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Wednesday, February 28, 2018

Edmonton downtown office market undergoes unprecedented transformation

By Corey Gay and Antoni Randhawa (Edmonton)

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.)

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