‘Historic’ Metro Vancouver commercial real estate market needs financing fuel

Running under a full head of steam for the past three years, Metro Vancouver’s commercial real estate sector hit a speed bump late in 2018, but it wasn’t enough to derail the hottest market in Canada this year, analysts say.

In the third quarter of last year, sales of commercial real estate properties dropped nearly 20% from the second quarter, to 565, the lowest quarterly level in four years, according to the commercial division of the Real Estate Board of Greater Vancouver (REBGV).

Sales of land, which had been leading the investment pace, posted the biggest decrease, falling 34.8% quarter-to-quarter from to 199 from 305. The sales volume increased, however, rising 14.8% to $2.3 million in the third quarter.

This reflects soaring land prices that have doubled in the past two years in many Metro municipalities. Development land values can now easily top $1,000 per square foot.

“We’re seeing less demand across our commercial market compared to recent years and supply is beginning to ramp up, with a number of projects expected to complete in our region over the next year,” said REBGV president Phil Moore.

This, combined with a perception of a slowing economy and higher interest rates, has lenders looking harder at pre-sale and pre-leasing agreements for developers financing land, said Jon Switzer, a mortgage broker with Impact Commercial, based in North Vancouver.

“Lenders are looking for shovel-ready projects they can get paid out on within 12 to 24 months,” Switzer said. “Lenders are asking for higher pre-sale requirements to prove out the financial viability of a development.”

Still, Metro Vancouver is witnessing a rare confluence of among the lowest vacancy rates in North America, record-high prices and sustained development that is confidently pushing up office towers, industrial parks, shopping malls and multi-family rental buildings across the entire region.

“It is a historical time for Metro Vancouver’s commercial real estate,” said market analyst Andrew Petrozzi, principal and vice-president of research with Avison Young’s Vancouver office.

Vancouver’s downtown office vacancy rate is experiencing record-high prices as leasing costs also nudge all-time highs, even as a rush of new construction continues.

There are 1.6 million square feet of new offices under development in downtown Vancouver, but most of the space is already claimed.

This includes the 1.1-million-square-foot redevelopment of the old Vancouver post office on West Georgia Street, where 60% is preleased though ground has not been broken, and 400 West Georgia, where Spaces has already claimed one-third of the 375,000-square-foot Westbank tower.

Vancouver-based mobile game developer Kabam has pre-leased 105,000 square feet of office space at Vancouver Centre 2 (VC2), which is under construction by GWL Realty Advisors on Seymour Street.

Kabam has taken a third of the building’s 345,000-square-foot floor space across seven floors. The 33-storey tower is under construction at 753 Seymour Street with an expected completion date in 2021.

“We are confident that VC2 will be fully leased prior to completion,” said Geoff Heu, GWL vice-president of development for Western Canada.

Commercial agency Devencore notes that vacancy rates for all office classes in downtown Vancouver have fallen to 4.5%, down from 5% a year ago. Class A office vacancy rates are even lower, at 3.9%. At the same time, Class A average gross rents are continuing to climb with annual rates exceeding $51 per square foot.

“The market is showing no signs of slowing down in terms of rental rates. With no major new office buildings delivered to the market until 2021, tenants with upcoming leases are competing within a very tight market,” said Jon Bishop, executive vice-president and managing principal of Devencore’s Vancouver office.

Across Metro Vancouver, an all-time high of 21 office buildings are under construction that will deliver 3.5 million square feet within the next five years – and suburban activity is outpacing downtown construction by a ratio of two to one, noted Jason Marriott, vice-president of office properties with Lee & Associates.


Only in Vancouver is bare concrete industrial space selling for higher prices than luxury residential condos in any other Canadian city. In Vancouver’s Mount Pleasant and the emerging Clark Drive and Hastings Street zone, light industrial space is fetching from $800 to $1,000 per square foot in trendy new low-rise buildings.

In the third quarter of last year 1.5 million square feet of new industrial space came to the Metro Vancouver market, but 1.4 million square feet was either sold or leased during the same period. The new supply led to the first increase in industrial vacancy rates in two years – a rise of 1.46%.

Richmond and Delta have emerged as major industrial destinations, which will carry well into 2019, according to Avison Young. Vacancy in Richmond’s 37.7-million-square-foot industrial market – Metro Vancouver’s largest – increased to 2.3% in fall 2018 from 1% a year earlier. Delta, which has nearly 25 million square feet of industrial space, registered a decline in vacancy to 1.9%, despite the addition of new inventory. As vacancy has remained extraordinarily tight across the Metro region, rental rates have risen rapidly, a pace expected to continue but gradually slow over the next 12 months, Avison Young forecast.


Major shopping malls across the region such as Brentwood Town Centre, Lougheed Town Centre, Metrotown, Oakridge Centre, Park Royal and others are redeveloping, adding square footage or building condominium towers on mall parking lots this year, Cushman & Wakefield reports.

The largest retail project in Vancouver is QuadReal’s mixed-use redevelopment of a 28.5-acre site at Cambie Street and West 41st Avenue, which includes Oakridge Centre. Oakridge’s development will include 10 towers and three mid-rise buildings with commercial, office and residential uses, as well as 100,000 square feet of community space.

Shape Properties and the Healthcare of Ontario Pension Plan are redeveloping the 28-acre Amazing Brentwood site in Burnaby, for 11 residential towers. Much of the new retail will open this year, just as Shape begins substantial work on its even larger City of Lougheed redevelopment on the Burnaby-Coquitlam border.

In Burnaby’s Metrotown area, where a development site sold in December for more than $1,200 per square foot, Anthem Properties is spearheading development of the 12-acre Station Square site into a mix of commercial and housing that includes five high-rise condo towers.


Once the trump card in Metro Vancouver commercial real estate plays, the multi-family market will face headwinds in 2019.

The sector still has about the lowest vacancy rate possible, in the 1% range, according to the Canada Mortgage and Housing Corp., but provincial and Vancouver regulations threaten the sector.

In December, the City of Vancouver introduced rental legislation that requires multi-family landlords to offer displaced tenants the option of moving back into a renovated suite without having their rent increased.

The province is expected to act this year on some of the 23 recommendations of a Rental Housing Task Force study released in December that includes capping the annual allowable rental increase to 2.5%, making it harder for landlords to evict tenants and penalizing landlords who are tardy on repairs.

In the third quarter of last year, multi-family land sales fell 17% from the earlier quarter to the lowest level in at least five years. As of December, multi-family land sellers were slashing prices by as much as $1 million.

Pre-sales of new condos were down an estimated 40% from January to November, according to Urban Analytics. As of November there were 815 new and unsold condos on the Metro market, the highest inventory since 2014.


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