It has now been approximately twelve weeks, or the equivalent of one quarter, since we were all asked to work from home and social distance to help stem the spread of the COVID-19 pandemic. From that surreal beginning, few of us would have predicted the efficacy of the global mobilization that shuttered businesses, sporting events, air travel and international borders. Nor could we have predicted the myriad of government support programs, from interest-free loans to commercial rent relief. In the long term, all of us will be asked to repay this government largess in some form of higher taxation, but that is a topic for another study.
For now, the short-term deep freeze that has idled our economy is beginning to melt as we slowly return to work, and with businesses haltingly reopening, we are finally getting a glimpse into our new normal. Accordingly, we are pleased to provide you with our Q1 study on the effects of the health crisis on the downtown Vancouver office market.
Some highlights:
- While demand has diminished for now, we expect the pre-COVID demand trend to resume to a large degree as the economy begins to open up, given the strong underlying macro-economic fundamentals.
- With only four headlease spaces greater than 20,000 square feet available in existing downtown product, the Vancouver office market is uniquely positioned to weather short-term volatility stemming from the COVID-19 pandemic.
- COVID-19 has resulted in a proliferation of subleasing activity, from 37 opportunities at the end of Q4 2019 to 90 today. These subleases represent just over 500,000 square feet of space and increased the overall vacancy rate to only just over 4%. This makes it one of the strongest office markets in the world from a vacancy perspective.
- With current low vacancy rates, coupled with the long lead time before new office buildings under construction are complete, we expect a minimal negative short-term impact on office rental rates throughout Greater Vancouver.
- A conservative forecast scenario, including the newly-delivered sublease space, would place vacancy rates at a peak of only 7% by 2024, still under the 8% that represents a balanced office market.
- Global quantitative easing should result in a long-term low interest rate environment resulting in capitalization rate compression, with yields for Vancouver office product remaining at or below pre-COVID levels.
