Colliers Spark - b class building in a class market email
1. A Knowledge Leader Publication.
Accelerating success.
How to Be a B-Class Building
in an A-Class Market
SUMMER 2014
2. 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 floor
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 office
space. This office 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 office space due to its cost-
effectiveness. 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 classification.
Although Class B and C buildings are
attracting tenants with their cost-effective
rents, they may be having trouble
securing tenants for long-lease terms and
attracting new tenants to fill up vacant
space – thus, these classes of building
may be experiencing high vacancy rates
for extended period of time. With new
office 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 offer 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 Class
Demand for office space is not solely driven by financial
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
3. Reposition
Repositioning an office 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 specific
industry. For example, a landlord who
wants to compete in the Information,
Communication and Technology (ICT)
sector can outfit their building with fibre
optics, server rooms with separate air
conditioning units, and backup generators
in order to attract technology firms.
Specialization can be a risky maneuver
as it identifies the building to a specific
sector, and as a result, companies in
other sectors often overlook the building.
Landlords with existing technology tenants
may find 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 specific tenant/
industry.
How
Perimeter invested capital to reposition the building as a
specialized location for IT or high-tech type firms. The
building had undergone significant enhancements aimed
at attracting this type of industry, including floor to ceiling
windows, open floor plates and fibre 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 benefits of investing in and specializing C
class buildings.
CASE STUDY
Scenario
SPECIALIZATION
Location
305 King Street West | Kitchener, Ontario
collierscanada.com/research
305 King Street West | Post Renovation
4. 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 significant investment from
the landlord. The invested capital can be
used to outfit the building with a variety
of features such as expanded retail on
the ground floor, 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 significantly broaden
the building’s appeal.
The final product could possibly shift the
building’s classification (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 offices
for various non-profit 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 office space
and retail.
How
The new landlords invested a
significant amount of capital into
the 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 floor plates.
Results
While undergoing the renovations, a
large office 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
classification from Class C to B.
Scenario
CAPITAL INJECTION
Where
411 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
5. approved the conversion of the office
building into 243 residential strata lots
and one commercial. The approval
came with a comprehensive list of
conditions, which wasn’t finalized
until late 1994 and the Electra building
condos were listed for sale. Although
requiring a significant 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 Office to Home: The
Adaptive Reuse of Office Buildings to Residential Use in
the Core of the City of Vancouver. UBC: Vancouver.
collierscanada.com/researchcollierscanada.com/research
CASE STUDY
Scenario
REPURPOSE
Where
989 Nelson Street | Vancouver, British Columbia
Typically, landlords decide to build new
office 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
office supply, landlords of older, lower-
grade buildings tend to experience
higher turnover of tenants. When supply
increases in a significant 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
“flight 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 office 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 early
1990s 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 office 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 office
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 office building.
By 1992, the building was assessed at $40
million and Harrowston thought the best
alternative was to sell. As time passed,
offers for the building were not sufficient to
mitigate the loss in value, so the company
decided to convert the building into
residential condominiums.
In 1993, the Vancouver City Council
Repurpose