Vancouver Commercial Real Estate Market Trends 2024 End

Vancouver’s commercial real estate landscape in 2024 presents a complex picture of resilience and adaptation across different sectors. The market is experiencing varying dynamics, with some sectors showing remarkable strength while others undergo significant adjustments.

The multifamily sector stands out as particularly robust, driven by exceptional population growth rates of 3.8% and 4% in 2022 and 2023 respectively – more than double the historical average of 1.9%. This surge has created intense pressure on housing supply, pushing apartment vacancy rates to a mere 0.9%, highlighting the critical need for more purpose-built rental developments.

Meanwhile, the industrial, retail, and office sectors are each navigating distinct challenges and opportunities. Industrial vacancy has increased to 3.0%, marking a seven-year high, while retail faces a cooling market with leasing activity at its lowest since 2015. The office sector, though quiet through most of 2024, shows promising signs of revival, particularly in the downtown core. Here are the main trends we’re seeing:

Multifamily Market Trends

The Vancouver market has been experiencing exceptional population growth. In 2022 and 2023, growth was 3.8% and 4% in 2022, respectively, compared to average annual gains of 1.9% historically. Population growth has been a significant driver of housing demand amidst scarce supply. Much of the new housing development has traditionally focused on the for-sale condo market, with limited production of new purposebuilt rental apartments. As a result, apartment vacancy reached a low of 0.9%.

The rental market has long dealt with vacancy at or near 1%. The sustained demand has resulted in a crisis level of unaffordability. To keep a lid on runaway rental rates, the provincial government mandates limits to rent rate increases for existing tenancies. The result is one of the lowest tenant turnover rates in the nation and buildings with revenue that are often considered below market. Just 8% of the existing rental units in the market turned over in 2023, compared to the national average of 13%, according to Canada Mortgage and Housing Corporation (CMHC). Tenant turnover caused by the pandemic, the increased level of population growth since, and the building operator’s fight against inflation in operating costs have sent rental rates upward by 30% over the past five years to an overall average of $2,390, further cementing the Vancouver market as the most expensive in the nation. Rent growth has since slowed to an annual rate of 1.7%, limited by the market’s ability to absorb higher rents given its median, before-tax, household income of $100,000.

The supply trend has now shifted. Rental development accelerated in the past few years as demand and pricing in the condo market softened due to higher interest rates. Rising rents upon turnover have also helped to make new rental apartment development feasible. Favourable financing provided by CMHC has helped developers kickstart new rental apartment projects. Vancouver now has approximately 23,000 under construction or 15.8% of the overall inventory. Development continues to be focused around Skytrain, Vancouver’s rapid transit network. The government has introduced blanket zoning for high-density developments around these stations and other transit nodes. Developments at, or near, Skytrain stations are taking place across the region, almost all tied to mixed-use developments and/or mall densification projects. Shape Properties, Quadreal, Westbank and Bosa are all examples of developers carrying out projects, some of which have already seen first-phase completions.

According to developers, planning cycles within most regional municipalities continue to be drawn out and are a large obstacle affecting timely development. Increased development cost charges are another obstacle in making developments work, with the added costs often passed along to the renter via higher rents. First Nations developers, often unburdened by municipal planning cycles, will significantly contribute to the rental inventory in the years ahead. The Squamish Nation is working toward adding 7,000 units to the Vancouver westside, at the southern foot of the Burrard bridge, a project named Sen̓áḵw. Three towers are underway currently, with more to follow. MST Development, a partnership of three nations, will be developing a large tract of land on the west side of Vancouver, while Musqueum Nation has been partnering with developers for several years on smaller-scale rental development sites.

Investment activity in the multifamily market has improved throughout 2024. Volumes have climbed to $889 million and are likely to finish the year close to the five-year average of $1.1 billion. Pricing has again started to climb, currently sitting at $410,000 per unit, up between 5% and 10% since last year, but still 5% lower than values seen at the end of 2021. Further price growth is anticipated as demand remains resilient and the cost of borrowing improves. Local private buyers are typically responsible for 85% of the activity. However, over the last year, non-profit organizations have been more active and institutional buyers have emerged as buyers of new, high-density properties. Assets like 1770 Pendrell St., a 2019 development by Westbank, have come to market and found buyers at yields sub 4%.

Market Overview

Retail Market Trends

In the latter half of the year, momentum in Vancouver’s retail market has cooled. Leasing activity is near its lowest going back to 2015. Space absorption will fall short of matching 2023’s 500,000 SF. However, the year will be another in the trend of year-over-year positive absorption. The lack of space availability, currently 1.7%, is contributing to market slowdown with tenants facing challenges in finding space to satisfy their requirements with some reconsidering their timing until more suitable space arrives.

