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episode # 252

Opportunities in BC’s Commercial Real Estate Market with Cory Wright

People are working from home, restaurants have moved to delivery, clothing stores are selling online, but England has just approved a vaccine; so what does this mean for commercial real estate in Vancouver and B.C.? This week, Managing Broker of William Wright Commercial & VREP Commercial Correspondent, Cory Wright, joins Adam & Matt to discuss the strengths and weaknesses in the commercial real estate market and highlight some HUGE opportunities. How’s the retail market? Can you get a deal on an office space? And has Covid19 had an impact on BC’s red-hot industrial market? Cory discusses these questions and which regions he sees opportunity for growth. Whether you are interested in commercial or residential real estate, this episode will not disappoint!

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Episode Summary


 

What is the current perception of commercial real estate and the reality?

People think it’s dead. But if any market can take it, it’s Vancouver. We’ve transitioned from having one space available and ten potential tenants to maybe having three spaces available and five potential tenants. But five is still bigger than three. So as long as absorption stays steady, things will hold. Does that change 6-12 months from now? Maybe. But so far the absorption of the available product has been overwhelming. 

Let’s talk about retail space. With many places going out of business or hanging on by a thread, what are you seeing?

Retail is without a doubt the most challenging asset class. Pre-pandemic, retail had been changing a lot over the years. The face of retail was already changing but covid has expedited that. Unfortunately, some smaller businesses might not make it out the other side. 

We’re seeing a lot more professional services and medical practices coming into retail for the exposure. For example, we’re seeing dentists on a retail level instead of six floors up. I think this trend will continue. Crises always inspire change. We’ll see that escalated over the next 24 months. 

So many more companies are coming into Vancouver and all of them have medical plans. So having medical services on the retail level where they get that exposure helps their business. Retail is a copy-cat industry so once one person does it, everyone follows. 

Let’s move into office space. With a lot of people working from home, does that mean offices are sitting empty?

There’s a lot more product on the market than we’ve seen in past years. There are a lot of subleases available. There are a lot of great opportunities in the downtown core on subleasing at below-market rates, especially short-term contracts. I think the office market will propel itself and come back. Every time people have said the office market is dead, like after 9/11 or after the 2008 financial crisis, the market has boomed again. The office market is resilient. 

Because tech is such a huge driver of our office market here in Vancouver, we won’t be as scarred by the pandemic. We’ll have hiccups but we’ll be able to weather the storm better than some other communities, like Calgary, for example. 

We’ve been hearing the office is dead and that mental health issues are prevalent amongst people stuck at home. People don’t seem to be as happy working from home and they want to get back to social spaces. Are we in for a “Roaring 20’s” coming out of this? 

We’ve had this massive build up of anticipation for the second wave and everyone has been fearing the fall. Come spring when we can get out of our houses, people will want to get back to business. Hopefully that’s coupled with a vaccine or treatment. But I think there will be a lot of excitement on the other side that will spur business. 

Some countries have had rollbacks and gone back into lockdowns. But we know what to anticipate now. So there’s not that looming fear. People know how to live with it and are taking new safety measures. As a society, we’re adjusting. Ultimately, we have to move on. The government funding can only last so long. We have to get back to business in a new form. People are itching to do that and so are companies. 

Let’s talk about industrial space.

It was a hot market going into covid and it’ll be even hotter coming out. Industrial spaces have gotten smaller and the zoning is more flexible, which has increased the tenant pool. We have a large amount of owner-occupiers. The price point is cheaper, but has been rising. Coming out of this, it’s going to be a harder market to get into. A lot of retailers have been forced to think digitally. They can now take warehouse space instead of paying retail rent. A lot of companies are having to reevaluate their strategy. 

The marketplace for industrial has done extremely well but no one thought it was going to do this well in this short of a time period. 

We’ll be hearing the term “beds and sheds” a lot, referring to multi-family and industrial. Cities are shrinking the amount of land available and the tenant pool is growing. Industrial will be harder to get into than it was six months ago. On the multi-family side, people always need somewhere to live, pandemic or not. 

Multi-family has weathered the storm of this pandemic very well. How’s it looking?

While expenses are going up each year and there’s currently a rent freeze, interest rates are low and so are vacancy rates. So even if the cap rate is lower, there’s very little risk for investors. Many people are looking for safe haven investments. 

BC has become this oasis and investors are looking here. Investors from California are looking to reposition their portfolios here. And many in the movie/TV industry are moving full productions up to Vancouver. 

