MARKET OVERVIEW
Our Victoria office commenced operations in the spring of 2001 as J.J. Barnicke Victoria Limited and has since offered comprehensive, professional and highly personalized real estate services to its growing local and national clientele. Our energetic team is committed to providing outstanding sales, leasing and advisory services for retail, office, industrial, hotel, multi-residential and land development transactions. Recently, J.J. Barnicke Limited has become the Canadian operation of DTZ, one of the world's top four global advisors in commercial real estate. This is a tremendously exciting and positive move for us and will expand out service delivery to all our valued clients.
Beautiful Victoria, British Columbia is a sophisticated seaside City located on the southern tip of Vancouver Island. The region is the vacation capital of Canada and the premiere tourist destination in the Pacific Northwest, contributing over one billion Canadian dollars a year in revenue to the local economy. Victoria's temperate climate, natural beauty and laid-back lifestyle make it an attractive place to visit and a wonderful home to over 335,000 people. The City's British colonial heritage is still very much apparent today, but contemporary Victoria has a distinctly Pacific Northwest flavor with cosmopolitan dining, superb shopping, a colorful nightlife and a full complement of cultural offerings.
Greater Victoria Market Overview
As we proceed through 2010, we find the commercial real estate market reasonably healthy again with plenty of activity in all sectors. Almost every country in the world was more affected by the global economic meltdown of 2008 than Canada. Most economies are now in some form of recovery and Canada is leading the way! Real Gross Domestic Product grew at the end of 2009 and consumer and business confidence is on the rise in almost every province.
Production increased in most major sectors, as we closed out 2009. A significantly higher level of activity for real estate agents and brokers provided the largest contribution to the 0.2% gain in service industries. There were also increases in retail and wholesale trade as well as in some tourism-related industries. While we are not back to the frenzied activity levels of 2007, the market is reasonably healthy once again.
INVESTMENT MARKET
The investment market in Greater Victoria felt the impact of the global financial crisis but fortunately to a lesser extent than in many of the larger urban centers across Canada and in the United States. The challenge has been to bridge the gap between sellers and buyers as investors backed away from the record pricing and low capitalization rates that prevailed until early 2008. Between mid-2008 and mid-2009, capitalization rates moved higher across all investment sectors but the lack of transaction activity made it difficult to pinpoint the extent of the increase with any real exactitude. From a review of completed transactions and the response to unsold listings it appears that the increase for quality investments was between 50 and 100 basis points. The market stumbled through the latter part of 2008 and the beginning of 2009 with fewer investment transactions completed than in previous years, but now after a short break, the market has returned to very active levels with a sense of renewed confidence on the part of investors. In fact, over the last six months the investment market has shown signs of a firming trend and capitalization rates may again be heading lower. Financing conditions have improved as well, but remain challenging for buyers who are not well capitalized. Lenders are imposing tougher appraisal reviews and lower loan to value ratios, but interest rates are historically low, so are very supportive of investment transactions overall.
The local economy has been relatively insulated from the broader recession, due in part to Victoria’s large public service employment base and a diverse range of economic drivers, but like most regions in Canada, it too has seen employment dip and the unemployment rate rise to just over 6% (nearly double the rate of one year ago). Nonetheless, the effects have been primarily limited to the tourism and new housing sectors, which fell significantly in the second half of 2008, and first quarter of 2009. In recent months, the housing market has bounced back with a vengeance, improving steadily throughout 2009 and now into 2010 with increased sales activity and solid prices that are within 5% of their previous highs. Commercial vacancies remain low in all sectors (retail, office, industrial) and lease rates are relatively stable, characterized by low demand and supply over the past year. There is some concern that these conditions could be compromised by the downsizing and layoffs within the provincial government, accompanied by the introduction of HST, and rise in interest rates. However, for the time being, the market is very solid.
INDUSTRIAL MARKET
Renewed economic confidence has provided Greater Victoria with a resurgence in industrial market activity over the first quarter of 2010. Tour activity has picked up since the latter half of 2009, and landlords are seeing genuine interest from prospective tenants interested in securing a new or supplementary location. Demand for owner user and industrial investment product remains strong as pent up demand continues to build, given the chronic shortage of industrial properties. Land values and rental rates have escalated dramatically over the past few years, however, both seem to have stabilized since the global economic downturn.
Greater Victoria’s industrial vacancy rate ranks among the lowest in North America and is anticipated to hold steady below 3% for the duration of 2010. A considerable amount of new supply was added to the market in recent years, but virtually all of that space has since been absorbed. Developers are now able to capitalize on construction costs that have declined from previous highs and leveled off for the time being. However, financing is still tight, as banks remain conservative with their lending practices amidst improving but volatile economic conditions. The primary challenge facing developers is securing users to initiate build to suit and speculative projects.
APARTMENT MARKET
In the apartment market, there is a large amount of capital chasing available buildings with buyers looking firstly for long-term appreciation and secondly for a return on their investment. Despite this, the past 18 months saw the sale of apartment properties in Greater Victoria hit a 10-year low as a result of the global economic crisis tightening mortgage lending and a lack of available capital for investors. Mortgage money is now available and the market is strong once again. For those looking to sell, the market continues to be red-hot. In December 2009, a 46 unit good-quality building was put on the market and after receiving multiple strong offers, this property sold at a cap rate close to 4.25% and a price exceeding $132,000 per suite. Apartment buildings still represent an excellent income producing investment, particularly with the shortage of rental properties in Greater Victoria, which has led to rent increases for several consecutive years. Increased pressure on the rental market is largely a result of inter-provincial migration to British Columbia. This migratory wealth then translates to an influx of new renters. Given the Canadian age demographics and the appeal of Greater Victoria to young and old alike, this migratory trend is likely to continue for the foreseeable future.
