April 15, 2015

Attention Due: The Commercial Real Estate Market in Downtown Vancouver

Residential real-estate gets the comments and coverage (average detached-house price: $1.27 million in Vancouver and the North Shore!).  But at last week’s Vancouver Real Estate Forum, The Sun covered a panel discussing “one of Vancouver’s most frenzied episodes of downtown office construction, with more than 2.2 million square feet of new office space coming online.”

Office“Everybody is sort of guessing because the new buildings are coming,” said Bart Corbett, senior vice-president of office leasing at Cushman & Wakefield in Vancouver … pointing out that Vancouver has never been a head office town. “We just don’t know where (tenants) are going to come from. Who would have known that Amazon would have come into our market and chewed up about 140,000 square feet?”

There’s a division of opinion:

Panelist Tony Astles, executive vice-president at Bentall Kennedy, Canada, said the historic trends of office occupancy in Vancouver and the current building boom suggest that Vancouver already has too much office space. Astles told the conference that the absorption of office space has decreased each decade in Vancouver.

“In the ’80s, the average absorption per year — net increase in occupied space — was 570,000 square feet per year,” he said. “In the ’90s, it was 280,000 feet per year. In the 2000s, it was 150,000 feet per year, and since 2010 until today, it’s minus 196,000 feet per year.”

However …

Vancouver does hold a wild card — its natural beauty and lifestyle appeal, said Franz Gehriger, president of SwissReal Group Canada, which together with Credit Suisse is building The Exchange tower at the corner of Howe and West Pender streets. …

He called Vancouver a young city that is transitioning from a specialty in commodities to high-tech. “Forty-two per cent of the tenants (here) today are high-tech oriented,” Gehriger said. “It’s more than oil, gas and resource companies together.”

The numbers in the accompanying chart suggest that most of the new buildings opening in 2015 are already pre-leased, suggesting the impacts on vacancies will be in the older, Class-B buildings.  That’s not a bad thing; as Jane Jacobs said: ‘New ideas need old buildings’ – and those unable to afford new space will find offerings available that will keep them in the core.

Four thoughts:

  • A whole new group of Class B commercial buildings saw their viability changed overnight: the ones clustered around St. Paul’s Hospital.

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Burrard

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  • My guess is that along with the demolition of the non-heritage parts of the hospital, these building are also goners, now that the doctors, pharmacies and labs will depart for new locations that, like Central Broadway, create a new ecology of health-care.  The impacts on Chinatown and the DES need to be watched.
  • For the central area as a whole, transit is more critical than ever.  All this new development depends on moving people in and out efficiently.  It can’t be done by cars (despite the absurdity of the Fraser Institute’s latest offering, implying that Uber and self-driving vehicles can substitute for mass transit. So hey, vote No!), and goods movement requires the existing road space not be overly congested.
  • LNG and carbon-based development in B.C., whether successful or not, is inconsequential for the main jobs-generator in the province: Metro Vancouver, and its core.

    Corbett warned that LNG development in B.C. would likely not be a boon for the Vancouver office market. “I don’t see it,” he said. “I talk with TransCanada pipeline from time to time. They’re based in Calgary, and they just think of us as, well, ‘we’ll just have an outpost there.’ ”

    He said an LNG outpost office in Vancouver would take up only about 4,000 square feet. “They’re a half-million square feet in Calgary, so we’re just a little blip,” he said. “LNG is going to be great, but is it going to spur office demand in Vancouver? No.”

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  1. The fall of the Canadian dollar, the downtown expansion of legacy tech firms as well as startups, the geographical proximity to the Bay Area, the lifestyle factors, plus the opening up of all this old and new commercial space suggests that more high-paying jobs are coming to Vancouver.

    Really this should set off more alarms about our housing market, particularly rents within Vancouver. Until now, Vancouver has had one of the highest price-to-rent ratios in North America, mostly because residential property prices have so rapidly outpaced rents. People have still been able to afford renting in Vancouver even if they have little hope of owning, because local incomes can’t bid up the rent of apartments. People can only pay so much, and landlords can therefore only change so much. If a few thousand people show up making $90,000 per year, this will change.

    We need more housing or we may fall into the same situation as San Francisco, rents rapidly outpacing inflation: http://priceonomics.com/the-san-francisco-rent-explosion/

  2. No one mentioned extremely high commercial property taxes as a disincentive to open up office space in downtown Vancouver ?

    Companies find $50+/sq ft rent downtown attractive enough to move large offices there when they can be had in Richmond for half that ?

    We need more housing in Vancouver, not more office space. The West End is ripe for demolition of older housing stock to make room for tall towers.

    1. More housing and less office space?? Exactly where are all those new residents supposed to work? Oh that’s right, they may own a place in a tall, glass tower but they don’t actually live in it and they certainly don’t make their money in Canada. Sorry I totally forgot why we shouldn’t be building places to work at transportation hubs.

      Get real. The existing buildings in the west end are affordable, the new ones only to those with overseas riches and the “high” wages you complain about (would YOU drive a bus for $26/hour? Didn’t think so) allow people with ordinary jobs to live in the same city as they work. The savings in having 100,000 people who don’t need to commute 2 hours/day is massive. Your plan would force the construction of multi-billion dollar subways to move people who currently don’t need anything more than their own two feet to get around.

      1. $26-30/h PLUS BENEFITS AND PENSIONS and low layoff risk ..for an annual cost of $80,000 per driver or so .. does this seem reasonable to you ? Not to me.

