Downtown Vancouver’s white-hot office market – where sales soared 91% this year above the five-year average to $3.2 billion in the second quarter – is proving a profitable sector for some retired Ontario public employees.
On September 20, the Ontario Municipal Employees Retirement System (OMERS) announced the sale of a 19-storey office building on Burrard Street for $225 million, $108 million above its assessed value. At $1,000 per square foot, it is considered a record price for an existing non-strata Vancouver office building.
On September 25 the pension fund, one of Canada’s largest, announced the start of construction on a 36-
storey office tower on Melville Street through its Oxford Properties Group real estate arm.
OMERS has entered a 50-50 partnership with the Canada Pension Plan Investment Board on the project. Oxford bought the Melville Street site from Amacon in 2010 for $26 million.
It is not a pure speculation play.
The 540,000-square-foot Class AAA building has already attracted pre-leases from a trio of blue-chip firms. Ernst & Young LLP, Blake, Cassels & Graydon LLP and multinational law firm DLA Piper have taken 207,000 square feet of space collectively. With on-site demolition already underway, construction is set to start in 2019’s first quarter and be completed two years later.
Oxford is also building a nine-
storey, 147,000-square-foot office tower at 402 Dunsmuir Street, which is already fully leased to online retail giant Amazon (Nasdaq:AMZN). It is scheduled to be completed in early 2020. Oxford placed a moratorium on its Melville construction announcement, which was lifted September 26, but it came as no surprise to the commercial real estate sector.
In a second-quarter report released in August, Avison Young had listed 1133 Melville in its downtown development timeline and correctly projected the start and completion date, along with two of the pre-lease tenants.
Based on Vancouver’s performance this year, other big office towers taxiing along the runway could also be ready for takeoff shortly.
The space is needed. Vancouver’s downtown office vacancy rate has plunged to 5% – second lowest in Canada – and could hit all-time lows by next year, analysts say.
Vancouver has also recorded the largest price increase in North America for downtown prime office space, according to Peter Senst, president, Canadian capital markets, at CBRE Ltd.
Net rental rates for new Class AAA space downtown are approaching $60 per square foot and gross occupancy costs are flirting with $85 per square foot, Avison Young confirmed.
Glenn Gardner, an Avison Young principal who specializes in downtown office leasing, said vacancy in the core will continue to tighten during the next 18 months as new towers are built.
The building rush is on. In the largest wave of new office development in years, 4.3 million square feet is projected to arrive by 2022, representing a nearly 20% increase in the entire downtown office inventory.
Leading that wave will be Vancouver Centre. The 33-storey building on Seymour Street is scheduled to be completed by the summer of 2021.
The biggest project, the 1.07-million-square-foot twin-tower Post development on the site of the old Vancouver post office, has already been announced.
