Uncertainty lingers for buyers and sellers in Okanagan commercial market

Commercial real estate

The Okanagan, while one of Canada’s fastest-growing regions, is not immune to current real estate market fluctuations.

With inflation and rising interest rates, the real estate market is no longer labelled as “red hot.” Since June 2021, the Bank of Canada has slowly introduced interest rate hikes, with more severe rate hikes announced in Q3 and Q4 of 2022. Buyers, sellers, developers, and investors are now awaiting the next interest rate announcement.

Financing has become more difficult in the current climate, which determines what players in the market can acquire sites for development and proceed with existing projects. Others might be forced to cancel or pause projects as they can either no longer qualify for or arrange enough financing to keep the project going. This overall sense of uncertainty, which began almost three years ago due to the pandemic, has now become exacerbated by rising interest rate hikes. As the economic recovery continues and industrial, retail, and hotel sectors are impacted, buyers and sellers need to exercise caution in decision-making.

Watching and waiting in the hotel sector

During the summer of 2022, the hotel industry saw a pent-up demand due to a rebound in performance, especially in Kelowna, where the city saw high hotel occupancy. As travel restrictions lifted and travellers grew eager to explore, hotels saw prices soar due to high demand, with Canada’s average accommodation costs up from $2,794 in Q1 to $3,252 in Q2 of this year, seasonally adjusted at quarterly rates. The average hotel occupancy in Kelowna was 56.8% through the first six months of 2022, compared to 33.9% in 2021, indicating a positive uptick in the region’s tourism industry.

Hit by the pandemic, some independent or highly leveraged hotel owners preferred to exit the sector as they saw a deep turndown in their business, whereas investors saw the chance to jump into the market. Some investors are eyeing existing functionally obsolete hotel sites hoping to rezone and redevelop them, creating multi-family residential homes and condominiums. Additionally, the B.C. government has been buying aged hotels and motel sites for the creation of affordable and social community housing.

Supply shortages persist for the industrial sphere

Industrial space continues to remain in scarce supply, and Kelowna is no exception. National net absorption of the industrial market rose to 9.6 million sq. ft. in Q3 2022, and occupier opportunities for existing industrial space remained at all-time lows, with the national availability rate holding at 1.5%. Although the new supply of industrial developments reached 9.1 million sq. ft. in Q3 2022 per CBRE, 88.8% of the new builds were delivered pre-leased, providing limited relief to tight market conditions.

Industrial lands are an important component of Kelowna’s economic development and diversification. However, the use of these lands is often outcompeted for commercial and residential uses, especially in Kelowna, a city facing rapid population growth.

The City of Kelowna is taking action to provide more industrial land, marking the 106.5-acre Kelowna Springs Golf Course for conversion to industrial use. A diverse range of businesses in tech and manufacturing are moving from the Lower Mainland to the Okanagan as lack of supply continues to be a challenge for firms pursuing expansion.

High demand, coupled with businesses eyeing the Kelowna market for its lifestyle appeal, has caused industrial prices to soar. Developers are now starting to assess smaller markets near the city, including Vernon, Penticton and Peachland.

Retail realm sees increased vibrancy

One of the most significant changes coming out of the pandemic is the widespread community focus on shopping locally and supporting local businesses. While the pandemic impacted brick-and-mortar retailers, new businesses are now entering the market with renewed vigour. Downtown Kelowna has seen a revival in retail, with cafes, restaurants, and beauty retailers opening up; the retail industry is looking optimistic.

The planned 46-storey University of B.C. Okanagan tower and downtown campus will play a pivotal role in boosting Kelowna’s vibrancy as it’s set to bring at least 300 professional-level jobs to the region and 600 units of student rental housing in Kelowna’s tallest building, along with new retail opportunities.

Like the residential real estate market, interest rates will continue to be a key concern for Kelowna’s commercial market until inflation is controlled.

While cash-rich buyers may take advantage of deals that emerge as developers off-load burdensome projects, uncertainty will prevail while the market and economy try to strike a balance.

The Okanagan’s industrial, retail, and hotel sectors are in the midst of change, and while proceeding with caution is a safe choice for commercial real estate, there will be many opportunities created in 2023 by this fluctuating market for developers and investors alike.

Terese Cairns is a commercial and investment broker with the hotel division at faithwilson | Christie’s International Real Estate

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