The low level of space availability could be a significant driver of rent growth if it were also met by increased demand from the consumer. Over the last year, retail spending is up 0.6% as of the third quarter. However, retail spending per capita is down 2.2%. The flagging per capita spending has resulted in adjusted shopping habits; spending on clothing, furniture, and food/beverage is down, while health-related purchases, general merchandise (department store and warehouse retailers), pharmacy and building material purchases have increased. Of the top leases in the past year, gyms and big box thrift stores rank multiple times among the biggest leases of the year, including Mission Thrift store at Haney Place Mall, Maple Ridge (37,000 SF) in the spring, and Inclusive Place of Pickleball Sports, taking 36,000 SF at Lougheed Town Centre, in grocery space that had sat vacant for a number of years.

Space absorption has remained positive in eight of the last ten quarters. Large tenant moved-outs have influenced quarters with negative absorption, such as a bowling alley or restaurants, which sent the first quarter into negative territory. Space availability often results in tenant replacement rather than vacancy as demand for space exists at either end of the market: the affordable or the high profile. Over the past year, high-profile space at transit-adjacent developments like the City of Lougheed and the Amazing Brentwood in Burnaby have made significant contributions to overall positive absorption, while further reaching suburban markets have seen developments like Latimer Village in Langley and District 1881 in Chilliwack, contribute.

The push for residential construction to address the housing crisis continues, often at the expense of older retail buildings that are taken out of inventory and replaced by a mixed-use project. Several malls will add density over the next five to ten years, bringing residential towers and more retail space. Oakridge, Richmond Centre, the City of Lougheed, and Coquitlam Centre are all expected to be part of a lengthier list of properties where significant retail space increases are expected. Retail construction starts this year are the lowest going back ten years and will result in the continued absence of new retail space until some of these mall densification projects and mixed-use developments ultimately arrive on the market.

The lack of space availability has ensured that rent growth has remained positive. Rents have grown by 3.6% in the last year, taking metro-wide average rates to $36.00 net. Over the next year, mortgage renewals will continue negatively affecting consumer spending. Limitations in the space market will keep rent growth positive but more likely in line with the inflation rate with upward pressure in pockets where new retail space is delivered. Neighbourhood centres, anchored by grocery stores and with tenants curated to include drugstores or healthcare tenants, will help rent growth in the year ahead. Retail space along thoroughfares that see high levels of foot traffic and draw top brands, as well as retail in growth markets like Surrey, Coquitlam, Burnaby and Richmond, are likely to continue to be the main drivers for rental growth in the region.

Market Overview

Industrial Market Trends

As 2024 ends, Vancouver’s industrial market has seen a significant increase in vacancy over the year. It now sits at 3.0%, climbing from 2% over the year. The market is seven years removed from the last time the market saw 3.0%. Leasing activity has improved through the middle quarters of the year and is expected to close out the fourth quarter at, or near, the same level of activity, between 1.5 and 2 million SF leased. Discussions with market participants indicate that the improved level of leasing activity is anticipated to continue as space enquiries and touring have improved since the postpeak lull. Sustained leasing will help keep a lid on climbing vacancy rates, projected to be close to topping out, leaving the market firmly in the landlord’s favour.

In the past year, space absorption is 180,000 SF, and is forecast to close out the year at approximately -600,000 SF, a significant change of pace from 2021’s peak demand formation of 6 million SF. Meanwhile, sublet space availabilities have reached a four-year high of 1.9 million SF, a 12% contribution to overall availability. The upward movement in the fourth quarter is the result of 307,000 SF of distribution space coming to market in Campbell Heights, Surrey, currently occupied by Amazon and DSV Canada, a transport and logistics firm. However, most of the new sublet space that has come to market in the fourth quarter has been in smaller bays, between 2,000 and 12,000 SF, indicating a more prevalent defensive posture amongst occupiers in the smaller bay market.

A lack of industrial land transactions, due to a widening bid/ask spread, is expected to reduce new developments in the next 18 to 24 months, increasing rental growth pressure from the current annual rate of 0.6%. Vancouver’s geographic constraints will ensure it remains one of the country’s tightest and most expensive industrial markets. Current rents are averaging $21.00 net. A bifurcation of rents is emerging, with lower-tier assets softening while top-tier assets are more resilient. Significant rent decreases aren’t expected due to the tight market conditions and the anticipated improvement in leasing activity.

The 6.8 million SF of space that is currently under construction will take upwards of two years to absorb and will likely delay any marked improvement in rents until that point. Construction starts slowed in 2023 and carried through to 2024. The activity level is on par with 2019 and 2020, with approximately 4.0 million SF of new projects, including speculative condo and logistics projects. It’s understood that distribution firms, despite the recent uptick in sublet space in the segment, continue to shop for space but less urgently than in past years, led by distributors of essential goods. Currently, six developments that are under construction offer over 100,000 SF of space. The number of options far exceeds what has been present in the market for years.

