Vancouver’s office vacancy rate has moved into a tie with Toronto’s, and both cities now share the lowest office vacancy rates in North America, according to CBRE’s Canada Q2 Quarterly Statistics Report covering the office and industrial markets.
The report finds Vancouver’s office vacancy rate dropped to 2.6 per cent in the second quarter of 2019, from 4.7 per cent a year ago. That places the West Coast city in a dead heat with Toronto, which has seen its vacancy rate remain stable.
Given that San Francisco has the next lowest vacancy rate at 3.6 per cent, CBRE notes the three tightest downtown markets in North America are all tech hubs.
Vancouver is seeing significant growth in leasing activity from professional services and “a ton of interest” from technology-related firms from markets like San Francisco and Seattle, says Jason Kiselbach, vice-president and sales manager of CBRE Vancouver.
Although Vancouver rents have increased significantly in the last couple of years, Vancouver’s overall occupancy costs are about 20 per cent lower than Seattle’s and about 50 per cent lower than San Francisco’s.
Vancouver rents continue to rise
On the professional services side, there has been a flight to quality as newer buildings become available, he told RENX in an interview.
Rents for class-A space were in the high $30s or low $40s per square foot but “now we’re seeing rents that start in the high $40s for existing product, and for new builds, it’s in the high $50s,” he says. Average rents for class-A space in downtown Vancouver jumped to a record $44 per square foot in Q2, up from $42.02 in Q1.
“Landlords are really pushing escalation of rents. You used to get five years at a flat rate. Now, they’re building in increases annually.”
The low vacancy rate situation in Vancouver makes it very challenging to expand or relocate a business “because you’ll be battling with multiple people looking at the same space,” Kiselbach says. “You’ve got to plan well ahead of your lease expiry even if you’re renewing because if you don’t have an option to renew someone might take the space out from under you.”
Toronto office vacancy rate stable
Kiselbach says Vancouver’s historically low office vacancy rates are forecast to continue despite 3.9 million square feet of office space scheduled for delivery in 2022 and 2023. Forty-six per cent of that space is already pre-leased and there is significant activity on the remainder, he says.
Amid a construction boom in its downtown core, Toronto’s office vacancy rate remained stable at 2.6 per cent.
However, the ongoing record-low vacancy is producing record-high rental rates, the report notes. Average class-A net asking rents in Toronto’s financial core crossed the $40.00 per square foot threshold for the first time in Q2. As recently as two years ago these rates were seen mostly in class-AAA new builds.
In a statement, CBRE Canada vice-chairman Paul Morassutti noted it would have been unprecedented to have a Canadian city top the North American office rankings a few years ago. Having two Canadian cities setting the pace “is truly remarkable.”
Industrial vacancy also tight
According to the report, Toronto and Vancouver also have some of the lowest industrial availability rates in North America.
For a second straight quarter, the GTA’s availability rate was at a record low of 1.5 per cent, with a prolonged shortage of available options fuelling asking rents “to unprecedented levels.” For the first time, the average asking lease rate for the GTA has risen above $8.00 per square foot.
The report notes Toronto industrial rents had remained between $4 and $6 per square foot for about two decades until 2017.
Vancouver’s industrial availability rate fell to 2.1 per cent in Q2, despite having the largest amount of new supply delivered in a single quarter in more than 10 years: 1.5 million square feet. Average net rents for Vancouver industrial properties increased 1.3 per cent from Q1 to $12.62 per square foot in Q2.
Kiselbach says new industrial construction in Vancouver is going as far afield as Abbotsford, 71 kilometres east of Vancouver on the Trans-Canada Highway, where there is space to build. “Two years ago, people would be like ‘I’d never go out there,’ and now big logistics companies are looking at (Abbotsford).”
Tech drives dip in Ottawa vacancy
Among its other findings, the report notes Ottawa’s office vacancy rate is at its lowest level since 2011 at 7.0 per cent, down from 9.9 per cent in the same quarter last year.
“For us, the story is technology is strong in the suburbs (and) is gaining momentum in the core. The federal government has also started in the last 12 months ramping up activity in the core,” says Shawn Hamilton, managing director of CBRE Ottawa.
However, he expects federal government activity in the capital to quiet in the months leading to this fall’s federal election.