One notable characteristic of the current market is that it follows a rare and unprecedented pandemic, which prompted the federal government to implement extraordinary financial support measures. These actions eventually led to the Bank of Canada (BoC) taking steps to curb runaway inflation. The BoC has since maintained elevated interest rates to achieve their target inflation rate, but the repercussions are still evident across various commercial property asset classes.
The economic landscape surrounding this bear market in commercial real estate has unique aspects. Presently, the Lower Mainland benefits from significant population growth, primarily driven by economic immigration as well as a more diversified regional economy. Importantly, we have not observed a significant surge in commercial bankruptcies during this downturn thus far.
Overall, there are reasons for optimism and positive developments in each segment of the local commercial real estate market. We anticipate that an announcement signaling a recovery from this downturn is on the horizon, paving the way for a return to full strength.
There are challenges and there are bright sides
The pandemic has had a profound impact on how and where we work, and these changes are still ongoing. Remote work has posed a significant challenge to the office market, resulting in a downtown office vacancy rate of over 10% for the first time in roughly two decades.
However, Vancouver's office vacancy rate remains one of the lowest in North America, and the shifting market means that tenants now have a greater opportunity to expand or upgrade their office space.
Certain organizations will need to cater to the growing demand for work flexibility, particularly for specialized roles that require talent from outside the local area. Successful organizations will prioritize purposeful, amenity-rich office spaces that foster collaboration, teamwork, and a strong corporate culture. These spaces should also be conveniently located near transit hubs, facilitating easy access for employees.
On the other hand, the industrial property sector is experiencing strong demand while facing a scarcity of land for development. Vancouver boasts one of the busiest ports in North America and will remain a critical supplier to many eastern and northern regions, adding further pressure to an already tight industrial market. As a result, we are witnessing the emergence of innovative and environmentally friendly industrial developments, including multi-level projects closer to the urban core and transit hubs.
While the vacancy rate remains low, we anticipate this economic downturn will alleviate some of the space constraints in the industrial sector, bringing the market closer to a state of equilibrium. This shift will create opportunities for new occupiers who are looking to relocate or expand their presence in this market.
One of the driving forces behind the demand for industrial space is the rise of e-commerce, which poses challenges for traditional brick-and-mortar retail. However, in-person retail is not experiencing a catastrophic decline. According to a survey conducted by Colliers, 87% of retailers reported that in-store purchasing remains the most profitable form of shopping. In fact, brick-and-mortar sales reached $693 billion in 2022, representing a 9% increase compared to 2021, as stated in the Colliers Tenant Survey Report 2023. While online sales in Canada saw a significant surge in 2020, reaching nearly 12%, they have since normalized to pre-pandemic levels, currently accounting for approximately 6% of total sales.
The in-person retail shopping experience generates a unique energy and presents proven opportunities to expand omni-channel sales. Robust retail activity continues to thrive in transit-oriented, mixed-use developments, while convenience-based retail anchored by grocery stores attracts substantial consumer traffic for essential products.
Additionally, the return of tourists is a positive sign, as the World Health Organization declared the end of the global health emergency caused by COVID-19 in May. Vancouver is preparing to welcome 331 cruise ships by October 24th, bringing in a record-breaking 1.3 million visitors to the city. Each ship's visit is projected to contribute an average of almost $3 million to the local economy, with these predominantly international guests arriving at Waterfront, the gateway to Vancouver's downtown area and a short walk from Gastown, Chinatown, and luxury shopping destinations.
Furthermore, there is an increase in hotel room demand in Vancouver thus far in 2023, and the number of restaurant openings has surpassed closures by a net total of 12 businesses since 2021, as reported in the State of Downtown 2023 report.
These factors, along with others, provide reasons for optimism regarding the region's commercial markets.
Commercial failings remain muted
The commercial real estate sector has shown resilience amidst the current economic challenges. Surprisingly, the number of commercial bankruptcies or overall job cuts has not yet reached the expected levels despite the significant increase in borrowing rates, elevated inflation, and overall economic slowdown. This suggests that developers, landowners, and occupiers have generally managed to navigate the market challenges and maintained stability aside from a few unfortunate business closures.
It appears that the depth of this downturn is not as severe as previous ones, and the Bank of Canada’s efforts to ease inflation seem to be working, with inflation decelerating in May to 3.4%. Economists generally are expecting flat growth or a slight decline in GDP, with interest rates potentially reducing in 2024 as the economy stabilizes.
Growing population due to economic immigration
One of the positive factors driving the national commercial real estate market is the growing population due to economic immigration. Canada's population just reached 40 million, and increased in 2022 alone by over a million people, positioning it as the fastest-growing G7 nation. A significant portion of this growth, 96%, can be attributed to international immigration, particularly in the economic immigration category.
Many of these newcomers will choose Metro Vancouver as their settling place, fueling the already strong housing market and maintaining low vacancy rates in purpose-built apartment buildings. This robust immigration trend will have a positive ripple effect on other forms of commercial investment across various asset classes.
Vancouver isn’t a one-trick economy anymore
Vancouver has successfully diversified its economy, moving away from reliance solely on the natural resources industry and associated professional services. Today, the city's economy is driven by a range of sectors including the film industry, professional services, technology, tourism, advanced education, biomedical research, port-related activities, and natural resources, which still hold a significant influence.
This economic diversity positions Vancouver favourably, and it has attracted global companies such as Amazon, Microsoft, Salesforce, and Finning International, which have established a deeper presence in the local market.
A ‘downturn buster’ is coming, eventually
While we currently face a downturn, history has shown that there is always a turning point that sparks a resurgence in the market. This "downturn buster" typically comes in the form of a major announcement or deal that brings new energy and breakthroughs to the local economy.
It’s just a matter of time.
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