Dan Fumano, Vancouver Sun, August 15 (with interview with BCNPHA CEO Jill Atkey)
In early March, Mark Goodman flew to Toronto to meet with CEOs of six of that city’s seven biggest institutional investors in multi-family residential real estate.
They included pension funds and real estate investment trusts, or REITs, and they were all keen on expanding their presence in B.C.’s rental housing sector, Goodman said.
COVID-19 lockdowns barely made a dent.
“When they shut down B.C., for two weeks, things were quiet. And then it exploded again,” said Goodman, whose company Goodman Commercial is Metro Vancouver’s busiest agent for the sales of apartment buildings.
“We’ve seen major institutional groups out of Toronto buying assets. … We’ve seen no price deflation at all. Actually, if I may be so bold as to say, the value of buildings has even gone up. … People are feeling very bullish about rental.”
Vancouver’s rental housing landscape has been shifting recently away from local mom-and-pop landlords to large, mostly Toronto-based financial companies — including multi-billion-dollar pension funds, asset management firms and REITs. Experts expect that trend will only increase, despite the pandemic, as returns for investors have been great.
While the trend may be good news to Goodman and others in his industry, it alarms others.
Trend means sharply higher rents
Jill Atkey, CEO of the B.C. Non-Profit Housing Association, has been following the sales of older apartment buildings listed in Goodman Commercial’s regular reports and watching the sales prices climb higher. It “has not been good for my mental health.”
Atkey’s association has run the numbers on some of the sale prices compared with current rents, and concluded the only way they could be worthwhile investments is with substantial rent hikes.
Thom Armstrong, CEO of the Co-operative Housing Federation of B.C., and others in community housing took note of big institutional investors snapping up old rental buildings at an increasing pace. Last year, they decided action was required.
Before COVID, they were concerned. After COVID, he said, it seems “our worst fears are on the verge of materializing.”
This situation is not unique to B.C. In June, non-profit housing experts and advocates across Canada held an online discussion examining how to, in their words, “Beat the REITs.” The spoke in worried tones about the shift from local landlords, who valued stable, happy renters over maximizing profits, to financial firms, for whom the main customer isn’t the tenant but the investor.
The broader trend of the “financialization of housing” extends beyond Canada. Last year, the United Nations issued a statement condemning the “egregious” business practices of some global private equity and investment firms that have “transformed the global housing landscape by raising rents and forcing some tenants out of their homes.”
Now, B.C.’s Non-Profit Housing Association and Co-Op Federation have a proposal for what they call “a made-in-B.C. solution” to the problem.
In recent weeks, the groups have begun talks with the provincial government to outline a proposal for a $500 million capital fund from the province. The idea is to enable non-profits to buy apartment buildings when they come up for sale and preserve them as affordable non-profit homes, before institutional investors can acquire them as profit-generating assets.
Nothing has been made public yet about the non-profit groups’ strategy, but they provided Postmedia with documentation outlining their proposal.
The strategy outlines the connections between rising rents and homelessness, citing a U.S. study showing that for every $100-a-month increase in median rents across several jurisdictions, homelessness increased between 15 and 39 per cent. Homelessness is surging in many North American cities, but not caused by a bad economy or growing unemployment. Places like Vancouver, Seattle and San Francisco have had record homelessness while their economies boomed. Instead, the common theme is rising housing costs.
The strategy praises efforts by current federal, provincial and local governments to build more affordable housing. Despite that, B.C. is losing low-to-moderate rental homes — which they define as monthly rents of $750 or less — at “an alarming rate,” with three units lost for every one new one built.
In some cases, those affordable units are lost because of demolition and redevelopment. But in many cases, the brief says, the units are still there, in the same buildings — they have simply ceased to be affordable, often as rents rise after the building changes owners.
Preserving affordable rentals is crucial, the say, as rents have increased far faster than incomes, and home ownership is out of reach for a growing portion of the population.
“This acquisition strategy is really the missing piece. … It’s about plugging the leaks in the housing system,” Atkey said. “Without this piece, we’re just going to continue be bailing out a sinking ship.”
No end to housing crisis: ‘good news for investors’
Canadian cities built lots of apartments in the 1950s, 60s and 70s, aided by federal incentives. Rental construction largely stopped in the 1980s, due to factors including governments ending incentives and introducing more rent controls.
Decades-old apartment buildings still make up much of Canada’s rental stock. Today, more than 60 per centof Vancouver’s purpose-built rental housing was built between 1950 and 1979.
Privately owned, older apartments are crucial in Canada and the U.S., where social housing makes up a small fraction of the housing stockcompared with many European nations.
Industry representatives, defending corporate landlords, say this aging housing will require a lot of money to extend its useful life. And that money has to come from somewhere.
To investors, the value of these buildings is their scarcity. They cite the decades of lack of rental housing construction in cities like Vancouver — and the unlikelihood of the shortage ending soon — as reasons to be bullish.
Martine August, a University of Waterloo professor who has studied the “financialization of housing,” said this trend began in Ontario, where most of the big institutional investors are based, before spreading westwards.
