While Vancouver has weathered the slumping office real estate market better than many other North American cities, challenges with high vacancy rates and sublet space being taken off the market as its viability dwindles are becoming more common.
Some proposed office development plans have also been paused.
“With the cost of construction and the cost of financing, some projects that looked viable are not as viable,” Rob DesBrisay, managing partner of real estate services firm NAI Commercial, told RENX.
“If you look at office across North America, investors are no longer keen on office. Nobody is looking to weigh heavier in office investment right now.”
Los Angeles-headquartered owner Hudson Pacific Properties has made significant investments in Bentall Centre — comprised of four class-A office buildings and a retail concourse totalling approximately 1.5 million square feet on Burrard Street between West Pender and Melville streets — over the last few years to modernize it and activate it with programming and outdoor spaces.
Plans were in place with its partner Blackstone Real Estate to expand the campus with the addition of the 16-storey, 450,000-square-foot Burrard Exchange office and retail space at 1025 Dunsmuir St. The mass timber-constructed building was expected to create more than 2,000 direct and indirect jobs but has now been put on hold.
“We have city approval for Burrard Exchange and we are excited about what it will add to the Bentall Centre campus,” Hudson Pacific executive vice-president of office operations Chuck We said in a statement provided to RENX.
“We are waiting for the right market conditions to begin construction on the project.”
False Creek Station
False Creek Station was a planned 13-storey, 270,000-square-foot AAA office building with retail at grade at 1296 Station St., next to the Main Street Sky Train Station and the new St. Paul’s Hospital campus that’s scheduled to open in 2027.
That project has also been put on pause as GWL Realty Advisors (GWLRA), on behalf of the property’s ownership group, is exploring its long-term options now that the City of Vancouver has relaxed view protection guidelines and the provincial government has set minimum height and residential densities for areas near transit nodes.
While this will allow for more flexible land use options than before, GWLRA hasn’t yet applied to the City to make any changes.
“We appreciate the leadership of the City of Vancouver and the Province of B.C., who have made changes to encourage more housing development,” GWLRA VP of development for Western Canada Geoff Heu said in a statement provided to RENX about False Creek Station.
“These changes help to materially improve development possibilities at this unique location, and for a project that will complement the hospital campus and the broader community. We look forward to working with the City of Vancouver team and other stakeholders.”
Downtown has highest vacancy rate
The downtown Vancouver second-quarter office vacancy rate dropped to 16.1 per cent from 16.4 per cent in the previous quarter, while absorption was negligible, according to NAI Commercial’s Metro Vancouver Office Market Report Q2 2024.
“We’re not that large of a market in relative terms and we’ve been resilient,” DesBrisay said. “If you look at markets like Calgary, Seattle, San Francisco and Toronto, we tend to do better and our landlords have done really well.”
Vancouver has a lot more tenants per square foot than many major cities, DesBrisay added, which has been a contributing factor to why it hasn’t been hit as hard.
The downtown sublease market decreased by about 82,000 square feet to 928,647 and represented 19.6 per cent of the total available space.
“Each month we’re seeing space taken off that was formerly for sublet,” DesBrisay observed. “Part of that is absorption and part of it is just falling off as it gets longer into the term and there’s no sense in trying to sublet it anymore because there’s so little term left.”
Class-A outperforms inferior office buildings
The vacancy rate dropped from 15.7 to 15 per cent for class-A downtown office space, 15.7 to 15.9 per cent for class-B space and 21.6 to 23 per cent for class-C properties.
“The top-quality spaces are in high demand and get decent if not premium rental rates,” DesBrisay said. “If you have low-level unimproved space, that’s where landlords are starting to get aggressive and offer higher inducements to try and move it.”
The divergence in rental rates between renewal rents for quality space and the effective rents landlords need to accept for commodity space that requires improvements is the widest seen in more than three decades, according to the report.
“As the market gets softer, tenants move up to better quality space for the same amount of money or better quality space with a smaller footprint so their overhead is still the same or less,” DesBrisay said.
Suburban and periphery office markets
The suburban office vacancy rate fell to 8.1 per cent from 8.4 per cent but was still higher than the 7.6 per cent rate a year earlier. The sublease market represented 28.1 per cent of total space, nearly identical to the previous quarter.
The office vacancy rate on Vancouver’s periphery rose from 11.7 to 13.9 per cent — a new high for the past 24 years. Sublease space accounted for 36.1 per cent of what was available.
“The suburban market has been propped up as people move closer to home,” DesBrisay noted, “and now you’re starting to see the vacancy rate creep up in the periphery market.
“I think the exit from downtown will slow as tenants will start to look at the amenities that downtown has to offer and the deals will start to get sharper for some tenants.”
The conversion of under-utilized office space to residential, hotel or other uses hasn’t taken hold in Vancouver due to both the buildings themselves and financial challenges, DesBrisay noted.
