Celebrating its one-year anniversary this month, Unreserved has provided a niche to the real estate industry — a transparent, online call auction company.
Like his previous companies, Edealer and Eblock, Canada’s largest digital car auction which had an Initial Public Offering (IPO) in November at over one billion dollars, Unreserved CEO, Ryan O’Connor is no stranger to the digital auction world.
“The idea came to me a few years ago,” says O’Connor, “while auctioning cars, we considered the need for this to crossover into real estate.”
“I don’t come from a real estate background but I got to look at it with fresh eyes and see some fundamental problems with the process. Just because something has always been done a certain way doesn’t mean it’s right,” adds O’Connor, “If selling homes was suddenly brand new to the world, how would it be? I could tell you it would not be the way it is today.”
With traditional sales, albeit with some initial interest, many homes could remain on the market for months before dropping the listing price in order to up the chance of a sale. When COVID hit, however, the market went crazy.
“There was a massive lack of transparency across Canada and people demanded reform or change,” adds O’Connor, “A transparent auction would therefore solve the biggest problem flagging the industry. So we went all in on developing the [Unreserved] platform.”
In order to prove their concept to potential sellers, O’Connor and his team started by purchasing properties themselves to auction off. “It was a huge success. Our first year will finish with 270 properties sold,” says O’Connor.
How does Unreserved Evolve Away From Traditional Real Estate?
“From a seller’s perspective, we gave price guarantees. We still offer them. It’s a huge add-on for value,” says O’Connor, “Let’s say we guarantee $500,000. You’re guaranteed at least this amount before the auction even begins.”
This is only the beginning of how Unreserved is changing the game for sellers and buyers across Canada. “We only charge sellers a 1% seller’s fee. With that fee, we get the house up on MLS, do the staging, the marketing, and everything. While we do list your home, it’s the seller’s option to invite buyer agents for a 2% commission.”
How Does Unreserved Benefit Buyers?
For buyers, “from experience, if you have one house and 100 different inspectors, you’re going to get 100 different reports. There’s that human element,” says O’Connor.
“When you look at a house on Unreserved, it’s stationary. We automatically do a preinspection and then stand behind the property with a warranty. That’s a huge benefit for buyers.” Buyers can also bring their own inspections prior to the auction.
We are currently operating 100% for free
“We’re still only charging the 1% plus 2%, but we’re giving 3% back to buyers. In many cases, this will actually buy down a mortgage rate to 0% from 3%. This is the biggest promotion we’ve ever done as a company and we’re really excited to offer this to buyers,” says O’Connor, “It could essentially shave a couple of years off a mortgage or take it in cashback.”
As we pivot to more of a buyer’s market, transparency in bidding isn’t much of an issue as it was even months ago. “We make sure with all the offers coming in that everyone is in agreement to the same terms and conditions prior to making a bid. It makes it fair for all buyers. This protects a Seller from an agent coming back with two offers, a lower one and a high one, and then suggesting the higher one without telling you there were conditions attached to it that aren’t there on the slightly lower offer.”
The Unreserved platform has signed up over a billion dollars worth of preapproved buyers in the last 12 months, showing the amount of buyer interest and the need for something transparent.
“Both Sellers and Buyers have been overwhelming positive. Everything that hits the platform sells, yet some still question whether they’re getting the best offer possible,” says O’Connor, “We had a recent property in Ottawa where the Seller had a reserve to not take anything less than $850,000 and it pulled $830,000 in the auction. So the Seller fired us. They eventually ended up selling for $740,000. We can’t make everyone happy, but that was really validating for us.”
Continues O’Connor, “Many will list with an agent because they can say they think it’s worth more and list the property higher. But what that property ends up selling for at the end of the day, our numbers are bang on. Our data analyst team continues to grow and perfect that skill. The truth is in the numbers and our numbers don’t lie. Especially in this new Buyer’s market, that’s become really important.”
The grass isn’t always greener on the other side, but for British Columbia businesses seeking industrial real estate, there are strong signs that Alberta just might be a better place to set up shop.
