The hunt is on for Chinese buyers.
For investors, Vancouver real estate has been a heavenly gift. But now, suddenly, some of the biggest institutional investors, including Canada’s third largest pension fund, are getting cold feet and want out.
Just over the past 12 months, the “benchmark price” soared 27% for apartments and 38% for detached houses! The term “housing bubble” doesn’t even do it justice.
But in July, British Columbia implemented a 15% transfer tax on home purchases involving foreign investors, an effort to put a lid on the price spiral that’s threatening to price an entire generation out of the housing market. By the end of July, the first squiggles appeared, as prices still soared but year over year sales volume plunged nearly 20% [read…Vancouver Housing Bubble, Meet Pin].
Preliminary reports for August are now trickling in as anecdotal and incomplete data in a slow summer month, and therefore not necessarily indicative. For example, the Canadian publication, Global News, summarized the August move with plenty of caveats: “Vancouver real estate market is in the midst of a major slowdown, with prices dropping and sales plummeting.”
We will know more when the monthly data emerges.
Similarly powerful dynamics, including the influx of foreign money and a strong local economy, have driven the commercial real estate market. According to the second-quarter report by commercial real estate firm Colliers International, “Vancouver’s FIRE sector” – Finance, Insurance, Real Estate – is hot. Housing construction is hot. Office construction is even hotter, “set to be the fastest-growing sector” in the city, expected to expand by 5% in 2016, with 1.5 million square feet currently under construction. Alas:
The delivery of 2.1 million square feet of new office supply in 2015 has contributed to the office vacancy increasing slightly from 9.8% in Q1 to 10% this quarter.
Citing commercial real estate firm Avison Young, Bloomberg pegs the vacancy rate at 10.4%, “a 12-year high”:
Additional space is set to flood the market, with six office towers under construction for delivery as soon as this year totaling about 802,700 square feet, and 10 buildings proposed for the city….
Despite the vacancy, rental rates for the best quality assets in Vancouver are the highest in Canada and some U.S. cities such as Chicago and L.A. at about $30 a square foot, Avison Young said.
A perfect time to unload: with office rental rates at record levels and optimism still riding high, while a tsunami of new supply is piling on the market and vacancy rates are rising, this would be the definition of a peak.
The Ontario Teachers’ Pension Plan, Canada’s third-biggest pension fund, has $4 billion invested in Vancouver’s white-hot commercial real estate. But it is now trying to unload $2 billion worth of these holdings, “people familiar with the matter” told Bloomberg.
These properties are held by the fund’s real estate unit, Cadillac Fairview:
The Cadillac Fairview portfolio, which hasn’t yet started marketing, includes 14 properties in downtown Vancouver and Richmond, with some of Canada’s largest shopping centers, office towers, and historic buildings up for grabs.
The assets include a portfolio of waterfront properties including Waterfront Centre, a 21-story tower on the harbor built in 1990; the 238,000-square-foot PricewaterhouseCoopers Place; and The Station, a historic property built in 1912 that serves as North America’s largest transport hub, currently pending approval for an added office tower.
Some of the country’s biggest retail assets are also in the mix, such as the Pacific Centre, a downtown retailer with 1.6 million square feet for which Cadillac Fairview submitted a proposal this year to expand. It’s the third-most profitable shopping mall in Canada, according to brokerage Avison Young, with $1,599 in sales per square foot. The center also contains eight office towers of two million square feet, including 701 West Georgia and the HSBC building.
According to “the people familiar with the matter,” the fund has hired CBRE Group and Royal Bank of Canada to work the sale.
Other pension funds have already decided to unload some of their properties in Metro Vancouver, according to Bloomberg, including the Healthcare of Ontario Pension Plan and Ivanhoe Cambridge, which are trying to get about $800 million for their office towers in Burnaby.
What do they see that the market doesn’t see, or doesn’t want to see?
For pension funds, which have to achieve predictable and fat returns, this is a bleak environment, with the Canadian 10-year yield at 1.02%, and the US 10-year yield at 1.56%. Stocks are at dizzying levels, even as corporate profits and sales have declined for nearly two years. If these pension funds want to expand into government bonds and high-grade corporate bonds in Europe and Japan, they’ll make the acquaintance with negative yields.
So why are they selling hot assets with a predictable yield when the investment options for the proceeds are so dismal? Preservation of capital?
A commercial real estate bust can take 40% or more off the top. The last one in the US did. They take years to unfold. When prices go down, real estate markets become illiquid. Trying to sell a property at a survivable price might be impossible. And cutting the price far enough to where liquidity reappears might be devastating to the seller.
