By Andrew
Petrozzi (Vancouver)
While downtown Vancouver’s recent office
development cycle, which will result in more than 2.1 million square feet of
new space added to the core between 2015 and 2017, has been largely deemed a success,
a number of new actors and trends in 2017 may offer challenges to the next wave
of office development preparing to break ground.
Though downtown office vacancy did rise – peaking
at 9.8% at mid-year 2015 – as new buildings were delivered, dire predictions
that vacancy could spike to levels last recorded in the early 2000s when downtown
vacancy hit 13.5% failed to materialize. Nor did a tsunami of sublease space
wash out the downtown market by weakening asking rates and contributing to
vacancy in its wake. The vast majority of space in new buildings was leased and
resulting sublease space subsequently absorbed through existing tenant
expansions and businesses locating in the core.
Although tech firms have been largely
credited with the successful lease-up of this recent wave of development – and certainly Amazon, Microsoft, Sony Pictures
Imageworks and others played a substantial role – it is also important to note
the significant contribution made by local legal, finance and accounting firms
as well as engineering companies.
The first wave of development successfully
tapped most of the expansion demands (and a desire for ‘cool’ updated premises)
from these stalwarts of the downtown office market and the growing clout of the
city’s tech cluster that had built up over a decade, in which the downtown
market only recorded the addition of the 540,000-sf Bentall 5 office tower in
2007 (in two phases nonetheless!). A majority of the city’s lawyers, accountants,
engineers, bankers and software engineers have moved into new digs since 2015.
The next wave of development, which could start delivering new buildings by
late 2019 and would continue to 2021, will not be able to count on this pent-up
demand to drive their leasing programs.
The arrival of co-working juggernaut,
WeWork, to Downtown Vancouver’s office market in early 2017 may have a
potentially disruptive impact on the traditional relationship between tenants
and landlords, particularly with technology firms (which are touted as the
source of much of the future demand for new office space in Vancouver). Regus’
co-working format, Spaces, also opened in Vancouver this year. The fundamental
rethinking of the tenant-landlord relationship represented by these new players
may reduce demand for space in the next development wave. Whether or not the
appetites of a WeWork or Spaces to take on more space in these new buildings
outweighs a potential reduction in demand from firms that choose to go the
co-working route remains to be seen.
The scale of construction proposed in the
second wave of development, which already includes more than half a dozen
buildings totalling almost 1.5 msf and counting, will be much more reliant on
demand originating from outside the local market. While many Vancouver-based
businesses, tech and otherwise, continue to grow and will require additional space,
the magnitude of the office development being proposed exceeds the likely
requirements generated by local firms, many of whom already expanded or
relocated since 2015.
While ongoing concerns with immigration
policy under the current U.S. administration may lead some American firms
(particularly tech companies) to open offices in Vancouver to recruit talent
from around the globe and avoid U.S. visa restrictions, the nature of these
operations has a transient quality that may be unwise to base a development
cycle upon. A rising Canadian dollar and an end in sight to nearly a decade of
easy money will also be factors that need to be considered and which were
largely absent during the first wave of new development. While the success of
the recent wave of downtown office development may not be easily replicated,
the next wave will represent a true step forward in the city’s evolution and
its establishment as a truly global tech hub, but first steps are never easy or
simple.
(Andrew Petrozzi is Principal and Vice President Research in Avison Young's Vancouver office.)
