Colliers Spark - b class building in a class market email
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Transcript of Colliers Spark - b class building in a class market email
A Knowledge Leader Publication.
Accelerating success.
How to Be a B-Class Building in an A-Class Market
SUMMER 2014
Across all markets in Canada, most tenants prefer to occupy a Class A (or Class AAA) building, which is typically distinguished by accessibility and proximity to transit, amenities such as ground fl oor retail and community space, and location within the central business district (CBD). Tenants requiring these attributes are more willing to pay a premium in order to be in a Class A or AAA building.
On the other hand, there is less tenant demand for Class B and Class C offi ce space. This offi ce space typically lacks strategic locational attributes, has limited access to transit and amenities, and can be aesthetically less appealing. That being said, companies with limited access to capital or that are in the beginning growth stages would prefer to be in a Class B or Class C offi ce space due to its cost-eff ectiveness. These companies may be more willing to accept fewer amenities in favour of the associated cost savings.
Interestingly, Class B and C buildings were, at one point, considered Class A buildings, but due to geographical disadvantages, lack of retail and urbanization, or investment neglect, these buildings have fallen to a lower classifi cation. Although Class B and C buildings are attracting tenants with their cost-eff ective rents, they may be having trouble securing tenants for long-lease terms and attracting new tenants to fi ll up vacant space – thus, these classes of building may be experiencing high vacancy rates for extended period of time. With new offi ce supply being added to inventory every year, there is increased pressure for Class B and C buildings to lower rent or increase tenant inducements. In order to stay competitive in the market, landlords of Class B and C buildings must introduce new strategies to attract and retain tenants.
This Spark report will address this issue and off er two key strategies to help these landlords increase their competitive advantage.
“In order to stay competitive
in the market, landlords of
Class B and C buildings
must introduce new
strategies to attract
and retain tenants.”
Strategies for the B ClassDemand for offi ce space is not solely driven by fi nancial reasons, such as cost per square foot; there are many aspects a tenant considers before making a major real estate decision.
SPARK | HOW TO BE A “B” CLASS BUILDING IN AN “A” CLASS MARKET
Reposition
Repositioning an offi ce building is the most common strategy for Class B and C buildings.
Two actions most often taken:
• Specialization
• Capital Injection
SPECIALIZATION
Although industry specialization requires an initial capital investment, the building can be transformed to cater to a specifi c industry. For example, a landlord who wants to compete in the Information, Communication and Technology (ICT) sector can outfi t their building with fi bre optics, server rooms with separate air conditioning units, and backup generators in order to attract technology fi rms.
Specialization can be a risky maneuver as it identifi es the building to a specifi c sector, and as a result, companies in other sectors often overlook the building. Landlords with existing technology tenants may fi nd specialization a suitable strategy for renewing and retaining current tenants.
What
The property, prior to acquisition, had a vacancy of approximately 65% but was positioned in an opportunistic location for investment and revitalization.
Why
Perimeter Development saw the opportunity to reposition this building, invest capital, and attract a specifi c tenant/industry.
How
Perimeter invested capital to reposition the building as a specialized location for IT or high-tech type fi rms. The building had undergone signifi cant enhancements aimed at attracting this type of industry, including fl oor to ceiling windows, open fl oor plates and fi bre optic cables running throughout the premises.
Results
While the project is still underway, the building is now 70% occupied, cutting the vacancy nearly in half. This is truly a testament to the benefi ts of investing in and specializing C class buildings.
CASE STUDY
Scenario SPECIALIZATION
Location305 King Street West | Kitchener, Ontario
collierscanada.com/research
305 King Street West | Post Renovation
SPARK | HOW TO BE A “B” CLASS BUILDING IN AN “A” CLASS MARKET
The second common approach to repositioning an asset is capital injection.
CAPITAL INJECTION
Capital injection is the most common way to reposition a building. As its name suggests, it requires a signifi cant investment from the landlord. The invested capital can be used to outfi t the building with a variety of features such as expanded retail on the ground fl oor, community space in the building, new elevators, and new HVAC* and electrical service or electrical systems. Many tenants value all these attributes, and any upgrades would signifi cantly broaden the building’s appeal.
