Vancouver Commercial Real Estate Podcast

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July 6, 2022
VCREP #58: This Commercial Market Makes Dollars and Sense with Jeff Kennedy

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There's no secret that supply chain issues and inflation are having a direct impact on developers all around the world. In the studio this week, Cory and Adam welcome Jeff Kennedy from Troika Developments, one of Kelowna's most well-known builders, to discuss the challenges within the development industry and what the future looks like for developers, as well as breaking down some of the areas he is most excited about in BC's Interior.

Jeff also gives us insight into how developers would break down a purpose-built rental project vs. a strata site, along with the metrics behind the decision-making process. Not to mention, Jeff is one of the coolest guests we have had join us in 2022, so all things considered, this is another great episode you do not want to miss out on!

Who is Jeff Kennedy? What is Troika Developments?

I’m the Director of Investment at Troika Developments, which is a Western Canada developer with about 15 projects underway between Kelowna and Winnipeg. I’ve worked on properties from Newfoundland to Victoria and now work in Kelowna.

A good friend of mine’s dad was an office broker in Calgary and told me about it when I was nearing graduation. I didn’t know there were brokers who only worked in commercial real estate. So I started out in commercial and then transitioned into residential real estate in Toronto before coming back to BC.

What does a day in the life of a Director of Investment look like?

My team looks at 5-15 deals per week, spending about 75% of our time on new deals. The remaining 25% is spent on leasing and portfolio management. We’re monitoring ongoing projects and the financing situation.

The word is out about Kelowna so we’re getting inundated with new opportunities.

What is a joint venture between a developer and a landowner?

A joint venture is one of our preferred models for new deals. It allows us to bring our development expertise and allows the landowner to get more out of an unused asset. We bring our expertise and any needed equity to the project, such as purpose-built rental, and the landowner would bring the asset, which is the land.

Joint ventures are a great way to get good pricing for land, and access to good land, but the procurement period can be lengthy. We really value those relationships and want to do more joint venture deals.

The landowner isn’t selling the land, but entering into a limited partnership by vending in the land. That way, they can make profits off the eventual use of the land. It’s a good way for landowners who don’t have the expertise or means to get the most value out of their land.

How’s the Kelowna real estate market in 2022?

On the land side, we did see a bit of pause in early 2022. Kelowna was going through new draft zoning by-laws. Once that passed, things began to pick up. With the rising interest rates, properties become more expensive to carry, so we’ve seen more things come to market. For us, we’re being cautious and opportunistic. The market is a bit zanier than we would like.

On the residential side, everyone will tell you prices seem to be tapering a bit or plateauing and days on market are increasing in Kelowna. I think that’s good, because things were getting a bit crazy. It’s hard to say how much of that is due to rising interest rates or just less demand now that we’re getting out of the pandemic.

Like other places in BC, the problem in Kelowna is we don’t have enough supply. However, we’re not as doom and gloom about the future of Canadian real estate. While pricing might drop slightly, our assessment is that it won’t have a negative impact on our market in the long term because we’re so supply-constrained.

Has your development investment strategy changed in the last four months?

Absolutely. We’re a lot more deliberate with new acquisitions. For new deals, we’re focusing on really well-located properties because they will be the most resilient. We had a thesis about fringe properties but that has changed due to the rising interest rates. We’re focusing on the urban centres we believe in.

For deals we have under contract or already own, we’re constantly reassessing. We may have to reevaluate or shift our strategy, based on what’s happening in the market. We are trying to be very disciplined in our approach.

We have to continue moving forward and we want to do that in the smartest way possible. It’s about timing. Instead of pressing stop, we’re constantly reevaluating.

What neighbourhoods in Kelowna are you most excited about?

Troika Developments is primarily a low-rise and mid-rise developer, so downtown isn’t as suitable for us. We think there’s a huge opportunity in Rutland with its proximity to UBCO and downtown, as well as the transit coming in. We’re also focusing on other fringe downtown neighbourhoods, just outside the urban centre.

What challenges are you facing in the development world? Are any of those development challenges specific to Kelowna?

We’re facing all of the same challenges as other developers, if not more because we’re in a smaller urban area. We’re facing rising costs, rising interest rates and lack of availability of labour.

Costs are unpredictable, so we have to be cautious when we’re looking at new deals. That lack of certainty on where costs are going is our biggest challenge. It’s hard to see a path to how those costs come back down.

We’re getting CMHC quotes for take-outs in the 5-6% range which decreases the loan to cost we can get on projects. We’re having to invest 50% more equity for the same project compared to what we would have spent nine months ago. That changes the composition of the deal.

Single family homes have gone up 60% in Kelowna compared to pre-pandemic pricing. That makes it hard to bring people into Kelowna to work; it’s expensive to live here. We’re able to plan around some of the supply chain issues but staff shortages are a lot harder to manage.

How do you decide if a site is better suited to purpose-built rental or strata condo?

With downtown sites, we think there’s more potential for strata condos, generally speaking. But we’ve currently pressed pause on those projects and are being more defensive on for-sale projects. There’s a lot of inventory planned for Kelowna, particularly high-rise projects, that may make that marketplace more competitive.

Generally speaking, the price difference between purpose-built rental and strata condo is in the 20-25% range. Rental won’t make as much but condo is more expensive to build. We’re currently focusing on rental first. If a site doesn’t work as a rental project, we may consider condos, but we have to be really sold on the site.

What is an in-fill site? What is your strategy with in-fill sites?

The 2040 OCP in Kelowna was adopted in January 2022 and is currently with the ministry for approval. That has unlocked a lot of single family homes to now be assembled into low-rise or mid-rise product. People can see a lot more value in selling their homes through an assembly rather than just as single family homes. Our strategy for in-fill projects is to focus on the areas just outside of downtown where lots are assembled and there’s support from the city.

Why are you excited about Kelowna?

I’m a huge advocate for the Central Okanagan. The opportunities we have to be outside in nice weather are unmatched. Kelowna has received a lot of positive notoriety in the last few years. There’s an excellent growth story here and long term demand. The proximity to the lake and the weather, hopefully, are not going to change.

Population growth is very strong in Kelowna too. The risk is we won’t have enough housing for all of the new people moving to the Central Okanagan. That’s a challenge and an opportunity for us in the development community.

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Vancouver Commercial Real Estate Podcast

For all the curious minds interested in commercial real estate investing, grab a coffee and pull up a chair because we have exclusive stories and tips from commercial real estate brokers, investors, developers, economists, urban planners, and everyone in-between. From the successes and failures to the motivations and lessons learned, the Vancouver Commercial Real Estate Podcast is your insight into commercial real estate in Vancouver, Victoria, Kelowna, and beyond.

What's the best real estate market to invest in? What are the commercial real estate asset classes and property types? Hosted by Cory Wright, founder of William Wright Commercial, and co-hosts Adam and Matt Scalena of the Vancouver Real Estate Podcast, our podcast opens the door to real estate investing for everyone from beginner investors to experienced real estate professionals. New episodes are released every Tuesday. Follow the Vancouver Commercial Real Estate Podcast on Apple Podcasts, Spotify, Google Podcasts, or your favourite streaming platforms.

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