CRE OUTLOOK VANCOUVER: Follow the money to profit in 2022


Mortgage lenders hot for Vancouver, but even the bulls are cautious about certain areas in arguably Canada’s cheapest real estate market

It’s easy to understand the raw confidence that surrounds the outlook for Metro Vancouver’s commercial real estate through 2022.

When asked by mortgage lenders from 30 major Canadian financial firms where they wanted to invest money this year, three cities and two industries dominated each list. The cities included Vancouver and the areas were residential and industrial, with basic retail and grocery stores anchored in a distant third place, according to CBRE 2021 Canadian Mortgage Lender Report.

That sums up the 2022 lens well for normally conservative bankers, but Metro Vancouver investors and developers often play by their own rules and, judging by recent performance, they may be right, again, for the coming year.

After all, in their outlook for 2021, less than 50% of mortgage lenders were bullish on the industrial sector and only 60% wanted to increase lending to the multi-family apartment market.

Metro Vancouver, of course, has seen a tear in both sectors, achieving record levels of investment and returns in rental apartments and all types of industries. The concept of light industry strata, if not invented in Vancouver, has certainly been perfected here, achieving a stunning performance in 2021. Today, strata are quickly becoming the dominant industrial game in the region.

Retail

Locals are also shaking up the bleak outlook for the retail industry. Lenders say investors should avoid most brick-and-mortar retail outlets, especially regional malls in non-core markets. Yet metro Vancouver has experienced a multi-million dollar shopping spree from investors who grabbed retail assets last year, mostly suburban assets.

These include Delta’s 42,000 square foot Nordel Center shopping mall, which sold for $ 21.3 million, almost $ 3 million more than its appraised value in British Columbia. . Skyline Real Estate Investment Trust (REIT) paid $ 31.4 million for a 71,800 square foot Abbotsford shopping center; and a local private investor bought the Rodeo Square shopping center in Surrey for $ 23.3 million.

As an indication of confidence, 2021 ended with 27 acres of suburban Richmond selling for $ 300 million in the biggest commercial land deal of the year.

Lenders can be excused for myopic vision. Like no other city, Metro Vancouver seems designed for commercial real estate success.

With two million restless big spenders – retail spending averaged $ 3.4 billion per month throughout a global pandemic – surrounded by mountains, oceans, the U.S. border and from decades of progressive politics that have frozen thousands of acres of the market, nowhere is better to make money in real estate.

Even on the area’s worst streets, the infamous Downtown East Side, land sells for the equivalent of $ 10 million an acre and retail space sells for $ 800 per square foot. When the province bought row hotels in the area last spring, it paid up to $ 327,000 per door.

Office

Despite empty office floors due to working from home, 6.5 million square feet of new office towers are under construction in the metro area, 63% of which are downtown, and giant tech companies are pre-leasing a much of the space. Over the next 12 months, five downtown office towers will provide 900,000 square feet of premier space.

The third quarter of 2021 saw a net absorption of 713,000 square feet of downtown office space, down from a negative 420,000 square feet in the same period in 2020, and the average asking rent increased by 12. 7% to nearly $ 30 per square foot, according to Colliers. The vacancy rate for Class AAA downtown office space is 2.3 per cent.

“We expect 2022 to be a banner year for Vancouver’s commercial real estate industry,” said Madeleine Nicholls, Managing Director of Colliers Vancouver.

While the pandemic helped bring the downtown vacancy rate to 6.2% at the end of 2021, from 3.8% a year earlier, it has proven to be a boon for the office sector. suburban.

There has been a movement of people to the suburbs and many commuters are reluctant to use public transportation. Accessibility to parking therefore gives an advantage to suburban offices, as well as lower rental costs.

According to a recent survey, 70% of the 543,000 square feet of new office development in suburban markets has been pre-let or sold before completion, including 280,000 square feet of space in two new Class AA towers in Surrey.

Although in decline, there is still a large amount of sublet space in the market in Metro Vancouver, including over 725,000 square feet downtown and 1.7 million square feet. in the area, most in older Class A and B buildings. Sublets, agents note, can give small businesses and startups the opportunity to acquire office space cheaply in some prime locations. However, with an overall absorption rate of around 230,000 square feet per month at the end of 2021, even the sublet space could be wiped out at the start of this year.

Industrial

Metro Vancouver’s industrial real estate market is a victim of its own success.

It has the lowest industrial real estate vacancy rate in North America and the highest rental and strata costs in the country. The industrial land base has shrunk to near zero, pushing land prices into the stratosphere.

Demand was so intense that the vacancy rate fell to 0.4 percent, the lowest or most important city in North America and all the price metrics – land costs, rental rates and strata values ​​- soared.

The fear now is that many companies, especially large distribution companies, are moving to Calgary or Edmonton cheaply. Abnormal flooding that washed out major highways in British Columbia and crippled provincial supply chains in November 2021 did not help. The main Highway 5, the Coquihalla, could be closed for much of 2022.

“The availability of industrial and warehouse space over 100,000 square feet in Metro Vancouver has already fallen to virtually zero, threatening to strangle economic growth and business expansion in the region -” a problem exacerbated by the potential of Mother Nature to wreak havoc on our transportation infrastructure, ”said Josh Gaglardi, director of Orion Construction in Surrey, a leading contractor for industrial construction.

Gaglardi argues that industrial developers and their customers should look outside of the metro area into the interior of British Columbia, even Vancouver Island, to diversify the industrial base.

However, industrial land is also scarce on Vancouver Island, with a 0.2% vacancy rate in Greater Victoria and a few large plots available south of Nanaimo. In Kelowna, 40 percent of the city’s land – over 17,000 acres – is in the agricultural reserve, preventing industrial development. Kamloops had a total of just 240 acres of vacant industrial land ten years ago, and much of that is already developed. Last October, the city of Kamloops approved about 150 acres for future industrial development, but the land requires extensive environmental and other studies before anything is built.

This means that industrial density is pretty much the only solution for industrial development in Metro Vancouver. The past year saw the construction of the first multi-story industrial projects, a model for what may become normal in 2022.

In southwest Vancouver, developer Wesbild, along with Kingsett Capital, is transforming a former sawmill site into the largest mixed-use industrial office complex stacked in Canada in twin buildings. Its Marine Landing development will offer workspaces in strata ranging from 600 square feet to 34,000 square feet.

“We start the demolition in January, [2022]”Said Brennan Finley, Director of Development at Wesbild, of a multi-level project at 8188 Manitoba Street in Vancouver that is expected to cost between $ 110 million and $ 120 million to be built and completed by 2024. .

Unlike many industrial strata projects underway in Metro Vancouver, Wesbild is not betting on speculation. According to Finley, 90 percent of the industrial space in the first tower has already been sold, along with 20 percent of the office space. Industrial units sell for between $ 750 and $ 800 per square foot, while offices on the top three floors sell for between $ 950 and $ 1,000 per square foot.

At False Creek Flats in Vancouver, Alliance Partners is redeveloping a former warehouse on a 1.5 acre site into a 173,000 square foot five story industrial office project at the corner of East 1st Avenue and Clark Drive.

The project is the first in apartments with loading ramps to the first two floors of the industrial space, in addition to the freight elevators.

Frameworks begins construction this spring and is expected to be completed in 2024.


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