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What’s Next | Capital Markets 2019 Forecast (PART 3)

Is the flight to quality over since there are very few pockets of space left in the new properties and will there be investment opportunities in the market to utilize some of the older buildings for office space?

 

           Part 1         Part 2

What’s Next 2019 – Part3 (PDF)

 

Although this segment of the market had an increase in sales volume in 2018, it was heavily influenced by the sale of the Edmonton Tower at a price of $400,000,000. The Enbridge Tower that was the next largest sale at $22,000,000 is being converted into a combination Hotel/Long Stay Hotel.

The downtown vacancy rate and the age of the underlying product has led to a large number of conversion projects in the core. The conversions contemplate a variety of uses from lodging to residential and senior housing uses. The HSBC Building that was recently purchased by AIMCO is being completely retrofitted and will be partly occupied by AIMCO upon its completion.

The transaction volume over the past several years in the downtown area has been a mix of low price sales that will allow for the conversion of the product into alternative uses or retrofits to a limited number of pure office investment sales with record high price points. Due to the relatively small size of pure investment product in the core, we are likely going to see more speculative sales on challenged product over the next twelve months. Due to the lower prices, most of the purchasers will be able to hold the product with the vacancy and have time to determine their best course of action.

The rising suburban vacancy rate is more of a traditional supply/demand issue. Several new buildings were brought into the overall inventory of Summerside and areas south of the Anthony Henday. Similar to the downtown market, numerous tenants moved into these newer buildings and left older space behind. The move of one of the larger suburban tenancies, Electronic Arts, into the downtown core in 2019 will lead to another spike in vacancy in the suburban office market over the next twelve months. We anticipate that there will be strong downward pressure on suburban rental rates over the next year and we do not anticipate much investment activity on the older product in the suburbs.

Will the changing demographics of workers mean a shift away from car commuters and result in suburban office product being clustered over the medium term near transit or suburban residential density?

We do not anticipate much investment activity in this area unless there is an end game in play for the purchaser. This may mean buying product below replacement cost in well located properties with the aim of retrofitting into other uses or perhaps lower cost office product. It may also entail strategic purchases for newer, fully leased product that fits into a portfolio strategy.

In general, the volatility in the office investment market is not likely going to subside in the near term as different players are looking for different things in their investment strategies.

 

For more information, contact Cushman & Wakefield Edmonton Investment Division.

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