Strata office space set for stronger sales in 2017

Low lending costs, higher lease rates and a chance of equity appreciation boost interest in owning rather than leasing business space

Western Investor
January 18, 2017

Bosa Properties and Arpeg Holdings are completing the 46,000-square-feet of strata office space in this mixed-use tower in downtown Vancouver. | Bosa Properties

A combination of low interest rates, strong demand and willing builders could make 2017 the year of strata office space in downtown Vancouver.

“There’s no indication that the feds are going to raise the interest rate, so … I think we’re going to continue to see strong demand both from the owner-user side and the investor side in commercial product,” said Glenn Gardner, a principal with Avison Young in Vancouver.

Avison Young is bringing approximately 46,000 square feet of strata office and retail space to market in the mixed-use tower Bosa Properties Inc. and Arpeg Holdings Ltd. are building at 1575 West Georgia Street. The 26-storey tower will have 175 condos with offices on the second to fifth floors and retail at grade.

“We’re going to see a lot of interest in this product,” said Gardner, anticipating demand from both owner-occupiers and investors. “It’s a really unique opportunity for somebody to acquire a high-end office premises in downtown Vancouver that’s built to a LEED [Leadership in Energy and Environmental Design] Gold standard.”

With residential units in the tower fetching premium prices, he expects the commercial component to do the same.

Burrard Place, which launched in late October and rapidly sold the 60,000 square feet available in its 45 strata lots, has set the pace. Units sold for upwards of $1,100 a square foot, the pricing driven in part by access to a posh, 30,000-square-foot amenity centre shared with the residential portion of the development. 

A partnership of Reliance Properties Ltd. and the Jim Pattison Group, Burrard Place is the biggest addition of strata office space to the Metro Vancouver market since 2014. It’s also the largest offering downtown since Jameson House came to market in 2011.

Prices aside, Reliance president Jon Stovell said strata office makes sense in a market where it’s tough for investors, let alone owners, to purchase commercial real estate. The offerings, when they’re available, are usually limited to multi-tenant properties valued in the hundreds of millions of dollars.

“There’s many, many, many more people who will make a purchase at between $500,000 and $1 million, and our market always responds very well to that,” Stovell said.

Consistent with other strata office offerings, the ownership mix at Burrard Place includes professionals such as psychologists and physiotherapists.

However, small investors are a major part of the mix, too.

“It’s definitely attracting investors who plan to rent to small-scale entrepreneurial users who don’t need to do a lot of internal build out,” Stovell said.

Most are local: offshore buyers account for just 10 per cent of sales.

Whether or not returns on strata office space will meet investors’ expectations is a question nagging Mark Chambers, a leasing specialist and executive vice-president of Jones Lang LaSalle in Vancouver.

With values exceeding those of some residential developments, Chambers understands why developers find them attractive. “When you start hearing about numbers like we’re hearing on the Burrard [Place] project, you start to think a lot more about developing strata office, which in the past we haven’t really talked about or advised our clients to do. But the numbers are starting to make it a very compelling strategy,” he said.

“[But] the net rental you would need to justify that per-square-foot cost is substantial.”

With top-tier net lease rates peaking at just over $50 a square foot, Chambers said some investors may find the returns don’t pencil out. 

“You have to see a pretty big lift in the achievable rental rates in this city right now to justify those numbers,” he said.

Stovell said some purchasers of the office space at Burrard Place wanted premises close to their homes in the adjacent residential tower.

A similar phenomenon is playing out at Strathcona Village, where Colliers International is marketing 18 strata office units. The one purchaser to date is an interior designer, but residents in the project’s residential condos have also expressed interest.

The challenge with investor-owned strata units, however, is ensuring consistent management.

To address the issue, Stovell hopes to offer centralized management and leasing, unlike other multi-unit properties such as the nearby Electra or Broadway Central.

“There’ve probably been some lessons learned about trying to have more cohesive management,” Stovell said. “I think that discipline, and that key management, is going to be one of the differentiators between good and bad strata office projects.”

Copyright © Western Investor

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