All-In On Purpose Built Rentals: Insights from Byron Chard

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In this highly-anticipated episode, hosts Cory and Adam welcome back a fan-favorite guest, Byron Chard, the President & CEO at Chard Development Ltd.

With his finger on the pulse of the industry, Byron provides a comprehensive overview of the current state of the commercial real estate market.

Tune in as Byron sheds light on the recent GST changes affecting purpose-built rentals. What do these changes mean for investors, and how are they impacting Chard Development’s strategies? This episode is a must-listen for both seasoned investors and those keen on staying informed about the ever-evolving real estate landscape.

How will the federal government’s recent announcement to waive the GST on rental projects impact the purpose-built rental market? Chard Development CEO Byron Chard breaks down how the announcement will change rental project starts, why Chard is pivoting to more rental, and how other fees and policies could jeopardize Vancouver’s rental supply.

What is Chard Development?

Chard Development has 2500 homes and three commercial projects on the go right now. We’ve grown on a strategy of diversifying by asset class, not geographic location. It’s challenging to get permits and approvals in Vancouver and Victoria.

We pivoted to rental about five years ago focusing on large scale, amenity-rich rental buildings that provide more than just a home; they provide a lifestyle.

Why pivot to rental?

We did a 209 unitrental project in Victoriaabout 10 years ago. That was too large for a presale project so we pivoted to rentals. That was the catalyst to show we can deliver high end rental that operates well.

That project introduced us to institutions we could work with on future rental projects, mostly with pension funds. That’s who we work with today to build these rentals that are challenging but so needed. They’re everywhere else in the world but we’re not seeing enough in Vancouver.

Is Vancouver becoming a city of lifelong renters?

I think it’s a mix. Canadians still dream of a white picket fence and there’s a stigma that you need to own a single family home in order to have one. But that’s not the right lifestyle for everyone. Some people want to travel instead of doing yard work.

People’s needs and dreams are shifting and purpose-built rental has a lot of advantages. You don’t have to think about replacing your dishwasher or paying property taxes.

Let’s talk about stability.

The biggest advantage of purpose-built rental is stability. The secondary rental market is not stable. It’s a great investment for landlords but they could sell at any point.

That’s why purpose-built rental operated by a professional management company is so important. There are a few bad apples but most of the landlords in BC are really good landlords.

Thefederal government just announced a change to the GST charged on purpose-built rentals. Can you break down what happened?

When a developer builds condos, the end buyer pays the GST. But the GST is charged to the developer on purpose-built rental because there is no owner.

30 days after the first person moves into a unit, the developer needs to self-assess for GST. There can be rebates available if units qualify, but that’s rare in Vancouver. So typically developers are paying 5% GST on their entire building.

The federal government announced that the GST will be waived for rental projects not yet under construction that will start before 2030 and finish by 2035. This hugely reduces the equity required to build rentals. This will be a catalyst to get projects into the ground and leave more equity to build more rentals.

This is a massive announcement by the federal government and I do think we’re going to see a lot more rentals start construction. However, the market impacts are not yet realized. The government also needs to clarify what “under construction” means so more projects aren’t paused.

How will this announcement impact developers?

I think it’s a significant catalyst for projects to start construction in the next 12 months. Projects with permits in place and land already owned by developers will see starts.

I am concerned about projects still in rezoning or waiting to submit as municipalities will be having their hand out wanting a chunk of the GST savings. I’m also concerned for projects that don’t own the land yet, as landowners may also be looking for a new price. This could slow the number of homes this announcement was intended to help create.

Is this a big enough announcement to start projects that were paused?

Absolutely. I will be pivoting from commercial or condo space to delivering an extra 500-1000 rental homes because of this policy. But there are also new policies coming out, like the Metro Vancouver fee increase, that can erode this savings, which will stall projects again.

Can you break down developer fees?

Developer fees include:

• Land transfer tax when we purchase the land
• Application fees, for example we just paid $200,000 to the City of North Vancouver
• Building and development permit fees
• Community amenity contributions
• Public art fee
• Translink fee
• Metro Vancouver fees
• Engineering fees
• DCL, utilities and infrastructure

Fees are adding up to 20-30% of our pro formas, depending on the municipality. The increase in the Metro Vancouver fee is significant and would erode up to 70% of that GST savings. Most municipalities have also removed deductions for purpose-built rental projects.

As much as I’d love to deliver more affordable units, I need to secure financing. Lenders are a major player and need to be at the table more on these discussions around affordability.

There’s a perception that developers making money is a bad thing. But most of our money comes from pension funds. So it’s going directly back to pay for municipal councillors’ or teachers’ pensions. That is misunderstood in this equation.

What is your take on the real estate market right now?

