Vancouver's downtown office vacancy rate is the highest it has been in 20 years. Driven in relatively short order from 2% just prior to the pandemic to 12% today, the office market here has been experiencing change.
But it's important to keep Vancouver's downtown experience in perspective.
This is the first article of a two-part series focused on downtown vibrancy in which Thompson reviews the conditions, challenges and opportunities in Vancouver and Calgary — both cities in which she has lived and worked as a researcher in the commercial real estate industry.
Keeping Vancouver’s office challenges in perspective
It's understandable that the current Vancouver office vacancy rate would feel dramatic to those who haven’t been around the market or the business beyond that past 10 years. When we pull the lens back and compare Vancouver's office market to other North American cities and their downtown experiences, the situation here feels much less ominous.
A balanced office market is generally accepted as having vacancy between six and ten per cent.
Calgary's downtown office vacancy, for comparison’s sake, has been around 30% for several years. Other cities, including Houston, San Francisco and even New York City, also have higher office vacancies than Vancouver. These are markets with much more office inventory overall, meaning that they're facing much larger tracts of unused space to either convert or fill.
Let’s bottom line this: there remains plenty of confidence in the Vancouver commercial market, driven by an increasingly diverse provincial economy, record-high population growth and our world-class higher-education institutions. Many insiders believe this period of higher vacancy, while causing headaches for landlords, will wane — especially for the best-in-class office buildings that have come online in recent months and years, as tenants take advantage of softer conditions and fly to quality.
Robust new office development cycle comes to an end
We have gone through an extremely active office development cycle. In the last two years, several major AAA office towers have completed in downtown Vancouver including Deloitte Summit by Westbank; Vancouver Centre II by GWL Realty Advisors; Bosa Waterfront at 320 Granville Street by Bosa Development; The Stack on Melville Street by Oxford Properties; the 21-storey South Tower of The Post on Georgia Street by QuadReal Property Group; and the 32-storey Bentall 6 by BentallGreenOak.
In the last 10 years, more new office inventory has been added to the downtown Vancouver market than in the prior 20 years. That's a huge influx of new space. Meanwhile, our economy and work habits shifted as hybrid work took hold and many companies immediately started to reevaluate their space requirements. That reckoning is still happening for some.
There are other factors at play, including inflation spiraling higher and the Bank of Canada forcefully cooling the economy with rapid increases to its policy interest rate.
The bright side is that after many years of struggling through a landlord's market, tenants now have options to relocate, expand or establish a presence in Vancouver. A flight to quality is already occurring, with demand remaining strong for our many new AAA office towers.
Rent increases are now slowing, and even starting to retreat, for tenants. The GVA weighted average asking net rent decreased 1.0% to $34.49 per square foot in Q3 from the previous quarter. This was the first decrease in almost three years due to the steady increase in vacancy over the last 18 months, according to Colliers' Vancouver office market report for Q3 2023.
It's a good time to be a company that wants a flashy new office space to help with talent recruitment and retention. But landlords shouldn’t despair, as it takes much less time to absorb space than it takes to build new space. The space resting on the market could be snapped up quite quickly as the economy stabilizes and lending rates retreat.
Office conversions will happen, but don’t expect widespread changes
As companies continue to gravitate towards the newer, best-in-class office spaces that have been opening in recent months and years, many older, lower-quality buildings and spaces will be left behind.
Some of these buildings have fewer amenities and less desirable locations or lack downtown Vancouver’s best views. It’s getting more challenging to satisfy modern needs, and landlords must face the reality of investing back into their buildings. Generally speaking, the lifespan of an office tower without serious capital investment is about 50 years.
Vancouver has plenty of buildings built in the 1970s and 1980s that haven’t had many or any improvements or modernizing. Those landlords are going to have to evaluate: Is it time to renovate that building and keep it as office space? Or is it time to consider other options that this building could be used for?
While it's unlikely that Vancouver is going to see a lot of adaptive re-deployments of office buildings, there will be a few cases where it will be seriously considered, and perhaps even completed on a small scale.
For example, The Smithe, built only two years ago, will see its 30,000-square-feet of office space on three levels converted into 26 hotel suites. The building's office component within the podium has been sitting vacant and unleased since it was built. There are a couple of other cases under consideration for conversion, but not to the extent that large-scale offices are being converted to residential, as is the case in Calgary, where it’s crucial to take this step.
When will Vancouver’s next tower kick off?
It’s anybody’s guess when the next major office tower will kick off in Vancouver, but there will be signals that point to our market being ready.
Those signs will be a continued flight to quality and decreasing vacancy at our new collection of AAA towers; stabilizing or rising lease rates; and a reduction in available subleases. Obviously, a major tenant committing to a serious lease in one of our existing proposed office projects would be an essential spark for the next construction cycle.
For now, though, let’s not lose our heads. It’s prudent to keep Vancouver’s current office challenges in perspective in relation to the city’s past performance, the city’s and province’s prospects, and the experiences of other office markets around North America.