This week’s top stories tackle the continued office space pinch in downtown Vancouver, as tech companies continue to show interest in leasing high-quality, centrally-located office area. Meanwhile, the residential real estate class is also facing a crunch, as single-family land assemblies in favour of multi-family densification is becoming more popular. To that end, Western Investor Frank O’Brien offers some radical solutions to the housing pinch in Vancouver.
Here is Western Investor’s pick of the most buzz-worthy commercial real estate stories published this week.
Vancouver office vacancies have hit lowest level in 14 years as tech giants jostle for space. Demand is even causing developers to build on speculation.
In 18 months Vancouver’s downtown office vacancy rate has been cut in half, plunging to 5 per cent, the second lowest in North America, and speeding up a new cycle of speculative tower construction.
It has also attracted Amazon, one of the world’s largest tech companies, which has booked 150,000 square feet of new downtown office space.
The unprecedented demand could lead to record-high lease rates in the core with suggestions that prime rents could top $50 per square foot.
The October 11 start of the 33-storey Vancouver Centre 2 office tower, backed by the Healthcare of Ontario Pension Plan (HOOPP), the Great-West Life Real Estate Fund and London Life Real Estate Fund, kicked off the latest wave of office development and gave Vancouver a major credibility boost, said Norm Taylor, executive vice-president of CBRE Vancouver.
“HOOPP backing an office tower on speculation. That is a big move. A bold move and an endorsement that a major pension fund believes in B.C.,” Taylor said.
Vancouver Centre 2 is expected to be followed by a smaller, nine-storey office tower downtown by Oxford Properties, the real estate development arm of the Ontario Municipal Employees Retirement System (OMERS) pension fund.
Avison Young forecasts that the third new office building will be a 350,788-square-foot tower on West Georgia Street, a joint project by Westbank Corp. and Allied Properties Real Estate Investment Trust. This tower, known as the “lantern” because of its innovative design, is to be built using a fast prefabricated construction system and is expected to complete in mid-2020, a full year ahead of the similar-sized Vancouver Centre 2.
Taylor suspects a separate OMERS proposal, a 499,000- square-foot Oxford tower at 1133 Melville Street, could now move up the queue as the fourth tower to join the wave. Also near the starting point is a 25-storey office building by Morguard at 601 West Hastings Street.
“While relief for tenants is on the horizon in terms of these new buildings, in the short term, businesses seeking office space in Vancouver will see an upwards pressure on rents,” said Taylor.
All of the new towers are being built on speculation, and high demand, especially from the tech sector, combined with rising construction costs, will drive lease rates to record levels that could top $50 per square foot, he said. Currently, the highest net rent for premium downtown office is from $28 to $46 per square foot.
WeWork is in talks with many downtown office tower owners to lease space, upping their expected presence in the city and vying for space in an alright-tight market.
Bentall Centre, then the Bay: WeWork’s roll through downtown office buildings seems set to continue, with scant attention paid to Regus and other providers of shared office space. Now approaching 250,000 square feet in three buildings, WeWork is gunning to be the leading provider of co-working space and the single biggest tenant in downtown Vancouver.
“Every second downtown Vancouver office building’s in negotiation with WeWork,” quipped PCI Group partner Dan Turner at the recent Vancouver Real Estate Strategy and Leasing conference. But he added: “It’s testimony to Vancouver that they’re coming.”
Indeed, for many, WeWork represents not just lease commitments but also the arrival of a new landlord to the market. NAI Commercial touched on the dynamic in a report earlier this year, and more recently, David Haugen, leasing director for Canderel Pacific Management Inc. in Vancouver, made similar remarks.
“They’re expanding the service offering to be doing almost facilities management for these tenants ... not just their typical hot-desking operations,” he told the strategy and leasing conference.
