Discussion of Downtown Vancouver Office Construction Potential

[Mininari]

Economics just don't seem to favour office construction in downtown Vancouver anymore.

I am proposing this thread as an open discussion regarding the present and future Vancouver office market, and the various factors that influence (or hinder) the development of new downtown office towers.

Basically, where do we see the office construction market go in Vancouver? Will the softening global economy bring down construction costs a bit, and permit office developers to work some magic? Or will the credit crunch and lingering high construction costs basically "can" office projects indefinitely? Will demand for space continue to be strong, or will vacancies start to rise?
Low vacancy rates, downtown jobs study, height and density review possibly leading to the elimination or relaxation of viewcones, expansion of the CBD.
How will these factors all influence office tower development?

Its a broad array of variables to discuss, but I thought maybe we could dedicate a thread solely to office construction market dynamics & city hall politics.

Project-specific discussion is welcome too:
What ever happened to the rumoured 450' office proposals for the downtown? "400" range on a prominent corner?" The "tall" amacon proposal?
Bentall 6 seems the closest to actual construction... will it be built? The GM tower is stalled indefinitely... when might that go up?

Will Vancouver have a new tallest office tower in the next 10-15 years? And when I say tallest, I'm not talking about a meter taller!

I guess the real fun in this will come if we see revised viewcone height limits. this could make many more parcels suddenly viable for redevelopment. For example, an existing building 150' tower sits on a sit that can handle up to 270' under current rules. Current economics suggest that its "not worth" tearing down and rebuilding if you're only going to acheive a few more floors. It would take forever to recoup the costs of demolition and reconstruction.

However.... what if that same site had a 500' limit under the new rules?
What will it take for some of our existing stubby buildings to be replaced?

[wrenegade]

I don't see any smaller buildings being knocked down for a very very long time. There are still a number of parking lots or air parcel sites out there that can be built on before we need need to knock down the 8-12 story jobs. Construction costs don't justify it for one thing, and secondly while there is low vacancy, there still isn't a big enough demand for a big office user to take down a number floors in a new buildings. Especially until the commodities and/or forestry sectors rebound a bit. Didn't we see it with the GM Place tower? If I recall correctly it was all but given the green light but Aquilini couldn't get anyone to be the anchor right?

Costs will come down. It will probably take a while for them to be realized in Vancouver (as opposed to the rest of the province) and definitely so in the downtown core. Also, the freeze on residential in the CBD, and changes in zoning to promote office will hopefully bring land values down, especially if the only use is for office-only. I'd love to see a big new tower dedicated to office but Vancouver is not Calgary or Toronto. When was the last time 2 office buildings were being built at the same time in this city? 2002ish when Shaw and Bentall 5 were under construction? That was what, a combined total of 40 floors? The amount one tower would be in either of the aforementioned cities.

Bentall 6 will be built, same with the GM place one, it is just a matter of when for both of those. After that, I think we're quite lucky if we get 450' out of an Amacon tower. Anything approaching the size of Shangri-La is a pipe dream I think. Unfortunately. As I've mentioned before, I'd love for something really big (and not just for Vancouver, really big for Canada) happen on the Canada Post site.

[raggedy13]

I've noticed that Amacon has space at the current office building at 1133 Melville listed as "short term flex space".

http://www.amacon.com/property_management_van_com.html

Perhaps that's a hint of things to come.

[SpongeG]

plenty of office projects in the suburbs to take the load off downtown going up

until that can stop not much can sway a business to not go the cheaper route

[LeftCoaster]

Originally Posted by Mininari

Project-specific discussion is welcome too:
What ever happened to the rumoured 450' office proposals for the downtown? "400" range on a prominent corner?" The "tall" amacon proposal?
Bentall 6 seems the closest to actual construction... will it be built? The GM tower is stalled indefinitely... when might that go up?

Well I can speak to the 400' office tower on 'a prominent corner', although not to much. I still cant say who the developer is or where exactly the tower is, nor can I show you guys the renderings, but I can confirm it is still in the works, although no definate timeline has been set. I wouldnt mind hearing some news about that Amacon tower, although I can't see that project becoming a reality, at least not in its 600' form.

