No tenant, no problem in Vancouver as new office towers break ground on speculation
There was nothing to buy in Vancouver’s increasingly hot office market, so GWL Realty Advisors and its partners did the next best thing — they decided to build their own tower.
That GWL, which has $2 billion in office, industrial, mixed-use, and multi-residential projects planned or underway across Canada, and its partner, the Healthcare of Ontario Pension Plan, didn’t have a tenant lined up didn’t bother them at all.
“The story is just limited supply. There are a lot of condominiums around here but not a lot of offices,” Paul Finkbeiner, president of GWL Realty, said about the 33-storey Vancouver Centre II project at 753 Seymour Street, which is a joint venture of HOOPP and two of GWL’s segregated funds. It broke ground Wednesday. “We are one of the first ones out of the ground.”
The 371,000 square foot building is part of the AAA office tower complex known as Vancouver Centre, which is connected to two major transportation networks. “There is strong demand from tenants all around,” said Finkbeiner about the second tower which will open in 2021 next to the 480,000 square foot tower GWL already has on the site.
Ross Moore, a senior vice-president with Cresa Vancouver, calculates 12-plus buildings might hit the Vancouver market in the next two to four years and add as much as 3,665,000 square feet of space by 2022.
“You really have to go back to the last boom in 2015 when five buildings came in one year and then go back to 2012-2013 to see more,” said Moore. “We had all this new supply and it all got gobbled up. These (investors) can build on speculation. In the old days, developers just didn’t have the muscle but someone like GWL and HOOPP they can go on speculation.”
Space in Vancouver is getting leased up quickly. This month New York-based WeWork Inc. secured a deal with Amazon.com Inc. to rent most of the shared workspace provider’s first Vancouver office. The Seattle-based company had committed to rent space in a new building being constructed by Oxford Properties Inc. but because it won’t be ready until 2019 Amazon grabbed most of WeWork’s first foray into Vancouver at Burrard Station.
The domino effect was WeWork, a US$20 billion company which is expanding its shared space concept, went back into the market to get even more space to service its growing client list.
“What is shocking is that most of this speculative projects are going to go ahead. There might be one or two exceptions,” said Moore, who says developers just don’t see a potential problem like in Calgary where vacancy rates are near 30 per cent after a speculative building boom. “It’s … a much more diversified economy in Vancouver. Mining companies got slammed in Vancouver but tech picked up the slack and government services did too.”
Cresa says vacancy rates in downtown Vancouver are now about 6.4 per cent, down from about 8.4 per cent a year earlier. With that tightening, has come an increase in rent and Moore says some gross rents are almost $60 per square foot, unprecedented for the Vancouver market.
“The question is will they get the rents,” said Moore, who thinks landlords will be successful. “When you look at rents in San Francisco, it’s like US$90 (per square foot), so Vancouver is not that bad.”
Finkbeiner says pre-leasing a tower, normal practice for any type of development, is harder in Vancouver because the city is filled with smaller regional offices as opposed to head offices. But he doesn’t mind because leasing to one lead tenant usually means a considerable discount for that company and he expects overall rents will be higher with a series of smaller tenants.
“We like the whole office market here. We found it hard to find existing office buildings (to buy),” said Finkbeiner, noting Vancouver did see a couple of large transactions like the Bentall Centre move over the last couple of years but generally there is not much trading of assets in British Columbia’s largest city. “The (new building) is ideal for what we call the TAMI sector, technology, advertising, media and info.”
Source: The Financial Post