Tech to drive city core office demand
Kirk Kuester
Other
Office/commercial
With just over 1.7 million square feet of office space entering the Vancouver market in 2015, several new buildings were added to the skyline, including MNP Tower, Telus Garden, 980 Howe and 745 Thurlow. This new addition of space has been highly coveted by tenants looking to upgrade and improve efficiencies, explore new ways of working and, in some cases, possibly expand. We expect this occupier trend of “flight-to-quality” to continue through 2016, while landlords of Class A and B buildings will rely heavily on creative solutions to keep occupancy levels high.
Another noticeable office market trend is the revival of strata developments. While these assets have been historically tailored to medical tenants, the low interest rate environment and strong capital appreciation in commercial real estate have driven demand toward ownership, rather than leasing. Strata office will continue to shape the market for professional services and medical occupiers, as well as intrigue other occupiers, such as technology and digital media firms.
The office sector has seen a surge of demand with the technology and digital media industries, as well as consumer goods. The technology and digital sector has consistently accounted for the highest percentage of demand, averaging 36% of total demand between 2013 and 2015. We expect demand to remain strong in this industry, particularly if the Canadian dollar remains low. As well, firms from the United States and abroad see Vancouver as a gateway to the Canadian market, taking advantage of our strong talent pool and lifestyle opportunities.
Industrial
A strong economy and a low Canadian dollar are also major driving forces for the Metro Vancouver industrial market. Consistently robust market fundamentals have led to low vacancies, solid capital appreciation and modest cash flow growth through increasing lease rates. In 2016, we expect demand to continue to outweigh supply, particularly in cities that are land-constrained or experiencing a shortage of industrial-zoned land.
The low supply of industrial land and high land and construction costs, combined with high tenant and investor demand, have increased industrial ceiling heights. While our research has shown that users prefer 30- to 32-foot-clear ceilings, expanding building heights on smaller parcels of land is becoming a necessity and a financially viable alternative for developers facing high land costs. This trend will become more apparent in 2016.
Another result of high land and construction costs has been increased demand for ownership from end users, which has fuelled the development of industrial strata projects. This presents an opportunity for developers to earn an immediate return on investment, supplementing high upfront capital costs. This, in turn, provides an opportunity for end users to buy product at a low interest rate, resulting in a cash outlay competitive to leasing.
Retail
The intertwining of retail and industrial assets is increasing as most retailers move to an omni-channel strategy. With many big brand retailers competing to absorb space around dense, urbanized, transit-oriented centres, finding a balance between location and logistics will become a challenge. As more retailers compete to offer same-day deliveries, the challenge will be to acquire industrial space with features such as high ceilings, ample parking and a sufficient truck-turning radius, all in a location close to urbanized areas.
While retailers continue to move online, vacancy rates in Metro Vancouver continue to decline, particularly in areas with high-density, mixed-use developments. We’ve seen large, master-planned developments pre-lease retail space in record time. Demand for retail strata has also been extraordinary, selling at more than $1,000 per square foot. We expect to see more demand along major corridors as municipal policies transform the streetscape and competition increases among major mixed-use developments.
Investment/land
The Vancouver land market continues to be extremely competitive despite the huge increase in land values and construction costs. Recent transactions around the downtown core have set a price per buildable square foot in the mid-$400s, highlighting strong investor and developer desire to place capital in a supply-constrained market. More generally, with a low Canadian dollar and low interest rates and bond yields, we expect 2016 to be a very competitive market as local and international investors seek product with modest yield and development potential.
Investment in commercial real estate will continue to focus around areas where municipalities encourage high density developments.
On the residential side, we expect condominium values to increase alongside rising land prices and construction costs.
