Property Biz Canada
As more office space comes on stream, owners should lock up tenants new
Property Biz Canada
Thu Jan 17 2013
With generally tight downtown office supply in Toronto and Vancouver expected to loosen as new buildings come on stream in 2015 and beyond, owners of existing stock should be locking up tenants now.
“Landlords today are doing what they can” to prepare for the new wave of towers with inducements to renew key tenants in older buildings," said Kirk Kuester, Managing Director of Colliers International’s Vancouver office. “A lot of the major exposure that big landlords have today has been early renewed.”
In Vancouver, office owners are also “investing heavily in their buildings to compete in a market that will become a bit more tenant-friendly post-2015, 2016,” said Kuester. “They are doing lobby upgrades, common area upgrades, amenity upgrades and so on.”
Of the eight AAA buildings that Colliers regularly surveys in Vancouver, the average age is 20 years. “The last new building here was Bentall Five, which was done seven or eight years ago,” he said. “So you have tenants that are competing for talent and are clamouring for new space – modern, efficient, functional new space.”
The Vancouver downtown will add approximately 1.46 million square feet of new office space in 2015 in the form of four new office towers, adding about 6% to an existing market of 24.4 million sq. ft.
The Vancouver office market is currently a tale of two (or three) cities. Vacancy in the downtown core is currently just 4% according to Colliers figures, compared with 10% for suburban offices. That ranges from a low of 4.6% for the Broadway Corridor, to 8.3% for Burnaby and 20.5% for Richmond.
It’s Toronto too
Major Toronto landlords are similarly spending heavily on upgrades and inducements to ensure that their buildings don’t empty out as a result of new towers coming on stream. “At First Canadian Place, TD Centre as well, they are spending hundreds of millions on those assets to freshen them up,” said Ian MacCulloch, Colliers’ National Research Director.
“In some cases it is infrastructure, it is air handling systems, it is lighting to make the buildings more efficient, more friendly for tenants who are looking for those efficiencies both in terms of space and operating costs which is something that those new buildings have.” Not only does the next generation of office towers offer state of the art ventilation and lighting, they better suit the requirements of today’s tenants. “Some of the new buildings in Toronto are large floor plate, efficient lay out buildings.”
Owners of existing buildings in Toronto have been able to generally hold their own in the face of the pending new supply, said MacCulloch. “Commerce Court is a good example of that. They had a major availability there that they knocked off in the last four weeks or so because of a tenant moving to one of the new buildings. That was a looming chunk of space in the financial core that has now been addressed.”
The Toronto market will add about 4% in new office supply over the next few years as new towers begin filling up. Given Toronto’s current vacancy rate in the downtown is about 4.5%, the new construction will tip the scales to make the market somewhat more tenant friendly.
Steady as she goes for 2013
With no new supply coming in 2013, the downtown office markets in Vancouver and Toronto, “it will be slow and steady with rents firm and not a whole lot of rent growth expected,” said MacCulloch.
The Colliers research head is not surprised that owners of existing buildings have acted aggressively to ensure their buildings don’t become ghost towers with the advent of new buildings.
“The profile of the people building the new towers, they are large institutions, and to a great extent they are the people who own the older towers,” said MacCulloch. “So they are not surprising themselves.”
Conflicting trends in office
Colliers has identified two major trends that will impact on owners of downtown space, both positive and negative.
The first is a move by tenants to drive efficiency in their buildings by putting more and more employees into smaller footprints by having people work offsite, work from home part-time and generally cycle more people through their space. “It is not a one size fits all, it works in some businesses but not others.”
An offsetting trend to the efficiency push is the urbanization drive in the form of tenants moving back to the downtown core in an effort to attract sought-after employees. “We have seen the likes of Google, Coca-Cola and Telus consolidate locations back into the core to attract talent and try to hold onto the talent,” said MacCulloch. “Typically now people want to be well served by transit, they want good amenities in the area, a lot of the younger generation wants to walk to work from their condo. Those are all pulling people back to the core.”