B.C.’ s third-largest city is now seeing the real estate recovery that locals calmly expected all along
The 2008-09 recession that quaked B.C.’s central Okanagan did damage in its largest city but left confident Kelowna stirred but not shaken.
Now, with even chartered accountants getting excited about the recovery, the city of nearly 100,000 is calmly getting ready to reclaim its standing as one of the hottest real estate and investment markets in Western Canada.
Compelling evidence is seen right on downtown Kelowna’s South Pandosy Street, where seven buildings were taken down for the construction of the $25 million mixed-use SoPa project by local developer Edgar Fenwick.
SoPa, which started in the midst of the downturn, has already leased out all of its block-long ground-floor retail, which will open in 2013. Above the retail are 96 residential condominiums capped by large luxury penthouses, priced from $1.2 million to $1.3 million.
“It was the best penthouses, the lakeview ones, that sold first,” said sales agent Kayli Andersen. Only three of the eight penthouses remain unsold, yet SoPa’s residential component won’t complete for four years.
Tellingly, the buyers aren’t Albertans or cash-heavy Vancouverites. It is Kelowna residents who have bought all the penthouse units and most of the other condos. The SoPa also offers one-bedroom condos priced from $351,000, or an average of $600 per square foot, close to what condo buyers are paying in Calgary and Metro Vancouver.
“SoPa is not recreational property,” Andersen stressed. “These homes are for full-time residents.”
The distinction is important, because it’s Kelowna’s once white-hot vacation real estate market that took the biggest hit back in 2008 and is still struggling.
Enticed by visions of wealthy Albertans and U.S. investors, developers overbuilt and overpriced resort properties. The resulting crash was ugly, with many projects stopped, some forced into court protection – such as the ultra-luxury Tuscany Villas and Copper Sky Developments in West Kelowna – and many spec developers left with empty space, nervous lenders and few options. Some slashed prices, nearly all waived sales taxes and a few even included a free boat with every purchase. But, as one frustrated Okanagan developer told Western Investor last month – after a $60,000-per-unit price cut failed to move units – “it’s not the price, it’s the market.”
And the market is still tough. There are about 1,700 Kelowna homes listed on the MLS of the Okanagan Mainline Real Estate Board, and the average home is on the market for 86 days. In May, the average house price in Kelowna was down 6 per cent from a year earlier to $471,128 and total sales were only 168 homes, compared with a 10-year average of 268. Prices are generally at pre-boom values.
Some developers, though, believe this will bring the buyers back.
“Basically we are back to 2005 prices,” said Patricia Cecconi of La Casa Resort, a cottage development above Lake Okanagan in Kelowna.
Asking prices, she said, are down 20 per cent to 30 per cent from the peak and, in a special promotion, La Casa is offering a completed 700-square-foot non-view cottage for $199,000. That is the kind of value that would have sparked a bidding war three years ago. This spring, Cecconi said, it had drawn a lot of lookers but no signatures on the dotted line. (Resales at La Casa see lakeview cottages priced at around $320,000.)
Still, those looking for waterfront bargains won’t find many. Typical lakefront homes sell well north of $1 million and prices here have barely budged in the past two years.
Kelowna’s residential and commercial real estate agents may see an upturn sooner than expected. A report this year from the Chartered Accountants of BC forecasts a recovery that began in 2010 is gaining traction right across the Thompon-Okanagan region.
The report found that, after sustaining significant job losses in 2009, the regional economy rebounded last year with the addition of 9,200 new jobs. With a job-growth rate of 3.7 per cent, the region exceeded the average provincial increase of 1.7 per cent, the study found. Also, the number of business incorporations and establishments increased in 2010, reflecting growing entrepreneurial and investor confidence.
The accountants note that new projects starting construction in the region last year were down 50 per cent from a year earlier, to a total value of $800 million. “This decrease reflects the withdrawal of second home, resort and investor buyers who had been the catalyst for much of the development,” the report remarked.
But government spending has helped to put a base under the construction economy, with close to $12 billion in institutional projects going ahead this year.
These include the $433 million Kelowna General Hospital expansion and the $25 million expansion of Okanagan College. Together with the University of British Columbia Okanagan, Kelowna has more than 11,000 university students during the school season. The hospital and the universities are Kelowna’s largest employers.
Despite the influx of students, however, the apartment rental vacancy rate in Kelowna has increased to 6.6 per cent, up from 3.7 per cent a year ago, according to an April survey by Canada Mortgage and Housing Corp.
As the takeup of store space at the SoPa development underlines, retail is perhaps the strongest sector in Kelowna commercial real estate. Last year, 202 new business incorporations were established in the city and region, an increase of 8.5 per cent from a year earlier. The current retail vacancy rate is 3.6 per cent, according to Colliers International, but spikes as high as 8.2 per cent downtown, mainly due to a couple of large vacancies.
Orchard Park Shopping Centre, the city’s main mall, is currently under renovation to welcome Best Buy Electronics, which will open this year in about 34,000 square feet. The mall is 100 per cent leased, as in Kelowna Crossing Shopping Centre, Spall Plaza and the big-box Central Park Power Centre on the edge of town.
Lease rates in anchored shopping centres are from $16 to $30 per square foot, while smaller centres post rental rates in the $10-to-$25-per-square-foot range. Lease rates downtown, such as along Bernard Avenue, are $14 to $18 per square foot. Retail space in Kelowna is selling for around $280 per square foot, based on the six most recent transactions.
The industrial market is less robust. Lease rates are falling – down as much as $2 per square foot in some locations – and the industrial vacancy rate was at 7.2 per cent in the first quarter, up from 6.4 per cent at the end of 2010.
Average lease rates now average $8.75 per square foot, down $1 from the peak in 2008, Colliers reports.
Vacancy has climbed back up to 2005 levels, the year that Western Star left Kelowna for Oregon. The Western Star building remains empty, as does the nearby former Crown Packaging warehouse on Potterton Road, together accounting for nearly 300,000 square feet of vacant space.
Subleasing has become more common in Kelowna, with some tenants accepting below market rates to fill the space. Industrial land prices have softened: recently an acre of land in the Marshall Business Park went for $980,000 in a court-ordered sale. More typically, industrial space is selling for around $150 per square foot.
Kelowna has 1,320 acres of zoned industrial land and a further 1,721 acres not zoned but marked for industrial use under the official community plan.