The future is bright for Vancouver’s commercial real estate market, with one expert labelling the city as “one of the most resilient markets in the world.”
That’s according to Paul Morassutti, chairman of commercial real estate firm CBRE, who addressed a room of hundreds of attendees at the Vancouver Real Estate Forum on April 3 about what he thinks is in store for the office, retail and industrial markets in the coming year.
“Up until five or six years ago, I would have said that the most resilient major market globally was probably London, and then Vancouver. Today, I wouldn't put London at the top. Vancouver, if you go back over the last 30 years, it just shows less volatility. It's always [been] its own little micro market. It has significant appeal to global capital, significant appeal to Southeast Asia and Asia,” he said in an interview with Glacier Media.
“You put all those things together, and those are some of the reasons why it's continued to outperform other markets.”
While this may be the case, 2024 may not be an easy year thanks to persistently high interest rates and inflation.
“We don't know how much or when interest rates will fall in 2024 but it certainly does look like they are headed low. … 2024 will not be an easy year,” he said at the forum.
However, Morassutti said that the conditions for recovery are falling into place.
Office
Vancouver’s office market is in a period of readjustment as companies adjust their space needs and the gap between new and old supply grows.
Metro Vancouver’s office vacancy rate increased to 9.5 per cent in the first quarter of this year, with downtown Vancouver’s vacancy at 10.9 per cent, according to first-quarter figures for 2024 by CBRE.
Across Canada, there is a gap of 770 basis points, which is equivalent to 0.01 per cent, between downtown Class A office space and Class B and C buildings.
“There is clearly a long-term trend towards occupying space and often less space, but in better buildings with an array of amenities, in great neighbourhoods with an excellent transit productivity and with strong environmental, social and governance,” said Morassutti.
Another challenge is the move towards decarbonization and office buildings that are designed with the climate in mind.
“This is partially due to existing incoming regulations that mandate energy efficiency and partially due to the increasing number of occupiers, lenders and investors with strong net-zero commitments. But many of these buildings have no real pathway to decarbonization,” he said.
This trend of occupying less space is most prevalent in the technology sector, where companies are looking to “right-size” or scale down their office needs.
According to Morassutti, this is a result of technology companies taking on more square footage to accommodate growth targets.
“Today, with that growth having been muted and with the additional challenge of remote work, many of these companies now find that their office footprint is too big,” he said.
“There are some people who look at that dynamic of right-sizing and they assume it's going to continue in perpetuity. It's happening over these next few years and eventually, those tenants will find their right equilibrium.”
Despite these adjustments, Vancouver has not lost a single head office, he said.
“My biggest concern for Vancouver is not companies leaving in the same way that they're leaving some markets in the U.S. My biggest concern would be does the market become so unaffordable that talent begins to look elsewhere?” said Morassutti.
Industrial
Vancouver’s industrial market is known for its persistently low vacancy and high leasing rates; however, the market is inching toward equilibrium.
Industrial vacancy for the Metro Vancouver region increased to 2.1 per cent in the first quarter of 2024, representing the first time the vacancy rate has broken through the two per cent level in the past seven years, according to an April 4 report from Colliers.
“Industrial products in Vancouver will always have a low vacancy rate and always have high rental rates,” he said.
The region has been losing potential tenants to Calgary’s market thanks to lower prices and more available space.
The average asking rent in Vancouver is $21.48 per square foot, compared to Calgary’s $11.35 per square foot, according to data from CBRE for the first quarter of 2024.
“Many logistics companies have decided it's easier to bring goods in through the Port of Vancouver, ship them to Calgary and then distribute them rather than leasing space in Vancouver because it's so expensive,” he said.
“Yes, there is still a chance that there will be some further bleeding to Alberta, but I wouldn't lose sleep at night worrying about Vancouver industrial. It's going to be just fine.”
Retail
The local retail market finished off 2023 as one of the most desirable asset classes from an investment standpoint, but Morassutti said the market is at the whim of factors like population growth and consumer sentiments.
“There has been a renaissance in retail and even among global investors. Retail has been at the top of the list for a lot of them and who would have predicted that seven or eight years ago,” he said.
Vancouver’s retail availability rate is at 1.8 per cent as of the first quarter of 2024, according to a Spring 2024 Canadian Retail Outlook by Jones Lang LaSalle IP, Inc. (JLL).
Amazon’s new office The Post in downtown Vancouver and the Oakridge Mall redevelopment, Oakridge Park are “expected to sustain the market's momentum,” said the report.
Morassutti added that in-store experience is gaining more popularity among Gen Z buyers as more retailers invest in experiential retail that goes beyond online shopping.
A 2023 study from American Express Canada showed that two-thirds of Canadian retailers believe it is crucial to attract Gen Z customers for the success of their business and that 61 per cent of customers from this generation prefer in-store shopping.
“Retail performance is very closely tied to the broader economy,” said Morassutti.
“This year won't be the greatest for retail performance, but retail in general over the last few years, … nobody had it on their bingo card, but it has really performed very well.”
