Understanding the Current Rental Scene

The current rental market is buoyant and strong. We’re having good supply: lots of new product coming on stream. Everywhere you look around downtown Vancouver there are lots of cranes and high rise buildings nearing completion. We’ve just had a couple recently – the Melville has just come on and a luxury building in Coal Harbour; we’re fortunate to have several suites in there for rent, and we have rented several of them.

We are feeling a bit of resistance in some of the price points though, both there and in another building that just opened, Henderson Developments’ Firenze which is in the other end of the downtown, close to the stadiums and on the edge of Chinatown and Gastown.

We’re finding that investor owners are now paying more and more for their properties and they’re hoping to recoup this in rents. But the reality of the situation is that wages haven’t increased as much as property values have increased. A lot of owners now are trying to push the envelope to $2.50 and beyond a square foot. A couple of years ago $2 a square foot was considered the norm for a premium rent, We’ve been averaging $2.20, $2.25 but now they are pushing the envelope to $2.50 and beyond.

What’s happening is that individuals are now moving into one bedroom apartments and sharing. I saw this when I was young, in London, New York, and various big cities; people double up or quadruple up as they used to do in London – the rents were just so high. We are seeing more of that now. One bedrooms and studios we’re finding a very strong demand for, but two bedroom suites priced over $2000, $2500 a month are very very slow. There is so much product on the market they’ve become increasingly difficult to rent out.

We have to consider the demographic of the people that are renting, and how much they are actually earning. The reality is that the average person who is living and working in downtown Vancouver is making between $12-20 an hour. Somebody in the higher echelons, over $20 an hour, approximately $45,000 a year, Looking at my tables I see that if somebody earns $45,000 a year, their take-home pay is only $1300 every two weeks. So to support a rental payment of $1500 – $2000 a month for a one bedroom just isn’t possible for them. It’s 50-60% of their actual take-home income. So people just can’t afford to pay the big rents that are coming out. I think we’re going to have to see a bit of a correction on this. As I pointed out to some owners the other day, we were in one of the new developments on the horizon, there were four new towers of the Spectrum development about to be unleashed on the market, which would be 800 more suites and maybe 400 of those would be rentals.

Of course this is the best form of rent control to have: the constant supply of good quality housing. Plus of course the possibility of moving into other areas of the downtown, Gastown and the near East Side, and the new Olympic village area which is being developed, however with those prices between $450,000 and a million dollars, it would be very difficult to cash flow, as the rents will not support the payments on the payments on those kind of suites at this time. There is no way that you could buy a $400,000 suite at 600 square feet and expect to be able to cover the mortgage and costs, which would be probably $2000 – 2250 a month while the actual rental for it would be $1450, 1500 max.

Because ultimately in the Vancouver real estate market, the most important thing you need to be concerned about is not so much cash flow, but the reason you’re buying it. The tenant is paying your mortgage for you, the bulk of your mortgage and expenses. The asset is appreciating. And historically properties have appreciated in the 7-10% range per year. So there probably is going to be a bit of a plateau in the market, but ultimately, if you hold firm for 5, 10, 15 years, you are going to see some substantial increases in your equity in your portfolio.

(See also the video version of this info: Current Rental Environment)