Harvard Developments has just started construction on Tower III, a $100 million, 200,000-square-foot, 18-storey instant landmark that is already fully leased.
With such demand for office space that the Class A vacancy is estimated at 0.8 per cent - the lowest ever recorded in Canada - it would appear developers would need no further incentives to build on spec.
But this is Regina. This year, the city is offering any developer who builds new office space downtown a 20 per cent annual tax break for three years if it builds Class A or Class B space. Property taxes for such projects can range from $500,000 to $1 million per year. The incentive will stay in place until the office vacancy rate reaches at least 5 per cent, according to city officials.
"Developers aren't building on speculation," explained Larry Hines, president and CEO of the Regina Regional Opportunities Commission. "If someone comes into Regina looking for 50,000 square feet downtown, we don't have it. The city is missing an opportunity." The lack of available space, he said, could convince potential tenants to locate in the suburbs or - horror - Saskatoon or other western cities. "The incentives will convince developers to pull the trigger," Hines said.
Melhsen has a simpler explanation why the office incentives are in place: "The Mosaic tower got it, so everyone else wanted it."
There are some who worry that government handouts may not be the best method to encourage office construction. John Hopkins, CEO of the Regina and District Chamber of Commerce, has voiced concern that the incentives could distort the market. Tenants could begin relocating to buildings receiving the tax exemption, he suggests. But tenants apparently won't be getting any breaks on rents in the subsidized office space. NAI estimates that new Class A office lease rates in downtown Regina demand $35 to $37 per square foot, similar to that charged in Calgary and Edmonton, where spec office building is normal.
Housing handouts
It is not only the office market where government is handing money to developers. Regina is also wheelbarrelling cash this year to developers who built either rentals or condominiums in the downtown and selected areas. This is in a city where the rental vacancy rate is pegged by Canada Mortgage and Housing Corp. (CMHC) at 0.6 per cent, the lowest in Canada if not all of North America.
Rental rates for two-bedroom apartments are up 6.2 per cent from a year ago, the highest increase among the 25 major centres CMHC surveyed in its fall 2011 report. The average monthly rent for all apartments in Regina increased to $850 in October from $802 last October, the report said.
Sounds like developers would need no encouragement to build more homes. Think again. The City of Regina is offering a five-year tax exemption for new residential condominiums or rental projects under its recently expanded Residential Tax Incentive Program. The city also offers a tax exemption of $7,500 per suite for five years for anyone who converts space into housing in Regina's old warehouse district. Developers may apply for an exemption on several units at once or for a whole phase of construction. The city has also slapped a moratorium on the conversion of rental apartments to condos, though many of the condos are bought by investors who rent them out. CMHC says that the number of condominiums identified as rentals totals 897 suites, a two-fold increase from its October 2010 survey.
And there is even more government help for home builders.
The city is also linked to new provincial "headstart on a home" and "affordable home ownership" programs. The incentives may seem redundant in Regina, which has both the lowest average housing prices of any major Canadian city west of the Maritimes, at $276,000, and the lowest unemployment rate.
Headstart offers low-interest loans directly to builders and developers of "moderately priced" homes. The affordable home ownership program gives home buyers down-payment assistance of up to $5,000. The province also partners with Regina to provide a construction rental incentive of up to $5,000 per new rental suite built.
Industrial
NAI senior commercial agent Micky Schmidtz dismisses critics who say Regina developers are cowardly and points to the robust industrial sector as proof.
"Industrial is the blood and guts of real estate here," said Schmidtz, who noted that speculative development is common, supply is tight and land prices are soaring.
The city, the largest owner of industrial land, is about to release its final 60 acres of industrial-zoned land. Five years ago industrial land was selling for $80,000 an acre. A year ago it was $230,000. The next batch is expected to fetch at least $350,000 per acre in 2012, NAI estimates.
With the city land drying up, industrial development will be on the privately owned land to the east of the city, where Melcor Holdings Ltd. is releasing lots, and to the giant Global Transportation Hub (GTH). Phase 1 construction of a million-square-foot distribution centre in the Hub, adjacent to the new Canadian Pacific intermodal facility, is complete with more than 425,000 square feet in use. Phase 2 is underway with an additional 565,000 square feet operational in 2012. Schmidtz points out that industrial action around the Balkan oilfields - which extend into the U.S. - is helping to fuel the GTH and Regina's industrial market.
According to the Conference Board of Canada, Regina's economy grew by more than 5 per cent in 2011, second best in Canada. Growth will ease to 2.9 per cent in 2012, which still ranks Regina fourth among Canada's major cities. Strong employment growth is drawing migrants to the city, the board said.
Said Schmidtz of the current Regina upturn. "This is no blip," he said. "Regina is the new Alberta."
from Western Investor February 2012
