Downtown Vancouver will face an office space crunch within the next two years, predict commercial real estate analysts.

Chris Clibbon, a senior research analyst with the Vancouver office of CB Richard Ellis, a real estate services company with 300 offices in 50 countries, says downtown vacancy will fall below 10 per cent by 2006.

“There’s very few opportunities to build new space in downtown Vancouver,” says Clibbon. “That is becoming even more of an issue right now.”

The 10-per-cent vacancy threshold is considered the point where demand for space becomes competitive and landlords have more control of the market, whereas it is now viewed as a renter’s market.

Bayne Stanley, Business Edge
Analyst Chris Clibbon says downtown Vancouver vacancy will fall below 10 per cent by 2006.

In its third-quarter report on the Greater Vancouver office market, prepared by Clibbon, CB Richard Ellis says downtown Vancouver’s vacancy rate fell to a near two-year low of 12.1 per cent from the most recent low of 13.8 per cent in the second quarter of 2003.

The 0.6-per-cent decline in the third quarter marked the sixth consecutive quarter of modestly decreasing vacancy downtown, while the area experienced its largest positive absorption – the amount of space occupied from one quarter to another (137,000 square feet) – since 2000. Greater Vancouver’s overall vacancy rate decreased 0.9 per cent to 15.2 per cent.

Since the fourth quarter of 2002, vacancies in large high-quality buildings, classified as Triple-A (more than 200,000 square feet) or A-class structures (more than 100,000 sq. ft.), fell because of favourable rental fees and low interest rates, while vacancies in smaller buildings, described as B- and C-class structures, increased in all but two quarters of the same period.

But now, says Clibbon, vacancies for both large and small buildings are heading downward at the same time.

“There are opportunities for smaller sites in downtown Vancouver, but there’s few sites for large developments right now,” says Clibbon. “So as a result of that, we’re going to see vacancy continue to decrease in downtown Vancouver, especially as we move toward the Olympics and we know there are going to be some Olympic-related users moving into downtown space.”

The 278,000-sq.-ft. Shaw Tower at 1067 W. Cordova, slated for completion in November, is the only new Triple-A building going into the downtown core this year. It has been preleased to Shaw Communications, real estate developer Westbank Projects Corp. and the Pattison Group, a conglomerate headed by B.C. businessman Jimmy Pattison.

Clibbon says large infrastructure projects such as the Sea-to-Sky highway improvement and the Vancouver Convention and Exhibition Centre expansion are prompting engineering and consulting firms to expand and, if necessary, relocate their office space.

“We’re going to see more of that (expansion and relocation),” predicts Clibbon. “It’s not going to fill huge amounts of space, but it is having an impact. Later, in 2008-2009, we’ll see more space get occupied as we get close to the Olympics.”

According to a separate CB Richard Ellis study conducted in the summer, financial and investment firms (16 per cent), legal services (14 per cent) and accounting, architectural and consulting professionals (11 per cent) and business services (10 per cent) occupied about half (51 per cent) of the downtown space. Two staples of B.C.’s resource sector – mining and forestry – took up only seven per cent of the total downtown market, but rentals by mining and oil- and gas-related companies rose 30 per cent, says Clibbon.

Meanwhile, suburban vacancies declined with their downtown counterpart. That decline is significant, says Clibbon, because in the last year and a half, suburban vacancies were increasing while downtown vacancies were decreasing modestly.

Burnaby will be the next area to experience significant vacancy decreases, because it has the biggest concentration of information-technology (IT) firms in the Greater Vancouver area and several more IT-related office deals will occur there in the next 10 to 12 months, says Clibbon.

Wendy Waters, research director with the Vancouver office of Avison Young Commercial Real Estate, agrees with Clibbon’s prediction that the downtown vacancy rate will dip under 10 per cent.

“I would expect by the end of next year we’ll be below 10 – maybe sooner, but definitely by the end of next year,” says Waters.

Waters adds businesses are becoming concerned that the high number of office-to-condo conversions downtown will lead to a shortage of office space within the next decade.

The City of Vancouver has announced a two-year moratorium on condo conversions on the eastern edge of the central business district, from Seymour to Beatty streets between Robson and Pender. The city is expected to release a new comprehensive plan for the area.

Waters praises the city’s decision to slow down and rethink development in the area.

Demand-wise, downtown is not ready for more office towers, but developers will soon start thinking about whether to build them, says Waters.

Phil Boname, president and CEO of Urbanics Consultants Ltd., also agrees the vacancy rate is heading down because no new construction is likely to start within six to 12 months, and a building would probably not be completed before 2007.

“It’s quite probable that that prediction may, indeed, occur but there’s a lot of volatility, particularly on the demand side,” says Boname.

A residential housing boom, high downtown property prices, a 25-per-cent increase in construction costs, low office rental rates and a shortage of labour make new office towers less appealing.

If he had to choose, Boname says he would build a new condo complex instead of office space.

Bentall V’s Phase II expansion has the most incentive to get out of the gate first, he notes, because most of its infrastructure is already in place.

Bentall V, owned by Bentall Capital LP, is one of five office towers at Dunsmuir and Burrard in the central business district. Its Phase II expansion project involves adding more offices on top of the existing structure. Analysts predict Bentall will announce construction plans by the end of this year.

(Monte Stewart can be reached at monte@businessedge.ca)