The cost to occupy downtown Vancouver’s top-grade office space surged more rapidly than any other Canadian market, and topped all but six global cities since early 2018, according to a CBRE report.
Vancouver’s prime office market occupancy costs climbed by 12.9 per cent year-over-year since Q1 2018. The rate of growth ranked seventh globally and the highest in Canada, according to CBRE’s 2019 Global Prime Office Occupancy Costs report.
In the past two years, Vancouver’s office rent rate growth has been greater than the combined growth rates of London, New York and Tokyo, the report found. Since 2017, the city’s office rents grew by 31.1 per cent, making Vancouver the only city to experience top-10 rental rate growth two years in a row.
Office occupancy costs include the net rent tenants must pay, plus the tenant’s share of taxes and operating expenses to run the building, said Norm Taylor, CBRE’s executive vice-president and managing director in Vancouver.
“It’s the gross rental rate that a tenant pays to have the right to operate their business within an office building,” he said.
Supply-demand economics at play
The main reason for the surge is simple supply and demand economics, Taylor told RENX in an interview.
“It’s a lack of supply with an abundant amount of demand coming into Vancouver,” he said. “We’re caught in a timing cycle between new supply coming to the market and the demand that is already here that’s looking to place people in jobs.”
He said a strong economy with low unemployment, combined with the low Canadian dollar relative to other major currencies, means more businesses are seeking local space. That is pushing up rental rates.
It’s hurting smaller firms the most, he said.
“For a major corporation, it’s easier to tolerate rental increases,” Taylor said. “The occupancy cost of a lease for most businesses should be in and around six or seven per cent of their total operational budget.”
Small- to mid-sized firms spend more of their budget on office space however, so they have to budget accordingly when prices climb.
“They’ve got to look at how they can do more with less space,” he said. “You may have to look at downgrading the quality of the building and or changing geography to markets that have lower rental rates.”
Vancouver trails top cities in overall costs
The four million square feet of new office product coming to the Vancouver market won’t arrive until 2021 at the earliest, Taylor said.
“However, those (buildings) are pre-leasing pretty quick as well, and if they come on one hundred per cent full, then there will be no relief there, either,” he said.
Even though Vancouver’s rental rates are climbing quickly, it remains a relatively affordable office market compared to other major global cities in terms of overall occupancy costs.
CBRE’s report ranked downtown Vancouver as the 66th-most expensive office markets among the global cities at $69.83 per square foot per year, with local rents just one-sixth of those in Hong Kong, the world’s most expensive office market.
“From an affordability perspective, (Vancouver is) still not an expensive city on a global scale,” Taylor said. “Tokyo, London, San Francisco (and) New York have higher rents than we do.”
However, Vancouver is becoming a world-class city so it remains to be seen just how much its office rates can rise.
“I’ve been in this business for 25 years. These are the highest rental rates I’ve ever seen in the marketplace,” Taylor said. “It’s a question of how high they will go.”