Vancouver Commercial Real Estate Podcast

Where is BC’s hottest real estate market? How do you analyze and reposition a deal? And what 3 lessons do all real estate investors need to learn? William Wright Commercial’s Cory Wright shares all. Get ready to supercharge your commercial investment strategy! 

You were recently listed as an EY Entrepreneur Of The Year 2023 Pacific regional finalist, in addition to being a 40 Under 40 recipient last year. Congratulations!

I was just excited to go to the Ernst & Young buffet! I think if you win the whole thing you end up at a big event in Monaco. The founder of Knix won it last year.

Why do you like commercial real estate as an investment?

I had a bad experience in the condo market; it was a renter who wouldn’t pay and wouldn’t leave. We had to go through the RTB and sue her before she would leave. When she did leave, she left all her stuff which we had to deal with. Luckily, the market had gone up enough that we still made money on the sale.

In commercial, you have triple net leases and every landlord gets to create their own lease that tenants have to abide with. You also have a lot of diversity in commercial being able to invest in different asset classes. There are a lot of opportunities and untapped markets still for investors.

How did you decide to start your own brokerage? 

Before I started William Wright Commercial, I had an idea of how commercial real estate could work. I tried out my theories in residential first and still remember lugging my signs on the skytrain doing a few open houses every weekend.

We’re now ten years into William Wright Commercial. I knew there were areas we could improve on when we started; one of those areas was customer service. I wanted to take a different approach to this business. We went big into the digital side of things. We’re now 55 people across 7 offices in BC and growing.

Instead of having one hub office in Vancouver, we have seven different offices around the province. By having more offices in more markets, we have boots on the ground and can offer local knowledge. You don’t realize how important that local knowledge is until you get there. Those relationships with the local community are essential.

When covid hit, it put a new onus on the secondary markets that we were going to anyway. That expedited our expansion. I thought the company would either die or it’d be like pouring gas on the fire. We ended up opening two offices in the middle of covid. It worked out tremendously and we grew more than we ever anticipated.

Not a lot of companies in our industry could operate at the same pace as we could during covid because of the overhead of having one huge office. But we were go-go-go the whole time, which allowed us to shoot out the other side like a rocket. We were able to capitalize on the secondary markets sooner.

We like the idea of being a big fish in a small pond. Right now we’re the only commercial company in Kamloops. Which is fine by me; we’ll just do all the business!

We do business differently. With time, clients come to expect that and the market has to keep up with us. We have clients who own assets in Kelowna, Kamloops, the Island, etc. Because we have offices across the province, we offer them a one stop shop.

Your pace of investing and putting deals together is second to none. So how is the market right now?

In the medium to long term, real estate in any asset class in this province will win out because of supply and demand. We have immigration, geographical constraints, political challenges, etc. Being locked down in BC was a lot different than being locked down in Manitoba. Is there a better place to get stuck? Everyone wants to be here.

In the medium to long term, BC real estate will be your best investment.

In the short term, the only thing that has changed is the interest rate. You’re paying more interest but the future value hasn’t changed. You just have to be smarter about what you’re buying.

You need to be able to get equity into your property quickly, refinance out and de-risk your investment. You want to be in a position where you don’t get hurt when interest rates move.

Rents need to outpace interest rates. In a lot of these areas, the rental income is not going to go down. For example, Nanaimo is only going to keep growing. As more people come in, those people will need to work somewhere.

If your deal doesn’t work when the interest rate goes up 25 basis points, it didn’t work before. If you’re cautious, now is the best time to buy.

How do you analyze a deal?

You want to find a market with legacy leases – a lease that is ending its term soon in a market that has changed dramatically. It’s set to have a once-in-a-lifetime increase in rent. For example, rents in Yaletown once went from $40 to $80. But the next increase was probably only $80 to $85.

In these secondary markets, the vacancy rate isn’t far off what you find in the Lower Mainland. And in industrial real estate in Victoria, the vacancy rate is actually lower than in Vancouver! So you want to look for high population growth and low vacancy. That allows you to buy with confidence even in a high interest rate market because the rents can sustain it.

To find a good commercial investment, you’re looking for:

1. Legacy leases
2. Asset classes with low vacancy
3. Above average population growth

Based on that criteria, I think the secondary markets have the greatest opportunities. A lot of those markets, like Nanaimo, are very liveable and attracting new residents. Especially with the fast ferry from Nanaimo to Vancouver, it makes commuting much easier.

Is Vancouver a good reference for BC’s secondary markets? 

If you look at these secondary markets, a lot of the metrics are the same as we have in Vancouver. You just have to make sure you’re investing based on current income, not future income. A lot of people can’t see past the high interest rates right now.

How do you find deals?

A lot of stuff in secondary markets actually is listed, so they’re not hidden deals. But people just aren’t buying right now because of the high interest rates. But there are still opportunities if you run your numbers, look at lease rates and look at vacancy rates. There are also opportunities for buyers with vendor take-back mortgages.

How do you reposition an asset?

Three steps to repositioning an asset:

Step 1: What are the current lease rates in the building and what are market lease rates in the area? If your building is well below market lease rates, that could be an opportunity.

Step 2: What do the other buildings in the area offer in order to charge those higher lease rates? If your building is old and the one you’re comparing to is new, you probably can’t command the same rent price. But maybe there are renovations you can do.

Step 3: When do the leases in your building expire? If they’re coming up in the next 12-18 months, you know you can get a lift in rents in a short period of time. That allows you to move the debt out of that building and into a new property.