Vancouverites are especially affected by higher interest rates and the effect on purchasing power due to the lack of affordability present in the housing market. Small to medium-sized industrial tenants, a large component of Vancouver’s industrial market, face similar challenges. As interest rates trend downward, consumer spending and business investment will likely begin recovering, putting further pressure on the local industrial real estate market. Population growth will slow, returning to its average growth rate, but it will still pressure the small to medium-sized bay market, which services the population. Vacancy rates will stabilize in 2025, and marginal decreases are anticipated in 2026.

Market Overview

Office Market Trends

Vancouver’s office market has slowed to a baseline activity level best described as quiet over the past three quarters. The fourth quarter, however, has had a strong start. The brokerage community reports increased enquiries and showings in the last sixty days, with the downtown core leading.

Last year, metro Vancouver saw absorption reach 1.6 million SF. New buildings downtown totalled 1.9 million SF and contributed over 1.3 million SF towards net absorption. Pre-leasing commitments made years ago have resulted in strong occupancy levels. However, some head lease space remains available, along with sublet availabilities. With these deliveries complete, absorption over the trailing 12 months now sits at 200,000 SF. Contributing factors include stalled officeusing job growth since January, no new market entrants, and the continued trend of tenants taking less space, offsetting the cost of moving into higher-quality buildings. However, there are positive signs that expansion is starting to take place, currently driven by tenants in the finance and law segments, with engineering firms expected to ramp up. For example, at Vancouver Centre downtown, The Bank of Nova Scotia added 20,000 SF while Harper Grey added 7,000 to their existing tenancies. Despite not being the most significant lease size, the space expansions are an encouraging sign. Also, there are several larger deals rumoured to be in the works that are expected to help leasing momentum build.

The reduced leasing activity has resulted in vacancies moving upward to 6.7%. Revising inventory to exclude small buildings and government and education properties brings the vacancy to 9%. Further growth in vacancy is expected as the tail end of the region’s construction cycle wraps, almost all of which will be outside of downtown, which isn’t likely to see another office development commence for 24 to 36 months, at minimum.

The metro Vancouver market has approximately 3.1 million million SF under construction. Of the lease space arriving this year or next, big block availabilities are limited to Discovery Campus in Burnaby and Kaslo Tower West in Vancouver. Future lease availabilities in the condo builds are expected to be contained to smaller suites. Most projects underway today will be completed by the end of 2025, potentially pushing metro-level vacancies to a 10-year high. Two office projects appear to have been cancelled. Strand’s Three Sixty (112K SF) in Vancouver and Century Group’s Holland Park (190K SF) in Surrey. If it is possible to cancel an office development, developers are expected to continue to do so, choosing to pivot to multifamily where possible.

Across the metro region, 10 million SF is available for lease, 20% of which is sublet. Historically, sublet leasing contributed 10% to 15% to leasing activity. That has since moved to between 15% and 20%. Tenants taking under 10,000 SF increasingly turn to the sublet market for ready-to-occupy space. To compete, landlords are now willing to build show suites that offer turnkey space for prospective tenants.

Rents have been flat since 2022, except for top buildings, which have shown some softness in their rents this year. Still, the reductions haven’t erased the growth recorded in 2022 and into 2023, a successful leasing period that saw tenants like Lululemon, Microsoft, and others secure big blocks downtown while Fraser Health, Fortinet and others were active in suburban markets. According to the leasing community, downtown tenants have been able to negotiate face discounts of late. However, suburban markets have not followed, with negotiations limited to incentive packages. Once the market has worked through the new space overhang, anticipated by the end of 2026, rent growth is expected to increase, potentially exceeding 3% in 2027.

Market Overview

Conclusion

As we analyze Vancouver’s commercial real estate market performance in 2024, several key themes emerge that will likely shape the market’s future trajectory:

1. Market Resilience: Despite varying challenges across sectors, Vancouver’s commercial real estate market demonstrates fundamental strength, supported by strong population growth and evolving business needs.

1. Sector-Specific Dynamics:
  - - The multifamily sector’s extreme low vacancy rates signal robust investment opportunities in purpose-built rentals
  - - Industrial market’s adjustment phase suggests a more balanced market emerging
  - - Retail’s evolution reflects changing consumer behaviors, with health and value-oriented businesses leading leasing activity
  - - Office sector’s nascent recovery, particularly in premium spaces, indicates returning confidence

1. Forward Outlook: The market shows signs of transitioning toward a more normalized state, though each sector is moving at its own pace. The multifamily sector’s severe supply constraints present both challenges and opportunities, while the industrial market’s stabilizing vacancy rates suggest a healthy rebalancing. Retail’s adaptation to new consumer patterns and the office sector’s gradual recovery point to a market that continues to evolve and find new equilibrium points.

Investment opportunities remain strong in Vancouver, particularly in sectors addressing critical market needs such as rental housing and quality office space. However, success will increasingly depend on understanding and adapting to shifting market dynamics and changing user preferences across all sectors.