In 18 months Vancouver’s downtown office vacancy rate has been cut in half, plunging to 5%, the second lowest in North America, and accelerating a new cycle of speculative tower construction.
The unprecedented demand could also 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), 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 bold move and an endorsement that a major pension fund believes in B.C.,” Taylor said.
Vancouver Centre 2 will be followed by a smaller, nine-storey office tower at 401 West Georgia Street 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. Known as the “lantern” because of its innovative design, the tower is to be built using a fast prefabricated construction system and is expected to be completed in mid-2020, a 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 Morguard’s 25-storey office building 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 upward 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, this 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 ranges from $28 to $46 per square foot.