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Investing in office space

Location and timing crucial when investing in the office space sector across Western Canada
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Capitalization rates and investment activity in Western Canada’s three major markets, Vancouver, Calgary and Edmonton, experienced disparate trends between 2010 and 2016, largely influenced by economic events and shifting investor demand.

Class A cap rates for the Alberta markets ran in tandem over the past six-year period, holding an average of +42 basis points difference (Edmonton versus Calgary), with Calgary maintaining a lower yield throughout the entire period. The Class B market for the two cities experienced more ebb and flow during this time period, with Calgary eventually flattening between 2014 and 2016, while Edmonton continued to rise.

The Vancouver Class A office asset, on the other hand, massively outperformed the two Alberta cities, maintaining a lower yield through the same six-year period. Interestingly, Vancouver’s highest point in Q1 2010 at a 6 per cent capitalization rate, still outperformed the Edmonton Class A market over the six years. Vancouver’s Class B market also eventually started to outperform the Calgary and Edmonton Class A markets from Q2 2014 to Q4 2016, averaging at a 4.94 per cent capitalization rate, versus 5.97 per cent and 6.41 per cent, respectively.

For the Class B market, the average cap rates were 5.52 per cent, 7.01 per cent and 7.19 per cent, respectively.

Investor appetite to purchase office buildings in Vancouver remains apparent despite the decline in capitalization rates. This demand is largely due to the city’s occupier diversity and market stability. Investors see Vancouver as economically diverse and a magnet for local and international talent, driving companies to continue to invest in this city.

Class B & C markets: Modern tenants, particularly those in the technology sector, present a spectacular opportunity for landlords of non-traditional office space outside the downtown core, as these companies primarily look for “non-corporate” or “edgy” spaces as a means to attract and retain talent. Older buildings typically offer the ability to build out the “creative spaces” that these organizations prefer. These buildings can accommodate cosmetic updates, such as brick-and-beam or art murals, or design adjustments, such as the switch to an open-plan concept or the addition of entertainment areas. Non-traditional spaces also offer technology firms the opportunity to be located amidst like-minded companies, which facilitates knowledge sharing and commerce. That said, access to amenities, transit (and other travel options) and the urban core is crucial for these firms to even consider moving into an older building. An efficient commute and immediate access to entertainment and social venues are must-haves for these organizations’ employees.

Alternatively, as urban centres struggle with affordability, “tech hubs” or satellite offices in suburban markets could be a feasible option for the investor. Employees living outside of the city centre express challenges with commuting and achieving work-life balance. Landlords of non-traditional office space outside the city core could thus seize the opportunity and reposition their assets to attract these tenants. This doesn’t signal the revival of the suburban office park; rather, it points to the redevelopment or resurgence of space in suburban cores offering amenities and multi-modal access.

By the same token, technology firms that have a strong position downtown and face challenges with attracting and retaining talent due to the high cost of living could look to partner with local developers to construct residential projects on, or near, their site. The new Telus project in Vancouver (and soon in Calgary) is an example.

Telus partnered with Westbank to construct a new office building and neighbouring residential towers to provide housing options to support the attraction and retention of employees.


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