Vancouver's core is a busy, vibrant centre any time of the day or night. It's why people are clamouring to live there, and it's one of the reasons why condo towers have sprung up where there could have been -- or once were -- office buildings.
Residential and hotel development have been on a roll in this city, and it has come at the expense of office space.
As the region's economy thrives, the office vacancy rate has tumbled, and rents have risen. At the same time, some office buildings have been demolished, and another converted to residential use.
Add to that high land costs that have favoured residential development, and the office sector has become a landlord's market over the past two years, says Chris Clibbon, senior research analyst with CB Richard Ellis Ltd.
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If these trends continue, companies could flee downtown's high rents for the suburbs and force residents into reverse commutes out of the city, say Mr. Clibbon and other real estate experts.
The fear that residential is taking over the downtown is serious enough that the City of Vancouver has placed a moratorium on residential development in the office core. But some industry experts say it's already too late.
"It has swung too far past, and we are now going to become an area where residential has taken over and squeezed the downtown core," says Jeff Rank, vice-president of leasing for Bentall Real Estate Services.
Economic factors have played a role, he says, but "the city has gone with what the developers want to build, and now realize that they have done it at the expense of downtown office space."
Mr. Rank points to last month's announcement that the Vancouver suburb of Surrey wants to build an 81-storey office and residential building near the King George SkyTrain station.
"I joked with my colleagues here that it's pretty amazing to think that the tallest building in Canada could be in Surrey," he says.
Vancouver has one of the lowest vacancy rates in North America for office space, at 8.4 per cent, compared with Montreal's 11.9 per cent, Toronto's 11.1 per cent and a national rate of 9.1 per cent. Vancouver's rate is expected to fall to 7.7 per cent by the end of the year, according to CB Richard Ellis.
With new building projects almost entirely made up of residential and hotels, and with some rental rates for commercial space increasing by 15 to 25 per cent over the past year, the cost for premium office space is expected to continue to rise.
Among new developments in Vancouver is the Shangri-La building on West Georgia Street, which when completed will be the tallest building in the city. The 60-storey tower will have 120 luxury hotel rooms and a mix of condominiums and live-work units.
"That has long been considered the centre of the business core in downtown Vancouver, and that really should be an office development site, but it's going residential," Mr. Clibbon says. "This is happening in a dozen sites around downtown Vancouver, and what that means now is that there are no more sites to build an office tower."
The shortage of available land downtown has resulted in a shift away from huge, multiple-tenant buildings, Mr. Clibbon says.
"Those developments that have occurred over the last five years are all single-purpose office buildings, they are not mixed-use," he says. "We are not going to see any of the large-scale, typical office development any more in downtown Vancouver because we don't have these big sites that will accommodate full city blocks."
It's not hard to see why developers would rather build residential towers. A high-end Coal Harbour condo can sell for more than twice the value a square foot of a downtown office building, says Ron Bagan, managing director at Colliers International.
"You can't make money right now on building a downtown office building if you've got to pay what residential developers are paying for the land," Mr. Bagan says.
Even with rising rents and falling vacancy rates, it still doesn't make financial sense to build a downtown office tower, he says.
"Construction costs have gone up faster than the pace of lease rates," he says. "In order to justify a downtown office building you've got to be talking $30-plus lease rates [a square foot], and . . . we are not there yet."
As an example to show how strong demand for office space is, Mr. Rank points to the 11-floor addition to the Bentall office building at 550 Burrard Street. The addition won't open until April, 2007, but is already 90 per cent leased.
Mr. Clibbon says that since the beginning of 2004, two downtown office towers have been demolished for residential and another building converted from office to residential, reducing the inventory of office space by about 300,000 square feet. As available office space shrinks, demand for it will continue to rise, he says.
"In Vancouver, Calgary and Edmonton we've seen really rapid decreases in vacancy. The reason for that is a lot of the growth is related to construction and the housing booms that have been recurring, and that has created construction jobs," he says. "The spinoff of that is pretty much every office-related employment industry has been expanding."
While office tenants have yet to make a mass exodus from downtown, the situation is prompting fears that, as leases expire over the next two to three years, companies will face pressure to move to cheaper digs in such suburbs as Surrey, Richmond and Burnaby, sparking a reverse commute, Mr. Clibbon says.
The growth in residential at the expense of office development concerns city planners, says Larry Beasley, director of current planning for the City of Vancouver. Businesses pay five times the municipal tax rates that residential houses and condos do, compared with a three-to-one ratio in Toronto.
"It's an unusually high differential between those two -- we know it's an area in policy that has to be challenged," Mr. Beasley says.
In addition to the moratorium on downtown residential construction, the city is also conducting its biggest land-use study in a decade.
"We are very carefully considering in policy terms how we best position our land-use allocations for the future," Mr. Beasley says.
He adds that while the city will emphasize the construction of office space in new mixed-used buildings, it is also important that the city preserve the downtown's diversity and balance, a goal it has worked toward for 20 years.
"We are not moving unilaterally to stymie the residential growth," he says, "which has also been a very important part of the economic miracle of downtown Vancouver in the last decade."
