Vancouver Commercial Real Estate Podcast

Shawn Bouchard, COO of Lorval Developments, explains how with one change the federal government could greenlight 115 rental projects in Vancouver tomorrow and stimulate a building boom for rental housing across Canada. Did we just solve the housing crisis? 

Who is Shawn Bouchard? What is Lorval Developments? 

I’ve been in the development industry for 20 years and have worked as the COO of Lorval Developments for the last six months. I love building things! We have a great team here and want to be part of the housing solution for this region.

What is the main housing issue? 

We’ve had a structural deficit in the supply of housing for over 20 years and it’s just been compounding. Last year, CMHC said we had a shortage of 3.5 million homes in the country. This year alone we need 269,000 homes in Canada but last year we only produced 201,000. That number will be even lower this year thanks to the rapid interest rate growth.

In Metro Vancouver we need 32,500 homes this year but we’re only on pace to deliver 18,000. The most we’ve ever done in this region is just over 25,000. So getting to 32,500 would be a monumental task even without the other issues we’re facing today.

How do rental rate restrictions impact projects?

That has some merit but it’s not the biggest problem by far. The biggest problem with rentals right now is the cost of land and other things developers have to deal with in the Lower Mainland. You typically allocate capital to the highest and best use. That usually means for-sale product in the Lower Mainland. Rental projects just don’t pencil.

What can we do to get ahead on housing supply?

We’ve had a structural deficit in the building of homes for over 20 years. We’re throwing gasoline on that fire with massive immigration targets. I’m not saying we don’t need that immigration; we have demographic issues and a labour shortage in this country.

If we’re going to increase immigration to historic levels, we need to stimulate housing to historic levels.

What is the lowest hanging fruit to stimulate housing? We know rental housing is going to be critically important for a lot of the big cities where immigrants are coming. We have very low vacancy rates in many of these immigration cities and incredibly high rental rates. That happens because of a massive shortage of product.

How do we get rentals to 3-4% vacancy? That’s what we need to concentrate on. The federal government can stimulate that. Many rental projects have been approved but are sidelined because the math doesn’t pencil out. There are 80 rental projects in Vancouver on hold and another 35 affordable rental projects on hold.

If the government could change one policy to make the math work, they could unleash 115 rental projects in Vancouver tomorrow.

If you can stimulate rental housing by allowing developers and charities to use their balance sheets, they can then use their cash for the for-market projects. So both streams will be going at the same time.

How can the government stimulate rental projects?

There’s a program run by CMHC called the Rental Construction Financing Initiative (RCFI). It’s part of the national housing program and, in my opinion, one of the best programs devised to stimulate rental housing. It’s the only program where the funding comes from the Bank of Canada to CMHC to the builder/developer/charity.

Usually developers have to go through a bank and borrow at a higher interest rate. But with the RCFI, the money is funded through the Bank of Canada so the interest isn’t a burden on the taxpayer or federal government. It’s a revenue source.

If you make the term of the loan long enough, you can overcome what I like to call the Four Horsemen of the Rental Apocalypse. The four horsemen are:

1. The largest interest rate percentage move in the history of Canada.
2. Cap rates have been increasing with that interest rate rise. When cap rates go up, the building is worth less. You have to raise the rent to make up for the difference. 
3. Inflation. Again, we have to raise the rents to make up for significant inflation. The Bank of Canada said that inflation was caused by a broken supply change, higher shipping costs and higher energy costs. I don’t know how raising interest rates address those issues – it just feeds the beast.
4. Increasing fees and land prices.

Why don’t the federal and provincial governments use the RCFI program with the CMHC?

I don’t have the answer to that. I’ve reached out to all levels of government and decision makers and haven’t received an answer.

How can local municipalities help to incentivize rental housing development?

I’ve worked in a municipality that was going to waive its fees and help stimulate affordable rental. It was all wrapped up but when interest rates started to spike last year, the math no longer worked on that project.

But there are municipalities that will give developers relaxation on density, expedite the approval process, relax fees, etc. That creates value, which helps subsidize a pro forma and helps get rents to a better level.

The Bank of Canada just raised interest rates by 25 basis points and many say they will do so again. What are your thoughts on the current interest rate market?

It makes the problem worse. The government says they want more housing, more rentals and more affordable rental but the interest rate policy is in direct contrast with that goal.

