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.

West Vancouver has long been recognized as an affluent, limited-growth, high barrier to entry market among all asset classes. As a result, there has been a limited amount of transaction activity over the past several years. Valuations remain stable with continued growth as a result of lack of new supply and increasing rental rates. Current market dynamics for each asset class in West Vancouver are summarized below:

Office

Office space in West Vancouver comprises only a fraction of that available on the North Shore and is limited primarily to a handful of buildings in the Marine Drive and Bellevue areas. The balance of available space is typically in smaller strata or mixed use buildings which reflects the demand base of professional and medical services.

There have been few office transactions in this market, with pricing for larger freehold assets typically ranging in  the $450-500 per sq ft range, with cap rates of between 5.0-6.0%.

Retail

Retail continues to be in high demand in West Vancouver as an investment, particularly due to the ongoing demand on behalf of retailers to be part of this market and no new opportunities to develop. Well established nodes include Park Royal, the Marine Drive corridor, Dundarave Village and Caulfield Village Shopping Centre.

Retail assets that have traded over the past 5 years have typically been streetfront retail, with most sales occurring in the Marine Drive area. Cap rates for retail tend to be between 5.0% and 6.0% in this market, and have exhibited average prices as follows:

Apartment

The lack of sales activity for multifamily assets in West Vancouver reflects the desirability of the market from an income perspective, particularly given high demand spurred by prohibitive housing costs in the area, an aging population, and lack of opportunities for new development.

Apartment buildings that have traded have typically been at capitalization rates around 4.0% and at prices per unit of approximately $300,000 depending on the age of the building.

Bellevue Tower, 195 21st Street, a 126 unit concrete highrise apartment tower sold in June 2010 to Hollyburn Properties for $36,500,000, 3.8% cap rate.

Quick Facts on Apartment Market:

• Overall vacancy rate is 0.6%
• Overall average rent is $1,462
• 2,329 total private apartment units (not including rented condos)
• 2.1% average rent growth in 2010

Source: CMHC

For information on current opportunities in this market, contact Simon or David.

According to Colliers’ Q2 2012 Metro Vancouver Office Market Report, the Metro Vancouver office market maintained its stability once again this quarter, with the
vacancy rate decreasing minimally from 7.7 percent last quarter to 7.6 percent this quarter.

Q2 highlights:

• The Metro Vancouver vacancy rate decreased minimally from 7.7 percent in Q1 2012 to 7.6 percent in Q2 2012
• The Downtown Vancouver vacancy rate decreased to 3.5 percent this quarter, down from 3.8 percent last quarter
• Investment activity Downtown was reasonably strong, with the sale of Bentall V and several significant firms deals in place
• The Suburban vacancy rate remained unchanged from last quarter at 11.2 percent and the market as a whole was relatively slow
• Broadway Tech Centre Building 6 commenced construction this quarter after it was revealed that Golder Associates preleased approximately 130,000 square feet

Resales volume for single family houses in West Vancouver have slowed significantly, and reflects a Metro-wide trend of a definitive swing towards a buyer’s market. June 2012 was the slowest June in over 10 years, with just 30 resales. Comparatively, there were 121 sales in June 2011. Of these 30 sales last month, 20% had dropped their asking price at least once, compared with just 10% of the sales in June 2011.

Source: MLS Statistics

Resales activity for Downtown Vancouver condos (including the West End, Coal Harbour and Yaletown) have remained steady in recent months, with an overall average since 2010 of 220 sales per month. June 2012 is on pace to be one of the slower months in recent memory, and at a projected 142 sales based on MLS statistics, is anticipated to be one of the slowest Junes since 2000.

Source: MLS Stats (June 2012 estimated based on sales to June 19, 2012)

It appears that a slowdown is forthcoming, but unlike some areas, Downtown Vancouver is not a submarket with a glut of inventory coming on the market. This should bode relatively well for pricing for both new and resale product moving forward despite any correction in the market.