Residential properties remain a leading segment in Western Canada’s real estate markets, although housing starts are sluggish in some provinces and insolvencies are becoming more common countrywide.
B.C. in particular faces unique challenges related to Vancouver’s geography as well as the recent provincial election, with investors facing greater regulatory and investment risk in today’s business environment.
Experts say factors such as rents, vacancy rates, interest rates, cap rates and immigration are contributing to a mixed outlook, albeit one in which there are good deals to be had.
“Multifamily units are highly coveted,” said Christopher Alexander, president of RE/MAX Canada. “It’s been one of the leading segments in the real estate market for investment and demand, whether it’s ownership or rental.”
Multi-unit housing has strong fundamentals, he said. On the consumer side, affordability is pushing homebuyers toward the multifamily market at attractive price points. Meanwhile, Vancouver is geographically constrained, boosting development potential for the rest of Western Canada, where municipal permitting may also be faster.
“Multifamily units are going to become more and more prevalent the more our urban centres intensify and densify,” said Alexander.
Alberta leads B.C. in housing starts per capita
Despite these long-term fundamentals, housing starts per capita in B.C. are at the lowest level in at least a decade, not counting 2020 when the province was in the throes of the COVID-19 pandemic.
As of September, there are projected to be 7.5 housing units per 1,000 people started in 2024, compared to almost 8.5 units per 1,000 people started in 2017, when the BC NDP came into power.
Compared to the pre-pandemic year of 2019, B.C. housing starts per capita have actually fallen 1.1 per cent. Even looking at total (i.e., not per-capita) housing starts, B.C. is on track to have fewer units started in 2024 compared to 2019.
By contrast, Alberta’s housing starts per capita are up 3.4 per cent compared to 2019. Looking at the rest of Canada during this period, housing starts per capita are also up slightly, compared to B.C.’s decrease.
“What strikes me is, we are now on target to start the same number of homes in 2024 that we started in 2019, for all the talk about getting [more] new home construction underway,” said Ken Peacock, chief economist with the Business Council of British Columbia.
Regulatory risk high in B.C.
One factor in B.C.’s sluggish housing starts is the regulatory climate, where a deeply divided electorate recently extended the BC NDP’s mandate by a whisker.
Laurence Putnam, managing broker with Royal LePage Sussex, said the past few years have been challenging with elevated interest rates and onerous regulation.
“The last couple years here in B.C. have been a little challenging with higher interest rates and considerably more regulation added to how tenants have to be dealt with in B.C. and so forth,” he said. “I’d be much more optimistic about the rest of Western Canada. It looks like in Edmonton, Calgary and even in Saskatchewan and Manitoba, there is sort of room to grow.”
He continued: “We’re all grappling with this shortage of housing supply that we all know that we have. But in B.C. the picture’s a little different. I would unfortunately be a fair bit more cynical about our prospects in B.C.”
Specifically, there are concerns about the BC Green Party wielding outsized influence and potentially using vacancy control as a legislative bargaining chip. Vacancy control is a form of rent control that limits how much a landlord can increase the rent when one tenant moves out and another moves in.
Still, Putnam is cautiously optimistic. “I’m more optimistic going into 2025 than I’ve been about the last couple of years, but when you’re talking about the big multifamily markets, any small- to medium-sized investor has to be looking at their SWOT analysis of this market and saying, you know, we do have this combative government in Victoria that’s looking to constantly shift everything in favour of tenants, and I think that’s going to make it tough.”
Multifamily market turning a corner
The higher end of rents is softening, due in part to new federal curbs on international students and other immigrants, said James Blair, senior vice-president of investments with Marcus & Millichap.
With high construction costs and other barriers to getting projects to market, “there could be a lull in completions coming up in the coming years, and that could really decrease the vacancy again, and we could see a climb in rents again after that as well,” he said.
Patrick McEvay, also of Marcus & Millichap, said market transaction volume is down by about half compared to the highs of 2021 and early 2022.
Following a surge in deals prior to capital gains tax changes that took effect on June 25, there was renewed clarity on pricing. With cap rates steady and demand recovering, momentum could pick up heading into 2025.
“Either buy now or compete in 2025,” said McEvay. “There’s a lot of product out there. There’s still some apprehension in the market, but I think there’s a lot of deals, and a lot of people are going to be looking back in the rearview mirror a year from now wishing they had acted sooner and gotten out there and started offering and gotten aggressive again.”
Uptick in real estate insolvencies
Meanwhile, some residential projects are becoming insolvent due to inflation, the steep jump in the key interest rate from 0.25 per cent in March 2022 to five per cent in June 2023, rising construction costs, permitting delays, changing building codes and other reasons.
According to the federal Office of the Superintendent of Bankruptcy, there were 256 bankruptcies and proposals in the real estate, rental, leasing and construction sectors under the Bankruptcy and Insolvency Act in Q3 2024, compared to 199 in Q3 2023—an increase of 29 per cent.
“Conditions in the market are improving but we expect to see more properties being sold under court order before this cycle is over,” said Mark Goodman, principal of Goodman Commercial Inc.
He said the majority of foreclosures and receiverships have been development sites where the developers haven’t been able to manage their leverage or exposure in a period of prolonged high interest rates, and where high construction costs combined with softer conditions in the pre-sale market don’t support moving forward with launching some projects.
With decreased land values and conservative lending conditions making it more difficult to refinance, it has become significantly more challenging to raise funds to repay lenders if they call their loans. Market conditions may require developers to sell their land at a loss to repay the debt, and there is nowhere for these developers to turn if they don’t have deep-enough pockets.
“Developers should talk with their lenders early to try to find solutions to avoid receivership or foreclosure,” said Goodman. “They should also be realistic about their options. In some cases they may be better off selling at a discount rather than going down the path towards bankruptcy. Once a lender starts their action, buyers smell blood and are looking for a steal. I’ve seen many developers hold out for better deals only to end up with nothing.”
