While demand for commercial real estate in Vancouver remains strong across all asset classes, ‘beds and sheds’ continue to be top market performers, despite a critical shortage of inventory. This, according to the 2022 Commercial Real Estate Report from RE/MAX Canada. Industrial availability, to illustrate, has dropped to less than one per cent*, with land constraints compounding an already tight market. Overall investment in the first quarter of 2022 topped $2 billion*, but could have easily gone higher if more product was available.
The insatiable appetite for industrial product continues unabated in Metro Vancouver, with absorption in the first quarter of 2022 hovering at just over 1.4 million square feet**. More investors are seeking to buy industrial properties as a hedge against inflation as both lease rates and expenses climb, but little product is available for sale. Smaller businesses are being pushed out of the core as lease rates top an average of $19.00 per square foot net for Class A industrial product, up about 12 per cent from $17.44 one-year prior. Current market conditions are prohibitive for many small industrial players, many of whom are prevented from expanding their operations due to space constraints.
While another 7.5 million square** feet of industrial space is currently under construction, much of the inventory is located on the outskirts of the city in areas such as Surrey and Burnaby. Pre-sales are now pushing $700 per square ft in prime areas. With just over 350,000 square feet under construction in Vancouver proper, developers are getting creative with their new projects. Demand has been voracious for a five-floor, multi-storey commercial condominium that incorporates industrial and office space under one roof in Vancouver’s False Creek Flats area. The stratified Framework development by Alliance Partners offers end users the opportunity to realize commercial ownership in the city’s core. Delivery is likely two years out, with the first two phases now sold out and a third phase selling at $725 per square foot. Oxford Properties introduced Canada’s first multi-level industrial building in 2019, with 1.35 million square feet spread over six buildings in Burnaby, BC, the last of which, scheduled for completion in Q4 2022, will be leased by Amazon. Cities that adopt this industrial model are more likely to secure the future, while there’s a possibility that those that remain reactionary may encounter challenges down the road.
Given the state of the industrial market, there appears to be no path for balanced conditions in sight. Small business is exceptionally vulnerable in the core under current conditions, with rising costs and the inability to expand choking this segment of the market. The industry will need to better evolve, with some suggesting a need for an industrial land reserve, registered areas that are dedicated to industrial. In the interim, end users with $10 million to $20 million and much more remain frustrated with the lack of acquisition options.
As the population in the Vancouver CMA grows, the city’s housing needs have been accentuated. Between 2016 and 2021, the Vancouver CMA experienced an uptick of more than seven per cent, with close to 200,000 people added to the area (2,463,431 to 2,642,825), according to the latest Statistics Canada Census data. Intensification is underway throughout the city, with particular emphasis on purpose-built, multi-unit residential. Some developers and builders are achieving this through re-purposing strip malls in mature areas throughout Vancouver, bringing new life to older communities. These developments often have retail/commercial space on the ground floor and residential component in the stories above. The city has also proposed the ambitious Broadway Plan, based on the Skytrain extension to Arbutus, which will integrate housing, retail, and commercial development in the Kitsilano, Fairview, and Mount Pleasant neighbourhoods, with mixed-use buildings ranging from 20 to 40 storeys in main areas and low-rise buildings offering four to six stories in more residential communities.
Institutional investors are active in this segment, although there are some mid-sized investors getting into the market. A retail mall with a significant land parcel recently sold in the high $70 million range with a four per cent cap rate, which is expected to be clawed back should high-density residential be approved for the area.
While the retail sector is on the rebound, it has yet to fully recover, giving smaller investors an opportunity to buy in. Significant change has occurred in retail in recent years, with lessons learned from the intersectional relationship between the asset classes resonating with retailers both small and large. The new retailer is exceptionally adept, flexible and innovative. Signs of growth are already evident in the retail sector, with premium storefront in high demand but low supply. Fourth Avenue is almost completely leased with rates reportedly pushing $100 net per square foot. Big box stores are thinking out of the box, modifying their footprints by reducing their consumer facing areas and retaining more storage space for inventory in the back. Once employees return to their offices and the travel and tourism sector is back on track, this segment should really gain momentum.
Vancouver’s office market is the strongest in Canada at present. Availability rates are trending down, sitting at 9.6 per cent *in the first quarter of 2022, compared to 10 per cent during the same period in 2021. Downtown rates** vary by area, with the Downtown Peninsula—with more than 33 million square feet of space—experiencing the highest availability rates at 10 per cent and Vancouver City experiencing the lowest 5.7 per cent. The suburban market continues to thrive, with the tightest market conditions occurring in the North Shore and New Westminster at just over 3 per cent and the highest availability in Langley at 8.2 per cent.
While the office market is still feeling the effects of the pandemic, the hybrid work schedule will likely bridge the gap between now and the full-scale return to the office. The downsizing and sublease fall-out that was expected failed to materialize, and some companies increased their workforce and used any extra space freed up by work-from-home initiatives to accommodate the increase in staff. Some new players are moving into the market, largely from the tech sector, which is helping to keep inventory levels stable. More than three million square feet of office space is currently under construction in the Downtown Peninsula, with almost 80 per cent pre-leased.
British Columbia’s economy continues to experience rapid expansion, leading the nation in terms of employment and consumer spending growth***. Building on strong GDP growth in 2021, at an estimated 5.1 per cent, the province is forecast to climb another 4.3 per cent in 2022. As such, the Vancouver commercial real estate market is expected to remain strong. However, inventory challenges are expected, given land constraints.
**Cresa/CoStar April 2022
***RBC Economics, Provincial Outlook, March 10, 2022
National Commercial Real Estate Highlights
With North American stock markets dangerously close to correction, bricks-and-mortar commercial real estate continues to resonate with institutional and private investors, particularly those who are personally vested, across almost every commercial asset class in major Canadian centres, say RE/MAX brokers.
The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential—particularly purpose-built rentals—and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets.
The report examined 12 major Canadian centres from Metro Vancouver to St. John’s. Regional highlights include the following:
- 92 per cent of markets surveyed (11/12) reported extremely tight market conditions for industrial product in the first quarter of 2022. Newfoundland-Labrador was the only outlier.
- 67 per cent of markets surveyed (8/12) found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, Hamilton-Burlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.
- While demand for overall office space in the core remains relatively soft in 92 per cent of markets (11/12) across the country, Metro Vancouver continues to buck the trend.
- Suburban office space continues to prove exceptionally resilient in 67 per cent of markets surveyed (8/12). Those markets include Vancouver, Calgary, Saskatoon, Winnipeg, Hamilton-Burlington-Niagara, Ottawa, Halifax-Dartmouth and Newfoundland-Labrador.
- Development land remained sought after (industrial/residential) in 67 per cent of markets surveyed (8/12) including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and Halifax-Dartmouth.
- End users are encountering challenges in terms of expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.
- Retail is on the rebound in 75 per cent of major Canadian markets (9/12), with strong emphasis on prime locations in neighbourhood microcosms. The trend has been identified in Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Hamilton-Burlington-Niagara, Toronto and Ottawa.