Posted by Brandon Copeland
I have been harping on my “downtown thesis” for several years now – basically since I started working in real estate. I remember writing a report for the developer I worked for in 2012, less than 6-months on the job, saying that the west end of the downtown was going to begin taking on a new shape. Today, we have Jag Hotel, the new Fortis Building, the expanded convention centre, and a whole host of new activity. I think this sort of growth is only going to continue.
I’ve also been a big advocate (sometimes to the annoyance of my friends) about the values of downtown residential property. Specifically, I have been advocating that a safer investment in the current residential market is in a downtown property. People who know me have often heard me suggest that we are lucky to live in one of very few cities where “downtown property is cheaper than suburban property.” I stand by this. When you consider larger cities, a general statement is normally that the further you are from the core, the cheaper your housing will be. There tends to be a premium on proximity to the action. For whatever reason, this has not taken hold to the same extent in St. John’s. I think this is largely due to the aged housing stock downtown.
I want to lay out the basis for my thoughts on downtown St. John’s, as well as my predictions for the coming years. I also want to demonstrate that I’m not just rambling – there are real stats that back up the narrative I’m selling. What I’m really trying to do is ensure that I capitalize on this trend.
The Premise
To start, I want to explain my logic. To be clear, I don’t think I am the only person in this city thinking this. When I explain my logic to others, they nod along and identify that they have had similar thoughts. However, for folks not paying overly close attention to real estate, or to urban trends across the country, it makes sense to provide a bit of background.
Basically, across North America, there is a trend towards urbanism. Jobs are clustering in cities. Even tech-jobs, which are often cited as allowing people to work wherever they want, are clustering. Rural depopulation is happening everywhere – currently 3.9 billion of the world’s 7.6 billion people live in cities (51.31%). This number is expected to rise to 6.34 billion out of 9.5 billion (66.7%) by 2050.
If we accept cities are growing, then we must also think about HOW they are growing. Logically, there are only two ways that a city can grow. Upwards, or outwards. Generally, the idea of “up” lends itself to the idea of densification of existing neighbourhoods, where as “out” makes us think of urban sprawl and the creation of new, suburban neighbourhoods.
For a very long time, St. John’s has leaned heavily towards “out”. Paradise is an excellent example of outwards development; it is a community that simply wouldn’t function if not for St. John’s (only recently gaining a grocery store, as an example.) Places like Kenmount Terrace and Elizabeth Park are essentially suburbs within our city – that is to say, they are communities that are skewed very heavily towards residential development.
For much of the past 50 to 75 years, suburbs flourished. “Suburban flight” (also commonly known as “white flight”) occurred across North America. In many places, the downtown area was drained as people transitioned towards white picket fences and backyards. These communities were marketed as safer, friendlier, and simply better. The idea that kids could play in backyards, and work was only a short commute away, made North American suburbs incredibly attractive.
As is natural, growth on the “edge of the city” stretches further and further away if the edge is always moving. Given that this is a new housing stock, there needs to be the assumption that there will be new buyers. Additionally, the further away we get, the longer those commutes get, making dependency on cars important. Provided that families continue to grow, cars remain the preferred form of transportation, and people keep buying new houses, outward growth can continue.
Fast-forward to today, and you start to see why the growth of cities has changed. Families haven’t continued to grow. In fact, couples are having fewer children while also having them later in life. The price of oil has risen since the proliferation of suburbs in the 50s and 60s – a fact that when combined with the rise of environmentalism has tarnished the reputation of the car among younger generations. Lastly, millennials are simply no longer buying those new houses. This is a combination of many factors – record student debt and stagnating income levels contribute – but I firmly believe that it also has to do with where the product is located.
So that’s the background. Do the numbers back me up?
The Numbers Back Me Up
Yes. They do.
The Business Insider article I linked above has a choice quote. “According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely [populated] cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.”
That is interesting. We hear so much about how our housing market is declining, but looking deeper at our stats paints a bit of a different picture. It isn’t the entire market that is down; it is actually certain PRODUCT TYPES that are struggling. The first indicator for me was this incredibly telling release in 2016 from CMHC. When speaking about housing price, the document states “Lower-priced ($250,000 to $350,000) home segment sales activity is expected to be robust as pent-up demand gets met, particularly among first-time buyers. This segment represents the largest within the St. John’s area housing market at over half of all activity.”
