Vancouver commercial real estate market update – Q2 2023

In Q2 2023, Vancouver reported $2 billion in dollar volume, a 56% decrease year-over-year, with declines observed across all sectors. While Vancouver remained one of the hottest markets in Canada, this decline can be attributed to rising interest rates, inflationary pressures and financing challenges slowing down investment activity and driving up cap rates across all four major asset classes. Total investments throughout the first half of 2023 sat at $4 billion, a 61% decrease compared to the same period in 2022. According to Altus Group’s most recent Investment Trends Survey, Vancouver has dropped to third place from second in Q2 2022 as a preferred market by investors for all asset classes after Ottawa and Toronto, respectively.

Figure 1 - Vancouver market area: Property transactions – All sectors by year

The industrial sector posted $576 million in transactions, and although this reflects a 28% decrease year-over-year, it is the lowest decline compared to all other asset classes. Additionally, the sector reported an increase in availability rate to 2.3%, the highest rate in two years, as investors exercised more due diligence in the high-interest rate environment. Moreover, demand for industrial assets continued to outweigh supply as an aging inventory and shortage of available, developable industrial land have led to sustained activity in the development pipeline. The market plans to introduce approximately 4.6 million square feet of new supply, with nearly two-thirds pre-leased. According to Altus Group’s most recent Investment Trends Survey, Single-tenant industrial was chosen as Vancouver’s most preferred product by investors for Q2 2023.

Canada may also be on track to set a new population growth record in 2023. According to Statistics Canada, in Q2 2023, British Columbia recorded 5.4 million persons, surpassed only by Ontario (15.5 million) and Quebec (8.8 million). However, this population increase may be particularly disruptive to a market facing one of Canada’s worst housing shortages. Vancouver reported $263 million in apartment sales, a 59% decrease year-over-year. However, the apartment sector remained an investor favourite as a growing population, increased homeownership costs, and constrained supply supported asset fundamentals.

Figure 2 - Vancouver market area: Property transactions by asset class YTD (Q2 2022 vs. Q2 2023)

The industrial and apartment sectors continued to experience challenges related to limited developable land, which will drive the need for densification to support the province’s growing population. The land sector posted $959 million, a 58% decrease year-over-year primarily due to rising interest rates and limited supply hampering investment activity. The residential land sector reported $416 million, and ICI land reported $543 million, a 46% and 64% decrease year-over-year, respectively. However, residential land still comprised a large portion of overall investment volume in the Vancouver area in Q2 2023, at 26.8%.

Similar to other major Canadian markets, Vancouver’s office sector continued to experience declining leasing activity as tenants sought to rightsize their space through subleasing, with some letting go of their space entirely. To this effect, the office sector saw $71 million in investment volume, marking an 80% decrease from 2022 and the highest decline compared to other sectors. Office leasing activity also continued to decline, with 507,909 square feet of negative absorption in Q2 2023, while overall availability rates climbed to 12.1%. Furthermore, Vancouver has 29 projects under construction in Q2 2023, totaling approximately five million square feet, with 55% pre-leased, which may put added pressure on the market. Still, Vancouver continued to have the lowest office availability rate across all major markets in Canada.

Notable Q2 2023 transactions

The following are the notable transactions for the Q2 2023 Vancouver commercial real estate market update:

588 Shanghai Alley (Harmony House) - Apartment

The BC Government and the Social Service Agency in British Columbia (S.U.C.C.E.S.S) purchased Harmony House in Vancouver's Chinatown for $15,575,500. Harmony House consists of 33 units of senior residences located on the second through fourth stories of 588 Shanghai Alley. This is the BC government's second acquisition of senior residences in Vancouver’s Chinatown. In 2021, the 62-unit Grace Seniors Home was purchased for $13,700,000.

13631 Vulcan Way – ICI Land

The purchase of 13631 Vulcan Way is Conwest Group of Companies’ third acquisition this year. Purchased for $40,250,000, the 9.5-acre parcel is slated for future industrial development. While a development application has not yet been submitted to the City of Richmond, it has been suggested the property will be developed into 14 industrial strata units. This represents Conwest’s fourth purchase of industrial land in Richmond, one of which has already been developed into a 37-unit industrial development.

1145 Inlet Street – Residential Land

Ledingham McAllister’s purchase of 1145 Inlet Street represents the largest transaction of 2023 to date. The 8-acre site was purchased for $111,196,000 and has been improved with 113 strata townhouses in 15 buildings. A development application has been submitted to the City of Coquitlam to allow for an 8-phase master-planned development consisting of one 25-storey residential tower and eight (8) 6 and 7-storey residential buildings.

Figure 3 - Vancouver market area: OCR trends across four benchmark asset classes

The Vancouver Market Area market experienced continued downward momentum amid rising interest rates and inflationary pressures, with total investment down for both investment volume and transaction counts. As previously mentioned, the industrial and residential sectors continued to display resilience as new projects in the development pipeline have not kept pace with the growing demand for modern industrial facilities and housing demand. Similar to other major markets across Canada, investment transaction activity is expected to remain slow as investors continue to be cautious with their investment decisions amid the high-interest rate environment.