Commercial strata give investors an edge not seen in the more regulated and complex residential condominium market.
Geographically and historically, the Vancouver metro represents perhaps the best opportunity on the planet to make money from commercial real estate. Mortgage rates are at their lowest in the last 100 years, and this area has one of the lowest vacancy rates in industrial and commercial premises and the highest rental rates in the country.
In this fourth of four parts Western investor In our Real Estate Investment Series, we look at the commercial and light industrial market segments where the opportunity to invest in commercial “condominiums” may outweigh the potential of residential tiers.
In British Columbia, the Strata Provincial Property Act makes no distinction between the commercial and residential sectors. While this gives some confidence, it also poses problems in older mixed-use projects, where four or five commercial owners may be ignored by a much larger number of residential owners. In British Columbia, a vote of 80% of strata owners could force an entire project to be sold for re-development.
Most developers create separate layer groups for residential and commercial properties to avoid this. Investors are encouraged to check for this separation in any mixed project.
Commercial condominiums offer investors the opportunity to participate in stable rental demand and confirmed price increases from Metro Vancouver. In addition, some BC secondary markets, most notably Victoria and Kelowna, offer opportunities for commercial strata with a lower entry price, but with similar income and yield potential.
Investing in commercial strata typically involves buying a property, renting it out for a period of time, say five years, and then selling the property to capture the rise in property values.
Commercial layers have an advantage over residential in that tenants usually sign long-term leases than residential units, properties require less maintenance, and tenants are responsible for any improvements. In addition, commercial leases are not subject to BC Residential Tenancy rules, which limit annual rent increases and may restrict evictions for non-payment of rent.
In Metro Vancouver, a well-located retail group could return a capitalization rate of 3.5% to 5%, while shopping centers located in grocery stores and regional malls could return from 4% to 5.5%.
“What you can get on the street will outperform a bank,” said Macdonald Commercial, a commercial property sales and rental agent.
Metro Vancouver’s retail vacancy rate is 2.3 percent, about half the current national figure of 4.1 percent.
Prices for commercial strata such as retail or light industry have skyrocketed over the past year. It is not uncommon to see existing Metro Vancouver commercial complexes selling for over $ 700 per square foot, with a new product charging $ 1,000 or more per square foot, just like in the residential condominium market.
Retail rental rates range from $ 25 to $ 60 per square foot in Vancouver’s suburbs and secondary walks to $ 150 per square foot in upmarket downtown shopping areas such as Robson and Alberney Street.
Commercial rent is calculated annually. For example, if you rent your 1,000 square foot retail chain at $ 50 per square foot, it brings in $ 50,000 per year, or about $ 4,100 per month.
It is advisable that commercial tenants pay triple rent, which means the tenant pays all maintenance and property taxes, as well as space. In British Columbia, the value of commercial real estate – and property taxes – could skyrocket if the site is reassigned to a high-density residential development. Having a triple lease protects you as an investor.
While the Vancouver metro is the most popular area for commercial investors, there are also enticing opportunities in Victoria and Kelowna, where some see a ground floor opportunity for commercial investors.
In Victoria, major players, including Chard Properties, Nicola Wealth, Reliance Properties and the giant Jim Pattison group, have been buying neighborhoods in Victoria’s Old Town, North Douglas Street and Harris Green to create large mixed use complexes. Harris Green alone plans to build 2,200 homes near downtown within an eight-block radius.
“It’s like buying Yaletown in Vancouver two decades ago,” said William Wright Commercial. “As people move to these areas, you will see an explosive demand for retail services.”
One new retail project in Victoria recently sold at $ 607 per square foot to Metro Vancouver investors.
Kelowna also sees both an influx of new residents and rapid development, much of it concentrated in the city center, where the University of British Columbia Okanagan is expanding its campus and growing a number of new residential towers.
In the Kelowna retail sector, vacancy rates fell to 4.3% from 5.5% a year ago.
Kelowna strata retail space starts at $ 500 per square foot, while downtown rental rates range from $ 35 to $ 50 per square foot. As a result, the typical capitalization rate for retail investors is between 5.5% and 6%, higher than most of the Vancouver Metro.