Bentall 6 will undoubedly be the next large office tower in Vancouver, and i still do hold out some hope for the GM place office tower, even though it has been in trouble lately. I see it coming in a few years time though, not too soon.

Also look to the broadway corridor to pick up some of the slack with more 5-10 storey office buildings providing nice infill. Particularily around the Cambie and Broadway area

I think with the slowdown in residential development and the minor shortage of office space we should see a few of the office proposals move forward in the next few years. Afterall economic downturns often prove to be the most successful time to develop commercial real estate, as often the projects are just coming online as the economy is finally heating up.

[Metro-One]

Metrotower 3 is a good size office tower, go metro town go!

[phesto]

Originally Posted by raggedy13

I've noticed that Amacon has space at the current office building at 1133 Melville listed as "short term flex space".

http://www.amacon.com/property_management_van_com.html

Perhaps that's a hint of things to come.

Amacon is not leasing any space in the building beyond July 1, 2010 at which time they will either demolish the building and redevelop, or re-lease the building as-is. The office tower proposal is still very much on the table; if they do decide to move ahead with a proposal on that site, we'll likely hear about it sometime in 2009.

[Mininari]

Originally Posted by LeftCoaster

Well I can speak to the 400' office tower on 'a prominent corner', although not to much. I still cant say who the developer is or where exactly the tower is, nor can I show you guys the renderings, but I can confirm it is still in the works, although no definate timeline has been set.
.

Thanks for the update on this one.

Should the city decide to relax height restrictions for office towers, do you think that the developer might want to seek additional height for this project?
Or would it be too far along as a 400' project by then?

[EastVanMark]

Any office tower construction will continue to suffer until the city council/planners remove their heads out of their collective assess and allow for some bigger, taller buildings. As long as its stance towards business continues companies will continue to choose cheaper alternatives in other municipalities.

[SpongeG]

really the downtown has too much to compete with

especially the kind of businesses looking for office space in the city

[phesto]

Here's an article from the Globe yesterday that really speaks to one of the main issues confronting new office developments in the short-term: financing.

Credit shortage chokes office building boom
LORI MCLEOD

REAL ESTATE REPORTER

November 25, 2008

The Canadian office building boom has run into a wall.

Hit by a shortage of funds, many borrowers can't get loans for construction or mortgages. That means a number of proposed projects are being put back on the shelf to wait for better days.

Even well-capitalized companies including Brookfield Properties Corp., one of the country's largest owners of high-quality office buildings, are becoming more conservative about new projects.

"I think it's reasonable for anybody who has a proposed development or a development in the initial stages, that they are re-evaluating whether to go or not to go ahead. That will likely be driven by what kind of leasing they have in place," said Tom Farley, president of Canadian commercial operations at Brookfield Properties.

Brookfield has two Canadian projects under construction, Toronto's Bay Adelaide Centre and Bankers Court in Calgary.

The Bay Adelaide project was given the green light when it was 25 per cent preleased, Mr. Farley said. The building is now 75 per cent preleased and scheduled for completion next year.

For any new projects, however, Brookfield will seek preleasing levels of between 40 to 60 per cent. This includes the proposed second phase of Bay Adelaide, Mr. Farley said.

"Now is not the time to build on [speculation]," he added.

Other property developers appear to share this view. At a recent industry event, a representative of SITQ, a real estate subsidiary of the Caisse de dépôt et placement du Québec, said the pension fund will likely develop a planned office project at 45 Bay St. in Toronto during the next round of real estate construction, expected around 2015.

In the past, SITQ has had a higher tolerance for risk than some other developers, building projects on speculation, or without preleasing, in cities including Paris, France, and Calgary.

One of these projects, the first phase of Calgary's Eighth Avenue Place, is now under construction. Bets in the industry are that most new projects, including the second phase of that development, will likely be put on hold for the time being.

"The cost means it makes more sense right now for the strong players to build liquidity and get ready to buy cheap when people's mortgages come due," said Michael Smith, an analyst at National Bank Financial.

A dearth of available funds in the Canadian commercial mortgage market, which is valued at an estimated $15-billion, has been driving up borrowing costs for those who can raise capital, despite falling interest rates.

