Economic downturn breeds office sublease space

    Avison Young (Canada) releases its Metro Vancouver Year-End 2008 Office
    Market Report, reveals vacant sublease space in Metro Vancouver up 70%
    from mid-year 2008

    VANCOUVER, Feb. 4 /CNW/ - The Metro Vancouver office leasing market
witnessed a significant rise in sublease space in the latter half of 2008,
particularly in the Downtown core as businesses restructured themselves, shed
unneeded space, and tried to generate additional income in response to the
changed economic environment.
    As of year-end 2008, 516,627 square feet (sq. ft.) of vacant sublease
space was available in the region, up 70% from 304,395 sq. ft. at mid-year
2008 and 52% from 339,871 sq. ft. at year-end 2007. Downtown, total vacant
sublease space at year-end 2008 amounted to 188,472 sq. ft.- doubling the
amount recorded at mid-year 2008 and at year-end 2007. The current sublease
vacancy also represents nearly 40% of total vacancy in the Downtown core
compared to 17% (92,188 sq. ft.) in 2007.
    These are some of the key trends noted in Avison Young (Canada) Inc.'s
Metro Vancouver Year-End 2008 Office Market Report, released today. The
semi-annual survey covers vacancy, absorption and new construction trends in
the Downtown, Yaletown, Broadway, Burnaby, Richmond, Surrey, New Westminster
and North Shore markets.
    "The increase in sublease space is representative of corporate
downsizing, companies rightsizing and businesses focusing on maintaining their
bottom line," comments Darrell Hurst, Principal, Avison Young
(Canada)-Vancouver. "Many companies are scrutinizing their budgets and putting
major decisions on hold while awaiting economic clarity. Tenants are looking
for savings in their real estate and some companies have had to reduce staff,
and the result is space being brought back to the marketplace."
    The Downtown core currently affords little room for movement, with only
2.5% (or 481,581 sq. ft. of its 19.4 million sq. ft. in inventory) vacant. No
major Downtown office tower is anticipated to come on stream before 2013.
However, when the Downtown core's space availability factor or SAF (which
refers to head lease or sublease space that is being marketed but is not
physically vacant, or new supply that is nearing completion and available for
lease) is added to the equation, another 386,702 sq. ft. is piled on to the
available space stock. Given that there is little new construction activity
Downtown, virtually all of the current SAF space is attributed to occupied
space that is available for lease or sublease. This brings total available
(occupied and vacant) space to more than 800,000 sq. ft. Downtown.
    Commercial real estate leasing transaction volumes across the country are
anticipated to decline in 2009 due to a slowdown in executive decision-making
as many firms elect to stay put while the economy recovers. In major markets,
the addition of new inventory and a spike in sublease space may cause vacancy
levels to rise through 2009, and tenants may see some relief with regard to
rental rates. Metro Vancouver's overall vacancy rate nudged up to 5.4% at
year-end 2008 from 5.0% at mid-year 2008 and 4.8% at year-end 2007.
    While there is no one particular sector that is returning the bulk of the
space to the market in BC, the financial sector, resource-based industries and
engineering companies have been participants in the current sublease movement.
    "Unlike the dotcom crash of 2000-2002, whereby the technology industry
was specifically hit hard, this is a much broader problem that has affected
industries across the board," says Hurst. He adds, however, that Western
Canada/BC have fared better than other markets. "We're a branch-office town
and infrastructure projects, some of which are related to the 2010 Olympics,
have softened the impact of the global credit malaise."
    The tenant response to the increase in sublease space has been lukewarm
at best. "There is a definite lack of demand, and that will likely continue
for the first one or two quarters of 2009," confirms Hurst. The hike in
sublease space has had little effect on landlords to-date as most landlords
have little head lease exposure or vacancy issues.
    A problem for landlords will likely arise, however, if and when
sub-landlords cannot find sub-tenants. "If some of these companies (that are
subleasing space) go under, thereby converting their sublease to head lease
space, then it becomes a landlord's problem because that space will compete
with other sublease opportunities," explains Hurst. "But right now, it's not a
landlord's issue."
    In the suburbs, the Richmond submarket posted the largest amount of
vacant sublease space available at year-end 2008, at 82,867 sq. ft. (or 2.4%
of total Richmond inventory). However, overall, there have been minimal
suburban sublease listings offered to the market.
    As for the effect the rise in sublease space has had on overall rental
rates in the market, there is little evidence to-date that this trend has
provided tenants seeking head lease space with more negotiating leverage.
(However, the lack of evidence may be due to the lack of bids.) "There has
been some softening in rents from landlords and they may increase inducements
over time, but in general, they're trying to hold their rents. There has not
been a lot of rental rate erosion," says Bill Elliott, Principal, Avison Young
    Any vacant suites that are not built-out or improved will likely stand
the biggest test as improvements are still costly to be made. "To reduce
costs, tenants will likely gravitate to improved sublease space first and
improved head lease space second," notes Elliott, who says rental rates for
sublease space are currently being offered at up to a 50% discount over what
the tenants' contractual rents are, and that could increase over time.
    Overall, the region expects to see a continual increase in sublease space
through 2009. "By conservative estimates, this trend will likely continue for
the next 12 to 18 months," points out Avison Young downtown leasing
specialist, Brian Pearson. "A potential benefit is that tenants considering
moving Downtown may have more options. Having said that, tenants must be
cognizant of the risks associated with a sublease," he says. "Subleases
typically trade at a discount because subtenants generally don't enjoy the
same rights as tenants do, and the sublease is only valid so long as the
tenant remains current with its lease commitment."
    Nonetheless, a softening in the Metro Vancouver office leasing market is
expected to be less severe than in other parts of Canada due to Metro
Vancouver's relatively healthy vacancy levels and the fact that BC's economy
is well supported by major private and public investment spending, according
to the Avison Young report.
    Although the credit turmoil will continue to challenge developers and
tenants this year, lending markets are forecast to return to some level of
normalcy later in 2009. "Hesitant decision-making is at the root of the deal
volume slowdown, and it is anticipated that once perception returns to meet
reality, deal activity will return to higher levels in 2010," says Hurst.

    Founded in 1996, Avison Young is a full-service commercial real estate
company and the only national, Canadian-owned, principal-managed real estate
brokerage firm in the country. With offices in Vancouver, Edmonton, Calgary,
Regina, Winnipeg, Mississauga, Toronto, Ottawa, Montreal, Quebec City, Halifax
and Chicago, Avison Young ranks among Canada's leading national commercial
real estate organizations. The firm provides value-added, client-centric
investment sales, leasing, advisory, management and financial services to
owners and users of commercial, industrial and multi-residential real estate

    - Click here to view Avison Young (Canada)'s Metro Vancouver Year-End
      2008 Office Market Report:

    Note: If you are unable to open the link, please contact Sherry Quan for
    pdf version, thank you.

    For further info/comment/photos:

    - Sherry Quan, Director of Corporate Communications (B.C.):
      (604) 647-5098; cell: (604) 726-0959
    - Darrell Hurst, Principal, Avison Young (Canada)-Vancouver:
      (604) 647-5069
    - Bill Elliott, Principal, Avison Young (Canada)-Vancouver:
      (604) 647-5062
    - Brian Pearson, Downtown Office Leasing Specialist,
      Avison Young (Canada)-Vancouver:  (604) 647-5078

For further information:

For further information: Media Relations: Sherry Quan, (604) 647-5098,
or (604) 726-0959,

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