With interest rates easing and the end of the year in sight, landlords are breathing a sigh of relief as long-term patterns return to the office market.
“We really do feel like we’re bumping up against the top of where vacancies will go … as we get into later this year and definitely next year, as no new space is planned,” said Jason Kiselbach, managing director, British Columbia, with commercial brokerage CBRE Ltd.
CBRE statistics for the third quarter indicate vacancies of 10.9 per cent in Metro Vancouver, up from 9.6 per cent a year ago. Downtown reported vacancies of 11.8 per cent, even with a year ago thanks to persistent and rising vacancies in B and C space.
Downtown notched a significant gain in the third quarter thanks to a return of space at 745 Thurlow Street as Amazon completed its move to the south tower of the Post. A number of smaller spaces also came back to market, but leasing activity overall has picked up as leases signed before the pandemic come up for renewal.
“Office leasing volumes have been really steady; they’ve actually picked up compared to last year, so we do feel like we’re getting to the end of the cycle where tenants are going through right-sizing,” Kiselbach said.
Many companies have a better handle on their space requirements as hybrid work arrangements moderate and historic patterns reassert themselves. Workforces aren’t quite as dispersed as before, and more companies are requiring more in-office time from workers.
This is true across sectors, including tech where collaboration is key to problem-solving, creativity as well as team-building and employee engagement.
A focus on collaborative environments is shaping the future of work at Amazon’s new digs at the Post on West Georgia, where it recently completed occupancy of the south tower and intends to complete occupancy of the development’s north tower in 2026. Together, the project represents 1.1 million square feet of space leased exclusively to Amazon and will host approximately 6,000 employees.
“Our investment in the Post reflects Amazon’s continued commitment to our Vancouver Tech Hub,” said Amazon vice-president Jesse Dougherty during the recent opening of the building’s atrium. “This new space will be an ideal location for our teams to gather and invent on behalf of customers. It’s incredibly rewarding to witness the impact of Amazon’s investments in downtown Vancouver, bringing thousands of employees to the city centre in a building that also offers retail and other amenities for the broader community to enjoy.”
Meanwhile, some smaller tenants continue to face adjustments as financing remains an issue.
“There’s still definitely demand but it’s mixed, based on size of companies and what subsector they’re in,” Kiselbach said.
The life sciences boom during the pandemic has waned while the prospects for cleantech have brightened, for example.
Suburban shift
While the past three years have seen demand for suburban space boom, that’s now moderating relative to downtown, where tenants have ample opportunities to change up their space requirements. Suburban vacancies jumped to 10 per cent in the third quarter from 7.2 per cent a year ago, according to CBRE.
“We’ve seen a reversal, where the suburban markets were holding a really low vacancy – lower than downtown – for a really long time,” Kiselbach said.
“We’ve seen vacancy in the suburban markets really tick up in the last couple of quarters, and there’s also more new supply being built there, so they’re delivering product in this period where demand is not where it was.”
Burnaby, for example, saw 300,000 square feet added in the third quarter with another 218,350 square feet under construction. Burnaby is the most active submarket outside Vancouver’s Broadway corridor, according to CBRE, with 522,180 square feet under construction. Surrey is the only other suburban market with new space being built.
While dispersed workforces were tipped as driving demand for suburban space, it was short-lived.
Co-working spaces that targeted a suburban workforce have thrived, but not as expected. The majority of uptake has been from the self-employed and entrepreneurs, though this has fueled a surge in openings across Western Canada by managed workspace providers such as IWG plc.
Since last year, IWG has announced 13 new locations in Western Canada in locations including Surrey, Red Deer and Medicine Hat, as well as every major Prairie city.
Many of the locations are through partnerships, underscoring the importance of managed workspaces in addressing high vacancies, primarily in older space, across the West. Partnerships reduce the risk to the landlords, allowing them to deal with a single tenant while the space fills with multiple occupiers.
This is particularly true in smaller centres, with IWG noting that 95 per cent of its new locations are the result of partnerships with landlords.
Kiselbach sees the trend to managed space ending in downtown Vancouver, however, with more companies once again looking to take control of their space.
“We’re back to a place where larger occupiers are looking at long-term commitments,” he said. “The majority of them are looking to put capital in to create a workplace environment that’s going to retain and attract talent.”
New investment is also pointing to a revival in some suburban markets.
Century21 Coastal Realty broker Harp Khela, also chair of the Downtown Surrey Business Improvement Association, closed a $10 million deal for office space in downtown Surrey at the end of August. The buyer was a professional services firm.
“It’s probably been at least a year since we’ve seen deals of that size for office,” he said. “With interest rates coming down and people that are ending their lease terms, they’re starting to think, ‘Maybe we shouldn’t be leasing space.’”
With the Bank of Canada’s policy rate starting to fall, and CIBC forecasting it to hit 2.5 per cent by next summer, real estate investments are once again making sense for business owners.
“We saw a slowing in offices coming to Surrey while we’ve been going through high interest rates,” Khela said. “But we’re starting to see that pick up again. … We’re starting to look at a market where a business can finance themselves and get out of a lease situation and get into an ownership situation.”
This is supporting new strata office development, in turn building suburban capacity and providing an alternative to the core.
“Real estate firms, law firms, accounting firms always looked at [Surrey] as the submarket they could typically service out of Vancouver,” he said.
But with population growth in the suburbs, particularly south of the Fraser, many professional firms are opening dedicated offices in the region and even seeing space requirements greater than in the core.
Surrey’s growth is underscored by the move to request its own charter from the province.
“It’s not a submarket; it’s a core market,” Khela said. “And that’s what’s helped the leasing side in Surrey.”
A similar phenomenon is being seen on the fringes of other major centres across the West, such as Calgary, Edmonton, Saskatoon and Winnipeg.
Population growth has supported suburban demand outside the historic core and in the municipalities surrounding these cities, particularly for professional office space, including medical offices, as well as retail units that offer street-level visibility and easy access for business clients.
“When you have that much population growth, you need the businesses to follow suit,” Khela said.
