The first of Artis’ Calgary office buildings to undergo redevelopment will be Sierra Place: a 92,000-square foot downtown office building of 10 storeys, constructed in 1958 and connected to the Plus 15 skywalk.Artis REIT/Handout
Artis, one of the largest real estate investment trusts in Canada, is preparing to repurpose four of its downtown Calgary offices into residential buildings. The company, founded in 2003, also plans to reclassify a surplus office land site near Stampede Station to accommodate a 300-unit multifamily development.
The news follows a Land Use Bylaw amendment made by the city in June which makes it easier to attain permission to repurpose office spaces, giving landlords and developers greater flexibility with their assets while downtown-office vacancy soars to 25 per cent.
The amendment abolished the requirement for a development permit to convert an office to a residential building. Now, in most cases, only a building permit is required.
Armin Martens, Artis' president and chief executive officer, says reducing the company's office assets in Calgary is a matter of "reducing our Alberta exposure."
Currently the company's portfolio across Canada and the United States consists entirely of commercial assets: 248 properties totalling 25.9 million square feet.
Twenty-six per cent of its net operating income comes from Alberta, where it holds 10 industrial properties, 24 retail units and 19 offices – 17 of which are located in Calgary.
Office space in Calgary accounts for 40 per cent of the company's gross leasable area for office space in Canada and the current vacancy rate for that space is 19 per cent, lower than the downtown Calgary average but still 5.5 per cent higher than Artis' Canada-wide vacancy rate and 11.5 per cent higher than their office vacancy rate in the United States.
"I wouldn't really call [repurposing assets from offices to apartments] a change in direction, since developing real estate to its highest and best use has always been integral to our mandate," Mr. Martens says. "However, this will be an additional asset class, to further diversify and improve our portfolio."
Since the second quarter of 2014, Artis has sold off three office buildings, seven retail properties and 10 industrial sites in Alberta. This has reduced its net operating income in Alberta from 39 per cent to 26 per cent and their Calgary office weighting from 19 per cent to 11 per cent.
The first of Artis' office buildings to undergo redevelopment will be Sierra Place: a 92,000-square foot downtown office building of 10 storeys, constructed in 1958 and connected to the Plus 15 skywalk. Artis will spend $16-million to repurpose Sierra Place into 100 apartment suites. Construction will begin this fall and be complete by the end of 2018.
"With its downtown location adjacent to an LRT Station on 7th Avenue, Sierra Place is ideally suited for this redevelopment purpose," Mr. Martens says. "These will be purpose-build rental units, not condos. However, upon completion and lease-up the building may be sold, or a joint venture partner may be taken in, if it is deemed a good way to unlock shareholder value."
"We have identified three other similar sized downtown office buildings in our portfolio that have the potential to be repurposed, like Sierra Place," he adds.
Mr. Martens believes demand for rental units in Calgary's downtown merits the redevelopment.
"Relative demand is not as strong as Vancouver or Toronto, but it is fair-to-good, and improving, as the Alberta economy continues to recover and grow," he says.
"When one considers the significant amount of condos being built on the east side, rental units in the Beltline and the desire to build more new product as well as repurpose select office properties and when we consider urban initiatives such as dedicated bike lanes, pet- and children-friendly office buildings, it's clear that the positive urbanization momentum in Calgary has depth and an excellent trend line."
"The Calgary downtown is gentrifying very well," he adds. "I expect other office landlords will give consideration to repurposing some of their office properties as well."
Thom Mahler, the City of Calgary's Urban Strategy Manager, says Mr. Martens is right on that score.
"The current economic cycle has certainly given some building owners the impetus to assess the long term use of older office buildings and ask: Will the office market come back or is another use a better financial proposition? Residential is one of those uses that building owners are looking at as an option," he says.
"We certainly welcome the conversion of office buildings to residential uses. It would meet many of the city's, and other downtown stakeholder's, objectives," he says. "Residential uses support retail and restaurant sales and bring people to public spaces to enliven the city and increase perceptions of safety. A vibrant downtown with plentiful residential options is a significant advantage when trying to attract new companies and businesses to Calgary. Long term, this is a part of the strategy to diversify our downtown economy."
But whether or not Calgary's downtown residential market is big enough for everyone, he says, remains to be seen.
"We already have a healthy inventory of existing residential buildings downtown and there are many approved residential developments that have yet to start construction," he explains. "As a result, there's considerable competition for the downtown residential dweller which may make it harder to justify a residential conversion in Calgary compared to other cities."
While the city is unsure whether the residential market is big enough, Artis' recent Management Discussion and Analysis Report expresses greater concerns over the city's growing office oversupply.
The report concluded that despite "signs of optimism" in the city's economy, "more [office] supply will be delivered to the market from 2017 to 2019 which is likely to further increase vacancy rates. As such, we continue to closely monitor our assets in both Calgary and Alberta as a whole, and will be aggressive and creative with our leasing program."