The Globe and Mail reported last week that Stantec Tower is for sale. Not only is the still-under-construction tower on the market, but Edmonton Tower, also owned by Katz Group and ONE Properties is also for sale.
The sale of both office towers is being spear-headed by the RBC’s Capital Markets real estate group with the Globe and Mail suggesting the asking price will be in the vicinity of $500 million. Each.
What’s interesting about this potential sale is last year’s sale of 4 office towers that amounted to a $160 million loss after 6 – 7 years of ownership. In a time where the office market is faced with rising vacancy and pressure on prices, the Katz Group and ONE Properties what might appear to be a huge premium.
In the article in the Globe there is also chatter and industry commentary about how Edmonton isn’t Toronto or Vancouver. While that fact isn’t lost on us, it does undermine some very basic economics of real estate investing. While there are exceptions, most prudent investors will purchase real estate on the basis that it will produce a certain level of income for the foreseeable future. Some might do some “back of the envelope math” to determine if the net operating income (the revenue coming in after the building’s operating expenses have been paid) corresponds to a capitalization rate that they are comfortable with. For example, if a building has $1M in net operating income and the asking price is $15M, the cap rate would be roughly 6.67%. Investors will vary in terms of what cap rate they want to hurdle, but they will all want to know that the rate can be sustained – or improved – over time. Edmonton Tower has the City of Edmonton as the main tenant and Stantec Tower will have Stantec. Notwithstanding the uncertainty of the remaining vacancy, an investor will be reasonably assured that both of these tenants will be able to pay their rent for the balance of the lease term. Once an investor has satisfied themselves on these simple terms, they will likely proceed to do much more sophisticated analysis. This will likely include discounted cash flow analysis to determine the internal rate of return and the net present value. There will be increased scrutiny on the vacancy and credit loss allowance, as well as a line item for structural reserves. Of equal importance, an investor will build out their pro forma with an expectation that the rent can be achieved over a long period of time (ie. 10 – 15+ years). If this analysis checks out, an investor looks at the numbers and balances it against the risk.
It is our opinion, therefore, that the investors that are willing, ready and able to purchase a building or two of this size won’t be concerned that this isn’t Vancouver or Toronto. Investors might not apply the same cap rate to this portfolio if it were in another market, but the fact that it is in Edmonton should not be a deterrent for major investors. Nor should the sales from last year as a recent office sale showed they were truly outliers.
These are class A office properties with very strong tenants, and Edmonton is still a major metropolitan area in Canada.
We suspect we’ll be reporting about these sales in a couple of months.
Chad is a partner with NAI Commercial and has finished as a top 15 producer Canada-wide for the past three years. Chad owes his success largely to his commitment to uncompromising client representation, his active involvement in the real estate and business communities and a lifelong pursuit of continuous learning.
Ryan is a partner with NAI Commercial Real Estate in Edmonton. He is currently ranked nationally as one of NAI’s top advisors in Canada. Having completed his Bachelor of Commerce majoring in Finance, his eye for detail and great understanding of the numbers associated with any business decision makes him an asset to his clients while providing them the highest level of service.
Darcie began her career in Commercial Real Estate after completing her studies in Business Administration. Her personable nature coupled with a results-driven attitude is a perfect match for customers. Darcie understands the importance of delivering a custom, accountable solution for her clients.
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