Imagine you’re a property developer who has just purchased an older building in a prime downtown location. First thing you do is order the wrecking ball – after all, a sleek skyscraper is worth more than a neglected former industrial space, right? Actually, you could be wrong.
Tearing down an old building isn’t always the best decision, according to Michael Emory, president and CEO of Allied Properties Real Estate Investment Trust. His company restores older structures in cities such as Toronto, Montreal, Vancouver and Winnipeg to create new office and retail space; he says that retaining and renovating older buildings can be financially viable for both developers and the tenants that will ultimately lease the space.
“We have the ability to make older structures work economically because of the incredible demand for office space,” he says. “The reason the old buildings are surviving and are being invigorated is that more and more office tenants want the kind of environment they can afford.”
According to Mr. Emory, there are three things tenants look for in Allied REIT buildings: proximity to the downtown core, a distinctive environment (both inside and out) and lower operating costs per square foot.
“To give you a context, our buildings cost our tenants approximately $30 per square foot, all in,” he says. “The towers cost approximately $60 to $65 dollars per square foot, all in.”
In addition to preserving buildings designated “historic” by city officials, developers are also refurbishing older buildings to meet the changing demands of the work force.
When it comes to certain categories of tenants, Graeme Young, senior vice-president of Colliers International in Toronto, says he's seen an “incredible sea change” in demand for older, refurbished buildings.
“Advertising agencies, communications agencies and, of course, the whole high-tech world,” he says. “There's a sea of 20- to 30-year-olds sitting in jeans and sandals, and even if you gave them a tower in the core, that's not where they'd want to be.”
When he's assessing whether an older building is suitable to refurbish, Mr. Emory says three questions come into play. First, will it suit office tenancies?
“[We look for]abundant natural light, high ceilings, post-and-beam structural frames, hardwood floors and exposed exterior brick,” says Mr. Emory. “Also relevant, although not critical, are articulated facades.”
Second, once it's been determined that a building could be a good fit for office use, Mr. Emory says they assess whether the building is structurally and environmentally sound. “Because a lot of these buildings were originally used for light industrial purposes, we have to make sure there's nothing that's been left in the ground,” he says.
And third, if a building passes those first two tests, it becomes a financial analysis, says Mr. Emory.
“The way we look at it is, ‘How much will it cost us to create a rentable square foot?’” he says. “So that will be a combination of our acquisition costs and the renovation costs, and what relationship does that bear to the rent we can get?”
“If the return it represents for us is appropriate to the risk we’re taking, it’s a go,” he said.
Still, refurbishing old property isn't always the ideal choice in the commercial world, says John Crombie, senior managing director at Cushman & Wakefield. When it comes to retail space, the raze-and-build-anew option usually wins.
“Certainly, a charming building is nice, but unfortunately charm doesn't translate to efficiency and size in many, many cases,” he says. “And I can tell you when I'm dealing with retail clients and it's an older building, they complain about ceiling heights, columns and exposure – meaning how many windows you have in front.”
First Gulf is another company transforming an older Toronto landmark building into new office and retail space – the former Toronto Sun building in the east end of the city. The 1975 building, which was originally 275,000 square feet of space on about four acres of land, will contain the Sun's editorial offices, new retail outlets on the ground floor and George Brown College's game design program.
In addition to renovating the existing structure, First Gulf is also building three storeys on top of it, which will house Coca-Cola's Canadian head offices.
“We decided we didn't have to make the decision to tear down or reuse, so we did both,” says David Gerofsky, chief executive of First Gulf.
He notes another benefit of refurbishing an old building – speed. While a new building can take years to complete, a refurbished building can often be completed in much less time.
“That's not always the case, because renovations can get pretty tricky, but generally speaking you can get to the market faster,” he says. “When the demand is there and the market wants it, you want to be able to provide it. You don’t want to say: ‘It's going to take five years’ – by then, who knows what the state of the economy will be?”