BY THE NUMBERS

OFFICE SPACE REMAINS INTEGRAL TO TENANTS’ POST-PANDEMIC PLANS

Reports of the death of Metro Vancouver office space have been grossly exaggerated

ANDREW PETROZZI

While deviations around layouts and work schedules are likely to emerge in the immediate aftermath of the ‘great return’ to Canadian urban cores this upcoming fall, the consensus among most employers across virtually all sectors of the economy – and from many employees themselves – is a stated desire to get back into the workplace and something resembling normalcy.

There are a variety of reasons for this, but after reviewing report after report and survey after survey, the preliminary euphoria and flexibility that initial work-from-home orders generated largely dissipated after more than a year into the COVID-19 pandemic. Let’s focus on three key features that demonstrate that any definitive autopsy of the regional office market is highly premature.

VACANCY FALLACY

While the percentage of sublease vacancy that makes up overall vacancy increased substantially in downtown Vancouver, overall downtown office vacancy rose to just 6.6% at year-end 2020 from 2.6% 12 months earlier. A balanced market is generally considered between 8% and 10%.

Will vacancy continue to rise in 2021? Yes. As a lagging indicator, quarterly vacancy rates represent leasing decisions that were made in the past or delayed, not current conditions. Many tenants pushed off leasing decisions through either short-term extensions or renewals. This leasing activity isn’t lost – it is deferred. As employers attain a clearer understanding this autumn of the pandemic’s enduring impact on staff productivity, innovation and workplace culture, leasing activity will resume in earnest as negotiations pushed from 2020 and 2021 into 2021 or 2022 roll over into tenant negotiations on 2022 and 2023 lease expiries, triggering the likely start of a steady decline in vacancy by mid-2022.

LOCATION, LOCATION, LOCATION

Much has been made of heightened office vacancy in urban cores across Canada, but what happened in the suburbs? In Metro Vancouver, there was little change outside of Vancouver’s city limits with the overwhelming amount of vacancy situated in the downtown core and along the Broadway corridor. Office vacancy in Burnaby and Richmond nudged upwards only slightly through 2020, while other municipalities such as New Westminster and Surrey actually recorded declines in vacancy. This was not a case of tenants fleeing the core to populate suburban office space, but an example of businesses that not only continued to operate in their respective communities but, in some cases, flourished and expanded during the pandemic.

FOLLOW THE SMART MONEY

Office buildings in downtown Vancouver typically command premium pricing, posing a relatively high bar of entry for investors. This has often led institutions and well-capitalized private investors to develop their own class A/ AAA office properties, a practice that has resulted in two development cycles kicking off in the past eight years.

After the banner years of 2017, which included the $1.25-billion sale of a 50% stake in Cadillac Fairview’s 12-building downtown office portfolio, and 2018, which involved the sale of 10 downtown office buildings, the second sale in three years of the iconic Bentall Centre followed, selling for more than $1 billion in 2019. However, in 2020, just two downtown office buildings sold (and neither were in the central business district). Why? Were investors fretting over the future of downtown office space? Apparently not. In the first quarter of 2021, at least five downtown office buildings transacted and two new large office developments were announced. Well-informed investors clearly see a positive future for downtown office space.

While the pandemic may have forced downtown Vancouver’s office market into hibernation, its near-term future among both tenants and investors remains bright as it reawakens in a post-pandemic world that will bear a striking resemblance to the pre-pandemic one.

Andrew Petrozzi is principal and practice leader, research (B.C.), at Avison Young.

WHILE THE PANDEMIC MAY HAVE FORCED DOWNTOWN VANCOUVER’S OFFICE MARKET INTO HIBERNATION, ITS NEAR-TERM FUTURE AMONG BOTH TENANTS AND INVESTORS REMAINS BRIGHT AS IT REAWAKENS IN A POST-PANDEMIC WORLD