Office space glut feared
Landlords, brokers sound alarm over new downtown towers
Edmonton’s plan to consolidate city staff in a new downtown office tower could glut the core with vacant office space and drive down rental rates for a decade.
That’s the grim assessment from several office landlords and commercial real estate brokers, who say demand for downtown space is simply too limited to absorb existing vacancies, let alone the two new office towers that are slated to hit the market over the next three years.
“We could have 10 years’ worth of supply come into the marketplace.” JORDAN HOKANSON, PRESIDENT, HOKANSON CAPITAL
“With new developments such as the Kelly-Ramsey Building underway and slated for completion in 2016, and other proposed developments ... there is potentially 1.1 million square feet of Class A office space that would be added to current inventory,” warns real estate broker DTZ Barnicke, in its latest quarterly office report. “Over the past decade there has been an average positive absorption rate of between 75,000 and 100,000 square feet per year in downtown Edmonton office space. At this rate it could take approximately another decade for the market to recover a healthy vacancy rate near eight per cent,” it warns.
The firm’s 1.1-millionsquare-foot estimate includes 188,000 square feet of still-vacant space in the Epcor Tower; 174,000 square feet that’s now empty in the former ATB Tower; 595,000 square feet in the new Kelly-Ramsey building, which is slated for completion in 2016; and nearly a quarter of the space in a 450,000-squarefoot tower that the city hopes to build.
“There is I would say a quiet majority consensus behind the scenes in this city that is quite concerned about this,” says Jordan Hokanson, president of Hokanson Capital, which is currently upgrading the former ATB Tower to LEED Gold certification in hopes of securing new tenants.
“We are potentially facing a situation here that if historical average downtown absorption rates persist we could have 10 years’ worth of supply come into the marketplace in about three years’ time.”
Although city council has yet to announce plans to proceed with its project, it’s widely expected that Katz Group and its partner, WAM Development Group, will soon get the nod to start construction at the southwest corner of 101st Street and 104th Avenue, site of a former Staples store.
The city wants to lease up to 350,000 square feet of space in a new tower, while 100,000 square feet of additional space would be leased to other tenants. At present, city staff work in various locations around the core, including Chancery Hall, an older building on the east side of Churchill Square that needs major upgrades.
By moving staff under one roof, and reducing the amount of space needed per employee, the city hopes to save roughly $160 million by 2039. But critics say the move would also create large blocks of vacant space when city leases come up for renewal in such buildings as the TD Tower, HSBC Bank Place and Scotia Place, cratering lease rates for years to come.
“We’re looking at 700,000 to 800,000 square feet of available product on the market today (including Kelly-Ramsey). And now the city is going to off-load another 300,000 square feet into the marketplace,” says Blair Sinclair, executive vice-president, investments and development at Triovest Realty Advisors, which owns several major downtown office towers, including Telus House.
“So now you’re talking about upwards of a million square feet of vacancies,” which could take up to a decade for the down town market to absorb, he says.
“The other question, to be very frank, as a taxpayer of Edmonton, if you’re in a new building you have to pay rents that are close to $40 a square foot to make an economic return for any developer. So I would ask, why would you pay $40 when you could be in buildings at $20-plus that can serve your needs?”
In addition to the abovementioned projects, Stantec is considering putting up a new downtown office tower of its own by 2018, and Enbridge has reportedly issued a request for proposals for 300,000-square-feet or more of alternative office space.
“If you assume there will be 100,000 to 150,000 square feet of positive absorption each year, you’re going to see a big spike (in vacancy rates) in 2016 and 2017, which is the time frame for the City of Edmonton tower and the Kelly-Ramsey building. And then you’re going to find another spike in 2018 if Stantec goes ahead,” says Ian Bradley, executive vice-president with Colliers International’s Edmonton office.
“That is a lot of supply unless we have a big spike in demand. Which means vacancy rates are going to go up and rental rates are going to drop. If they’re in the mid-to-high $20s rental rate ranges right now (for Class A buildings), to have them dip into the teens, it could happen very easily.”
Since 2010, the average Class A rental rates have been running around $23 to $24 per square foot, down from more than $30 per square foot in 2008, according to DTZ Barnicke. Downtown vacancy rates are running around 9.1 per cent, it says, after a weak year for downtown office space absorption in 2013.
“All the landlords are going to look at this looming vacancy issue and they’re going to say ‘OK, we want to retain or get whatever tenants are out there on a longterm basis, and we’re going to be willing to buy them,” says Bradley.
“I know for a fact that some of the major landlords are saying right now we might have to up our inducements or lower our rates because we don’t want to be in a position where we’ve got a high vacancy rate when KellyRamsey and the city building hit the market.”