Avison Young's Metro Vancouver Mid-Year 2009 Office Market Report shows a marked change in the regin. After posting positive absorption at both mid-year and year-end 2008, the region registered negative net absorption of 674,349 square feet between Jan. 1 and June 30 this year. "This is a far cry from the five-year annual absorption average of 1.1 million square feet," notes Avison Young broker Matthew Craig.

Avison Young's mid-year report covers vacancy, absorption and new construction trends in the Downtown, Yaletown, Broadway, Burnaby, Richmond, Surrey, New Westminster and North Shore submarkets, which total 45.8 million square feet of office space. According to Darrell Hurst, principal at Avison Young-Vancouver, deal velocity was minimal during the first six months of 2009 as firms continued to downsize, consolidate, delay expansion plans and cut costs by subleasing some of their excess office space. Says Hurst, "This pause in leasing demand and crisis of confidence, which began in the latter half of 2008 when the global credit crunch intensified, pushed up vacancy levels in nearly every submarket during the first half of 2009."

The vacancy rate doubled from 2.5% at year-end 2008 to 5.0% at mid-year 2009 in the downtown core, where the office space inventory totals 19.4 million square feet. The actual amount of space available in the downtown core is closer to 6.5% or 1.26 million square feet if the space availability factor (which refers to space that is being marketed but is not physically vacant) is taken into account. Meanwhile, the overall suburban vacancy rate notched up to 9.1% from 7.7% at year-end 2008.

Vacant sublease space in Metro Vancouver climbed by 84% to reach 948,872 square feet at mid-year 2009, triple the 304,395 square feet recorded at mid-year 2008. The current amount of vacant sublease space also represents 28% of the region's total vacancy, which is the highest percentage of sublease vacancy in more than a decade. The Avison Young report notes that the downtown core, with 460,158 square feet in vacant sublease premises, accounts for half of the region's current vacant sublease inventory.

Hurst points out that, while the sublease market has grown, most of the space is in smaller pockets, which underscores the fact that the economic slowdown has affected industries across the board and not any one particular sector. "Tenants seeking larger blocks of space downtown still have limited choices," he says.

All submarkets recorded negative absorption at mid-year 2009, except for Burnaby and New Westminster. Most of the current negative absorption occurred in the downtown core. Downsizing and departures from the downtown core resulted in tenants vacating 487,775 square feet more space than they took up during the first six months of 2009. "This amount of space is roughly equivalent to the size of a new office tower," Craig points out. All classes of downtown office space posted negative absorption at mid-year 2009.

Craig adds: "Worth noting is that there are no notable large-sized tenant defaults to-date despite the global credit turmoil of the past year." He says that despite the increase in overall vacancy, institutional owners, primarily of class AAA and A buildings, "are relatively well-positioned with vacancy rates at or below prevailing market rates."

Summing up the market, Hurst says that Metro Vancouver, while not escaping entirely from the current economic tailspin, "continues to rank among the tightest in North America with new speculative construction in check and no major downtown office tower expected to come on stream before 2013." Although vacancy levels have risen, the increased availability of space is providing tenants with more options, he says, which has put downward pressure on rental rates. "Competing with attractively-priced sublease opportunities, some landlords are now more aggressive in securing quality tenants and maintain existing ones," he adds.

Hurst expects vacancy levels to tick up by year-end 2009 as companies continue to restructure. Ongoing infrastructure projects, some of which are related to the 2010 Olympics, coupled with the fact that Metro Vancouver is not a headquarters office town, "will continue to soften the impact of the global economic recession," he says.