Foreign buyers and city hall eye commercial strata potential

Appraiser Brady Fleguel expects strata office to dominate the office landscape in Vancouver in coming years

By
Western Investor
June 6, 2018





ironworks project

 

I would identify low supply, special taxes, and relative affordability as key factors fuelling the strata office market in downtown Vancouver.

On the supply side, only 320 Granville Street, Burrard Place and 999 Seymour have brought noteworthy strata office supply to the downtown in the past five years. Much of this space was quickly absorbed with 320 Granville Street selling roughly half of its space in a week last November. 

With regard to special taxes, the Foreign Entity Tax (FET), recently increased to 20 per cent tax while the B.C. Speculation Tax steps to 2 per cent annually in 2019 for foreign investors and satellite families. Strata office is exempt from both the FET and the Speculation Tax and groups, including foreigners, who historically invested in the residential market have shifted their focus to commercial assets to avoid these taxes. 

Lastly, the smaller size and lower price point of strata space allows market entry for small to medium-sized businesses as an alternative to leasing. 

CACs negotiated

Counteracting the appeal of strata office space in Vancouver is the City’s community amenity constribution (CAC) policy update: Simplifying Community Amenity Contributions on New Rental Housing and Commercial Development (effective November 29, 2017). 

This policy removes CAC negotiations for commercial-only rezoning applications in the Downtown and Metro Core and instead creates an interim commercial linkage targets at fixed rates ($15.00 per square foot in Downtown, $10.00 per square foot in the Metro Core). 

This sounds like a progressive idea, as predictable CACs have proven to be a catalyst to supply of new development (i.e. Cambie Corridor). However, the new policy excludes all commercial-only rezoning applications proposing stratified commercial space and large site developments. These sites will continue to be processed under the negotiated CAC approach.

Why would strata office be excluded from fixed CACs? Clearly the City plans to “participate” in this sector. 

To give perspective, 320 Granville and Burrard Gateway have sold strata office space for more than double the price of similar leased office space (on a per square foot basis). The proposed commercial linkage targets are only expected to result in $3.0 million per year. This is nominal relative to the negotiated CAC approach using 75 per cent of the resultant “land-lift” from rezoning. 

For the reader’s reference the last notable negotiated rezoning in Downtown Vancouver (the First Baptist Church site at Burrard and Nelson) netted the City a CAC package of over $91 million dollars (primarily a residential project). 

The new CAC policy shows that the City wants jobs within its borders but has its hand out in case the numbers look too good.

Outlook 

My thoughts for the future are optimistic for both the strata and leasing components of the office market. 

Broadly, the Downtown and surrounding areas offer limited sites for office use. Sites considering a shift to strata office space will limit the supply of new projects for lease, bolstering new projects that have commenced construction with limited or no pre-leasing (Vancouver Centre II, 601 West Hastings ands 400 West Georgia). 

Secondly, older C-class office buildings in the core could see demolition or possibly conversion to strata. Both could be achieved without rezoning. Tenants in these buildings are currently in place at relatively affordable rents and could struggle to replicate existing rental costs without sacrificing location.  This demand could be met by projects in Railtown, Mount Pleasant, Burrard Slopes and most notably the False Creek Flats as a source of new office supply, a good portion of which could be strata office. 

Next, the Broadway Uptown Office District is reaching peak desirability since the Translink Mayor’s Council reached an agreement in March 2018 for the remaining funding of the Broadway Subway. Concurrently, UBC is now offering to contribute funds to extend the Broadway Subway to its campus. Expect more strata office supply here albeit at discount pricing to Downtown projects.

I expect strata office to dominate the office landscape in Vancouver in coming years. The value premium between strata office and leasehold office space is dramatic. 

Some questions

What if this premium leads a significant percentage of office sites choose strata tenure over leasehold, much like the residential market from the past 15 years? Could the City be left with a similar undersupply of office space for lease? Will the City need subsidizing policy similar to Rental 100, but for office space? Will commercial use be added to the FET and the Speculation Tax? Maybe I’m one cycle ahead.

 
Appraiser Brady Fleguel is a principal with Burgess, Cawley, Sullivan & Associates. His focus is on development land, office buildings and other commercial real estate projects throughout British Columbia. 

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