From stable to dynamic market

Hey there, time traveller!
This article was published 19/11/2018 (2521 days ago), so information in it may no longer be current.

When CBRE published its quarterly commercial real estate statistics for the third quarter of this year, there were a couple of notable line items in the Winnipeg entry.

For starters, in a market that is persistently stable, the Winnipeg numbers wouldn’t normally stand out. But, this time they did in a couple of instances.

On the positive side, of the 10 cities CBRE reported on, the only city with any net new downtown office space entering the market during the quarter was in Winnipeg — the 365,000-square-foot True North Square.

But, on the other hand, the downtown class-A office vacancy rate in Winnipeg almost doubled from the second quarter to the third quarter — to 12.5 per cent from 6.9 per cent.

Industry professionals know that Winnipeg’s real estate market, especially when it comes to high-end downtown office space, can be totally disrupted with just one new building. But, at last week’s state-of-the-industry event put on every year by the Building Owners and Managers Association (BOMA) of Manitoba, there was plenty of evidence to show that, in fact, the commercial real estate scene in Winnipeg is surprisingly dynamic.

In the office market, a new tower is causing renewed interest in fixed-up class-B buildings; in retail, the new legal cannabis sector has caused a bustle of activity; and the ongoing dynamic of high demand and low supply in the industrial market is generating more activity than has been seen in a decade.

Ryan Behie, vice-president and managing director at CBRE Ltd.; Trevor Clay, principal at Capital Commercial Real Estate Services Inc.; and Michael Stronger, senior vice-president of retail and investment at Shindico all painted a lively picture of the office, industrial and retail sectors in the city.

Retail

In the good-news, bad-news scenario in the retail sector that Shindico’s Michael Stronger presented at the BOMA event, things just end up almost the same as they began.

Stronger said the good news is that the Target store failure is over, and all the former Winnipeg Target stores have been redeveloped and re-leased. The bad news is that the closure of Sears stores put the retail vacancy rate right back to where it was post-Target.

But the great news is that the old Sears stores are getting redeveloped. Stronger said all those old big-box stores are becoming more productive for the building owners.

“Those boxes were like white elephants,” he said. “For instance, at Garden City Shopping Centre, Sears was sitting there for 20 years with a vacant parking lot weighing down the entire centre. It was dormant space. Sears was open, but it might as well have been closed.”

That space is being redeveloped with Seafood City as the anchor, and a couple of other high-profile tenants are close to completing deals.

“The facade will be completely re-designed. It will look fantastic,” Stronger said. “They will redo the parking lot and it will add a new vibrancy for the area.”

Stronger said the spate of bankruptcies in the retail sector may continue, so owners of retail space have to be flexible.

The poster child for that type of creativity may be the recent opening of the 24/7 Intouch call centre in the old St. James Street Target store, along with a big new Winners/HomeSense store.

The debut of legal cannabis retailing is another example of how retail real estate still has options, even if the retail sector itself may be suffering. Stronger said he thought it would mostly be local landlords jumping on the cannabis bandwagon first.

“I would have thought the large centres would have to go through dozens of leases to see if there were restrictive covenants,” he said. “But cannabis stores are going into some of the largest centres in the city with some of the largest landlords.”

Industrial

Of the three commercial real estate sections, the industrial market has consistently been on the plus side of the supply-demand equation.

With a bunch of new serviced land now available in Centreport and elsewhere, it means there are more opportunities than there have been for some time for new industrial construction.

“With the additional serviced industrial land ready for development, there is lots of activity,” Capital Commercial’s Trevor Clay said. “In fact, in the industrial land market I’ve not seen this much activity in the 13 years I’ve been in the business.”

Few would disagree with Clay when he says the industrial market has been leading Winnipeg in growth and development. The vacancy rate has gone down to 3.3 per cent from 4.3 per cent a year ago, and is continuing to get tighter.

A lot of the new development is happening in the RM of Rosser (much of the Centreport developments) and the RM of Macdonald. The real estate industry has no problem with that, but it will have a long-term negative effect on the city’s tax base.

There was a debate about whether or not there are too many outdated commercial buildings in the city and not enough demolition, but Clay made the point there are opportunities for smart landlords who may have owned buildings for a long time and have had a holiday on input costs to spend some money on their buildings to revive their commercial potential.

Clay’s prime example in that regard is 1000 King Edward St., the former long-time Safeway distribution centre that is in the process of being redeveloped for new clients, including Manitoba Liquor & Lotteries.

Office

Despite the fact that the downtown class-A vacancy doubled virtually overnight with the opening of True North Square, CBRE’s Behie said, “Realistically, our market is performing quite well overall.”

With an overall 10.7 per cent office vacancy rate in the Winnipeg area, only Toronto, Vancouver and Ottawa have lower rates.

“Although True North Square took the downtown vacancy rate from seven per cent to 12 per cent in one quarter, it does not tell the whole story,” Behie said.

A total of 119,000 square feet of new space was absorbed in the market during the third quarter — almost twice as much as the same quarter last year, and three times as much as the second quarter this year.

And while the new inventory has caused some vacant space, Behie said it’s not necessarily pushing down rental rates.

He thinks it’s making tenants and landlords re-think the total economic package of what tenants get for their rents. Behie believes, for instance, there are competitive opportunities in this market for landlords to attract new tenants to class-B buildings with the appropriate investments. While those landlords would obviously have to get their money back, Behie said the economics are there to make that work.

He believes one of the prime examples of that scenario is the fact that KingSett Capital, the largest private-equity real estate firm in the country, has acquired a controlling stake in 330 Portage Ave., and is in the midst of an $8-million upgrading of the building’s amenities.

While that building has traditionally been a little down market, it is across Hargrave Street from Bell MTS Place, right in the middle of the activity that the SHED (Sports Hospitality Entertainment District) has been generating.

Behie said companies the size of KingSett, which has a $13-billion portfolio, do not typically come to cities the size of Winnipeg.

“They are buying into Winnipeg, they are buying into our downtown, they are buying into the SHED and they are buying into what is happening down here,” Behie said. “There is an opportunity to unlock here, to take it from a B-minus building to a B-plus, and if anyone can do it, it’s them.”

Know of any newsworthy or interesting trends or developments in the local office, retail, industrial or multi-family residential sectors? Let us know at business@freepress.mb.ca

martin.cash@freepress.mb.ca