Condos and new housing subdivisions have had the spotlight for most of the decade, but office construction in the region is moving these days, and the economic troubles don’t seem to have affected this property market.
But first, the bad news (for tenants looking for space): the amount of office space available has actually diminished; the vacancy rate is down near two per cent, less than a third of what it was five years ago and maybe dropping farther. And you’ll pay higher lease rates if you have to find office space this year or renew a lease.
“Demand has pushed rental rates up sharply in the past year, a trend that will continue as long as there is a shortage of available space.” That’s from Colliers’ 2008 mid-year report on the Victoria office market.
There’s a total of just under eight million square feet of office space in the region, 58 per cent of it downtown. The Hashna Court fire at 3347 Oak Street and the demolition of the Telus building at Blanshard and Yates took some space out of circulation and reduced an already falling vacancy rate a little more. “It’s really tight right now,” says Rick Pettinger, manager of DTZ Barnicke’s local office.
For tenants out looking for offices, or wanting to move, the space situation is supposed to improve by early 2010. The reason is the current supply-and-demand equation — scarcity has priced office space higher, but, on the other, hand that’s luring major new office developments for the first time in quite a while.
Pettinger points out that Victoria office space is finally commanding rents high enough to justify new construction at current high building costs. Office lease rates have hit the lower $30s and in that range, so the cost of constructing new space can be justified, he notes. Vancouver office space is about five per cent higher on average and, in Calgary, another 10 per cent.
Colliers’ report continues: “Sustained strong demand during the first six months of 2008 has driven Victoria’s office vacancy rate to a 13-year low. As a result, rental rates have risen sharply in the past year and are starting to approach levels required to justify new construction.
“No new supply was added to the market in the first half of the year  and none is anticipated prior to the end of 2009.… A total of 232,000 square feet of new construction is currently under way, most of it downtown and scheduled to be completed in late 2010.
“Vacancy rates will continue to drop, pushing rental rates upwards. 2010 is the earliest anticipated delivery date for any significant new office space inventory capable of satisfying this growing demand.”
Realtor Bob Law, who specializes in office leasing at Colliers, says the office vacancy rate is headed even lower in 2009, as the new projects under construction are going to take time to build. The overall office vacancy rate dropped from almost three per cent to 2.3 per cent in the first half of 2008, and Colliers is predicting it will dip to two per cent or lower. “By the time we get there, the vacancy rate is going to be so low. Any amount of demand is going to drive it lower.”
One half of the region’s office space is government of some type. “It’s very steady,” says Law. There’s no office of Lehman Bros. here, he says, mentioning the Wall Street investment bank that closed its doors last fall.
The tight Victoria market has spurred new construction and re-use of old space that’s being renovated. Before the doors even opened, Law had pre-leased 15,000 square feet of upstairs space at the old A&B Sound premises at Yates and Broad Streets. Still coming is office space at Dockside Green, better known for its award-winning condos. About 30,000 square feet of office space is opening at Dockside this year in the sold-out Inspiration building at 398 Harbour Road. The two upper floors that the B.C. Oil and Gas Commission is taking (over a ground-floor bakery, espresso place, and restaurant) are planned for LEED platinum. That requires at least 42 points on the Green Building Council rating system, which allots credits for things like building on a brownfield (1/2 point), alternative transportation, bike storage and changing rooms (one point), and daylight and views for at least 75 per cent of space (one point). In 2010, another 25,000 square feet of office space will go up at Dockside.
Office rents at Dockside are going up just like downtown. (It’s an odd fact of the Victoria office market that over the bridge on the far side of the harbour, all of a 10-minute walk from downtown, is considered “suburban” office space.) Prices started at $27.50 in the almost-completed Synergy building, but for the Prosperity and Evolution buildings expected in the next two years, rents are $2 and $4 per foot higher, respectively.
The Uptown redevelopment at Town & Country shopping centre is known for the giant Supercentre Wal-Mart under construction and numerous retail stores. But upstairs, there will also be 80,000 square feet of office space.
Still on the uncertain side of the ledger are Radius, now owned by Townline, developer of the old Bay store next door and Gateway Green at Blanshard and Fisgard, a 143,000-square-foot proposal. Leasing on Gateway is apparently starting to firm up, and there may be a decision to start building this year. Radius remains a hole in the ground.
Adding up all the projects, Law says about 129,000 square feet of new space is expected to come on stream this year. Next year, that will hit 325,000 square feet across the region — most of it at 800 Yates Street, the new seven-storey building by Victoria-centred Jawl Investment Corp. at the corner of Blanshard Street, former site of Victoria’s telephone exchange and Telus offices. The new building also has 30,000 square feet of retail space on the ground floor, wrapping around a curving glass atrium that rises through seven floors of offices above. Most of the cubicle dwellers upstairs will get natural light. The family company has seven other buildings downtown, six on the Selkirk and four in Saanich.
Pettinger points out that, while this is one of the biggest office blocks ever built in Victoria, in a town like Calgary, “you wouldn’t see too many buildings of that size.” It’s too small. B.C. Ferry Services Inc. has confirmed it will take half of the office space at 800 Yates for its new headquarters location, having outgrown Fleet House on Fort Street. The ferry corporation has signed a 15-year lease and has options to renew for 20 more years.
In the meantime, it will continue to be a tight fit for office space in Victoria.