at one time but they are encouraged by the response that they're receiving so far, so that'll be a good news story for [inaudible 00:55:23].
[00:55:26] Greg: Thank you. Next question is for Robert. We've seen foreign capital inflows into the Vancouver real estate market decline significantly and most notably from China. Do you expect this trend to continue?
[00:55:41] Robert: I think we're probably leveling off at what-- We continue to see inflows but we've seen provincial policy measures, in BC and Ontario as well, damp down a lot of the excessive inflows. Federally, as well, we've seen some measures taken on that front too through annual tax on non-residents. I think we're finding this steady-state. There's always going to be demand for Canadian real estate as a store of wealth from outside the country, that's not going to go away. The economics have changed a little bit with these provincial measures.
I think we're probably going to settle into some level that is obviously down from where it was 2015-2016 when policymakers were really fighting it, but it's not just going to go away.
[00:56:40] Greg: Thank you. I think we have time for one more question and I'll give that to Michael. We've seen, in Robert's presentation about the impact of cost escalations that we've seen on developers. So far, developers have been able to pass that along. Do you expect that if we continue to see cost pressures that developers will be able to pass those along or will they have to start absorbing some of them?
[00:57:07] Michael: I think they'll have to start absorbing some of those, particularly if we start to see those interest rates rise as Robert was pointing to and referring to. I think buyers can only afford so much. We have seen a lot of price escalation, but at some point, I think there is a ceiling as to what they can pay. I think at some point, probably within the next 18 to 24 months, we're likely going to have to see a little bit of a flattening in prices and developers having to absorb some of those increases, which will make the viability of some projects more different.
[00:57:47] Greg: That's great. Thank you. Unfortunately, we have a lot of more great questions but we've run out of time here. I want to thank all of you for joining us. We hope that you enjoy today's session and appreciate you taking time out of your busy schedule to join us. A special thank you to Michael and Robert for their excellent insights today. We hope that our firm's commitment to the real estate industry and to you, our clients, is discernible. I want to say that we truly appreciate your business and we look forward to doing more business with you in the near future.
As a reminder, today's call is recorded and there will be a playback available. We will send you an email with the details on how to access that playback. Once again, thank you very much for joining us. We appreciate you being here and hope you have a good day and we look forward to seeing you in person soon. Thank you very much.
[00:58:42] [END OF AUDIO]
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >BMO recently hosted a forum on the real estate outlook for BC. We brought together industry experts to discuss the trends driving the resiliency of the BC real estate market.
- Robert Kavcic, Director and Senior Economist at BMO, provided a high-level economic update.
- Michael Ferreira, Managing Principal at Zonda Urban (formerly Urban Analytics), discussed market trends in the BC region.
- Greg Vriend, BMO’s Regional Vice President, Real Estate Finance, moderated a roundtable discussion which included Mike Beg, Senior Vice President and Head, Real Estate Finance at BMO, Robert, and Michael, covering key topics including industry challenges.
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