Commercial market has survived worst of recession

British Columbia's commercial real estate markets started their downturn long before the current recession began and have likely passed through the worst of times, a new report from Central 1 Credit Union said Tuesday.

However, the recession, with its job losses and office closings, is continuing to push up vacancies and bring down office rents, which will lead to more contraction before things bounce back.

"The way it works, these market cycles in commercial real estate tend to lead and lag the real economy," Central 1 economist Dave Hobden said in an interview.

Investors bought heavily into commercial properties starting in 2003 and 2004 in anticipation of the strong economic growth B.C. experienced in 2006 and 2007, the peak years for commercial property transactions (2006) and commercial property values (2007).

"So in a way, [commercial real estate] got oversold," Hobden said. "Prices got to the point that they were reflecting that peak growth all the way through the future. Once we saw the economy was slowing, people had to start to adjust."

The value of commercial buildings (Central 1's research did not evaluate commercially zoned bare land), increased so much, Hobden said, that it became difficult to make a case for buying it as an investment with prospects for increasing rental income and capital gains.

Central 1 found the number of commercial real estate sales dropped a cumulative 34 per cent over 2007 and 2008, and Hobden expects a further 17-per-cent decline over this year and 2010 before sales start showing an increase in 2011.

Hobden also expects commercial-building values to drop 20 per cent in 2009 and 15 per cent in 2010 before rebounding by five per cent in 2011.

Central 1 is also predicting availability of financing in the commercial real estate market will return to historical levels by the end of 2009, with recovery over the next couple of years.

"Now, we're into [a] recession," Hobden said.

"We see the outcome of all that anticipation, the rising vacancy rates and decreasing rents."

Indicators of that element of the downturn were also out this week.

Commercial realtor CB Richard Ellis reported that the Metro Vancouver office vacancy rate, in the second quarter of 2009, climbed for the third straight quarter, hitting 7.8 per cent, up from 6.2 per cent in the first quarter.

CB Richard Ellis senior analyst Nicholas Westlake said that's "an indication that businesses are still either downsizing or vacating the market."

"Overall market conditions continue to be impacted by the economic downturn this quarter," Westlake said in a news release, "primarily in the Burnaby and Richmond markets."

Suburban Burnaby and Richmond have historically drawn high-tech businesses, Westlake said, and the high-tech sector has seen substantial downsizing in recent months.

The vacancy rate in Burnaby hit 10.4 per cent in the second quarter, CB Richard Ellis found, and Westlake expects it to edge up in that market as new buildings now under construction are completed in late 2009 and early 2010.

However, Westlake believes downtown Vancouver's vacancy rate will remain stable as "the lack of new supply in the downtown core will limit the over all vacancy risks which are now evident in Calgary and Toronto."

(prepared by Derrick Penner/Vancouver Sun)