The office tower building boom in major metropolitan markets is proving to be bad news for a significant group of largely pre-2000 built towers that are bleeding tenants to shiny new competitors.
Altus InSite’s Spring 2015 report finds that for the “worst eight” group of downtown class-A buildings with the most available space, the numbers are stunning: Vancouver 25.5 per cent, Edmonton 26.6%, Calgary 21.5%, Toronto 24.2%, Ottawa 13.7% and Montreal 32.5%.
That’s the big surprise that jumps out of the data, observed Sandy McNair, president of Toronto-based Altus Group and author of the report.
Donating tenants to newer buildings
“Many of the buildings that you would have thought of as top of market have got big issues in them,” said McNair.
“It is not as big a surprise as to why they do (have massive vacancies); they have been inadvertently donating their tenants to these brand new buildings. Unlike prior cycles, there hasn’t been an easy move from A-minus to A-plus or from B to A as there might have been in the past.”
In one respect, it should not be a surprise. The latest state-of-the-art buildings all require a big-anchor tenant to justify their construction and where they are coming from shows up in the current or pending vacancy numbers.
It’s not all bad news, however, as the rest of the downtown class-A buildings in those markets look to be holding their own. Taken as a group, class-A availability rates beyond the worst eight look healthy: Vancouver 6.2%, Edmonton 3.5%, Calgary 4.0%, Toronto 7.9%, Ottawa 3.1% and Montreal 8.0%.
This time it’s different
That’s small comfort to the worst-affected towers. Most of these buildings put up in the Eighties, Nineties or 2000s have survived and thrived during prior building cycles, so what’s different this time with the next-gen build? Plenty, according to McNair.
“It is capacity to be more intensely occupied all the way down to 100 square feet a person, whereas the existing buildings, even the very, very good ones, can’t do that. And then, of course, they have different technology in them, more daylight, more personal control.”
Add in a new “vibe” or vibrancy that has been created when new builds have grouped together – perhaps best seen in Toronto’s “downtown south” development that has taken place below Front Street.
“It is difficult to measure, but it is real. That vibe matters to some of the occupiers a great deal and they are willing to go through the pain of moving to get closer to that in their chosen battle for talent.
“There has always been a battle for talent, but this time around space is being used as one of the weapons.”
The development of Toronto’s downtown south has been so extensive it has tilted the concept of the city’s core southward along with it.
“We have had a clear shift of ‘centre ice’ being King and Bay to centre ice being Union Station,” he said. “That’s a Toronto phenomenon, but there are other versions of that because I think most every city has got a transit deficit or a commuter deficit.”
The issue for the hardest-hit class-A office towers is there is likely no easy fix, McNair noted.
“There has been some migration from the suburbs to downtown . . . there has been some consolidation. But there is no easy cure-all.”
The most vacant buildings
Altus InSite data for downtown Toronto, which boasts 114 class-A office towers, has a most challenged cohort of eight buildings that consists of: Scotia Plaza; Brookfield Place Bay Wellington Tower; Ernst Young (TD Place); First Canadian Place; Sun Life Financial Tower; TD Canada Trust Tower; the CBC Broadcast Centre; and Air Miles tower (438 University Ave.)
Each one has “200,000 or more” square feet of vacant or coming vacant space.
In Calgary, the group of eight with the most space consists of: EnCana Place on 9th Ave. SW; Bow Valley Square 4; Centennial Place East Tower (a relative new-build); BP Centre; Penn West Plaza – West tower; Jamieson Place; Barclay Centre One; Devon Tower; and a bonus ninth, Bankers Hall West.
Downtown Vancouver, with 60 class-A towers, has a worst eight of: 1075 West Georgia; Four Bentall Centre; Royal Centre; Park Place; Pacific Centre Tower Four; FortisBC Centre; 900 Howe St.; and Guinness Tower.
Montreal, with 55 class-A towers in its downtown, has a most-vacant nine (100,000 sq. ft. or more) made up of: Place Ville Marie; 1981 McGill College; 1360 Rene-Levesque West; 1250 Rene-Levesque; Telus Tower; Maison Alcan; Tour 1130; Tour Aimia; and 1350 Rene-Levesque West.
Montreal is not quite in the same situation as is Toronto, McNair said.
“There are some new buildings going up, and they also have a loft phenomenon” which has attracted many former and would-be office tenants into converted garment building space.