While the available land supply for office and residential development in downtown Vancouver is rapidly depleting, Surrey is emerging as a promising nexus of jobs and new retail development, say real estate experts.

The city is poised to experience the largest population growth in the Greater Vancouver Regional District (GVRD) between now and 2021, Royal LePage Advisors Inc. vice-president and manager Richard Wozny told a seminar at Buildex Vancouver last week.

“The analysis confirms that the regional real estate market (including Surrey) generally will remain very strong, with great promise,” said Wozny, who is also a consultant to the retail real estate industry.

Thousands of building owners, designers, developers, property and facility managers attended the two-day Buildex event at the Vancouver Convention Centre, which addressed the challenges and benefits of the city’s thriving real estate market and provided display space for more than 500 exhibitors.

Bayne Stanley photo, Business Edge
Vancouver’s small land base combines with a high concentration of condominiums and a greater population density than most North American cities.

The “four-in-one” event included Buildex, now in its 15th year, running alongside the British Columbia Construction Show, Design Northwest, and the Homebuilder and Renovator Expo.

Ron Bagan, executive managing director of Colliers International, told one Buildex seminar that private investors, who in the past have favoured industrial real estate, may face competition from institutional investors looking to get into the market.

Although investors such as pension funds have typically been too risk averse to buy land and then sit on potentially vacant land, he said the mentality of institutional investors has changed over the past two years because they can’t buy the quality of asset they want for their pension funds. Close to 40 per cent of new industrial real estate last year was speculative development, Bagan added.

Wozny said the value of retail real estate transactions is currently the largest of all non-residential real estate in the GVRD, and well-located retail space will appreciate more rapidly than in the past, particularly in the population growth areas. He added the city of Vancouver’s small land base – with its large concentration of condominiums and a greater density of population than most North American cities – is creating the opportunity for retail to go right into those dense communities and attract local residents.

“I think generally in terms of the inner urban areas, we are going to see each and every street getting better,” he said. “Retail is always exciting.”

Investors interested in retail are narrowing their scope to smaller geographic areas, which has hurt regional retail operations, says Wozny. Developers are now looking at the inner urban areas.

“People don’t want to commit to an hour each way for shopping; they already do it to commute to work.”

Typical of this is the proposed Home Depot project on West Broadway, a new concept in “big-box” stores located on a single city block, with concrete construction and structured parking at a cost of more than $15,000 per stall. Developers must rely on very strong sales to make such a project viable.

Wozny said the inventory of added retail space in the Vancouver region is expected to slow down by 2021, but greater population growth resulting in higher demand will produce more sales and higher rents.

“Retail generally has been a tremendous investment over the years,” he said. “In general, retail space looks ready to appreciate quickly in terms of sales, rents and values, in all likelihood more quickly than the other kinds of real estate.”

The allure of industrial real estate also remains strong to private investors, said Bagan. “Industrial investment, in one word, is simplicity,” he said, citing consistency and cash flow, less turnover of tenants, a low cost to replace them, and a consistent drop in the cap rate and interest rates as the attractions.

“Industrial has now taken over the No. 1 asset class in terms of investor demand across Canada.”

Industrial vacancy rates are low across Canada, with Vancouver reporting a two- per-cent vacancy rate in 2003, basically a full market.

Bagan said industrial development has been spread out over the Lower Mainland, although he predicts the area of south Burnaby is going to take off because it’s the only area with available industrial land close in at a reasonable price – about $550,000 per acre. About 300 acres are available in that area, which will see development over the next four to five years.

As for the Vancouver residential real estate market – the hottest in Canada – one analyst at Buildex said with land costs downtown reaching $100 per buildable square foot, the availability of small units for investors or first-time buyers will get tighter.

Cameron Muir, a senior market analyst with the Vancouver office of Canada Mortgage & Housing Corp., said it’s more profitable for developers to build larger, more luxurious units such as those in the new downtown Shaw Tower, selling at $600 to $700 a square foot.

The market currently has the lowest number of active listings in 10 years for used apartment condominiums, with the lowest listing-to-sales ratio since 1989. In 1999 in Greater Vancouver, there were 2,600 apartment units complete, new and unoccupied; today there are 141, and only five in the downtown core. Most of the apartment condominiums being built now, or which are still just holes in the ground, have already been pre-sold, and with the dwindling land supply and the shortage of skilled tradespeople, builders and developers are finding it increasingly difficult to respond to demand.

Muir said although prices are climbing, in terms of real dollars when adjusted for inflation they still aren’t at the level they were at in 1995. Combined with low mortgage rates, “our market here is actually more affordable than it’s been in many years,” he said.

The office real estate market is also facing a land crunch in Vancouver, and with the inability to react quickly to market dynamics, developers are becoming increasingly interested in suburban business parks, according to Royal LePage vice-president Sandy Cruickshank.

However, he said he doesn’t think there is necessarily a trend for companies to migrate out of the downtown to suburban business parks. “I think what you are seeing is a better quality of product being built in the suburban markets, and those tenants that are there are staying in that market.”

He said while it takes about three years to bring a project to market in downtown Vancouver at a current cost of $17 to $18 per square foot in property costs and taxes, suburban markets cost about $10 per square foot.

Cruickshank said when the bottom fell out of the tech market at the end of 2000, it resulted in the worst negative absorption in office space in the last 15 years.

And although there was only a positive absorption in the downtown market last year of about 2,000 square feet, it does signify a turnaround, he said, since the downtown market had about 1.2 million square feet of negative absorption in 2001 and 2002.

Right now there is about 44.5 million square feet of office inventory in the GVRD. The downtown Vancouver, Broadway and Burnaby markets make up 80 per cent of the inventory.

“We actually see absorption in the office market improving and climbing up, but it’s going to be a bit of a slow climb,” said Cruickshank.