The week’s top stories focus entirely on Metro Vancouver’s office market, analyzing the region’s low availability rate and taking a look at major leases of space in the city’s tight downtown sector. Cannabis companies are also adding pressure to the market, while Toronto stands alone as the only office market in Canada more congested than Vancouver’s.
Here’s is Western Investor’s pick of the top commercial real estate stories published this week.
Cannabis companies looking for space need to consider laws and bylaws at all levels as the adjust to legalization policies.
British Columbia has a liberal reputation, but is it all just smoke (and a mirror of our aspirations)?
Colliers International notes that B.C. residents were among those most in favour of legalizing cannabis, but its recent survey of worker attitudes found the province’s office tenants are also the most likely to favour tight restrictions on the marketing, sale and use of cannabis in office buildings. Just 26 per cent felt cannabis should be modestly or mostly unrestricted.
Recent conferences where cannabis and real estate intersected echoed the cautious, and dare we say conservative, attitude.
Colliers associate Bianca Gilbert, who focuses on industrial sales and leasing, told the Vancouver Real Estate Strategy and Leasing Conference that cannabis may be legal at the federal and provincial levels, but municipalities and stratas essentially hold a veto.
Cannabis companies looking for real estate need to consider both municipal and strata bylaws.
“There’s going to be three things that I could foresee that are potential issues and problems,” she said. “One is municipal bylaws, where they can be located, which is still … up in the air. Two: strata bylaws. … You could have your bylaws written against you.”
Stratas also hold power – literally – when it comes to the reserve of power some cannabis companies may need to access for their famously resource-intensive crop. Strata corporations may not write bylaws against cannabis operators but may deny them access to reserve power.
Residential unit owners may fare better, according to Michael Drouillard, an associate with Vancouver law firm Harper Grey LLP who is helping update bylaws at a half-dozen buildings.
“A strata corporation has wide-ranging authority to regulate the common areas and the use of strata lots,” he said. “But what’s going to happen is these strata corporations are going to come up against human rights legislation.”
An owner who can demonstrate a medical need to consume cannabis must be accommodated, Drouillard indicated, including in production. (Growers of medical cannabis for personal use are allowed more than four plants each.)
Speaking at the CanWest Hort Expo in Abbotsford earlier this fall, Kwantlen Polytechnic University instructor Tom Ulanowski noted that insurance was also a risk because some insurers still consider any residence with cannabis production a grow-op.
“That’s not a good thing. I don’t know how this is going to change,” he said.
By the same token, some insurers (like banks) are cool with cannabis, so long as clients respect the law and engage qualified professionals to undertake any home modifications to accommodate production systems.
Large firms are finding it challenging to find appropriate Vancouver office space as vacancy rates decline and lease rates soar.
Vancouver is facing an office space crunch with declining vacancy rates and rising lease rates. While more supply is on the way, some are concerned that the lack of available space will push Vancouver off the radar screens of international companies seeking to expand.
Amid the shortage, some developers have told Business in Vancouver that they are not interested in building office space because other real estate classes are more stable and more profitable.
“A successful downtown needs a successful office sector, and a successful central business district [CBD],” said former City of Vancouver chief planner and Toderian Urbanworks principal Brent Toderian, who is concerned that the lack of available office space will hurt the city.
He said the challenge in planning CBDs is in determining how to help them grow in the long term while simultaneously enabling them to respond quickly to changes in vacancy rates.
CBDs “need to be both future looking and nimble,” he said. “It’s hard to be nimble when it takes time to build something, but the best a city can do is make sure its planning house is in order ahead of time.”
Smart planning, which proactively aims to time construction with demand, is therefore crucial, he said.
Downtown Vancouver’s office vacancy rate sank to 3.9 per cent in the third quarter of 2018, down from 4.1 per cent three months earlier and 4.6 per cent at the beginning of the year, according to Colliers International.
A research note from the company noted that no options exist for large tenants seeking immediately available, contiguous office space of more than 30,000 square feet in a triple-A-class building in downtown Vancouver. Average asking rates have climbed to $36.15 per square foot, up from $33.57 per square foot during the past six months.
New office towers are quickly being filled.
Credit Suisse spent about $200 million to build the 369,000-square-foot Exchange tower on speculation last year. After completion, much of the tower was converted into the 202-room Exchange Hotel Vancouver, which opened in August, but 138,560 square feet of office space went onto the market late last year and has since been fully leased.
The good thing is that there are office projects under construction – the largest of which is QuadReal’s 1.13-million-square-foot tower complex above Vancouver’s former main post office, at 349 West Georgia Street.
GWL Realty Advisors is partway through building its 33-storey, 371,000-square-foot office tower at 753 Seymour Street, which is set to be complete by 2021.
