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:


  1. Good post fish. I have been thinking that we will see the first cracks on commercial real estate for some time as this is not subsidised by CHMC. However it seems that low rates are keeping things afloat.
    The available aera for lease has doubled since this time last year in vancouver and it is a fact that the cap rate is so low that it makes no sense to buy commercial real estate instead of a risk free bond.
    I am sure that cap rates will go up but if interest rates go up it only makes sense that cap rates go up as well. You have to look at the spread for a more meaningful picture.
    For me, the rule of thumb of buying CRE is that gross revenue should represent minimum 10% of the purchase price, anything under is bound to loose money, no matter what.
    I am not so sure that rich people are coming to retire to vancouver and invest lots of money. I hear this argument very often but I am not convinced. I have a considerable amount of money myself and if i would take up permanent residence in Canada, I will be taxed by CRS on my worldwide income (same in US but with much lower taxation rates than in Canada) unless those people come and live here and dont declare their worldwide income, (which is very possible, this way they get free healthcare and other as low income families) but that is cheating.
    It is absolutely of no interest for a chinese rich guy to come here and pay taxes in its worldwide income where he could keep collecting tax free interest in his country of origin or other tax heaven countries. Canada is not a tax friendly country nore does it compare favourably to other developed countries!
    I honestly beleive that if there is some explanation to be found, forget about the rich people argument, rather it is hot specualtive money still flowing here in the beleif that real estate will appreciate for ever and that is the only argument for investing in RE in Vancouver today, so far they have been proven right, so i guess it will continue in the future until it does not.. just like all real estate bubbles things eventualy return to fundementals. JMHO.

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