Offices Overbuilt?
Is downtown’s office new construction boom creating too much supply? (Usually when there's too much of a good thing, you save some 'til later. But our garage is full; there may not be room for a skyscraper.)
The concern was raised at last week’s Vancouver Real Estate Forum, so we reached out for some opinion from industry leaders. There are seven new towers under construction in the core. CBRE pres Mark Renzoni says while there’s some market softness in the office sector across the country, the medium-term outlook for office demand in Vancouver is good (Mark should know, being a key cog in CBRE’s western expansion before becoming president).
What's being built will service the next two to five years of economic growth, Mark says, pointing to a rebounding US economy and a lower Canadian dollar, making exports more competitive. “While everyone hopes that new supply and market demand is perfectly timed, that rarely comes to pass,” Mark says. Pictured: Oxord’s 35-storey, 290k SF MNP building, with CBRE heading up leasing efforts.
Morguard Investments director Geoff Nagle says the “extended approval processes and developments periods” associated with bringing a new office building to market in Vancouver naturally leads to “bulges” in the supply pipeline. His company is another developer with a stake in the ground here. It has submitted a re-zoning application for their 25-storey 601 West Hastings St office project (image).
Geoff with colleagues Margaret Knowles and Rina Zigler. “One of those bulges is showing up currently,” Geoff says. The greatest impact of the new office space will be on the vacancy rate in B and C office buildings in the core. Owners there will have to be flexible in their lease renewal terms to avoid losing existing tenants to the new, modern, energy efficient buildings coming on stream, Geoff says. Vancouver is a city that provides excellent opportunity for stable, reliable yields and future growth. The greater constraint for long-term investors is a shortage of institutional-quality buildings available for purchase.
Avison Young principal Glenn Gardner isn't worried about the building boom. Given the historical average annual absorption and the amount of new supply scheduled to come online, Glenn says, “the market should move to a more balanced state between tenants and landlords.”
Cushman & Wakefield Vancouver SVP Mark Chambers predicted this for the market in a conversation with Bisnow late last year. A C&W office market report then said occupancy growth was expected to remain slow through 2014, putting upward pressure on vacancy rates, but demand should pick up in 2015. Mark tells us he isn't concerned about an over-build cycle, adding the “real test” for the market will centre around the two newest towers to start construction: Manulife’s 16-storey, 250k SF building (below) at 980 Howe St and The Exchange, the 31-storey tower at 475 Howe St.
But even with moderate demand, Mark says he sees the market, “swinging from what has been firmly a landlords’ market for several years” to a balanced market. Tenants will get flexibility and new opportunities that have not been available for a long time. (Now's as good a time as any to ask for a Sodastream in the employee kitchen.) The anticipated vacuum effect out of the older towers has not been a reality so far, he says.
