Examining land purchases made today can provide the information needed to speak with confidence on the future of the market in the years to come. As the development life cycle of the typical condominium development project can be up to four years, large land sales are an indicator of long-term confidence and provide sight-lines into the future. It allows interested parties to anticipate, from an early stage, which markets are going to be most active in the coming years so that they can act and react accordingly. The Fraser Valley has long been a compelling market within the Lower Mainland, made more so during the pandemic due to shifting homeowner needs. Developers and homebuyers alike are, or will soon be, adjusting to the market shifts. As we move into a new phase, what factors can we look to in order to best predict the future of land values in the Fraser Valley?
Land prices: exponential growth and a shifting tide
As with the majority of resale products in the greater Vancouver area, land prices in the Fraser Valley have grown exponentially in the last two years. The ‘flight to the suburbs’ had a large effect on this, driven by new or more flexible work-from-home policies along with the desire for more space due to more time spent in the home. Many developers saw this new need and acquired land in previously less traditionally developed areas. The average price per square foot of these transactions increased by 19% year-over-year as developers chased and competed for more development opportunities in an extremely hot market. However, many developers who bought land during that hot period are now seeing their expected profit margin eaten up with input supply and labour prices rising and the market cooling. Some developers may choose to push through and launch the project, while some may choose to hold and wait for a higher, more guaranteed return on investment. Their decision will come down to financing options and pro-forma details that will inform a myriad of factors. The coming year will reveal the spread on who will move forward, and who will hold; that percentage will affect land prices.
Portfolio holdings: diversification and breathing room
As the twists and turns of a market affect different submarkets in varying ways, developers with diverse development portfolios will have more flexibility and opportunity to hold on their projects and wait for a more beneficial environment. Diversity in holdings allows the developer to proceed with projects in a well-performing submarket while holding off on less clear wins. Any group that has spent the time to actively cultivate a portfolio of diverse holdings will benefit here. There is a strong case for diversification, as developers who find themselves over-indexed in one submarket or one product offering may feel the pinch of the current landscape more. For example, offering product that is end-user focused may act as a hedge against market conditions that would otherwise hurt the demand for investor targeted product.
Land acquisitions: downturns and market shifts
Due to the evolving market conditions, there has been a significant downturn in new land acquisitions in the Fraser Valley. There was only one reported large land sale for the month of June in the Valley, a huge change from the first quarter of the year which saw an average of 30 low-high density land transactions take place each month. Of the sales that are happening, Surrey continues to be the most active market followed by Langley and then Abbotsford. The Surrey SkyTrain extension has led to continued confidence in the Fraser Valley markets. As a result of the extension, the city has updated five neighbourhood plans to reflect the undoubtable increase in density in newly transit-oriented areas. The huge dip in land transactions seen between the start of the year and now may only persist. With the further interest rate increase announced in July, developers are once again seeing their risk and cost environment surge.
This shifting market makes it necessary to be proactively armed with the right information, and to be ready to apply changing data in flexible and nimble ways. Those who can make time-sensitive decisions to jump on transition opportunities and who have kept diversified portfolios will come out of this phase the strongest competitors.