Anticipating an office exodus in Edmonton, Strategic Group has applied for a permit to convert a long-held commercial property into a rental apartment building.
The Calgary-based developer – one of the largest privately held real estate companies in Canada – hopes to repurpose Harley Court, a 1970s office building in the downtown neighbourhood of Oliver, into apartments this fall. The application comes after a year-long commercial viability study.
Like other commercial landlords, Strategic is adjusting its portfolio to reflect a changing real estate landscape.
"We've been studying our office holdings in both Edmonton and Calgary, looking at certain buildings that might present an opportunity for conversion from office to residential," says Randy Ferguson, chief operating officer of Strategic Group.
"There's several reasons for that," he continues. "Firstly, it's a less costly way of developing residential property; secondly, these buildings are positioned in desirable and mature neighbourhoods; and thirdly the office markets in Edmonton and Calgary are struggling somewhat."
Strategic Group currently operates five office buildings in Edmonton with a 14-per-cent vacancy rate. That's just a couple of points below the city average, but Mr. Ferguson says he doesn't believe this will be the case long term.
"In Edmonton, we foresee a 'flight to quality' due to the large amount of new office space that's about to come to market in the Ice District. We have several large tenants preparing to relocate from the CN Tower to the Edmonton Tower for example, one of those being the City of Edmonton. We're simply trying to stay a step ahead."
It's estimated that 1.8-million square feet of office space will come to market in Edmonton in 2017 as projects like the Edmonton Tower and the Stantec Tower open their doors to tenants.
Harley Court totals 156,000 square feet and could accommodate more than 170 one- and two-bedroom apartments. Of the properties studied so far, it's the one which has been identified as having the greatest potential for residential conversion.
"We've studied more than a dozen of our commercial properties in Alberta and, of everything we've looked at so far, Harley Court is our best option," Mr. Ferguson says. "It can be [converted] very efficiently because of the way in which residential apartments would lay out on the floor plate. It's also located in an important employment, education and government district so it will be appealing location-wise to residents."
"We studied the CN Tower too," he adds, "but it's just not commercially viable for a conversion because of the layout; it's highest and best use is as an office building."
Mr. Ferguson says the development of Harley Court will be phased, taking "up to several years to complete." He also says the building could end up as a mixed-use development, retaining some office space.
"We're still in discussions with tenants at this stage. Some of them have decided to relocate and others wish to remain. We'll be honouring our contracts with them. It's likely that we'll develop half-a-dozen floors initially so as to minimize disruption."
Strategic hasn't settled on a rental rate per unit, but condos are expected to be "compact, modern and affordable," appealing to students and young professionals.
"Rent will be determined by the market, at the time of completion," he says. "We want to see our buildings well placed to take advantage of occupancy where it is in demand and repurpose our buildings where it's not in demand."
According to Canada Mortgage and Housing Corp. statistics, the rental vacancy rate in Edmonton has risen sharply in recent years: from 1.7 per cent in 2014 to 7.1 per cent in 2016 – the highest it's been in 20 years. Rental income however, has continued to rise steadily; the average rental income for a two-bedroom property in Edmonton in 2016 was $1,229; that's up 52 per cent in the last decade.
Mr. Ferguson believes both vacancy rates and rents are being pushed up by Edmonton's lack of quality, modern rental apartments.
"Over 50 per cent of the rental apartments in Edmonton and Calgary were built prior to 1979 so you have an inventory that is aging and lacks the benefits of modern construction," Mr. Ferguson says.
"There are far more condominiums being constructed right now than purpose-build rental apartments. I believe the rental markets in Alberta's two biggest cities are significantly under-serviced and that's the market we're converting for."
To date, Strategic Group has undertaken a commercial feasibility study on a quarter of their Alberta office portfolio but the intention is to examine all potential properties in the coming months, including those in Calgary where it has an 11 per cent vacancy rate; well below the current city-wide rate of 25 per cent.
"In Calgary, high vacancy rates are largely focused in the urban downtown market and in the A class towers. It's very much an energy head office environment. Our properties in Calgary, as in Edmonton, are primarily B and C class buildings. Our tenants are much smaller," Mr. Ferguson explains. "When those businesses are affected it might mean they lose one person or not grow by one person so generally our portfolio there has remained stable."
"So far we haven't found a property in Calgary that we can achieve economic feasibility for a conversion," he continues, "but we've only studied a small segment of our portfolio and we have a lot more work to do. I'd love to find an opportunity or two in Calgary."
Mr. Ferguson says his company is looking for a property to meet two requirements in order to be considered for a residential conversion.
"We're looking for a building in an area that's rich in amenities, that's first and foremost," he says. "Because the opportunity for conversion is about creating a mix of uses in the neighbourhood; that's were you start to get little shops popping up at street level and it feels less like a hard-core commercial centre and more like an integrated mixed use neighbourhood."
"The second part is finding a property which can be converted efficiently," he continues, "so that you can create attractive housing that operates on an efficient basis and it doesn't cost the world to do it. The capital cost to convert Harley Court will take many years to retire; there's a threshold at which that isn't viable."
"It's easy to find the first and more difficult to find the second," he adds.
Mr. Ferguson says he knows a number of Strategic's competitors are looking at making similar conversions of their properties.
"Governments in both Edmonton and Calgary are encouraging developers to look at this kind of conversion because they believe it can change the profile of a neighbourhood. When you have a glut of office space like we're about to see in Edmonton you can lease it, tear it down or repurpose it. The obvious first choice is to repurpose it," he explains.
"There's a fundamental understanding of the long-term benefits of adding a residential population into a commercial mould," he continues. "The way we built our cities in the sixties, seventies and eighties, that's just not how people live any more. It's all about work, live and play these days."