A large office transaction in Vancouver points to a resurgence in office dealmaking, with more deals expected in the coming months as leasing and lending rebound, says one expert.
The recent sale of 700 and 750 W. Pender St. by The Cadillac Fairview Corp. Ltd. to KingSett Capital Inc. is a sign of renewed activity, said Michael Emmott, Vancouver-based capital markets principal with Avison Young (Canada) Inc.
Return-to-office mandates and brisk leasing at the high end of the market are breathing new life into the asset class, which saw low deal velocity during the height of the pandemic and the subsequent escalation of interest rates, he said.
“There are rumours, and there is a fair amount of office valuation activity happening. I think we will see more activity come the end of the summer, come September,” he said.
Leasing activity for premium offices is contributing to rising investment values and a greater willingness by lenders to finance deals such as West Pender Street, Emmott said.
“In Vancouver, the leasing market is actually extremely strong at the moment for the top-quality office,” he said.
“We are hearing from institutions that they are keen to buy again, and that is partly driven of course by the fact that banks are willing to lend money for those acquisitions,” he said.
Cadillac Fairview and KingSett did not respond to requests for comment.
Emmot said it’s unclear what the cap rate—the measure of a property’s financial performance relative to its purchase price—will be on the deal.
“My understanding is that it’s in the high six-per-cent range,” he said.
Higher cap rates imply higher risk and reward, and lower cap rates imply safety and stable income.
Emmott said older, lower-grade office buildings face refurbishment, redevelopment or demolition, with residential conversion unlikely due to cost and code constraints.
“Soon, B and C-class buildings, some of them, will be in very little demand and landlords are definitely going to have to come up with solutions,” he said.
Investors may find opportunities in the suburbs, says another office expert.
“The suburban and the periphery markets, so anywhere from Broadway Corridor out to Chilliwack, are the major contributors” to the strength of Metro Vancouver’s office market, said Jordan Corbett, Vancouver-based associate vice-president at Cushman & Wakefield Inc.
Population increases have been concentrated in suburbs, and city-dwellers are moving outward for affordability, he said.
Corbett said developers are building “at a healthier pace” in the suburbs than in downtown, which has seen boom and bust in new office inventory. The building of suburban offices has been spread out more evenly to meet a “very stable stock of demand,” he said.
And because suburban tenants tend to be local enterprises and government, they are less likely to be affected by corporate decisions made by head offices, according to Corbett.
“A decision south of the border is less likely to cause a tenant in the suburbs to shed a large block of space,” he said.
