Winnipeg Free Press - PRINT EDITION

Duo of downtown deals

Office buildings attractive as investment properties

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Downtown office buildings are a hot commodity these days, with the latest deal involving the sale of a pair of downtown Class B buildings for $38.9 million.

The two buildings -- 330 St. Mary Ave. and 175 Hargrave St. -- garnered widespread interest from both local and out-of-province investors as well as multiple purchase offers, said Ken Yee, senior executive vice-president of the Winnipeg office of Cushman & Wakefield.

C&W and TD Securities Inc. were the listing agents for the properties, which were put on the market by LaSalle Investment Management Inc., one of the world's largest real estate investment management firms.

"In addition to the usual suspects in Canada having a look at this offering, we had 400-plus hits in the U.S. and 50-plus from offshore investors," Yee said.

He wouldn't say how many offers were received. But it was more than three, and they came from both local and out-of-province parties.

The successful bidder was a local player -- Investors Group's Investors Real Property Fund.

Fund officials could not be reached for comment. But Yee said they're bullish on Winnipeg, especially with all of the new development taking place and the ongoing efforts to attract more businesses and residents to the area.

"The downtown is coming around. It's been revitalized, and I think that was the icing on the cake."

Yee also noted the two buildings are located within the city's sports, hospitality and entertainment district, and are both good quality properties.

The 12-storey, 147,000-square-foot building at 330 St. Mary Ave.is considered one of the downtown's best Class B+ office buildings, he said, with a 95 per cent occupancy rate and a direct connection to the downtown skywalk system. Tenants include HSBC Bank Canada, a software firm and several law firms.

The seven-storey, 10,600-square-foot building at 175 Hargrave St. also has a high occupancy rate -- 92 per cent -- and its tenants include a number of government offices with long-term leases. The two buildings also came with two surface parking lots and an underground parkade (a total of 238 stalls).

LaSalle had owned the buildings for about seven years. Zelick Altman, managing director of Toronto-based LaSalle Investment Management (Canada) Inc., said it sold them because they were owned in a closed-end fund and their maturity date was approaching.

Although LaSalle no longer owns any property in Winnipeg, Altman said it would have no hesitation investing in the city again if the right opportunity arises.

Yee and Bob Borys, an office leasing specialist with the Winnipeg office of Colliers International, said a growing number of outside investors are seeing Winnipeg in a different light these days.

"Winnipeg is definitely on more people's radar screens now than it's ever been," Borys said. "The '90s were a really dark time here, but (the city) has picked itself up and dusted itself off. There is an underlying enthusiasm now."

"There is an unsatisfied demand for good, institutional-quality product," Yee said. "The cost of construction and demand for return, with a lot of equity needing to be deployed, all contribute to a robust market for both the seller and buyer."

Yee said there's a particularly strong demand for buildings priced in the $1-million to $5-million range.

"I've got lots of investors saying, 'Get me something.' We're running around writing unsolicited offers all the time... and they're prepared to offer really decent value for properties."

He estimated downtown property values have risen 10 per cent over the last few years due to increased demand, rising rental rates, and falling capitalization rates.

The cap rate is the expected return on an investment. It's calculated by dividing a property's income by its value. The lower the cap rate, the lower the perceived investment risk associated with the property.

Yee noted the two MTS office towers at 333 Main St. and 191 Pioneer Ave. sold for $50 million in 2007, and sold again in June 2011 for $55.8 million.

He said rental rates in downtown buildings have been rising because rates in newly built office buildings are rising.

Class A rental rates are now running in the high teens, versus $15 to $16 per square foot a few years ago, he said. And the Class B rates now range from $11.50 to $16 versus $10 to $14 a few years ago.

Although the appetite for investment properties is growing, the demand for downtown rental space remains fairly soft, said Wayne Johnson, a commercial agent with Royal LePage Dynamic Real Estate and author of the semi-annual Johnson Report on commercial real estate activity in Winnipeg.

In his mid-year report, Johnson said downtown vacancy rates have started to fall after three consecutive years of rising rates. But they're still below desirable levels, he said, and the recovery will likely be slow.

"I don't see us attracting any new head offices, so that leaves you with expansion by existing tenants."

 

Know of any newsworthy or interesting trends or developments in the local office, retail, or industrial real estate sectors? Let real estate reporter Murray McNeill know at the e-mail address below, or at 697-7254.

murray.mcneill@freepress.mb.ca

 

Downtown vacancies lower this year

 

HERE is a summary of the mid-year vacancy rates for downtown Winnipeg office space over the last four years:

 

Class A Class B Class C Overall

20093.9%5.6%3.7%4.6%

20102.4%7.2%4.6%5.1%

20115.1%8.5%6.3%6.9%

20124.4%6.3%6.0%5.2%

 

-- source: Johnson Report

Republished from the Winnipeg Free Press print edition September 17, 2012 B4

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