Vancouver's amazingly tight office market

Current demand fuels a white-hot sector but some owners eye a sale to catch the value uplift

By
Western Investor
April 30, 2019





office stock

Metro Vancouver’s current office market environment can be summed up as: very landlord-friendly with extremely tight vacancy characterized by future uncertainty associated with several new downtown office developments scheduled to come online in the next 24 to 48 months. 

Metro Vancouver’s office market is currently sitting at a near-record-low vacancy rate of 5.1 per cent, down from 8 per cent a year earlier and nearly 10 per cent 24 months ago, thanks in part to a significant leasing push from the technology and co-working sectors. Vacancy in Metro Vancouver is forecast to fall to 3.9 per cent by year-end 2019 while the downtown office market vacancy rate is forecasted to fall to 1 per cent by year-end 2019 – the lowest-ever recorded downtown vacancy rate since Avison Young started tracking in 1996.

Three dominant tenants 

A significant chunk of this demand has come from just three users located overwhelmingly in downtown Vancouver: Amazon leasing/pre-leasing approximately 820,000 square feet, WeWork securing approximately 337,000 square feet and Regus/Spaces taking up approximately 388,540 square feet. 

Over the next 12 to 24 months, the Metro Vancouver office market is expected to enter into a period of demand far outpacing the available supply, which will very likely continue to drive rental rates up to new heights. Strong demand and limited availability in downtown Vancouver has had a ripple effect on vacancy and rates in surrounding submarkets such as Yaletown, Gastown, False Creek Flats, Mount Pleasant and Burnaby, all of which have seen record-breaking rental rates as vacancy tightens throughout Metro Vancouver. 

In the competitive labour market seen today, it is imperative for growing organizations to ensure that their office space caters to their workforce, whether that is proximity to employee residences, rapid transit, amenities or other like-minded organizations. This can drive organizations to consider relocating into other areas of Vancouver or to suburban markets and represents an opportunity for investors to acquire office properties or potential development sites.

For office tenants seeking to relocate into this marketplace, there are very few options available. When a potential office space alternative is located and pursued, it usually results in a competitive bid scenario whereby the landlord is able to drive more favourable lease terms and rates. 

Avison Young highlighted this challenge in its Q3 2018 Downtown Office Tenant Profile Report, which revealed that a tenant seeking more than 30,000 square feet of contiguous office space in a Class AAA building had no options in downtown Vancouver. Similarly, a tenant seeking 10,000 square feet to 15,000 square feet of downtown office space located on a single floor only had five available alternatives. 

Lease rates bump up

With these supply constraints, when an office tenant approaches its landlord to engage in renewal negotiations of existing leases, many are seeing a 25 per cent to 50 per cent increase in their net rental rate.

For a risk-averse office landlord/investor, there is a real opportunity to hedge against future risk by approaching existing tenants to renegotiate longer-term leases well in advance of lease expiries. Alternatively, an owner could wait it out as the market continues to tighten over the next 12 to 24 months; however, there is a lot of uncertainty on whether the market will continue on this trend with an additional 4.4 million square feet coming to the downtown market alone between 2020-23 (only 28.4 per cent of that is pre-leased). Vancouver’s office market will have to continue to attract large international users along with local organizations to avoid a significant increase in vacancy, which would eventually put downward pressure on rental rates. 

This uncertainty is leading several institutions and private investors to explore the possibility of selling off existing assets while the market has momentum.

 

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