Two legal firms have preleased the top floors of The Stack, in Vancouver.handout
Commercial landlords can look to a recent study that predicts the types of business most likely to lease the top, middle or lower floors of office towers at a time when office vacancy rates have increased due to the pandemic.
Conducted by commercial real estate firm Avison Young, the report, published this summer and in part titled, Building Verticality and Office Leasing Trends, focuses on the Vancouver market.
Examining nearly 3,000 businesses in every downtown building – 117 in total – the study claims an 82 per cent tenant-placement accuracy rate.
“We wanted to help office brokers to more effectively target-market potential tenants for their vacant spaces,” says report co-author Andrew Petrozzi, principal and practice leader of research (B.C.) at Avison Young. “If they have space in a certain part of their building, rather than reaching out to every prospect, here’s a better understanding of the type of tenant likely to fill it.”
So, who’s on top?
Some of the study’s findings aren’t likely to surprise experts: Law and finance firms prefer higher-priced top floors, with talent-retaining and client-impressing mountain-and-ocean views.
But nuanced analytics of the study, which focuses on Vancouver’s six largest tenant sectors – a group that accounts for 56 per cent of downtown office space – indicate that financers are more flexible than lawyers. Indeed, more finance companies lease middle-floor space than top-floor space – but that top-floor space nearly equals that of legal firms. Mining and real estate companies also prefer to lease top-floor space.
The technology sector leases top, middle and lower floors almost equally. The study notes that this sector is dominated by only a few corporations with super-large space requirements.
“Just 2 per cent of technology companies have taken more than 40 per cent of the square footage leased by this tenant group,” the report states. (Looking at you, Amazon and Telus.)
Accounting firms are much less flexible, with a strong preference to be in the middle. “It’s a demonstration of fiscal responsibility,” Mr. Petrozzi suggests. “Choosing the less-flashy middle of the building as opposed to the top, says, ‘Look, we’re responsible with our money, we’ll be responsible with yours.’ ”
The study’s data was gathered in late 2018. Much has changed. Vancouver’s office vacancy rate has doubled to 7 per cent (still the lowest rate of any major city in North America, according to CBRE). And while lease price per square foot has risen 2.6 per cent to $43.33 (to remain the highest in Canada, followed by Toronto at $33.14), a brisk run of transactions has plummeted by more than half, according to Colliers.
Before the pandemic, tech-driven demand for downtown Vancouver office space spurred an unprecedented number of new developments, construction of which has been allowed to continue. Nearly four million square feet of leasable office space across 13 projects is expected to be delivered by 2023.
Predicting the building floor preferences for various tenant types in a post-COVID-19 world is a tough task, Mr. Petrozzi admits.
“Businesses are still deciding whether they’re going to need more space to accommodate social distancing, or less space [due to remote work].”
Yet the study’s examination of preleasing activity in several buildings under development shows the accuracy of its predictive model.
The Stack, one of the largest office developments downtown, is expected to be delivered by Oxford Properties and the Canadian Pension Plan Investment Board by the end of 2022.
“It’s just 40 per cent preleased, but so far, we’re three for three as to where tenants are located,” Mr. Petrozzi says. As anticipated, two legal firms took space in the upper floors and an accounting company has leased the middle of the building.
Queried about the study’s relevancy in other cities, Mr. Petrozzi suggests, “broad, macro-trends will translate,” such as the study’s finding that super-large tenants in any sector prefer top-floor space. “But each city has its own history in terms of office use. Finance would be huge in Toronto, the financial capital of Canada.” In Calgary, energy companies lease top floors.
BentallGreenOak has 15 office buildings in development in Canada, including two in Vancouver. Tony Astles, managing partner and head of Canadian development at BGO, calls the study “intriguing,” and offers a few more tips that landlords might consider when leasing downtown office space.
“You want to manage your lease-up for large-tenant growth,” he advises.
Lease out floors just below a large tenant to multiple, small tenants, “where leases might roll over more often, so that the big tenant can grow into them in the future,” he adds.
“Secondly, some tenants don’t play well together,” he says. “Tech tenants are famous for this. They have proprietary information. They have challenges recruiting talent fast enough. They don’t want employees riding in the elevator with their competition and trading stories. Also, some law firms will not go below other law firms in a building; they find it’s less prestigious.”
“You want to manage the culture of use throughout the building to ensure everything’s copacetic.”
Top trend in top-floor office space
Shared amenity space on the 28th floor of Bosa Waterfront leads to a rooftop garden.handout
The era of the swank office penthouse being the exclusive purview of well-heeled legal and bank companies may be over – in Vancouver at least – as a trend for shared amenity space on the top floor monopolizes the private office.
Of 13 upcoming office developments in downtown Vancouver, nine feature shared top-floor or rooftop space that can be accessed by all the tenants in the building.
“If you can give someone on the bottom floor access to a view and experience of the top floor, why wouldn’t you?” says Ryan Bosa, president of Vancouver-based Bosa Development.
The 28th floor of the downtown Bosa Waterfront, scheduled for completion one year from now, features meeting rooms, a lounge and access to a rooftop garden.
Half the tower’s office space is strata, and it sold out in three days, at a record-shattering $2,000 per square foot, in 2017.
“Take away those amenities, we wouldn’t get those numbers. So, the financial model proves out,” Mr. Bosa says.
The cost of shared top-floor space is reflected in higher overall lease rates but the amenity allows tenants to lease smaller spaces without boardrooms, Mr. Bosa says.