With less than 200,000 SF of new office space built since the completion of Bentall 5 in 2007, and a vacancy rate hovering below 5%, there is finally some new supply on the horizon. Only Jameson House and the Hotel Georgia offices, both commercial strata office space in mixed-use projects have been built since that time, adding approximately 130,000 SF.
In 2014-2015, over 1,000,000 SF will be added to the downtown market with the addition of 745 Thurlow, Telus Garden and MNP Tower (1021 West Hastings). All three are at varying stages of demolition or excavation.
A two-storey retail building has sold at the Southwest corner of Denman and West Georgia Streets in Downtown Vancouver. The building is 9,400 sq ft and tenants include the Running Room. The purchase price was $7,360,000, equating to $780 per sq ft.
Over the past few years, a significant proportion of the increasing value of commercial real estate in Vancouver has been attributed to declining capitalization rates. This so-called “cap-rate compression” has been evidenced by seemingly perpetual price appreciation in Vancouver throughout the past several years, with only a small blip in the markets in late 2008 and early 2009. Since that time, cap rates have followed the march of the bond market.
When will we witness the end of declining capitalization rates? Logic would dictate that this trend cannot be sustained; however, with continued low bond yields, debt financing can continue to be characterized as ‘cheap’, and many investors will continue to be attracted to Vancouver’s overall low-risk profile.
Yields on 5-year bonds are forecast to increase approximately 50 basis points by the end of 2013. This may have an impact on lower-tier properties and those in secondary markets, where average yields may increase by as much as 50-100 BPS. On the other hand, with continued global economic uncertainty, Vancouver may benefit from sustained low interest rates and a ‘safe’ outlook, particularly in core areas where there remains high barriers to new supply.