A confluence of factors have made it clear that those requiring large amounts of industrial space in British Columbia are going to have a challenging time, while making the other side of the provincial border increasingly appealing.
In interviews with STOREYS, three experts on the industrial real estate market — from Vancouver, Calgary, and Edmonton — detailed these factors, how they’ve coalesced at the right time, and the Albertan advantages businesses seek to benefit from.
In a national Q3 report on the industrial and office market published this week, Colliers said Vancouver became “the first market in the history of our tracking” to exceed an average asking net rent per sq. ft of over $20, at $20.44.
Part of the reason for that high price is location, but another factor is just simple supply and demand.
“The supply of land suited for industrial development is low,” Susan Thompson, Associate Director of Research at Colliers, told STOREYS.
Additionally, vacancy in the industrial market in BC is also low. In Q3, the total industrial vacancy rate was just 0.2%, according the Colliers report. That was actually a small increase from Q2, when the vacancy rate was a record-low 0.1%, but Colliers points out that the small increase was due to absorption catching up and not new supply added. What happens when supply is low and demand stays strong? High prices.
Industrial facilities such as distribution centres or warehouses have traditionally been a single floor, whether it’s because of too much weight on an upper floor potentially causing problems, or decreased efficiency with multiple floors. However, Vancouver is so “tight”, says Thompson, that companies hoping to stay in the market are now thinking about “stacked” (multi-floor) industrial space.
One such example Thompson points to is none other than Amazon, who took over a 707,056 sq. ft, two-storey space on 8351 Fraser Reach Court in Burnaby — near Queensborough — in August. Thompson believes that once there are more success stories with stacked industrial space, the idea will start taking off. It’s something that has already occurred in the residential real estate market in Metro Vancouver, where the land shortage and housing crisis has resulted in increased density — building more space vertically, rather than horizontally.
Alberta: The Land of Industrial Abundance?
Meanwhile, these issues don’t really register in Alberta. Not only does the province have an abundance of land, it’s also significantly cheaper. David St. Cyr, Principal for Industrial in Edmonton at Avison Young, told STOREYS that an acre in British Columbia that could cost anywhere between $4M an $5M would be closer to $400,000 in Alberta.
And while the supply in British Columbia is getting plugged up, supply of industrial space in Alberta is trending the other direction.
According to Avison Young’s Q2 industrial market report, Calgary alone has seen $792M in investment sales in the industrial market halfway through 2022, which is up 32% from the same point in 2021. Furthermore, “the development pipeline is expected to deliver an unprecedented number of new builds. With 8.7M sq. ft under construction and in the pipeline, the 2022 industrial development frenzy will continue well into 2023.”
And if the abundance of supply and cheaper costs aren’t appealing enough, Alberta will often also have less red-tape when it comes to things like permitting. (A Greater Vancouver Board of Trade survey published earlier this month found that permitting and red-tape reduction was the top issue for businesses.)
There’s more “working with businesses” and “cooperation between municipalities” and “less red-tape”, St. Cyr says. His colleague, Tyler Wellwood, Principal for Industrial in Calgary at Avison Young, told STOREYS that there’s also a stronger focus on approvals of permits, which take “significantly less time” than in British Columbia. Faster permitting times means construction can begin sooner, which translates to less wasted costs and less risk for businesses.
Thompson, the expert from Colliers, recognizes this too, saying that jurisdictions in Alberta are often willing to expedite the permitting process. “Companies want their needs met quickly, not years and years later,” she said. “If they can’t get their needs met, they need to consider their options.”
The Province of Alberta launched a new witty advertising campaign last month called “Alberta Is Calling,” which highlighted many of the challenges residents of British Columbia and Ontario are facing — and how they’re of significantly less concern in wild rose country — in an attempt to lure talent. “Find things you’d never expect. Like a centrally located house you can afford,” one of the campaign’s slogans reads. “Bigger paycheques. Smaller rent cheques,” says another.
