Prestigious finance and legal firms prefer the top third of downtown office towers where the views are spectacular. Large accountant offices generally opt for the middle floors of a building, a respectable but more cost-efficient space.
In the lower third of an office building, a growing tech or co-working company with a young, amenity-seeking workforce is happy to set up shop.
These are among the findings of a Vancouver-based Avison Young special report entitled Top floor types: The role verticality plays in Downtown Vancouver office tenant leasing decisions. It surveyed the class of buildings and the vertical locations within those buildings, which are preferred by different types of tenants.
Andrew Petrozzi said some of the findings were predictable and true to office leasing stereotypes, but others surprised him.
“It’s common knowledge that law firms typically look for prestige locations, the top floors, the best views, class-A, triple-A buildings — but to see how that was replicated in other tenant types was, for me, some of the more interesting findings,” said Petrozzi, principal and practice leader, research, for Avison Young.
“For example . . . accounting. Who would have guessed that they have an overwhelming preference for the middle of the building?”
Office leasing surveyed in 117 buildings
The report comprises 117 buildings and 2,904 tenants, who were classified into 32 tenant types. However, most fell within the big six, which are legal, accounting, technology, mining, real estate and finance/business firms. Those sectors account for 56 per cent of Vancouver’s downtown tenants.
The goal for the report was to help landlords find the right tenants for their spaces and also to help Avison Young forecast potential tenants that will be most interested in downtown office spaces currently under construction.
Nearly 3.9 million square feet of downtown office space will come online by 2023, representing 13 office projects.
The intent is to figure out how to best marry tenants with the appropriate leasable space.
With the help of a team of summer students, Avison Young gathered data for buildings within the central business district, bounded by the harbour to the north, Hamilton Street to the east, Bute to the west and Nelson to the south.
The class of building takes into account proximity to transit and amenities, age of building and its building systems. A triple-A building historically only exists in a desirable location downtown, with views, said Petrozzi, although there are no hard-and-fast rules. Each city, he said, has its own definitions.
Case study: Office leasing at The Stack
So far, the building is 40 per cent pre-leased and, true to type, the legal firms Blake, Cassels & Graydon and DLA Piper have pre-leased space in the top third of the building, with Ernst & Young accountants taking up five of the middle floors.
Based on the findings, Avison Young authors suggest the remaining blocks of space available in the middle and lower third of The Stack would be most suitable for a large finance/insurance firm, or tech tenant.
The report also looked at tenant flexibility, which correlated with the size of the company.
Finance/insurance companies are often willing to occupy space anywhere in the vertical spectrum. Small and mid-size tech firms are also flexible, although they tend to prefer the lower floors.
Although very large real estate firms prefer the top floors, the real estate industry is characterized by many small and mid-size firms that are flexible in their choice of space and class of building.
Accountants, on the other hand, “strongly prefer” space in the middle of the building, no matter what class of building. And while big tenants who take up large areas tend to seek space in high-quality buildings, large accounting tenants are happy to occupy space in class-B buildings.
Law firms are sticklers for the top third of the building, regardless of company size.
Technology tenants are the second-largest tenant group in Vancouver’s downtown core, with only two per cent of companies occupying more than 40 per cent of the square footage in the category.
Vancouver has a couple of behemoth tech companies and a prevalence of small to mid-size tech companies. Super-sized tech companies are known to lease entire buildings, such as Amazon’s leasing of 1.1 million square feet at The Post building.
Tech companies most flexible tenants
The majority of tech companies are small to mid-size startups. But big or small, they tend to develop work ecosystems, clustering together in certain areas and creating campuses.
Petrozzi said tech is the most flexible when it comes to use of physical space, scaling up or down in terms of growth, and the need to control costs. It means these businesses can occupy a diverse range of spaces, from traditional brick-and-beam to new class-A office buildings.
Amenities such as proximity to transit are key to attracting talent.
As these companies grow, they will become increasingly important tenants.
“Tech is all around collaboration, sparking ideas, creative work places, and that’s driven by team dynamics,” he said. “So there will always be a very important place for office space for tech firms, but because of the nature of tech, a lot of the so-called grunt work can be done by people sitting in front of a computer anywhere.”
A key question going forward will be how the pandemic year changed tenant preferences. Petrozzi said Avison Young will be reviewing the past year for the same trends, but he suspects not much will have changed for those in class-A and -AAA spaces.
“I would suggest that for most of the big six . . . it would probably remain largely unchanged. And I say that because those six tend to occupy class-A and triple-A buildings, and those types of buildings were the least impacted by COVID 19,” said Petrozzi.
“The buildings impacted were class-B in particular, and class-C buildings, and those tend to be small and medium-sized companies, generally locally based, not like a national or international firm.”
Biggest COVID impacts in class-B and -C
As a result, rent changes were most evident in class-B and -C, where tenants could re-negotiate for a better deal. Class-A rents were hardly impacted. There was the occasional deal for a sublease space in a class-A building, but that window of opportunity has closed, Petrozzi said.
“Where we saw the biggest impacts from COVID-19 happen, was in the class-B and -C space, which would lead me to believe that the tenants that typically populate a class-A and triple-A building would likely continue to have that preference moving forward.”
There could be some economic impact, however, which could change that end of the office leasing market.
“Depending on how their business has been impacted, it may reduce the appetite in one of two ways,” said Petrozzi. “One, they might reduce the amount of space they have in an A or triple-A building, in order to control costs.
“Or two, they could end up expanding in a triple-A space because of new requirements in order to make employees feel safe in the office.
“So, right now that is the discussion that is going on in a lot of head offices. As we get people back into the office probably this fall we will see a steep acceleration (in the conversation) It’s happening already.
“You will start to see decisions around space, whether to give it back or take more space, and what a work-from-home policy will look like.
“That is what could lead to a change in the preference pattern identified in this report.”