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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.