The key is to get out while optimism makes these transactions possible and before the market becomes illiquid. Perhaps find a Chinese company, such as Anbang Insurance Group, which already scooped up the Bentall Centre in Vancouver, a 1.5-million-square-foot office complex and shopping mall.
Even as Canada’s debt-fueled economy is bogged down, consumer debt rose to a new record and delinquences are are soaring among Millennials. Read… Canadian Debt Slaves Pile it on, Millennials Fall Behind
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Wow! Here’s a way to solve a couple problems:
We gotta get the Ontario Teachers guys to sell to Banco de Pachi (aka: Italian black hole). Makes the teachers happy, gives the Italians a positive-performing assets – until it blows up like all their other loans.
And here’s the best news: you don’t have to worry about an Italian bank actually, you know, foreclosing…
Ok, so correction on bank name: Monte dei Paschi.
Still, this is some great transnational synergy.
How about Banco de Espirito Sancto -where your money is spirited away
Forget about all those names – in reality you are simply selling to the ECB, and we know they will pay any price for “eligible assets” in order to flood more euro’s into the market and trash its value even more.
The Eurocrats have been debating for more than a year how large pension funds and the ECB can be allowed to buy Dutch mortgage debt, because there is a huge volume of that and rates are already way beyond silly (the average mortgage is 103% and pays less than 1% now for 10-year fixed), so why not move to negative mortgage rates on a massive scale courtesy of ECB?
The problem seems to be the implicit government guarantee against loss for most of these mortgages; a guarantee that is impossible in reality, and sure to bankrupt the Dutch government at the next real RE downturn – that’s why politicians have been taking desperate measures for years to keep the bubble growing. Who knows, maybe they can transfer this risk to the black hole at the ECB?
Three Card Monte ??
Good one! The best I could come up with was the “Full Monte.”
the commercial sector will still be easier to unload than residential as big funds will be able to buy the canadian dollar at a significant low from par. the most likely purchasers will be american funds just take a look at whistler vancouver is next.
The crown jewels will be sold off to the big players however i agree that the prices will be firesale not retail.
Dejavu with Japanese buying up the storm in US like the trophy Rockefeller Center back in 1989 right before the all mighty Japanese RE and stock market crashed ushering in the lost decade and Japan to be labeled as sick man of Asia…
Scroll almost 30 yrs and we have Chinese buying RE in North America not to mention frothy RE market in China full of ghost towns/flats. Greater Fool Theory says the end is nigh and there will be a lot of bagholding fools.
We learn history so as not to repeat it
We learn History so we can repeat it perfectly, but hope for a different result.
RE: …For investors, Vancouver real estate has been a heavenly gift…
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Two observations:
Try not to conflate “investors” and “speculators.”
The sooner an asset bubble can be burst, the less the total aggregate damage will be, and there will be very considerable regional damage inflicted from the bursting of a bubble this size, generally on people that had nothing to do with, and made no money from, the bubble formation.
We do not allow people to drive 180 MPH on the public streets even if they have enough money to buy a “super car,” so why do we allow analogous behavior in other public areas, such as real estate speculation just because they have the money to do it?
George
You’ll never stop people from doing monumentally stupid things with their own money; however, you can significantly limit the amount of bank money used in these goofy schemes. Examples:
o 20% minimum downpayment to purchase house
o 1st + 2nd mortgage cannot exceed 75% of appraised house value
o Non-compliant mortgages must stay on the originating bank’s balance sheet; bank must re-purchase non-compliant mortgages from FANNIE MAE, FREDDIE MAC or other governmental holders
Your ideas are too rational. Maybe that why you were not invited to join the FED, the above mentioned as well as similar Canadian institutions.
RE: …You’ll never stop people from doing monumentally stupid things with their own money; however, you can significantly limit the amount of bank money used in these goofy schemes. …
—–
Indeed! One suggestion would be to have a sliding scale for building permit fees depending on the vacancy rate [leased but not operationally occupied counts as vacant]. If the building permit fees could be set high enough as the real vacancy rate increases, this could prevent overbuilding and asset bubbles. The building permits would have to expire 90 to 120 days after issuance unless actual construction had started to prevent “banking.”
A progressively increasing [with time] vacancy tax on operationally unoccupied units,both residential and commercial, should also help dampen real estate bubbles.
This is not re: commercial but is related.
My niece has rented a condo in downtown Vancouver for three years.
Two months ago she got a notice saying it had been sold and to now pay her rent to new outfit.
Two weeks later she got a notice that it was going up for sale.
