The week’s top stories run through the past year’s commercial real estate sales and lease activity, from Vancouver to Winnipeg. In B.C., dollar volumes of real estate transactions at an all-time high, while office leasing reflects the astronomical commercial demand both in its velocity and rental rates. Prices for strata office purchases in Vancouver have also reach stratospheric heights, while Winnipeg commercial investment is down year-over-year.
Here is Western Investor’s pick of the top commercial real estate stories published this week.
Lease rates in Vancouver top $30 per square foot but contrast starkly with Calgary’s declining rates, while activity remains steady.
All of Western Canada’s office markets have reported an increase in leasing activity, reflected in decreasing vacancy rates. However, falling demand in metro Calgary has led to compressed rental rates.
Vancouver and Calgary saw increases to their inventory but their vacancy rates dropped, according to a new report by Colliers International. Vancouver saw its vacancy rate drop for the eighth straight quarter, from 6 per cent in the third quarter of 2017 to 5.8 per cent in the fourth quarter. New supply from The West Tower at Rogers Arena (70,000 square feet), One Burrard Place (150,000 square feet) and 400 West Georgia (350,000 square feet) is not anticipated to meet user demand.
The downtown Calgary office market experienced another year of increasing vacancy in 2017 but there were some positive signs of recovery. For the first time since 2012, Colliers International recorded two consecutive quarters of positive absorption in the second and third quarters. The final quarter of 2017 brought this cycle to an end with 266,000 square feet of negative absorption. Accordingly, vacancy ballooned to 27.4 per cent in the fourth quarter of 2017, and posted an average net rent of $14.50 per square foot – less than half of Vancouver’s average rate of $31.89.
Edmonton turned a corner in the final quarter of 2017, recording its first period of positive absorption since early 2015. Tenant growth led to a decreased office vacancy of 17.2 per cent and an average rent of $18.10 per square foot.
Toronto recorded over half a million in positive absorption in Q4 2017, led by AAA Class product. High quality product continues to drive up demand and lease rates.
Real estate sales over $5 million hit a new dollar volume high in 2017, led by institutional buyer demand – however, buyer velocity is expected to slow in 2018.
A new year-end investment review from Avison Young Commercial Real Estate notes commercial real estate deals and dollar volumes have continued to rise astronomically since 2015. Avison Young cites a number of reasons behind this acceleration – primarily a divergence of market opinion between vendors and purchasers that has led to more assets for sale by owners and more demand for purchase among investors.
The report tracks B.C. office, industrial, retail and multi-family property transactions greater than $5 million. Two hundred and thirty property sales were recording in 2017, versus 147 in 2016.
2017 property sales continued to be led by redevelopment potential, regardless of asset class.
"Ongoing price appreciation in all asset classes is being driven almost exclusively by land value and redevelopment potential," says Bob Levine, principal for Avison Young. "The acquisition of retail assets has morphed in many cases into land deals with lesser consideration or interest for the income in place or the retail asset itself.”
Private investors accounted for 87 per cent of transactions in 2017 but only 46 per cent of dollar volume. Institutional buyers accounted for the other 47 per cent of dollar volume recorded in 2017. Institutional buyers were involved in most high-profile transactions of the year, including Cadillac Fairview’s downtown Vancouver office portfolio, Pacific Centre shopping mall, Oakridge Centre and Solo District office sales in Burnaby.
Retail sales in B.C. claimed the largest portion of sales dollar volume, claiming 48 per cent or $3.6 billion of 2017’s 7.5 billion investment total.
The year’s single biggest transaction was the $1.9-billion sale of Pacific Centre and surrounding office towers. It was B.C.’s second commercial real estate deal to surpass $1 billion, following the $1.05-billion sale of Bentall Centre in 2016.
Avison Young do not anticipate a billion-dollar transaction in 2018 and believes institutional buyer demand will slow, leading to an annual dollar volume decrease.
Investment dollar volume is down 12 per cent year-over-year, but expected to increase throughout 2018 as high-quality projects complete.
Winnipeg real estate investment dollar volume is down 12 per cent year-over-year, trending below the five-year average of $632 million.
A new report by Colliers International places overall sales volume at $426 million in 2017, as compared to $484 million in 2016. Investment is down approximately 125 per cent from Winnipeg’s decade-high of $966 million in 2016.
Investment volume in 2018 is expected to make a comeback in 2018, surpassing last year’s value.
“A number of larger scale listings are currently being marketed with strong buyer interest pursuing them,” the report states. “Investor demand remains robust for high quality existing investment opportunities with stable cash flows and strong tenant rosters.”
Rising interest rates aren’t expected to affect high quality real estate’s capitalization rates. However, the saturation of high quality stock coming onto the market in 2018 is likely to affect the value of lower quality buildings requiring renovations.
Residential and multi-family sales may record the most sales in 2018, as the implementation of Transit-Oriented Development (TOD) zoning as helped facilitate more real estate development not restricted to Winnipeg’s downtown core. Apartment building permits totaled $417 million in 2017 – far ahead of retail ($63M), industrial ($33M) and office ($165M) permits.
Deals for Metro Vancouver office properties are heavily disconnected from potential income, industry insider says.
A real estate conference aimed at explaining Metro Vancouver’s runaway commercial strata market concluded that prices defy logic but will likely keep increasing.
“Strata office prices are disconnected from lease rates,” Matthew MacLean, senior vice-president at Cushman Wakefield, said March 1 at the Urban Development Institute meeting in Vancouver.
Office strata prices two years ago in Metro Vancouver averaged $222 per square foot. Today they range as high as $950 per square foot in Mount Pleasant and north of $350 per square foot in Burnaby and Richmond, but lease rates have not risen in step, the conference was told.
A new downtown office building, Waterfront Centre on Cordova Street, recently pre-sold strata space at a record-snapping $2,000 per square foot.
MacLean explained that office lease rates are around $25 per square foot in Mount Pleasant, even lower in the suburbs and rarely higher than $45 per square foot for prime space downtown.
In Burnaby’s Metrotown, Sun Towers, the first commercial strata project in Metro Vancouver by a China-backed developer, is selling 100,000 square feet of commercial space, with retail from $2,600 per square foot and office space from $1,300 per square foot. All 285 residential condos in the mixed-use Sun Towers complex sold out at prices from $488,000 to more than $1.1 million per suite.
Ninety per cent of all the buyers were of Chinese descent, said Cam Good, president of Key Marketing.
Investors, he suggested, are often “second-generation” Canadians, often representing family businesses, who are buying for future appreciation, not for income.
“They buy for the lift and that is all they care about,” he said. “It is strictly a capital gain.”
Commercial real estate is attractive to offshore real estate investors, suggested MacLean, because, unlike residential, there is no 20 per cent foreign-buyer tax.
“There has been a massive shift to strata commercial,” MacLean told the conference.