Office construction in the suburbs is less costly then downtowns upscale market

Thursday, March 21st, 2013


There is now more office construction underway in the suburbs of Vancouver, Calgary and Edmonton than there is downtown and – with the exception of a single downtown Calgary tower – more space is being leased in outlier areas than in the core of all three centres.

The suburban shift spreads further than Western Canada’s three largest cities: it is a national trend that has far-reaching implications, recent studies suggest.

“While frequently overshadowed by thriving downtown markets, the suburban office market should not be written off,” said John O’Bryan, chairman of CBRE Ltd. Vacancy rates remain higher in the suburbs, but these secondary markets have proved much more resilient than downtown “despite two challenging years.”

The proof is in the numbers. Canadian suburbs have seen annual office absorption reach 2.2 million square feet in 2011 and 2.4 million square feet in 2012. In comparison, downtown office absorption was cut in half from 5.7 million square feet in 2011 to 2.4 million square feet in 2012.

The movement to the suburbs is based on four key factors, realtors in all three cities say: lower leasing costs, lower-cost or even free parking, better transit access and “being closer to where workers are actually living.”

The average suburban office lease rate in Canada for Class A space is $17.68, compared with $25.84 in the downtown. Add in cheap parking and shorter commute times and suburban offices gain a definite edge.

In Vancouver, 465,000 square feet of suburban offices were leased up last year, while the downtown experienced negative leasing of 157,500 square feet. Edmonton’s suburban markets saw a take-up of 328,000 square feet, compared with just 245,000 square feet downtown.

In Calgary, two million square feet were leased downtown last year, but it was nearly all in the 1.8-million-square-foot Bow Tower, which opened in the fourth quarter. Take the Bow out and less office space was taken up downtown than in the suburbs, according to CBRE.


Avison Young calls the current churn in the office market “a fundamental shift” that will redefine future development in the region for decades.

Basically, Avison Young sees the epicentre of the downtown core moving eastward and into suburbs such as the widely defined Broadway Corridor, Burnaby and Richmond. Last year, Vancouver’s downtown had the lowest absorption level since 1997 while the Broadway area (virtually every Vancouver market outside of the core) had the highest leasing in six years as 229,000 square feet were taken up.

An example is the first tower of Rize Alliance’s Containers project on Terminal Avenue in East Vancouver. When the wraps are taken off the colourful landmark this spring, all 81,500 square feet will have been leased to Columbia College, which will then sub-lease about 10,000 square feet.

Bentall Kennedy has already pre-leased 75 per cent of its 176,000-square-foot Broadway Tech Centre 6 that won’t complete for two years.

Altogether, 600,000 square feet of new office space is coming to the Broadway area by 2016, but half it is already claimed, according to Avison Young.


As a comparison, only two pre-leases were announced in the second half of last year for four major new downtown towers being built: a total of just 40,000 square feet at the 275,000-square-foot MNP tower by Oxford Properties, where about half the space remains unclaimed 18 months away from completion.

Telus Garden remains 60 per cent preleased, but Telus has taken half the 500,000 square feet. It opens in the second quarter of next year.

Bentall Kennedy’s 365,000-square-foot tower at 745 Thurlow is about 50 per cent preleased as it prepares to open in 2015.

Cadillac Fairview, which is making over the former Sears building into 292,000 square feet of office space, has no leases confirmed.

The potential overhang of prime office space could affect the entire downtown. “If developers of new inventory decide to stimulate leasing momentum by reducing [rent], landlords may need to adjust expectations,” Avison Young suggested.

While most analysts agree the new downtown towers – all Class AAA space, which now has a 0.7 per cent vacancy rate – will likely be leased by the time the doors open, there is some question of whether Class A and B tenants will stay in the core or head for the suburbs.

Some have apparently already made the decision. Burnaby experienced 250,000 square feet of absorption last year, the highest take-up in Metro Vancouver. Altogether, tenants snapped up 84,000 square feet of Class A space and 147,000 square feet of Class B space in Burnaby.

Even Richmond, which has suffered a near-20 per cent office vacancy rate for years, saw the highest level of leasing activity in four years in 2012, as tenants took over 110,000 square feet – 20 times more than was leased last year in all of downtown Vancouver.


Calgary is seeing a similar churn. The pattern is most pronounced in Class A office leasing over the past eight quarters, which saw increased activity in the Beltline and suburbs while downtown leasing declined.

Calgary‘s overall downtown office vacancy rate is 3 per cent, up just 0.15 per cent from a year ago. The 1.8-million-square-foot Class AAA Bow building is fully leased, but downtown landlords holding older space have seen negative absorption over the past 12 months.

“The lack of quality space downtown is causing tenants to consider the Beltline and suburbs as viable options,” according to the Calgary office of Avison Young.

Price is a key lure. Class A space in the suburbs now leases for an average of $24.30 per square foot, net, compared with $40.58 downtown.

Calgary‘s suburban markets could get a boost this year as the U.S. economy improves, since American companies already have a significant presence in suburban Calgary.

As in other markets, the suburbs may present the only option for some Calgary tenants to expand or sign new leases in the near term, noted Ross Moore, CBRE’s director of research.

Calgary‘s hottest office market now appears to be south Calgary, which has both a healthy inventory of space – Class A vacancy is 6.2 per cent – and new product coming on stream. In the fourth quarter of last year, 265,000 square feet of new space was added and 235,000 square feet was leased up.

“Both Class B and C witnessed decreases in vacancy rates, supporting the trend of [downtown] tenants relocating to suburban areas,” Avison Young noted.

This year, more than 1.1 million square feet of new office space will open in south Calgary, including 350,000 square feet that is being built on spec.

More ominous for downtown, Imperial Oil is moving its headquarters from downtown to a 20-acre site at Remington Development Corp.’s Quarry Park in the southeast. The new space will allow Imperial to consolidate its operations from several downtown Calgary buildings.

The Beltline is also feeling competition from lower-cost suburbs, with the overall office vacancy rate up marginally this year to around 5.9 per cent.

However, 723,000 square feet of high-quality space will be added this year in projects that are expected to lure more tenants out of the central business district.


Melcor Development’s Village at Blackmud Creek office project in south Edmonton will deliver 741,486 square feet of Class A space in a campus-like, 35-acre development. Now under construction, it is an indication of the competition that downtown landlords are facing.

Suburban Edmonton has about half the office space as the downtown, but more space was leased and built in the suburbs last year than in the central core – and the trend is accelerating.

In the fourth quarter of 2012, the downtown actually saw negative absorption of office space, while 103,000 square feet were snapped up in the suburbs.

Mainly due to a pullback by government – which posted negative leasing of 42,800 square feet last year – the downtown office vacancy rate is now 7 per cent, but 9 per cent in the Class A sector. Suburban office vacancies for Class A is 8.8 per cent. Last year, more than a quarter-million square feet of offices were built in Alberta’s capital, compared with zero downtown.

from Western Investor March 2013

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