Another two weeks later she got a notice it been sold again. She looked it up- it sold for 440K, 20 K over list. It sold for 350 K the first time.
It is 540 square feet.
Two weeks later (two weeks ago) she got evicted with two months notice.
She makes good bucks and has found a new place at 2000 K. She was paying 1500.
I asked sis her mom where that is coming from
‘I don’t know -her nails?’
Crumbs, that’s a lot of activity over a short space of time!!
Perhaps people in Vancouver will follow the americans into stealth camper vans parked around town? It seems that would also give one greater stability too by the sound of it….
While those in Russia get free offered of farmland to the east it seems the western dream has come down to being able to pay the rent or find a decent van to convert..
Some smart people find that buying a boat and living in a Marina much cheaper and more stable than trying to make speculative landlords rich too.
30% of Vancouver’s GDP comes from the housing sector, directly or indirectly. It would not be an overstatement to say it is literally holding up the economy.
Commercial has been dead there for years, but developers are in denial. Now that housing is crashing, reality will be swift and brutal in commercial as well.
You can pick any mall, commercial district or office tower in Vancouver and you’ll find vacancy signs, they’re everywhere. Been that way for years.
RE: …You can pick any mall, commercial district or office tower in Vancouver and you’ll find vacancy signs, they’re everywhere. Been that way for years…
—–
Were there no sane individuals at the building permit office? We do not allow people to drive 300KPH on the public roads just because they can afford to buy a “super car,” so why should we allow a few individuals with enough money (or credit) to create an asset bubble to do so. It they wish to gamble with their money and want some action, let them go to a casino, and not ruin it for everyone else.
“Minsky Moments”
1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)
2016 – Vancouver (real estate)
Debt inflated asset bubbles burst in a very nasty way.
Always have done, always will do.
Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.
Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.
Hyman Minsky came up with “financial instability hypothesis” in 1974 and Steve Keen carries on with this work today.
Steve Keen saw the debt bubble inflating in 2005, three years before 2008.
Investors, read some Minsky, you fools.
No one wants to learn that Santa Claus, the tooth fairy, and the Easter bunny aren’t real, and don’t leave presents for good little boys and girls…
Ah…but the global financial rabbit hole IS the real deal..!
What is it called when you block foreign corporate buyout offers, instate a special 15% foreign tax while at the same time calling your economy liberal, free trade friendly and open?
When houses are being sold like peaches and oranges, every change is going to look like slowdown, and will be called crash by the MDM (mass deception media). If you adjust your glasses, you will be better able to assess the situation.
Right now, I doubt we are close to reality.
In the 70’s when the residential vacancy rate dropped to almost zero, in New York City, renters started renting cheaper commercial space and turning it into lofts. It was illegal then but renters had no choice and neither did commercial landlords. Everybody looked the other way and life went on. I believe they are also doing this in Detroit right now.
Since techies practically live at work anyway, I always wondered why the practice never took off in Silicon Valley.
Who wants to sleep on a filthy office carpet strewn with potato chip crumbs and legos?
In todays eCONomy, I think you’d be surprised, very surprised.
Some Silicon Valley companies were allowing work/sleep cubicle spaces a few years back. Obvious disadvantages for the employee and the office.
Google used to allow employees to live in campers in the parking lot but has since banned it.
Petunia- so funny about the lofts. as an artist, years ago during the first dot com boom, and when i saw what was happening to all the cities being unaffordable to the freaks artists and thinkers and writers, i wondered if we’d be soon renting studio space in dilapidated strip malls or carving up airplane hangar costos in the middle of nowhere. you reminded me of that old idea and i laugh because…yeah… what if it’s true? the suburbs, around here and elsewhere, are already starting to look like nyc in the 70s with lots of trash, feral dogs and squatters and such. in 2016’s san francisco of today, the dead strip mall doesn’t seem as bad as it did to me in 2000.
oh yeah- and google had some sleep pods an evicted artist i know was involved in making for them. it was chilling. but what they’ve done to these people is beyond chilling; it’s like having someone take a spade and hack your spine with it.
yes. i’ve also often wondered why they didn’t just house them on the google barge. plug them into their machines like the matrix. they wouldn’t know the DIFFERENCE. but they like to go to restaurants in huge gangs and take pictures of their food. it’s like their eyes will dry up if they don’t get constant bent over nourishment from their screens.
they could be ANYWHERE. (but they’re here)
and they only do anything at all so they can write about it or film it. it’s like we’ve been infested with zombie soul vacuum cleaners. they’re a lovely, twitchy bunch.
children are the future? screw the future. we’re toast. old people aren’t just complaining and grouchy. they really and truly are the most interesting and adventurous and sexy people left. so you all out there know that it’s not just you imagining that you really are more fabulous than you’d realized, all along.
every horror story you’ve ever read or watched is CUTE compared to techies and all the ancillary shovel-sellers who’ve taken over here.
in the meantime, i’m trying to figure out how to make the suburbs cool if i have to end up in the middle seat of a dilapidated strip mall with a sheet on the window.
