Downtown Vancouver office vacancy rate hits 12.3 percent

This Article originally appeared online in the Vancouver Sun.

Surprising post-pandemic shift hits downtown Vancouver as office vacancies rise to 12.3%

'You might think the downtown office market is falling, but the reality is that it's healthy'
Joanne Lee-Young
Published June 28, 2023

A day after a report that two of Canada’s largest pension funds were putting up for sale two downtown Vancouver office towers — including one occupied solely by Inc. — a commercial real estate firm said the vacancy rate for downtown Vancouver office space had risen to 12.3 per cent in the last quarter.

On Wednesday Avison Young said three-quarters of the total increase in downtown Vancouver vacant office space in the last quarter came from tenants choosing not to renew primary leases rather than from an increase in the subleasing market.

Most observers in Vancouver were sanguine with their analysis of the situation.

Relative to other downtown office markets, such as in Calgary, Toronto and the U.S., Vancouver is more liquid for sellers, said Ross Moore, a managing broker at real estate company Cresa.

This could explain the choice of the pension funds to sell the Vancouver properties, he said.

According to the Bloomberg report, Oxford Properties, the real estate arm of the pension fund representing Ontario’s municipal workers, and the Canada Pension Plan Investment Board expect to get about $350 million for the buildings at 402 Dunsmuir St., which is entirely occupied by, and 401 West Georgia St., which has multiple tenants. Both are fully leased.

Bloomberg, citing people familiar with the matter, said the two pension funds are seeking to manage their exposure to Vancouver’s office market and have opted to sell more mature projects, given they are nearing completion on another new office tower with about 51,100 square metres of space.

As large pension funds face increasing pressure to balance their portfolios and lighten exposure to downtown office space in general, selling those assets in Vancouver probably brings a better return on investment for the funds than doing so in other cities where vacancy rates are higher and they have to sell at a lower price, said Moore.

“To say that (investing) in office buildings is out of favour would be an understatement,” said Moore. However, “there will always be a buyer looking at it as a purchase in a hedge city” like Vancouver, where they could “park their money and hold it for two, five or 10 years.

There has been growing attention to rising vacancy rates as companies try to reduce their costs by offering up their leased office space to a second tenant. In fact, observers have wondered whether will put its newly leased space at The Post at 349 West Georgia St. on the sublease market.

But the Avison Young firm said the rise in the last quarter had mostly been due to tenants waiting for their leases to expire. There has been a limit to subleasing because spaces marketed for this have specific build-outs and are often designed for technology companies, which saw limited demand. In response, other tenants who had this kind of industry-specific space didn’t try to sublease their offices.

Some landlords have also had restrictions on subleasing space. Additionally, there has been a time lag between when companies started their strategies of pulling back on office space and actually executing on these.

“If you didn’t understand the office market and just read the news,” and saw these higher vacancy rate numbers, “you might think the downtown office market is falling, but the reality is that it’s healthy,” said Glenn Gardner, principal at Avison Young who leads its Vancouver office leasing team.

The firm is expecting that more “head lease” office space will become vacant as “the year and macroeconomic uncertainty progress,” but Gardner emphasizes that the mark of a healthy market is one with a vacancy rate of about eight per cent and he thinks that in the long-term, the uptick will stabilize and reverse.

Meanwhile, the suburban markets, such as Richmond, Surrey, New Westminster and North and West Vancouver, saw office vacancy rates drop since the first quarter.