        Office is overbuilt in Vancouver and its commercial taxes are quite high, as the property values are 2x that of Richmond, er sq ft, roughly.

        Rent control benefits those that already live near downtown and the beach in the west end, but benefits no one else. A subsidy, really, from the landowner to the renter. Socialism in other words.

        1. Hi Thomas, a truly free market for rentals is a great idea, but for it work, you’d need a free market for residential real estate development (i.e. no zoning and no nimby veto, no tax incentives for homeownership, no tax disincentives for becoming a landlord) and a free market for real estate used in transportation. (i.e. the space used for streets and roads)

          If socialism is your concern, the situation on real estate used for transportation must truly horrify you, where anyone can use as much space as they please, but never see a bill.

          1. Thomas is utterly wrong about nearly everything, IMHO, but you can’t accuse him of not believing in road tariffs (as he reminds us twice a day).

          1. Okay, I’ll notice that Thomas said “per square foot” and the analysis uses “per $1,000 assessed value.” So maybe we’re both right. What’s important to take away though is that assessed value is only so high in Vancouver because the market truly rewards offices being in Vancouver. Being in Richmond is, according to the market, so undesirable that it’s worth it for companies to pay so much more for a similar-sized office space in Vancouver. One can hardly fault the city of Vancouver that it’s so successful.

    2. If I remember correctly, you’ve repeated this falsehood on numerous occasions. As was mentioned to this blog, Vancouver’s commercial property taxes are BELOW AVERAGE in the region, and lower than Coquitlam, Delta, Abbotsford, North Vancouver city and district, Burnaby and New Westminster, to name a few. Richmond’s property taxes are only slightly lower. It doesn’t significantly affect business decisions, as can be seen in the fact that the very people who will be paying property taxes, that is the property owner, are investing heavily in building new buildings downtown.

      data: https://pricetags.wordpress.com/2014/10/07/a-comparison-of-property-tax-rates-2/

      I’m not even going to comment on the suggestion to demolish the West End.

      1. Property taxes are usually paid by the tenant as most leases are triple net !

        Vancouver subsidizes residential reL estate as it taxes commercial at roughly quadruple the residential rates for a similarly sized floor plate. Downtowns commercial space could be a lot bigger if property taxes are lowered. Within in activities way down downtown office space is bleeding as it is so expensive. For every Microsoft or EA there are ten to twenty smaller software firms that would love to be downtown but are not due to its enormous rent of often well above $50/sq ft. Burnaby, Richmond, New West and especially Surrey rejoices as jobs settle there while downtown Vancouver bleeds !

        1. Vancouver is not bleeding jobs; it is adding office space. That is a fact.One that you for some reason continue to deny. And as it adds office space, Class B will also become more affordable. The “enormous rent” is because downtown office space is in such high demand (and because of the basic rules of geometry), not because of commercial taxes, which are lower in Vancouver than in Burnaby – another fact you don’t seem to accept.

          1. Tessa, due to the zoning and ridiculous land prices, the rate may be reasonable, but please, trust me or look elsewhere, the taxes on such overinflated land/building values is very, very high. If you are a small business operating on a piece of commercially zoned land, you will be paying tens of thousands a year in property tax, either because you have a triple net agreement or because it has been factored into your rent. when the land and building values are so inflated, it doesn’t matter if the rate is low because the rate is a percentage of the assessment.

            1. so, is it the city’s fault that Vancouver is so economically successful that the market has decided that commercial properties here are worth so much more than in Richmond. The rate is all the city has control over, really. And lastly: if it were a real problem, the vacancy rate would be much higher downtown than in the suburbs. From what I can tell, the opposite is true.

          2. Exactly. The % might be “average” but the assessment is often more than double in Vancouver compared to Richmond, Surrey or Burnaby making taxes more than double per sq ft, plus the base rent is far higher too.

            Generally speaking, commercial taxes in Vancouver are 3-4 times per $100,000 assessed value of a similar located residential condo in downtown Vancouver.

            1. yes Thomas, but the way you’re choosing to present the information is what I would characterize as blatently misleading. You blame the city for having higher taxes when the tax rates are lower than average: If you want to blame someone, blame the invisible hand of the market, which has decided that downtown real estate is simply more valuable for companies. Yet I fear that goes against your whole argument, and so somehow it gets ignored.

              And as for your suggestion that somehow Vancouver is bleeding jobs: there is no evidence for this. Let’s please move onto fact-based arguments.

          3. Facts are downtown rents are usually over $50/sq ft. I am not stating that this unreasonable, but it is far higher than elsewhere. So a 1000 sq ft office for perhaps 4-5 people is $50,000/year or over $10,000/person/year. Not cheap.

  3. “downtown Vancouver needs an emergency room, especially in an emergency. In an earthquake all exits out of downtown may be closed. 2/2”

    That’s Chandra Herbert on Twitter fighting the planned relocation. It reminded me that of course the viaducts could fall down in an earthquake, and even block Pacific Blvd., and he’s trying to point out how tough that could be for emergency transportation to a hospital. True, but it made me wonder: could this be an argument for removing the viaducts? A ground-based transportation system is much more secure, especially in an earthquake.

  4. Looking at CoV tax data, properties paying business tax rates are seeing higher percentage increases in building value and lower percentage increases in land value when compared to properties paying residential property tax rates. That’s between 2006 and 2014.

    So the higher tax rate for businesses slightly depresses the growth of lane value, but draws higher investment in raising building value when compared to the residential market.

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