Vancouver Commercial Real Estate Podcast

William Wright Commercial’s Rod MacKay joins us to give out the 2023 Vancouver commercial real estate mid-year report card. Where has the market been and where is it going? What asset type has been most surprising? And what is the best bet for the rest of 2023? 

Who is Rod MacKay?

I was born and raised in Vancouver and have lived here my entire life. My father has had his own real estate brokerage for over 40 years, which was how I got into the industry. I’ve been with William Wright Commercial for the past five years and it’s been an amazing journey.

Outside of work I like to stay active with golf, hiking and running. I ended up doing the BMO Vancouver Marathon this past weekend. It was my first marathon and it was actually a lot of fun. Conditions were perfect! I finished in under four hours, which was my goal, and had a very strong finish. 

How has the commercial real estate market been so far in 2023?

The number one thing on everyone’s minds has been interest rates. Things were slowing at the end of 2022 due to the high interest rates. But now that rates are being held, it’s generated a lot of optimism in the market. We’re finally seeing some activity!

Right before this call I was sitting outside of a retail unit that was sold for 15% above the assessed value within two weeks of listing and with multiple offers.

At the beginning of 2023, we were busy but a lot of education was needed with clients. Now that the rate has been held for a little while, activity is picking up quite a bit.

What does inventory look like across the different asset classes?

Broadly, inventory is quite low, especially if you look at land. It’s challenging for developers to get the lending they need.

Industrial: 

In the industrial asset class, we’ve continued to see strength. It’s taken a bit of a step back with slower activity because inventory is still low. Some businesses are switching to leasing instead of buying. But lease rates are still creeping up.

Office: 

If you look at office real estate in Vancouver, we’re hovering around 10% vacancy. It’s one of the lowest vacancy rates in North America, despite the rate being sub 3% pre-pandemic. But obviously covid has changed a lot of things. A lot of office space has been built and it’s taking longer to be absorbed.

We haven’t seen office leases creep up too much but we have seen more incentives being offered by landlords. It will be interesting to see how that shakes out as more inventory becomes available. Once all of that inventory gets absorbed, we’ll see the vacancy rate come back down and it will be a tighter market. A healthy vacancy rate is 7-8%.

Retail: 

Retail real estate has made a huge comeback. It’s looking very strong coming out of covid when we saw a big shift to ecommerce. There are very low vacancy rates, especially for good product. It’s a surprising asset class that is looking stronger than expected.

Cory Wright on how the housing crisis affects commercial real estate:

When people are selling land, the highest price to fetch is for a strata condo development. You could put offices or mixed use buildings on that land, however the numbers won’t pencil. And with the incoming immigration, most of the land out there will need to be used for rental or strata condo. As that happens, older industrial areas will need to be developed into housing. The land will get absorbed for the highest and best use.

No one wants to buy land to build office towers anymore. But eventually we’ll run out of land and need the space for office, industrial, etc. That will cause vacancy rates to go down and prices to go up. We’re seeing this in all of the major cities in British Columbia. 

We’ll see fluctuations in asset classes, prices, etc. but the problem is there isn’t enough land to service commercial and housing needs. The housing side will take precedence because people need a place to live.

How is multi-family real estate doing in 2023?

Multi-family real estate is a steady and secure investment. Vacancy rates are extremely low across all of the markets we work in. We’re having to do a lot of reeducation with our clients.

Inventory is low and not enough product is coming to market, which is causing rents to skyrocket. We’ve seen 20-30% increases in Vancouver just in the last year. The problem is we’re not incentivizing the developers to build more market rental at any level of government.

With the other asset classes, we see owner-occupiers. But with multi-family it’s only investors who are looking for a return. The cap rates are low but because the asset is so steady, most multi-family investors have a long term view.

Cory Wright on why he believes we need to remove rental restrictions to solve the rental crisis:

You solve the rental crisis by taking away rental restrictions. No renter wants to hear that but by removing restrictions, developers and REITs will want to enter the game. We’re seeing this in Seattle. But it creates a few years of havoc for renters as landlords raise rents and inventory slowly comes to market.

Unfortunately, it will take longer than one political term to get the rental inventory we need and allow rents to settle, so no politician wants to run on a campaign of removing rental restrictions. They won’t survive the next election.

But you can backstock that supply by getting incentives from the provincial and federal level. That allows more supply to enter the market faster, which hopefully could open the door to removing rental restrictions in the future.  

It’s a case of picking your poison: Do you want to remove rental restrictions and lose the next election because rental rates go up, but have supply increase over the next 10 years and rental rates come off? Or do you want to increase taxes to incentify developers to deliver more supply?

We can’t blame people for wanting to live in Vancouver. During covid, there wasn’t a better place to get locked down than BC.

Let’s not worry about affordability; let’s get product to the market so people can live in houses and not have to pay $3000 to rent a condo. That way, they can save money to live in a house at some point.

Where has the market been and where is it going in 2023?

Sellers expectations were very high thanks to the low interest rates we had through the pandemic. If you saw your neighbour sell at $2 million and people are now offering you $1.4 million, you want to hold out for that $2 million. But we’re in a different market now. People can’t afford the same price they could when interest rates were low.

As we come into spring, the market always seems to pick up. Buyers are coming back but sellers still need to be realistic. Pricing might come off a little bit still.

What is the best commercial real estate buy in 2023?

It depends on your goals. If you’re looking for something with short term uptick in the next 5-10 years, you’re probably still in the secondary and tertiary markets. If you want something stable for the long term and no vacancy issues, you could stay in the primary markets.

Industrial strata is a great buy. The price per square foot is quite high but you can find a tenant right away and don’t have to put in major incentives, like you would in the office market. It’s a very hands-off investment.

The 6 Pack: Getting to Know William Wright Commercial broker, Rod MacKay

Favourite restaurant or bar of 2023?

As the weather is getting nicer, I’d like to have some mussels on the patio at Cardero’s.

What is a book you recommend?

I listen to a podcast, The School of Greatness by Lewis Howes, where the host interviews successful people to find out how they got where they are. He recently came out with a book called The Greatness Mindset that I’m just getting into. There are some great lessons in there.

What does your post-covid office wear look like?

I’m going with a dress shirt and a sweater. There’s a time and a place for a suit but the office attire has changed post-covid. You still want to dress smart but you don’t need a suit and tie every day.

Who is winning the Stanley Cup?

Florida is out of control here. It’s hard to bet against them because they have so much momentum. It’d be interesting to see Florida win.

What show are you currently binge watching?

We usually throw on The Office. It’s our default show when we don’t know what to watch.

Favourite band in 2023? (Cory is hoping it’s Nickelback!)

A lot of people say they don’t like Nickelback just to say they don’t like it. But if you listen to their top ten songs, they’re bangers! You can’t listen to some of those and not have a good time.