Vancouver Commercial Real Estate Podcast

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

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February 15, 2023
VCREP #85: Will the Vancouver Real Estate Market Collapse in 2023? with Ryan Wong

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Who better to hear from on how 2023 is shaping up than an appraiser who sees all the deals and numbers? This week, Cory and Melisa welcome commercial appraiser Ryan Wong from Ryan LLC.

Ryan sees ALL the numbers and knows what assets are trading and where, and he lets us in on what he is seeing. Will the market collapse in 2023? Will inflation topple the market? Will we see gains in real estate assets in BC this year?

Ryan lets us in on all of this and more. Plus, he explains the important role appraisers play in the sales aspect of commercial real estate in BC.

What is a commercial appraisal and when should you get one? What happens if your appraisal is lower than your purchase price? And how long will prices be down or is this the start of the Vancouver real estate market collapse? Find out with commercial appraiser Ryan Wong! 

Before we dive into commercial appraisals with Ryan Wong, let’s talk about the residential market. 

Melisa: No one in the industry is super busy right now but it’s not quiet. It felt like there was an uptick of activity in January, but it’s not playing out in the stats yet. However, we feel the interest on the ground before we see it in the stats. There’s more urgency in the market. A lot of people who were waiting now think it’s a good time to get in. 

We’re seeing subject-free, over-ask, multiple offers on properties. There’s low inventory in a lot of markets. I operate mostly in Vancouver but I’ve been hearing of these offers happening out in the Valley too. If it’s a good property that is priced well, it’s going to get good activity.

I did an open house over the weekend and every time I came down to the lobby I said, “This feels like 2021!” There were probably 20 groups that came through.

Who is Ryan Wong?

I’m a commercial real estate appraiser based here in Vancouver. We were acquired a few years ago by Ryan LLC, which is based out of Dallas. Before that, we were a privately held practice that has worked in Vancouver for over 40 years.

What does a commercial appraiser do?

Appraisers are frequently engaged by purchasers who are looking for financing. They’ll take our appraisal and bring it to the bank, who will use it to decide if they want to finance the deal and how much they want to lend.

When we look at larger commercial projects, the appraisal process gets a lot more complex than a residential condo appraisal.

On the appraisal side, what have you seen in the market over the last few years?

In the first 6-9 months of the pandemic, there was a lot of hesitancy in the market. But once we emerged from that in 2021, the commercial market really started to pick up. Certain asset types did really well, such as industrial real estate. As people relied on ecommerce more than ever those industrial spaces were in demand.

Multi-family was another asset type that did well over the last few years as more people worked from home and needed to find suitable housing. No one anticipated the rapid increase in rents that we’ve seen.

Did you see a decline in pricing with office and retail assets? Have those prices now come back to normal levels?

In the downtown Vancouver market in 2022, there were very few large blocks of space that were available to be leased. Since then, some space has freed up in the market. Organizations are still trying to figure out the proper work-life balance and what their space needs will be moving forward.

I think office rents have stablizied, especially in the downtown core and Broadway corridor. On the retail side, we saw secondary retail locations suffer but some of the stronger locations have outperformed their pre-pandemic levels. 

Have you seen an uptick in values in some of the secondary or tertiary markets outside of Vancouver? Have those also come back down?

We’re still expecting upward pressure on cap rates. It’s not linear with interest rates but there is bound to be some upward pressure. So we’re not seeing a lot of value change because the income growth is offsetting that upward pressure on cap rates.

What are the methods used to evaluate and appraise a commercial property?

There are two main methodologies to appraise commercial assets:

  1. Income
  2. Direct comparison

With the income approach we’re asking, “What is the cash flow generated by the property?” We look at similar rents in the area and the anticipated rate of return.

With the direct comparison approach, we look at things like price per square foot. We determine the final value of a property by reconciling the two approaches and seeing which should be weighted more heavily.

What is the risk for buyers if a property appraises low?

If the purchase price is not in line with the appraisal, it can make a deal go sideways.

By the time the appraisal assignment lands on our desk, the contract may have been negotiated weeks or even years ago. So the price negotiated may differ greatly from current market values.

What areas have you seen the most uptick on evaluations?

The most rapid appreciation in the last 12 months was in purpose-built rentals, especially in East Vancouver and the westside of Vancouver. We’ve really seen how far rents have climbed.

We also saw a lot of rental rate increases in Kelowna and on Vancouver Island. Both of those locations offer more yield than you’d find in Vancouver.

Have prices started to come off as interest rates have gone up?

Generally, yes. The first round of interest rate movement didn’t spark a lot of price movement. But as the interest rate increases continued, they couldn’t be ignored. There had to be an adjustment in pricing.

I expect going forward that things will level off. I think there will be some good opportunities throughout 2023.

What is a replacement cost appraisal?

