Do Cities and Municipalities Really Want to See More Market Purpose-Built Rental Housing Built in Their Communities? Probably Not.

On August 28th, 2018 LandlordBC co-presented with the City of Vancouver Renters Advisory Committee a non-partisan workshop entitled “Delivering Rental Housing in Your Community”. The workshop was exclusively for declared Metro Vancouver mayoral and council candidates in the upcoming fall civic election. To ensure that the candidates felt free to ask candid question, no media was allowed during the workshop. The workshop offered candidates information that is unavailable anywhere else so that they could learn about opportunities and barriers to building secure purpose-built rental housing* in their communities. This was a 3+ hour workshop that took a “deep-dive” into the financial considerations related to building purpose-built rental, and the critical role municipalities and their political leaders play in the process. Just under 100 candidates attended, with the majority being non-incumbents. While the candidates attending where extremely engaged in the workshop (90 minutes of Q&A is definitely a proof of that!), we are not entirely convinced that cities and municipalities want to see more market purpose-built rental getting built in their communities. Here’s why.

*Definition:  Purpose-Built Rental (PBR) housing is designed and built expressly as long-term rental accommodation.  It is different from other types of rentals, such as condominiums or secondary suites, which may be available in the rental pool one year and not the next.  Purpose-Built Rental housing is the most secure form of rental housing available.

As an ever-increasing number of people look to rent, the pressure on the limited supply rises. While the solution seems obvious, build more purpose-built rental, the reality is that building more purpose-built rental is easier said than done. This is especially true as long as the risk/reward imbalance of purpose-built rental versus condos persists, and cities and municipalities continue to insist that they get “paid” when we build purpose-built rental just like they do for condos. More on that later.

At the same time municipalities are largely silent on the suggestion by some stakeholders that rent controls should be expanded or that rents should be frozen (with some essentially endorsing these measures), they are not willing to “walk the walk”. As a landlord, one of the largest expenses we have is property taxes. If you compare the legislated allowable rent increase to the budget increases year over year for pretty much any city or municipality in the province, you will find a larger and larger gap. Somehow landlords are required to make ends meet with 2%, but it is sacrosanct for a mayor and council to stick to 2% as a year over year budget increase.

Cities want the quality of rental housing to improve, and so do we. This is a worthy goal, but cities seem to ignore the fact that every improvement (cost to the landlord) needs to be covered by revenue – “There is no money tree out back.” Rental property owners are not willing to lose money. We are, after all, in the business of providing homes. With constantly changing bylaws and building standards we will be forced to simply cut back on maintenance, something no one wants to do, or other expenses. This results in an ongoing degradation of the quality of the existing rental stock and it is ultimately renters who suffer. To be clear, new bylaws and constantly changing building standards are directly linked to and cause higher rents.

There is a significant risk/reward imbalance between building purpose-built rental housing and condos

There are all kinds of symptoms surrounding the real issue and often, these are tackled in hopes of finding a solution. This sometimes produces short term breathing room, but nothing long term is going to change until the root of the issue is addressed. One of the major problems that continues to persist is the fact that it is significantly less risky and more profitable to build condominiums than purpose-built rental housing. And this is where cities and municipalities come in.

Purpose-Built Rentals Simply Don’t Feed the Machine

At some stage, municipalities decided to demand part of the profits from developments. In the early days it was a legitimate request. Developers were building subdivisions at a frantic pace and civic governments were having to try to keep up with fire halls, sewers, domestic water, etc. for the new suburbs. What they demanded was a “contribution” (today referred to as Community Amenity Contributions or CACs). Developers were making huge profits from rezoning and building on virgin land. Surely, they could pay for some of the civic facilities required. It was all for a good cause, but very quickly these “contributions” became a pillar of municipal revenue.

The money did build some new infrastructure, but soon it was mostly flowing into general expenses. Other cities and municipalities, some without any or very limited expansion, decided they shouldn’t be missing out, so the practice grew. What has been witnessed is gross profiteering from the practice. One Metro Vancouver municipality has a $1+ billion surplus sitting in a reserve, and no incentives to build purpose-built rental housing! To add insult to injury they continue to allow existing purpose-built rental housing to be redeveloped into high-end condos for wealthy investors. That’s just wrong.

So, while cities and municipalities tell renters “we are on your side”, they are in fact discouraging purpose-built rental building through unfriendly bureaucracy and a fee structure designed for condominiums. Purpose-built rentals simply don’t feed the machine.

But we are doing something about it…

Some cities have launched programs to try to stimulate rentals. We would submit they have been marginally effective because most civic programs only go part of the way and, consequently, are not as effective as they could be. Those people who were already going to build rental will take the money. Anyone else will ignore the incentives because building purpose-built rental doesn’t make business sense for them. They will continue to build condos because they are lower risk and more profitable.

A successful program needs to be supported by the math. If a condominium in downtown Vancouver or Victoria can be sold for $1800 per sq. ft. and a rental unit sells for $1300 per sq. ft, then the tax on condominiums needs to be $550 per sq. ft or the incentive to rentals needs to be $550 per sq. ft.  It is important to note that the costs to build condos or purpose-built rentals are pretty much a wash.

In addition, incentives for purpose-built rentals cannot be for sale. As an example, some cities and municipalities offer additional density for building rentals. A great idea! The issue is developers can also buy the same density for less than the gap between condominiums and rentals. For clarity, it is more profitable to build condominiums and buy density from the city than it is to build rentals and get the density for free. Developers will always make the better business decision.

What needs to change?

Quite simply, the playing field needs to level for purpose-built rental housing. And we say simply, because it really is a simple problem to solve with a little political will. Here’s some suggestions:

  • Rental incentive programming needs to be based on the difference between the sale price of condominiums and the sale price of rentals. The math needs to make sense and going half way won’t work.
  • Bonuses for building rentals cannot be for sale or bargained away.
  • Municipalities need to consider building code changes for rental buildings more carefully.
  • Taxes need to be fair. It cannot be significantly worse to build or own a purpose-built rental apartment building from a tax point of view.
  • Incentive programs need to have hard goals tied to number of purpose-built rental buildings built, not just the number of units.  We like the idea of 40% – 50% of new multi-unit building permits being purpose-built rental.
  • Finally, don’t make the rental business unattractive. At the end of the day, the health of the rental market depends on investors wanting to put capital into new buildings and units. When a government becomes heavy-handed with regulations, rent controls and other restrictions, people will simply invest elsewhere.

Don’t forget to vote on October 20th, 2018