Vancouver Commercial Real Estate Podcast

Providing real-time insight into today's commercial real estate industry.

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August 2, 2023
VCREP #106: The Office Market is Coming Back with Kevin Johnston

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Cory and Melisa are back with an incredible episode featuring Kevin Johnston, President of Strand. Prepare for an in-depth discussion as Kevin takes center stage to share his expert perspectives on the market's current landscape, interest rates, and the latest developments coming from Strand.

Kevin unpacks the opportunities and challenges that shape Vancouver's real estate scene. From market trends to the impact of interest rates, the excitement doesn't end there—we also dive into the office asset class, which seems to be bubbling under the surface with potential.

Discover the cutting-edge projects that Strand has in the pipeline, providing a glimpse into the future of Vancouver's architectural marvels. If you're a real estate enthusiast or an investor seeking to navigate the dynamic Vancouver market, this episode is a goldmine of valuable insights.

Let's go!

Kevin Johnston joins us to talk about Strand’s latest projects, from industrial in Langford and townhouses in Nanaimo to towers in Coquitlam and office in Vancouver. What does a good development deal look like these days? And is the office market finally making a comeback?

Who is Kevin Johnston?

I’m a chartered accountant and have been in the real estate game for about 15 years. I started out on the financial side and then moved into operations. 

I joined Strand about four years ago. When I saw what Mike Mackay was building with Strand, I knew I wanted to be a part of it. We’ve become more of a household name recently, even though we’ve been around for about 45 years. Mike is very ambitious.

Can you tell us about one of Strand’s most memorable projects?

One of our great accomplishments recently was The Oaks. It’s a 400 unit, three phase, condo development in Coquitlam. It’s fully sold out and we just completed the third and final building. It’s the first condo project under Mike’s leadership at Strand.

Can you tell us about Strand’s new office project in Vancouver, Three Sixty?

Three Sixty is a 112,000 square foot office project on West 2nd in Olympic Village. It has great access to transit and the amenities in Mount Pleasant. We just broke ground on the project last week. Historically, Mount Pleasant has seen a lot of great small and medium developers come in. We wanted to invest in that.

During covid, the city increased the density in the area, specifically doubling density on our site which helped make the project more viable. Office has endured challenges through covid but we see it coming back. This isn’t a huge project and we already have a lot of interest in leasing. There are great tenants who want to be in this area and want to be in a Class A building.

Vacancy has risen and occupancy is down, but Vancouver is still one of the best office markets in North America. Investment and immigration are coming here.

Can you tell us about your Langford Heights project on the Island?

We love Langford! It’s one of the fastest growing communities in Canada. We purchased an 81 acre site in Langford that was initially envisioned as an industrial business park. We’ve since then worked with the city to turn some of Langford Heights into residential. But there’s great interest in the industrial element. We’re looking forward to having a long term footprint in the Langford market.

Typically Victoria is not a pre-lease market for industrial real estate. We’re working with interested users but no one has locked it down yet. We are moving forward with construction.

What challenges are you facing right now in the development community?

It’s a difficult time to be a developer. Revenues have either stopped growing or are just coming back while costs are rising. So margins are compressed and it’s tough to find the equity and financing you need.

Lenders are coming back and being more aggressive than they were a year ago. But it’s a question of quality. Lenders are doing more deals with fewer clients, which is tough for smaller developers. If you’re well capitalized and have great deals, you should be fine.

What markets is Strand interested in?

We just launched our second tower in Coquitlam and have a third tower coming, which are both on the back of The Oaks project. We also have 350 rental homes coming in adjacent to those condos. We’re big believers in the Coquitlam market.

We’re big believers in Surrey, Port Moody and, of course, Langford. We have a project in Nanaimo and really like that market. There’s new access to Vancouver with the fast ferry and people can still afford ground-oriented homes there. We have a 168 unit townhouse project in Nanaimo, Park & Fourth, coming to market next year.

Can you tell us more about your Nanaimo townhouse project?

These 3-4 bed townhomes will sell for $600,000 – $700,000, which is much more attainable than a townhouse in Vancouver. We’re expecting absorption rates of about 5-10 units per month. We are already looking at expanding our footprint in Nanaimo beyond this project.

You mentioned zoning changes for your office project on west 2nd, Three Sixty. Can you walk us through those?

