Full and fuller: hotels, office space face record-low vacancies

Full house

The first long weekend of cottage season in much of Canada has just passed, even though the North Shore backcountry remains hazardous. It may be summer in the city, but it’s still winter in the mountains.

But with cruise ships in port and tourist season ramping up, hoteliers are wondering just how much more Vancouver’s hotel stock can stand. A recent Urban Development Institute panel discussed what could be done to stem the loss of rooms and bring more online, and a recent CBRE Ltd. report indicates the problem isn’t limited to this city.

“The hotel industry in Canada is performing at all-time highs, with record occupancy, average daily rates and RevPAR [revenue per available room], as well as bottom-line performance,” David Larone, senior managing director with CBRE Hotels, says in the report. “Our hotels are full, and we are in good shape to continue to grow top and bottom lines in 2019.”

Hotels in Greater Victoria and Campbell River saw the greatest RevPAR increases of anywhere in the province last year, posting gains of 17.1% and 16.5%, respectively. In Richmond, meanwhile, the average daily rate rose 12.2%, more than anywhere else in Canada, thanks to a short supply.

Average occupancy is pushing 83% in Richmond and 80% in downtown Vancouver, numbers that give the uninitiated little cause for concern. With rental apartment vacancies in Metro Vancouver averaging 1%, it can look like hotels have plenty of room. And isn’t Airbnb meeting some of the demand?

According to David Ferguson, director of hotel valuation and advisory services in the Vancouver office of CBRE, local hotels are at “functional capacity.”

“We used to say that 75% of Metro Vancouver was probably functional capacity, but what they’ve proven is there’s sufficient demand to get this market to 80%,” he said. “You won’t find many markets that are running 80% occupancy.”

He credits the marketing of Canada and Metro Vancouver since the 2010 Winter Olympics with creating the demand for visitors to be here not only during the summer but also during the off-peak periods.

“They’ve really helped to start bring more people to Metro Vancouver at the times of year when they didn’t used to come,” he said. “We’ve been able to smash through those times of year and get people to come.”

Landlord’s market

Hotels and purpose-built rental properties aren’t the only forms of accommodation at functional capacity in Metro Vancouver. Office space is also full, with little relief on the horizon for tenants despite the current boom in construction.

Office brokers typically consider the local market in balance when 8% to 10% of office space is vacant. Tenants have choice, landlords have cash flow, and neither side has the upper (or lower) hand. But the rate today is firmly on the landlord’s side. The first quarter saw CBRE report 2.7% for downtown Vancouver. Colliers International reported 2.5% for the same market, while tenant representation firm Cresa Global Inc. pegged Class A vacancies in the core at 1.9%.

“The news goes from bad to worse,” Cresa’s latest report warns. It adds: “Lower rents are unlikely, even with pending new supply.

Cresa advises tenants to expect lease rates to increase by up to 50% downtown and 20% in suburban markets, which are “tightening rapidly,” too.

Rents are already at record highs in the core, according to both CBRE and Colliers. Downtown space averages $35.92 a square foot, according to CBRE, while Colliers puts it nearly $2 higher at $37.82 a square foot. Additional rent averages $20.58, according to Colliers, and is one figure that dropped from the previous quarter.