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Commercial real estate market proving robust in Vancouver

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While Metro Vancouver’s residential sector struggles, its commercial real estate market is holding firm, with vacancy rates extremely low, according to a monthly analysis by commercial market intelligence company CoStar Group.

The group analyzed the office, industrial and residential sectors and offered some forecasts on each market.

Office space

With minimum wages rising and unemployment low, office-based employment is expected to grow by 9.3 per cent in 2019, putting additional strain on the already overstretched office market in Metro Vancouver, according to CoStar.

The report said, “The Metro Vancouver office market continues to show signs of strength as the vacancy rate has continued to decline from 4.0 per cent at the beginning of 2019 to 3.0 per cent to close out the month of July. Strong net absorption levels of 2.5 million square feet over the past year have contributed to this decline, along with the lack of new office space coming to market as of late… Developers are actively working to alleviate this shortage as there are now 26 office projects totalling 4.9 million square feet currently under construction. With that being said, much of this new stock will not be delivered to the market until late 2021 and 2022. Additionally, many of the new flagship office projects that will be coming to market are heavily pre-leased, thus leaving prospective tenants with little options if they did not secure space well in advance.”

Any new buildings that are coming on stream are being snapped up in pre-leasing – but this does offer an opportunity to other office tenants struggling to find space.

Jamil Jamani, senior market analyst at CoStar, told Glacier Media, “Office tenants are continuing to demand higher quality spaces and this has resulted in many new buildings coming to market to be heavily pre-leased. As many of these larger tenants move into their new higher quality spaces, there will likely be a upswing in vacancy in older buildings. This would be the optimal time for firms to secure larger space in the downtown core.”

The report added that the high demand in office space has pushed lease rates up. “While Metro Vancouver waits for new supply to hit the market, average net asking rents have continued to increase, up 2.5 per cent year-over-year, to $24.04 per square foot in July 2019.”

Jamani added, “Although the office market is strong, we don’t expect rents to grow as aggressively as they have, due to new supply coming to market within the next two years. Rent growth will likely return to more normal levels of two to four per cent per year.”

Industrial market

Space is even tighter in Metro Vancouver’s industrial market, said CoStar.

The report said, “The industrial vacancy declined… to 1.6 per cent at the end of July 2019. Net absorptions levels have also increased over the past year reaching a whopping 5.8 million SF. In particular, the region faces extreme shortages of specialized industrial space as the vacancy rate in this segment is at a mere 0.7 per cent.”

Jamani told Glacier Media, “We have started to see strata industrial units continue to play a greater role in the Lower Mainland, especially with rents growing at such a rapid rate over the past three years. Many industrial tenants are now starting to consider ownership as a viable option to control rent increases and avoid the possibility of eviction due to redevelopment.”

According to the report, “The extremely tight market has caused net average asking rents to increase by 12.7 per cent year-over-year to $12.17 per square foot.”

Retail sector

Despite the strong showings of the office and industrial market, CoStar describes the retail sector as the “true gem” of Metro Vancouver’s commercial real estate.

The report said, “Metro Vancouver’s true gem of the commercial real estate market belongs to the retail sector, as the overall vacancy rate has declined … to a record low of 1.3 per cent at the end of July 2019. The surge of demand has been the result of international and luxury brands continuing to increase their presence in Metro Vancouver, and as a result, net absorption topped 2.1 million square feet.”

It added, “Average net asking rental rates [for retail space] have been on an upward trend, growing by 13 per cent year-over-year to $34.44 per square foot. Retailers will now have to make more efficient use of spaces to overcome rising rental costs and continued upward pressure on wages.”

Jamani said, “Many small businesses have continued to face pressure due to rising property taxes as many of their leases are on a triple net basis, and as a result we continue to see many businesses that have been around for years close their doors. This combined with many older retail units being replaced with multi-family developments has also depleted older retail stock and have forced retailers to transition to newer but smaller units.”

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Blackstone raises $20.5 billion for largest ever real estate fund

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U.S. private equity firm Blackstone Group Inc said on Wednesday it has raised the largest ever real estate fund, amassing $20.5 billion to be invested in property assets around the world.

Large buyout firms such as Blackstone have been attracting a lot of capital from investors seeking higher returns not available in public markets.

The capital ready to be deployed has swollen to over $2 trillion, according to data provider Prequin, driving up asset prices and deal making activity.

Blackstone said in a statement the fund, named Blackstone Real Estate Partners IX (BREP IX), has already made its first investment: the purchase of U.S. industrial warehouse properties from Singapore-based logistics provider GLP for $18.7 billion.

The deal, in which BREP IX co-invested with other Blackstone funds, was announced in June and is expected to close in coming weeks, the company said.

Blackstone is the world’s largest alternative asset manager and one of the biggest property investors, with $154 billion in real estate assets under management. (Reporting by Chibuike Oguh; Editing by Sandra Maler)

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Real estate lessons to live by Pattie Lovett-Reid

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Real estate lessons

Disclaimer: I’m not a real estate expert but I am a real estate junkie.

