With a handful of high-end new office towers coming to Vancouver, landlords of older Triple A properties could soon find themselves pushed down the ladder a rung.
That’s one of the consequences foreseen by office-market experts as more than a million square feet of office space opens up downtown over the next two years.
“A lot of landlords will be shocked to see their Triple As reduced to As,” Blair Quinn, senior vice-president of CBRE Ltd., said at a city real-estate forum recently. “There’s going to be fights on everyone’s hands …”
Mr. Quinn and others also acknowledged that the explosion of new office space is facing other hurdles: Office tenants are showing resistance to moving around; they’re not exhibiting any signs of needing extra space because of growth; and there aren’t a huge number of new businesses moving to Vancouver.
In spite of all that, no one at the forum panel was willing to say that Vancouver is teetering into overbuilding its downtown office space.
Mr. Quinn said that, although times are tough now, they’re not as bad as in 2008, when many companies abandoned their Vancouver outposts.
“It was a ‘cut the arms off to save the body’ mentality.”
Now, he noted, Microsoft is expanding in downtown Vancouver and Facebook just signed a deal for 20,000 square feet. Outside the core, Westport – the local company made good that builds equipment to convert gas engines to hydrogen or natural gas – has expanded to occupy 170,000 square feet, and Samsung just leased 25,000 for a research and development facility.
Sandy McNair, the president of Altus InSite, said that although office construction seems to be in a frenzy now, it is only catching up with a deficit.
“Vancouver has been starved,” he said, as he compared the proportion of all office space in various cities that has been built since 2000. For Vancouver, it’s only 15 per cent. That’s compared with 35 per cent in Calgary.
“It’s a fraction of what we need to see in this market.”
While the number of new businesses looking for downtown office space is not huge, Mr. McNair said people coming from American high-tech markets don’t think twice about paying the $40 to $50 per square foot that top office space commands in Vancouver.
“They are coming to Vancouver and looking to replicate what they’re already doing elsewhere. They’re not looking for a deal,” said Mr. McNair, noting that tenants in the high-tech clusters around San Francisco are used to paying $70 to $80 per square foot for office leases.
And he has seen American clients willing to pay any price after trying to find space in the Vancouver market and failing to find anything that fits their company.
Mr. McNair did acknowledge that if every single project currently on the books for all of Vancouver and the suburbs went ahead – 1.4-million square feet in the city, 1.6-million in the suburbs – “it would be a disaster.”
That is unlikely to happen, he said, but Vancouver is seeing some pressure from pension funds that are looking for a safe haven for their capital and might choose to build even if the market is weak.
Projecting what that would mean for vacancy rates in the future, Mr. McNair said that if there were no new tenants coming into the region and all of that space were built, there would be an overall 13-per-cent vacancy rate by 2017.
However, he anticipated that not every single project will be built. As well, it’s unlikely the region wouldn’t see a single new tenant.
“If there is just a little bit of demand, the vacancy rate would be 8.5 per cent and lots would say that is balanced.”
Chuck We, the director of leasing at Oxford Properties, said that the buildings going up this time around have been designed by people who learned from the mistakes of the past, like too much office space intended for corporations occupying a whole floor if not two or three.
There’s a lot more variety in the size of offices available this time.
“With floorplates of 8,000 square feet to 70,000, there’s something for everyone.”