The B.C. condo market has slowed significantly in the last eight months, enough that developer Rocky Sethi acknowledges that it was a “brave” move launching the first phase of the city of Penticton’s first master-planned community.
The 10-acre site is also the first project for Mr. Sethi’s new Stryke Group development company after he spent 16 years working for other companies, including Adera Development. In partnership with his father’s Tien Sher Group, Mr. Sethi chose the former Britco manufacturing site because it’s across the street from Penticton Regional Hospital. They are building office, retail, recreational and moderately priced condos with the hospital worker in mind. The Okanagan city has seen population growth of more than 9 per cent in the past few years.
Presales are underway for the first condo building, with 127 units. But first, there are the out-of-pocket expenses, such as the large Danish-style presentation centre to give consumers an idea of what’s to come.
Developer Rocky Sethi at the not-quite-finished presentation centre for his company's master-planned community in Penticton, B.C.Kerry Gold/The Globe and Mail
“Some people said, ‘you know, what you’re doing here is a bit crazy,’” says Mr. Sethi, standing in the not-quite-finished showroom.
“But we’ve got 127 condos to sell, and that’s actually not a lot of condos. We’re not putting down 300 condos. There are only 127, and then that’s it for now. So, we’ll start, and then people will see what we’re doing here.”
The current downturn is perhaps not surprising considering that market cycles are often tied to interest rates. The Bank of Canada last week cut its key policy rate – the first drop in four years. And although it’s only a small drop from 5 to 4.75 per cent, it’s a move in the right direction for a thirsty development community that’s seeing condo projects put on pause or pivoting to rental. Small builders are going into foreclosure at an unprecedented rate.
“Throughout the last 2 1/2 years there have been these windows where people are waiting to make a move, and so then we will knock off a few sales, then it will be quiet, and then we’ll knock off a few sales. It’s been choppy, and I’ve never experienced anything like this,” says Mark Goodman, broker at Goodman Commercial, which specializes in the sale of multifamily buildings.
Mr. Goodman says many apartment building owners in the Lower Mainland have owned for so long that they aren’t impacted by the higher rate. But investors who purchased in 2016 or 2017, when the “market was strong and money cheap,” are having to refinance at four times the initial mortgage.
“And coupled with rent freezes during COVID and only nominal rent increases after. Combine that with rapid inflation, insurance and tax and utilities, and many of these landlords are in a negative cash flow.
“This situation is even worse in the land development market. There has never been a time that I have been selling real estate in the last 22 years that I have seen so many court-ordered sales.
“The big guys are okay. But the ones that are not well capitalized… I have a lot of developments for sale and some of my clients are in trouble. It’s a tough time.”
However, Mr. Goodman said he has sold nine buildings so far this year, and is hopeful that there is already an uptick underway. The true nature of the market can take time to reveal itself because of the lag between purchase and completion many months later, he says.
He just sold a waterfront property at 1000 Cypress St., in Kitsilano Point, which had been listed for $14.5-million. The 1970s-era eight-unit apartment building had been approved for a development permit to build three high-end detached houses. It’s rare that the city allows the conversion of multifamily rental to detached houses, but the zoning allowed for it and the city approved the project last year.
The sales launch of the ultra-high-end Curv, a 60-storey downtown tower promising to be the world’s tallest passive house tower once built, has not been immune to the down cycle. Last summer, marketer Jacky Chan, chief executive officer at BakerWest Real Estate, said he had presold a Curv unit at a record $4,400 per square foot – which raised eyebrows among the real estate community, because there were already signs the market was slowing.
Renderings of the CURV condo project in Vancouver by partners Brivia Group and Henson Group.Brivia Group/Henson Group
Today, the Montreal-based developer Brivia Group still needs to sell about $100-million worth of presales, according to Mr. Chan. He said that’s doable as confidence in the market is restored. Earlier this year, they threw in a free Porsche to promote the purchase of a unit.
By law, developers of presale condos in B.C. have a one-year window from the date they begin marketing a project to sell enough units and secure the financing they need to start construction. Because of the size of the project, Curv has been given a one-year extension to work on the financing, says Mr. Chan. And although purchasers had the option of getting their deposits back, he says the vast majority have chosen to “stay and continue to see this building come through.”
Mr. Chan said the market overall, is hugely impacted by the lack of available cash from China, which has seen a significant real estate downturn.
“Nobody is really throwing anybody a bone, right? Everyone is suffering. Nobody has a lot of cash lying around doing nothing. They are all servicing their increased cost because of the increased interest [rate].”
On the upside, there are opportunities.
“It’s a huge opportunity for developers to snatch up some of these shovel-ready or DP [development permit] ready projects,” he says.
Mortgage broker Eitan Pinsky says that after “a bit of a nosedive” the last eight months, they saw a busier spring that has since tapered off.
“From everything I’ve heard, downtown Vancouver is a ghost town, very few people are purchasing. I think [buyers] think prices are going to be decreasing. A lot of listings are coming online.”
As of Aug. 1, first-time buyers will have the option of purchasing a newly built home using a 30-year amortization rate to lower payments. Because the new home must be less than $1-million, the policy could help Vancouver’s condo market.
Mr. Pinsky said last week’s interest rate cut will have a positive psychological impact but more is needed.
“There are always going to be purchases and there are always going to be sales. But what is going to move the market a lot, I think, is we need a 0.5 to 1 per cent decrease for more buyers to jump in and for the condo market to take off again. It’s just too hard for first-time home buyers.”
Senior economist David Williams, vice-president of policy for the Business Council of B.C., believes the market could experience yet more pain in the next couple of years, largely due to the amount of mortgage debt consumers have taken on during the ultra-low interest rate period.
“We’re like Wile E. Coyote,” says Mr. Williams, who spent six years with the Bank of Canada. “We haven’t realized the ground is out from under us yet and the legs are still pumping, because you’ve got about half of all mortgages that have yet to reach refinancing,” he said. “That’s a lot of loans coming due over the next two and a half years. Next year is a big year and 2026 is even bigger. All those loans locked in for five years, at one and a bit per cent, or 2 per cent – they are all coming due for refinancing at significantly higher interest rates.”