Vancouver Commercial Real Estate Podcast

How are investors feeling in 2023? When is the time to buy and what asset class is outperforming the rest? Stay tuned as Impact Commercial’s Alan Haigh shares what we can expect in commercial real estate in 2023!

Who is Alan Haigh?

I’m the Managing Partner at Impact Commercial and do a lot of things when it comes to financing commercial real estate. I’ve been busy lately with all of the conversations around inflation and interest rates.

What does commercial real estate in 2023 look like?

Honestly, I don’t know. We thought inflation would be tamed earlier than this. There was a lot of talk in 2022 about how inflation was transitory and would be worked out quickly. But unfortunately, we haven’t seen it come down.

With the Bank of Canada and the Federal Reserve, it seems to be a story of expecting the unexpected. They raised rates more aggressively than we thought they would in 2022.

Right now, people are waiting to get clarity. A lot of people are sitting on their hands waiting to see what happens before they buy a multi-million dollar commercial property.

It feels like we’ve been in a prolonged period of inflation. Will we see relief from inflation and high interest rates in 2023?

On the positive side, I’m seeing more cracks these days. It feels like we’re closer to the top of the tightening cycle than the bottom. The big rate hikes from the Bank of Canada seem to be over. I’m shocked that our jobs are still growing at such an impressive clip despite 7% inflation. So if you’re the Bank of Canada, what do you do?

We understand why the Bank of Canada is doing what they’re doing. We follow both the overnight rate and the yield curve. Right now, we’re in an inverted yield curve where short term rates are higher than longer term rates due to policy changes. That usually leads to a recession.

A lot of financial institutions are predicting rates will come down. For now, you have to live with what’s happening. But good times will return!

When will interest rates drop?

I think the overnight rate will go up one or two more times this year, by about 25 basis points each time, to justify inflation. I think we’ve got 12 months of the overnight rate being at about this level. I wish I had better news but that’s just where we’re at with interest rates right now.

What is coming across your desk right now? How has commercial lending fared recently?

We are seeing a slowdown right now, but I don’t worry about it. There’s so much strength and positivity in the BC marketplace that once we get through this speed bump, we’ll go back up. With immigration coming in, it’s inevitable that our market will go gang-busters!

We’re working with clients and creatively trying to help entrepreneurial individuals achieve their goals. We’re seeing a lot more owner-occupiers who are committed to the long term. They still want good properties located by transit corridors for their products and staff. The success of their business in the long term is more important than a higher interest rate.

We’re also seeing construction come back, which we haven’t seen over the last few months.

Has the lending criteria changed for owner-occupiers?

No, the lending criteria for owner-occupiers hasn’t changed much. There’s still a lot of liquidity out there.

As an owner-occupier, you can use all of the net operating income from your business to support your mortgage. This is different from when you’re an investor and the income from the property has to support the mortgage.

When you’re in a strong business, sure, your income will have to go to higher mortgage payments instead of dividends to shareholders. But at least you’re securing your property for the long term.

I was meeting with a client this morning and when you have a 20-30 year mindset, you have different considerations. A small interest rate increase pales in comparison to recruiting good staff who will stay with you for the next 5, 10 or 15 years.

Getting the right property, even at a higher interest rate, is more important when you have a longer term view.

With higher interest rates, where are people looking for deals in commercial real estate in 2023?

We have a very entrepreneurial group of clients. The city of Vancouver has become so institutional, so a lot of entrepreneurs and investors are looking outside of the city. The Interior and the Island keep blowing up. I’m amazed at what is coming in from places like Parksville, Nanaimo, Campbell River, Kamloops, Penticton, etc.

5-10 years ago, no one would look outside the Lower Mainland. Now, it’s more often than not that entrepreneurs are looking outside the Lower Mainland for their next purchase.

Has there been a shift in any one asset class during this period of high interest rates?

The biggest asset classes right now are industrial and multi-family rental. Industrial probably has the most robust buyers and the fundamentals are so strong. With industrial commercial real estate, it’s important to be near urban areas but that asset class is blowing up everywhere.

