An unprecedented supply of new office product has graced the skylines of Downtown Edmonton.  Advancing from one new office tower over a span of 25 years, to three new office towers over a span of four years, the landscape of the Downtown Zone has been significantly altered.

The competition for tenants has intensified as the forthcoming supply wave is causing a shift to a tenant-favored market.  In perspective, the quantity of Class AAA office space in Downtown Edmonton is growing by 1.735 million sq. ft. between 2016 and 2018 (43% increase in Class AA or higher space).  The pairing of this new supply wave and back-fill vacancy with a comparatively slow-moving  level of demand (absorption of around 100,000 sq. ft. per year), has caused significant ripple effects related to the rental curves, absorption rates and stabilized vacancy throughout the market. The net effect is a far greater degree of market segmentation with fierce competition for tenancy.

With the evolving shifts in market dynamics, new strategies are evolving, ranging from re-purposing for alternative uses, to competing on rates and inducements, to complete divesture.   The important thing to consider is that not all buildings can be painted with the same brush and there is no one size fits all strategy.

After accumulating a strong position in the Edmonton Office market during an upcycle, in the first quarter of 2017 Dream REIT took a bold divesture strategy in the Edmonton Office Market and placed six assets on the market.  The disposition is part of a strategic initiative by the REIT as enacted in 2016 to sell off $1.2 billion of assets to create a “private equity-like” strategy that would create a leaner, more resilient and valuable company for the shareholders.   The assets were acquired by the REIT between 2010 and 2011 with purchase prices between $218 and $345 per sq. ft.  Four of the assets have now transferred showing disposition values between $41 and $108 per sq. ft. decreasing by between 57% and 81% of the acquisition price.

This disposition creates new benchmarks within the Downtown Zone, but it is also important to consider the bifurcation evident in the market, whereby the same metrics cannot be applied to all assets within the market.  Lease profile, income durability, and product positioning is weighed heavily in the valuation of office assets.  The impact of current market conditions will impact individual assets to a varying degree given different risk profiles.

From a re-purposing standpoint, it is important to consider that it is very capital intensive to change asset use.  An investor must consider the supply and demand characteristics of alternative uses from the standpoint of the position of the asset in question.

  • Altus Group forecasts that population in the Downtown Zone is expected to increase to about 83,480 by 2031 from 43,535 in 2011, representing an average annual increase of 2.6%.
  • With a soft economy, hotel occupancy in Edmonton is in the mid 60% range, but the Edmonton Ice District is a major new demand generator in town.  With improvement in energy prices some developers/investors are considering hotel investments.

Beyond supply and demand conditions, there are significant limitations and advantages to specific building floorplates, mechanical systems, structural systems, etc.  Altus group has assisted several clients in determining the feasibility of, and optimizing repurposing initiatives at the asset level factoring the many economic, financial, functional, and cost related considerations.

Many investors will take a long position in the office market.  New buildings and well positioned existing assets will continue to drive value based on the durability of income.  With transactions occurring at benchmark low cost bases, new building owners have the means to move market rents far lower to induce relocation as they are carrying very high level of vacancy. The next step of the Downtown Edmonton office real estate cycle will be further downward pressure on market rents as competitive forces unfold.  Some landlords have taken a strategy of investing defensive capital to improve their competitive offering, examples including the renovations to Scotia Plaza and WSP Place.  With re-pricing evident in the market, asset strategies to maintain occupancy and income in an increasingly competitive market are of utmost importance in maintaining value.

Ultimately there are many factors in determining the appropriate asset strategy to maintain long term asset value in a market that is enduring a re-pricing phase.  With an un-biased market view, coupled with industry leading professionals and data, Altus Group can provide a realistic market view and assist in determining optimal asset strategies moving forward.