Turning Lead into Gold with Jon Stovell

Please tell us about yourself.

I’m the President of Reliance Properties, a regional, niche developer. We work on a lot of infill and heritage redevelopment and in mature urban environments. We’re a design-forward developer and have been active in Vancouver for over 60 years.

Why real estate?

It’s an asset that gives you income and appreciation. It’s high risk and high reward. Real estate requires a deep understanding and expertise. It’s not very liquid but the returns can be very high. It’s great to be able to drive around and see real estate that was once just a twinkle in your eye and is now providing housing and offices. It’s a secret pleasure to know you built the building that you’re walking into.

Has the last year and a half surprised you?

It’s been nothing but surprises. We didn’t know what covid meant – we thought the economy might collapse. Since then, there’s been a series of incremental positive surprises. There was a ban on rent increases but everyone is paying their rent. Retail and restaurants are receiving government support. Then there’s been this big run on the residential side, starting in the suburbs and settling now in pre-sales. We didn’t have to shut down construction, which would’ve been devastating for our industry.

The supply chain issues and construction costs have been negative. But overall it’s been a lot less negative than we were thinking.

How do challenges in the supply chain and construction impact end users?

It increases costs. At the entry level, pricing is set by formation costs. If you can’t buy land and put up a building for the mandated profit margin, you can’t build. So these problems push up costs and properties become more expensive. The market will have to pay these higher prices to meet demand. At the higher end of prices, it’s more about competition than formation costs.

Since this last run was driven by local demand, does that change the narrative we saw back in 2015-2017 about foreign buyers?

In my view, it already has. It amazes me that back in 2015-2017 the government decided to start with the least obvious issue. Foreign buyers and speculators were never the problem, but that’s where they decided to start.

The number one culprit behind the shortage of supply in the Lower Mainland and most major cities around the world is zoning. Municipal governance is set up to protect the people who already got theirs. Constipated municipal processes and the fear of change are the reasons we don’t have housing affordability. We’ve finally figured that out. But what are we going to do about it?

What’s the easiest way to get out of this?

It starts with the federal government and their immigration programs. They know we have an aging and shrinking population. To maintain our society, we need to grow our population. All of the new immigrants go to Montreal, Toronto and Vancouver but those places have municipal governments who put their heads in the sand. And the provincial government has given the power to the municipal government for city planning.

Until we have mandatory growth targets for municipalities, this problem isn’t going away. It can be a carrot and stick approach – if we exceed our targets, we could receive more funding for infrastructure and technology.

We’re about to go into the third transit extension through Vancouver where Vancouver has dodged the density bullet but has accepted this huge financial investment in transit. The provincial government needs to tell municipalities they can’t get away with this anymore. Vancouver has an obligation to the whole province to provide that density.

Would growth targets be community by community? 

The city of Vancouver is one city. Each community has a different form, levels of wealth, culture, etc. These neighbourhoods show the diversity across the city, but we are one city.

Part of our problem is that we’ve created all of these informal communities that don’t want the growth, so they push the growth into another community. Some communities end up shouldering an unfair burden of growth. I think we should look at the density across neighbourhoods to ensure we’re maintaining the same form. But everyone has to grow; you don’t get to opt out.

Looking at the Downtown Eastside what, if anything, are we getting right there? What’s the future of that area?

I’ve been down in that area, on the corner of the Downtown Eastside, for 25 years. For a time, it was one of the best ranked neighbourhoods in the world. With the fentanyl crisis and crime related to drugs, the area is suffering mightily.

Nothing that we’re doing as a society in the Downtown Eastside is right. It’s an absolute disaster. The land just sits waiting for government funding. It’s the biggest point of shame for Vancouver. Not because it’s unsightly, but because the people who are there are not being helped.

Do you see the Downtown Eastside becoming more concentrated or more expansive over time? 

It’s expanding. BC Housing is being tasked to fix the problem and what do they do? They build housing. They put four walls around the problem. I don’t blame them because that’s the only choice they’re given. But people don’t get better by having a converted hotel to live in. Housing is one small part of the problem. Until we deal with all the pillars, it won’t get any better. They’ll just create more Downtown Eastsides wherever they go.

Are we too far gone?

I don’t know. For as long as I can remember, the Downtown Eastside has been a worsening situation. I don’t see the powers that be recognizing that what they’re doing isn’t working. I don’t know if we’re going to be able to solve this.

Reliance Properties recently sold a building in the Downtown Eastside. There seem to be a lot of real positive things happening around that area but has the last year and a half changed your opinion on that area for real estate investors?

Yes, I think so. I wouldn’t invest in Chinatown or the Downtown Eastside. We did have a building there and we never expected it to become a gentrified or squeaky clean area. But it was getting to the point where tenants couldn’t even use the front door. The police and other personnel told us there was nothing they could do. So our building became more valuable when it was empty. But is it progress in the Downtown Eastside to convert market housing to social housing in a neighbourhood that is 80-90% social housing?

