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episode # 53

Is the Commercial Real Estate Market about to Crash? with Rod MacKay

As we approach the halfway point of 2022, people are asking; is the commercial real estate market about to crash?

Rod Mackay of William Wright Commercial’s Vancouver office is here this week to discuss the most unpredictable year we have had in real estate yet. From faster than expected rising interest rates, to record breaking month-over-month inflation, to worldwide supply chain issues… 2022 has been anything but predictable, so what does all this mean for BC’s commercial real estate markets?

Rod provides his insight on what has happened so far, what the rest of 2022 looks like, and where you can expect to see the deals… if any.

Whether you’re a business owner, a commercial real estate investor, or just someone enjoying the action this episode is another must listen!

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Episode Summary


 

How is the commercial real estate market right now? How has inflation affected the real estate market? 

In January, everyone was talking about inflation. How did that affect the commercial market? In some ways, it was positive. People were looking for hard assets to put their money into to curb the threat of inflation. Real estate was a popular choice. 

When you put your money into real estate, you get a return through a cap rate and also through appreciation. If you look back year over year, appreciation outpaces inflation. 

How has the industrial real estate market been in 2022? 

I’ve been at the Vancouver office of William Wright for four years now. Industrial is the main asset class that has been outperforming. The reason is because there’s such a lack of supply; we’re at 0.4% vacancy in industrial space in Greater Vancouver. That scares people but the reality is things are moving, but they get swallowed up quickly. You need to work with a broker who knows that area so they can help you make moves quickly. 

Are we still seeing multiple offers in industrial real estate?

Yes and no. What’s been driving the industrial commercial market is owner-occupiers. We’re still seeing a lot of activity in the market from those buyers. There’s simply not enough supply for the amount of demand out there. 

We’ve heard a lot about Metro Vancouver governments almost approving Surrey’s plans to turn 500 acres of rural land into an industrial park. That could bring millions of square feet to the market. But it will take years to assemble that land and get permits. 

Even though cap rates are dropping in industrial, there’s still a huge amount of interest from institutional buyers because industrial is seen as such a safe asset class. 

What is the vacancy rate in industrial in Greater Victoria?

Greater Victoria has the lowest industrial real estate vacancy rate at 0.2% and some of the highest lease rates in Canada. It’s unbelievable! 

How’s the office real estate market in Vancouver in 2022?

Everyone you talk to has a different answer for what happens to office space in Vancouver. Right now, the vacancy rate in office space is at 5.9%. People say that no one is looking for office space but that’s not true. A healthy market would have 8% vacancy, so we’re still below that. Before the pandemic, the office vacancy rate was around 2%. But we still have a pretty healthy market in 2022. 

Asking net rents are up 1.5% year over year and there’s a lot of construction happening. We have 5.6 million square feet of office space under construction in Greater Vancouver with lots of downtown projects in the works. 

The office market certainly isn’t dying. If developers are building this much, it can’t be all bad. Even in the suburbs, there isn’t that much office space available. Vancouver is landlocked, so eventually demand will catch up with supply. 

Are there a lot of investors in the office market? 

In downtown Vancouver, there’s a lot of large corporations who own most of the square footage in office. When you’re talking about strata ownership, it’s a different ball game and there’s a lot of demand. There are good financing options for companies who want to become owner-occupiers in the office space. 

How has the multi-family real estate market been in 2022?

We see some of the largest institutions and savviest investors in the multi-family real estate market. They’re getting about 2-3% cap rates. So why are they bothering to invest if cap rates are low? I think it’s because of the value-add opportunities. They see something promising in this market. 

There’s a lack of inventory in multi-family. So even as interest rates rise, I don’t think the demand is going anywhere. You may lose money in the short term but eventually interest rates will stabilize. The multi-family market may soften a bit but will remain steady for the long term.

Are there areas where you’ll do better than others for multi-family real estate?

Shifting to the suburbs is where you’ll find the better cap rates in multi-family.

How is the development land market in 2022? 

It’s hard to say how the development land market shakes out. Developers are weighing the increasing cost of land, rising interest rates, inflation and rising construction costs. It remains to be seen but I think interest rates will have an effect on this submarket. 

Developers will be looking to the secondary and tertiary markets as they get priced out. It’s been happening for a while. Look at Victoria. Developers from Vancouver, Toronto and the US have moved there and that momentum trickles down to the smaller markets. 

How is the retail real estate market in 2022?

At the beginning of the pandemic, there was chaos in the retail market. Sadly, we saw a lot of small businesses close. But today, there’s a lot of optimism. The streets are filling up as restrictions have been lifted. We’re starting to see spaces fill up and sales increase. 

There is still a level of risk for investors but retail is where you’ll find the best cap rates. If you can find a space with a good long term tenant, you’ll get a better cap rate than you would in other asset classes. 

As an investor, you have to consider your tenant mix. In retail, your tenants may need to apply for permits, do a build out, etc. You could be out a lot of money if your tenant goes out of business in just a few months. Finding the right tenants is critical. 

What is the biggest factor affecting commercial real estate in 2022?

The biggest factor in 2022 is interest rates. The overnight interest rate is currently at 1.5%, as of June 1st, which has risen a lot faster than many of us thought it would. We have to wait and see how that will affect the market. It takes longer to get data from the commercial market because so much is done off-market. 

Where are interest rates going?

I’m not an economist but I could see us getting to 2.5 or 3%. Higher than that is tricky, as the actual rate that people get from their bank is even higher than the overnight rate. It seems like the Bank of Canada is trying to level out inflation with these hikes. And it appears as if we’re already seeing that. So hopefully it only goes up another 1 or 1.5% from where we’re at now. Only time will tell. 

What commercial asset classes are hot right now?

We’re always talking about the industrial asset class. That’s where the tenants and the buyers are. But we are seeing a mix of everything. Pre-pandemic, I was doing a lot of office leases and we’re starting to see more of that now. We work with investors who are very bullish on retail. We’re seeing healthy demand across all asset classes in commercial real estate.

What will we say about the 2022 commercial real estate market a year or two from now?

Historically, anyone who has bought real estate in BC in the last 10 years and has held onto it has done well. It’s like they say, “Don’t wait to buy real estate. Buy real estate and wait.” It sounds simple but it’s so true. 

What commercial real estate asset class would you buy and where?

It depends what kind of investment you’re looking for. If you’re looking for something safe, you could buy industrial strata where you can get a tenant immediately. Returns may not be as high, but it’s a safe bet. If you want something riskier where you have to put in more money upfront but could reap greater rewards, you could look at retail in Victoria. 

What advice do you have for someone wanting to invest in commercial real estate?

Surround yourself with a good team. Choose a good broker. And I’ll say it again, “Don’t wait to buy real estate. Buy real estate and wait.”

Find out more: https://williamwright.ca/

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