Vacancy rates in Vancouver and Toronto West drop in 4Q16: Newmark Knight Frank Devencore

In its Real Estate Market Research study, Newmark Knight Frank Devencore has reported that, as downtown Vancouver’s current cycle of new development winds down, the office market is gradually becoming more challenging for tenants. Buildings delivered during this cycle of development are approximately 94 per cent leased, and overall vacancy rates in Vancouver’s downtown core are continuing to tighten. The vacancy rate for all office classes in downtown Vancouver was 7.5 per cent at the end of 2016, down from 9.6 per cent a year earlier.

The study also reported that there was a surge of tenant activity in Toronto West in 4Q16, when approximately 615,000 square feet of office space was absorbed, marking Q4 as the most active quarter of the year. At the end of the year, the vacancy rate was 15.5 per cent for all office classes in Toronto West, down from 17.0 per cent in mid-2016.

Vacancy rate for all office classes in downtown Toronto was 6.4 per cent at the end of 4Q16, up slightly from the 5.6 per cent reported at the end of 2015. More than 2.2 million square feet of new office space is coming to the downtown market in 2017; in 2016 almost 1 million square feet was delivered. This development boom shows no signs of slowing and is effectively expanding the downtown core to both the west and east.

In Vancouver, “the market is somewhat fragmented at the moment,” said Jon Bishop, executive vice president and managing principal of Newmark Knight Frank Devencore’s Vancouver office. “Much of the downtown office space with less dated, user-friendly improvements has been absorbed. Many of the remaining opportunities are built out with older improvements or are in shell condition that require more substantial tenant improvement projects and capital budgets. For tenants requiring over 25,000 square feet of contiguous space, The Exchange Building, which will come online later this year, may offer the best new-build alternative.”

The Newmark Knight Frank Devencore report also notes that strata office spaces are attracting heightened interest. At present, there are almost 1,100 commercial strata lots in downtown Vancouver and two strata office developments scheduled to be completed in the first half of 2019. Up to 45,000 square feet is currently being offered at 1575 West Georgia Street during its pre-sale stage and One Burrard Place recently sold out 60,000 square feet of office space in less than 2 months, indicating substantial interest in strata ownership from investors.

Newmark Knight Frank Devencore recently arranged a pre-sale of 45,000 square feet for a client; this is one of the largest office strata transactions in British Columbia. “While supply and demand in the downtown Vancouver office market are in relative balance, tenants will likely find the office market more challenging in the quarters ahead as space is steadily absorbed,” Bishop said. “Opportunities still exist, but they are often building-specific. Some landlords, for example, are beginning to market their properties aggressively, while others are more willing and able to carry vacant space and wait until market conditions turn in their favour. With the next new development cycle likely some years away, space users may want to consider extending a term into the next building cycle underway in 2019/2020.”

In Toronto West, report notes that part of the reason for the high vacancy and rates is the amount of new space that has been delivered to the Toronto West office market over the last 24 months–in excess of 685,000 square feet. Activity was particularly pronounced in the Airport Corporate Centre (ACC) submarket in 2016, when approximately 235,000 square feet of office space was absorbed.

“The ACC has seen a resurgence of tenant interest,” said Rob Renaud, managing principal/Broker of Record at Newmark Knight Frank Devencore’s Toronto West office. “The ACC has many advantages that tenants seek. Several new LEED buildings have retail amenities within close walking distance; as well, there has been improved access to public transit, all of which are draws for corporate tenants and their millennial employees.”

In the Meadowvale submarket, approximately 920,000 square feet was vacant at year-end, currently marking this submarket as the most challenged in Toronto West. “Notwithstanding that there may be one or two mid-size office lease transactions announced shortly, some of the marquis buildings in Meadowvale have been facing headwinds,” Renaud said. “While over the last few years Meadowvale became the favoured submarket for major tenants looking to upgrade their office space, more recently the ACC has become a hotbed of activity for many corporate moves in Toronto West due to some of the key investments that have been made.”

Over the next 18 months the pace of development activity in Toronto West will slow and very little new speculative space is scheduled for construction. “Ample tenant opportunities exist, especially in some of the softer submarkets,” Renaud said. “There are a number of landlords and developers willing to work with tenants to find creative ways to add value to leasing transactions, so there are some very good opportunities available in both new and older buildings.”

In Downtown Toronto, “driving much of the leasing activity are tenants in the financial services, legal, media entertainment and high-tech sectors,” said Allan Schaffer, president/Broker of Record of Newmark Knight Frank Devencore’s Toronto downtown office. “Demand continues to be strong for office space in the new towers as well as for sublease space. Many well built-out sublease spaces are attracting multiple offers and do not remain on the market for very long.”

Schaffer also commented that the extraordinary appetite for condo development in downtown Toronto is having a number of implications for both tenants and landlords. “Building lots are increasingly scarce in the downtown area and some landlords, particularly those whose properties are close to subway lines, are inserting 12-month demolition clauses into their office leases in order to provide them with the flexibility to perform office-to-condo conversions,” Schaffer said. “Existing and prospective tenants should determine whether their space is restricted or allows for these conversions.”

As a way of intensifying the use of existing properties, developers have also launched redevelopment projects that add new structures on top of older buildings, the NKF Devencore report notes. It points to the success of this strategy at 134 Peter Street, where a 12-storey office tower built on top of two heritage buildings has attracted tenants seeking offices that combine a brick-and-beam character with contemporary systems and amenities.

In the months ahead, Newmark Knight Frank Devencore anticipates a relatively stable office market. “With over 2 million square feet of office space being delivered to the downtown Toronto market in 2017, vacancy rates will likely remain at current levels or increase slightly,” Schaffer said. “However, certain areas remain landlord-favoured — downtown West, for example — and there is no longer an oversupply of sublease space, as was the case a few years ago.”

To read the complete market study, click here.

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