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episode # 1

Commercial Real Estate for Dummies

Have you ever wondered how commercial real estate works or better yet what it even is? We got you covered with the launch of the Vancouver “Commercial” Real Estate Podcast hosted by Cory Wright. To kick things off Cory welcomes very special guests and co-hosts Adam & Matt Scalena, aka Cory’s new boss, to help break down the commercial real estate world and help educate with commercial 101.  What asset classes fall within the commercial industry, where to buy, how to buy, and everything in between Cory breaks down everything you need to know to get started. This episode will start a  journey into the commercial real estate industry within British Columbia so grab a seat, get a drink, and sit back and let Cory open up the mysterious world of commercial real estate in one of the most competitive and sought after real estate markets in the world.

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Episode Summary


 

Can you give us a general overview of commercial real estate in Vancouver since the pandemic? 

There was a lot of uncertainty going into the pandemic and we are happy to say the market has not imploded on itself. Vancouver was in a position where we could take a bit of a blow because we had some of the lowest vacancy rates in North America. 

Tech is one of the largest drivers in our industry. A lot of the largest leases signed recently in Vancouver were for the tech industry and there has been a scramble to keep up with that. The absorption rate of space coming in is very healthy. 

People were scared for Vancouver when covid first hit but it sounds like we’ve weathered the storm quite well.

Some asset classes have been affected more than others, like restaurants and hotels. But if you look internationally, and particularly in the US, people are starting to come back to tourism and hospitality. I think we’ll have a strong 2022/2023 in tourism and in commercial real estate. We weren’t sure if we ever would get back to normal, so it’s encouraging to see people want to come back. 

It seems every month people are more eagre to get back to the office. Without the office, you don’t have that same company culture. After 9/11, people said that no one would live in a high-rise or work in an office building ever again. But we’re creatures of habit and like to go back to what we know best. So I think things will go back to how they were before, but with some new modifications. 

Commercial real estate is a completely different world from residential, which is why we started this show. What is commercial real estate?

Commercial real estate is so much more accessible to people than they realize. There are six asset classes: retail, office, industrial, multi-family, development land and hotels. A sub-sector of the industrial market is self-storage, which has gained a lot of traction in recent years. 

Let’s dig into each asset class and look at how the pandemic has affected that market. Can we start with retail?

Retail, besides hotels, has been affected the most by covid. Retail is everything from restaurants to a small mom and pop shop. Covid has accelerated the change of retail. 

Landlords will need to be conscious of the tenants they’re putting in – will these businesses make it through big events like a pandemic? Unfortunately, we’ll see more mom and pop shops pushed out, especially in cities like Vancouver, and now Victoria and Kelowna, with high rent. We’ll see more medical-based retail or international type retailers than the local guys. 

Are we through the carnage of covid? What does that look like for retail?

We suffer from lack of inventory on a good day. Anyone in retail who is still standing right now has a high probability of getting through this. For example with restaurants, there’s currently no dining indoors but there’s patio season coming up, expanded patios and new optimism in the market. Business owners have learned a lot this year. The patios that have spilled out onto the street this past year have made cities better. Hopefully those will be permanent and help restaurants all summer long. 

If we look at interest rates, they’re a third of what they were a year ago. The carnage was not as bad as everyone thought, there’s not as much supply as we thought and there are low interest rates. That makes for a competitive landscape for buyers, high prices and multiple offers. 

Inventory is low across the board. People who were thinking about buying retail may have hit the breaks but there wasn’t an oversupply like people thought there would be. 

Let’s talk about the office market. 

Pre-pandemic, we were at a sub 3% vacancy rate in the city. There’s about 4.5 million square feet coming to market very soon and the absorption rate for that space was very high pre-pandemic. There are rumours about some companies not moving forward with their commitments, which could affect supply. A balanced office market is probably 7-9% and some reports say we’re up to 6% now in Vancouver.

The tech industry is our saving grace in Vancouver. They’re taking up more space. The tech industry grew during the pandemic and it’s one of our largest tenants in the city. Tech will save our office market. 

With so many people working from home, especially tech employees, we’d think they wouldn’t need the office space. But that’s not the case?

That’s not what we’re seeing. Employers want an office culture, retention, etc. That’s hard to create over video. A lot of things get said during the turmoil but don’t come to fruition. I think if you look 12-24 months down the road, we’ll see the office market back to the way it was. We have big demand coming into the city.

Our numbers are low, compared to places like San Francisco and New York. So there’s still room to grow. 

Why are the vacancy rates so low in Vancouver?

The talent we have here in Vancouver, our proximity to Seattle and San Francisco, and the liveability really affect vacancy rates in the office market. We’re easily accessible by boat and plane. Like on the residential side, there’s only so much land available. If we need more office space, we have the same challenges as the downtown residential market. 

