Strong demand, short supply keep office, industrial on full boil

World leader

The latest figures from CBRE Ltd. give Vancouver’s downtown a credible claim to being the hottest office market in the world, and most certainly North America.

A mid-June report examining occupancy costs saw Vancouver’s core outpace that of every other city in Canada with triple
-net rates increasing 12.9% during the first quarter versus a year earlier to $69.83 a square foot.

Over the previous two years, occupancy costs soared 31.1% – outstripping not only cities in Canada but also London, Tokyo and New York. While the cost here is less than in those global centres, it highlights both the dependable nature of the local market for investors and the lack of supply versus demand that’s given builders the confidence to proceed with projects.

According to CBRE’s latest quarterly review of national office markets, office vacancies in downtown Vancouver dropped to 2.6% in the second quarter while rental rates increased to $44 a square foot.

“It will be difficult to find locations for businesses that need to expand and for new entrants to the market,” said Jason Kiselbach, vice-president and sales manager with CBRE in Vancouver.

Conditions are set to continue for the foreseeable future, according to Jones Lang LaSalle (JLL), which issued its own report last week.

“We are currently in one of the strongest landlord markets Vancouver has ever experienced, fuelled by a lack of supply and increasing demand from both local and international companies. New supply is on the horizon, but the initial relief won’t be felt until 2021/2022,” it said. “Metro Vancouver will continue its run as one of the tightest office markets in North America for the near future.”

Strata surge

A record volume of industrial construction in Metro Vancouver isn’t likely to ease equally tight vacancy rates, according to CBRE Ltd. While overall availability of industrial space inched up to 2.1% in the second quarter (from 1.9% the previous quarter), 71.4% of the space under construction has been spoken for. Of the space set to complete in the second half of 2019, nearly 80% is pre-leased or sold.

Stratification is a way developers are extracting more value from sites, says Jones Lang LaSalle.

“With less and less available land, and rapidly increasing net rents, developers will look to create value in unique ways,” JLL said in a report focused on strata space.

Strata industrial space sold for an average of $299 a square foot across Metro Vancouver in 2018, led by North Vancouver at $575 a square foot.

Vancouver came in second at $417 a square foot, but sales this year have approached $600 a square foot, most notably at Ironworks by Conwest Group of Cos.

The project is one that couldn’t be replicated today, Conwest COO Ben Taddei recently told commercial real estate association NAIOP. The sale price on a buildable-square-foot basis has doubled, and recouping the investment would require a different building form that would allow phased sales.

“It’s very special. You’ll never see that again, probably,” Taddei said. “That 2.3-acre site would probably be chopped in half with a lane going down the middle and you’d probably have two stand-alone buildings.”

Contract awarded

Victoria has awarded management of its 17 million square feet of real estate to CBRE Ltd., in what CBRE described as “a fair, open and collaborative procurement process.” (The B.C. Ministry of Citizens’ Services, for its part, described the process as “transparent” rather than “collaborative.”)

Bids were evaluated on criteria that included “environmental responsibility, best value for money, social benefits and impacts to people and businesses.” CBRE will provide repairs, maintenance and landscaping, janitorial and construction services to 1,800 facilities across the province.

The five-year contract begins April 1, 2020, and is worth $190 million a year. The province can opt to renew the contract for two additional five-year terms.