While many of us traditionally think of a real estate investment as a residential property, the last few years have seen strong growth amongst commercial real estate in Vancouver–today a highly sought after and valuable asset. As of late, I am being asked with increasing regularity by my clients to provide some insight into this potentially lucrative venture. While there’s too much to cover in one post, here are a few considerations.
STICK WITH WHAT YOU KNOW
If you’re interested in purchasing commercial real estate, think about what type appeals to you. Properties which fall under the umbrella of commercial real estate include: multi-family rental buildings, retail space, office space, mobile parks, office buildings, retirement dwellings, industrial warehouses, hotels and resorts, land, mixed use and agricultural properties. It can be a heck of a list to contemplate if you’re new to the game but, as with most things in life, my advice is usually to stick with what you know. That means if you work in an industrial field, maybe an industrial warehouse is a good fit for you. The more comfortable you feel within the realm of an investment property, the more confident you will be navigating the purchase of one.
CHECK THE NUMBERS
Earlier this year, The Vancouver Sun ran an interesting article about commercial real estate in Vancouver. In it, not only did they forecast a strong demand for commercial real estate over the coming year, they doled out some pretty impressive numbers along with it. The article quoted Michael Gill with Avison Young capital markets group, who remarked that commercial deals within B.C. in 2015 would probably clock in around $2.6 billion. It seems unnecessary to point out that that’s a lot of money. And while Metro Vancouver is responsible for the majority of that number, there are commercial investments being made all over the province.
BE PREPARED FOR COMPETITION (IN OR OUT OF PROVINCE)
It’s not all Canadians who are buying either. Non-resident investors have made some bold moves into the commercial real estate here in Vancouver. An article from The Financial Post cited a local real estate lawyer who essentially said that those coming to the table with U.S. dollars are looking at B.C. as being a “20 to 30 per cent discount off the top.” This is important to note as foreign dollars have potential repercussions for Canadians wanting to get into the market–namely, prepare for the possibility of competition from outside forces; particularly if the loonie continues to flounder against the U.S. greenback. And lest not forget the strong Euro, rumored to be a strong force in the (also rumored) $400 million cheque handed over by a German multi-billionaire for the Royal Centre on West Georgia Street earlier this year.
In a first quarter 2016 Economic Outlook and Market Fundamentals Report released by Morguard Corporation various trends in Canadian investment real estate were zeroed in on. In particular, Canadian commercial properties are in limited supply and as a result investors are becoming keener on multi-suite residential buildings. In GVA, the industrial availability rate is around 4.1%, and the demand for space in industrial properties either is on par with, or has surpassed supply.
WEIGH THE GOOD, THE BAD, AND THE DIFFICULT
Consider the pros and cons of a commercial property. Yes, a larger down payment is required (typically around 25-35%), which can be a huge obstacle for some. Unlike residential properties, your personal income does not really affect the application, but your credit, and personal net worth are still considered. The mortgage rates on these properties are higher unless backend insured, however, there are many benefits as well.
Tenants in commercial or industrial properties are far less likely to break their lease and leave you in the hot seat. Unlike the relatively loose bonds of a residential rental contract, once you lease a space for commercial use, those people have invested everything they have in making their business work. Leases are also usually for much longer periods than in residential situations. Another big selling feature is that tenants are responsible for paying the taxes, utilities and maintenance.
Unless you have just been told you are an heir to a small country, I cannot stress enough the benefits of starting out small and getting your feet wet. For first time buyers, smaller office or retail condos spring to mind; as do small mixed-use properties. Financing these smaller commercial properties may be more difficult as many commercial lenders only consider properties that are over a million dollars.
The truth is that not everyone is up to this type of investment. For the unprepared, the career-oriented individual with little free time, and the new parents, I would not encourage this type of transaction. Commercial real estate can be a daunting, complex, and incredibly time-consuming venture. But for those up to the challenge, the potential for large financial profits over the long-term is a very real possibility.