August attended a seminar last year in Toronto, where real estate investment executives spoke about the outlook for the industry. She quoted some of the executives’ comments in a paper this year in the peer-reviewed Journal of Urban Affairs, including Starlight Investments CEO Daniel Drimmer, who told the crowd: “We think there is a definite housing shortage, or almost a crisis level in Canada … and the good news for investors is there is no easy solution in sight. … This is not good news for consumers.”
Starlight, which did not reply to requests for comment for this story, owns more than 400 multi-family properties in Canada, totalling more than 33,000 units, worth more than $10 billion.
In B.C., Starlight’s portfolio includes dozens of buildings, many clustered in specific neighbourhoods. In a handful of blocks in Vancouver’s West End, Starlight owns seven apartment buildings totalling more than 600 homes. In an even smaller area in Victoria’s James Bay, Starlight owns 12 buildings totalling more than 630 homes. In 2018, CTV reported, tenants of Starlight’s James Bay buildings filed more than 100 formal complaints to the Residential Tenancy Branch.
Starlight has highlighted their business model in other markets, through their own materials and regulatory filings, the Globe and Mail reported in November, including a 174-unit Toronto rental building they’d acquired where they increased average rents by $411 a month over four years.
These kinds of investments have become hugely popular in Canada. Armstrong of the Co-operative Housing Federation of B.C. says it’s ironic that while many people who disapprove of a business model based on squeezing low-income tenants, “many of those same people probably own units in mutual funds which have as part of their portfolio the REITs that are doing exactly that.”
“If you’re an investor, you’re loving double-digit returns on your investment. There’s nothing illegal about it, that’s what investment is: You invest and you hope for a big return,” Armstrong said. “But the problem is when you ‘financialize’ housing that way, the consequences for people who need an affordable place to live is a little different than if you’re investing in widgets.”
But, August says, even if this investment strategy is perfectly legal — and lucrative — it raises moral questions.
“What we think is right in society, sometimes the law isn’t always caught up to that,” August said. “To squeeze people for their income and jack up rents for no reason other than to enrich investors, that’s considered legal, but I don’t think it’s morally right. And I think a lot of people would agree with me.”
August’s report also quotes Patrick Smith, a vice-president at Timbercreek Asset Management, speaking at the Toronto seminar, saying that by “repositioning” — an industry term for upgrading, refurbishing, and retrofitting — they can bring apartments “up to a condo quality” and “in many cases, double rents.”
In Vancouver, Smith said, “the business plan there is to roll the tenants, and in that market, we are seeing them take rents two to three times what the existing rents are.”
Reached by phone this week, Smith said his “comments were based on a segment of market repositioning programs,” and not on any specific plans. Smith declined to further discuss his seminar remarks, saying the event was “supposed to be a press-free zone so that people can speak candidly.”
Timbercreek did not make anyone available for an interview, but sent a statement through a public relations firm saying: “Institutional investment, while proportionally small in Canadian multi-residential properties, supports many aspects of much needed multi-residential housing, including the upkeep and preservation of older stock buildings, to ensure they remain viable for residents in the long term and assists in maintaining multi-residential inventory levels.”
Timbercreek’s 2020 Market Outlook forecasts a “strong operating performance” in the Canadian apartment sector, explaining: “Cumbersome permitting processes and richly priced land have made development of new apartments challenging. … Supply is coming online but it is not expected to be high enough to meet demand.”
That’s one area where voices on both sides of this debate seem to agree. If cities like Vancouver had not stopped building new rental housing four decades ago, thereby creating today’s acute shortage, these old apartment buildings wouldn’t be so appealing to financial firms today.
“Global capital is, to be sure, a fundamentally amoral force, and investors’ pursuit of quick returns through the purchase of apartment buildings has encouraged rent hikes that greatly outpace income gains for most families,” Jenny Shuetz, a Brookings Institute fellow, wrote this February in The Atlantic. “The distortions have been worst where local government policies — such as zoning restrictions, historic-preservation and environmental rules, and other measures — have most tightly restricted the construction of new housing. Indeed, for-profit companies’ behavior is entirely predictable, based on the financial incentives that local governments have created. When tight supply sends housing prices skyrocketing, deep-pocketed investors like Blackstone are far better positioned to take advantage than small-scale landlords are.”
‘A changing of the guard’
In the past, when big Toronto-based institutional investors looked at apartment buildings in B.C., they were generally interested in large-scale acquisitions, deals including several towers and hundreds of units, said Goodman.
“But we’ve been surprised,” Goodman said, pointing to a 54-suite, three-storey East Van apartment building the company recently sold to a public company, with the deal expected to close this month. “We traditionally thought these companies are only going to go for big, that’s not true. They’re buying smaller, 50-year-old wood-frame buildings as well.”
Goodman described the “changing of the guard” underway now. Many of Vancouver’s apartment buildings were built in the 1950s, 60s and 70s by families, many of them immigrants, who passed the assets down to their children. Today, though, the landlord business has become more challenging and “more sophisticated,” he said.
“There’s a more business-minded approach to multi-family now. I think the East Coast was a little further ahead,” Goodman said. “We, traditionally, were more of a mom-and-pop type of market, but that’s changing.”
