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episode # 17

The Best Real Estate Market in BC with Jeff Brown

Is there a real estate market, whether it be residential or commercial, that has attracted more hype during the pandemic than Kelowna?

This week, Cory and Matt welcome Jeff Brown, Team Leader of William Wright Commercial’s Kelowna office, to the show. They  discuss the readily growing Kelowna real estate market; what, if any, impact the BC wildfires have had on this booming city; and how does Kelowna top the recent growth heading into the fall season and beyond.

Could you imagine tripling your investment in under 36 months? Jeff tells you what asset class in Kelowna has experienced this and what that asset class will do so in the future. Kelowna was recently named the 4th fastest growing city in Canada with a population growth of over 2% in 2020 but, can Kelowna maintain this pace into the later part of 2021 and into 2022?? If you’re looking for an attractive commercial real estate investment that ticks all the boxes on the professional’s investment checklist, then look no further than Kelowna. This is a must listen to episode for all commercial real estate investors!

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Episode Summary


 

Please tell us about yourself.

I was born and raised in Burnaby and started my career in the restaurant business. I did that for quite some time, met my wife in Calgary and then we planned to move back to Vancouver. I had some connections in commercial business in Kelowna and so we decided to move the family out here about five years ago. It was more affordable for first time home buyers then. I got into commercial brokerage and really haven’t looked back. 

I love living in Kelowna; it provides a great work/life balance. People know that, which is why we’ve seen a dramatic increase in sales and prices. I joined William Wright in December and the sky’s the limit for us in the Okanagan! 

What have been the major changes in Kelowna over the last five years?

With the lake on one side and the mountains on the other, we’ve always faced a challenge of land supply. With Kelowna becoming more of a focal point for industries, everyone is fighting over the same plots of land. There’s nowhere to go but up. Industrial land in Kelowna is hard to find. The difference in prices between Vancouver and Kelowna is shrinking every month. 

People are looking for that work/life balance. If people get to work remotely, where do they want to spend their time? Kelowna provides a great option for them.

Can you tell us more about the industrial demand in Kelowna?

Lease rates for a 2000-3000 square foot industrial space would be $12-18/foot. New developers have to make up the land cost and with construction costs going up, those costs are transferred to the end user. You’d see those same lease rates in Coquitlam. People are coming up here looking for value and are surprised to see rates similar to those of the Lower Mainland.

There is so much infrastructure in Kelowna; it is truly a secondary market to Vancouver and Victoria. There are so many industries supporting this city and these prices. 

What other asset classes are doing well in Kelowna? How do they compare to Vancouver?

On the lease side, lots of people are still looking for ground floor retail space; there’s very high demand for that. We see a lot of activity on the sales side for office strata, retail strata or industrial strata. There’s huge demand to buy instead of lease. People see the value and appreciation opportunities in Kelowna across all asset classes. 

Let’s talk more about industrial land. 

When I was first getting into the market, industrial acreage used to sell for $700,000-$1.2 million/acre. That same property is now going for $2 million/acre. You’re looking at $1.8-3 million/acre if you can fit the needs of the end user, especially if there’s highway exposure. Larger parcels have seen the same level of increase. There’s at least a 100-150% increase over the last three years.

Where does Kelowna go from here?

People are looking for turnkey opportunities but are starting to understand they may need more money for new construction. On the leasing side, people have to see if they can budget for upfront improvements because we do lack inventory. On the land side or industrial side, it’s about land assembly. What can we piece together? We’ll see more off-market activity as we move forward. 

The City of Kelowna is in the process of approving their OCP for 2040. People are looking at that closely to see what the vision of the city is. As those plans move forward, we’re getting more and more calls. 

Has the developer pool changed in Kelowna?

We are seeing more mainland/international developers now looking at Kelowna. Larger investment firms are starting to take a look and consider the development of Kelowna for the long term. I think that will trickle into the tertiary markets. West Kelowna is seeing a lot of growth and that’ll continue into Penticton and Vernon. There is still value to be found in those tertiary markets that are nearby to Kelowna. Those markets will become more attractive as Kelowna booms. 

What industries are continuing to thrive?

The education sector is growing with UBCO. The Kelowna General Hospital continues to grow. Industrial construction and e-commerce are growing. I don’t see e-commerce slowing down. The airport is continuing to expand. These industries that have supported the growth of Kelowna will continue to do so over the next 10 years. The city has put in good infrastructure and investment to support those industries. 

Is the market shifting from vacation homeowners to an investor market?

Absolutely. There’s no speculation tax on commercial real estate, so we’ve seen an increase in activity. People can invest and get a return without the additional tax. The housing market also continues to benefit as more people need to move into the area. And those people are buying their primary residence.

We did see higher-end properties, like large lake front homes, hurt by the vacancy tax but on the speculation tax side, with something like a two bedroom condo, it didn’t translate the same way. People still see the value in investing in that type of real estate moving forward. 

What advice would you give to a mom and pop investor looking at Kelowna?

Industrial strata and office strata will still give you great returns. Anything commercial strata related is both affordable and desirable for an end-user, whether you’re an owner-occupier or you want to lease it out. There’s demand for people who want to lease it and good value if you want to bring your business here.

What is the cost of those types of investments?

It depends on what the needed improvements are. Built-out office space can go for $400-600/square foot, and industrial warehouse can go from $285-325/foot for just the shell space. There is that capital expenditure budget buyers will need to be aware of so they know what it will cost them to build out the space before they can tenant it. You have to consider those costs so you can lease it out successfully. 

If you can get a 2-3% cap rate on an industrial property in Vancouver, you can expect a 4-5% cap rate on a similar property in Kelowna. Can you get higher than 5%? Definitely. When I moved here it was between 5-6% but when you compare it to Lower Mainland rates, it’s still very attractive. 

Kelowna has been on a real run in both residential and commercial over the last year and a half. How do the wildfires impact that? 

Unfortunately, Kelowna has had to deal with really bad Augusts. The smoke comes in and it doesn’t leave. People who grew up here are now making plans to not be here in August. Fire insurance is extremely challenging to get. It will be interesting to see how this insurance issue plays out as wildfires remain a problem going forward. 

Sadly, that will translate into higher costs until we can figure it out. It adds a new layer of complexity to the purchase or lease process. I’m now recommending people get their insurance sorted out as they’re reviewing their lease or sale contract; it’s not something you can do at the last minute anymore. 

Can you tell us more about the last 6-8 months? Has there been a slowdown?

We’re still seeing demand; phone calls are still coming in. We might see a bit of a plateau but I don’t see the interest in Kelowna going away anytime soon. People from Vancouver and Alberta will still be coming into Kelowna. 

Where are the buyers from? Has the buyer pool changed in the last five years?

There’s local interest, and then it’s mainly demand from Vancouver, Calgary and Edmonton. But larger corporations out east or in the US have Kelowna on their radar too. But the majority of buyers are Vancouver or Alberta-based. 

What advice do you have for people getting into commercial real estate in Kelowna?

You need to have someone locally who understands the market. Having an insurance broker in place is key too. Know what your end goal is before starting a transaction process. Time flies and things move quickly here. Having people in place who will work hard on your behalf is what you’ll need to make an informed decision quickly. 

Find out more: jeff.brown@williamwright.ca 250-575-8768 

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