Vancouver faces the thorny problem of following through on promise for three-bedroom condos

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Late in September the B.C. Ministry of Housing set targets for 10 municipalities that need to up their housing game. But the targets weren’t just aimed at total units of housing: there were also requirements for homes with three bedrooms or more, suitable for families.

It will be a tricky, but necessary challenge for Vancouver, West Vancouver, District of North Vancouver, Port Moody, Victoria, Oak Bay, Saanich, Abbotsford, Delta and Kamloops. The tally is more than 60,000 units over five years, with Vancouver’s target set the highest, at 28,900 units.

A Metro Vancouver survey presented to the regional planning committee last month showed that there is increased demand from both existing residents and new immigrants for three-bedroom units. The challenge is that the three-bedroom unit is a pricey home to build in any economic climate, never mind one with high interest rates and high land and construction costs. For the average developer, the three-bedroom is a losing proposition.

“Every three bedroom I have in a rental is basically being subsidized by the rest of the project,” says developer Rick Ilich, chief executive officer of the developer Townline, which does a lot of rental construction. “I respect and believe we need more family housing, but the math is just too dear. The cities and the provincial government are mandating three bedrooms, and all those things become subsidized by the balance of the project.”

Vancouver is expected to deliver 6,209 units that have three or more bedrooms. Abbotsford has to deliver the second highest number, 2,034 three-plus bedrooms out of 7,240 total units. The 10 municipalities are also required to bring a certain number of rentals versus owned units to market, and below-market versus market units. Some below-market rental housing with on-site support is also required.

The province identified the municipalities as having the greatest housing need based on population growth and lack of affordability.

It’s not entirely clear how the province will follow through on compliance. Housing experts argue that the private sector can only deliver housing when it’s economically viable. In an e-mail, Housing Minister Ravi Kahlon said the breakdown for each target is “guidance,” for housing needed in that community, and those targets may be updated.

Ministry staff will meet regularly with municipalities and will expect progress reports, to be delivered annually after the first six-month report.

If a municipality isn’t making progress, then it will have to come up with a report on actions to be taken over the next two years. The ministry might appoint an adviser to assess compliance, and if it’s clear that the target is greater, or no longer necessary, it could adjust the requirements, said Mr. Kahlon.

There was no mention of Premier David Eby’s promised “big-stick” approach to override municipal powers and rezone entire neighbourhoods.

The 10 communities named last month are just the first batch. There were 47 municipalities identified as having the greatest housing need.

Developer and real estate consultant Michael Geller built his share of two- and three-bedroom units when he helped plan and develop Simon Fraser University’s UniverCity community, beginning in the early 2000s. He introduced the lock-off suite, which is a bedroom and small kitchenette that is part of the unit but capable of being locked off and rented out as a revenue suite. They proved extremely popular, particularly with investors, and continue to show up in other developments to this day.

“As a general rule, the smaller the unit, the higher the rent per square foot,” says Mr. Geller, who will give a public talk on Oct. 18 at Simon Fraser University’s downtown campus, called Looking Back and Forward: Vancouver’s Changing Urban Development Landscape.

“The land cost for a 1,000-square-foot, three-bedroom unit is going to be twice the land cost for a 500-square-foot one-bedroom unit,” he said. “The land cost is higher, and the rent is lower, which is why if you left it up to most developers they would build predominantly studios and one-bedrooms.”

That said, developers have found ways to make it work.

“It is hard to do. But if it’s a requirement, you’ll do it,” Mr. Geller said. “And in recent years it has become a requirement, especially for the below-market units. You just factor it into the pro forma. It’s the price of admission.”

The city of Vancouver’s requirement for below-market units used to call for 20 per cent of all units to be below market. As a result, says Mr. Geller, developers built a lot of small studios and one bedrooms to fulfill that 20 per cent. Then the rule became 20 per cent of floor area, which justified building more three-bedroom units because it was just a matter of floor area instead of unit count.

Three-bedroom condos are also challenging because of investor demand.

“On the sales side, it’s a slightly different story,” said Mr. Geller. “The reason why developers don’t include a lot of three-bedrooms if they don’t have to, is partially because when they are doing a project in order to arrange financing they need to hit a certain presale target.

“And it’s a lot easier to presell one-bedroom units to end users and investors than it is to presell a three-bedroom unit that is likely going to be purchased by an end user. “Why wouldn’t investors buy the three-bedroom units? It goes back to the same reason, because they rent for less on a square foot basis than studios and one-bedrooms.”

Mr. Ilich said that the solution lies in bringing down the cost of building rental. Rental is an appealing long-term investment; however, it’s more expensive.

“We require approximately 2½-times as much equity in rental projects as needed in condo development,” said Mr. Ilich. “I can develop 2½-times more condos than rentals with the same amount of equity. That alone keeps many developers out of the rental business.”

He can think of a couple of ways to lower costs, such as following the American “1031 exchange”, a provision of the U.S. tax code that allows real estate investors to defer taxes so they can invest in other properties. Canadian rental building developers could take their new break on the GST and roll it over from one project to the next, as a type of tax deferral to motivate them to keep building.

“Give us the opportunity to roll over that GST value into the next project,” he said. “It reduces our equity requirement, or at least it becomes part of our equity waterfall, and again, when we played with the math that would be a benefit for us.”

The province and Metro Vancouver are also exploring ways to reduce costs by introducing pre-approved building designs and off-site construction, such as the use of factory-built modular units that can be transported to the site and assembled quickly with less waste and without the need for large crews.