And at 400 West Georgia Street, Westbank and Allied Properties Real Estate Investment Trust are building a 345,000-square-foot tower that is fully leased to companies such as Apple Inc., according to Colliers International senior managing director Maury Dubuque.
“People [five years ago] were saying, ‘Build it, and let us look at it. Then we’ll think about leasing it,’” he said. “Now, that’s far from the case.”
Dubuque said he knows of one large technology company that is seeking 200,000 square feet of space in downtown Vancouver. A second company, he said, is U.S.-based and is seeking 250,000 square feet of office space in the city. Both multinationals face challenges, he said.
With demand for office space high across Metro Vancouver, property owners are eager to redevelop and cash in.
Metro’s high-tech sector is driving demand for new office-industrial strata projects, pushing up prices.
New light industrial/office strata projects springing up from Mount Pleasant to East Vancouver may have tapped into a profitable path, despite per-square-foot prices ranging from $800 to $1,000.
The most recent manifestations include a four-storey project on Yukon Street at West 6th Avenue – formerly the 3 Vets outdoor store – by Chard Development, which bought the site last year for $20.4 million.
Now under development, the 49,000-square-foot Yukon project will feature a high-ceiling ground floor for light industrial, with bay access for trucks, capped by three floors of stylish office space.
Chard recognized a demand for smaller office sizes from the area’s tech, finance and retail services industries. As a result, Yukon will feature smaller unit sizes (1,000 to 5,000 square feet) to adapt to this new Vancouver real estate reality, according to Byron Chard, Chard’s principal and CFO.
A similar Chard project at 34 West 7th Avenue sold out all 48,000 square feet while still under construction.
Nothing has pre-sold yet at the Yukon, where strata space starts at $1,000 per square foot.
The building will include a freight elevator, bike lockers, showers and 83 parking stalls, and it could prove popular, according to the type of high-tech tenant Chard is targeting. Completion is expected in 2020.
“I can definitely see the demand,” said Dogu Taskiran, a partner and founder at Stambol Studios, a virtual-reality startup that concentrates on the real estate market.
Taskiran said the Mount Pleasant location and ample parking would be among the draws.
Stambol is currently splitting 2,000 square feet of space in False Creek Flats, where the total monthly rent is $3,000, which Taskiran described as “a very good deal, very cheap.”
Chard noted that a startup could buy office or industrial space at Yukon and lease out part of it until it expands, but he expects most of the buyers will be sole owner-occupiers.
“Our goal is to make the space as flexible as possible,” he said.
Alliance Partners is trying the same concept in East Vancouver with a five-storey, 55,000-square-foot light industrial/office strata project on Clark Drive at Adanac Street.
Kevin Kassautzki, vice-president at Avison Young, which is handling sales of the project, expects per-square-foot prices to be in the $700 range for industrial space and $800 for offices.
“I think this area is on its way to becoming the next Mount Pleasant,” Kassautzki said.
Comparing Canada’s two hottest - and tightest - commercial markets as both careen towards record-low levels of availability.
Downtown Vancouver and Toronto are cited as the two hottest office markets in the country, but while the West Coast city leads in leasing costs, much larger Toronto appears headed for the first 0 per cent vacancy rate for office towers in Canadian history.
Toronto has an inventory of 87.2 million square feet of downtown office space and had a 2.4 per cent vacancy rate as of the third quarter, according to a survey by real estate services and investment firm CBRE.
Vancouver has 23.9 million square feet of offices downtown and a vacancy rate of 4.4 per cent, second only to Toronto. As a comparison, the national downtown office vacancy rate is 10.7 per cent.
Vancouver, however, has the highest office lease costs in the country, at an average of $34.99 per square foot. This compares with Toronto, where the average is $32.91 per square foot. But in Vancouver, analysts say, the average office rent for the new prime Class A space coming to the market will approach $60 per square foot, by far the highest in the country.
The main divergence between Vancouver and Toronto is the pace of office construction and its take-up. Vancouver has 1.9 million square feet of new office space underway, compared with six million square feet being built in Toronto.
In Toronto, more than one million square feet of office space has been leased or sold so far in 2018, compared with 548,900 square feet in Vancouver, according to Thomas Forr, Toronto-based research manager for Jones Lang LaSalle Canada. Forr noted that none of the new office towers would open in downtown Toronto for at least three years.
“Toronto needs more supply but the question shifts to how tight the market becomes in the lead-up to 2021. At the current momentum of demand, we’re 12 months or less from a 0 per cent vacancy rate. It’s a distinct possibility that’s getting closer to reality,” Forr said.
Vancouver is also facing a tightening vacancy rate, but it is not as dire as its big eastern rival’s.