As companies like Amazon come in, those employees are going to want to live downtown. They’ll be high earners and will be able to afford to live, shop and eat downtown. That will drive the downtown marketplace back to where it was pre-pandemic. 

Is there investment opportunities in the office space or is that just for the big players?

There is not a lot of strata office available in Vancouver. If you’re a mom and pop investor, you probably aren’t spending $2500/foot for office space. A lot of the space downtown is owned by pension funds and institutions. With future guests on this show, we’ll talk about how you can participate in things like that to buy into those buildings. 

Let’s talk industrial.

Pre-pandemic, it was hard to find good industrial. Cities see these enormous lot sizes and want to use them for housing, which shrinks the industrial pool. On the flip side, we’re now seeing smaller industrial strata properties but the zoning is flexible, allowing for more diverse tenants. So inventory is dwindling but the tenant pool is growing which is creating perfect storms for landlords and huge increases in rent. 

For example, in Richmond we have small bay industrial zones where you can now have professional services, like a law firm or accounting firm. So you have the growth of the tech industry (who can sell online and don’t need downtown office space), flexible zoning, dwindling supply, and lease rates that are much cheaper than retail. 

Those factors explain what’s happening in industrial right now. The numbers are very attractive for investors. 

Let’s move onto development land and multi-family.

No more land is coming into play. Vancouver hasn’t grown and there’s no more land available for investors. There’s a competitive fever out there. We haven’t seen much of a pullback in this market since the pandemic. A lot of land is in multiple offer situations because of lack of supply. 

In 2018/2019, there was a lot of uncertainty in the housing market as the NDP threw money on the demand problems. But now we haven’t talked about foreign buyers in the last year and there’s been very little immigration, and the market is still growing out of control. Which tells us it’s a supply issue. And you change that by making development easier – less red tape and less costs for developers to get projects off the ground. 

What happens when borders reopen? It’s going to create a chaotic housing market for 2022/2023. I don’t know what more local governments can throw at it. It’s not a foreign buyer issue; it’s a supply and demand issue. 

Multi-family vacancy rates haven’t grown to where we thought they would, considering we don’t have immigration and international students. So that’s a positive for when we reopen; vacancy rates in multi-family should remain consistent. But housing prices and lease rates will continue to grow. Demand will swell and landlords will get that market price. This will push rental rates up. 

Multi-family is known for low capitalization rates. Why do people still buy in Vancouver when cap rates are so low?

The marketplace for multi-family is more than institutional buyers. There is an achievable level for people to get into this marketplace. The vacancy rate is so low, which is the trade off for the low cap rates. You don’t want to pay for your own risk. If you can get a 5% cap rate but with a 10% vacancy rate, your actual cap rate is much lower. A lot of people will pay more knowing they’ll be fully occupied, or close to, throughout the year. 

In Victoria, cap rates were 5-6% a few years ago and now they’re closer to 3%. People recognized you could get a better cap rate in Victoria but with a similar low vacancy rate as Vancouver, which increased demand. 

The landscape for multi-family is more competitive, with institutions, pension funds and mom and pop investors all involved, which pushes prices up and cap rates down. 

With low cap rates, is the play just mortgage paydown or appreciation like it is in the residential market?

It depends on the purchaser’s level of risk. You’re banking on high leases paying down your mortgage. There’s not a lot of growth opportunity outside of that unless you find a sub-market with better rates. 

How does pricing work in commercial real estate? 

There are many factors. There’s the value of your tenant. Starbucks is going to be more valuable to a landlord than Cory’s Coffee Shop. Lease rates play a factor. What is the market rent today? In a non-strata situation, is there development potential in the land? From there, we look at comparables. It’s hard to put a standard price per foot on commercial real estate. 

Last but not least, what’s happening with hotels and hospitality?

Without a doubt, this has been the asset class that has suffered the most in Vancouver throughout the pandemic. Hotels have some challenges ahead of themselves. I do think tourism is coming back and that will be the saving grace. But going from a massive operation to 0-20% revenue for 1-2 years and then all of a sudden having to start over is going to be a big challenge. 

There are a lot of things behind the scenes with hotels. We see a Marriott hotel and assume they have tons of locations so will be fine. But Marriott is the licensing brand or management company; they’re not the owners. 

I’m hopeful we’ll have a strong tourism season by the end of this summer and into 2022. But some challenges ahead for sure. Hotels will have to start over. It’s a hard thing to do but they will have to look at it as a brand new opening. 

What excited you about commercial real estate? 

I always had a passion for business. One thing about commercial is that you’re working with all kinds of clients and helping to grow a community. I like helping people go from A to B. Helping clients envision their goals and achieve them through commercial real estate is really exciting. 

Commercial real estate is achievable for a lot of people out there. Please reach out with questions, comments or show ideas. We want to educate people and let them know what is happening and what is available to them! 

Reach out to cory@williamwright.ca and find out more at https://williamwright.ca/

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