Hotel
Historically, the resilient Canadian residential markets have helped fuel urban hotel sales for redevelopment or re-use as condos and apartments. While that trend has somewhat tapered, hotel buyers today are largely motivated by the underlying land value in major cities and are driven by an increasing appetite for large, full-services assets. This was best demonstrated by the sale of the Westin Bayshore in Vancouver’s West End. Given the compression of cap rates across other assets, hotel sale activity is expected to continue in 2016, driven by demand from non-traditional and traditional hotel owners.
David Goodman, Principal, HQ Commercial Realty and founder, the Goodman Report
Residential/apartments
Investors local, national and worldwide will continue to flock to Metro Vancouver’s rental apartment asset class. Housing is chronically undersupplied in our region. For 2016, expect to see more than 200 transactions amounting to between $1.5 billion and $2 billion in total sales.
We are in the midst of a hyper-competitive environment with investors experiencing extreme shortages of multi-family development sites.
A new source of sites has been added to the development landscape throughout the province. New strata termination legislation approved by the provincial government last November and expected to take effect in early 2016 will allow strata owners to terminate a strata corporation with an 80% vote of owners instead of the previous 100% requirement.
There is significant interest in older strata buildings, particularly in Greater Vancouver, being targeted for land value by the development community. The residual land value of these properties for development, in some instances, far exceeds the break-up value as a condo or co-op, resulting in a huge tax-free windfall for the owners of suites. For the developers, it’s a virtual godsend because overnight they’ve acquired access to prime sites historically off-limits.
Metro Vancouver housing
Led by Don Littleford, director of housing for Metro Vancouver, the Metro 2040 forecast indicates that we require 18,500 units per year over the next 10 years. Making up this yearly figure, 12,000 households are expected to buy, leaving 6,500 new rental housing units required each year for the next 10 years. Of these, two-thirds will be for low- and moderate-income households, or 4,700 units per year, the remaining demand of 1,800 units per year is for moderate- and higher-income households who can afford to pay market rents.
Developers shift strategy
Of late, we’ve encountered a growing trend among Lower Mainland developers and investors who had initially contemplated building condos revisiting their business plans to instead explore the viability of rental options.
The primary catalyst for this profound change in attitude are the factors contributing to the lower financial risk. Lenders are now far more eager to fund new rental project construction. They are keenly aware that there is a strong pool of tenants and investors anxious to either live in or buy rarely available new housing stock, devoid of the all-too-common maintenance and obsolescence problems. Additionally, Canada Mortgage and Housing Corp. (CMHC) insurance for rental apartment construction has made rental housing financing safer for lenders uneasy about how the property market will react to concerns about the Canadian economy in 2016.
Developers switching to rentals can forgo a costly presale program, avoid intense competition, and one would hope receive further municipal incentives for their rental initiative, such as reduced parking requirements, height and density bonuses and waived development cost levies.
New rentals
Building new rental properties in the Lower Mainland is a formidable task. With the absence of any federal or provincial tax breaks, the advent of high land and construction costs, municipal add-on charges, well-documented red tape and related processing delays, zoning and social engineering issues, a project from inception to completion can take up to five years.
While new rental supply of any stripe is generally welcome, the emphasis, particularly in Vancouver, has been on promoting and creating affordable/social housing rather than more upscale projects.
A spectacular departure has been Westbank’s recent completion of the West End’s Lauren at 1051 Broughton. It’s one of the first new highrise luxury market rental buildings in many years. It consists of 180 suites made up of junior one-bedroom, regular one-bedroom and two-bedroom units. Not only have tenants embraced this welcome new addition to Vancouver’s sophisticated market, but so should Vancouver’s development community. The numbers are compelling.
The juniors, averaging 420 square feet, are getting $4.61 a square foot (approximately $1,925 a month), the regular one-bedroom, averaging 501 square feet, is receiving $4.08 a square foot (approximately $2,045 a month) and the two-bedroom units, averaging 762 square feet, are renting at approximately $3.25-plus a square foot (over $2,300 a month depending on the floor level). The lesson here: build a well-designed, efficient building with sufficient density in the right location and, presto, the numbers make sense.
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