Will Vancouver Commercial Real Estate Have the Same Fate as the Housing Bubble?

Will Vancouver Commercial Real Estate Have the Same Fate as the Housing Bubble?
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Altus Group, a provider of commercial real estate services, reported that real estate transactions in Vancouver were up 34% in just one quarter, the sixth straight quarter of growth. $3.75 billion in deal flow was recorded by Altus, 875 of those deals exceeded $1 million and 19 transactions for more than $25 million.

The increase in commercial real estate sales could be partly attributed to foreign nationals redirecting their investment dollars to avoid the 15% tax on foreign home buyers in British Columbia. More than one-third of $3.75 billion in commercial real estate sales so far this year came from Germany, China and U.S. investors.

Will the fact that the B.C. government has implemented a retroactive poorly thought out tax on foreign home buyers in such short order affect the sentiment of foreign commercial real estate investors, knowing that such tactics could be created without any warning?

Paul Richter, Director of Altus Data Solutions Canada stated “The record-setting first half of 2016 has been fueled by a combination of both high value asset trades as well as a sharp uptick in the deal velocity, the diversity in the market in terms of asset-by-asset contribution at all price levels, will remain key in maintaining momentum going forward.”

Momentum may get stifled as Canadian pension funds have quietly begun liquidating B.C. commercial real estate. Bloomberg reported that Cadillac Fairview, a subsidiary of The Ontario Teachers’ Pension Plan, is looking to raise $2 billion dollars by selling some of Vancouver’s best known properties, including Granville Square and Pacific Centre, the second most profitable shopping mall in Canada according to a report by Avison Young.

Healthcare of Ontario Pension Plan is reducing their real estate portfolio in B.C. by 17% with the nine office tower business park in Burnaby listed at $400 million, while Ivanhoe, a subsidiary of Caisse de dépôt et placement du Québec reduced their commercial real estate investment in B.C. by 28% by selling off the Fairmont Hotel Vancouver and the Bentall Centre.

Are Pension funds preparing for a long-term decline in commercial real estate activity in Vancouver and is it being perpetuated by falling capitalization rates? The cap rate of downtown Vancouver office space plunged 26.31% from the last quarter of 2013 to the second quarter of 2016. In addition, six proposed office units in Downtown Vancouver will deliver over 1,595,000 sf of space, not including existing construction underway and another three buildings with undetermined build areas.

We’ll have to wait and see what happens before year end to determine the 2017 commercial real estate outlook for Vancouver.

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