I’ve often thought about the many ways there are to make money – and there are many. Throughout the years, we have created side hustles, worked hard at our jobs, built an investment portfolio and we have bought and sold a lot of real estate.

We love real estate, and over the past 25 years, we have bought and sold six principle residents and six recreational properties. The majority of our housing transactions made money, and we broke even on a couple. There have also been lessons learned along the way.

Here are a few.

1. Listen to the experts. They are qualified in their field so believe them when they say location sells. Try not to be the most expensive house on the street and don’t let your emotions drive your buying or selling decisions.

2. Don’t fall in love with your assets, or in this case, your home. Sometimes you need to make tough decisions financially and that may mean selling the family home. Your assets will never love you back but your family will.

3. When selling, don’t be greedy. If your home isn’t selling, it is priced too high. Listen to what prospective buyers are silently telling you as they move on and check out the next listing.

4. Get your home ready to sell as soon as you move in. Life has a funny way of throwing you a curve ball when you least expect it. Curb appeal matters but the inside likely matters more. This is where you live. Keep it neutral and up to date. Look at your home as a prospective buyer would.  Small changes can yield big financial results.

5. Avoid concentration risk. Don’t put all your money in the real estate basket.

6. Take the time to save up the down payment. Consider all-in and all-out costs such as insurance, appraisals, real estate, moving, land transfer costs and the dreaded unknown repairs. There will always be something that requires your financial attention.

7. Don’t buy beyond your means. I’ve been there and it isn’t fun. No one wants to be 100 per cent house poor. You aren’t expected to be flush with cash when you are new homeowner but you also don’t want to live life worrying about the next mortgage payment each month.

8. Buy low and sell high. Even if you love real estate you are always scouting out new opportunities, this investment mantra still must hold true.

9. Focus on your stage of life. Do you really want to be building your dream home for your family as your children head off to university or are beginning to build their own lives under their own roof? Just because you want your family there doesn’t mean they will be. Buy for reality not dreams.

10. Put in offers earlier in the week. You are more likely to have less competition and more likely to get a deal if you do. Everyone is out   looking on the weekends. Don’t follow the herd mentality.

11. Take advantage of the capital gains exemption on your principle residence. This is one of the best tax-savings opportunities to create wealth I know.

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B.C. Real Estate Association forecasts lower mortgage rates in 2019

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The cost of borrowing for a home is predicted to get a little cheaper this year.

That’s according to the latest mortgage rate forecast from the B.C. Real Estate Association.

“The average contract rate for 5-year mortgages has declined about 30 basis points from its peak in 2018, reaching 3.44 per cent in March,” the BCREA states in a two-page report. “Unfortunately, this still means a stress test rate of 5.44 per cent, even for the highest quality borrowers.”

However, the association points out that if five-year bond yields remain at the current level, “a 5-year qualifying rate of under 5 per cent should follow suit.”

The contract rate refers to the interest percentage listed on the face of a note or a bond.

The qualifying rate refers to a lender’s determination of what a borrower can afford. This takes into account a person’s income, debt obligations, utility, and living costs, as well as the amortization period and mortgage rate.

The qualifying rate is forecast to fall to 4.99 percent in the second quarter and 4.84 percent in the third quarter, before rising to 4.99 percent in the fourth quarter.

“While there is an outside chance of a rate cut from the Bank of Canada, our baseline is for the Bank to remain on hold for 2019,” the BCREA states. “Therefore, we are forecasting no change in the prime rate, from which variable rates are discounted.”

The BCREA predicts that the qualifying rate will rise to between 5.14 percent and 5.34 percent in 2020.

Metro Vancouverites carry large debt loads

According to the Canada Mortgage and Housing Corporation, Metro Vancouver leads the country in the ratio of liabilities to annual income at 242 percent.

The mortgage debt-to-interest ratio in this region is 178 percent, which is three times the figure in St. John, New Brunswick, which has the lowest rate in the country.

CMHC released this chart in December, showing that Metro Vancouver residents, on average, have the highest debt-to-income ratio in the country.
Canada Mortgage and Housing Corporation

In October 2017, the Office of the Superintendent of Financial Institutions announced that the minimum qualifying rate for uninsured mortgages to be the greater of two figures:

* the five-year benchmark rate published by the Bank of Canada;

* or the contractual mortgage rate plus two percent.

This meant that many homebuyers could not take out as large a mortgage, reducing the value of what they could afford to purchase.

That, in turn, is one of the factors cited in the monumental slowdown in the Metro Vancouver housing market in 2018.

The BCREA report questions whether these new mortgage stress-test rules can continue to apply to Canadians with more than 20 percent in home equity.

That’s because the association maintains that they “will be stress tested at a rate much higher than what we estimate as a long-run equilibrium mortgage rate”.

“Given the disruption caused in Canadian housing markets by the stress test at the presently lower rates, the stress test is not likely to be sustainable in the long-run as currently constituted,” the BCREA declares.

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