When asked whether housing affordability has any connection to the growing appeal of the Alberta industrial market, both Wellwood and St. Cyr said that it’s definitely an added bonus, for both the workforce and employers who worry about labour shortages — another issue in British Columbia.
“These factors are all coming together,” St. Cyr says. Those that “can’t grow in tighter markets, can’t activate next phase of growth in their current markets are looking to Alberta”, Calgary’s Wellwood adds.
And it’s pretty much across the board, when it comes to companies. Wellwood says that there are some small differences between the composition of the markets in Alberta, with Edmonton seeing a little more from the raw material market and manufacturing, while Calgary has seen more when it comes to distribution and logistics. St. Cyr agrees, saying that while the cities are distinct, the costs are very similar and it often just comes down to preference.
It’s not so much that companies desire to leave British Columbia, but more so that they’re shifting the weights towards Alberta more. St. Cyr says that British Columbia is increasingly losing out on deals to Alberta for large distribution centres. One example he points to is Lowe’s, the home improvement retailer, which signed on in late-2021 to lease a 1.2M-sq.-ft facility in the High Plains Industrial Park in Balzac, Alberta. Another is De Havilland, the aircraft manufacturer, who announced a new manufacturing facility in Alberta just last week.
St. Cyr also points out other additional benefits of Alberta, such as the significant amounts of cargo space between Alberta’s two international airports and Edmonton’s rail connection to the Port of Prince Rupert in British Columbia, the closest North American port to Asia, meaning businesses can still access the advantages of British Columbia without having to deal with the exorbitant prices.
In their report, Avison Young notes that despite the rising interest rates and steeper construction costs, “Calgary’s position as a viable alternative to larger and more congested industrial markets continues to solidify. The market’s relative affordability, even in the face of elevated costs, will still play into its favor.”
It’s a “perfect storm of conditions,” Thompson says.
In other words, Alberta is calling, and those in the industrial real estate market are answering.
Amid skyrocketing investor demand and people’s fear of missing out (or FOMO) on real estate, what occurred was unprecedented: “We [had] never seen houses out-earn people, but we did. And that has set us up for where we are today,” Rabidoux said.
The medium-term picture so far isn’t entirely clear, he conceded, but Rabidoux doesn’t expect a housing crash. While home sales across Canada have declined by more than 40% in 2022 and active listings have been weak as well, he noted that the plunge is from “peak levels.”
Further, “The declines [in real estate activity] are exaggerated,” in part due to distressed sales — where homeowners have been forced to sell in a weak market — and those transactions are “working themselves through the system.”
Rather than home prices bottoming, Rabidoux said they’re slipping “back to decade averages.” Demand is “very low” and “has to bounce,” he added, especially if inventory levels keep recovering as they began to in early 2022. Still, new home listings would have to rise almost 50% and reach pre-Covid levels for there to be true oversupply dangers, he explained.
So what we’re really seeing currently is “an interest rate story” where the fear of being burned by real estate is weighing on demand in the short term and overshadowing that FOMO that emerged, Rabidoux said.
But there are risks to watch out for, given the sizeable chunk of GDP activity that real estate has assumed.
First, Rabidoux highlighted what he deemed “a record gap” between residential investment and business investment, noting that “housing is sucking capital from productive investments” that could actually help build the economy. In particular, real estate transfer costs are “triple the long-term average (being around that 3% level), so have become “nearly as large as core business investment.”
On top of that, there’s the massive affordability issue for clients in the face of rising interest rates and, thus, mortgage payments — weighing on their ability to consume and prop up the economy.
“Canadian households are extremely levered,” Rabidoux indicated, “and not just by our own historical standards.” The household effective interest rate is sitting at heights last seen in the 1990s, substantially affecting “even borrowers on five-year fixed mortgages.”
So how can advisors guide clients? With discretionary spending in for a pinch, cash flow analysis is of great value, as is taking a look at how, according to Rabidoux, people’s balance sheets are “more exposed to housing than ever.”