With construction pricing, I projected it would be stable or go down a little bit this year. We have seen materials go down but labour has continued to increase, so construction costs have gone up. We also have code changes coming up at the end of this year which will increase building costs on the Island.

We’re competing with the same sub trades as projects like the hospital and major infrastructure. We need more skilled labour and we need to do that through better education and immigration.

Therental marketcontinues to be extremely tight for the end consumer. There’s not enough supply and it will continue to be tight for years because there’s not enough under construction.

I hope that will change over the next 12 months and I think the winner will be the end consumer in 3-4 years when the buildings need to get leased up. They’ll offer better amenities and a more competitive price.

Where are purpose-built rental buildings popping up?

A lot of municipalities are supporting purpose-built rental. We’re seeing more built around skytrain nodes and rapid transit. The lenders like to be close to transit, as do renters. But it’s diverse across the region, which gives renters more options.

Even though it’s challenging to work in the City of Vancouver, we feel it’s an area we want to continue to invest in. The lifestyle and amenities are unmatched. We have good capital behind us who also desire to work in Vancouver.

Where are interest rates going?

Every month we look at what the Big 5 banks are projecting and run our pro formas based on those projections. I wouldn’t be shocked if we saw one more interest rate increase this fall, but I don’t think it’s the right decision. The Bank of Canada is set on how they want to get to their 2% inflation target.

I don’t think we’ll see a decrease in interest ratesuntil summer 2024. The Bank does not want to see a rebound on inflation.

When we do see interest rate decreases, they won’t be significant. This is the environment we’re working in, so let’s get used to it.

How does a high interest rate market impact your future projects?

The nice thing about purpose-built rental is we know that our capital is there as long as we get approval. We just have to ensure we can secure debt service coverage.

Debt service coverage is the ratio between your loan income and your net operating income, your total revenue from tenants minus operating costs, applied to your amortization and interest rate. In a rental building, the landlord pays operating costs. When taxes andinterest rates go up, that stalls projects.

Is there any other low hanging fruit the government could grab to help increase rental projects?

The three levels of government need to work together. We’ve seen the federal government step up and I think they will continue to through the CMHC. But there’s a lot the BC government could do to encourage speed and work with BC Housing.

Municipalities just need to speed up. Holding costs greatly impact equity. Automation technology would speed things up. They also need to understand what affordability means. We’ve seen significant wage inflation so we need to switch from affordability to obtainability.

More politicians want to see more rentals built. So they need to help make that happen.

Developers also need to be good players. We need to submit good applications and help staff approve them sooner. But this could be done faster with automation.

City staff are there to protect public interest and as developers, we need to respect that. They have a challenging role and we need to be a team with them.

What are some of your favourite neighbourhoods? Where are the fringe markets?

I think areas on rapid transit will be key for purpose-built rental, as well as areas with views. We haven’t made any plays in the Oakridge area as I don’t think there’s a good view opportunity.

We look at the long term vision for the different properties. It’s about what corner you’re on, not just what neighbourhood you’re in. The small details are important to us.

We’re going tocontinue investing in the Island and Victoria. We like the weather and the employment opportunities. It’s a fantastic area to live.

I don’t plan to change our strategy and move away from the cores of Vancouver and Victoria because I think they will continue to be strong. We do adjust our approach, such as including coworking spaces in our buildings, but people still want to be near friends, great restaurants, etc.

What does the future of office real estate in Vancouver look like?

I think we’ll continue to see a flight to quality in the office market. The employer is going to need to offer more to the employee, from amenities to office style. What makes someone want to come into the office?

I believe in-office work brings more collaboration but people need to make their own decisions about coming into the office. At Chard, we like to have our staff in three days per week with two mandatory days for collaboration. It also impacts culture, which is so important.

I think the amount of space companies need will continue to be a conversation. I don’t think we’ll see the full impacts of covid for another 2-5 years. Companies are still trying to figure this out.

The 5 Wire: Getting to Know the CEO of Chard Development, Byron Chard

Favourite restaurant or bar? 

I’ll pick AnnaLena in Kits.

Share a book recommendation for our listeners.

This summer I read Am I Being Too Subtle? by Sam Zell. I love reading business books and trying to improve my communication style.

Drink of choice?

Definitely the Maca Rush smoothie at Body Energy Club.

Car of choice?

I’m not a car guy. As long as it gets me to Whistler, I’m happy.

If someone puts a karaoke mic in your hands, what are you singing?

I was a percussionist as a kid so put me on the drums but don’t hand me a mic!

What is something you’ve bought recently for under $1500 that has had a positive impact on your life?

A Theragun. That’s been really positive! I love it from a recovery standpoint.

• Chard Development