Edmonton’s
downtown financial district is in the midst of an unprecedented development
period that is reshaping the office market.
The
transformation is being driven by the introduction of 1.8 million square feet
(msf) of class AAA office space over a three-year period between 2016 and 2018.
The phased integration of three towers – Enbridge Centre, Edmonton Tower and
Stantec Tower – has prompted a flight-to-quality scenario with tenants vacating
primarily class A space to take advantage of the new developments. The increase
in office inventory partly contributed to the increase in vacancy to 15.3% from
12.9% in downtown districts between Dec 31, 2016 and Dec 31, 2017. Compounding
the effect was the recessionary period felt throughout the Alberta economy in
the wake of the 2014 oil-price decline. In general, the city-wide trend saw
vacancy levels consistently increase throughout 2016 and the first half of
2017. The most recent two quarters are showing signs of stability after many of
the city’s submarkets experienced modest positive absorption.
There
were a handful of transactions in the Edmonton central business district in
2017 – most notably, the sale of 9Triple8 Jasper and HSBC Bank Place. Both
buildings are the same age and within two blocks of each other. However, on a
per-square-foot basis, they sold for dramatically different prices. The 9Triple8
Jasper property sold for $342 per square foot (psf). HSBC Bank Place sold for
$108 psf.
This
price difference has prompted the question: What is the market value for an
office building in downtown Edmonton?
The
9Triple8 Jasper tower was completely redeveloped, starting in 2015 to a LEED
Gold standard. The total renovation cost was $22 million ($124 psf). The
building was 9.1% vacant at the time of sale.
On
the other hand, HSBC Bank Place was 58% vacant when it was sold. In order to
get HSBC Bank Place to the same occupancy level as 9Triple8 Jasper, a costly
and time-consuming re-leasing and renovation program will be required. This
investment would likely make up a large portion of the $234-psf spread in sale
price.
So,
to answer the question… well, the market value of a downtown Edmonton office
building depends on a number of variables and, therefore, requires answers to
more questions – namely, what is the current occupancy in the building? When
was it last renovated? How extensive were the renovations? Is it a LEED-certified
building?
Going
forward, we expect to see a wide range of prices, as landlords who have
reinvested in their buildings will be rewarded through higher rental rates,
higher occupancy levels and strong prices. Landlords who have not made these reinvestments
and kept up with their peers will be faced with compounding challenges of lower
rental rates, lower occupancy levels and difficult decisions about their
assets. To that end, in the last few months both Centre West ($55 psf) and the former
Enbridge Tower (approximately $100 psf) have been sold to purchasers who intend
to convert these assets to non-office uses.
(Corey Gay and Antoni
Randhawa are members of Avison Young’s capital markets group based in Edmonton.
Gay is a Principal of Avison Young and office, industrial and retail property
investment sales specialist. Randhawa is an analyst/sales assistant who
complements Gay’s advisory services.)
