This recent article in Business in Vancouver caught my attention as it represents a key planning challenge in our region: the rising cost of commercial real estate. While increasing commercial land values is not the critical challenge that deeply entrenched housing unaffordability and neighbourhood gentrification can be, when the cost of a storefront increases beyond the ability of local-based and local-serving retail to pay for it, it can be a real loss for any community. This issue came up a few times when I was working on the OCP update for the City of North Vancouver and there are no easy answers.

“In a growing number of transactions this year, speculators appear willing to pay up to $1,000 per square foot – equal to $44 million per acre – for Vancouver commercial land assemblies. This is about three times higher than the prices that shocked the market in 2015.”

When a local business makes an investment in community, is part of the attractiveness of a community, and then is priced out by the desirability of a community, that is a real challenge that planners, urbanist and civic leaders need to put some energy into solving. Furthermore, the high cost of commercial land assemblies narrows the range of developers able to pay the price, typically privileging large-scale developers who prefer to work with large-scale retail tenants. Here in Vancouver, this challenge is heightened by the emphasis on commercial ‘corridors’ as potential ‘mixed-use’ redevelopment sites (a topic I may touch on in greater depth later this week).
Thoughts?

Comments

  1. We were in Portland over Spring Break, and they’ve got little stores that we don’t have in Vancouver. Like a local leather maker. I kept thinking, “This is so cool. There’s no way we’d get a shop like this in Vancouver because they’d never sell enough to cover the rent.” There’s a bunch of little places like that. One-off, independent shops that probably don’t sell enough to get rich, but enough to live. They add a fun, unique character to the city that’s great for exploring.
    I don’t know if this is true, but maybe instead of a block having one coffee shop that’s full of people, they can have two that are half full. And, they can both survive because rents are low enough. In Vancouver, a shop would need to be full all the time or else it can’t survive. So, here, instead of two half full shops, we get one crowded shop, plus one vacant storefront. Anyway, that’s just a guess. I know nothing about running a cafe.
    High rents killed all the boutique shops on Robson years ago. 4th Ave Kits will probably be next. Hopefully, Main St, Commercial Dr, and Gastown can hang on. But, if real estate keeps going up, it’s inevitable that they’ll disappear.

    1. Yeah pretty much the only people that are able to rent in brand new mixed use buildings are those that are well capitalized. Young indie entrepreneurs can’t afford this at all. The negative affect of redevelopment is a decrease in class B/C retail and the City loses its ability to incubate new, risky businesses.

      1. Lol. Shoppers Drug Mart, bank, Starbucks. Copy/paste all over the Lower Mainland. I have to admit, those three things provide everything residents need, all within a block WalkScore. But, geez, it’s getting boring around here.

        1. Bank? Surely the local bank branch will soon be a thing of the past as the vast majority of transactions require no human intervention. Even more complex matters like loans and investment advice are moving to the telephone and internet. By the time we bury the last baby boomer there will be no more physical bank branches than there are life insurance offices. That is, about a half dozen per institution to cover the entire region from Squamish to Hope.

  2. I wonder how much of this is related to the prohibition against developing in single family housing areas. If you take the Mount Pleasant Community Plan as an example, they only really selected a handful of sites as suitable for upzoning and left most of the neighbourhood untouched. It’s unsurprising that across the city you’d see developer attention strongly focused on the small amount of sites where development is even possible. Those few developable sites accordingly rise in value.
    It would be interesting to compare Vancouver’s situation against a city where new housing development isn’t so closely tied to a sparse locations along arterials.

    1. Indeed. You hear the bold and risky ideas from the Planning department are apperently ‘townhomes on arterials’. If we start infilling Nanaimo or 16th Avenue with more people, where are they going to walk to shop? Not at townhomes they won’t.
      looking over some of the old Harland Bartholomew Zoning maps from the 1920s and 1930s, it would appear that in many areas the allowed commercial area has gone down

  3. You do see a lot of hairdressers and nail salons opening up in the retail spaces of condo projects (as well as coffee shops).
    Is there really that much money in hairdressers and nail salons?

