Presale plays a major role in British Columbia's real estate scene, and it's an area well worth watching; presale's ebbs and flows can serve as a measure of industry sentiment, economic conditions, and how developers see the state of the market overall.
In 2023, that state was one that real estate marketing and advisory firm MLA Canada described as "subdued," and "reflective of the cautious stance amidst prevailing conditions." The result: 104 new project launches — a number that was in stark contrast to 2022 and 2021, and closer in line with more challenging years like 2019.
Bringing the year ahead into the forefront, MLA Canada has officially published its 2024 Intel report. The new report carries an optimistic mood, anticipating that economic conditions will improve and market activity will follow.
"While uncertainties persist, we anticipate a marked improvement in unit absorption, prices, and consumer sentiment toward the second half of 2024 and into 2025," said MLA Canada.
In an interview with STOREYS, MLA Canada's Director of Advisory Garde MacDonald looks back at 2023, elaborates on what to expect in 2024, and discusses the findings from the developer survey MLA Canada conducted as part of this year's report.
S: Looking back at 2023, what were some key presale market highlights? What projects or sales successes will be the ones to remember?
GM: Looking back at 2023, there were a few key reasons for project successes. Of utmost importance is the correct product-market fit, essentially building for exactly what a target audience is looking for. In 2023, we saw a shift toward end-user-focused projects, often with sharp end price points. Additionally, presale projects with extended completion timelines succeeded. These projects give purchasers the flexibility of placing a lump-sum deposit and not having to trigger a mortgage for a number of years in the future.
When I think about specific project successes, one would be the project MTN Village by Anthem Properties in Squamish. The [Squamish] buyer is such a specific buyer, [who] I don't necessarily think is as sensitive to the market conditions as maybe some pure investor-buyers. The marketing is so specific to that outdoorsy young couple in the early family-formation stage who wants close access to Vancouver, but also wants to go biking or hiking after work, and ultimately desires the lifestyle that Squamish offers.
MTN Village by Anthem
Overall, we really noticed that projects with extended completion timelines succeeded. The reason is that there's currently a lot of uncertainty when you're looking at a 12- or 24-month time horizon. But as soon as you get to that 36- or 48-month timeline for some of these larger concrete projects, that was a really easy sell for a lot of buyers.
One example of this was Beedie's Fraser Mills. That was the first phase of a multi-tower master plan, and almost every time a developer brings a project like that to market, it's successful, because people understand the value of being first to purchase. Even from a pricing standpoint, the second or third building is always priced higher than the first, because the interest is there and the prices have been validated.
S: Your 2024 Intel Report mentions that higher-end markets, such as on the westside of Vancouver, saw more of a "constricted competitive environment." Can you elaborate on that, and the factors at play?
GM: The westside of Vancouver — and really anything priced over $1,400 or $1,500 per sq. ft — has a smaller buyer pool. When you have expensive product with an already limited buyer pool, if the greater market sentiment from a macro level is not there, that buyer pool — which is small to begin with — becomes very small.
So, a lot of developers don't feel like they have the necessary demand to bring their projects to market at the prices required to make these projects work from a financial standpoint. I think if you were to compare that to Burnaby, for example, as you go from west to east, the values drop off a little bit, and because the product is generally cheaper, you have a larger buyer pool.
In the Lower Mainland, Vancouver has always been centre ice, and everybody's perception of value has been relative to Vancouver. But with the advent of new, mixed-use communities, on top of fresh commercial amenities and development of infrastructure, that mentality has actually shifted quite a bit, and a lot of people would consider areas of Burnaby — Metrotown or Brentwood — to be centre ice. Some may consider Surrey City Centre.
The attraction of Vancouver, depending on what buyer group you're talking about, may be reduced. A large part of the high pricing in Vancouver is the historical pricing, and the fact that land is quite expensive. I would also add that downtown Vancouver used to be viewed as the pinnacle of real estate, and something that a lot of people would market based off of. There's a certain argument to be made for other areas of Vancouver becoming centre ice, such as Oakridge. Specifically, I've noticed that projects in the Cambie Corridor used to market their proximity to downtown Vancouver, but there [have been] quite a few recently who have marketed based on their proximity to Oakridge Park.
I think that's an interesting note, as to the change in people's perception of what value is over time.
S: For developers who may have a project ready to launch, but didn't do so in 2023, what do you think their mindset is heading into 2024, in terms of timing?
GM: There [are] a lot of developers in this situation. We throw around the term "pent-up demand," but there's also pent-up supply to match that. It really comes down to the capital stack and how the projects are being financed. For certain developers, they have a clock that is started when it comes to their financing or holding their land, and just sitting there idle is not financially viable. They'll be more pressured to bring their projects to market in 2024. Other developers who largely use their own money — and perhaps have a piece of land that they bought 10 to 15 years ago at quite a cheap price — they have a bit more flexibility when it comes to when to bring their projects to market.