You also have to look at the vacancy rates in your asset class. If there are not many places for a tenant to go, they’re more likely to sign a higher lease with you. There’s a cost to moving, so most tenants will stay if the price increase isn’t exorbitant.

How do you find lease comps?

Leases are private contracts between a landlord and a tenant. There isn’t a central database you can go to check. So this is where having boots on the ground really comes into play. Local commercial brokers should have access to data in that market.

What is a triple net lease?

A triple net lease is where a tenant pays the basic rent as well as triple net costs. The basic rent is a fixed number for the term of the year that we negotiate as a fair market value. The additional costs are the landlord’s costs of operating the building. This could be HVAC maintenance, elevator repairs, insurance, property taxes, strata fees, etc. Those costs are all passed onto the tenant, even as they go up over the years.

In residential, if your strata fees or property taxes go up or if you’re hit with a special levy, that eats into your numbers because the rent you’re charging your tenants is fixed. Whereas in commercial, all of those additional costs are passed onto the tenant to absorb.

In a market with high vacancy rates, the tenant has more negotiating power. Tenants can review leases and agree or disagree with certain terms. Landlords may have to offer certain incentives and negotiate terms. But a triple net lease will usually cover all of the landlord’s operating costs, whether you’re in Vancouver or Edmonton. It would just be a matter of a tenant having the ability to nitpick certain things in the lease.

You hear horror stories about the office market in the US and places like Calgary. Are we seeing vacancy rates go up in Vancouver’s office market? 

Downtown Vancouver is basically an island. It’s 70% condos and hotels and 30% office space. In Seattle, it’s the opposite. Vancouver is not traditionally a head office city. Pre-covid we had an unhealthy sub 3% vacancy rate in the office market and now it’s 8-10%. The media will tell us this is scary but it’s a similar vacancy rate to New York. The geographical constraints of Vancouver will save the day.

In Calgary, they were – and still are – so heavily invested in one industry. When that industry had challenges, they were vulnerable. We’re seeing the same thing in San Francisco with tech as that industry pulls back.

Things will change for offices in Vancouver. But I think incoming immigration will correct any blips in the Vancouver office market.

Are we seeing challenges and high vacancy rates in other asset classes besides office? What about retail?

Well-positioned retail will always be busy. Everyone thought retail would die during covid but my dentist isn’t coming to my house, my barber isn’t coming, Footlocker isn’t bringing all of their shoes to my house for me to try on, etc. The face of retail might change but the marketplace will do well overall.

Demand hasn’t gone anywhere. People still want to buy commercial properties, they’re just scared of the high interest rates.

What’s your favourite market in BC?

Nanaimo. I like office, believe it or not, in Nanaimo. Industrial is great but right now there are only six office buildings in Nanaimo and it will probably still be six in 10 years because land is so expensive.
Right now, no one wants to build new office space in Nanaimo. You’re asking to go bankrupt. Construction costs are so expensive, making these older assets really attractive.

Why did you go into the Harris Green district in Victoria? 

Victoria is a government city and the government is pandemic-proof; they still occupy space. The Harris-Green district was a prime area for the city to densify, which they need to do as a constrained island. Victoria also has tourism and education, which brings in a lot of people.

When it’s all said and done, there will be something like 6600 condos in the Harris Green district. It reminds me of Yaletown. That population is going to come in and they are going to want retail offerings in their area. If there’s not enough retail space and a large population, retail tenants will pay to be there.

What are some of the biggest lessons investors need to learn?

Location is key in commercial real estate. If you’re a block or two off the main drag, it can drastically affect your vacancy rate. There’s a property in Kamloops that is a block from where it should be and the retail space sat vacant for two years.

You need to understand the vacancy rate. High cap rates are great if you have tenants but will flush through if you have high vacancy.

Most leases restrict your ability to charge back capital improvement costs, like fixing a roof. So you need to have a thorough inspection done to make sure the building doesn’t have a lot of deferred maintenance. That will really affect your numbers.

So the three rules for commercial investors are:

1. Location, location, location
2. Understand your vacancy rate
3. Get a good building inspection to avoid deferred maintenance 

The 5 Wire: Getting to Know the Founder and Managing Director of William Wright Commercial (& VCREP host!), Cory Wright

What is one book you recommend?

I just finished Extreme Ownership by Jocko Willink. It was really good! If you get the audiobook, he has the voice to tell the story. He’s an ex Navy SEAL and it’s all about accountability.

Good to Great by James C Collins is like the bible. Everyone has to read that. Robert Iger, the CEO of Disney, has a great autobiography called The Ride of a Lifetime. Little Black Stretchy Pants by Chip Wilson, the CEO of Lululemon, is another great read. People think he’s just a dumb jock but you get a whole new respect for what he did for that company.

What new belief, behaviour or habit has improved your life?

Improved, and hindered, my life is my Peloton. It gets me ready for the day but I have had some injuries. How do you even fall off a stationary bike? It hurt my face and my ego!

What have you been binge watching lately?

I’m rewatching Selling Sunset. It’s tacky but I’ve watched Suits so many times that I need to find something else. Don’t judge me!

What is one piece of advice you’d give your 18 year old self?

Slow down. I put a lot of pressure on myself to hustle and get to a certain place. I needed to slow down, absorb and learn.

What is something you’ve purchased recently for less than $1500 that has changed your life?

This putter that I bought. It’s tailor-made. I went from missing every putt to getting one out of every eighteen.