The region’s retail and office real estate sectors appear poised for a strong 2017 after setting the table last year with improvements in vacancy rates and new supply, according to a new report by Colliers International’s Victoria office.
The Colliers market report for office, retail and rental housing paints a healthy picture for the region.
Strong tourism numbers, a significant increase in the number of people living downtown and the increased high-tech presence combined to create new life in downtown’s retail segment in 2016, the report said.
The survey noted the retail street-front vacancy rate dropped more than three per cent to 5.45 per cent by the end of 2016. That’s the lowest rate since 2010.
“Of significance, Government Street experienced positive leasing activity and a number of long-term retail vacancies were leased, including the Promise Block and the Royal Trust Building,” Colliers said. “There is very little vacancy on Government Street now and rates are anticipated to strengthen in 2017.”
Shopping centres had a positive year with the vacancy rate dropping to 4.43 per cent at the end of 2016 compared with 5.24 per cent in 2015.
Colliers said that drop is down to empty Target stores finding new tenants (Canadian Tire at Hillside Centre and Lowe’s at Tillicum Centre) and the new supply in developments such as Eagle Creek in View Royal being taken up by new retailers.
The survey noted that downtown will continue to get fresh supplies of retail space with new developments coming up in several areas, while outside the core there’s plenty of expansion to come.
“There are new shopping centres and redevelopments either proposed or underway,” the report said. It cited Mayfair Shopping Centre, which has started its 100,000-square-foot expansion; Sidney Crossing Shopping Centre being approved at the entrance to Sidney; Belmont Shopping Centre in Langford offering 200,000 square feet of retail space with the first phase scheduled to be complete by July 2018; and Colwood Corners expecting its first phase of 120,000 square feet to be completed in 2018.
“We expect all categories of retail to experience continued interest and anticipate a general strengthening of rates along with decreasing vacancies in 2017,” the report said, adding the strongest retail demand will be downtown.
Office vacancy rate drops
The office market had a good year in 2016, according to Colliers. For the first time in seven years, the office vacancy rate dropped below eight per cent as the private sector absorbed empty space around the region.
Colliers’ fourth-quarter office market report said the rate fell to 7.81 per cent at the end of 2016, compared with 9.54 per cent at the same time in 2015.
Of the nearly 200,000 square feet of space that was occupied, 73,454 square feet was downtown and 123,224 was in suburban areas.
There were 21 sales during 2016 worth a total of $110.7 million, with 17 of those transactions involving property downtown.
Colliers said office vacancy is expected to continue to decrease throughout 2017 with no significant new supply expected to hit the market until the first phases of Capital Park and 1515 Douglas become available in late 2017 or early 2018.
The first of the new supply will be the 125,000 square feet of phase one of Capital Park which is scheduled for completion by September this year.
In total, the two buildings at Capital Park will represent 500,000 square feet of new Class A office space, but Colliers does not expect that to affect vacancy rates this year.
“The staggered timing of the supply over two years will not drive the vacancy up by a similar amount,” the report said. “We will also undoubtedly see higher vacancies in Class B and C buildings as tenants take advantage of the new supply of Class A office space, but the overall impact will not be dramatic.
“With the current downtown Class A vacancy at 1.07 per cent, it is clear there is pent up demand for this new product.”
There is also plenty of demand in the residential rental market, with only a little relief in sight.
New rental units on tap
Low residential rental vacancy rates could see a slight increase in 2017 with new purpose-built rental units hitting the market this year around the region.
Colliers’ multi-family market report said there will be more than 1,300 new residential units added downtown in the next 12 to 24 months and another 466 on the West Shore that should lead to a migration from older stock for those who want to upgrade their accommodations.
“Vacancies in these 1960s and 1970s era buildings that represent over 80 per cent of existing stock will present opportunities for tenants residing in the West Shore and other outlying areas, who are working downtown, to relocate closer to their centres of employment,” the report noted.
“This will have the positive impact of reducing the time and expense associated with commute times. As a result, we should see potential for a minor uptick in vacancy rates for 2017 as the market digests these new additions to inventory.”
Vacancy rates in the fourth quarter were 0.5 per cent, a slight drop from the 0.6 per cent at the same time in 2015.
Colliers said the low vacancy rate has been driven by a younger demographic moving to the region for post-secondary education or work in what has proved to be a buoyant economy.
An increase in the number of retirees and empty-nesters in the region considering rental accommodation and would-be first-time homebuyers who have found it difficult to break into the housing market have also had an impact on the low vacancy rate.
“This extreme downward pressure, being exercised on a limited supply of existing rental inventory, clearly justifies the delivery of more rental supply,” the report noted.
Colliers has also called on municipalities around the region to streamline project approval and increase density requirements to ease the pressure on the rental supply, lower rental rates and ensure the best use of limited land.
The report pointed out the central Victoria market is dealing with a loss of units in buildings that are being taken out of the rental pool for renovation, upgrade or conversion to strata to meet demand for condominiums.
The market report noted condo development has been strong in that central market with another 1,600 new units expected to be added over the next 12 to 24 months.
