Sales and dollar values in the Lower Mainland’s commercial real estate market took a dramatic but not unexpected year-over-year drop through the third quarter (Q3) of 2022. The plunge was led by land, multi-family assets and the industrial sector, all of which were considered near bullet-proof earlier this year.
There were 349 commercial real estate sales in the Lower Mainland in Q3 2022, a 46 per cent decrease from the 646 sales in Q3 2021, according to data from Commercial Edge, a commercial real estate system operated by the Real Estate Board of Greater Vancouver (REBGV).
The Commercial Edge tracks every transfer through the land title office of British Columbia across the Lower Mainland.
The total dollar value of commercial real estate sales in the Lower Mainland was $2.02 billion in Q3 2022, a 40.4 per cent decrease from $3.39 billion in Q3 2021.
“We’ve seen deal volumes drop across all asset classes including land deals, which were a bright spot in Q2,” said Andrew Lis, director of economics and data analytics with REBGV, said.
Carmen Di Fiore, executive vice-president, debt and structured finance with CBRE, said commercial real estate lenders are shying away from land financing,
“Last year, only 17 per cent had concerns, this year almost 52 per cent of lenders are raising their eyebrows when dealing with land financing requests,” Di Fiore said.
The old saw, “Buy land, they’re not making any more of it,” has shifted for lenders, Di Fiore said. “This year, lenders are responding, ‘Don’t buy land, because we’re not lending as much on it.”
Lis credited the seven increases in interest rates this year for the market correction.
“The significant pace of rate increases from the Bank of Canada are having their intended effect, which is to cool demand across all sectors of the economy with the goal of bringing inflation back to target. The Q3 data shows us the commercial real estate segment has not been spared the impact, and with inflation remaining stubbornly high, interest rates may remain at or above current levels for some time. This will likely translate to a slower pace of activity in the commercial market over the coming months and into 2023,” Lis noted.
Sources tell Western Investor they expect the commercial real estate sector to post even worse numbers over the fourth quarter and into 2023. “The first quarter of next year will read like a disaster,” one research analyst forecast.
Lis said low capitalization rates in the Lower Mainland, often seen as a badge of high demand and rising property values, are now a detriment to investment.
“With some fixed-income investments earning over 4 per cent these days, viable alternatives to the relatively low cap rates we’ve seen over the past few years in commercial real estate now exist,” Lis said
Still, the first half of 2022 was so strong that CBRE forecasts that Metro Vancouver commercial real estate will end the year with a dollar volume of around $13 billion, down less than 10 per cent from $14.3 billion posted in 2021.
Q3 2022 activity by category
Multi-family: There were just 10 multi-family land sales in the Lower Mainland in Q3 2022, which is down 61.5 per cent from 26 sales in Q3 2021. The dollar value of multi-family sales was $57 million in Q3 2022, an 86.2 per cent decrease from $413 million in Q3 2021. James Blair, senior vice-president with Marcus & Millichap’s multi-family sales team in Vancouver, noted that Q3 rental apartment building transactions posted the lowest quarterly sales in seven years.
Industrial: There were 81 industrial land sales in the Lower Mainland in Q3 2022, a 46.7 per cent decrease from 152 sales in Q3 2021. The dollar value of industrial sales was $226 million in Q3 2022, a 58.3 per cent decrease from $543 million in Q3 2021.
Office and retail: There were 104 office and retail sales in the Lower Mainland in Q3 2022, which is down 56.1 per cent from 237 sales in Q3 2021. The dollar value of office and retail sales was $294 million in Q3 2022, a 47.8 per cent decrease from $563 million in Q3 2021.
Land: There were 154 commercial land sales in Q3 2022, which is a 33.3 per cent decrease from 231 land sales in Q3 2021. The dollar value of land sales was $1.44 billion in Q3 2022, a 22.9 per cent decrease from $1.87 billion in Q3 2021.