The fi nal product could possibly shift the building’s classifi cation (from Class C to Class B or Class B to Class A), resulting in higher net rents. A caveat of the investment is that existing tenants would have to work amidst the ongoing construction, which may lead to higher turnover in the short run.
CASE STUDY
What
The property was previously a seniors center that housed offi ces for various non-profi t medical groups. Due to the nature of its tenants, the building experienced high turnover.
Who
Omicron and CRS Group of Companies acquired the property.
Why
Omicron originally intended to occupy a portion of the building and lease the balance of the offi ce space and retail.
How
The new landlords invested a signifi cant amount of capital intothe building. They stripped the
building back to its original shell and completely renovated the building. Some of the renovations include: a seismic upgrade to the building, a new HVAC system, new windows and asbestos removal. Also, the landlords built an addition to the building, which will increase the size of the fl oor plates.
Results
While undergoing the renovations, a large offi ce tenant, Morneau Shepell, expressed interest in occupying the building. Omicron has revised its plans to occupy the building and will instead will instead make way for Morneau Shepell. The improvements by the landlord increased the classifi cation from Class C to B.
Scenario CAPITAL INJECTION
Where411 Dunsmuir Street | Vancouver, British Columbia
SPARK | HOW TO BE A “B” CLASS BUILDING IN AN “A” CLASS MARKET
411 Dunsmuir Street | Exterior Rendering
*Heating, ventilation and air conditioningg
approved the conversion of the offi ce building into 243 residential strata lots and one commercial. The approval
came with a comprehensive list of conditions, which wasn’t fi nalized until late 1994 and the Electra building condos were listed for sale. Although requiring a signifi cant amount of capital, this strategy proved to be successful due to the high demand for residential condominiums in Downtown Vancouver.
Source: Mawani, Jabeen (1997) From Offi ce to Home: The Adaptive Reuse of Offi ce Buildings to Residential Use in the Core of the City of Vancouver. UBC: Vancouver.
collierscanada.com/researchcollierscanada.com/research
CASE STUDY
Scenario REPURPOSE
Where989 Nelson Street | Vancouver, British Columbia
Typically, landlords decide to build new offi ce inventory when vacancy rates are low, in order to capitalize on higher rental rates. When a market experiences a dramatic increase in new high-grade offi ce supply, landlords of older, lower-grade buildings tend to experience higher turnover of tenants. When supply increases in a signifi cant way, vacancy rates increase and put downward pressure on rental rates. With lower rental rates and plenty of choices,
tenants gravitate to higher quality properties. This is referred to as the “fl ight to quality”. During this time period, landlords of older buildings often look to reposition themselves through capital injection or specialization. Some owners see the advantage in completely repurposing a building.
ACTION ITEMS
With many major Canadian cities
expecting millions of square feet of new AAA offi ce space to hit the market over the next several years, repositioning or repurposing a lesser class building is becoming increasingly important to stay competitive in the marketplace. Reviewing your portfolio to understand the strengths and weaknesses of each building will help determine whether capital investment and strategic planning are required to meet changing tenant demands.
The Electra Building | Circa 1961
The Electra Building | Downtown Vancouver
SOURCE: condoinvancouver.ca/electra
With the recession of the early1990s fast approaching, Downtown Vancouver saw nearly two million square feet of new supply, which caused vacancy rates to nearly double by 1992 to 16%.
This phenomenon resulted in Class B and Class C offi ce buildings decreasing their asking lease rates in order to stay competitive, or risk a period of high vacancy. One building, the BC Hydro Building (now called Electra), decided not to compete in the oversaturated offi ce market, but instead decided to convert to residential condominiums, an asset that was in high demand in Downtown Vancouver.
Harrowston Developments Corporation, with the understanding that BC Hydro was going to vacate the building over the next few years, purchased the BC Hydro Building in 1989 for $56 million with the intention to renovate and lease the building as a multi-tenant offi ce building. By 1992, the building was assessed at $40 million and Harrowston thought the best alternative was to sell. As time passed, off ers for the building were not suffi cient to mitigate the loss in value, so the company decided to convert the building into residential condominiums. In 1993, the Vancouver City Council
Repurpose
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