Wow.
Let’s try to create the narrative around this, using the 2016 CMHC report as well as the general culture around home-buying that we walked through in the previous section. If first time buyers want to buy, they likely want to buy in St. John’s, and they are generally looking at prices between $250,000 and $350,000. This segment represents OVER HALF OF ALL ACTIVITY IN OUR MARKET. Downtown St. John’s, which has historically received less attention then some of the more sprawling neighbourhoods, has housing priced just right for first time buyers based on the CMHC report. Lucky for those buyers, it also has the types of houses they value – houses located near amenities that can be reached without a car versus houses outside the core with big backyards, as an example.
I suspected in 2016; that with prices down across the city, and downtown having been glanced over by many developers for a very long time, there was opportunity. I started consulting in 2017 hoping to find ways to help people pursue that opportunity. It was therefore quite validating to find an article on AllNewfoundlandAndLabrador earlier this week suggesting that recent StatsCanada data further backs up my thesis. Specifically, Newfoundland and Labrador residential construction investment continues to decline; now for the fifth straight year. While almost all indicators were down, there were some bright spots. Namely, that provincially, row-houses and duplex investment grow a combined 75% ($19-million). Renovations also rose $19 million (2%) over the previous year. It was these new stats that really made me want to write this article, specifically because I felt incredibly confident after reading how 2017 transpired.
For me, there is one specific part of the city that I associate with rowhouses, duplexes, and needing some renovation. I feel like all signs are continuing to point towards downtown.
So Now What?
I think the opportunity for investment in downtown St. John’s will persist, and I think that the opportunity is not just residential in nature. I am a very large proponent of downtown commercial investment because I think that the coming influx of people to downtown will also want to work there. For one, cars are getting progressively more expensive while at the same time younger people have progressively more debt. Tack on the trend towards environmental accountability, and increased talk towards alternative transportation, and I think that many will look to ditch their vehicles in favour of greener methods. Walkability will grow as home-buying priority, and while I don’t think our city is particularly great to walk in anywhere, I see far more people choosing to walk around Harvey Road and Water Street than I do on Kenmount Road or Topsail Road.
I work with small businesses, and the above point is noteworthy for them. One of the biggest decisions for a small businesses is where to locate. Often the biggest complaint I hear about downtown is that there is not enough parking for employees. However, as the nature of people’s lifestyles change, so to will the frequency of the parking complaint. Based on points I’ve talked about, I am betting that the need for parking will trend downwards, while the desire to be in a walkable and connected place will trend upwards. Businesses looking to establish themselves may see a lot of value in becoming staples in the downtown core (similar to Rocket Bakery or Whink!). I think that over time we will see an increase in foot-traffic, as well as an increase in larger companies that locate downtown for employee satisfaction. I predict a downtown location will only help to grow customer loyalty and brand recognition over time for small businesses.
For residential investors, I think that now is the time to take advantage of renovation opportunities downtown. This is tricky, as we know that the stock downtown has aged and the historic demand-level and associated price-point has not made a reno justifiable. That said, the data we’ve reviewed suggests that both price-point and lifestyle are aligned in the downtown core right now, which should result in a demand increase in the coming years. What isn’t there in significant quantity is product quality. Prices rise with demand, and that will mean the cost of the run-down houses will increase as well. As we’ve seen, people in Newfoundland and Labrador are already beginning to invest in renovating – and townhouses and duplexes are popular. Adventurous buyers are likely already pursuing renovations on their own. Unlike sprawling suburbs, built neighbourhoods have a finite supply of options. Developers may want to begin searching now.
Downtown St. John’s is a beautiful place. As someone who is not a native of Newfoundland and Labrador, I was drawn here more than anywhere. It feels unique, unlike many other neighbourhoods in the city. It has culture and character. I truly believe that as the world continues to trend urban, so to will home-buyers trend downtown. We sit in a unique position currently, where urban homes are priced very affordably when compared to other major centres. I think the ship is sailing either way – I for one want to be on it.