Global investment interest in Metro Vancouver commercial real estate has never been greater, and, with strong economic fundamentals underpinning what will likely be the top provincial economy in Canada in 2017, that interest is not expected to wane any time soon.
Coming off a record year for investment volume in 2016 with more than $3.7 billion invested in office, industrial and retail assets across the province, the demand for commercial properties in B.C. from investors and owner-occupiers remains nearly insatiable.
Institutional and private capital – both local and foreign – remain active in the B.C. market and in 2016 resulted in the first commercial real estate transaction in B.C. history to surpass $1 billion in value. The billion-dollar sale of the Bentall Centre as well as the $427 million sale of Royal Centre marked the arrival of Vancouver on the global investment stage. This interest will be sustained as investors continue to seek the safe harbour that Metro Vancouver commercial real estate assets represent for buyers.
Metro Vancouver commercial assets’ ongoing value proposition (including capital-preservation strategies, political stability and rule of law) has proven irresistible for investors of all stripes. Investment activity is anticipated to remain strong in 2017 despite a likely return to more historical dollar volumes.
The success of B.C.’s commercial real estate sector, particularly in Metro Vancouver, has revealed the challenges facing not only those who wish to enter the commercial real estate market, but also those seeking to expand or relocate within it. Pricing has achieved record levels as the combination of a lack of supply, high land prices and physical and political boundaries to expansion drives pricing higher each year.
Near-record-low interest rates have so far provided potential buyers with the leverage needed to meet these elevated vendor expectations. Investors – particularly institutional ones – are also finding the return on investment offered by many assets too low to meet mandated portfolio thresholds necessary to trigger an acquisition. Capitalization rates remain highly compressed in all asset classes with many successful buyers disregarding cap rates as a metric if they wish to successfully acquire property.
Heightened global uncertainty triggered by the new U.S. administration will have unforeseeable impacts on commercial real estate markets throughout North America. Therefore, U.S.-based technology companies with offices in Metro Vancouver may require additional space for expansion plans to accommodate employees who also happen to be immigrants and now face challenges as they try to work in the U.S. This situation is already occurring in Metro Vancouver. Demand for office space in Metro Vancouver could also be boosted by American technology firms locating offices in B.C. to recruit and retain employees from outside the U.S. The provincial election in May might also give local business leaders pause until the outcome is decided.
The high cost of real estate in Metro Vancouver will continue to be a factor for those choosing to live or invest here, but a drag on investment activity has yet to materialize. Housing costs will remain a factor, particularly for the recruitment of C-suite executives and those in specialized leadership roles. •
Mark E. Rose is CEO of Avison Young. The Young Presidents' Organization (YPO) member will be appearing at the YPO’s March 1-3 conference in Vancouver.
