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Commercial real estate facing “abnormal and uncertain environment”

Promising data does not match reality on Vancouver streets as fourth wave of pandemic disrupts office and retail sectors
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Fewer workers back in the office, less street shopping seen due to stubborn COVID-19. | Chung Chow

The latest data that shows that Metro Vancouver’s commercial real estate sector should be prepping for a full-press recovery in September but the reality on the street paints a different, and troubling, scenario according to the B.C. Real Estate Association, which released second quarter data this week.

The BCREA Commercial Leading Indicator (CLI) rose from 150 to 155 in the second quarter of 2021, representing the fourth consecutive quarterly increase as the economy recovered from the COVID-19-induced recession.

Compared to the same time last year, the index was up by 25 per cent

But Brendon Ogmundson, BCREA chief economist, warns commercial real estate is facing a “very abnormal and uncertain environment.

“Normally, the type of growth we see reflected in the CLI would imply an improvement in demand for retail and office space. However, the complexities of the COVID-19 pandemic and related public health restrictions are driving a wedge between what we see in the data and what is being experienced on the ground,” Ogmundson said.

The arrival of a fourth wave of COVID-19 led to an August 24 return of mandatory masks in all public areas in B.C., reversing a July 1 re-opening of the province.

Provincial health officer Dr. Bonnie Henry announced the reintroduction of the mask mandate, pointing to the alarmingly contagious Delta variant and the significant number of B.C. residents who remain unvaccinated.

The fourth wave has cooled perceptions of workers returning to the office and consumers rushing to retailers for back-to-school shopping.

In early August, Colliers senior managing director Darrel Hurst was predicting that 62 per cent of Vancouver office employees would return to the office after Labour Day,

Ogmundson said it’s now unclear if the need for office space is as strong as predicted and added that there is also a question on the future need for retail space because shoppers increasingly rely on online orders.

Still, the economic data at the end June 2021 looked promising. Overall manufacturing sales rose 5 per cent in the second quarter on higher sales in the wood products, food manufacturing, and chemical products sectors. The economic activity component of the CLI was also positively driven by a 4.8 per cent increase in wholesale trade.

Commercial real estate investment trust unit prices approached all-time records and risk spreads between corporate and government debt continued to narrow, the BCREA found.

Employment in key commercial real estate sectors such as finance, insurance, real estate and leasing increased by about 13,800 jobs in the second quarter, and the office employment component of the index hit an all-time high.

“However, the effect of this strong employment growth on the demand for office space remains unclear as many employees continue to work remotely,” Ogmundson cautioned.