WeWork’s New York deal sends waves through Vancouver commercial real estate sector

Monday, October 23rd, 2017

WeWork deals show tightness of local office market

Derrick Penner
The Vancouver Sun

The $1-billion deal that saw commercial real estate firm WeWork buy the Hudson’s Bay Co.’s flagship Lord and Taylor store in New York will spark a small transformation of downtown Vancouver’s commercial real estate sector between the office and retail sectors.

WeWork will take over Lord and Taylor’s landmark building on Fifth Avenue in Manhattan as its global headquarters in a transaction that will also allow the firm to lease store space in Frankfurt, Toronto and Vancouver.

And in taking the upper floors of Hudson’s Bay’s historic Vancouver store, WeWork wins some additional space in Vancouver’s increasingly squeezed downtown office market to expand the beachhead it established in the city earlier this year by leasing seven floors in the Bentall III office tower downtown.

“(The deal) says two things very clearly,” said Norm Taylor, executive vice-president of commercial realtors CBRE, speaking about its implications for Vancouver. “The fact (WeWork) is coming into our marketplace is a positive because it’s validation for our economy and local talent pool.

“And secondly, it shows the tightness of the downtown (Vancouver) market.”

WeWork, which packages shared office space for short-term users, was looking to recruit a roster of freelancers, technology-and-design-firm customers, but saw most of the space snapped up by online retail giant Amazon to expand its already substantial presence in Vancouver, according to a report in the Financial Post.

CBRE, on the morning that WeWork and Hudson’s Bay announced the deal, released its latest market report, which showed that downtown Vancouver’s office vacancy had dropped to five per cent, its lowest rate since 2013 when the city was in the middle of its biggest office-construction boom in the last two decades.

Taylor said turning old retail space to office space isn’t a new phenomenon for Vancouver — the former Sears location on Granville was converted to a smaller Nordstrom, with office space that includes prominent branded space for Microsoft and Sony Pictures Imageworks.

And with big-box retail becoming a tougher business the world over, Taylor said such conversions serve a dual purpose, particularly in Vancouver where the market has run out of options for tenants that need large spaces despite the recent building boom.

“These buildings, built a long time ago (have) big floor plates that you wouldn’t be able to convert to residential easily,” Taylor said. “But they will work for office.”

Downtown Vancouver saw its office-vacancy rate peak at 10 per cent at the start of 2016, according to CBRE’s report, but has been steadily ratcheted down by demand driven by the city’s still-growing tech sector, Taylor said.

“Right now, over 50 per cent of tenants in the market, true demand looking for (office space) is from technology companies,” Taylor said. “At times it’s been as high as 70 per cent.”

WeWork hasn’t confirmed that it is Amazon that has leased most of its initial setup in Vancouver, but the Financial Post reported that the online merchant and cloud computing company grabbed WeWork’s floors as a stopgap while it secures purpose-built space in a new building that Oxford Properties is developing at 401 Georgia Street.

On Tuesday, Commercial realtor Avison Young also commented on the tightness of downtown Vancouver’s office-leasing market.

“As the year has progressed, the availability of office space in downtown Vancouver continued to dwindle,” the realtor wrote in its latest report, “creating a more challenging environment for tenants of various sizes of various sizes to secure office space.”

The last round of office construction in downtown Vancouver saw new landmarks such as Oxford Properties’ MNP Tower on Hastings Street, the 745 Thurlow building — developed by Bentall Kennedy on behalf of B.C. Investment Management Corp. — and Westbank’s Telus Gardens office tower initially flood the downtown market.

However, despite projections that all that new space would “crater our market,” Taylor said it has been steadily absorbed and even conservative institutional investors are taking speculative bets on new Vancouver developments.

“The fact that vacancy rates have halved in under two years is testament to the economic vitality of the city and the expansion of business in the city,” Taylor said.

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