    1. Scot, yes, it is an issue that pops up from time to time (and thanks to your efforts in highlighting it on this blog). There are no easy answers but at a minimum I think we need a frank discussion of it to. Myself, I am hesitant to advocate for commercial rent control but perhaps a rate control approach might have some validity (however, that would require action by the Province). I do think we need a commercial streets strategy and we need to de-emphasize land assembly (it will always happen anyway, but need to be careful to have policies that encourage/require). But above all, I believe that having an appreciation for affordable commercial spaces will also encourage some creative site-specific solutions and perhaps a rethinking of the standard midrise or podium model for many developments in areas where small-scale commercial is a key component of neighbourhood character (Kits, Main Street, the Drive, Central Lonsdale, etc). At the very least, its worth a conversation!

  4. Vancouver is certainly doing its best to become a giant outdoor shopping mall. Outside of very limited exceptions (i.e. Juniper in Chinatown, East is East up on Main) new developments cannot bring in interesting retail. They bring in essentials, which are needed, but that is it. Too much of that, and Vancouver will have all the uniqueness of an overgrown suburb. That is a major problem, especially when the city has made every attempt to expel neighbourhood shops (like La Marche St. George, or Wildest Snail, a few of the last remaining holdouts).

    1. I challenge you to walk Hastings between Lakewood and Renfrew and then report back to us on whether your claim is true.
      Baring that, even if it is true, these things soften with age. If you want to have a stock of lower-rent buildings in the future for quirky businesses yet unconvinced, it will help to have a larger stock of new retail to go down in value over time rather than whatever can pay the rent in a pinched market

      1. An astute observation. Renewal is happening all over Vancouver and its 26 local shopping areas. It’s an ongoing process. The economics of local serving retail are illuminating.
        * COST OF BUILDING A 900 sf RETAIL UNIT
        Let’s look at a 900 sf retail unit. It’ll require some common area so the actual Gross Floor Area is probably 15% bigger (1,035 sf GFA). Put land in at $100/sf buildable; construction hard costs at $150/sf buildable**; $60,000 for 2 underground parking stalls; design, permits and soft costs at 30% of hard costs; 15% for profit and the cost for that 900 sf retail unit equals about $438/sf GFA or $454,175 total. Add Property Transfer Tax of $7,090 and the TOTAL INVESTMENT COST = $461,265.
        * RETAIL AFFORDABILITY
        As for affordability, CBRE reports 2015 triple net rents in the Main Street corridor between $35 to $60/sf*. So for a 900 sf store (15′ x 60′) you would pay between $2,625 to $4,500 per month in rent ($31,500 to $54,000 per year).
        The Business Tax rate is $15.04 per $1,000 of property value, so that would mean the shop operator would also pay another $7,000 in property tax annually based on the $461,265 value.
        Rent + Property Tax = $38,500 to $61,000/year or $3,208 to $5,803/month.
        * WHAT DOES THE INVESTOR GET?
        Let’s look at the low end of the rental spectrum ($35/sf NNN rent) as an example because in many neighbourhoods retail landlords are price takers not price makers.
        As a landlord, you’re going to have to give the mom and pop a tenant improvement allowance, call it $25/sf which is an up-front cost of $22,500 that you’ll amortize over the term of a 5 year lease. You’ll also pay commission on the lease if you use a broker and you’ll have legal fees, say 5% commissions and fees. You might also give a few months free rent but I have not in my calculations here.
        Assuming you have no vacancy you’ll get 95% of £31,500/year x 5 years – $22,500 Tenant Improvement = $127,125 over 5 years. That’s about $25,425 per year on a $461,265 investment which is a 5.6% yield before vacancy and bad debt, before you pay any debt interest on that property, and before you pay for any capital replacement (roofs, major building systems etc).
        The failure rate for mom and pop shops can be quite high, so you WILL eventually have vacancies, bad debt and legal costs, as well as additional Tenant Improvement and Commissions to pay to find a new tenant.
        Will any of us jump in to buy this unit for $461,265 and lease it for $35/sf for an annual return of 5.6% with the risks noted? Hmmm ……
        * http://www.cbre.ca/EN/o/vancouver/Pages/market-reports.aspx
        (Triple Net = base rent before property tax and operating expenses)
        ** Altus 2016 Construction Cost guide

          1. Property tax is not the driver. Mixed use conversions are driven by the value of added density and particularly the market value of residential uses which exceed those of commercial uses on a $/SF basis.