Asked about the warnings from non-profit housing advocates about corporate ownership hurting affordability, Goodman said: “It is truly sad that a lot of our community and our residents are being priced out of the Vancouver market. And yes, while it’s a noble idea to protect this old rental stock, the side effects are devastating.”
If restrictions on things like rent increases are too tight for landlords to pay for necessary maintenance, Goodman says, “the buildings are just going to fall apart.”
The pandemic could lead to even more smaller-scale landlords putting rental properties up for sale, some experts predict, because they could be less able than a national corporation to withstand tenants defaulting on rent.
Some of those properties coming to market soon could be “distressed assets,” meaning market trends have depressed their value or an owner is forced to sell quickly because they can’t afford to keep an asset.
Distressed assets are “very interesting to private equity,” Leilani Farha, the former United Nations special rapporteur on the right to adequate housing, told Vancouver city council last month, urging them to push senior governments “to ensure institutional investors are not grabbing and snatching up distressed assets” in the next 18 months.
Farha told Postmedia the pandemic provides both an opportunity and a risk for affordable housing.
“There are going to be multi-family assets that will come to market that are either distressed or people just wanting to off-load, and those are an opportunity” for governments and non-profits, said Farha, who is a global director of The Shift, an international housing rights group. “Or there’s a risk that institutional investors will swoop in, like they did in the States in particular, after 2008-09” — recession years in the U.S.
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Farha co-wrote last year’s UN statement warning about the damaging impacts on global housing affordability of private equity and asset management firms “pouring unprecedented amounts of capital into housing,” converting “homes into financial instruments and investments.”
The UN’s statement last year singled out a single firm: Blackstone Group, a U.S. multinational managing more than US$500 billion in assets. Blackstone has partnered with Starlight in recent years to buy rental buildings in Canada.
Farha is watching Montreal, which recently passed a bylaw giving the city the right of first refusal when private landowners put their properties up for sale.
The City of Vancouver is “interested in what Montreal is doing,” said Edna Cho, a senior planner with the city. “But implementing that model here would require further exploration,” she said, and legislative change by the province.
COVID ‘enhances the buying opportunity’
Selina Robinson, B.C.’s housing minister, said by email that her government is aware of the trend in ownership and is “in the very early stages of discussions” with the non-profit and co-op housing associations about their acquisition strategy. She also pointed to “significant actions to improve protections for renters that may be impacted by a new owner’s attempts to increase rental revenues, to ensure that the rights and responsibilities of both renters and landlords are being respected.”
Since the NDP brought in those additional renter protections, there seem to be fewer stories about fly-by-night numbered companies buying rental buildings, and aggressively or illegally evicting tenants to jack up rents, said Spencer Chandra Herbert, NDP MLA for Vancouver-West End. While big corporate landlords might be maligned in some quarters, he said, many of them seem more likely to follow tenancy laws than the bad actors making headlines a few years ago.
But displacement remains a real fear for renters, particularly in rental-majority neighbourhoods like the West End, he said. “For some, there’s great anxiety, like: ‘What is the future? Some plan to mass-evict down the road?’ And I get people’s paranoia and concern about that, because in some cases it’s real.”
“We have to remind these businesses this is housing you’re owning. Not some other tradable good with no consequences,” said Chandra Herbert, who chaired the NDP’s rental housing task force. “It’s inherently part of the challenge of balancing one person’s interests of making profit versus another person’s right to have housing.”
However, David Hutniak, CEO of the industry association LandlordBC, said recent changes to rental housing regulations by all levels of government have also made it harder for mom-and-pop landlords to make a go of it, further accelerating the trend toward corporate ownership.
“If you take everything into consideration, it’s suddenly a much more challenging environment for a smaller player,” Hutniak said. The big players, though, have access to huge amounts of capital and can take a long view, he said, and “the COVID situation probably enhances the buying opportunity for them.”
The trend seems likely to continue, he said, “and I don’t think it’s a negative thing, per se. We need this investment, so I think by and large it’s a good thing. … We should be taking advantage of the capital they have, because where else are we going to get it? The province doesn’t have the money, the cities don’t have the money.”
A sound investment
Atkey and Armstrong hope to persuade the B.C. government that their $500 million seek acquisition strategy proposal could be a sound investment.
“The time is right for an acquisition strategy like this,” Atkey said. “Money has never been cheaper. I know governments at every level are facing escalating deficits, but they’ve got a lot of borrowing capacity.
“It’s not an issue we can afford to dither over for the next two years.
“For me, it boils down to an unavoidable choice, and no level of government, I think, can escape this choice: do you prefer a financial deficit over a social deficit? If you do, then start investing in this type of solution.
“But if you would rather see the social deficit balloon to protect some mythical credit rating, then just leave the acquisition strategy on the drawing board, and don’t make a move to transfer those assets into the community, and watch the affordability crisis become even more acute than it is right now.”
Atkey and Armstrong’s acquisition strategy would be, to their knowledge, the first of its kind and scope in North America.
“Everybody says it’s a great idea. But it’s unprecedented. And the numbers, I mean, there’s a lot of zeros,” Armstrong said. “But somebody has to be first. … Why not B.C.?”