Downtown office vacancy is ‘dropping like a stone’
Mark Trepp takes a moment to look through several years of Vancouver office market data for confirmation. Indeed, Vancouver’s downtown class-A vacancy rate hasn’t been this low since just before the 2008 financial crisis, says the senior vice-president with Jones Lang LaSalle Real Estate Services (JLL) in Vancouver.
“According to our stats, at the end of quarter three of 2017, the vacancy rate for A-class product downtown was 4.9 per cent,” he told Postmedia recently. “Not only is it low, but the trend is that it’s going lower.”
In the last three years, developers added about 2.5 million square feet of new office space downtown, easing the vacancy rate up to about 11 per cent in early 2016. The downtown office vacancy has been “dropping like a stone” ever since, Trepp said.
In mid-October, Trepp and JLL were preparing to start marketing a new 30-storey office tower for sale and lease by Bosa Development at 320 Granville St. — now a parkade that sits across from Waterfront Station.
The Bosa tower, the now-complete 373,000-square-foot Exchange Tower by Credit Suisse and SwissReal Group, and a few other ready-to-start office projects mark the beginning of a new period of robust office construction downtown. Trepp and several other stakeholders insist, though, that new and expanding businesses here will fill up all this new space.
Half of the 375,000-sq.-ft office building by Bosa Development will be sold as strata office units, with the remaining 50 per cent leased out with JLL’s help, said Richard Weir, executive vice-president with Bosa Development.
“We’re finalizing the development permit now and we’re hoping to begin demolition of the existing parkade Feb. 1,” he said. “We’re anticipating completion in late 2020.
“There is an acute shortage of office space. The office market in Vancouver has grown up. Absorption this year will be about double the historic average, and it’s accelerating.”
Trepp agreed. In the last two years, the downtown market has been absorbing about 800,000 square feet of office space annually, he said. “The 10-year average is more like 350,000 square feet. Demand has really been double what we’ve seen as an average over the last 10 years.”
Weir said a new category of tenants is looking to move into Vancouver in search of large blocks of space.
“It’s technology driven,” he said. “We’re all aware of the technology firms that are looking at Vancouver, that have moved into Vancouver, that love Vancouver. We see that accelerating.”
That demand, taken together with the central location of the planned Bosa tower, is giving his team confidence to build without pre-leasing, Weir said.
They are not the only developers with that strategy. On Oct. 11, GWL Realty Advisors and Healthcare of Ontario Pension Plan held a ceremonial demolition at the site of their jointly developed Vancouver Centre II office tower at Seymour and Georgia streets.
The class-AAA, 371,000-sq.-ft tower is being built on spec, meaning without pre-leases, and is the next phase of the Vancouver Centre complex, which also includes the 1976-built Scotia Tower and the Vancouver Centre Mall.
Like the Bosa tower, Vancouver Centre II is replacing a parkade building. It is expected to open in 2021.
“You always have to be conscious about the competition, but we’ve got the best location in Vancouver,” Weir said.
“When companies begin their search for office space, one of the first questions they ask is: ‘Where is transit? Are you on transit?’ We are on every mode of transit in Vancouver, and it’s right across the street,” he said.
Trepp said many of the buyers of the strata space would likely end up leasing their space back into the market. By his estimate, about 75 per cent of the space in the building will end up leased.
Even if the overall downtown vacancy climbs a few points, it remains a landlord’s market, Trepp said.
“We kind of think of a balanced market of between eight per cent and 10 per cent vacancy,” he said. “Any time the vacancy drops below eight per cent you’re dealing with a market where the landlord definitely has the upper hand as it relates to leverage and negotiations.”
There are 19 other office projects of varying size that are either approved for construction, under proposal, or being considered by developers, according to Avison Young’s 2017 Mid-Year Metro Vancouver Office Market report.
In all, those projects could add approximately 3.7 million square feet of new office space in coming years.
However, Trepp said only a few of those projects should be considered as sure things at this point.
“Supply is pretty easy to gauge,” he said. “The tough side is trying to predict what demand is going to do.”
Trepp said he takes confidence from the strength of Vancouver’s tech industry, the city’s burgeoning talent pool, and U.S. immigration concerns that are increasingly pushing talented workers and companies north of the border.
“I believe, and we believe here, that (tenant) demand is sustainable,” Trepp said.