OFFICE MARKET
Victoria enjoys a relatively small but stable office market that grew substantially (40%) in the period from 1992 to 2002 and has seen few new additions to the market since that time. The strong local economy that persisted in the five years prior to the second half of 2008 saw the demand for office space substantially outpace new supply and led to ultra-low vacancy rates that were accompanied by fairly dramatic increases in rental rates. By 2008, when the availability of larger spaces (i.e. > 10,000 square feet) became extremely limited, several new office construction projects were enabled and are now in progress to provide some much-needed relief to the Class “A” market.
There is approximately 8,100,000 square feet of office space in Greater Victoria, split 60/40 between downtown and suburban buildings respectively. In terms of quality, about 15% of the market (+/-1,300,000sf) is considered Class “A” buildings, with just under half of such space (600,000sf) located downtown. The largest portion of the City’s inventory falls into the Class B category, which amounts to 73% of the total market (almost 6,000,000sf) and represents almost the same proportion downtown as in the suburbs. The remaining 11% of the market is designated Class C and is comprised of older stock with varying degrees of functionality.
RETAIL MARKET
A slowing economy, a drop in tourism and a sharp decline in residential property sales put the brakes on retail sales growth in Greater Victoria for the first half of 2009. A number of retailers throughout the region were forced to downsize or close, with those most affected being retailers in the downtown core who cater primarily to tourists. As a result, we have experienced a slight decrease in demand, moderate increase in vacancy and a leveling of rental rates for retail space in the Capital Region.
In recent months’ market conditions have improved, retailers are experiencing increased consumer confidence and the Bank of Canada has predicted a quick economic recovery. Consumers remain cautiously optimistic, as there are obvious economic challenges ahead with a less then robust provincial economic forecast that is expected to incur additional debt in the year ahead, which will affect public spending and put pressure on government services.
Nonetheless, Greater Victoria’s retailers appear to be faring better than originally expected in 2009. Despite the global economic downturn, it has been a relatively stable period for the Capital Region’s retail market with several exciting new developments underway, which are sure to attract new retailers to our region. Downtown Victoria’s northern periphery, the Uptown development in Saanich, Harris Green community, and the Humboldt Valley remain a source of optimism and growth. Only time will tell how retailers will evolve to face the challenges ahead, but Greater Victoria benefits from strong market fundamentals and a diverse economy that should help support continued growth going forward.
TOURISM MARKET
Victorians are blessed with a beautiful City, a magnificent setting and a climate that is the envy of the rest of Canada. It is not surprising that Victoria is a major tourism destination attracting more than 3.65 million visitors a year who inject more than one billion dollars into the local economy. Tourism in the Capital Region hit a record high in 2007 generating $1.23 billion after we saw increases in room revenues, hotel occupancies, average daily room rates, and both airport and ferry transportation. In 2008, Victoria began to experience the effects of the economic downturn, with the City’s tourism revenue declining to $1.1 billion. Until that time, the local tourism market remained resilient with overseas and inter-provincial travelling offsetting the decline in American tourists. In 2009, tourism suffered further as the fallout from the global economic downturn rippled through the industry. Despite the busiest year ever in the cruise ship sector with 215 ships making stops in Victoria, the City saw a decline in the US, overseas and domestic markets. Reports suggest that Victoria’s tourism market was down 3.15 per cent for 2009, with revenue per available hotel room down as much as $8.50, average daily room rates down by $6.66 to $126.86, and virtually flat numbers from the airport and BC Ferries.
It is challenging to forecast what the economy will bring over the next year and how Victoria’s tourism market will be affected. Americans play a considerable role in the BC tourism industry and the fact that many Americans are staying home, instead of vacationing outside their country, accounts for a large portion of Greater Victoria’s negative statistics. Chemistry Consulting reported that American visitor numbers were down 8.1% between January and April 2009 and their stats show that between 2000 and 2008, the number of Americans entering BC dropped 36.1%. The reasons for the drop range from new passport regulations to dollar parity issues, and finally to the global financial crisis. American tourists have traditionally been our largest customer, but as American and other international travelers were staying home, Canadians were helping to fill the gaps. Domestic travel is what helped sustain the industry in 2008, with visitors from Ontario and Alberta being outnumbered only by British Columbians, particularly those from Vancouver Island. As a result, Victoria tourism operators are shifting their focus to the close-in markets, namely people from Western Canada and the Seattle area in particular. Through the difficulties of the past, tourism has proven to be a resilient industry. Vancouver and Victoria are faring better than other Canadian cities in this down market with higher room occupancy rates. In addition, the province was recently host to the Winter Olympics with tourism benefits expected to follow for many years to come. There are obvious challenges that remain which could be further compromised by the introduction of HST, but many expect things to improve throughout 2010, mirroring the overall economy, before we see some big gains in 2011-12. Only time will tell how the tourism industry will evolve to face the challenges ahead, but research shows people will want a break and history tells us that Vancouver Island is a great destination offering a charming and attractive place to visit.
VANCOUVER 2010 OLYMPIC GAMES
In February 2010, Vancouver was the host city for the 2010 Winter Olympics. This event created quite a buzz provincially, nationally and internationally. Coined the “Sea to Sky Games”, the 2010 Olympics was the first held at sea level. The Games focused international media attention on Vancouver, Whistler and all of British Columbia and generated tourism and stimulated new business investment. A recent study by the Provincial Ministry of Competition, Science and Enterprise suggested that there are many influential economic benefits to holding the games. They include a generation of close to $10 billion in direct economic activity, the creation of approximately 228,000 jobs throughout the province and up to $2.5 billion in incremental tax revenues. Greater Victoria and Vancouver Island will certainly receive long-term economic benefits for years to come.