With one month left until the provincial election, it appears to be business as usual as far as transaction activity in the Vancouver commercial real estate market.

As we asked a couple of months ago, “does a change in government matter?” and at least from an investment and development perspective over the last 60 days, the answer is seemingly no, at least not until there is a confirmed change in government.

The latest EKOS poll shows the NDP leading with 39.3% of intended voters, with the BC Liberals at 27.3%, followed by the Greens at 16.2% and the BC Conservatives at 13.4%.

Source: BC Election 2013 Blog

As a reminder of our previous analysis, here is a look at some market indicators showing the contrast in economic performance between each party’s stay in power. Each chart has been divided to show the two parties’ terms in power (since 1995), as follows:

Cap Rates

Capitalization rates take into account many more external factors (federal interest rates, for example), and have shown compression in other markets in Canada, but Vancouver has witnessed cap rates drop moreso than others amid continued strength in the local and provincial economy since the early 2000’s.

Housing Starts

Developers will appreciate this one. After a stagnant housing market in the late 90’s, construction in Vancouver (and B.C.) went on an unprecedented run between 2002 and 2008 shortly after Gordon Campbell was elected in 2001. Of course, the global downturn in 2008/2009 put the brakes on the market, but it has bounced back relatively well despite recent forecasts of a prolonged slowdown (perhaps due to lack of confidence and risk in the provincial outlook for 2014 and beyond?)

Source: Statistics Canada

Office Vacancy Rates and Rents

Many will remember a period in the early 2000’s when new office construction wasn’t a topic of conversation in the local commercial real estate industry. In fact, confidence was so bad in 2002 with the vacancy rate hovering around 15% that Bentall decided to halt construction of Bentall 5, now one of Vancouver’s most valuable towers, at half of its height and wait for the office market to improve.

Of course, the office market has always been cyclical irrespective of the political climate. It is largely impacted by macroeconomic factors; however, a look at the Downtown Vancouver office market in terms of rents and vacancy from 1995 to 2013 shows some marked contrast between the NDP and Liberal’s reign on the province.

A Market Forecast  Under Adrian Dix?

Stay tuned next month…

How much longer can values keep going up at this rate? This is a question we are asked all the time, even by savvy and experienced investors who know the Vancouver market well. As we have documented before, there are numerous factors that have driven capitalization rates to an all-time low, many of which are external to the local market.

A trend we have noticed in recent sales however, is that many of the sellers have only held the assets for a few years.

To get a glimpse of what kind of gains these sellers are achieving, we took a look at a handful of sales in each asset class over the past two years. The criteria was as follows:

• Apartment, retail and office properties (5 each) that sold since September 2011 over $5 Million
• Properties that were acquired less than 10 years before they were sold and did not experience significant capital expenditures

From this sample set of 15 sales that took place during this period, the average annual rate of appreciation is displayed below:

Some observations taken from this sample of sales activity:

• Average property was held for 5.5 years and then sold.
• The annual appreciation ranged from 4.4% to 13.1%, and averaged 8.6%.
• Notable resales in this survey included: Bentall 5, which was sold by Deka to Bentall Kennedy after 3 years and 10% gain per year. 2450 Ontario Street sold in February 2013 also after 3 years, and also after a 10% annual gain.
• Note that the above data does not even reflect the overall return to the sellers as it does not incorporate the cash flow component of the return during the holding period. While yields have been driven to all-time lows, cash flow has historically been the bigger component of real estate returns. This should be something for all owners and buyers to think about in Vancouver.

This type of resales activity isn’t unexpected in a market that is continually being inundated with capital and buyers, many of whom are new to the market. Interestingly many of the sellers in the above survey are well-capitalized and don’t need the cash, they are simply selling based upon the view that currently achievable values aren’t sustainable in the near term. Our question is (as echoed by our clients): how long can these types of gains last?

In our view, there will be more assets coming to the market as the risks to the provincial and local economic outlook begin to pressure more owners to cash out and realize gains. In most areas, cap rates have no further room to decrease.