If the Bank of Canada continues to raise interest rates they continue to make housing less affordable and slow down the production of the housing we need. You can’t have it both ways.

Would removing the restriction on rental rate increases help stimulate rental supply and, over a long term period, help rental rates plateau?

That’s a hard question. When we build a new rental building, we set the rate when the first renter comes in. So we can take advantage of rental increases from the time we conceive of the project until the time someone moves in. The rate isn’t set until that person moves in and then is reset when they move out.

The bigger problem is if a project pencils at current rates, not the rental rate restriction. If I were to buy a piece of dirt today and try to pencil out the math, I would need rents to go up 50-70% from current levels to make the math the same as it was three years ago.

As a developer, I don’t want rents to be that high. I want a stable rental market. I want to bring a good product to market that is affordable. I want our children to be able to stay in the regions where they were born and not have to move because they can’t afford to live in their communities.

I don’t want higher rents and I don’t think any reasonable person does either. I don’t know how the average person making the average salary in Canada is making it work right now with our massive rent increases and inflation.

I have a co-worker who owns a townhouse in Langley. Last February, their mortgage was $2200/month on a variable rate. This year, it’s $4200/month and this person makes $90,000 per year. How do you make up that difference? That is what we don’t want in our country.

Given the current environment, why would anyone want to build rental housing?

From the rental standpoint, it’s just too much of a risk right now. From the for-market side, you have to be careful. You have to come to market with complete plans. So the question is what can the federal government do to overcome these issues and bring stability to pro formas? We need more people to take the risk to build the product we need.

After the recent interest rate increase, I did some math on a pro forma I’m working on and it translates into a $68/month/unit increase in rent. That adds up fast for a tenant. Consider that we’ve had a 3% interest rate increase since the increases started; that’s an $817 increase in monthly rent per unit.

And that’s just the interest rate! Inflation increases the rent by $333 per month. The cap rate difference increases rent by $370 per month. With land and fee increases, that’s another $400 per month. That’s why rents have jumped up so high in the last little bit. We have no choice.

So, how do we solve this problem and incentivize rental housing?

The most important thing is for the federal government to incentivize for-profit and non-profit businesses to build rental en masse. They did this in the 70s and 80s. They can do this with the direct fund from the Bank of Canada and the RCFI program that is already in place with the CMHC. All they have to do is change the rules around how they do the funding.

Instead of a 10 year term, make it a 30 year term. That brings down the cap rate. Fix the interest rate at 0.75% and keep the same amount of leverage as listed in the RCFI. They could even attach an affordability component to it in order to get the funding. Right now you have to zone the property first and then compete at CMHC to get the funding, which is a big risk. The federal government should allow allocations prior to rezoning.

With these changes, you could eliminate the interest rate rise, eliminate the cap rate rise, and absorb a lot of the inflation we’ve had. Land prices are still costly, which is where the federal, provincial and municipal governments can kick in. They can assess the land they own and sell it for a lower price, as long as the savings go into rental housing production. The municipalities can also speed up zoning and permitting processes which would help to save on the carrying costs.

These changes would allow us to build pro formas that overcome the problems we have and release a building boom for rentals in this country that we haven’t seen since the 70s/80s.

What markets are you excited about? 

I’m excited to be in the development business because we want to build and help the country find housing solutions. I love Metro Vancouver and love living and developing here. We also work in the Kelowna region. I’m excited about both of those areas.

The 6 Pack: Getting to Know Shawn Bouchard, COO of Lorval Developments 

Favourite band or musician?

Bethel Music.

What would your last meal be on death row?

That’s easy! I love a great steak. Give me a baked potato with sour cream, fried mushrooms and beans. I would be very happy.

What’s your favourite vacation spot? 

I like Mexico. I can go, relax and do nothing. I can walk to six different restaurants. I can just read and spend time with the family. Puerto Vallarta is a favourite.

What is one book you recommend?

The New Psychology of Achievement by Brian Tracy. I recommend this book to anyone who wants to do some personal improvement.

What show are you currently binge watching?

I don’t binge watch shows but I do binge watch YouTube videos on AI. I think everyone should spend a lot of time understanding AI. It’s going to radically change the world in a way we have never seen before.

What’s your go-to karaoke song? 

Raise a Hallelujah by Bethel Music