The week’s top stories focus on the retail and office markets in major B.C. and Saskatchewan cities. In B.C., small retailers are struggling to stay afloat amidst high rental prices, while office properties continue to set new per-square-foot price records. In Saskatchewan, Saskatoon’s downtown is struggling to lock in an anchor grocery, while Regina landlords are attempting to sweeten lease deals to entice potential office tenants.
Here is Western Investor’s pick of the top commercial real estate stories published this week.
The Toronto-based real estate firm acquired the building for $1,000 per square foot, more than three times the per-square-foot value of similar Montreal acquisition.
A Toronto-based real estate investment firm has acquired a Vancouver Class A office building for approximately $225 million – or more than $1,000 per square foot.
The office and retail property at 800 Georgia Street was purchased by Crestpoint Real Estate Investment. The firm also acquired a 53 per cent stake in a similar Montreal office property, at a value of $300 per square foot.
"The difference is liquidity. In downtown Vancouver, there is a limited supply of land, and it's very attractive to foreign capital. There will always be an exit price if the market goes south. Right now the market in Montreal is great, but sometimes you can't sell a building," said Kevin Leon, Crestpoint president, commenting on the price discrepancy between the two markets.
The Vancouver property is a 19-story building, with five ground level retail units. Canadian retailer Lululemon anchors the retail units, while the office space is fully leased by the federal government.
The site’s capitalization rate is placed at 4.25 per cent, mostly on par with the projected cap rate for office product in Vancouver – between 3.75 to four per cent.
"Some people say the cap rate is low, some people think we got a pretty good deal," said Leon. "This is probably one of the most prime retail corners in downtown Vancouver."
Major shopping thoroughfare in Vancouver is seeing more vacancies due to higher rents, development pressures.
Empty storefronts pockmarking Vancouver strolls such as Robson Street, Denman Street and south Main Street are due to a mix of higher rents, development pressures and store owners following their customers to the suburbs, analysts say. Small retailers are the most affected.
Craig Patterson, editor of Retail Insider, who has been consulting with the City of Vancouver on the issue, pointed to the 1100 block of Robson, parts of Denman Street and the Punjabi market area around Main Street and East 49th Avenue as retail areas that are struggling.
“Certain areas of Vancouver are hollowing out,” Patterson said.
On Denman and Robson, he suggested, it is due to higher rents, some of which is tied to rezoning potential.
“Some landlords don’t want to lower [retail] rents because it reduces the value of their building,” he said. “They would rather leave [storefronts] empty.”
Retail lease rates on Robson Street range from $120 to $250 per square foot, second highest in the city behind Alberni Street, according to a recent survey by Cushman & Wakefield.
A second-quarter 2018 study by commercial realtor Marcus & Millchap showed the average price of a retail property sold in Vancouver this year was in excess of $1,000 per square foot, up 25 per cent from 2017. Average retail rents now average $30.10 per square foot, up nearly 10 per cent from 2017, the agency added.
On south Main Street, the increasing number of vacancies is due to retailers following their customers to the Fraser Valley, Patterson said.
Commercial real estate agencies suggest the current vacancies could be a localized, short-term cycle. They note that Metro Vancouver retail spending in May, the latest figures available, reached $3.4 billion, up 5.4 per cent from May 2017 – the second-highest annual increase among major Canadian cities. Vancouver’s retail vacancy rate is 1.7 per cent, and it is 2.5 per cent downtown, both among the lowest in the country.
“Despite all the doom and gloom surrounding mid-level retail stores closing, both high-end and low-end retail, as well as food-service locations, continue to perform well,” noted Andrea Welburn, manager of information and research for Cushman & Wakefield in Vancouver.
"Without a grocery store, fewer people are going to choose to live downtown," worries Saskatoon Regional Economic Development Authority.
The table is being set for a grocery store to move into downtown Saskatoon, but it’s too early to say when, or even if, it will happen.
The Saskatoon Regional Economic Development Authority (SREDA) has various incentive programs for growth and expansion in place – although nothing specific for a grocery store – but further consideration could be given for grants and tax abatements for a potential grocery operator.
David Gauthier, SREDA’s vice-president of corporate development and investor relations, has had discussions with one “fairly large” chain that is looking at property just outside of the downtown core and another local entrepreneur considering opening up a smaller grocery store in some vacant space downtown.
“I can’t say who they are but those discussions are happening,” he said.
The closure of Good Food Junction six months ago has left a gaping hole in the service offering in downtown Saskatoon and also contributed to a rising vacancy rate in the central business district. The challenge, however, will be convincing a potential operator that there will be sufficient volume from such a store and that they could earn a big enough margin to make it worthwhile.
Downtown grocers tend to have smaller margins because of higher levels of shoplifting and higher lease costs.
It's a good time to be an office tenant in downtown Regina, according to a new report by Colliers International.
It’s a good time to be an office tenant in downtown Regina.
“There are deals to be had,” said Duncan Mayer, Saskatoon-based research manager at Colliers International. “Landlords are reducing rates. It’s the only thing they can do.”
They’re also dangling carrots such as $20-per-square-foot tenant improvement rebates to help offset some of the outfitting costs.
According to the latest National Dashboard report from Colliers on cities with populations of less than one million, Regina’s downtown office vacancy improved slightly in the first three months of the year, falling to 11.3 per cent, down from 13 per cent in 2016.
It’s a far cry from the halcyon days of just a few years ago when Regina had the lowest vacancy rate in North America for five years running at 1 per cent, enabling landlords to charge “significant” rents, Mayer said.
A combination of additional inventory hitting the market over the last couple of years at the same time the provincial government, the biggest employer in the provincial capital, was scaling back was the biggest factor in the vacancy rate heading upwards.
The increased competitiveness of downtown landlords is trickling out to the suburbs, where vacancy rates have risen to their highest levels in recent memory.
Regina is also a unique market in that civic leaders maintain tight controls over suburban development. For example, if the vacancy rate downtown is more than 6 per cent, developers are forbidden from building office space in the suburbs.