Short answer: I wouldn’t invest in the Downtown Eastside or Chinatown. Gastown is a different story. It suffered a bit during covid but it will come back.

What are your thoughts on the Hastings Corridor area?

I love Hastings Corridor east of Clark. We have a big project coming in there. It doesn’t have the same ridiculous zoning as the Downtown Eastside plan. Hastings east of Clark Drive is an awesome neighbourhood and is going to be a great growth area.

What about the new St. Paul’s Hospital and that area?

We’re not in there but a lot of people are making plays around the area. I think it’s good. At the north end of it, it will be bordering the Downtown Eastside, which may be problematic. But I’m pretty positive about the area and it’s great to have that investment.

We used to always be on the eastern border, around Gastown, but once that became popular we started heading west. We’re drilling into the core of downtown.

Can you tell us more about what prompted that shift west?

We were starting to scale so the types of densities we found most efficient to work on were growing. You have to do the same amount of work on a $10 million deal as you do on a $100 million deal. Our developments in Gastown were about 75,000-100,000 square feet but now our projects are typically 350,000-450,000 square feet. It was about scale and where you can build to that scale.

Downtown has had a rough year. Has covid changed your strategy? 

The short answer is no. We’re doubling down on downtown. We know how downtowns around the world will come back. We believe downtown Vancouver has a fantastic future. We think people will come back down and want to get together again. Downtown cores weren’t developed by accident; that doesn’t go away because everyone leaves for a year.

But covid did teach us a lot and opened up some areas of inquiry. We’re looking at a major master plan community in a suburb on South Vancouver Island. That’s the first suburb location for us. We’re working with a partner and are interested in diversifying. Working from home, not as a replacement for office but as another avenue, means the commuting negative of the suburbs has been diminished. That changes things long term to a degree.

Suburban high-end properties used to only be for retired people. But I think we’re going to see more career-aged people living in these properties and only commuting a few days a week. I think that shift will be permanent, making those properties more attractive.

What areas outside of downtown are you most excited about?

Most of our growth in that space is on South Vancouver Island. I love Burnaby, if you can compete with all of the Burnaby pros. We’re downtown Vancouver experts so I don’t know what I don’t know about Burnaby, but I like the potential.

I’m not a big fan of the West Side – it’s overpriced and under-dense. We did a tower in Surrey early on so we’re keeping an eye on it.

But we’re mostly focused on Vancouver Island at this point. It’s a shorter financial journey to go to a single family home in Langford from a high-end condo in Victoria. So more people are making that choice. In Vancouver, there’s a much bigger price jump and a bigger commute too.

What’s your take on the interior?

I don’t have a clue on how to do anything there. We watch it and know it’s a big growth area. Up until 10 years ago, we were 100% Vancouver. We then decided to go to Victoria and have been able to expand there.

The next growth market outside of Vancouver is the Okanagan, which is great. I could see us going there in the future, but right now our focus is more on Vancouver Island.

One of the things that worries me about the Okanagan is that it’s buffeted by what’s going on in Alberta. It’s becoming a bedroom community for the Lower Mainland but it’s still mainly a second-home or recreational community for Alberta. But as people start to work remotely, I think that will help the Okanagan.

You operate in some of the hardest areas to build things. Are you just suckers for punishment? 

That’s an interesting question! I think we do see that as our competitive advantage. We’re not the fastest, we don’t do our own construction and we’re not a manufacturer. We see ourselves as alchemists – turning lead into goal. It’s super hard and at times you want to give up. But when it’s successful, the returns are outstanding. It’s hard for our competitors to know how things will turn out. Because we’re private and small, we can stay optimistic and fluid. We’re willing to do the heavy lifting in infill development. That’s what gives us the advantage.

How do you spot an opportunity? 

Decision making in infill development is hyper-granular. You’re asking what side of the street a property is on, its shape, whether it gets sun, etc. That comes from decades of experience. There’s no fasttrack. We are very design-focused at our company. It’s hard to tell somebody how to do that.

What are your thoughts on the market moving forward? 

Covid actually created a surplus of money supply. Money that was being spent is now in savings and whatever you could spend on during covid. I think that drew a lot of housing demand, as well as the flight to suburban zones. The government also printed a lot of money and lowered interest rates, which created a perfect storm for housing. And during covid, it was all about the house. I expect that to dissipate a bit more as people spend on things they couldn’t before and interest rates rise.

I would hope for a steady and healthy market going forward. I expect to see a big return of the office market. I think we’ll have a pretty good few years but there’s a lot up in the air. Inflation is a big factor. Inflation is good for real estate if you’re not over-leveraged.

We feel there’s some pent-up demand downtown; but it’s not crazy. I think the early bird will get the worm. For our new Burrard tower, we’re coming in at a number that will give people a level of affordability that hasn’t been seen in the downtown for a long time.

• Reliance Properties
• @JonStovell

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