As Canada’s capital-gains tax change loomed, the country saw a flurry of transactions. In Vancouver, Goodman Commercial quickly closed several deals in June. The burst of activity came after months of a slow and sleepy market.
On June 25, Ottawa upped the capital-gains inclusion rate from one-half to two-thirds on all gains for corporations. The changes were announced as part of the federal budget earlier this year. The federal government touts them as narrowing the tax advantage between capital gains and other forms of taxation.
But some business organizations, such as the Canadian Federation of Independent Business, argue the increase will discourage investment and want the changes scrapped.
Green Street News sat down with Mark Goodman, principal of Goodman Commercial, to talk about what happened on the ground as June 25 approached and what he expects to happen next.
What was the market like in the leadup to June 25?
Well, I guess for the last two, two-and-a-half years, it’s been a relatively slow market compared to previous years, coming off the highs of Covid and cheap money. And then we’ve had these unprecedented, unrelenting interest rate hikes over this two-year period. It sent shock waves through the industry, which we continue to feel today, particularly in the land market.
So that translated into slower activity. It was hard to bring buyers and sellers together. And when I spoke at the Canadian Real Estate Apartment Forum last year in Toronto, I showed that volume and transactions had dropped about 50% from the previous year. So we’re talking a dramatic drop, the slowest period we’ve witnessed in the multifamily market in 10 years
There have been times where the clouds parted and we’d do a few deals, and then there would be a pause in sales activity as interest rates hiked up again. It’s been a choppy market.
Did the impending capital-gains tax increase contribute to the flurry of activity, including the five deals closing in a week, you saw in late June?
We’ve been anticipating this for years, and the increase in capital gains was finally announced. It took a while for our clients to get their heads around it. “What does [the tax] translate to in dollars and cents?” And many of our clients started speaking to their accountants, and then we realized that you’re close to an additional 10% in tax once the dust settles.
And so, the savings could have been a few hundred thousand dollars, but in some extreme cases, well over a million. So, what that did is it fueled this frenzy. It’s kind of a momentary blip in my opinion, but I also don’t think we’re going to go back to this sleepy-time market we’ve experienced over the last two years.
“It demonstrated to everybody that there’s still demand. There are still willing buyers to buy property at the right price. It’s not like there’s no market.”
Do you think the capital-gains tax kickstarted the market then?
It demonstrated to everybody that there’s still demand. There are still willing buyers to buy property at the right price. It’s not like there’s no market. And that’s the key. A lot of people thought there was just simply no market. There was virtually no activity for a while.
There is a lot of demand for people to move capital, and they’re starting to make decisions. So even before this capital-gains announcement, we were starting to see more activity compared to last year.
A few weeks ago, would you have expected June to suddenly become so busy?
No, it kind of crept up on us where we had some of these properties listed already, and then the calls started coming in, like, “Mark, I need to get this sold by June 25th.” And I respond, “Okay, drop your price.”
So, some of our clients dropped their price. It was quite beneficial for them, because although they received a price below what they wanted, there was a net gain due to the substantial tax savings.
So, had sellers hung on, they could have taken a loss?
In some cases, yes, quite significant. A couple of these deals were well over a million-dollar savings. And then none of my clients had the mentality, “Well, I’ll just ask a million dollars more.” I mean, they realized the market wasn’t there. And then there were other clients who decided to list right away.
Now, some missed the deadline, and that’s life. But I do think that was a momentary, crazy blip. But I also believe that despite that blip, we are starting to see more confidence. And this quarter-point reduction [in interest rates], I don’t think, is going to have a material change in values, but what it is doing is prompting a psychological shift in investors that maybe, finally, there’s some relief.
And I’m seeing it. We’re busy. We’re getting calls. We’re launching several new properties in the coming weeks, including a court-ordered sale and a $100-plus million site.
What do you think it will look like for the rest of the year?
Well, this year we’ve already surpassed what we did in the entire year last year. Mind you, a lot of that could be due to the capital-gains looming deadline. I would say that even if we remove this outlier of the capital gains, I think we are not going backwards. We’re moving forwards in terms of dealflow.
I mean, really, I think values in apartment buildings have plateaued for a while. I don’t see any reason why we’re going to see any pronounced increase in value. I think what we will see are willing participants to do deals, because for the longest time it felt like the market was frozen. Even before the capital gains, we had already closed five deals this year. So, there’s a market, it’s just a lot slower.
We’re seeing a lot of distressed properties. Do you think they could be picked up and completed by other developers?
Yeah, we’re also seeing a trend of developers calling us saying, “Instead of selling our site, can you help find us equity partners?” For example, I had a discussion with a major group yesterday. They have two buckets: buying existing buildings and developing new purpose-built. And they’re across the country.
What they said was that they’ve been almost “pens down” completely in the last two years to buy existing apartment buildings, because it does not make sense. The yields don’t pencil out. They said that, alternatively, it made more sense to buy development land to build rental.
There are definitely developers actively looking for new projects, and I think those that are well capitalized and ready to pounce will find some good deals out there. The fundamentals are still solid, we have a massive housing shortage, but developers are being more cautious today and the numbers have to make sense.
Any closing thoughts?
Well, I would say that overall, there’s a lot of positive things happening. We live in the best country in the world. We live in a great city. There’s a lot of opportunity in Metro Vancouver, because the entire city, in my mind, is one big construction site. We are a magnate for people and money from around the world.
We have so many shifts in land-use policies. We’re going to see significant change over the next couple of decades. Broadway Plan, TOD and the Vancouver Plan. It’s constantly evolving, and there’s not enough housing. So, this supply-demand imbalance that we’ve seen in rental is not going anywhere.
Coupled with massive immigration, I think we’re going to see a continued increase in rental rates, and we’re going to see a continued decrease in vacancy rates. And so that supply-demand imbalance is going to be here for a while. I think investing in multifamily is going to be an important part of the local economy for a long time, and we’ll see how things unfold.
