Institutional and private investors pulled back from office space as they mulled the future of office space post-COVID, real estate services firm Avison Young notes
Industrial properties fared better than retail assets during the first half of 2020 as the pandemic sapped investment, a new report shows
COVID-19 hit the province’s commercial real estate market where it hurts, but the deals have kept flowing this year.
As the pandemic took hold, investment in B.C. commercial property suffered its worst first half since 2015, according to a new midyear report by Avison Young. Tracking industrial, office and retail deals valued at more than $5 million, the real estate services firm found that 84 transactions worth a total of $1.5 billion wrapped in the first six months of 2020. (Avison Young tracks multifamily sales and commercial and multifamily land sales separately.)
Despite the relatively large number of deals, dollar volume was well below the tally for the first half of 2019, whose 85 transactions clocked in at a combined $2.74 billion. It’s also a far cry from the record setter for the past decade—the first six months of 2017, which saw 109 deals and dollar volume of $5.09 billion.
“While this marked a substantial departure from the dollar volume recorded in the first halves of the previous four years,” Avison Young notes, “deal velocity in first-half 2020 remained comparable to previous years and actually marked the fourth-highest number of completed deals on record.”
For the first time since Avison Young began following B.C. commercial real estate in 1998, investment in industrial property led the pack by dollar volume for the first half, with $644 million. The 44 industrial transactions accounted for 52 percent of all deals.
Office ($629 million) and multifamily ($620 million) followed close behind, with retail ($223 million) finishing a distant fourth. “Industrial assets and multifamily properties remained at the top of investor wish lists throughout the first half of 2020 and were widely perceived as being the most resilient in the face of COVID-19 containment measures,” the report states.
Private buyers accounted for 95 percent of deals closed and 82 percent of dollar volume in the first six months of 2020, both new records. With institutional money sitting things out, Avison Young says, private investors competed among themselves.
“While COVID-19 and the impact of pandemic containment measures certainly played a role in the absence of institutional investment in the first half of 2020,” the report says, “a lack of supply of institutional-grade assets in Metro Vancouver, ongoing cap rate compression and the inability of investors to acquire assets of scale, particularly in B.C.’s robust industrial market, also contributed to institutions remaining on the sidelines.”
As for institutional investors with portfolios tilted toward retail properties—especially big enclosed regional malls—the pandemic prompted them to freeze or cancel investment decisions.
Private purchasers played a role in all of the industrial deals during the first half, plus 92 percent of retail transactions and 87 percent of office sales. Real estate investment trusts (REITs) figured in just 4 percent of deals but supplied 18 percent of dollar volume.
On the other side, private vendors accounted for 95 percent of all proceeds, Avison Young says. “Despite representing just 5 percent of the sales, institutional sellers captured 26 percent of total dollar volume as the majority of deals valued at more than $25 million in the first half of 2020 were sold by institutional owners.”
Leading the industrial segment was February’s $146-million sale of the Lake City lands in Burnaby, to local private firm Larco Investments, which plans to build a film studio there. The second- and third-largest deals, which closed in February, too: the $51-million sale of 6064 Spur Avenue and 8335 Meadow Avenue in Burnaby, and the $49.2-million acquisition of Richmond’s Viking Way Business Centre.
“Industrial assets, particularly those related to logistics/distribution and last-mile warehousing, were already in high demand due to shoppers’ ongoing embrace of e-commerce,” Avison Young says. “But the arrival of COVID-19 triggered an even more rapid shift in consumer shopping patterns in a matter of months (if not weeks), further driving demand for industrial assets.”
At the same time, manufacturers benefited from a spike in demand for various goods, Avison Young explains, while some retailers needed industrial space to support their growing online business. “All of these factors occurred in a regional industrial market that has posted near-record-low vacancy for more than four years despite millions of square feet of new development being delivered annually amid rapidly rising rental rates and asset pricing,” the report adds. “COVID-19 does not appear to have impacted industrial vacancy, rental rates or asset pricing in Metro Vancouver.”
Of the 15 office deals in the first half of the year, three dominated: April’s $225-million sale of The Landing in Vancouver’s Gastown, the $218-million acquisition of Richmond’s Crestwood Corporate Centre office park in May and the same month’s $75-million sale of the 9500 Glenlyon Parkway building in Burnaby.
Although investors are still keen on quality office properties, which remain in short supply, most private and institutional buyers had shelved any major acquisitions by April as they mulled the future of office space post-COVID, Avison Young says. “The strong demand for B.C. office assets, particularly since 2017, temporarily retreated in the latter part of the first half of 2020 and will likely remain muted for the rest of 2020.”
Noting that this pullback is a trend in urban office markets worldwide, Avison Young is bullish on the Vancouver region. “Metro Vancouver’s strong office market fundamentals, including near-record-low vacancy downtown and in the suburbs, rental-rate appreciation and limited new supply being delivered regionally in the next three years, will continue to attract and hold investors’ attention in 2021 and beyond as economic activity normalizes.”
Let’s not go to the mall
Retail property deals fell to their lowest ebb since the first six months of 2011. “The 25 retail sales completed in the first half of 2020 largely consisted of small suburban strip malls, strata retail units in new developments and select retail storefronts in popular shopping districts in Vancouver and North Vancouver,” Avison Young explains. “The largest retail sale, the $21.15-million acquisition of two retail buildings at a busy intersection in Coquitlam, was largely based on the likely mixed-use redevelopment potential of the property.”
As the reports points out, property with land value and development potential has driven the retail market over the past five years. Such assets were scarce in the first half, helping drive a decline in deal and dollar volume that began in 2019.
Meanwhile, the shuttering of enclosed malls during the COVID lockdown—followed by reduced foot traffic when they reopened—and the rise of e-commerce left investors shy to pursue big traditional retail deals. Here, Avison Young singles out “assets that do not include a redevelopment component and/or lack the stabilized income necessary to carry the asset through multiyear rezoning and development permitting processes.”
Winners and losers
Looking ahead, Avison Young sees demand for industrial and multifamily properties driving the B.C. commercial real estate market for the rest of the year. “On the industrial side, logistics/distribution, e-commerce, select manufacturing related to home improvement, food processing and PPE providers as well as the film/television production industry remain active and eager to acquire/lease industrial space to accommodate demands that have arisen as a result of COVID-19.”
When it comes to retail, the pandemic only made things worse for traditional assets already facing headwinds from e-commerce, the report says. But deals will continue, Avison Young predicts, citing properties such as retail strata units and single-tenant storefronts in established shopping districts. “Retail assets with underlying land value that can be unlocked through mixed-use redevelopment will continue to transact as long as some certainty regarding permitting timelines is provided.”