The BC real estate landscape is changing as major investors that answer to shareholders either partner with local developers or increasingly, do the development work themselves. Seeking greater returns, they have upped their game.
For example, there’s the massive The Post office building in downtown Vancouver on West Georgia, occupying an entire city block. Institutional investor QuadReal is behind the redevelopment of the old Canada Post building into 1.13M sq. ft of office space. The B.C. Investment Management Corp. created QuadReal Property Group in 2016, with a reported $18B allocated to real estate. Today the pension fund is a major player in real estate development.
But a decade ago, they would likely have just purchased the post office site, says Kirk Kuester, Executive Vice President, national investment services for Colliers.
“They wouldn’t have taken the development risk back then, but they do now because they have to satisfy their investment objectives.”
Kuester has been around commercial real estate for more than 30 years and specializes in bringing developers and large investors together. Because land and construction costs have become so intensive, developers are increasingly relying on outside money for equity, and also to offset risk, he says.
The problem for institutional investors is that there aren’t a lot of top-drawer opportunities. Metro Vancouver is uncommon to other markets in that there are several family offices and local wealth management companies that own a significant share of high-quality properties. In such a competitive environment, the big-capital investors are willing to assume greater risk, and bigger profit margins, by doing the development in-house.
“It’s a long investment time horizon and investors are always looking for the biggest and best in asset classes, and there is only so much of that around, and once spoken for it doesn’t come up often,” says Kuester. “So that in itself has really moved much of the capital to start considering developing for their own account. They are either doing it on their own or through partnerships.”
“If you were to look around our region, institutional capital is showing up now in many of the bigger rental apartment buildings.”
QuadReal, GWL Realty Advisors and Oxford Properties are examples of institutions that are finding sites and developing on their own. Vancouver developers Westbank and PCUrban are developers who’ve partnered with large institutions to deliver projects. Westbank and QuadReal partnered on transforming the old Oakridge Centre shopping mall into a major transit-oriented community. PCUrban and Hines are building what aims to be Canada’s largest and tallest mass timber office building at 123 E. 6th Ave., in Mount Pleasant. And those are just two examples.
“Any time you see a private developer doing a huge project it’s highly likely there’s capital behind it,” says Kuester. “There are private developers that can do it on their own, but oftentimes they won’t because it’s less risky to partner with huge partners.”
While institutional investment has long been part of the downtown office market, in more recent years it has moved into multi-family residential. With demand for housing at an all-time high, rental buildings have become a highly desirable long-term asset, and big money has an ongoing role to play in delivering housing in the region, says Kuester.
“The reality is, big housing couldn’t happen without big capital. These projects require so much equity in relation to other investments, they just wouldn’t happen otherwise.”
Cape Group president Zack Ross concurs. His family-run company has partnered with high-net-worth individuals and other families over the years. More recently, they’ve been talking with institutional investors that have approached them. Founded by his grandfather Ralph Schwartzman, Cape Group has apartment, office and industrial holdings.
“Behind the scenes I can almost guarantee every project you see has some partnership in there. No one is coming up with the money themselves.
“The project metrics are starting to get beyond the scope of what the average family office or development office can manage,” he adds.
The business has become far more complicated, and higher stakes, since his grandfather’s days, says Ross.
“Buying a six-storey condo building site is $15 to $20M in Vancouver, depending on location. I mean, I don’t know how many people have $10M in their pocket plus the security to get a $10M mortgage, and on top of that, spending millions to get the permits in place. And that’s one project. So if trying to do multiple projects, and train staff and help people grow and provide housing, you need three, four, five or six projects on the go.
“So it’s becoming more and more important or necessary to have strong partners -- not only to share the risk, but to share the capital burden, because it is expensive, and it’s coming from all angles.
“And let’s say something does go wrong, and you need additional capital to finish a project, it’s nice to have a strong capital group who know they will get the project done. And it’s the same for the people buying—they don’t want to be stuck with a half built building and their deposits sitting there.”
Cape has a mass timber rental building on East 2nd Avenue that had already broken ground when the city announced a new area plan that would allow higher density. The developer is going to apply for a rezoning to at least double the 95-unit building. Ross says an institutional partner might work for that project.
Kuester said the high interest rate environment is also impacting the industry.
“It’s nodifferent than buying a house today,” says Kuester. “Interest rates have gone up. You qualify for less financing and you need more equity. The developer either funds it or brings in a partner.
“I’m aware of a few projects that have hit a point where a developer has taken something on that they had fully intended to execute on their own, but given the requirements for more equity they have now decided to consider bringing in partners, and oftentimes it’s Institutional capital.”