Space to question
While the pace of office leasing picked up in 2014’s final quarter, CBRE Ltd.’s latest office market report indicates that it was driven largely by one sector: tech.
“Tech companies account for 42% of tenants pursuing office space,” reads the report, which appeared days before the local chapter of commercial real estate association NAIOP convened a panel to discuss the office market.
And panellists concurred.
“Outside of tech, there isn’t really a whole lot to hang your hat on,” Steffan Smith, director of leasing for GWL Realty Advisors Ltd., told NAIOP. “Demand is spotty in most of the other sectors.”
While liquefied natural gas (LNG) was a great hope, Smith suggested that it’s been more of a letdown.
“It has a large question mark next to it,” he said. “We’re hopeful that it’s going to drive demand, but is it demand in Vancouver, is it Metro Vancouver, is it somewhere in B.C., is it in Alberta? I’m still waiting.”
Nevertheless, approximately 90% of the downtown space nearing completion will have tenants. It’s the demand for the space that follows that’s more difficult to determine.
Panel moderator Mark Chambers, executive vice-president at Jones Lang LaSalle, voiced optimism, but Smith noted that the space now completing has effectively served the market through 2017.
Demand is less clear for the period following 2018, the earliest that any new building could complete.
“The pool is a little bit more shallow than I think we’d like to see,” Smith said.
While fellow panellist Bart Corbett said people are watching how late-breaking projects such as 475 Howe Street fare, CBRE’s Kevin Nelson was optimistic given that more than two million square feet of space is up for renewal in 2020 – enough to tempt an owner to build first and lease later.
“I think someone’s going to spec for that,” Nelson said.
Tight assets
CBRE expects institutional investors to weight their portfolios toward more real estate this year, but finding the investment opportunities to satisfy the demand may be hard to do in Vancouver.
Avison Young notes that private buyers dominated the $2 billion worth of investment deals done in B.C. in 2014, accounting for 87% of purchases and 75% of dollars invested. While institutional investors have money to place, representing 20% of dollars invested last year, they were stuck on the sidelines with just 6% of purchases.
A need for respectable returns works against institutions such as pension funds, explains Avison Young in a roundup of investment activity. While private buyers are accountable to themselves, pension funds and their ilk have more stringent criteria and can afford to pay for the assets that fulfil them.
Trouble is, there are few such assets available – especially office buildings, which Colliers International identifies as the favoured asset type last year – and those that do trade often do so for sums at odds with expectations.
“The ascribed value of many office buildings is no longer based on fundamentals,” Avison Young reports. “Off-market deals will remain an integral source of office transactional activity and likely the only way to pry loose quality assets from reluctant sellers.”
With deal activity heating up in the latter half of 2014 and some hefty trades already completed this year, 2015 seems set to rival last year’s values. CBRE estimates that pension funds have $45 billion to place, but the availability of product will be key to whether or not sale volumes keep pace with last year’s 118 deals.
Slick situation
The latest residential sales stats will be out before this column, but expect minimal impact from the downturn in the oilpatch.
Two months ago, the BC Real Estate Association (BCREA) forecast a 2.4% rise in resales this year and even stronger growth next year of 3.9% – putting resales comfortably above the 10-year average of 82,100.
Year-to-date activity is bearing this out, and new homes in the Alberta-sensitive Okanagan market haven’t been left behind.
Eric Van Maren reported that strong interest in the Van Maren Group’s Cottages on Osoyoos Lake has driven sales steadily to nearly 95 units, while Greyback Construction Ltd. and PIB Development Corp. have ambitiously launched the second phase of the massive Skaha Hills residential development.
Moreover, while Calgary accounts for 75.9% of the country’s sublease space, CBRE deems the situation nowhere near as dire as in 2008. A report last week from Avison Young added that the present volatility is a short-term phenomenon.
Oil may not be flowing as fast as it did a year ago, but it’s still enough to calm troubled waters. •
