All cylinders
Metro Vancouver’s office market is firing on all cylinders, with Ross Moore, senior vice-president in the Vancouver office of tenant representation firm Cresa Global Inc., reporting that absorption hit near-record levels in 2017.
Cresa figures indicate that tenants leased 1.3 million square feet of office space across Metro Vancouver last year, on par with 2015 and the robust days of the mid-2000s. Absorption peaked in 1989, when tenants sucked up 1.8 million square feet – the final year of a three-year run in which 4.5 million square feet were absorbed between 1987 and 1989.
Moore said absorption in 2017 puts landlords firmly in control of the market, with downtown vacancies at 6.2% and the region averaging 8.2%.
With no new downtown space set to be completed until 2020 and limited construction elsewhere, the stage is set for the dynamic to continue.
“Deal velocity through 2017 remained robust and will likely lead to a similar but slightly smaller decline in vacancy in 2018, particularly downtown, as the number of options grows fewer,” Avison Young reported in its own year-end office report.
Space under construction outside of downtown is two-thirds preleased, Avison Young reports, meaning absorption rates have nowhere to go but down thanks to a limited available supply.
“Supply constraints are starting to manifest throughout the region,” Avison Young says. “The temporary result is the emergence of an imbalanced market that favours landlords until new supply can be delivered.”
The result is rising speculative development.
GWL Realty Advisors Inc. broke ground on Vancouver Centre 2 at 753 Seymour Street last fall with no commitments on the tower’s 370,000 square feet of space. Reliance Properties Ltd. followed suit last week with the Offices at Burrard Place, a 146,375-square-foot tower that’s also proceeding without lease commitments.
Reliance previously sold 60,000 square feet of strata space at Burrard Place, and more recently Bosa Development Corp. achieved record pricing for 150,000 square feet of strata space at 320 Granville Street. Both projects underscored strong demand for a slice of the market, and Reliance president Jon Stovell sees an appetite for large tranches of space.
“Space to meet the growth projections of large companies currently doesn’t exist in Vancouver,” he said last week. “This is an era when developers like Reliance can build offices without any prelease agreements.”
Handsome pricing
Vacant new office space might be in short supply in Metro Vancouver, but industrial space is tighter.
CBRE Ltd. reports that 97.2% of the 1.4 million square feet of industrial space delivered in 2017’s last quarter had commitments prior to completion. Demand for space was strong enough to push average lease rates above $10 a square foot for the first time in the region’s history.
CBRE senior vice-president Chris MacCauley, who focuses on industrial properties, said tenants that need to be in the market will swallow the higher lease rates, which still pale in comparison to labour and transportation costs. He added that they increased 16% last year and expects them to increase a further 10% in 2018.
However, they’re still double what landlords in Calgary are charging. Combined with the lack of space, companies that don’t need to be on the coast will opt for Calgary.
Key sectors that could be affected include food processing, film, and fulfilment operations in the retail and e-commerce sectors. The biggest uptake in space in 2017 came from the food and beverage sector (31.3%) and building supplies (26.1%).
CBRE reports that just 23 transactions involved properties of five acres or more, underscoring the lack of large sites suitable for development. The aggregate value was $345 million, or an average of $1.2 million an acre – up 45% from a year earlier.
“Many developers and corporations are trying to either build or establish their footprint in the Metro Vancouver industrial market,” CBRE reports, and as the numbers show, they’re willing to spend handsomely to do so. •