Much of the problem is fallout from the global credit crisis, which has choked off one of the industry's key funding sources, commercial mortgage-backed securities. Fears about commercial mortgage defaults in the United States are now indirectly causing more pain.

After months of stability, the cost of default protection on high-quality mortgage bonds has soared, according to the CMBX Markit index. That's partly being driven by news that two commercial mortgage borrowers in the United States are expected to default on loans made to them by JPMorgan Chase & Co., valued at $334-million (U.S.).

"If lenders start seeing more defaults in the U.S., the typical bank or [life insurance company] in Canada can't help but be nervous about some spillover. The U.S. is a leading indicator. We know there's already been spillover in residential, and it's not hard to draw that line from residential to commercial," Mr. Smith said.

With the end of the year approaching, many traditional real estate lenders - banks, life insurance companies and pension funds - have already dramatically reduced their financing activities.

A drop in the value of public equities means many pension funds have soared past their target allocations in real estate, with some even being forced to sell off holdings to achieve their required asset mix.

The Caisse, for example, has been one of the country's most prominent real estate lenders. But it recently said it would scale back real estate and private equity investing as a result of its stock market losses.

A big question is whether there will be more capital available for borrowers next year when lenders are working with fresh budgets, said John O'Bryan, vice-chairman, Canada, at CB Richard Ellis.

Despite rumours that some office projects now being built will get scaled back, most have secured construction financing and will get finished, Mr. O'Bryan said.

Developers are contractually obligated to lessors, contractors and equipment suppliers, and trying to halt a project can actually be more expensive than finishing it, he added.

One high-profile project without financing is EnCana Corp.'s new head office in Calgary, owned by H&R Real Estate Investment Trust. H&R recently said it will consider selling assets to fund the project, and one analyst has suggested a major distribution cut could be on the horizon.

*****

Developments

Major office projects, proposed and under development

Bay Adelaide Centre

West Tower

Toronto

Brookfield Properties Corp.

1.2 million square feet, entire

project 2.6 million square feet

Bankers Court

Calgary

Brookfield Properties Corp.

and British Columbia Investment Management Corp.

265,000 square feet

45 Bay Street

Toronto

SITQ

Zoned for 1.2 million square feet

Eighth Avenue Place

Phase I and II

Calgary

SITQ, Alberta Investment

Management Corp.,

Matco Investments Ltd.

1.8 million square feet

The Bow

Calgary

H&R Real Estate Investment Trust

1.7 million square feet

[Metro-One]

too bad there was never an office boom here, i guess it will feel same old for us!

[Mininari]

So given the economic situation, is it pretty safe to say we won't be seeing any ground broken on a new singificant office tower in Vancouver within the next 3-4 years? Or will the extremely low vacancy rate for AAA office space push one of these towers forward regardless?

[red-paladin]

Wow, relax.
Part of the reason that we have all those suburban office towers like Central City and Metrotowers, and little towers at the skytrain stations is because we are building a liveable region. We wanted to live in a city where people are commuting in all directions, working and living all over the place. Would you rather have an American style city that has big towers downtown and then thousands of hectares of sprawl in every direction with nothing but roads and subdivisions. I would rather live in Vancouver, even if it means there are little towers in brentwood and coquitlam and new west and surrey, instead of just a big clump downtown and junk everywhere else.
I would love big tall towers as much as anyone, but we want overall density to be high everywhere, not just one place.

[jlousa]

The vacancy rate isn't low, it's actually quite high, if you include sub lease space there is now over 1million sqft empty. That's over 3 office towers worth of space. We will probably see ground break on office space with the next 3yrs though, probably a couple of towers.

[phesto]

^Sublease space is not included in the vacancy rate, as vacant sublease space does not directly impact a building owner’s bottom line. At 3.5%, the vacancy rate is still very low for Downtown Vancouver from a historical perspective. 7-8% vacancy is considered a balanced market.

Now of course sublease space has increased dramatically over the past 6 months, up to over 800,000 sq ft and counting (some has actually been leased recently) and this space competes with headlease vacancy for tenants because it is often the cheaper option. However, even at 800,000 sq ft, the total sublease space in Downtown Vancouver is not remarkably high. It also sounds as though sublease activity has slowed more recently which is encouraging.