Previously, the zoning was a 3.0 FSR. We had bought the site years ago as a holding property with tenancies. In order to demolish the existing use, the 3.0 FSR density didn’t make sense. When the city doubled that density, the numbers worked and we could move forward. We’ve created a flat iron design with lots of glass that’s quite beautiful.

The City of Vancouver looked along W 2nd to expand density on certain sites. And they’re continuing to look at other areas in Mount Pleasant where they can continue to increase density.

We have a handful of tenants who are interested in leasing at Three Sixty, everyone from tech to health services. We’re excited about all of them. More to come!

Three Sixty has a creative industrial element. What does “creative industrial” mean?

A third of the building is creative industrial, which is a throwback to the industrial roots of Mount Pleasant. The city is trying to encourage users who have a manufacturing element.

For example, Terra Breads has their bakery where they produce bread but also a storefront where you can go in and have a coffee. So a user like that would be a great fit for the creative industrial space.

What does a deal look like in 2023?

We structure deals very carefully. Not a lot of deals are working right now, which you see throughout the industry. A lot of developers aren’t able to move. At Strand, we’re being very careful. We are looking at new sites but we have to be cautious about where costs go.

How have recent interest rate hikes impacted the market?

The Fed just raised rates again in the US and the Bank of Canada did too in their most recent announcement. A lot of people think this is the end but we’ve been fooled before. The fact is they won’t stop until they’ve crushed this growth. Inflation has been stubborn and the only thing they can do is lay down the hammer.

I think the US will go into a recession next year and we may see a mild recession in Canada. Then interest rateswill start to taper off and come back down. But I don’t think they’ll ever come down to as low as they were in 2020/2021.

Ultimately, resale pricing and rents are moving in a positive direction. They have to in order to support rising costs. People are making more money so revenues will help right the ship. But where are cap rates? It’s hard to say when there aren’t a lot of transactions happening.

Strand does look at value-add opportunities. We’re looking at them across North America. Now might be a good time to purchase sites where others can’t make sense of the debt.

Where is the office market 2-3 years from now?

Two to three years from now, office real estate will be at a more regulated and stable pace. People will be back in the office; we’re seeing a push for that from larger corporations who have to do it in a way that makes sense.

One of the trends we’re seeing is people actually want more space, not less, to come back into the office. They don’t want these open, floating offices that we saw in 2018/2019. So companies will have to figure out how to accommodate that.

Are there other real estate markets Strand is looking at, such as the Okanagan?

We do look at deals in the Okanagan but we’re not as familiar with that market. We’ve actually done more business in the US than the Okanagan, since the markets are bigger. So we’re looking more for larger markets like Toronto, Calgary and south of the border.

Typically, US markets are more volatile than what we see in BC. We have immigration to insulate us against market challenges here. US markets are also more transient, so rental vacancy rates are higher. Debt is more hot and cold; institutions will shut off the tap if things start to go awry.

The 6 Pack: Getting to Know President of Strand, Kevin Johnston

Favourite bar or restaurant?

Cioppino’s and not just because I’m going there for lunch today. Lunch on their patio in the summer is hard to beat!

What would your last meal be on death row?

I’m half Italian so I have to go with a vongole pasta, which is a clam pasta.

Favourite band or musician?

The War on Drugs. It’s something I’ve been listening to lately. It’s new rock with a throwback sound. I grew up on classic rock.

What is your go-to karaoke song?

I’m not singing and people respect that! But the best karaoke experience I’ve had is when a friend sang Sledgehammer, so I might have to replicate that one.

What is one book you recommend?

Everyone listening to this podcast should read Am I Being Too Subtle? by Sam Zell. He’s a real estate tycoon from the US and has a lot of insight on how to create an enduring business.

What is something you’ve purchased for under $1500 that has had a positive impact on your life?

My first surfboard! It got me hooked on a sport that I’ve been chasing ever since. It has consumed me for the last 20-25 years. I do some surfing on Vancouver Island but I’ve done it all over the world – Maui, Indonesia, etc.

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This communication is not intended to cause or induce breach of an existing agency agreement. E&OE: All information contained herein is from sources deemed reliable, and have no reason to doubt its accuracy; however, no guarantee or responsibility is assumed thereof, and it shall not form any part of future contracts. Properties are submitted subject to errors and omissions and all information should be carefully verified. All measurements quoted herein are approximate.