Ascending inventory could lead to higher vacancies and lower lease rates – but developers appear bullish and ready to build
For most cities, news that the tallest office tower would soon be rising would be cause for celebration, but in Kelowna there are some concerns that the addition of more space will push the office vacancy rate higher just as the market was improving.
“We have an oversupply of office space already,” said Murray Wills, vice-president and managing broker for Colliers International in Kelowna.
The overall vacancy rate in the Thompson-Okanagan region, which includes Kelowna and Vernon, fell to 4.5 per cent at the end of last year, down from 6.7 per cent a year earlier. There is 61,000 square feet of new space under construction and 315,000 square feet planned for development.
The biggest new build in the pipeline is Landmark 7 by Al Stober Construction, which would add to the six Landmark towers already built and nearly fully leased.
Landmark 7 is planned to come to the market in early 2022, delivering a 23-storey tower,the tallest in the city, with 224,000 square feet of commercial space.
This space would represent more than all of the currently vacant office space in Kelowna – about 185,000 square feet – and nearly 6 per cent of the city’s entire office inventory.
Unless there is a concurrent rise in office demand over the next three years, the additional inventory could lead to a higher vacancy rate and suppressed lease rates, Wills cautioned, especially in older office properties.
The six-building Landmark Centre, which are grouped in a cluster of towers at Dickson Road and Dayton Road near Highway 97, has a 5 per cent vacancy rate, according to a Colliers survey done in at the end of last year.
Stober Construction is confident, however, in the success of Landmark 7.
“Landmark Centre is full,” said Dallas Gray, marketing agent for Al Stober Construction. “We expect the same for Landmark 7.”
Al Stober had a record year in 2018 at Landmark Centre, leasing space to 23 new businesses and allowing 15 more to expand, he said.
Gray estimated there is only 1,800 square feet vacant now in the entire complex.
Gray said he is already fielding inquires for the seventh tower, with an array of tenants asking about footprints from 1,000 square feet up to multi-floor space of 40,000 to 60,000 square feet in the Class A tower.
Al Stober has submitted its development application to the City of Kelowna and “we don’t expect any hiccups,” Gray added.
Al Stober is not the only developer planning to deliver new Kelowna office space.
Mission Group, the largest residential developer in the city, has included a 13-storey Class A office building in its latest proposal. The downtown complex will contain 80,000 square feet of office space, supported by over 18,000 square feet of Bernard Avenue storefront retail. Construction of the office tower is planned for early 2020, with completion and tenant possession projected for late 2021.
Kelowna’s current office lease rates average $16.65 per square foot, up from $16.35 per square foot a year ago, according to Colliers.
The North Okanagan community of Vernon has 1.2 million square feet of office space, of which about 41,000 square feet is vacant, according to Colliers. The resulting 3.3 per cent vacancy rate, as of the fourth quarter 2018, was down from 4 per cent a year earlier.
About 8,000 square feet of new space is set for delivery this spring and another 15,800 square feet is proposed in two new buildings, but there is no news on when it will complete.
Typical office lease rates in Vernon are around $12.10 per square foot. This is down slightly from last year, reflecting lower lease costs for Class B and C space.
Frank O'Brien Western Investor | April 2, 2019