Obsolete buildings a growing factor in commercial real estate

The Commercial Real Estate industry is facing a new challenge in major cities – obsolete buildings, delegates were told at the recent Vancouver Real Estate Forum.
Sandy McNair, president of Altus Insite, told a panel discussion entitled A Game of Musical Chairs or Well-Planned Growth? that there are three clear threads running through office tower developments in Canada's major cities.
He said it is not clear whether the new buildings now under construction are a driven by investors looking to place money or by developers who recognized the demand for new structures.
The question remains whether Vancouver tenants are playing musical chairs shifting from older structures to the more modern ones or whether there is enough demand and new market entrants to backfill space created as the tenants move to new structures.
Altus Insite tracks backfill and recently completed a survey that sliced through the market inventory of office buildings looking at age in four cities (Vancouver, Calgary, Toronto and Montreal). The results show that there is a huge block of older buildings built from 1960 through to 1989 that are becoming outmoded and potentially 'obsolete' explained McNair.

The figures show that between Greater Vancouver and downtown Vancouver are coming into the market with 14.3% listed as new space.
Is Vancouver moving toward a glut in office space?
Panel members said that Vancouver has continually added to its office supply through the construction of new buildings except during the downturn in 2008.
“We are now in the dangerous point of the cycle” of new supply and “we have to go forward with eyes wide open,” McNair warned.
He pointed out that 1.6 million square feet of space in the downtown Vancouver and 1.2 million square feet in the suburban areas is coming on stream with 700,000 square feet in periphery markets. Following behind in pre-lease mode is another 1.5 million square feet in the downtown Vancouver area plus 700,000 square feet in the suburban areas and 500,000 square feet in periphery markets.
“If it all happens, it will be a disaster for pension funds and capital,” he said. Not only would it leave the areas with a glut of office space, but the new structures would pull in tenants from older buildings, leaving them with larger vacancy rates.
There is already a pull toward the newer structures, as they reflect the new green building standards that many clients want.
The Vancouver pre-lease market remains strong
Gavin Reynolds, senior vice president with Jones Lang LaSalle said several projects have already signed anchor clients. He predicted that as much as 90% of new space under construction will be pre-leased by first quarter of 2014.
Reynolds said that “if the market is healthy” then others would come in and reuse “high-quality” space.
Whether the market remains healthy will depend both upon a number of factors including the political landscape in B.C., where an election campaign is underway.

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