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BC's commercial real-estate sector a land of opportunity for institutional investors

The downtown Victoria skyline in July of 2022. BC's commercial real-estate sector continues to attract investment, says William Wright Commercial Real Estate Services, despite higher interest rates and a shifting real-estate environment.  Citified.ca

BC's commercial real-estate sector a land of opportunity for institutional investors
Mike Kozakowski, Citified.ca
Citified's 'Commercial Real Estate Insight' in partnership with William Wright Commercial Real Estate Services is a monthly series covering regional commercial market activity, market updates and trends.
 
While the consumer side of the real-estate market reacts to rising interest rates and homebuyers reassess their purchasing expectations, British Columbia's commercial sector continues to draw landmark deals as investors compete for limited acquisition opportunities.
 
Cory Wright of commercial real-estate brokerage William Wright Commercial Real Estate Services says a rising interest rate environment has lead to an expected slowdown in the real-estate industry. However, BC’s growth prospects are leveraging significant interest in quality development sites, holding properties and revenue-generating mixed-use projects.
 
“Although we’re seeing a ‘pens down’ scenario in commercial real-estate with some buyers taking a wait and see approach, desirable properties are still changing hands at price points set earlier in the year as investors remain bullish on the future of the province, and in particular, its key markets of Vancouver, Victoria, Kelowna and Nanaimo,” Wright said, adding that “there may be less activity in the broader sense, but top-tier inventory continues to move, and continues to field healthy competition between purchasers.”
 
Wright says the Bank of Canada’s under-estimation of inflationary pressures in the beginning of 2022 set the economy on a higher rate trajectory than initially estimated, and in a shorter amount of time than analysts had predicted. Nevertheless, the Vancouver-based broker believes the medium term outcome will eventually produce a declining rate environment to bolster the tail end of a forecasted economic retraction by the second half of 2023, which has well-capitalized investors gearing up to take advantage of current buying opportunities despite near-term headwinds.
 
“The likelihood of rising interest rates will be with us through mid-2023, I think, at which point we are likely to see a rate pullback to re-ignite lost economic momentum after inflation is under control,” Wright says. “Once we are absent of the pressures of inflation, we fully expect the market to see a pent-up demand buying surge given the significant population growth pressures facing BC. In light of this, for investors with cash holdings, now is the time to pursue acquisitions coming to market as distressed sales, or from developers who may no longer have the financial wherewithal to pursue construction of approved inventory of housing or commercial spaces.”
 
One of the primary challenges facing the commercial real-estate market are borrowing costs, which tend to settle well above consumer lending rates, meaning developers and investors pay a premium for their holdings relative to what a consumer would pay for a similarly priced property. Down payments and equity stakes required by lenders can also rapidly change as interest rates rise, meaning cash deposits can balloon overnight, putting some players in difficult positions.
 
“As interest rates increase, the monthly mortgage payment shifts from predominantly paying down the principle under an ultra low rate scenario, to paying predominantly interest, and this can trigger an equity increase payable immediately to the lender,” Wright said. “These scenarios can make or break a less capitalized investor, and force them to list their asset for sale rather than not only carry the burden of a higher monthly mortgage, but also provide more up-front cash to hold on to the mortgage.”
 
This week the province expanded its speculation tax coverage beyond Greater Victoria, Nanaimo, Metro Vancouver and Kelowna to much of the Cowichan Valley, Ladysmith south of Nanaimo and the southern portion of the Sea to Sky Corridor north of Vancouver.
 
Speculative real-estate has played some role in BC’s housing market, but the proverbial elephant in the room has never changed.
 
“The industry has maintained that the fundamental problem with BC’s housing situation is the lack of supply, and it has perennially been tethered to a tendency for government to enact changes which can hinder, rather than bolster, the rate of new housing construction,” Wright said, and continued:
 
“That aside, we are starting to see governments at all levels coming to the realization that we cannot accommodate an annual inter-provincial migration of 100,000 people, while approaching new home construction like we did in generations past. And with that, we are seeing clear signals from elected officials that the status quo on housing is no longer good enough, and that supply is the single biggest factor impacting rising housing costs, be they ownership costs or rental rates.”
 
While all eyes are on the province as the cut-off for deciding the 2023 maximum rental rate increase nears (set annually according to the provincial consumer price index average, to July), industry leaders in BC are pointing to Seattle’s about-face on rental housing that lead to fewer government-created obstacles and produced a significant influx of purpose-built units, even leading to price reductions among some housing categories.
 
“As we combine the rising costs of land, the rapidly rising construction costs with an environment where more rent controls are possible, we may want to look to our neighbours to the south, and understand why their rental strategy was so successful over a relatively short period of time. Based on reports and professional analyses of Seattle’s housing efforts, fewer government regulations produced more housing, faster, and helped suppress rising rental rates.”
 
Given the growing awareness of the role various government restrictions, mounting development costs and lengthy project planning timelines play, there is hope institutional players facing lengthy outlooks for housing approvals and escalating delivery costs will see more government support moving forward, thereby buffering the province’s commercial real-estate sector at a time when it could use more certainty.
 
“Moving into 2023, amid the current economic climate, we have to come together to avoid a pullback among builders working to deliver purpose-built rentals, condominiums, new homes and missing middle housing stock,” Wright says. “BC’s commercial real-estate industry is exceptionally well balanced and can weather economic storms, but more certainty from government can go a long way to ensuring sufficient housing keeps being built to address the current shortfall, and adequately plan for future growth.” C
 
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