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Vancouver: San Francisco of the North?

In Saturday’s list of the Top 10 International Markets for Hospitality Acquisitions, which I shamelessly pilfered from Jones Lang LaSalle (NYSE: JLL), I glossed over one of the more striking markets on the list. For 2013, say the investors responding to JLL’s survey, the number one international market for hospitality investment is Vancouver, British Columbia.

Vancouver, Wikipedia tells me, is a city in Canada. Canada, Wikipedia tells me, is the country above ours.

Indeed, while the U.S. commercial real estate industry has fixated on investor favorites like New York City and Washington, D.C., and newly thriving CRE markets like Austin and Houston, this cosmopolitan city on Canada’s west coast has seen increasingly strong activity among a variety of asset types. Obviously, hotels (especially of the high-end variety) are looking especially promising to foreign funds and investors, which means such properties are yet to reach an expected peak in valuations. But other property classes are looking quite strong as well.

Even though U.S. real estate maintains its perch atop AFIRE‘s annual international investor survey, Vancouver’s CRE transactions have been showing cap rates practically unheard of in the States. Colliers Canada reports Vancouver’s cap rates for Q4 2012–among high-quality retail, office, and industrial properties–have dipped as low as 4.75%, and multifamily cap rates have sunk as low as 3%.

As if that wasn’t positive enough, consider the state of Vancouver’s single-family sector. Even though single-family’s year-over-year sales volume at the end of 2012 dropped by 28.6% (very bad news), the home price index barely dipped at all, with an average sale price of about $597,000, or $605,000 in USD (very good news). In fact, the Vancouver Sun reports,

Single-family homes have been the winners over the long term while apartments have been struggling, an analysis of Metro Vancouver real estate statistics released last week shows.

Which, obviously, hasn’t been the case for the vast majority of U.S. real estate markets. Vancouver seems to be Canada’s answer to San Francisco, where industry and population growth have led to skyrocketing rents and real estate values. Like San Francisco or New York City, Vancouver’s real estate market benefits from the city’s geographical constriction. Located on British Columbia’s Burrard Peninsula, the city is bordered on three sides by water, limiting sprawl.

Even though it is home to little more than half a million people, it has the highest population density in all of Canada. Rather odd, it seems, to imagine any place in Canada “running out of space.”

Still, even in the most high-demand markets, prospective buyers and renters will eventually draw the line when it comes to prices. Even in Manhattan. Vancouver, it seems, has reached the point that buyers’ financial means can’t keep pace with demand. The Vancouver Sun continues,

Over the past five years, single-family homes were the big winners, particularly in Burnaby, Vancouver and Richmond, where the five-year gains are still more than 20 per cent.

However, this year, for the first time in many years, a number of homeowners in some areas of B.C. will see a drop in their property assessments.

According to the CBC, the decrease may also be a result of the country’s tighter lending regulations. The maximum amortization rate for home mortgages has been reduced to 25 years, leaving home ownership out of reach for many more people.

So, where will Vancouver’s real estate market evolve from here? I’m going to go ahead and guess multifamily will be the place to be.

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