PCI vice-president Jarvis Rouillard told commercial real estate association NAIOP that the evolution of companies providing co-working space into facilities managers gives them a more fluid role in the market. PCI sees them as tenants rather than competitors, but they’re definitely going head-to-head with larger landlords. This means landlords may start to take a leaf out of WeWork’s and Regius’ playbook and begin offering tenants similaroptions.
Land assembly sales of single family lots are picking up steam in Richmond, as townhome and condo demand long the city’s arterial road increases.
Two long-time Richmond realtors say builders and developers are increasingly turning to townhouse construction along Richmond’s arterial roads.
“In many ways the townhouse is the new single-family home,” said realtor Martin Dash, who is, along with business partner Carmen McCracken, putting together a land assembly on Steveston Highway to market to a developer.
A land assembly occurs when neighbouring owners of single-family home properties, that are zoned for townhouses, decide to sell their lots collectively to a townhouse developer. Realtors such as Dash will often approach homeowners to bring awareness to such “opportunities.”
Their four-home land assembly is one of three on Steveston Highway, between Railway Avenue and No. 2 Road.
“Three or four years from now we’ll see a steady stream of townhouses between Railway and No.2,” said McCracken.
Because the City of Richmond recently amended its Official Community Plan to allow for more townhouse zones along these main roads, such opportunities are growing.
The townhouse is seen as a more affordable housing option on the open market, but land assemblies also raise the value of land.
“When you get a number of homes in a row that has potential for development, then the land value increases because the developer can build more homes,” explained Nash, who is trying to market the four homes at a premium price to a developer (a fourth homeowner has yet to agree to a price).
Nash and McCracken determine a value for the land assembly based on market trends. McCracken said they can calculate the allowed buildable square footage of an assembled lot, to estimate how many townhouse units can be built.
In such a hot and “fluid” market, McCracken and Dash said final sale prices of the single-family homes may not always reflect the final townhouse listing prices. That’s because land assemblies take longer to be finalized and townhouse developments also takes longer to build. Hence it may take two or three years to see construction finished from the time a land assembly deal is reached.
Western Investor editor Frank O'Brien suggests some radical ideas to deliver affordable homes in B.C.’s pricey Lower Mainland.
It will require a degree of political courage and public and industry co-operation we have never seen before.
Here are some ideas to reduce the cost of housing and rising homelessness if we go all-in on a solution.
· Senior governments should buy non-fertile acres of the Agricultural Land Reserve (ALR) close to the urban edge by leveraging low-cost government financing. The ALR covers 150,000 acres in Metro Vancouver but only 50 per cent is being farmed and nearly 30,000 acres have no agricultural potential, according to a 2016 Vancity study. A potential housing solution is for senior governments to buy 1,000 acres of non-arable ALR land and extend transit to the sites. B.C.’s largest public-employee pension fund is already among the largest owners of modular home parks in the province. By removing the land value, modular home parks or co-op apartments could be built on the ALR acres, providing low-cost housing for thousands.
· Rental housing should be encouraged to mix with industrial development in Vancouver, starting with the False Creek Flats, by offering industrial developers tax breaks based on the number of new rental apartments stacked above the often one-storey projects.
· Higher-density rental zoning should be mandated in Vancouver neighbourhoods near transit stops. For instance, Vancouver’s Commercial SkyTrain station, built 30 years ago, currently has only one-storey retail and no high-density housing. Renfrew and Rupert stations, and some other transit stations in Burnaby, also have potential for higher-density housing.
· Delay Vancouver’s new zero-emission bylaw and B.C.’s new Energy Step Code until the housing crisis eases. These new codes add thousands of dollars to the cost of all new homes while having zero effect on global greenhouse gas emissions, which they are meant to address.
· Rezone 25 per cent of single-family neighbourhoods in larger urban areas for higher-density housing, with a provision that half the new homes created be market rentals.
· Scrap Vancouver’s new bylaw that allows stratifying laneway houses on single-family lots. This bylaw increases lot values for house owners without delivering lower-cost homes.