Office vacancies like it’s 1999

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This article was published 30/01/2017 (3357 days ago), so information in it may no longer be current.

Winnipeg’s Class A office-vacancy rate has fallen to its lowest level in nearly 20 years, thanks in part to a downtown highrise office tower landing a new 10-year government contract.

The tower at 360 Main St. beat out 11 other contenders late last fall for a federal contract to supply 68,000 square feet of office space for the Canada Revenue Agency (CRA).

The deal helped to drive down the city’s Class A office vacancy rate to 2.9 per cent at the start of this year from 5.7 per cent in January 2016, according to the latest vacancy-rate report (the Johnson Report) from Wayne Johnson, a commercial agent with Royal LePage Dynamic Real Estate.

Johnson said that’s the lowest the rate has been since 1999 when it was 2.8 per cent. He noted in 1998 it was 1.1 per cent.

But while the rate is at its lowest level in nearly two decades, Johnson said there’s a twist. Although the 360 Main St. space is considered leased, the CRA won’t be moving in and won’t begin paying rent until January 2021.

So for the next four years, the 68,000 square feet at 360 Main St. will be classified as leased, and the 87,000 square feet the CRA now occupies in a Class B building at 325 Broadway will also be classified as leased. So that will keep the Class A and B vacancy rates lower than they otherwise would be. He said the Class B vacancy rate is 7.1 per cent.

“So it’s one of those unusual… circumstances where you’re double-counting the same tenant (for the next four years),” he added.

One downtown office leasing specialist — Wayne Sato, vice-president of office for Cushman & Wakefield, Winnipeg — said a long lead time is not unusual for federal government tenants, which have strict leasing requirements.

“And given that it’s for 68,000 square feet… we haven’t got very many (existing) buildings that would be ready to do that space,” Sato added. “So they would have to anticipate that it may require a brand-new build-to-suit (building). That’s why the long lead time.”

It turned out there was an existing building that was able to meet the agency’s requirements. Sato said one of the things that likely worked in 360 Main’s favour is the federal government already leases space there.

A spokesman for Artis Real Estate Investment Trust, which owns 360 Main and has its head office there, could not be reached for comment.

A federal government spokesman also confirmed long lead times are typically necessary for larger spaces so new developments also have a chance to bid on the contract. He said the government chose the 360 Main proposal because it met all of the agency’s requirements and was the lowest bid.

Sato said it was encouraging to see the federal government make another long-term commitment to leasing space downtown. Especially when the Liquor and Gaming Authority of Manitoba recently issued a tender seeking to lease 22,000 sq. ft. of office space for 15 years but specified it couldn’t be downtown.

A spokesperson for the gaming authority said two reasons it prefers suburban space is rents are cheaper and on-site parking spaces are more plentiful.

Sato said many downtown landlords are disappointed by the authority’s decision to look outside the downtown.

“We look to the public sector to play a role in the revitalization of the downtown, and the feds signing (a long-term lease) and the gaming commission leaving is one step forward and one step back,” he said. “The public sector really has to play a role (in downtown revitalization) or it won’t happen.”

Sato said he’s not surprised to see the Class A vacancy rate declining because there is a strong interest in downtown office space.

“The enthusiasm really has been sparked by all of the downtown development that’s been going on,” he said. “All eyes are on the downtown.”

Johnson said the CRA’s decision to lease space at 360 Main will have a ripple effect on the downtown market. Marwest Management Canada Ltd., which manages 360 Main on behalf of Artis, currently occupies a big chunk of the space the CRA has leased, he said. So this September, it will be relocating its operations to a 42,000-sq.-ft. space in the neighbouring building at 220 Portage, which is also owned by Artis.

The CRA’s departure at the end of 2020 also means the landlord at 325 Broadway will have to backfill that space, and Johnson said that may not be easy.

“They’re going to go looking for tenants, but where are the tenants coming from if our market isn’t growing in need?”

He said some of the existing Class A buildings could face the same challenge if they lose tenants to the new Class A buildings that will be coming onto the market in a few years. He noted there are several hundred thousand square feet of Class A office space in the True North Square development and two floors of Class A office space in the proposed SkyCity Centre Winnipeg residential/office/retail tower.

“We’re not having head-office space move here from Toronto. Not even from Saskatchewan,” he said, so the new buildings will likely end up poaching tenants from existing Class A and B buildings. In fact, two of the office tenants that have leased space in the True North Square tower will be relocating from existing buildings at Portage and Main.

“So I would call this the calm before the storm,” Johnson added.

murray.mcneill@freepress.mb.ca