Three Reasons we don’t see more rental housing in the Fraser Valley

March 3, 2023

By Mike Harrison

Media headlines and industry events have been full of discussion on the rental housing supply challenges throughout Metro Vancouver, especially following CMHC’s most recent Rental Market Report (click here). The Fraser Valley, while often left out of the spotlight specifically, is experiencing the same increasing rents and falling vacancy rates as other regions which is no surprise given Fraser Valley municipalities consistently take multiple top 5 spots in Metro Vancouver population growth reports. As a result, rental development comes up frequently in conversation and these are the most commonly cited factors holding developers back from building more of it:

Market condo builders can pay more for the land – because community plans don’t have rental-only land use designations (nor should they) rental developers are forced to compete for land that could be used for market condo projects. Over the course of my career, running hundreds of comparison proformas of rental vs condo developments on the same site, the residual land value of the rental proforma rarely makes it to even 75% of the of the market condo land value. As a result, when a development site becomes available, market condo developers beat out rental developers every time.
Fraser Valley municipalities offer little to no formal incentive to build rental – With the exception of Surrey’s waiver of Community Amenity Contributions (CACs) for rental projects, Fraser Valley municipalities do not have standardized incentive programs for rental development. In an environment where market condo developments produce a higher residual land value, incentives can bridge the gap and allow rental developers to compete on the land buy. Some municipalities consider parking relaxations or may even reduce DCCs but unless it’s a formalized policy, developers won’t commit to a land acquisition based on hope.
The math does not work – Most recently it is the jump in interest rates that have hammered proformas the hardest, forcing many developers to give up searching for rental development sites or shelf existing projects until the financial projections move out of the red. Exacerbating the issue are rising construction costs (although there’s hope for that) and ever-lengthening permitting timelines.

So what’s the answer? Look further out. As you move from Surrey and Langley, east into Abbotsford and Chilliwack or North into Maple Ridge, you find nearly the same per square foot rental rates and the same rock-bottom vacancy but lower market condo selling prices. The result is that the residual land value in the rental proforma holds relatively constant while the residual land value for the market condo project falls. That gap closing allows the rental developer to compete with the market condo developer in the pursuit of the next site.

Additionally, if rental rates continue their upward trajectory and recent forecasts of lower interest rates and flat construction costs become reality some time in 2024, additional opportunities should emerge in the rental development space. At the very least, existing rental development projects should get pulled back off the shelf.