2013 has been relatively quiet for the sale of office buildings in Metro Vancouver. There were no major downtown office buildings sold in the past year; though there were a number of sizable deals elsewhere in the region.

Here are the top 5 office deals in Metro Vancouver in 2013 (ranked by purchase price):

1. Discovery Parks Building, 887 Great Northern Way – Dundee REIT acquired the building through a share sale in May for a total purchase price of $66,135,000. The 165,000 SF building was developed in 2002 by Discovery Parks. It is fully leased and includes tenants such as QLT Inc., and 1-800-GOT-JUNK. The cap rate was reported to be 6.2%.

 
2. Surrey Central Business Park – Concert Properties‘ sale of Surrey Central Business Park was one of the larger deals of the year at $59,700,000. This five building, 350,000 SF portfolio was bought by a local investor. This sale was linked with another of Concert’s assets in Burnaby.

 
3. 1770 West 7th Avenue – just a few weeks ago this sale was announced. Chip Wilson, former CEO of Lululemon acquired this 5-storey, 75,000 SF office building located at Burrard and West 7th. The building, built in 1985, was sold for $32,625,000, or $430 per SF.

4. 3500 – 3650 Gilmore Way – this sale was part of Concert’s portfolio sale of suburban office assets. The $30,700,000 purchase price equates to $295 per SF.

5. 33991 Gladys Avenue – this newly constructed 3-storey, 71,500 SF office building was sold by the developer to a local private investor for $20,250,000. The building was 85% leased to the Federal Government.

The Goldilocks Bakery property at the Southwest corner of West Broadway and Fir has sold for $4,350,000. The 6,250 SF site was listed for sale for $4,500,000. The Bakery does not have a lease and will likely vacate.

It’s been a great 5 years for owners of the City’s older office buildings. Amid near-record low vacancy and high rents, B and C Class buildings have enjoyed all-time high valuations in 2013, particularly those located in ‘hip’ areas like Yaletown and Gastown. This trend has been exhibited in a number of recent sales, including: 576 Seymour Street, 1445 West Georgia Street and 1112 West Pender, all of which sold at cap rates roughly half of what they would have been just 7 or 8 years ago. Are owners of older office buildings looking to cash out on gains? Well, not really….yet. While many would likely agree that there are risks to the outlook for office leasing fundamentals going forward, vacancy and rental rates are only beginning to feel negative pressure. Here’s a look at some trends in the leasing market:

B Class buildings in particular are expected to feel pressure as the upward movement of tenants throughout the market is fuelled by the new construction of AAA Class buildings downtown.

Compare that with the run-up in values over the past ten years:

Ten years ago, half-empty older downtown buildings often sold for as low as $100 per SF, and now they are trading often as high as new product in other markets. Cap rate compression in this subset has also reflected the market at large.

As leasing fundamentals are expected to show a more pronounced weakening around the same time that interest rates finally show upward movement (ie. early 2015), expect to see more activity in this subset of the commercial real estate market, with more sellers looking to cash out on existing tenancies, as well as renewed pressure for conversion to hotel or residential.

Conversion in particular is a much more difficult strategy than it was a decade ago, when the loss of older commercial space prompted the City of Vancouver to initiate a moratorium on the conversion or demolition of commercial space in core areas (the Metro Core Jobs Study).