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Return to work keeps Lethbridge office market dynamic

Strong economy, young families keep demand for space active
The post-pandemic return to the office has spurred leasing activity in Lethbridge.

Rising office construction costs have hit Lethbridge as hard as any other Prairie market, but demand for space has kept tenants opting for upgrades over older digs as the market tries to meet shifting demand.

“We’re constantly adapting and reusing spaces to accommodate different trends and different needs that the city is dictating are needed,” Ashley Soames, senior associate with commercial brokerage Avison Young in Lethbridge, said. “We have to react quicker because there just isn’t anywhere else to go.”

But construction costs have doubled over the past four years, making the development of new space a costly proposition. Professional and similar offices dominate the stock, and the cost to build out medical offices from shell has increased from more than $100 a square foot in the first quarter of 2019 to approximately $200 a square foot today.

“This presents a challenge for investors taking on new development projects, and for owner-users and tenants building out their office space,” Avison Young notes.

This hasn’t stopped tenants from embracing new, high-quality of space, however. Given the options on the table, and the need for environments that are both functional for workers and attractive to clients, many companies are willing to embrace the higher development costs.

“It becomes a little less about the cost per square foot and more about retention and workplace culture and just a desire to go in the office versus outside the office,” said Soames, who says many landlords are providing higher tenant improvement incentives to help them keep pace with high construction costs while ensuring they have surroundings that suit their needs.

Daycare tenants are a surprising example of how the trend is playing out.

“They’re taking previously used office spaces and converting them,” Soames said.

These can include both streetfront offices as well as other commercial spaces. Soames is working with one tenants that’s planning to give a fitness studio a makeover so it can meet the demand for daycare services in the community, where 11 per cent of the population is under the age of 10.

“With everyone going back to work, our need for daycares in Lethbridge is extremely significant,” she said, noting that the local YMCA has closed its waitlist given the demand, creating opportunities for other providers. “[Parents] need some place to be able to put their kids.”

Reopening has also created demand from other users, too. This has resulted in the city’s vacancy rate declining, something unusual in many larger centres across the country. Thanks to an agricultural economy and strong demand for commodities, Lethbridge is thriving.

During the latest quarter, Avison Young reported vacancies of 11% on an inventory of 1.2 million square feet. A further 36,676 square feet is under construction in a market where the average asking rent is $15.82 per square foot. Triple net rents are closer to $23.49.