VANCOUVER, BC / ACCESSWIRE / February 17, 2019 / Currently there are a lot of real estate developers in Vancouver seeking funding for their large multifamily apartment projects. While at first glance bigger projects might seem better, that isn't really the case when developing multifamily property in Vancouver.
How mid rise multifamily projects are developed
Mid rise apartment buildings are those that are 4 to 8 stories high with a total of between 40 and 120 units. The development of mid rise multifamily buildings in Vancouver begins by locating and assembling several parcels of adjacent single-family lots that can accommodate the bigger building footprint that a mid rise building requires.
After the developer has purchased and assembled the lots to build on, engineers and architects must design a building that matches the site and doesn't raise objection from the neighborhood residents. Then permits must be obtained, construction begins, and after 5 years or more the project is ready for occupancy.
When seeking funding for new multifamily projects developers pitch several common perceived advantages of larger buildings to investors: 1) There is investor demand in the market for mid rise property because so many projects are being developed, 2) Individual units are easier to sell or lease because of the larger quantity and variety, 3) People like living in bigger apartment projects so there will never be a lack of demand for the units.
Major risks of developing mid rise apartment buildings
Unfortunately, these perceived advantages of bigger apartment buildings end up being overly optimistic and understate the risks involved in developing mid rise multifamily projects because of the multi-year development time frame and the expense involved, real estate developers building mid rise projects attempt to collect investor funds up front. While this provides working capital for the developer, it's risky for the investor because money is being sunk into a project that the developer doesn't have complete control of.
There are several cons to developing mid rise apartment buildings, making these projects suitable only for investors willing to accept an extremely high level of risk:
- Developers seek capital for projects whose land they don't currently own, where due diligence hasn't been completed, and plans and permitting have not been approved by the city
- Contiguous single-family parcels are extremely difficult to locate and are usually found only in the less desirable areas of Vancouver or in locations where the market is already saturated
- Local communities often object to the construction of a mid rise building because these projects don't match the existing character of the neighborhood
- Investors will not begin to see a return for at least 5 years due to the extremely long timeframe needed to develop a mid rise multifamily project
- A lot can change during the 5-year development time for a mid rise building, especially in a dynamic city like Vancouver - a project that appears to make sense today could easily end up being a money-losing property five years from now
However the biggest risk for investors in this type of project is that developers must pre-sell at least 50% of their units to obtain construction financing from most lenders. Historically these off plan units have been sold to overseas investors however due to recent government policies to curb speculation these funding sources have diminished. If this quota is not met the project will hang in limbo leaving all involved high and dry.
As for the sales pitch that mid rise developers make to investors about people liking bigger apartment building living? That isn't exactly true, as a recent article in the Vancouver Sun explains in detail.
Why smaller multifamily projects make more financial sense
Developing smaller multifamily projects in Vancouver follows the value-add investment strategy. These projects provide high net worth investors with a balance of risk and reward that preserves and grows investment capital while offering double-digit ROIs.
The team at Tycon Capital has years of development success with nearly a dozen profitable multifamily projects completed for our investors. There are several key advantages to investing in one of our joint venture multifamily projects in Vancouver:
- Investment capital is accepted only after due diligence has been completed, building sites have been acquired, and plans have been submitted for approval
- Established banking relationships allow Windsor to arrange project financing without a presale requirement, compared to larger mid rise projects that require a certain percentage of presales before banks will make a loan
- Multifamily development projects from Tycon Capital and their partner JC Tycon Developments only take 2-3 years to complete, providing investors with a higher ROI and the option to reinvest funds in future projects to compound returns even further
Tycon Capital is keenly aware of the competition and the saturated market in many parts of Vancouver. Our in-depth knowledge and portfolio of successful multifamily projects allows us to seek untapped opportunities, meet pent up market demand, and identify neighborhoods in Vancouver that are undeveloped.
By maintaining the single-family character of the neighborhoods we build in, we are increasing density and helping Vancouver grow in a very positive way for the community and a very profitable way for our investors.
SOURCE: Jonathan Clogg - Tycon Capital