A Tale of Two Markets-Kitchener's Two-Tiered Office Market Solidified as Google Inks Deal for Remainder of Breithaupt Block

WATERLOO, ONTARIO--(Marketwired - Feb. 7, 2014) - Tech companies looking to lease office space in Downtown Kitchener are opting for less traditional spaces. Office space in Downtown Kitchener has reached chronically high vacancy rates, but for many firms there is no desirable space available. In a stark contrast from years past, many firms are not even considering the traditional office towers that once compromised the entire inventory of office space Downtown.

Google has reportedly leased the remainder of the Brick and Beam space at Breithaupt Block, a converted car parts factory stretching over a full block of land adjacent to the Region's future Transit Hub, completed in 2012. Within easy walking distance of the Tannery, this building is an ideal location for tech tenants, and a unique opportunity within the district.

"Tech founders and their employees are increasingly looking for creative spaces that allow them to hire and retain the best talent in an increasingly competitive hiring environment," said Benjamin Bach, Cushman & Wakefield Waterloo Region Office Leasing Advisory Group.

"When we tour with startups and established tech firms, they are very quick to cross 'traditional' office space off of their list. They're looking for funky space that encourages their employees to spend more time in the office, increasing both productivity and workplace enjoyment."

The Brick and Beam space most tenants desire downtown is almost fully occupied, while older office towers have significant vacancy. This has led to a divided office market in Downtown Kitchener, with two sets of office buildings, two sets of rates, and two sets of clientele.

"Although the vacancy rate is over 15 per cent, most companies are finding it difficult to locate office space that meets their needs," said Michael Polzl, Cushman & Wakefield Waterloo Region Office Managing Director.

The older Downtown office towers, built in the 1970s and 1980s, lack the amenities and character that tech firms are looking for. This includes collaborative common areas, flexible floorplates that support increased density and productivity, and sustainable features such as bike lockers and proactive energy management. Most importantly, the gross occupancy cost for older buildings can be much higher than that of Brick and Beam space, and can even be higher than brand new space. Such higher costs are a result of inefficient building systems, as well as higher repair and replacement costs associated with managing older systems.

The trend of tech occupiers gravitating to Brick and Beam buildings began across North America in the early 2000s and has continued throughout 2013, especially in Kitchener. Former industrial buildings converted to modern office space in the Kitchener urban centre have never been in more demand, with firms like Embium, Thalmic and Vidyard moving into converted buildings.

Locally, the trend towards Brick and Beam buildings was triggered by the conversion of the Lang Tannery in 2009, which was once the British Empire's largest leather tannery. Communitech, Desire2Learn and Google each took large office tenancies in The Tannery complex, in addition to smaller tech startups who have space in the "Artisan" wing of the building.

With the Breithaupt Block space now unavailable, the Innovation District, and more specifically the Brick and Beam space within the district has the second lowest office vacancy rate in the entire Region. However, even this does not paint an entirely accurate picture. The available space is either sublease space at 72 Victoria St., or smaller (under 3000 SF), awkward and un-air-conditioned C class suites within The Tannery's "Artisan" wing.

The exception in the office tower submarket is 305 King Street West, a building with a high historic vacancy rate that was purchased in 2013 by David Gibson and Craig Beattie of Perimeter Developments. The building is now undergoing interior renovation to make it more appealing to tech firms. As a result, a number of companies have recently inked deals to come to the site, including startups that have recently "graduated" from local incubator and accelerator programs.

Over the next two years the gap between the two bifurcated markets will only become more pronounced. Demand for office space overall is expected to remain steady, but the demand for Brick and Beam office space will only increase exponentially as the tech sector continues to grow.

2014-2015 FORECAST

The Region of Waterloo consists of Kitchener, Cambridge and Waterloo and is jointly known as the tri-cities. Office demand drivers include technology and innovation companies, along with the insurance and financial services sectors. The Innovation District in Kitchener, Waterloo's Research and Technology Park, and suburban Kitchener near Highway 401, have all been growth markets over the recent past.

Within the tri-cities, Waterloo has developed an international reputation for knowledge industries and is home to such prestigious organizations as the Perimeter Institute for Theoretical Physics, the Institute for Quantum Computing, and the Centre for International Governance Innovation. World-class companies including Open Text Corporation, Sandvine, Desire2Learn, Thalmic Labs, Vidyard and Maplesoft are all "home grown", emerging out of the University of Waterloo. In Kitchener's Tannery District, The Communitech Hub, a technology ecosystem that provides support to startups and tech companies, was selected as Canada's only member of Google for Entrepreneurs Tech Hub Network this year and as a result will receive ongoing financial and technology support.

The success of the technology sector is influenced by a steady stream of young talent generated by the University of Waterloo and Wilfrid Laurier University. In 2013, it was impacted by instability surrounding Blackberry, which is one of the area's largest employers, currently occupying close to 1.7 million sf in Waterloo.

However, confidence in the market remains high as other high-tech companies are performing exceptionally well and new entrants Motorola and Square are set to open offices in the Innovation District. All of this activity is helping absorb some of the employees laid off by Blackberry.

Although near-term office demand may soften depending on how the Blackberry assets are disposed of, the local economy is expected to remain stable and should see strengthening demand from other core tenants as the Canadian economy gains momentum in the latter half of 2014. Markets that stand to see the lion's share of the growth include: suburban Kitchener, due to its proximity to Highway 401; Uptown Waterloo, which has evolved into a financial district; and, the Innovation District, just north of the traditional Kitchener downtown core. Rental rates will generally remain flat over the next two years.

Cushman & Wakefield is the world's largest privately‐held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world's major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has nearly $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.