GWL Realty Advisors has $6-billion worth of development across Canada. But until recently, the company had never added to its portfolio by building an office tower on spec – that is, without a single tenant lined up in a prelease agreement.
That is what the company is doing now, though, on a downtown site in Vancouver, where it is tearing down a parkade near the central intersection of Georgia and Granville streets to construct a 33-storey, nearly half-million-square-foot office tower.
"Why we chose to do this in Vancouver, is there's a great supply of tenants from a number of sectors. Vancouver has a classic situation of strong demand and low supply of space," says Paul Finkbeiner, the president of GWL, a subsidiary of the Great-West Life Assurance Co.
GWL is not the first in Vancouver to build an office tower on spec in the recent office boom. In fact, it is one of about half a dozen buildings that have gone up or are about to be built on spec in the downtown core.
Many attribute it to the city's unusual economy and mix of potential tenants – such as many tech companies that do not make commitments until a building is near completion and that do not lease large amounts of space even when they do commit.
But, while the trend is pronounced in Vancouver, it is not the only Canadian city with a major office building going up on spec.
The developer Cadillac Fairview Corp. announced its 16 York project in downtown Toronto in March, committing to building the $479-million, 32-floor, nearly 900,000-square-foot tower before it had a single tenant signed.
"It's basically unprecedented for us," says Wayne Barwise, the executive vice-president of development at the company. He says now that about 40 per cent of the space is preleased, something he expected because of the office situation in Toronto.
"The vacancy rate here is 4 per cent and the site [16 York] is across from the main transportation hub, and the vacancy rate is one and a half per cent."
Cadillac Fairview has about 10-million square feet of space downtown, and a significant proportion of its tenants were looking to expand in the coming years. That alone, not even factoring in new tenants, was enough to drive the project.
Both cities share some similar factors, say company executives and commercial real-estate brokers.
"There's a lack of big-block space in Vancouver and Toronto," says Richard Vilner, the director of market intelligence for Colliers International in Toronto.
But both he and John Arnoldi, an executive managing director with Colliers, caution that the phenomenon of building on spec is rare. The vast majority of buildings are still planned on the basis of preleasing to a major tenant.
That is absolutely the case for cities outside Vancouver and Toronto and still mostly the case even in those two hot markets. And even most of those supposedly being built on spec actually have tenants lined up waiting to sign.
"Developers are being more aggressive, yes, but most prefer to go the traditional route," says Mr. Arnoldi.
There are constraints, as well, on many office developers.
Pension-fund-backed companies such as Cadillac Fairview and GWL Realty Advisors can self-finance, which makes it somewhat easier for them to build speculatively because they do not need to get bank financing.
But "it's tough for most builders to get financing to build on spec," says Mr. Vilner.
And the memory lingers of the overbuilding that Toronto saw in the late 1980s and early 1990s that resulted in some half-empty buildings and plummeting rental rates.
But in some cases, it can make sense, though even for companies like Cadillac and GWL, moving ahead with a spec building requires careful analysis and a solid argument to present to their boards.
"You have to show to your board or your client that there is a strong demand and limited supply," says Mr. Finkbeiner. "There's a tonne of thought and discipline. We run scenarios looking at what happens if rents go up, if rents go down, if it takes longer to lease."
He said that care is key when you're using people's pension investments.
"My goal is to pay people's pensions, pay for their groceries. I want to make very certain it's going to cash-flow out."
For GWL, moving ahead with the Vancouver Centre tower was supported by company leaders because it is among the first in a new group of spec offices with a building permit, which puts it ahead of other developers in attracting tenants.
The latest wave of building office towers on spec in Vancouver started in the early 2000s, when Oxford Properties Group Inc. built a 35-storey spec tower, now called MNP, that eventually opened in 2015. It was fully leased by the time it opened.
That prompted others, but the situation of the Exchange Tower that started construction later – financed by Credit Suisse and SwissReal Group – gave some the jitters.
The Exchange Tower, which officially opened earlier this month, seemed stuck at near-empty for a long time. After construction on the $220-million tower started, and went on over the past couple of years, only one committed tenant, National Bank, came on board.
But now it is close to being filled, with a new hotel chain and tech companies such as HyperWallet Systems Inc., the accounting firm Smythe LLP and Sovereign General Insurance Co.
"Almost half of the space went to tech. And tech guys make decisions three to six months in advance, not two to three years," says Mark Chambers, an executive vice-president with Jones Lang LaSalle Inc., which was marketing the site.
He predicts there will be many more in Vancouver, at least.
"The market has changed, the tenants have changed. You almost have to go on spec."