You’re now opening your fifth brokerage office, this one in Kelowna. Why Kelowna?

We’ve been following this market for the last five years. The pandemic will probably push more people to this marketplace and so many employment opportunities are thriving here. We think Kelowna is a sure-bet market to get into. Cap rates in Kelowna could be double what they are in Vancouver, with similar vacancy rates. 

How have you thought of 2020 in terms of uncertainty and risk? 

The reality is we can’t fold up shop. In any good business, you have to adapt. Looking at historical crises, we’ve always come out okay and have had to keep going. Some people and companies looked at this as a time to take a break and resume down the road. We didn’t do that as a company. We decided to keep going. We had to make changes very quickly. 

When your competition goes on hiatus, that’s the time to accelerate your growth. We’ve been very fortunate to work with great people. Your number one asset is always your people. It was a collaborative effort and we were all on the same page. Because we’ve been so active during this time period, investors have come to us to help them with their product. We don’t plan on slowing down anytime soon. 

We’re growing. We’ve expanded our Victoria office, we’re moving into Kelowna, and we’re hiring people in our Vancouver office. There’s not a lot of people who just do commercial real estate. We were social distancing before it was the norm! We can grow at a faster pace because we don’t require as much space. 

What would you suggest to someone who wants to get into commercial real estate with a limited budget?

Go outside the Lower Mainland and look at places like Victoria, Nanaimo or Kelowna. Those places are going to see growth and the price point isn’t overwhelming. People are intimidated by commercial but most of the owners are just like your neighbours. Once people realize it’s not as intimidating as they thought, they expand their portfolio. 

And we’re here to help. We have management companies that can handle that side of the building. We hold buyers’ hands and teach them what they’re buying and how it operates. 

In Kelowna, you’re seeing 4-6% for cap rates. You can find product for as little as $250,000-400,000. To buy those, you’re looking at 20-25% down with slightly different closing costs. So you can get into those markets for a lot cheaper than buying a condo downtown. 

There’s also the triple-net lease factor. Landlords get paid a base rent price as well as triple-net costs that fluctuate year to year. So as your expenses as a landlord go up, you pass those expenses onto the tenant. It’s a safety net for investors.   

Lease terms are negotiable. When demand spikes, inventory drops and landlords can ask for 5 or 10 year leases. Most terms are 10 years in prime markets. You’ll see as little as three years, but those terms are increasing as demand increases. Landlords want security. 

Why are you excited about areas outside of Vancouver like Kelowna, Kamloops or Victoria? 

If I have $100,000 and I’m getting a return, I’d rather get 4-5% than 2-3%. You have to look at vacancy rates. The cap rate only works if the market is fully leased. You may see 7-9% cap rates in Alberta, but with 15% vacancy rates. So those numbers are actually similar to ours. People prefer to buy in BC even if the cap rates are lower, because the vacancy rates are so low there’s no risk. So in these areas outside of Vancouver, you see those low vacancy rates as well as cap rates higher than you’d get in the city. 

In a Victoria multi-family, you’d see a 5% cap rate 2-3 years ago. Now, that same product is turning at a 3.5% cap rate. But it’s still higher than what you’d get in Vancouver, and the vacancy rate is the same.

If you see a market with a high cap rate, dig deeper and find out the vacancy rate for that asset class. That is what you have to factor into your annual numbers.

In Kelowna, multi-family vacancy rates are around 2.5%. In the office market, it was 4% pre-pandemic. You also want to know about the absorption rate for new product. If the absorption rate is low, inventory will spike and as a landlord, you’ll lose money. You need to have someone local who knows the market and you need to be getting the right information.

Why Kelowna specifically?

We look for how many industries are supporting a marketplace. There are so many thriving industries in Kelowna: tech, real estate, tourism, etc. As those industries take off, other things like education and healthcare match them. The economy is well-supported and not dependent on just one industry, like what we see in Calgary. 

Are you seeing a light at the end of the tunnel?

100%. The positive news on vaccines is helping people see that light. We went through this during the spring/summer so we know what to expect during a second lockdown. We hope the next spring will see us out on the other side. People are feeling that this is the beginning of the end. There’s a lot of optimism out there. Low interest rates are making things attractive. We haven’t had the same carnage as some other cities; it hasn’t been as bad as we expected. Things will be okay. 

Notes on the condo market downtown:

Vancouver is landlocked. There’s only so much space here. These new companies coming in are going to create lots of new jobs and their employees will be well paid. Those employees will be able to afford the costs of downtown living: condo prices and the rents. I see the market bouncing back. 

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

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