Office space squeeze to continue

Monday, January 30th, 2006

Extremely low vacancy rate will spur ‘highest net rental rates in history’

Derrick Penner

Demand for commercial real estate will continue to outstrip supply, Colliers International reports.

An already squeezed downtown Vancouver office market will tighten further in 2006, commercial realtor Colliers International is predicting, with the vacancy rate slipping to five per cent sparking “the highest net rental rates in history” within three years.

Colliers, in its 2006 Canadian Real Estate Forecast said rising demand for space will surpass supply in downtown Vancouver, hit five-year lows on the Broadway corridor and even begin to become scarce in suburbs such as Burnaby and Surrey.

“Looking at triple-A or A [quality] space, it’s going to be difficult to even find space, because the vacancy factor is getting down into the three-per-cent level and even below that in some buildings,” Ron Bagan, Colliers’ managing director for Vancouver said in an interview.

Colliers predicts that tenants will absorb some 350,000 square feet of vacant downtown office space, which will pull the overall vacancy rate to five per cent from 6.6 per cent in 2005.

Bagan said that as vacancy drops, rents will “move up significantly” and tenants will have to accept increases because rents are still too low to justify the replacement cost of new construction.

“We’re not going to see new buildings downtown with significant space for at least three to four years, because there isn’t one on the books or in the planning stages let alone [being put into construction],” Bagan said.

The second phase of downtown’s Bentall V project is the last major downtown office project, Bagan said, and many of the remaining suitable sites are zoned for residential use.

“In my personal opinion [Vancouver] is at a very critical juncture,” Bagan said. “What appears to be our lack of ability to build some significant A and triple A buildings is going to restrict our ability to become a downtown, head-office city.”

Bagan added that Vancouver’s population boom downtown has been a good thing for the city, but people have to take “a serious look at what are going to be the employment options in the downtown core.”

Even in the suburbs, Bagan said that “anything over 10,000 to 15,000 square feet is becoming very limited in Burnaby and [along] Broadway.”

Along Broadway, Colliers predicts that vacancy will drop to four per cent in 2006, with the lack of new office supply to “reach a critical point in the next few years.”

However, the report also forecasts that rents will rise high enough in response to spur new office developments to be proposed as early as 2007.

Bagan said finding industrial space for tenants is even becoming difficult, especially for large spaces over 50,000 square feet, even though a lot of speculative space is being built.

The Colliers report noted that companies built four million square feet of new industrial space, yet vacancy in the industrial category hovered at 1.9 per cent, one of the lowest rates in the country.

On the retail front, Bagan said 2006 will continue to see growth in shopping-centre development, with more mixed-use and “stacked” retail developments, such as the Canadian Tire and Best Buy project at Cambie and Seventh Avenue in Vancouver.

Finding spots in some prime streetfront locations, such as Robson Street, however, will continue to be very difficult, Bagan said. Colliers reported that rents for the most prime spots on Robson hit $200 a square foot in 2005.

© The Vancouver Sun 2006

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