How can Vancouver real estate players drive growth in Canada’s top market to watch?

For the third year in a row, Vancouver is the top market to watch in Canada in our annual survey of Canadian real estate players. Investors and developers alike are feeling optimistic given Vancouver’s strong economic outlook, the restart of immigration activity and an abundance of capital. But challenges related to the strength of the market—such as rising costs and fierce competition for deals—are requiring the real estate industry to explore ways to manage risks while continuing to drive growth.

Strong fundamentals in the residential market

After a decline of 4% last year, the Conference Board of Canada (CBoC) is predicting gross domestic product (GDP) growth of 4.9% for Vancouver in 2021 and 3.7% in 2022. With pent-up demand stoked by low interest rates, the residential market remained strong in September amid steady price growth. The composite benchmark price was up 13.8% in comparison to September 2020 while sales were 20.8% above the 10-year average for the month, according to the Real Estate Board of Greater Vancouver. Rental demand is also healthy with students moving back to the city and immigration activity picking up.

Also fuelling the Vancouver market is the role of intergenerational wealth transfers, through which homeowners are passing billions of dollars in wealth on to their children or other family members. Statistics Canada, through its Canadian housing statistics program, recently released data on non-market transactions in British Columbia’s residential real estate market, which are an indicator of the role of wealth transfers by people looking to help family members, such as their children, buy a home in expensive places like Vancouver. The report found that, in the Vancouver census metropolitan area, 38% of single-family home sales were non-market transactions. We can expect these types of intergenerational wealth transfers to continue to bolster our city’s housing market in the years ahead.

Industrial properties, offices continue to fare well

But it isn’t just the residential market that’s fuelling Vancouver real estate. The industrial market is particularly strong, while offices are faring well compared to the rest of the country.

Industrial vacancy in the Vancouver area hit an all-time low of 0.7% in the second quarter of 2021, according to Colliers. Strong demand, coupled with a lack of available land, is pushing prices higher and helped boost asking net rents by 13.2% in the second quarter over the same period last year. Some companies are adapting by investing in industrial strata opportunities instead of renting; there also continues to be a trend towards vertical industrial development in the region.

While much of the rest of the country is still dealing with a significant amount of empty office space, Vancouver continues to have the tightest major downtown market for offices in North America (with a Class A vacancy rate of 5% in the second quarter of 2021, according to CBRE). The vacancy rate has remained low as traditional downtown tenants in sectors like professional and financial services have continued to be busy and largely maintained their office footprints while new capacity created since the onset of the COVID-19 pandemic has mostly been absorbed. That’s largely due to our strong job market, which we see reflected in the CBoC’s forecast for unemployment in Vancouver: it predicts an unemployment rate of 5.3% next year, which is the second lowest among our 10 markets to watch. The growing technology sector continues to create jobs and take up office space in Vancouver, while British Columbia’s key mining industry is doing well amid strong commodity prices.

Navigating a competitive environment for Vancouver real estate

But amid these signs of strength were challenges created by one of the key trends explored in our Emerging Trends in Real Estate report this year: rising costs and fierce competition for deals. Supply shortages, rising prices for key inputs, lengthening approvals, potential tax changes and tight labour markets are just some of the factors creating uncertainty around projects and making it harder for Vancouver real estate players to make the numbers work. And amid abundant capital to deploy in the Vancouver real estate market, interviewees indicated it’s harder to do a deal now given the competitive environment, with one suggesting some companies may be sacrificing returns and taking risky positions as they count on price inflation to make up for the gap.

This interviewee noted the competitive environment is putting a renewed focus on operational efficiency, which is leading some companies to accelerate their digitization and technology adoption efforts as they look to reduce costs. A key opportunity to do this is to invest in construction technology, which respondents to our survey ranked as the second most important real estate industry disrupter when looking ahead to 2022. Many interviewees said they’re exploring construction technology solutions to not only reduce costs but also speed up processes and decrease labour needs.

One Vancouver interviewee pointed to small-scale efforts that can create efficiencies, such as incorporating tablets on construction sites so people can more easily share files and information while in the field. There are also significant opportunities to incorporate automation and other digital and cloud-based solutions into back-office activities to deliver efficiency gains.

A key role for data analytics

And in such a competitive environment for deals in Vancouver, data analytics will play a key role in helping real estate companies gain deeper insights into asset and development optimization decisions and using real-time data to support business cases for capital allocations and financing. This will be critical at a time when cost pressures are increasing uncertainties for Vancouver real estate players even as our city remains Canada’s top market to watch in 2022.