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Buying office space as strata, rather than leasing, is becoming a major market push in Surrey, led by the success of a new 150,000-square-foot office tower at Morgan Crossing.
And realtors close to the action say strata office space increasingly makes good sense to developers, lenders and owner-occupiers. Investors not so much.
“We have the Grandview Business Centre 95 per cent sold out of strata office space,” said Gord McPherson of Re/Max Commercial Advantage, referring to the Elkay Developments Ltd. project in South Surrey. It is the largest strata office project in Surrey and one of the biggest in Metro Vancouver.
The strata space at Grandview is selling for around $360 per square foot, and the typical office unit is 3,000 square feet, according to McPherson. As of press time, there was only one unit left unsold.
All of the strata buyers have been owner-occupiers, not investors, McPherson said. One key reasons is the availability of low mortgage rates. “Banks are willing to lend at rates under 4 per cent for five-year terms for businesses buying their space,” he said, with some highly-qualified owners even allowed 100 per cent financing.
Selling space rather than pre-leasing can prove a boon to developers, he explained. In most cases, developers need to have up to 30 per cent of space pre-leased before they can achieve construction financing. This can take a lot of time. But Grandview Centre had one-third of the space pre-sold quickly, which gave both Elkay and lenders a “level of comfort”, McPherson explained.
One floor of the Grandview Business Centre is leased to Royal Bank, at $18.50 per square foot net, a rate that may make investors take note.
But investing in strata space has limitations. First of all lenders are reluctant to provide investor funding without substantial downpayments, often as high as 35 per cent, and with higher mortgage rates, McPherson explained.
Also, investors must then contend with finding and keeping tenants in a market where office vacancy rates are in double-digits, as in Surrey and most of suburban Metro Vancouver.
“I can see the office strata trend growing,” said McPherson, who will be starting pre-sales soon on a new office tower adjacent to Grandview Business Centre. “Owners expect to see future appreciation of the asset and they like the security of knowing what their long-term costs are.”
