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Wednesday, August 1, 2012 - Does Vancouver's hot investment market make building a better option?

Consistent demand and high lease values in Vancouver's downtown office and retail property markets combined with low interest rates continue to fuel a sizzling investment market.

"I don't think I've ever seen the investment market this robust, vibrant and strong. We get multiple bids on everything and anything," says Ross Moore, director of research for CBRE Canada.

"There are so many groups that want to buy - every Canadian pension fund, and probably 30 Vancouver families that have been investing in Vancouver real estate for a long time. They'd all love to buy something, but there's nothing there," he adds.

According to the Q2 Office Market Report for Metro Vancouver released by Colliers International, investment activity in downtown remained reasonably strong, with most of the deal activity focused on Class C buildings. The biggest deal of the last quarter was the sale of Bentall V. The deal saw Bentall Kennedy acquire the Class AAA property from Deka Immobilien Investment for approximately $400 million.

Investors are driving the prices up and with that, capitalization rates come down. Cap rates are the ratio between an asset's net operating income and its original price. Despite consistent increases in lease rates in Downtown Vancouver, property values are rising much faster. According to Moore, Deka sold Bentall V at a cap rate of 4.6 per cent.

"Once you get below five per cent, its like London, New York or Paris," says Moore.

"Given a choice, people would rather buy than build because there's less risk, but because prices have gotten so high and cap rates have gotten so low that we are seeing big institutional investors saying they are prepared to take on development risk."

The MNP Tower project at 1021 West Hastings is a case in point. The 35-story development will add 270,000 square feet of inventory to Downtown Vancouver. A joint venture between developer, Oxford Properties, and the Canada Pension Plan Investment Board, the decision to build was made before the group found a lead tenant.

"This market hasn't had much new inventory, the technology has aged, vacancy is low and demand is high. We think there will be demand for our product and we can build profitably," says Michael Turner, senior vice president of investment for Oxford Properties.

"We also are sensitive that it costs more to buy than it does to build. We can build with modern technology and to better specifications instead of buying stock with 30-year-old technology and design," he adds.

With a general shortage of tenants large enough to anchor a development project of this nature in Vancouver, Oxford engaged architects Kohn Pedersen Fox Associates to design a building suited to the smaller tenants that are typical of the market.

"We made a commitment without a tenant because we fundamentally are believers in the market," says Turner. "The building we are designing has smaller floor plate. With this type of building, we never expected to have a lead tenant."

In January 2012, Oxford Properties announced that MNP LLP, one of Canada's largest chartered accountancy and business consulting firms, will lease 72,000 square feet of the office tower, and rebranded the building MNP Tower.

The appetite for new and upgraded spaces remains strong, and is driving demand for Class B and C buildings. The shortage of land in the downtown core means that these buildings are at least as valuable for their redevelopment potential as they are for their current revenue.

"Right now, we own and manage 1.5 million square feet in seven different buildings in the downtown core," says Turner. "We bought 1133 Melville in 2010 as an income property, knowing that it's something that we would redevelop in the longer term. That's how you find land in Vancouver."

"Not everybody can build," he says, reflecting on why more investors aren't looking to build given the potential returns. "Only a few developers in the country have technical ability, the where with all and the land. We're in the fortunate position of being able to build in this market."

Asked when Oxford Properties plans to move on the Melville redevelopment, Turner responds simply, "We will buy when it makes sense to buy and build when it makes sense to build."

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posted in General at Wed, 01 Aug 2012 08:54:21 -0700

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