Vancouver’s Office Market Still Has North America’s Lowest Vacancy Rate
Vancouver had North America’s lowest office vacancy rate before the COVID-19 pandemic, and even 25 months after the contagion turned the world upside down, little has changed.
“Tight vacancy conditions in downtown Vancouver’s office market have largely persisted despite the ongoing impact from COVID-19 containment measures on the leasing market,” reads a Q1-2022 Avison Young report on the city’s office sector. “Rental rates for applicable spaces in class AAA, A and B buildings appear to have plateaued and availabilities continue to be constrained for small- and mid-sized tenants, though a considerable number of options exist for larger tenants due to the continued delivery of new class AAA buildings to the Vancouver market.”
Activity in downtown Vancouver’s sublease market has been particularly frenetic, but while larger tenants are having an easier time securing sublets, the same cannot be said for small- and mid-sized tenants because the availability of inventory that suits their needs is constricted. Sublease availability was practically sideways last quarter compared to late last year, falling to 0.12% from 0.15% in Q3-2021.
Conditions were tighter for smaller tenants: Direct availabilities declined by seven basis points to 0.93% during the same period, Avison Young’s report noted, however, mid-sized office tenants had a slightly easier time sifting through vacancies, albeit only marginally, with the availability rate for such tenants increasing to 1.62% from 0.95% during the second half of 2021. The sublease vacancy rate for mid-sized tenants rose to 1.31% from 0.38%.
The likeliest reason Vancouver’s office vacancy rate is so low is that about 95% companies in the city are small businesses, meaning they have no more than 50 employees and, logistically, they have had an easier time navigating the hurdles posed by the coronavirus than their larger counterparts.
Strong Signs of Recovery
According to Andre Alie Day, a commercial real estate broker with CBRE in Vancouver, downtown foot traffic is up almost 300% since the beginning of the pandemic, and while it hasn’t returned to pre-COVID levels, it is nonetheless an encouraging sign, he says.
CBRE statistics reveal that Vancouver’s downtown office vacancy rate is 7.7%, and while that’s considerably higher than the pre-pandemic availability rate of 2.2%, it remains North America’s tightest market, signifying a propitious post-COVID recovery. There is also 850,000 sq. ft of office space under offer in the buildings under construction downtown Vancouver, where there were 150 sublease spaces available in July 2020, which fell to 75 by mid-2021 and to 67 this month.
There are other tell tale signs, Alie Day added: morning rush hour traffic on the highways and bridges leading into the urban core are banes once again for most commuters; meetings between peers in the city are taking place in person in lieu of through Zoom; in-person conferences are becoming commonplace again; restaurants and concerts are at full capacity; and the Canucks, in the midst of a tight playoff race, are once again the hottest ticket in town, playing in front of sold-out crowds at Rogers Arena.
That doesn’t mean remote working will go down as a COVID-induced aberration. The resounding success of working remotely throughout the pandemic, during which time productivity hardly dipped from industry to industry, has raised expectations in the workforce, and companies are resultantly proffering inducements to reel employees back to the office. That isn’t unreasonable, especially considering the implications of hiring employees with whom executives never interact beyond a Zoom meeting.
Alie Day says these incentives range from companies leasing bigger, nicer, renovated offices that encourage more collaboration, whether in purpose-designed meeting spaces, lounges, and even kitchens, possibly hinting at an evolution to open concept offices, which have traditionally helped reduce square footage outlays per employees.
“They’re making offices places to come in and collaborate and talk with staff and co-workers,” Alie Day told STOREYS. “I’m seeing incentives such as monthly team bonding activities, whether that’s Thursday drinks and dinner at Earl’s after work or happy hour on Friday. I’ve heard that some companies are incentivizing their staff to come back by expensing their lunches; anyone who has difficulty getting to work, in some cases, the company will pay for their parking. That’s on the extreme incentivizing side.”
The majority of companies, however — and especially in Vancouver where, again, small companies vastly outnumber headquarter offices — are more cautious in their approaches, letting employees know that office attendance is optional, albeit for the time being, as a slow return, whether five or several days a week, is gradually phased in.
That might prove a harder sell for skilled tech employees, though. Vancouver has equivalent time zones to the two biggest tech hubs, San Francisco and Seattle, which, in addition to a favourable U.S.-Canadian dollar exchange, has made Canada’s third-largest city a hotbed for satellite offices opened by Silicon Valley-based firms.
Amazon just leased 1.5M sq. ft of space in Vancouver that will house 4,000-5,000 employees, many of whom will have graduated from local universities, while others will, thanks to Canada’s welcoming immigration policies, be imported from abroad. In short, Vancouver’s tech industry is attracting the cream of the crop.
But that will come with concessions from companies, Alie Day says.
“Why Amazon would do that is a lot of employees are based out of Seattle, which is the same time zone as Vancouver, and our universities produce good talent and, in addition to our immigration policies and office costs, Vancouver is a discount to Seattle, as are salaries,” he said. “But there’s a fight for quality right now. A lot of the subleases that remain on the market are stuck on the market for a reason, whether they are uninspiring, in bad locations or maybe they’re B- or C-class facilities.”
He added that the skilled tech employees are very much empowered and many choose have chosen to keep working remotely, and because companies are fiercely competing with each other to hire them, their office needs exist on a spectrum.
“If their best talent wants to work from home, that company doesn’t want to lose that employee to a rival company that offers more flexibility, but they are mandating returns to offices to some degree,” Alie Day said.
However, there’s no greater reason for companies to make sure employees are physically present during work hours at least a couple of days a week than than to measure their competence and efficiency — and desire to be in the office is a two-way street, especially for the young and ambitious.
Moreover, Vancouver is the third-least affordable city in the world, and for younger employees who rent cramped apartments with roommates, returning to the office could offer some respite.
“Young, eager professionals want to be back because it’s really important to get that collaboration during the early years of your career, as well as the mentorship you receive simply by being around people in the office,” Alie Day said. “It’s tough being stuck in an apartment all week with a roommate working at a kitchen table. Working from home might be different if you’re a Silicon Valley CEO with a mansion on the hills with your own private office, but I don’t think two people working at a kitchen table is the future of work. It’s just not feasible.”