In This Issue...

JULY 2009 ALTUS IN DEPTH – VANCOUVER

In this issue of Altus In Depth, we highlight some current valuation, construction cost, and property assessment issues.

1. QUICK OVERVIEW – VANCOUVER REAL ESTATE INVESTMENT MARKET
2. WOOD FRAME CONSTRUCTION: FOUR STOREY VERSUS FIVE AND SIX STOREY CONSTRUCTION
3. WILL MY 2010 ASSESSMENT VALUES GO DOWN…..DON’T COUNT ON IT

1. Although the long term consequences of the upheaval in the financial and credit markets are not yet known, Vancouver continues to remain a preferred location for real estate investment in Canada. The recent sale of Bentall V to a foreign purchaser (DEKA Bank) exemplifies this trend and provides support for perception of stronger fundamentals in the local market.
2. Multi-residential continues to be the asset of choice in a weaker investment market. We have tracked over 20 transactions that still demonstrate investor’s willingness to accept low yield parameters for this asset class (i.e. a number still trading at CR’s @4.25% - 5.00%). Attractive debt financing + high rental occupancy continue to drive investment decision.
3. There has been a considerable absence of office investment activity in major Canadian centres, although the Vancouver market has seen a number of office properties trade in 2009, which demonstrates liquidity in the local marketplace despite an uncertain investment market abroad. Here’s a brief recap of weighted total value parameters on the most recent office transactions occurring in 2009 we’ve analyzed:

4. Examining the office sector in detail, the following elements are noted:
   • Office conditions have been deteriorating since the end of mid 2008. According to Altus Insite Research, the availability rate in Metro Vancouver has increased from a low of 5.3% in Q4 2007 to its current rate at 9.7% (Early Jun-09). This level is still considerable off the peak of 16.1% achieved at the end of 2003.
   • Availability in Downtown Vancouver has also increased to 7.4% (early Jun-09) after hitting a low of 2.5% at the end of 2007. Current availability is also off previous highs achieved downtown (14.3% - Q3 2003). In comparison, Downtown Vancouver is outperforming other major Canadian markets:
     
   • Sublease availability has become a considerable component of market availability, with Metro Vancouver’s sublet availability at 1.20 MM (2.8% of total availability). The previous peaks achieved for sublet availability was in Q1 2002 when there was 1.087 MM s.f. sublet available in Metro Vancouver.
   • There is currently 1.20 MM s.f. under construction across Metro Vancouver, of which 1,000,000 s.f. is situated in the Burnaby district that is 22% pre-leased. There is no material new supply under construction in Downtown Vancouver, while new supply being added to other downtown sectors present real rental rate risk in other major Canadian markets (i.e. Calgary / Toronto). For comparison, the previous market peak in new supply under construction in Metro Vancouver was 2.80 MM s.f. in Q1 2002.
5. BC continues to lead nationally in terms of pricing, as some prospective buyers are viewing the current market as a ‘generational’ opportunity to get into the Vancouver marketplace.
6. Commercial lenders are reporting improved activity since the end of 2008, with some downward pressure on credit spreads now reported. Rates still be quoted < 6.00% on Tier I real estate, although financing still preferred to be reflective of conservative parameters (i.e. 65% LTV or less; < $20 Million total loan). Debt service coverage requirement is greater than 12 months ago.
7. Retail, Senior Housing, Hospitality and to a lesser extent, Industrial, appear to the less preferred asset types, with limited or no activity reported in 2009 in Vancouver.

With the recent change to the BC Building code allowing mid-rise (five and six storey) wood frame residential construction effective April 6th 2009, we present below a sampling of the issues that will affect the construction costs of mid-rise wood frame residential buildings.

Design Efficiencies - applicable to a scenario of comparing a similar size four storey and a mid-rise building.
In the case where a four storey building is compared to a mid-rise building with the gross square footage remaining the same, increased costs will result from inefficiencies relating to more façade costs, increased circulation space, and possibly a deeper (more levels) underground parking structure – among others.

Architectural Impacts
The revised BC Building Code has specific requirements related to mid-rise wood frame construction that will affect construction costs including requirements for non-combustible façade materials, addition of fire compartments if the floor area is bigger than 1,200m2, and increased requirements for façade insulation due to the application of ASHRAE 90.1. Other impacts might include upgraded windows and facades due to greater exposure to weather and more surface water run-off. In addition, façade design considerations will have to be given to building shrinkage.

Structural Impacts
The increase in height will have structural impacts including increased requirements for shearwall quantities, assembly requirements, and code limitations on shearwall configurations. There may be the possible introduction or increase in the quantity of kiln dried lumber, an increase in the quantity of wood due to greater loads tied to additional building height. Also, additional seismic hold downs will be required.

Fire safety
Mid-rise wood frame buildings are required to be sprinklered to NFPA 13 standards which requires sprinklers to balconies of a nominal width and to attic spaces. Other impacts include fire compartment requirements, and access / exit requirements.

Mechanical and electrical costs
Mechanical costs include compliance with ASHRAE 90.1 relating to ventilation requirements, programmable thermostats, etc. In addition, mid-rise buildings will have larger risers and there may be cost implications in the consideration of building shrinkage and movement due to greater building height.

Summary
The BC Building Code change to allow mid-rise wood frame construction gives developers and owners greater flexibility and choice in the use of materials other than concrete or steel for the structure, and also more choice in site selection. We believe this type of construction will be economically less to construct than concrete and steel. For further information on this form of construction please call Ray Bott or Steve Elias at 604-683-5591.

Last fall, the provincial government passed legislation which dictated that the 2009 assessment roll will use the lower of two values that were established July 1, 2007 or July 1, 2008. Arguably, July 1, 2008 was the peak of the market where values were at their highest they’ve ever been.

Approximately 95% of the 2009 values used were based on the lower July 1, 2007 values. For 2010, the 2009 uncapped value will provide BC Assessment a starting point for determining the 2010 assessed value.

Many think that their property values have dropped and while this may be true it does not necessarily mean that your assessment values will. In fact many taxpayers will see an increase for 2010. Below is a sample report showing the variation between the 2009 uncapped values (July 1, 2008) and the 2009 (July 1, 2007) capped values.

In the above example the 2009 assessment was capped at $6,672,000. However, for this property to get a reduction for the 2010 assessment year the value (as determined by BC Assessment) would have to drop 45%.

If you would like us to send you a detailed analysis of your properties and how their 2009 capped and uncapped values compare please contact us and we would be happy to send it to you at no cost.