With housing weakness set “to break stuff” and there being “nowhere to hide from interest rates,” Rabidoux said to expect possible economic retraction of 1%. (An outlook session also from the IAFP symposium that was led by Pierre Cléroux, vice-president of research and chief economist at Montreal-based BDC, similarly suggested downside risk of a 1%decline for 2023, with an upside of 1% growth.)
Investors will need to brace for medium-term pain as the economy resets, will likely end of up paying more on their existing homes than expected and will need support with the psychological effect of perceived loss of value in their real estate investments.
On the upside, he added, while there could be a rise in consumer insolvencies from current levels, he suggests that “credit trends look very good for now.”
A piece of advice was it’s likely “not a good time to buy big-ticket items,” where investors will lean on savings amassed throughout the pandemic to ride the inflation, interest-rate and market volatility wave.
Real estate portals generate competition, inform buyers and draw even more attention to listings
The owners of real estate sales data in Canada have gone to great lengths to restrict unauthorized access to and use of that data, but the Competition Bureau and many within the industry have long argued for freer access to data to enhance competition.
The matter seems far from settled despite years of litigation and rulings. As a result, some real estate boards continue to file legal notices against property technology companies that try to gain access to their data and remind them of the integrity of their digital infrastructure.
Real estate transaction and listing data in Canada is disseminated via the Multiple Listing Service (MLS) systems, which are owned and maintained by the real estate boards. A collaborative agreement facilitates the sharing of data between and amongst boards. Realtors usually register with one or more boards and then become eligible to list properties on the MLS system, which can then be reviewed by prospective buyers and their agents online for free.
The boards, of course, are motivated to protect the integrity of data they collect, maintain and disseminate, either by themselves or with help from others. The improper use of that data or access by unauthorized entities is a valid industry concern, but so is the commitment to promote competition and prevent monopolies.
A recent industry-sponsored paper by Paul Johnson and Anthony Niblett pointed out the success of the MLS system lies in its “network effects.” As more homes are listed on the system, more buyers are attracted to it, which motivates more sellers to list their properties. This reinforcing loop of more listings leading to more buyers leading to even more sellers creates the so-called network effect.
The authors offer three recommendations to preserve and expand this system’s value. First, it recommends realtors be required to list all properties on MLS. Currently, the system operates as a voluntary listing service, so realtors can decide to handle the transaction alone or within their brokerage.
Before the real estate industry embraced the internet, the practice of keeping listings off the MLS system was prevalent among large brokerages that would double end the sale by having agents from the same brokerage represent the buyer and the seller. However, such practices are unlikely to be in the best interests of consumers, so requiring all properties to be listed (with some exceptions) is a worthwhile consideration.
Their second recommendation is that MLS “must continue to leverage highly effective portals” through which real estate data is disseminated. The most recognizable real estate portal in Canada is Realtor.ca, which is operated by the Canadian Real Estate Association, the sponsor of the study.
At the same time, proptech companies and digital–first brokerages also provide listing data with additional information about neighbourhoods and previous transaction prices through virtual office websites. Portals generate competition, inform buyers and draw even more attention to listings. The industry, therefore, benefits from such portals.
The third recommendation is about limiting access to MLS data. The authors said unfettered access to listing data might discourage sellers from listing their property on MLS, but we believe such privacy concerns are a red herring.
Sellers willingly consent to have photographs of their bedrooms and washrooms made freely available online to anyone in the world when they list their properties on MLS. If privacy was a concern, sellers would be more cautious. Yet the millions of homes listed on MLS containing photographs, 3-D renderings of floor plans and videos suggest privacy concerns are not a deterrent.
The authors said “any entity whose access to MLS Systems is used for the transaction of real estate would presumptively create value and should (continue to) have access.” But realtors are not the only ones who create value. Most real estate transactions do not take place without home inspectors, lawyers, financial institutions and others getting involved.
With advances in artificial intelligence and communication technologies, the real estate sector is ripe for constructive disruption that will benefit consumers while safeguarding the intellectual property rights of those who collect and store real estate data. Restricting the definition of value-adding entities to those who market real estate is not in the best interest of consumers.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website,www.hmbulletin.com.
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