It’s our last edition of Weekly Buzz before the New Year, so it seems fitting to populate our pick of the week’s top stories with 2018 commercial real estate outlooks. Our picks discuss the future of retail and industrial sectors most notably, while suburbs outside of Vancouver make headlines for their development potential.
Here is Western Investor’s last pick of the year’s most buzz-worthy stories.
2018 outlook: Vancouver commercial real estate's new boom – Western Investor
Is commercial real estate’s new boom in industrial projects? Will commercial outshine residential in 2018? Our editor Frank O’Brien took a look at Vancouver’s growing momentum for office and industrial sectors.
The unprecedented momentum in Canada’s leading commercial real estate market will carry it well into 2018 and likely further, Vancouver analysts say.
Vancouver has Canada’s lowest office vacancy rate, and new office towers are pre-selling space at record-shattering prices.
The largest industrial developments in Metro Vancouver’s history are underway as industrial lease rates increase and strata values skyrocket.
Eager hotel developers are waging – and losing – battles for land against “insatiable demand” in the residential rental sector.
Move over, housing; commercial is the new real estate boom.
Office
Vancouver’s downtown office vacancy rate plunged 50 per cent in 2017 to 5 per cent, the lowest since 2013, and it is expected to remain at that level for the next three to four years.
The demand has moved up the launch for new office towers, but the earliest won’t open for at least two years. Strata prices and lease rates are therefore expected to top all-time highs in 2018.
Latest example: a new 30-storey Bosa Development tower sold out 170,000 square feet of Class AAA strata space in less than a week in November at an unprecedented $2,000 per square foot.
The downtown office sector is so strong it has even turned blue-chip conservative pension funds into big-time speculators.
Healthcare of Ontario Pension Plan is backing the 33-storey Waterfront Centre 2, and the Ontario Municipal Employees Retirement System is behind a new nine-storey office building and a near-500,000-square-foot tower on Melville Street. All three are being built without pre-leases in place.
The biggest office deal in 2017 involved the Ontario Pension Board and Workplace Safety and Insurance Board together taking a 25 per cent share in half of Cadillac Fairview’s downtown office portfolio, which sold for $1.25 billion.
There appears to be no lack of tenant demand, particularly from Vancouver’s expanding tech sector.
Tech giant Amazon recently pre-leased 150,000 square feet in Oxford Properties’ new office tower on Dunsmuir Street, and tech companies have taken about half of the new downtown space in the past two years.
Morguard, meanwhile, is said to be itching to start a new 25-storey office tower on West Hastings.
Commercial agents say the sales performance of the new Bosa tower has office developers erasing and rewriting their pro forma: it is expected that office lease rates for top space could edge up over $50 per square foot in 2018 for the first time.
But some analysts caution that 2017 – when office sales hit a record $1.86 billion in the first half – might have marked an investment peak.
“The re-emergence of longer periods of due diligence and more measured financial analysis may lessen the exuberance, haste and impatience that [has] characterized much of the transactional volume,” noted Avison Young in a September analysis.
Industrial
At 1.7 per cent, Metro Vancouver has Canada’s second-lowest industrial vacancy rate (behind Toronto), but the real news is the sudden spike in the region’s industrial lease rates.
They surged 12 per cent this year from 2016, the highest increase in three decades, to an average of just under $10 per square foot. Vancouver industrial strata prices are hitting $700 per square foot and cresting over $300 in the suburbs.
And, even with a limited supply, demand is on a record pace.
“Usually, in a market with so little available space, you would expect to see a slowdown in leasing activity as tenants opt to renew and stay put as finding space becomes harder,” said CBRE executive vice-president Norm Taylor. “So it’s been a surprise to see that absorption is keeping pace with last year’s record-setting numbers.”
Taylor and others expect the industrial pace to accelerate into 2018.
“With [Metro] Vancouver’s economy firing on all cylinders and next year’s GDP growth forecast to lead the nation, we will continue to attract top companies,” Taylor said.
Next year will test the appetite as a 170-acre, $350 million industrial park – the largest ever in Metro Vancouver – starts inking leases for its one-million-square-foot Phase 1.
“We aren’t building on speculation,” confirmed Tom Land, CEO and president of Montrose Properties Ltd., of its Richmond Industrial Centre, though he concedes it wouldn’t be much of a gamble in one of Canada’s biggest and tightest industrial zones.
More than three million square feet of competing space is either proposed or under construction in Richmond. As is the case across most of Metro, some is strata and nearly all is speculative.
Burnaby and Coquitlam industrial sets records – Western Investor
Developers are clearly flocking to suburban cities outside of Vancouver for available land for industrial projects as major housing projects continue to sprout up across Burnaby and Coquitlam.
With some of the largest residential and retail developments underway, Burnaby and Coquitlam are headlined as among the hottest housing markets in Metro Vancouver – but the record-setting industrial sector is also turning heads.
Burnaby set an industrial sales record two years ago as 73 properties traded hands for $230 million: in the first eight months of 2017, the 22 deals had already hit $107.6 million. The biggest sale to that date was a 279,900-square- foot warehouse on Spur Avenue that sold for $33.85 million.
“The Burnaby industrial vacancy rate is 2.8 per cent,” Avison Young noted in a mid-2017 report, but cautioned that lease rates are rising and the industrial land base is shrinking. This in turn has spurred more interest from investors, including heavy-hitters like Beedie Developments, Conwest Group, Kingsett Capital and Oxford Properties Group.
