The supply/demand of the development market
Understanding the price of your investment can be summed up in one simple economic concept; supply and demand. The balance between both sides of the equation represents a constantly evolving equilibrium that influences the overall value of every single development site. There are so many components at work that trying to grasp every point would be futile. However, understanding a few of the important aspects that are behind the scenes manipulating the different factors, like a marionette puppet, should help to give you a better grasp of the circumstances that generate the final value of your dirt.
First let’s look at the supply side of the equation. There are two drivers behind the supply of available land for sale. The first being the city’s influence on what densities they give to specific areas, municipalities have the most direct control over how many sites are available. How many areas they designate for specific densities will contribute to how many available sites can potentially be sold on the market. The amount of density allocated to each property is important because the profit from the overall project must be viable enough to pay out the land owner more for their land than the value of the current improvement. The second driver, which is the most influential, is the aggregate available land. Vancouver is a landlocked city with a limited supply compared to other areas. For this reason every time the city designates a new development opportunity they are diminishing their future inventory. Consequently it is important to note that city planners consider generations into the future when contemplating policies on development. Thus many municipalities in Greater Vancouver have taken a conservative stance by slowly allocating new areas as development opportunities relative to other cities. Keeping the supply low invariably drives up the price of the land, which works as a double edged sword. For the lucky investor who gets rezoned as a redevelopment site, the increased value in many cases is like receiving a winning lottery ticket. On the flip side the investors whose property is not zoned as redevelopment are left out of the pool for the moment. Keep in mind that a moment for the city, could realistically be the lifetime of the property owner, as new policies are typically adopted every twenty to thirty years.
The other side of the equation is the demand component. There are many different factors causing the current high demand for land ranging from: low interest rates, increasing population, a depressed dollar, and market speculation, to highlight some of the important ones. One of the driving factors is increasing population. Last year Greater Vancouver’s population swelled by approximately 31,519 people (BC Government’s BC Stats website http://www.bcstats.gov.bc.ca/StatisticsBySubject/Demography/PopulationEstimates.aspx) and everyone needs a place to live. This will invariable drive up the price as more people are trying to co-exist on the same amount of land. The only way to house the growing population is to look skyward with new development opportunities. Since we cannot add land, inventory of single family homes and low-rise multifamily buildings will continue to dwindle. Additionally the depressed dollar is contributing towards the increasing amount of purchasing power that investors are able to utilize. Any investment currently bought by foreign money can see up to an immediate 20% premium compared with the historic currency conversions. A sophisticated foreign Buyer may speculate that the dollar will regain strength in the near future and calculate that additional profit into his overall margins, which may justify paying more for the greater gain that domestic investors would not be able to take advantage of. Low interest rates continue to allow additional borrowing providing Buyers deeper pockets to purchase property. While rates continue to stay at current levels, this creates another opportunity for increased margins in the long run as investors may speculate that in the next couple years rates will begin to rise if the economy regains momentum and strength. The impact of low interest rates is substantial because it affects both domestic and foreign investors.
Let’s dispel the ideology some landowners have of the mythical foreign investor that is willing to overpay because they have more money than they know what to do with. To an extent we have seen increasing activity from foreign investors, however, they still make up a small portion of the overall pool of Buyers limiting the impact on demand. Additionally they are usually sophisticated and knowledgeable about local conditions before they make a purchase and will not generally overpay for product. The occasional anomaly occurs from ambitious investors that will leverage the current premium on the dollar, gambling on the Canadian currency to increase, to support paying more than market for the land.
Overall understanding the many factors influencing supply and demand should help you to determine whether local market conditions are conducive for either selling your property or looking for new acquisitions. Developers have limited flexibility on the amount they can afford to spend on new projects to make them viable. Being able to squeeze those margins by taking advantage of the depressed dollar, low interest rates, and limited available development sites are supportive of current market conditions being a good time to consider options.