Real estate investors are always looking for upside, whether in the form of positive cash flow or value-add opportunities. While value-add prospects offer the potential for appreciation, cash flow delivers consistent, long-term returns that rewards good maintenance, management and, increasingly, on-site programming – factors that make for a trophy asset.
“They’re typically highrises, you’ll see them located primarily in the core. There’s a lot of great amenities; the facility itself is usually managed by an institutional owner,” says Eliezer Timolien, office research lead with Colliers in Toronto.
Timolien recently produced a report that indicated the performance of trophy office properties across the country – as measured by vacancies – has improved markedly despite the challenges facing many areas.
His research pointed to AAA office towers having vacancies 890 basis points below lower-tier space, a contrast from 2017, when a 330-basis point gap existed in favour of lower-tier space.
“This is the most that we’ve seen,” he said of the latest spread.
Seven years ago, a wave of completions drove made for elevated vacancies in top-tier space, but social and demographic changes in the office population as well as the experience of working from home during pandemic-era mandates, has put premium space back into focus.
“You’re seeing vacancy rates dip or remain relatively low for premium, prestige towers,” Timolien said. “They’re still very, very competitive. When you compare them to mid-grade or even A-class facilities, we’ve seen such a surge in vacancies, and that gap has widened to what it is now.”
Vancouver, for example, saw increased listing activity in A and B space in the second quarter, while the AAA market remains resilient following a 550-basis point drop in vacancy over the past year. This has helped keep the downtown vacancy rate in check at 12.1 per cent versus 27.6 per cent in Calgary, which continues to see high vacancies despite lower-tier buildings being removed from the inventory.
“There are some investors who are looking at the wider market and saying OK, there is a chance that not only are trophy assets better in performance, they are the most competitive at the moment,” Timolien said.
Yet strong performance at the top of the market should ultimately deliver benefits to other classes.
“The market is just at the point where it’s finding its way, and it’s on the cusp of rebounding from what it once was,” he said.
With no meaningful new office construction in downtowns across the West, there’s a window of opportunity for markets to rebalance.
Beyond downtown
The Colliers study didn’t include other asset types, but similar principles apply to retail, multi-family and industrial assets. A combination of sound management, good traffic and solid tenants providing steady cash flow contribute to trophy assets in these categories, too.
Cottonwood Centre in Chilliwack may be the prime example. The mall sold earlier this year for close to $120 million following a dramatic makeover at the hands of a consortium led by PCI Group and also including Nicola Wealth Real Estate and Northland Properties Group. The partners invested $30 million on repositioning the mall and backfilling major vacancies, showing the benefits of hands-on management, driving down the gross rent/occupancy cost (GROC) as a proportion of sales.
“If it’s under 10 per cent, which you don’t see very often – in fact, almost never – that’s usually a good sign that all the tenants are making money,” explained Jim Szabo, who handled the mall’s sale to PCI Group then its disposition this year. “A lot of the shopping centres we see are 15 per cent GROCs. … This centre was sub-nine, something in the eights, which we just never see.”
With Save-On-Foods and other providers of consumer staples as anchors, Cottonwood Centre became a well-managed destination with impressive performance metrics.
Multi-family assets have also been performing well, with Edmonton leading the pack. While the city’s downtown office sector has been challenged, strong in-migration has driven active leasing and rental growth.
Avison Young principal Jandip Deol, who specializes in multi-family in Edmonton, calls out Citizen on Jasper and The Switch by Qualico in the city’s financial district for their rapid lease-up and on-market rents.
“Those are two of the ones on the downtown side that are AAA, trophy,” he said.
Timolien’s national perspective reflects the priorities of the institutional investors that are the primary owners of trophy assets.
“We take account what owners believe their buildings to be and compare them to what others believe,” he explained. “An institutional investor that has a portfolio that’s spread out across multiple markets, we’ll look and compare those markets.”
When viewed through an institutional lens, very few markets can compare with the top markets in the country, namely Vancouver and Toronto.
The result is a hard truth: not every market has what it takes to host a trophy asset.
“We don’t track trophy assets in Edmonton,” Timolien said, noting that Calgary is also omitted, as are the smaller centres of Regina, Saskatoon and Winnipeg.
“In western provinces, one of the only markets that does track premium, iconic towers, is Vancouver,” he said.
Despite major corporate investments by Telus and others in landmark towers like Brookfield Place, The Bow and Telus Sky in Calgary, the market is still adjusting to the effects of the pandemic and the earlier downturn in the energy sector.
“You’re seeing double-digit vacancies,” Timolien said of office markets outside Vancouver. “Calgary is the most challenged of any of them, but you’re seeing quite a bit more interest in A-grade buildings.”
Top-tier buildings in Calgary’s core report a vacancy rate of 17 per cent, stable and even improving versus the rest of the market.
Local opportunities
While institutional investors seek broad exposure for their portfolios, the investment criteria guiding them enforces a certain snobbery that drives them away from certain assets.
This gives local investors access to smaller trophies beyond the pale of the big players, often meeting individual or personal needs.
One of the best recent examples is the South Coast Transportation Authority’s recent acquisition of five acres of waterfront industrial land in south Vancouver for $12.4 million an acre. The value to the company was strategic – rather than continue leasing the parcel from Southgate Holdings Ltd., it opted to secure title through worth more than twice as much as what industrial land is currently worth.
Meanwhile, in Pemberton, the BC Parks Foundation paid $2.4 million on July 15 to secure a 115-acre tract of farmland for grizzly habitat. The price worked out to $20,870 an acre, the most expensive farm property sale in the valley, according to broker Frank Ingham of Royal LePage Sussex Realty, since the 134-acre Mitchell farm sold in 2023 at $35,820 an acre.
But the lower price also reflects the downward pressure on trophies acquired for personal reasons rather than business needs or income generation.
Ingham recently listed a property on Green Lake in Whistler for $5.8 million, but interest to date has been lacklustre.
“It’s just generally quiet out there,” he said.
He’s also been handling the sale of 3167 Point Grey Road in Vancouver, formerly home to the late CBC personality Ken Gibson. Custom-built, the property was originally listed at just under $12 million but reductions have lowered the asking price.
The shift is consistent with Sotheby’s International Realty Canada’s latest review of the luxury real estate market.
Sotheby’s recorded just two transactions above $10 million in the first half of this year, down from seven a year ago.