Replacement cost appraisals are mostly done for insurance purposes. If you need to renew your policy, you would need a replacement cost evaluation.

This is different from a financing report which is based on income and price per square foot. Instead, the report would be based on costing manuals. They want to know how much it would cost to replace your current structure.

There can be a huge difference between what people are actually paying for construction and what the reports say. Some purchasers use it as a final check on values; how much would it cost you to build this property from scratch vs buy the existing asset?

What markets are seeing a lot of multi-family project activity?

On the Island, I’ve worked on multi-family projects in places like Duncan and Victoria. They’re all reporting great rental rate growth, which we’re also seeing in the Interior.

If you were buying commercial real estate, what would you buy and where? And what would you avoid?

If you can get your hands on a core office building in a good location, that’s always a safe bet. However, office and commercial strata, even retail strata to a lesser extent, are areas where I’d be a bit more cautious.

Let’s talk about value-add opportunities.

There are some landlords who don’t want to put any money into building improvements. That keeps rents a bit lower, which tenants can take advantage of, but they have to live in the building as-is. I’ve seen demolition clauses which may also depress rents, because they reduce the tenant pool.

If you have a longer term view and want to invest in your property, that could be an opportunity to grow rents.

How does a commercial appraiser get an accurate value if a property is vacant or only 50% tenanted? 

Our commercial appraisal would start with a stabilized income approach where we apply market rent to the space. But we would also look at lease up costs. What are the carrying costs for the vacant spaces over the next couple of months or years? There may also be tenant improvement allowances or landlord’s work, as well as a leasing commission.

So you’d have the stabilized cash flow, which would represent a fully-leased building, and then deduct the carrying costs I mentioned to understand the value you’d be willing to pay today.

Where do appraisers get their information? 

If we’re looking at sales comparables, there are resources that track closed transactions. On the leasing side, it’s a bit more difficult. That’s when an appraiser has to rely on their network of clients in the industry.

With all of this research, you have to be mindful of when the deal was negotiated because they may not be indicative of the current market. You have to speak to the parties involved to find out what drove the deal and when the negotiations took place.

Can a potential purchaser come to an appraiser earlier in the buying  process to help determine what costs will be? 

That would be half of every day for me. Clients who are looking at properties call me for a second opinion on potential costs, market rents, etc. This would be a couple of months prior to them getting a property under contract and needing an appraisal for the bank.

Who commissions commercial appraisers? 

It could be purchasers or owners who commission commercial appraisals. Banks work with an approved list of appraisers. They need to know an appraisal is reliable to be able to do their job. The bank will often give that list to the borrower and then they would be the one who commissions an appraiser.

If it’s an institutional file, we may need to do an appraisal for financial reporting to shareholders. We do appraisals for arbitration, estate planning and many more situations.

Where is the real estate market going in 2023?

I think we’re going to see stabilization on the interest rate side, which will hopefully spur some activity in the market. I think the market will start ramping up by the end of the year and we’ll be firing on all cylinders by 2024.

The 6 Pack: Getting to Know Commercial Appraiser Ryan Wong 

Favourite vacation spot?

With a young family, you can’t go wrong with Hawaii. We’re actually going there for spring break. We like to stay close to the strip in Waikiki to be close to all the shops and restaurants.

What would your last meal be on death row?

If they would allow me to fly to any Nobu as my last dying wish, that would do it for me. I would get their sablefish.

Favourite band or musician? 

I’ll go with my favourite genre. I’m a big 90’s R&B guy.

What’s your go-to karaoke song?

It would probably be Every Little Step by Bobby Brown. It won’t be done well but that’s the one.

Share a book recommendation with us.

I think everyone has to read Malcolm Gladwell’s Outliers at some point. It’s so relatable and he’s a great storyteller. 

What advice would you give a commercial real estate investor in 2023?

It’s easy to get caught up in the excitement of what’s going on around you. But you need to be disciplined and focus on what you’re trying to do in your own business. Don’t get swayed by the trends around you.

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Vancouver Commercial Real Estate Podcast

For all the curious minds interested in commercial real estate investing, grab a coffee and pull up a chair because we have exclusive stories and tips from commercial real estate brokers, investors, developers, economists, urban planners, and everyone in-between. From the successes and failures to the motivations and lessons learned, the Vancouver Commercial Real Estate Podcast is your insight into commercial real estate in Vancouver, Victoria, Kelowna, and beyond.

What's the best real estate market to invest in? What are the commercial real estate asset classes and property types? Hosted by Cory Wright, founder of William Wright Commercial, and co-hosts Adam and Matt Scalena of the Vancouver Real Estate Podcast, our podcast opens the door to real estate investing for everyone from beginner investors to experienced real estate professionals. New episodes are released every Tuesday. Follow the Vancouver Commercial Real Estate Podcast on Apple Podcasts, Spotify, Google Podcasts, or your favourite streaming platforms.

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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.