Vacancy rate for office space to get even tighter
By 2019, Vancouver is predicted to have the second-lowest office vacancy rate in the Western hemisphere, according to a new global office report by Cushman and Wakefield.
Within the next two years, Vancouver will have an office vacancy rate of 6.3 per cent. In the Americas, that will trail only Toronto, which is forecast to have a vacancy rate of 3.9 per cent, according to the report released on July 21.
The report details economic drivers, supply and demand forecasts and prospects for rent growth in more than 100 cities around the world.
Canadian cities feature prominently on the list of cities in the Americas with the lowest office vacancies by 2019. Orlando is third, with a vacancy rate of 7.2 per cent, trailed by Ottawa (7.3 per cent) and Winnipeg (7.4 per cent).
In that same period, Cushman and Wakefield predicts the top10 fastest-growing office markets in the Americas will include four Canadian cities: Toronto at 6.6 per cent, Winnipeg (6.4 per cent), Edmonton (4 per cent) and Vancouver (3.7 per cent).
The report says more than 700 million square feet of new office space will be built over the next three years globally, the equivalent to five cities’ worth of office inventory — Washington D.C., Dallas, London, Singapore and Shanghai.
Globally, the pace of supply will outstrip the demand for office space, predicted to total about 520 million square feet, causing office vacancy to rise in most cities around the world.
In general, the big cities of the world are overbuilding office space, but not in Canada.
Here in Vancouver, developers delivered about 2.3 million square feet of new office to the downtown market between 2015 and 2017, said Stuart Barron, the firm’s national director of research.
“That 2.3 million was the most significant wave of development to arrive in basically the last 25 years in downtown Vancouver,” he said.
In that same time period, the absorption of that space was about four times the typical rate in downtown Vancouver, he said. “There was a lot of pent-up demand,” Barron said.
He said the resource and commodity sectors, once the foundation of Vancouver’s office towers, have since taken a back seat to the technology sector.
“The strength in the technology sector has been so strong that demand in the B- and C-class buildings has been more-or-less explosive,” he said, noting that the vacancy rate in downtown Vancouver’s older stock of heritage buildings is about five per cent.
“The creative companies do love creative buildings,” he said. “Companies are also taking advantage of the ability to grab on to (new) space and pull their different units together and consolidate and lock in for a longer period.”
Technology has indeed been a big contributor to growth in Canada’s two strongest markets, Toronto and Vancouver, and it’s having an impact on space requirements and rental appreciation, said Cushman and Wakefield CEO Chuck Scott in a release.
“The Canadian government is making huge investments in technology and we’re seeing its impact in the commercial real estate space,” he said. “While traditional growth drivers such as the banking industry will always remain strong, particularly in Toronto, we’re seeing an unquestionable shift in whose occupying space and where it’s being occupied.”
Vancouver maintains a disproportionate amount of singlefamily zoned property, which is pushing real estate investment and demand into every other property category, said Josh Gotlieb, an associate professor at the Vancouver School of Economics at UBC.
“It’s not very surprising that that drives up prices for commercial real estate,” he said.
“It will be fascinating to see what happens to the commercial and residential real estate markets as the next few months and years roll around,” he said. “The Bank of Canada has started to tighten interest rates and many people expect they’ll continue to do that, and that could lead to some interesting changes in this market.”
Barron agreed that interest rates could be the wild card in this forecast, noting that personal consumption is a massive part of GDP growth in Canada and Canadians are holding onto record levels of debt.
“If interest rates go up and halt Canadian consumption, that could halt profitability and growth in the office market across the country,” he said.
But for now, developers appear keen to continue building, he said, and predicted there will be a new round of downtown office tower announcements in the next six months of buildings that would join the market in roughly 20212022.
“We’re going to see more office development in downtown Vancouver,” he said.