        1. Yes, there are more important factors than commercial taxes that favour mixed use conversions, but the tax part is often forgotten.
          Not sure I understand the last part. Commercial rents are much higher than residential rents on $/SF basis. So are land values for commercial vs residential zoned property, say comparing adjacent C2-B to MR-4 along Broadway.

  5. Neal, I think this is a valid concern but it also makes me think that this where the real power of discretionary zoning comes into play.
    The outright use on most of our commercial arterials (C-3A zones) is 1.0 Floor Space Ratio – 1x the lot area for anyone unfamiliar with the term.
    Anything more – and you can go up to 3.3 FSR under existing C-3A zoning with a density bonus (and any other relaxations like parking) – requires examplar design that supports the type of uses we see as essential for our local neighbourhood shopping districts. Rezonings give us (speaking as a Vancouver planner) even more discretionary power.
    The pervasiveness of local neighbourhood shopping districts in Vancouver is one reason we have so few malls. The supply of small-bay retail shops demised at say 15 ft intervals supports a lively pedestrian street rhythm and it supports lower absolute rents suitable to ‘mom and pop’ operators.
    We’ve been able to shape and control the look and feel of the street because of Discretionary Zoning. Consider the requirements for window transparently for example that have allowed us to secure better storefronts even from grocery and drug stores that used to obliterate windows with shelves and advertising. At the ULI award winning “Rise” on Cambie and 8th (not to be confused with the “Rize”), the company I worked for mixed small retail units into the streetscape as relief against the monotony of the larger format retail on the site – again the power of discretionary zoning (and a great developer if I must say so myself!).
    The economic challenges ARE tough and you really can’t argue with Jane Jacobs’ famous observation that ‘new ideas need old buildings’. However, it is the market appetite for residential land that is driving these crazy land prices – not so much the demand for the commercial portion where many landlords are generally price takers not makers.
    For sure the cost of new construction will drive higher commercial rents relative to those charged for depreciating older buildings but there are also other pressures including higher commercial property taxes (assessed property values are rising faster than reductions in the commercial mil rate); and online shopping. We need to reconsider the impact of property taxes on local shopping and local Retail and Services generally need to evolve as well if Main Street is going to remain healthy and useful for us.
    Change and evolution are pervasive in the centuries-old landscape of high streets I see in my daily life here in London but they still evolve to serve local demand. The ubiquitous supply is a key factor. We can get very creative about how we accommodate (and require) diversity and mix; how we limit the negative impacts of some uses; and how we can keep the Main Steeet on Main Street.
    I’ve watched my old neighbourhood at Main and 26th evolve and it still makes me hopeful that we can have new shops and housing AND improve our local shopping areas by making sure there is a good supply of the right type of commercial units and by creating attractive landscaped streets and weather protected storefronts.
    Regards from London!
    Michael Mortensen

    Michael Mortensen MA, MCIP RPP
    Urban Developer & Professional Urban Planner
    http://www.plan-tlc.com

        1. Re: Transparency & Retail Design … and C-3A Discretionary Zoning
          A good observation “Guest” – worthy of some explanation and also a nice case study of the benefits of Vancouver’s discretionary zoning in mixed-use areas.
          The Rise was developed under existing C-3A Discretionary Zoning. It is a good example of where City Planning, City Engineering, the Developer and the Architect collaborated to improve design and performance and to include an interesting mix of City and Neighbourhood serving retail and also much needed high-quality housing within the same full block development.
          On transparency along 7th Ave: It is unusual for a grocery store to have more than one primary frontage and most commercial and residential buildings have some “back of house” areas for dealing with the movement of goods and vehicles in and recycling and waste out. In Vancouver, these functions are located off of back lanes but in the case of the Rise, there is no lane through the site as it is a full block site.
          Cambie Street and the SE corner of 7th Ave are primary frontages for the 45,000 sf Grocery Store – the entrance and displays focus pedestrian activity at this point. The frosting on much of the eastern half of 7th Ave masks back of house and utility areas. Walking by (or using Google Earth) you will notice however that functions like the bakery are extensively day-lighted with pedestrian level windows that provide “eyes (and light) on the street” and some pedestrian interest – good design moves which required that the tenant give up wall space typically dedicated to storage or equipment. On 7th, the developer also installed some covered bike racks; low-water landscaping; and a water fountain for cyclists and pedestrians. Save On also maintains cafe tables and chairs for a good portion of the 7th Ave frontage.

