Insatiable demand for office and industrial space by investors and occupiers, and new approaches to the evolving retail marketplace continue to stoke Metro Vancouver’s commercial property market, real estate insiders say.
Large deals for trophy assets once again marked Vancouver’s bullish commercial market during 2018.
In the office category, Telus and Westbank Corp. sold Telus Gardens during the summer. The 24-storey, 500,000-square-foot office tower sits at the northeast corner of West Georgia and Seymour Street and also includes residential condos and retail. The sale to an undisclosed buyer was believed to be valued at about $600 million, making it the region’s largest office transaction of the year.
Demand high, office vacancy “unbelievably low”
Investment and new developments in downtown Vancouver have been encouraged by tremendous demand from occupiers.
“We’ve seen a consistent decline in vacancy rates over the last 12 months . . . resulting in the lowest vacancy rate (at the end of December) that Vancouver has ever seen,” said Colin Scarlett, an office specialist and executive vice-president with Colliers International in Vancouver.
He said downtown Vancouver’s vacancy rate dropped from 3.9 to three per cent. Suburban office demand also remained strong, falling from 5.8 to 3.9 per cent at year’s end.
“Those are unbelievably low numbers,” Scarlett said, adding Vancouver and Toronto now have the lowest office vacancy rates in North America.
One of the main drivers during the past year has been the robust co-working industry, led mostly by WeWork and Spaces, which offer flexible short-term memberships to both individuals and all forms of businesses, including massive enterprise firms.
Scarlett and others predict up to 30 per cent of downtown Vancouver office space could eventually be taken up by co-working users. Spaces alone transacted on 223,000 square feet of office space in Vancouver last year, Scarlett said.
“(Co-working) is really being driven by uncertainty (by tenants) and capital expenses,” Scarlett said. “If a company from the U.S. wants to come to Vancouver and test the waters, then it’s really easy to do that from a co-working perspective.”
The co-working trend shows no signs of slowing. “The demand from the end user is going to continue to be really strong.”
Retail market evolves, remains strong
One of the largest deals of the year in the retail class was the sale of City Square, a mixed-use retail and office complex on Cambie Street near City Hall, said David Knight, a vice-president and retail specialist with Colliers.
The 246,000-square-feet complex includes a three-storey shopping mall with 50 tenants, as well as two six-storey office towers.
Colliers declined to disclose the sale price, and the buyer has not been publicly disclosed, but Knight underscored the deal as one of the top retail transactions of the year.
“This sale was unique and significant as it was a very large-core, high-profile asset located within close proximity to downtown Vancouver and across the street from rapid transit,” Knight said. “There’s a common misconception that retail is going away or that it’s diminishing. I would say that (retail) is becoming different.”
New trends in retail
One trend is that retailers, from clothing shops to retail banks, are seeking smaller spaces.
“Instead of having banks that are 5,000 to 7,000 square feet, now you have banks wanting to be 2,000 to 3,000 square feet because a lot of the functions that customers are going to the branch for are all done by financial tech solutions now,” he said.
“You’re seeing a constant downsizing and shifting of retailers into different-size categories. We’re starting to see developers adapt to design on new projects to help accommodate the change in retail.”
Large institutional investors, including pension funds, remain eager to own retail in Metro Vancouver’s urban core, he said. “They want to own retail, but they’re risk averse. That’s why you see upward pressure on pricing for well-positioned retail centres.”
More sophisticated investors prefer retail located near transit hubs, which have become centres of major redevelopment and densification. These include places such as Brentwood Town Centre in Burnaby, Marine Gateway and — eventually — Vancouver’s Oakridge Centre.
Industrial space, land in short supply
Two major industrial deals stood out in 2018, said Chris MacCauley, an industrial specialist and senior vice-president with CBRE.
In the largest industrial lease of the year, GWL Realty Advisors (GWLRA) announced in September Amazon would take a 450,000-square-foot logistics space at Delta iPort, a new industrial park being developed by GWLRA for project owner the Healthcare of Ontario Pension Plan (HOOPP). The development is on lands leased from the Tsawwassen First Nation (TFN).
Hungerford told RENX the deal was the largest private land deal in the city in the last 10 years in terms of space. It plans to redevelop the site for an industrial use.
The region’s industrial market is now in the grips of a major shortage of space, compounded by a lack of available land for development.
“For the fourth year in a row, we’ve seen demand consistently outpace supply,” MacCauley said. “For the longest time, we’ve been telling policy makers and different municipalities that we’re getting to a critical state.”
Regional industrial vacancy hit 1.4 per cent in 2018. “Certain municipalities are at basically zero per cent,” he said. “You look at places like Abbotsford, Surrey; they are around 0.5 per cent.”
Food preparation plants and consumer goods distribution buildings continue to drive the Metro Vancouver industrial market.
Companies which have never operated in the region are now seeking spaces of 500,000 to one million square feet.
“We’ve been telling people for the longest time that we’re running out of industrial lands and industrial opportunities,” he said. “Now I think we’re finally at that state where there’s going to be an economic impact to the province of not having these availabilities moving forward.”