Multi-family rentals are needed for the mass immigration coming in, so the market is strong. You can see opportunities in every area. I’m seeing them mostly in the secondary markets right now where you can find higher cap rates and less competition. We’re seeing more transactions there. Lenders are happy to go to the Interior or Vancouver Island for multi-family rental properties.

When is the right time to buy commercial real estate?

Last September, everyone wanted to kick the can into the new year. But now we’re in 2023 and we’re thinking Q2 is going to be an opportunistic time to secure some properties.

The institutions we are talking to have more moderate goals for this year. They’re taking a pause for Q1 but in Q2 and Q3 they’ll be looking for opportunities. So Q2 or Q3 might be a good time to purchase.

What makes a good deal in commercial real estate in 2023?

If you’re not an owner-occupier (which is lower risk), then you need to understand that if there’s no risk, there’s no reward. If you can get the right asset, in the right location with the right tenant profile, you need to jump on it right now.

You need to think long term; you’re investing for the long term but interest rates are short term. You can put more equity in now to secure the property and refinance when rates are lower. But if you wait for rates to lower, you will miss out on that opportunity.

Acquire when the market is thin. That’s when you can get the property at a good price, even if rates are high.

Even if you pay a higher borrowing cost today, you can sit on a property for the next 20-30 years and know you’re in a good spot.

Should commercial real estate investors go with a fixed or variable rate mortgage? What term length makes sense in 2023?

I field this question every day, multiple times a day. Everyone knows you’re supposed to buy low and sell high. So when interest rates are low, you go long. A few years ago we were getting 2.25% rates for five years.

But when interest rates are high like they are now, we don’t recommend locking in a high rate at a longer term. It doesn’t make sense to lock in 7% for five years. What happens if interest rates come down in 18 months? You’ll have a massive penalty.

We’re sticking with variable rates at 1-2 year terms. The benefit is that if rates come down in the next 1-2 years, you’ll be able to roll into a longer term mortgage without any penalty. We’re bridging ourselves to a projected lower interest rate.

At Impact Commercial, yes, we can assist with mortgages. But we also feel a duty to give our clients the right advice. We want our clients to have their eyes wide open so they can make the best decision.

What are you buying right now?

I like properties that are well-located, make a good income and have future opportunities, like a strip mall that we can acquire, do some improvements to, and hold on until rates lower. We’re looking all over the Lower Mainland and Interior right now.

What advice do you have for a residential investor interested in investing in commercial real estate in 2023?

For investors in residential real estate, I encourage you to do some reflections. The Residential Tenancy Act we have to abide by in BC is not kind to landlords. On the commercial side, the carefree triple-net lease is much easier and more predictable for myself and my clients.

So if you’re a residential investor and want to explore the commercial side, reach out!

The 6 Pack: Getting to Know Impact Commercial Managing Partner, Alan Haigh

Who makes the best turkey dinner: Your wife, your mom or your mother-in-law?

Hands down, it’s my wife. My mother came over from England and I don’t think she understands medium cooking. Everything is overcooked and dry – that’s how the British do it! My wife has a great turkey recipe.

What’s your new year’s resolution?

I’m doing Dry January for the very first time. It’s going great! I’m tracking my sleep with a FitBit and my sleep scores are going way up. I put on 10lbs in 2022 so I have the goal to take off that 10lbs in 2023.

What was the best gift you received over the holidays?

In honour of our Canadian boys bringing home the gold in World Juniors, I got Canadian socks that look like skates and underwear with the Canadian flag. I’m a diehard fan, so it was the perfect time to get those!

What is your last meal on death row?

I love a nice medium rare steak. I don’t eat a lot of steak but a steak I barbecue myself…there’s nothing better!

What are you currently binge watching?

I just finished The Recruit on Netflix. I think I took that down in four days or something like that. It’s fun and entertaining!

What’s your go-to karaoke song?

I’m going with Bon Jovi’s Living on a Prayer.