Virtually all of the recent new industrial space in Burnaby has been speculative, including the next phase of the Riverbend Business Park in South Burnaby, where Oxford is completing 327,317 square feet.
Beedie completed and sold out 115,842 square feet at Crescent Business Centre at the end of last year.
PC Urban is also in the mix, with an industrial strata project in the Brentwood area. Pricing starts at $380 per square foot.
In Coquitlam, investors have also plunged into a tight industrial market – the vacancy rate is 1.6 per cent, which is up from a record low of 0.5 per cent a year ago. The industrial lease rate has shot up to an average of $11.07 per square foot, third highest in Metro Vancouver.
The limited industrial space in Coquitlam has spurred strata speculation. Teck Construction LLP sold out all 27 units of its spec play at Coquitlam’s Nicola Avenue Business Park before the shovels hit the ground. The 68,700-square-foot complex opens this spring.
Beedie Development has a limited amount of industrial space unclaimed at its Fraser Mills site in Coquitlam, part of a new, massive mixed-use development. The main industrial part is 120,000 square feet in two buildings that can accommodate tenancies of 10,000 square feet to 80,000 square feet.
There has been a “ton of interest”, said leasing agent Greg Lane of Colliers International. Beedie is considering only tenant applications that match a specific profile.
Outlook 2018: housing slowdown in 2018 will have ripple effects – Business in Vancouver
The predicted housing supply slowdown will have social, economic and political fallout, Business in Vancouver columnist Peter Mitham predicts.
“Our housing market and our economy are becoming increasingly intertwined,” said Ryan Berlin, senior economist with the intelligence division of the Rennie Group, best known for its condo marketing programs. “If you’re going to grow the economy and add jobs, you’re going to need to import that labour. And as people move in, they need to be housed.”
But with housing development continuing to lag behind demand, not to mention population growth, Metro Vancouver’s economy is, poised to feel the pinch in 2018.
“There’s a whole bunch of reasons Amazon HQ2 won’t end up here, but one of the main reasons is how in the world are we going to find 50,000 people to work in the jobs that they’re looking to add – and where will they live?” Berlin asked.
He’s not alone in wondering.
Metro Vancouver has hitched its wagon to the technology workhorse, but speaking at the Vancouver Real Estate Strategy and Leasing Conference this past November, Colliers International senior vice-president Scott Chandler said residential real estate is the linchpin holding everything together.
“If all these big boys are coming here, how are they going to house all their employees?” he asked. “They want to try to be able to secure some of that housing ahead of time, and they’re not being able to find it.”
Don’t expect 2018 to bring relief, said Matthew Boukall, senior director, residential, with Altus Group Data Solutions Inc.
“Virtually all of the inventory that’s under construction and being delivered is pre-sold,” Boukall said. “There is no excess housing supply to meet the demand. Population growth is being kept in check by the housing supply.”
Canada Mortgage and Housing Corp. expects 2018 to deliver no more than 23,125 housing starts in Metro Vancouver and 37,500 for B.C. Both estimates are down about 8% from 2017.
Purpose-built rental starts, meanwhile, are slowly rising as developers take advantage of incentives to meet demand. David and Mark Goodman at HQ Real Estate Services Ltd. report that 1,861 new market rental units completed in 2017 and an additional 4,558 units will complete between 2018 and 2020.
Yet the new supply won’t alleviate affordability concerns, given rising land and development costs. Both are conspiring to drive the cost of new units past $3,000 a square foot in downtown Vancouver and $750 a square foot in Surrey, according to market research firm Urban Analytics Inc.
Outlook 2018: future of beleaguered retail sector resides in bricks and clicks – Business in Vancouver
The future of the retail sector will lie in the merging of online and offline sales, Peter Mitham reports.
“Retail right now is clearly more out of favour than other sectors,” he acknowledged. But within a decade, perhaps within five years, Phillips believes online and offline sales operations will function as one.
“The conversation about bricks versus clicks will have gone away because bricks and clicks will be essentially inextricable. The formats of retailing will effectively merge.”
The challenge will be eliminating the hassle of shopping while giving people a reason to show up in shops, said Michael Penalosa, managing principal of Thomas Consultants Inc. in Vancouver.
“One of the main reasons why retailers lose a sale, outside of bad service and too expensive, is a lineup – a lineup and a cashier,” he said. “Today, you can bypass that – you can go to your phone. And even better, you can get it delivered by the end of the day.”
To be successful, physical stores will have to give people a reason to show up rather than avoid them, providing the support people want when they shop online and the engagement that leads to brand loyalty.=
“If there’s no experience, I think there’s going to be a bit of trouble,” Penalosa said.
Place-making
The importance of stores accommodating people and commerce was key when Beedie Development Group broke ground October 24 at East 2nd and Quebec on a 60,000-square-foot, three-storey building for Mountain Equipment Co-op (MEC).
While traditional retail currently lacks cachet, dignitaries including Mayor Gregor Robertson touted the 35,000-square-foot flagship store the building will give MEC as a ray of social and economic light.
“Beyond the Creekside Community Centre, we do need more places for people to gather and go forth,” he said, describing the store as a “community hub.” The top floor will feature a community amenity room.
MEC has excelled at integrating e-commerce within its operations, but the fact the physical store would employ flesh-and-blood people thrilled the mayor, too.
“It’s fantastic to have this commercial job space here as well,” he said. “Green jobs in creating green buildings and selling green products are really at the core of Vancouver’s job growth.”