          Another great Transparency Example from my personal experience is the Rexall Drugs at International Village: that large expanse of glass windows was going to be completely obliterated by shelving if the retail tenant had their way … importing their “National” store layout more suitable for car-oriented suburban big box malls into a much different urban, pedestrian setting. In the capacity of the Developer/Owner I pushed back and used the transparency guidelines that were in force for the CD-1 Zone to force design changes to keep the windows clear. A much improved situation IMHO.

          But back to the Rise ….
          Other interesting features on the building designed by Vancouver Architect Nigel Baldwin and the recipient of an Urban Land Institute Global Award of Excellence:
          * All 4 corners of the site feature major entrances.
          * There are 92 rental loft residential units on the roof of the large format retail uses. One of the units has been dedicated to the Vancouver’s Artist in Residence program – awarded to a local artist at $325/month.
          * the Rowhouses frame a 20,000 “intensive” (you can walk on it) green roof with a metre of soil, a large area of raised bed planters, shared BBQ and patio areas and an amenity lounge and workout room. It is incredibly livable up there and few people know about it because they can’t generally see or appreciate it from the street.
          * The organization of this “5th Elevation” (the roof and the massing of the row houses) was worked and reworked to respond to the view and overview interests of the Edge Lofts across 8th Ave, just south of the Rise. Residents of the Edge today have a lovely view across an expanse of green. Baldwin’s brilliant move to slip the north facing residential units over the edge of the building opened up mountain views to the north. (The initial design had a “square” of housing with an internal courtyard that did not afford great views or overview for surrounding buildings).
          * More on the Green Roof: Note that a cubic metre of soil requires the same amount of structural support as a cubic metre of water … 1,000kg – a metric tonne – dead load over one square metre area of roof. Part of the reason the building can support all that weight ( a total of 1,800 metric tonnes for the green roof) is that Home Depot required a post-disaster design … now you know where to go for a crowbar and a shovel when the big one hits! (Home Depot is an exemplary corporate citizen when disasters strike BTW).
          * In the parking levels there are car share spots and electric vehicle charging stations.
          * All retail and residential loading is internalized in a large multi-bay zone that has a hammerhead turn that can accommodate multiple full-size semi-trailers. This keeps trucks and delivery vans off the street.
          * Retail Tenants participate in a waste diversion program.
          * Canada Line allowed the developer to reduce the parking ratio – pedestrian and cyclist traffic has been absolutely huge; even with the lower parking ration, parking is still oversupplied relative to the baseline demand.

    1. An astute response (I expect nothing less from you Michael!). And yes, I do think this is an area where Vancouver’s discretionary planning model is a great asset (however, I do have some critiques that may be a topic for another discussion). Vancouver has done a very good job retaining the small-scale commercial unit in new development (as well as supply of commercial spaces) which has served our high streets well, but that particular approach has its limits too. And there are tremendous benefits of incrementally renewing our high streets with new development.
      All that considered, I would like to see a wider palette of solutions – especially ones that take advantage of Vancouver’s discretionary model. And I am interested in exploring strategies to de-emphasize assembly on high streets with an established fine-grain parcel pattern (like Main Street).
      Something to discuss on your next visit back!

  6. Thanks Michael M for putting some numbers to the issue. In recent years I’ve looked at several potential projects with clients and come to the same conclusion: the returns usually aren’t good enough to warrant building for anyone except “premium tenants”, the banks and pharmacies. But I’ve also run into another parallel problem: local investors who tell me they can’t find any commercial property to buy because it’s being scooped up at higher prices by off-shore investors who have even less incentive to keep commercial areas “local and funky”. I’d be interested to know what the scale of this issue is. Anyone?

  7. This conversation and detailed analysis has been very interesting. Thanks to all who spent so much time to explain it.
    I would be very interested to hear some analysis on what’s happening in the West End. Denman St is virtually a ghost town for much of it and now Robson seems to be going the same way. My uninformed analysis is that rents are too high for independent businesses and falling foot traffic too low to attract new chain tenants. So we don’t get independent and interesting stores like Main St and we don’t even get Starbucks…. Thoughts?

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