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Sunday, August 6, 2017

Next downtown Vancouver, BC office development cycle facing headwinds

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 developmentand 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.)

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