Victoria’s growing technology sector appears to be doing more than creating new, innovative products. The industry is helping to fill some of the commercial real estate space in the city centre and could occupy even more empty office space if the landlords better address the growing industry’s needs.
While the provincial government is reducing the amount of space it occupies downtown and there is new high-end office space recently added and in the works, the tech sector is gobbling up a lot of older units, known as Class B and Class C office space.
“Fifty per cent of our market is the provincial government and they have been actively downsizing since 2009 — we’ve been operating the last five or six years on half of our market,” said Tristan Spark, commercial agent with Colliers Victoria. “The bright spot has definitely been the tech sector.”
But even then, it’s not that bright.
Randy Holt, vice-president of commercial real estate firm DTZ Victoria, said last year marked another in which office space vacated was not completely absorbed by the market.
“In fact, the amount of occupied space has been stuck at 7.8 million square feet for eight years. As government has retrenched, yes, some tech companies have back-filled that space, but meanwhile there’s been about 750,000 square feet of space added to the market,” Holt said. “There may be more talk about [occupied space] than actual evidence of meaningful action.”
According to Colliers’ 2014 year-end office market report, the overall downtown office vacancy rate was 8.58 per cent. The Class A vacancy rate was 0.53 per cent, Class B was at 7.77 per cent and Class C was at 19.21 per cent. Colliers reported the overall vacancy rate downtown was virtually unchanged in the first quarter of 2015 at 8.6 per cent.
Holt noted that without the tech sector those Class B and C numbers would be considerably higher.
Of the 900 local tech companies, as many as 330 are now located in the downtown core, many of them in second- and third-floor spaces that would be considered Class B or C space, according to the Victoria Advanced Technology Council.
“It’s not much of a surprise, as young people want to be around happening things like good coffee, good beer, good food and they want it to be walkable,” said Dan Gunn, executive director of VIATeC. “We have seen a lot more quality office space coming online, and seeing some investors getting in and investing downtown and we are also seeing some landlords struggling to adapt their business models to take advantage of the changing economy.”
Gunn said young, startup tech firms, which can grow very quickly, need flexibility in lease term and cost. “Landlords are finding five-year deals are not the way they think,” Gunn said. “The model that works is flexible space and short-term agreements with the right amenities at the right price.”
Spark said it’s often a clash of worlds when tech meets commercial real estate. “The [companies] may have been working in basement suites and then come into the very fixed world of commercial real estate, where landlords want five and 10-year terms,” said Spark.
Some real estate agents say it is the landlords who have to do the adapting, given the amount of office space on the market.
Peter Gustavson is one of them.
The founder of Encore FX and former owner of Custom House Currency Exchange, owned his downtown Victoria building, but when he sold Custom House in 2009, he was left with a partially empty Class C building.
The solution was Space Station. “It’s been a hugely successful real estate play,” said Gustavson. “We built out a high-tech funky space with communal lunch rooms for various firms that cross-pollinate each other.”
Gustavson said they spent a lot of money to renovate to suit the tech sector and tailored terms for them, too.
“They wanted to walk into it already prepared for short-term leases. They can’t sign long-term because one day they have five employees and six months later they have 40, so they need to be flexible,” he said.
Gustavson is advocating for a change of mindset among other landlords.
Owen Matthews of tech investment firm Wesley Clover has started doing just that, though it’s been a move of necessity.
Matthews got into real estate because companies he owned or was heavily invested in needed space. The result was a conversion of the old bottle depot on Vancouver Street, which now houses several tech firms, and a new project at 838 Fort St. When finished this summer, it will provide 20,000 square feet of dedicated space for a handful of tech firms.
“We can make use of what other people will ignore for a long time,” said Matthews.
“What I think matters a lot to those companies is flexibility. They are growing and changing and they don’t think about five-year plans,” he said. “And that’s one of the things that’s appealing to me as a landlord — I understand the tech business, my job is investing in tech companies.”
Matthews said he will be offering shorter leases, more flexibility within the space and room to expand.
Spark said the companies tend to want central locations in the heart of the city, close to where they live and the amenities they want. They value open spaces that encourage collaboration and they want the landlord to have done the heavy lifting in establishing the space.
“Landlords have an opportunity right now to renovate B and C class space with tech preferences in mind,” he said. “It’s brick walls, exposed ceiling beams and hardwood floors.”
Spark also encourages landlords to talk to prospective tenants about what they want, adding that landlords who don’t are going to face bigger vacancy problems.
Stuart Bowness, chief executive at Mediacore, said being central and close to where employees live and socialize was important when they picked their offices in Bastion Square.
“We wanted space, some character, exposed brick and woodwork,” he said, noting that’s the wishlist of many firms who have moved downtown. “You’re seeing a lot of young startups downtown. I feel we are really growing something right now and it’s awesome to see that.”
For Greg Bobolo, chief executive at SendtoNews, which has its head office on Wharf Street, being downtown was key.
“We were looking to be close to all the amenities,” he said, noting he wanted to be near the float planes because of frequent travel between Victoria and their Vancouver office.
“And being downtown our staff can walk next door to pubs and restaurants.”
Bobolo has noticed landlords and the broader business community in general are learning how to work with tech startups in terms of flexibility.
“They are understanding the growth tech companies can have. We’ve noticed a lot of massive companies you’d never think would give you the time of day now have to because you have companies with four to six people that can become billion-dollar operations with hundreds of staff,” he said.