Miniari - I don’t think you’ll see a new office tower announced downtown for at least the next two years. Companies are downsizing, rental rates are declining, and those who do need extra space (as has been the case with Custom House, CH2M, etc. in the past month or so) will be able to find cheaper sublease space. Developers are always keeping an ear to the street to see if there are any companies looking for space; but they won’t engage in a pre-leasing campaign right now, and there is definitely no appetite to build on spec.

One important factor to keep in mind is that several of Vancouver’s largest AAA class office tenants will be facing lease renewals between 2011-2014, and all it takes is one or two to commit to a new building. And there is always a cycle of tenants upgrading buildings as the buildings age. Look at the MacBlo building – once one of Vancouver’s premier addresses is now barely a mid-range building, hence why Fasken moved to Bentall5.

For new development to happen though, the economy will have to recover, and employment, rental rates, vacancy and construction costs will have to stabilize. That might sound like a grim prospect, but given that Vancouver did not overbuild like Toronto or Calgary, we are in a relatively good position and this could happen quite quickly.

As such, there are a handful of potential developments – and I suspect 1 or 2 will go ahead; it all depends on who can convince a tenant to move into a new building and/or who is going to be most aggressive.

[SpongeG]

Originally Posted by red-paladin

Wow, relax.
Part of the reason that we have all those suburban office towers like Central City and Metrotowers, and little towers at the skytrain stations is because we are building a liveable region. We wanted to live in a city where people are commuting in all directions, working and living all over the place. Would you rather have an American style city that has big towers downtown and then thousands of hectares of sprawl in every direction with nothing but roads and subdivisions. I would rather live in Vancouver, even if it means there are little towers in brentwood and coquitlam and new west and surrey, instead of just a big clump downtown and junk everywhere else.
I would love big tall towers as much as anyone, but we want overall density to be high everywhere, not just one place.

the way cities are or were thought of is changing

having one downtown will become a thing of past thinking

Vancouver is at the leadership of showing how regional and town centre ideas can work

[jlousa]

While the sublease market might not effect the building owners bottom line directly it does effect him indirectly, they can not increase their rates if there is a glut of sublease space available, nor can they justify building a new building if there is a glut of sublease space available.
Bentall doesn't appear too worried and is building hundreds of thousands of sqft at Broadway Tech and purchases the building next to it to build more. I beleive Bentall will probably be the first to proceed with a new office tower downtown, most likely the site at Thurlow and Melville, I don't imagine Aquillini is going ahead anytime soon. The Bay parkade and Telus parkade are both years away. Who knows maybe we'll finally see the Royal Bank site at Nelson go ahead that ones been on the back burners for about a decade.
Office space is pretty predictable and works in 7yr cycles, so all we need to do is count backwards.

[Vancity]

Originally Posted by red-paladin

Wow, relax.
Part of the reason that we have all those suburban office towers like Central City and Metrotowers, and little towers at the skytrain stations is because we are building a liveable region. We wanted to live in a city where people are commuting in all directions, working and living all over the place. Would you rather have an American style city that has big towers downtown and then thousands of hectares of sprawl in every direction with nothing but roads and subdivisions. I would rather live in Vancouver, even if it means there are little towers in brentwood and coquitlam and new west and surrey, instead of just a big clump downtown and junk everywhere else.
I would love big tall towers as much as anyone, but we want overall density to be high everywhere, not just one place.

excellent reasoning red-paladin

I also agree. I would rather have overall density than have urban sprawl like most American cities. that picture of Houston some poster posted a while back still rings in my head. That is one nice downtown core with huge offices, and towers, but everything else is a dump.

[red-paladin]

Thanks. I should also say that most European, Japanese or Korean cities have downtowns with buildings not much taller than Vancouver, with the whole of the city area being incredibly dense. London, Paris, Berlin, Tokyo all look like that, although they are starting to build really large towers now. I guess Chicago is kind of the opposite extreme, with the super gigantic towers and lots of lowrises.