High Vancouver land prices test city’s office strata ceiling

Developers grapple with doubts over buyer demand at $10 million per floor

3 Vets co-owners Jerry (left) and Keith Wolfman pulled the plug on their long-serving outdoor equipment store in December after 70 years in business. The property at Yukon and 6th Avenue was assessed at roughly $12 million in 2017. It’s sale closed in December for $20.4 million | Dan Toulgoet/Vancouver Courier

The developer behind the $20.4 million purchase of the 3 Vets outdoor store site on Yukon Street in Vancouver concedes that the final strata prices on its planned four-storey commercial building could surpass $10 million per floor.

The “complicated and confidential” deal for the 18,147-square-foot Mount Pleasant site closed in December at a per-square-foot land price of more than $1,100, confirmed Byron Chard, chief financial and acquisitions officer at Chard Development.

With a permitted floor space ratio (FSR) of 3, Chard is planning a 54,000-square-foot building that includes a mix of light industrial topped with three floors of offices. All of the space will be sold, not leased.

The per-buildable-square-foot value is pegged at $377.

Construction costs for a low-rise, Class A office building in Vancouver are in the $340-per-square-foot range, but can spike to more than $500 per square foot when interior fit-out is added, according to the Altus Group’s 2018 Construction Cost Guide.

Chard recently sold out a similar three-storey project nearby on West 7th Avenue at $900 per square foot – $10 million per floor – and the CFO said “it is possible” the 3 Vets project will be priced much higher.

The 3 Vets site had been assessed at $6.3 million in 2016, but values had spiked to nearly $12 million as of last July, a reflection of soaring land prices following a Vancouver city zoning change that allowed higher commercial density in much of Mount Pleasant.

The BC Assessment Authority calculates property on its “best and highest” use, so potential development, not the actual use of the property, dictates the assessed value. As a result, annual city property taxes for the owners of 2200 Yukon, who had operated 3 Vets for 70 years, had rocketed to more than $90,000, according to 3 Vets co-owner Jerry Wolfman.

Just blocks away, at 224 West 8thAvenue, developer Rendition paid $9.5 million a year ago for a 12,078-square-foot commercial site. The land value pencils out to $791 per square foot, but the 3 FSR zoning works out to $262 per buildable square foot for the planned 36,258-square-foot, four-storey office and industrial building.

These prices do not reflect the typical two-year delay in securing city building permits or construction, financing or marketing costs.

The question, as in the residential condo sector, is how deep the appetite is for new space that might consistently top four figures per square foot. Apparently, commercial buyers are confident that land and lease prices will continue to increase, so buying appears to be the smartest strategy in a tight commercial market.

Vancouver has Canada’s second-lowest industrial vacancy rate (behind Toronto), at 1.7%, and industrial lease rates are up 12% from a year ago. Meanwhile, Vancouver’s office vacancy rate plunged 50% in 2017 to 5%, the lowest since 2013.

“Investing in commercial real estate is more beneficial than leasing. When you purchase commercial real estate, you control your property,” said Cecilia Tse, senior vice-president, Colliers International. “With prices anticipated to increase throughout 2018, buyers are able to take advantage of asset appreciation.” •