Home Month and Year April 2017 Buy, Lease, or Sit?

Buy, Lease, or Sit?

How the real estate market is impacting Edmonton businesses?

Cory Wosnack.

“It’s no secret that Alberta’s economy has experienced rocky times,” says Adel Hanafi, commercial real estate associate, specialization in investment sales and leasing at Cushman & Wakefield Edmonton. “However, these economic cycles are often catalysts for investment opportunities, acting as stabilizing forces to a market that some previously labelled as ‘over-inflated.’ Commercial property investors see the depressed economic activity as the perfect storm for a series of property acquisitions that would have otherwise been impossible or unavailable to them a few years back. With a revived generalized positive outlook on the economy, Edmonton investors are actively searching for new commercial properties.

“We are seeing an influx in out-of-province interest with many investors from Vancouver and the surrounding regions looking to take advantage of Edmonton’s higher rates of return (capitalization rates) on investment class properties. There is a sense of urgency among the investor class that stems from positive projections—and the fact that investors want to take advantage of interest rates that are still relatively low.”

Hanafi continues, “Startup companies in Edmonton usually enter into the real estate market as tenants looking to lease. With the rise in office business centres that allow tenants flexible options to rent space for shorter lease terms, and small facilities such as Startup Edmonton that help cultivate and foster innovation in Edmonton’s start-up community, leasing is usually the path of least resistance for a new company with a leaner budget. The availability of affordable office space and increasingly flexible landlords doesn’t hurt either!

“Overall, the Edmonton commercial real estate market is active. Transactions are occurring at a healthy rate, and there are numerous opportunities for developers, landlords, tenants, purchasers, and investors.”

However, what Robert F. McLeod, associate broker, Re/Max Real Estate Edmonton, McLeod Realty & CEO of McLeod Project Marketing Ltd., has noticed is that for now, many are still taking the “wait and see” approach to the market.

“What we have seen,” McLeod says, “especially when we look at the industrial market (our best barometer because it is the first to react when market trends shift upwards or downwards) is an astonishing drop in industrial building permits—close to 50 per cent; but what they always say is that you buy on the rumor, sell on the news. We have enough positive rumors now that are turning into reality, and that means we’ll start to see the build permits pick up. However, offices still continue to oversupply the market.

“One of the most interesting parts of the market to watch over the next 10 years will be downtown. Everything new that is being built is expensive, class A; but downtown is significantly class B and class B minor. Developers will need to decide whether to completely renovate to compete with class A builds, or to perform minor renovations to provide competitive pricing. That will create a lot of interesting re-development opportunities downtown for 30- to 35-year-old buildings—and we are already starting to see that take place.

“For businesses, the opportunity to own space is probably the biggest challenge. Overall, it works out to be double the cost to rent than to own. Owning your own building means owning your own tangible asset—you can finance it, refinance it, improve it, invest in it; it can become the golden goose of your business for the long term.”

However, he notes, “That isn’t to say that all businesses should push to buy their own buildings right now. My purpose is not to dissuade from leasing. In fact, most businesses don’t buy their own buildings because they are busy using their operating capital to run the business. That 20 per cent down gets invested into payroll and inventory instead. The first goal is to have a successful business, and that depends on where you can put your operating capital to generate a high return, whether that means buying a building or investing in marketing or staff.

“Alberta, good market or bad market, leads Canadian growth year over year over year,” McLeod emphasizes. “Despite the challenges of an oil-dependent market with political uncertainty, it is still a great place to do business. The important thing to note is that the fear is gone. There is more confidence in the market, but everyone is looking around right now, waiting for someone else to jump first. Then another one will jump, and another, and another.”

“The Edmonton commercial real estate market in 2017 is already showing signs of a call for action,” agrees Cory D. Wosnack, principal & managing director at Avison Young. “We are seeing velocity on transactions pick up and a higher volume of deals in the past 60 days than we saw in this same period one year ago.

“As to whether it is better to buy or lease, the market is highly attractive for both scenarios right now. For owners, the financing options are, for the most part, as attractive as ever. For those considering leasing, rental rates are the lowest they have been in over a decade, and many landlords are offering large incentives to attract new tenants.

“The leasing market will slowly improve for owners over the next 18-24 months, so for tenants, today’s market is ideal. Choosing which path is better for business owners comes down to how a company’s capital is best used, but based on today’s real estate market and economic climate, the value of real estate is poised to improve.

“One investor group we are watching is non-Alberta based investors. During the past two years, the interest in Alberta from those located outside of the province has been scarce, but this is changing quickly. Investors located outside of Alberta are showing interest because they believe the market has hit a low point.

“For small business owners, there has been an increase in the number of purchase options because many developers have catered to the business condo market. There continues to be many ownership opportunities for small businesses to own their space within a larger project, with most of the opportunities in new developments. We expect this trend to continue for years to come.

“One observation that I have been fascinated with is the demand for quality. During a typical depressed market, the trend is for deals to be in the lowest-priced real estate category; however, in today’s market, business owners in Edmonton have been taking a pass on low priced options if the quality is also low.

“One has to look no further than the success of the new office buildings in the core and Legends condos above the JW Marriott at ICE District to see how starved people have been for new developments. New developments require top-of-market pricing to justify the cost to build, and their success in a depressed market has been a great lesson. Business owners in Edmonton recognize the value of locating in quality real estate for the dividends it provides in talent retention and securing business.”

Wosnack smiles as he concludes, “A lot of people come to our office in Bell Tower, which is next to ICE District, and ask how we feel about our view changing with the new towers blocking our unimpeded view to the west. The answer is, we couldn’t be happier. Seeing half a dozen cranes spinning outside our windows to construct Edmonton’s two tallest buildings is exciting—that’s city building. It sure beats overlooking pothole-filled gravel parking lots for as long as any of us can remember. This city has many high-quality developments underway in all sectors of commercial real estate, and fortunately, those risk-taking developers are being rewarded by a market that is demanding quality over just affordability.”