Metro Vancouver commercial market swaggers into new year with rare confluence of low vacancies, high prices and strong development
Metro Vancouver’s commercial and industrial real estate sector is coming into 2019 with arguably the best market conditions in Canada. It is witnessing a rare confluence of among the lowest vacancy rates in North America, record high prices and sustained development. While total sales dipped in the third quarter of last year from the previous quarter, sale volumes barely budged.
“It is a historical time for Metro Vancouver’s commercial real estate,” said market analyst Andrew Petrozzi of 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 is 1.6 million square feet of new offices under development downtown, 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, where 60 per cent is pre-leased 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 currently under construction by GWL Realty Advisors.
Kabam will be the tower’s lead tenant, leasing close to a third of the building’s 345,000-square-foot floor space across seven floors. The 33-storey building is currently under construction at 753 Seymour Street with completion expected in 2021. “We are confident that VC2 will be fully leased prior to completion,” said Geoff Heu, vice-president, development, with GWL.
Commercial agency Devencore notes that vacancy rates for all office classes in downtown Vancouver have fallen to 4.5 per cent, down from 5 per cent a year ago. Class A office vacancy rates are even lower, at 3.9 per cent. At the same time, Class A average gross rents are continuing to climb with rates exceeding $51 per square foot.
“The market is showing no signs of slowing down in terms of rental rates. With various developments underway, but 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. “We are seeing trends with large space users pre-leasing new AAA-class office space slated to be delivered in 2021 and beyond. In the meantime they are utilizing flexible swing space to hold them over until their new offices are completed.”
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.
A trend to commercial strata is surging despite nosebleed-level prices. Crestpoint Real Estate Investment paid $1,000 per square foot for a 19-storey office tower at 800 Burrard Street last year. Earlier in the year, Bosa Development sold pre-lease space at a new tower ascending on the northern edge of downtown at an average of $2,000 per square foot.
Only in Vancouver is bare concrete industrial space selling for higher prices than luxury residential condos in other Canadian cities. 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 durng the same period. The new supply led to the first increase in industrial vacancy rates in two years, to 1.46 per cent, still the second lowest in Canada and among the tightest in North America.
Richmond and Delta have emerged as 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 per cent in fall 2018 from 1 per cent a year earlier due mainly to a couple of large vacant listings coming back to market. Delta, which has nearly 25 million square feet of industrial space, registered a decline in vacancy to 1.9 per cent, despite the addition of new inventory.
As vacancy has remained extraordinarily tight across the region rental rates have risen rapidly in recent years, a pace expected to continue but gradually slow in 2019, Avison Young forecast.
Major shopping malls across the region,` such as Park Royal, Oakridge Centre, Brentwood Town Centre, Lougheed Town Centre and others, are redeveloping, adding square footage or building condominium towers on mall parking lots, Cushman & Wakefield reports.
The second phase of McArthurGlen Group’s outlet mall near Vancouver International Airport will expand by 84,000 square feet this spring. This outlet centre is a top sales performer in Canada with a reported $1,220 in sales per square foot per annum, behind only Oakridge Centre at $1,579 per square foot and Pacific Centre at $1,531 per square foot in sales, according to the International Council of Shopping Centres.
Shape Properties and the Healthcare of Ontario Pension Plan are redeveloping the 28-acre Amazing Brentwood site in Burnaby with 11 residential towers. The project is underway with several new shops, dining venues and entertainment areas set to arrive early this year.
The largest retail development in Vancouver is QuadReal’s planned 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.
In West Vancouver, Park Royal is in the final stages of its multi-year redevelopment. The developer, Larco, has already added 1.4 million square feet of new retail, including a large Cineplex cinema.
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 per cent range, according to Canada Mortgage and Housing Corp., but provincial and Vancouver regulations may threaten the sector.
Sales of condominiums in Greater Vancouver plunged 46.3 per cent in November, continuing a downward trend that started earlier in the year. Pre-sales of new condos were down to a take-up of 37.5 per cent in November, a low for the year after peaking at 94 per cent in January. Many condos are bought by rental investors, but B.C.’s new speculation tax, tight controls on pre-sale reporting and Vancouver’s empty-home tax are expected to make investors shy of the sector this year.
In December, the City of Vancouver introduced controversial rental legislation that some say will make it much more difficult for owners of older apartment buildings.
The new rules mean landlords will have to offer displaced tenants the option of temporarily moving out during renovations without having their leases end or their rent increase.
As well, the B.C. government is restricting annual rent increases to 2.5 per cent this year, which could stifle investment in the multi-family rental market.
The Urban Development Institute warns the new rules could also threaten construction of some 12,000 new purpose-built rental units across the region.
Multi-family dollar volumes increased 3.9 per cent from the second to the third quarter of 2018, reports the Real Estate Board of Greater Vancouver.
Frank O'Brien Western Investor | January 2, 2019