The challenge for a lot of the small-to-medium-size developers is that they need confidence in the market, in the way of precedents. For example, if a developer needs to bring a project to market at $1,050 per sq. ft and nothing has sold, presale, in that market above $950, it becomes a very big reach for them to think that they can sell at that number. Instead, as soon as one sells at $1,000 and then another sells at $1,025, the confidence increases quite quickly. It's almost a bit of a cat-and-mouse game, where some developers will eventually stick their neck out in certain submarkets and sell projects at values that give other developers confidence to sell at similar values.
People talk about launches as if they can occur [on] very quick timelines, from when someone presses go to when you're actually selling the project. That's a bit of a misconception. There is a lot upfront investment that has to occur to get a project ready for presales — municipal servicing costs, costs of the presentation centre, marketing. Launching is more of a two, three, and four-month decision, versus a one-to-two-week decision.
In terms of mindset, there's still nervousness in the market. There are more factors at play in the market [than] there [have] ever been — policies from all three levels of government, the uncertainty around new legislation, the cost environment, to name a few.
S: In the developer survey MLA Canada conducted, 94% of respondents identified building costs as having a "significant" impact on their business. How do building costs now compare to those of the last few years, since COVID?
GM: The high-level view is that building costs are up 50% to 60% over the past three years. Most of that increase was spurred by global uncertainty at the start of 2020, and there was a huge supply chain crunch that occurred. The largest portion of that construction cost increase occurred in 2021 and the beginning part of 2022. It hasn't necessarily markedly increased since the latter part of 2022, but we're still up 50% since COVID began.
Costs have increased and have stayed elevated while revenues have stayed largely flat, so what you're seeing there is the compression of margins for a lot of developers. Given the stakeholders that are at the table and the financing requirements, the return on their costs is just not where it needs to be to bring these projects forward. A lot of developers will need to see revenues increase between 5% and 15% to make these projects financially viable.
S: Have some of those tightening margins been passed along to consumers, in terms of pricing and affordability?
GM: Yes. There's a variety of reasons why projects have to come to market. One of the main reasons is required return on capital. When you're in the market environment we are in today, sometimes the required prices are just too high to be absorbed, but the developer doesn't have the flexibility to bring those prices down to a level that the consumer will be okay with, which can stall projects.
When you think about incentives, for 2024, there will be a lot of projects that will continue to bring incentives online, because sales are needed to make sure the projects get constructed. Under REDMA [BC's Real Estate Development Marketing Act], you have 12 months to secure your building permit after sales have begun, which acts as a consumer protection tool for presale buyers. If your 12-month clock started in August 2023, for example, you are required to get a building permit by August 2024, regardless of where the market is at, and those sales still need to occur to get you there. So, I expect project incentives to increase in 2024. And incentives are becoming more creative, because they're trying to appeal to a wider audience.
S: The developer survey also found that many developers are now most interested in "raw sites with potential rezoning." Can you elaborate on why those are appealing?
GM: One of the phrases you've probably heard tossed around quite a bit in the last two or three years is "uncertainty." A lot of that uncertainty, of late, has come from the increase in density through legislation from the provincial government. I think a lot of the developers that we spoke to would rather start from scratch and upzone. A "raw site" can also be cheaper on the acquisition side, so that's something developers are focusing on.
I would also say that there [are] not [many] raw sites available, given the overall land constriction we have. Most of the raw sites [with acquisition opportunity] are in the Fraser Valley or markets south of the Fraser River, where the lots are larger and there's less density overall.
S: What are the notable project launches to watch out for in 2024?
GM: I would say more so notable areas than notable projects, to be honest with you. I think West Coquitlam will continue to thrive due to its relative price point and proximity to Burnaby and Vancouver. I also think the Fraser Valley will continue to thrive due to its relative value and the addition of the [future] Surrey-Langley SkyTrain.
But if I was to talk about an area that I'm personally attracted to in the next number of years, I think it's Port Moody. It's very outdoors and lifestyle-focused. I love the lifestyle of Port Moody. It's very easy to understand why people would live there. Some of the projects I'm thinking of are Polygon's Coronation [Heights] development, Wesgroup's Inlet District, and Beedie's new project. When I think about Port Moody and I look at the brands and reputations of the developers that have committed there, to me that signals long-term value. There [are] a lot of markets where there's a whole host of developer sizes involved, but there [are] also markets where it's just the Big Guys — and if they're buying and planning multi-decade projects in a specific area, I think they know something and are making a clear investment signal.
*This interview has been edited for length and clarity
MLA Canada's 2024 Intel report has officially launched. To download it in full, click here.
This article was produced in partnership with STOREYS Custom Studio.