Office tenants ‘trading up’

Hey there, time traveller!
This article was published 27/01/2020 (2110 days ago), so information in it may no longer be current.

The vacancy rate for top-tier offices in downtown Winnipeg shrank during 2019 as the market absorbed new office space in True North Square.

The vacancy rate for downtown office space rated class A — the newest, highest-quality office spaces in the most desirable locations — peaked at 12.8 per cent in the fourth quarter of 2018 after True North Square put 365,000 square feet of new office space on the market, explained Ryan Behie, a vice-president with commercial real estate brokerage CBRE at the firm’s Winnipeg branch.

But by the fourth quarter of 2019, the class A vacancy rate downtown had fallen to 10.9 per cent, CBRE’s latest quarterly report shows.

Behie attributed the shrinking vacancy rate to tenants of class B office space taking advantage of the opportunity to upgrade to newly available class A real estate.

“Everybody’s kind of trading up, if you will,” he said.

Meanwhile, Behie said the vacancy rate for class C office space in downtown Winnipeg — such as smaller, older brick-and-beam buildings in the Exchange District — has stayed mostly steady. But with Skip the Dishes moving much of its operation to True North Square this year, he expects to see the class C vacancy rate increase.

The advent of True North Square also heated up competition for premium office space at Portage and Main, Behie said.

“Now the class A tenants had to decide: Do I want to be at Portage and Main, the keynote intersection and a centre of Winnipeg commerce? Or do we want to go to this vibrant, new (sports, hospitality and entertainment) district… The fact that Portage and Main and True North Square are showing signs of surviving and thriving, it tells us that they can both coexist,” he said.

In the year to come, Behie expects a continued appetite for class A office space as commercial tenants upgrade, leading to more vacancies in the class B market.

Major employers across Canada are trying to attract top talent by focusing on employee well-being in their workspaces, Behie said.

“And so these companies are investing significantly in their tenant improvements, and in the physical retrofits of their offices. And as they spend a significant amount of capital on that piece of their business, they want to make sure that they’re putting that in a building that is complementary to the quality that they’re investing in their space,” he said.

“If a tenant is going to build that Ferrari engine to attract employees, and for everybody to enjoy coming to work every day, they’re going to want to put that Ferrari engine in a Ferrari building… That’s why True North Square has been so successful, that’s also why we’re seeing positive absorption across the entire (class) A market.”

In Winnipeg’s suburbs, CBRE’s latest quarterly data show the overall vacancy rate for office space shrank from 8.2 per cent in the fourth quarter of 2018 to 5.7 per cent in the fourth quarter of 2019.

Behie said the suburban office market is particularly hot in Winnipeg’s southwest quadrant, where commercial space gets snapped up quickly amidst strong population growth and new development.

“There are some office parks in southwest Winnipeg that typically run a vacancy rate of one or two per cent,” he said.

As for Winnipeg’s stock of industrial real estate, CBRE’s data shows an availability rate of 3.6 per cent in the fourth quarter of 2019, up slightly from 3.2 per cent a year earlier.

“We’ve had a growing, vibrant industrial market constrained only by a lack of new supply, new construction,” said Behie.

“What’s happened in 2019 is that some of that sizzle has come out of the market. That’s not to say that the market is down, or that it’s going backwards. It’s that the market has slowed from its very robust peak.”

Know of any newsworthy developments in the local residential, commercial or industrial real estate sectors? Let us know at business@freepress.mb.ca

solomon.israel@freepress.mb.ca

@sol_israel