The Risk of Overlooking Commercial in Mixed-Use Developments; Is It Finally Getting the Credit it Deserves?

Commercial space has historically been considered the tail on the dog in our city. I’m talking about the space – typically ground level – that forms part of larger high-density residential developments. In many of these developments, it’s an afterthought or considered a planning nuisance required under zoning bylaws. Now, as demand for residential product cools in Metro Vancouver, demand for commercial strata space has never been frothier and developers are taking note.

In recent years, as the value of residential density in Metro Vancouver skyrocketed and housing availability became scarce, it was argued that ground-level commercial density should be (at minimum) partially converted to residential. In many cases, this argument has been successful as pressure mounted to increase housing supply.

From an end-user perspective, strata commercial has, in many areas, become the last bastion for a small-or-medium-sized businesses to own its real estate in Metro Vancouver. We know from our tail on the dog analogy that land values for fee simple property have been driven by residential, not commercial. This has made fee simple land virtually unobtainable to the very commercial businesses looking to own their property. These groups have turned to stratified developments where they are paying on just the commercial density and the condo purchasers are paying for the residential density – an equitable solution.

Another factor driving demand for strata commercial are the favourable lending conditions. Chartered banks, credit unions, and the BDC have incentive programs encouraging businesses to acquire hard assets, including real estate. With high leverage debt readily available at very low interest rates (yes, they are still very low) and the headwinds of rapidly increasing rental rates, it’s no surprise that many end-users have chosen to acquire strata commercial.

The calculation for an end-user is simple: At the end of a ten-year lease, you own nothing. After paying a mortgage for ten years, you have a tangible asset that theoretically has appreciated in value while you’ve paid down the principal owing. We’ve seen this paradigm shift across retail, office and industrial. And the only impediment is lack of supply.

In addition, as residential pre-sales slow, the importance of selling the commercial increases in order to meet construction financing thresholds. Financial considerations aside, the anticipated tenant mix of commercial is something buyers of the residential are increasingly concerned about. A strong roster of tenants in a mixed-use building can significantly increase the value of the residential and conversely, a bad tenant mix can have a negative impact on the building’s desirability – not to mention the developer’s credibility for future projects.   

For these reasons, municipalities need to pay closer attention to the commercial element of mixed-use projects. Some of the City of Vancouver’s major corridors and surrounding municipalities have seemingly arbitrary height restrictions on building envelopes. The end result is the flattening out of the commercial platform in order to maximize density and residential ceiling heights. It’s a short term gain. Less desirable commercial space means less desirable tenants, which subtracts from the liveability and vibrancy of the community.

Alternatively, why not have separate height requirements for each respective density to ensure not only liveable and aesthetically-pleasing residential, but also eye-catching and stimulating commercial at street level that animates and activates the street in which it is attempting to improve? We could go even further and encourage a density bonus and further height relaxation for adding a second floor of commercial to these very same projects in the hopes of attracting more businesses to these areas who want to invest in the community and hire its residents.

In closing, the responsibility to ensure that commercial in mixed-use developments is not overlooked or diminished, ultimately begins and ends with the municipalities.  Developers and planners seemingly debate over every square foot of density permitted and every inch of height allowed. Given that we are in the midst of a housing crisis, residential has understandably trumped commercial. My question, however, is why does there have to be a winner and a loser when both are so incredibly important to creating a livable city?