Wednesday, October 28, 2009

Commercial Real Estate

Vancouver has some of the lowest CAP rates (% returns) on commercial real estate in North America.

Hot cities like New York and Hong Kong and London have teeny weeny cap rates and now Vancouver.

The reason is clear, we have a lot of money chasing very little product.

As we all know a lot of people come to Vancouver with money, they retire from out East, they come from overseas and a lot of people here are making big chunks of money. After a few years of almost no interest in the bank, many finally make the leap into commercial real estate to try and juice their returns. They like to keep it local, so they can keep an eye on it.

Some of our retail rentals (like Robson Street) are amongst the highest per sq foot in North America.

The logic is that while it may just be 5-6% return now, the market is tight and so rents will go up and in a few years you may have CAP rates of 8% or more.

Downtown rental buildings have had particularly low CAPs. Some selling with minuscule 4-5% rates.

The problem with such low rates for commercial it office, retail or residential.. is how easily the CAP rate can disappear altogether.

A renovation or an elevator which needs replacing OR A tenant who leaves or goes bankrupt (and the tenant-inducement needed to bring another one in) and your total returns for the year are gone.

Also any on-going weakness and the rents will NOT be going up, and in fact may go down to keep struggling tenants.

Looks like the total sales of commercial property have fallen dramatically all across Canada. Though Vancouver was saved somewhat by the big ticket purchase of Bentall V by a German Pension agency. This seems like an expensive buy to me, especially in this environment. They must have a lot of faith in Vancouver: