Cautious Optimism in Greater Vancouver Commercial Real Estate Market

2024 Greater Vancouver Commercial Real Estate Trends (Squamish to Chilliwack)

Cautious optimism exists in the Vancouver commercial real estate market, despite hesitation among some investors amid growing concerns over how current conditions will play out, according to the RE/MAX 2024 Commercial Real Estate Report. Recovery has been slow from last year’s pull back, but tides are expected to turn with the Bank of Canada’s first interest rate cut.

Last year was one of the softest years on record in terms of commercial real estate in the Greater Vancouver Area and industry leaders had hoped for a return to more normal levels of activity in 2024. There was a slight uptick in the number of investors looking at available properties in the first quarter, but the swell was quashed by the federal government’s April announcement raising the inclusion rate for the capital gains tax to 66 per cent. Sellers immediately pulled back on listings.

Cap rates are up on industrial, retail and office product as a result, while multi-family has remained relatively stable due to low vacancy rates in the city. The multi-family asset class has proven to be a safe and secure investment, but some investors avoid multi-family because of the provinces’ Residential Tenancies Act that makes it more difficult for landlords to keep up with inflation.

The asset class has been bolstered by Canada Housing and Mortgage Corporation’s (CMHC) Apartment Construction Loan Program, which promises builders and developers preferred rates and longer amortization periods. The program was topped up by another $15 billion in April as part of the government’s Canada Builds program. The federal government has also cancelled Goods and Services Taxes (GST) on purpose-built rentals.

Vacancy rates in Vancouver hovered at just under one per cent in October 2023, according to the CMHC’s Rental Market Report, with the rental rate of an average two-bedroom apartment up almost nine per cent year over year. Purpose-built rental apartment inventory rose by 3,144 new units in 2023, with most of the available rentals located in the City of Vancouver and Surrey. There is a greater percentage of rentals coming into market now than in years past, with Southeast Vancouver, the Tri-Cities, and Surrey expected to see the largest growth in rental supply in the near future.

In the coveted industrial asset class, availability sat at 4.2 per cent in the first quarter of 2024, up two full percentage points from the same period one year ago, according to Altus Group. Leasing is getting tougher, with industrial in the downtown core particularly hard hit, as tenant pools wane and absorption moderates. Vacancy rates are expected to climb as more space opens up in coming months. Landlords need to be more cognizant of lease rate price adjustments in the market to be competitive.

Little new industrial product is expected to come to market as a lack of developable industrial land and residential intensification takes precedence. Movement of B.C. businesses to industrial markets in Alberta is climbing, especially if the client is looking for large tracts of development land. It’s easier to find 40-to-60-acre properties ideal for manufacturing facilities and distribution centres in Alberta than it is in Vancouver, where the cost would be extraordinary. Those leaving the province are typically looking for the availability of space and rail access, typically choosing either Calgary (where cost savings are greater for those seeking rail access) or Edmonton. Some BC businesses that need to be close to ports are looking at US markets such as Seattle and Portland.

Availability rates in the office sector are amongst the lowest in the country at 12.4 per cent, according to Q1 2024 statistics compiled by Altus Group. Most tenants are content to remain in their current premises. Some are downsizing, but most landlords are willing to work with existing tenants rather than search an increasingly narrow tenant pool. Landlords that are selling their properties tend to be looking to diversify their portfolios while those that are looking at product are interested in the lower cap rates. While downtown office performance is soft, an interesting dynamic is emerging in the suburbs. Strata buildings are holding their price per sq. ft. Fully tenanted buildings offered lower cap rates than those buildings with vacant units. Owner-investors are particularly interested in these properties for their own use and are willing to pay a higher dollar value for a property that has an existing vacancy they can assume, allowing the tenants to help subsidize their purchase.

Retail has seen a shift in tenants in recent years, moving from more traditional retailers such as clothing or jewellery stores to service-based offices and restaurants. Vacancy rates have remained steady at 2.3 per cent, with scant new retail development coming to markets. Smaller mixed-use commercial is an attractive option well-suited to medical consulting firms, therapeutic offices, and daycare facilities. However, a chronic shortage of daycare space in the lower mainland has created upward pressure on values. Commercially zoned daycares require parking requirements that allow for the creation of a playground or, alternatively, a rooftop playground, which are increasingly hard to find. The demand has only increased as more daycares are needed as the population in the lower mainland continues to grow.

Several malls within the Greater Vancouver area, including Squamish to Chilliwack, are considering the addition of a residential component, including purpose-built rentals, condominiums, retail and offices. Perhaps one of the best examples is the first phase of the redevelopment of Oakridge Park, which is scheduled to open in Spring 2025. The 650,000 sq. ft. mall includes a strong tenant mix, including stand-alone shops for luxury retailers such as Prada, Louis Vuitton, MaxMara and Moncler and an abundance of dining options within a mixed-use residential/office/retail community. In Langley, Willowbrook Shopping Centre recently completed its expansion/renovation, adding another 140,000 sq. ft. of space including food precinct, outdoor pedestrian shopping, and gathering spaces. Applications have been submitted for seven new residential high-rise towers on adjacent properties by two different developers.

Those in the development business tend to hold onto assets that bring in income and tend to move when the timing is right, given how large and costly redevelopment can be. Land is finite in the lower mainland and as such, regardless of how successful the retail business is, the community need for higher densification trumps all. For all shopping developments moving forward, there will likely be residential component included. While strip plazas may be targeted for residential conversion in other areas of the country, the high cost of land coupled with today’s interest rates make the prospect less appealing. Older strip malls not generating enough rent could be a better target.

Downtown retail has had its challenges, especially in high-rent districts, including Granville and Robson. Given an increase in vandalism in the area, there’s been an exodus by some businesses to shut down or relocate to other neighbourhoods.

Real Estate Investment Trust’s (REIT) and institutional investors remain cautious, although are prepared to move if the deal makes sense. No one is over-leveraging their portfolio at present, especially given tight lending policies currently in place for commercial real estate, with some lenders asking for 40 to 60 per cent down. Deals are increasingly difficult to keep together in a business environment that is not conducive to growth, but the promise of an end to quantitative financing down the road and lower interest rates have investors keeping their eyes open.