Well said. You nailed it. I am 66 and I look with amazement and disdain at the younger people glued to screens, unaware of the opportunity cost of human interaction, unaware of the mindless isolation, unaware of the loss of hands on discovery of life itself. All swapped for a lonely, voyeuristic waste of time and life.
If you and your fellow baby boomers could just for a second get out of your selfish and self centered view, you’d recognize that these behaviors seems by choice but necessity.
It’s the retirement entitlements and social security entitlements and health care entitlements benefitting these baby boomers, that are causing the tsunami of yield-seeking capital in this ZIRP world, skewing real estate as one of the few asset classes worth a dime into an inflationary speculation spiral… and the smartphone generation did not vote for governments that preach trickle-down economics, nor did they have a voice in the 90’s when it was evident that somethings gotta give, because they weren’t populous enough yet…
In a world where you can’t make a decent living if you don’t move to a tech hub and learn some tech related skill, you are by necessity forced to stare at a screen all day long.
The judgmental and righteous tone of not just these couple comments above but the baby boomer generation as a whole makes me cringe every time.
I watch people 20 years younger than I struggle to make ends meet while earning a six figure salary… and the true reason why that’s the case, is because their parents are getting an obscene amount of entitlements paid out, stolen from these kids’ future.
Your emotional reactivity limits your ability to meaningfully discuss this issue. Perhaps your screen time has truncated your interactive skillset? Good luck. Overcoming limitations is hard work.
Wolf, thank you for your excellent coverage of Canadian RE.
Unprecedented credit creation in China since 2009, coupled with accelerating capital outflows in the past few years, has led to accelerating price escalation in Vancouver RE, now in its parabolic phase. We well know how this unfolds going forward from past examples of same…that is, when interest rates were positive, and CB’s were not deliberately engineering a monetary conflagration. As Vancouver itself is increasingly a Chinese satellite city, rather incidentally on a different continent from the motherland, Vancouver RE is to a considerable extent an unintended consequence of Chinese policies. Thus its fate is closely linked to the course of China’s economic and political future.
Interesting times, and yes, one has a gnawing feeling that it is a curse!
Want to know the real unwritten TRUTH about Vancouver Real Estate? Something you’ve never heard before?
Most writers have been predicting the proverbial “bubble burst” for Vancouver real estate for DECADES but it has never happened – and it NEVER WILL (save for a much wider economic collapse):
Greater Vancouver is a tiny sliver (triangle) of land wedged between the Coast Mountains, the US border and the Pacific Ocean. You can see exactly what I’m saying whenever you FLY INTO this region on a clear day.
It will NEVER get any bigger and it is almost fully developed – yet people keep piling in from China and India (mostly) at a rate of 50,000 NET AVERAGE for almost THREE DECADES (since Expo 86) and it is NOT going to stop, no matter what the rest of Canada thinks, says or writes.
This new 15% tax for foreign buyers will slow things down and prices will PLATEAU for a while. Perhaps a year or even two, but probably not that long before the market value appreciations resume. Do the math.
The LAST TWO designated neighborhoods are both in the suburb of LANGLEY: Willoughby is more than half finished and South Brookswood will be the LAST ONE, which is about two square miles of designated-developable land.
If you think prices are high now, just wait another five years Amigo…
If I had a billion dollars, right now I would buy the best BC RE (land) parcels I could get my hands on – NOT right in Vancouver, but in outlying regions directly surrounding Greater Van. Vanisle and Gulf Isles, Sunshine Coast, Interior, etc. Some areas are better than others.
All the best to you and yours!
Sedunova at hotmail for more info.
Thanks to Wolf for your great articles!!
Let me know if you ever want more insider info on what’s really going on here in Greater Van.
Don’t underestimate the power of towers. You can put 500 luxury homes or more on a city block.
So-called landlocked cities, like San Francisco, and others not entirely landlocked, like Vancouver, are experiencing a construction boom. The size of the city doesn’t change, but the population density increases, especially in certain areas. Now happening in many major cities.
You can contact me via the email address on the “Contact Us” page (see the tab in the navigation bar).