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While the rising cost of borrowing against an inflationary backdrop has somewhat stifled demand for commercial real estate in the Greater Vancouver Area (GVA), several asset classes continue to outperform the overall market.

Industrial remains the top performing sector in Greater Vancouver with vacancy rates under one per cent. Consistent demand exists for warehousing and distribution space throughout the GVA, with conditions tightest in suburban areas outside Vancouver Proper in Richmond, Delta, Burnaby and Langley. Real Estate Investment Trusts (REITs) are slowly coming back to the market, as evidenced by the purchase of two industrial properties earlier this year by Crestpoint Real Estate Investments. The purchase included six buildings representing over 190,000 square feet in Burnaby as well as the 428,000-square-foot Coaster Heights Distribution Centre in Surrey’s Campbell Heights Industrial Park. Strata industrial product has also experienced an uptick in demand this year, with some upward pressure on values.

Availability rates for industrial space have edged higher, at 2.1 per cent in the first quarter of 2023, compared to the same period in 2022, but are still amongst the lowest in the country at present, according to data from the Altus Group. The greater influx of space in the market has yet to impact lease rates, which have risen by double-digits (almost 20%) year-over-year to $22 net per square foot on average. Prospective tenants are exercising patience in their decision-making as a result, while existing tenants are looking to achieve greater efficiencies by reducing their footprints.

Vancouver’s office sector has seen upward pressure on availability rates, climbing just over one per cent above the year-ago level to 10.9 per cent, according to Altus Group. As companies continue to hammer out work schedules with employees, it’s clear that some sort of hybrid model will emerge, and the likelihood of a return to a five-day work week fades. Many corporate offices in downtown Vancouver, where lease rates currently hover at $40 net per square foot, are looking to reduce costs by eliminating unnecessary space, but some are leaving the core for more affordable office space in the suburbs, where lease rates average $25 net per square foot. There has been some retrofitting of existing commercial space to residential, primarily in terms of student housing near the university, but that may change down the road if some of the red tape is eliminated from the conversion process.

Land sales continued but at a more tempered pace in the first quarter of the year. Property zoned residential, industrial, and some retail throughout the Greater Vancouver Area were sold but the selling process has been extended, with due diligence periods increased to 90 days, up from 30 to 45 days in Q1 2022, and much longer closing periods as high as one year and more taking hold. Industrial builds are moving forward, especially when they are pre-leased to quality tenants who sign on for at least five years. New restrictions on residential rentals, however, have put a damper on condominium development. While purpose-built rentals are still occurring throughout the city, investor margins are low, which is discouraging investment in this asset class to some extent. Existing multi-family portfolios are the exception to the rule for this exceptionally coveted asset class but are seldom available.

A resurgence in foot traffic has contributed to a brighter outlook for the retail sector. Retail nodes in the downtown core continue to evolve, with storefront on arteries including Fourth Avenue, Alberni Street, West Georgia Street, Robson Avenue, and residential neighbourhoods such as Yaletown, Gastown and False Creek in high demand but low supply. Big box stores are welcoming new retailers, bringing in a more diverse mix that resonates with the local community, including restaurants and grocery stores. Area malls are rethinking the value proposition of their expansive parking lots and replacing them with multi-family buildings and commercial office space. The Oakridge Shopping Centre, which has closed until 2024, is a prime example. The 574,000-square-foot shopping centre, which sits on 28 acres, will add between 15 to 20 new high-end restaurants and will eventually house 6,000 people in a mix of low and high-rise buildings as the live-work-shop phenomenon gains traction. Multiple malls and shopping centres are in various stages of development, with many offering a mix of multi-family, office, retail and restaurants, including Park Royal, in West Vancouver; the CF Richmond Centre; Burnaby’s Metrotown Mall; the Amazing Brentwood; and the Lougheed Shopping Centre, to name but a few.

Vancouver’s footprint and sizeable population continue to face challenges regarding growth. The Vancouver CMA grew by an estimated 2.8 per cent between July of 2021 and July of 2022 to close to 2.85 million, bringing an additional 77,798 new residents to the city, according to Statistics Canada. Vacancy rates, on the other hand, dropped below one per cent at year-end 2022 for purpose-built rentals, while condominiums hovered at 2.2 per cent, according to CMHC’s Rental Report. Housing continues to be Vancouver’s greatest challenge and residential builders and developers can’t get their shovels in the ground fast enough, but red tape and delays from application to approvals and development fees are dragging out the development process. Streamlining the process will go a long way in getting much-needed inventory to market.

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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.

*Altus Group

**Cresa/CoStar April 2022

***RBC Economics, Provincial Outlook, March 10, 2022

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