Payback time - Article from Atlantic progress

After years of stagnation, commercial property owners in Atlantic Canada are making money again. But is the competition for prime space getting too strong?

These are good days to be in the commercial real estate business. Thanks to a buoyant economy, property owners are finally seeing returns on their investments, with rental rates up and vacancies down. But the good times aren't creating a lot of new building activity. Instead, the market is still absorbing the demand, often through the redevelopment of existing properties.

Supply, demand, and coming up empty. Paul Brown is president of Royal LePage Commercial Eastern, which has offices in Nova Scotia, New Brunswick, and Newfoundland. He says the region's economy could be headed for a crisis within a year because of a lack of quality office space for new and growing businesses and a severe lack of support for new construction. "We have plenty of developers who would love to build right now," he says. "But it's a question of getting the money." Prior to 1990, there were close to 40 mortgage suppliers operating in Atlantic Canada. Now there are only a few.

The strain caused by the difficulty in locating capital is beginning to show in centres like Moncton, New Brunswick. According to a market survey from last October, the city's overall vacancy rate dropped from almost 6% in March 2000 to just over 3.5% over a period of only six months.

Similar examples can be found in places like St. John's, Newfoundland. There, new construction projects are being held back by a large supply of older buildings, which are being renovated for new uses. "The vacancy rate is doing down, and rents are coming back up to where they should be," says Brown. "They aren't in a crisis right now."

But that's not to say problems aren't looming. Brown's company recently put Convergys, a U.S.-based call centre, into a refurbished shopping centre. "That was the last contiguous 90,000 square-foot space in the city." Brown says. "It's going to be a real problem for Newfoundland to compete for high-tech firms and call centres without a place to put them."

Moving out, not up. According to Michael Turner, president of Turner, Drake and Partners, a Halifax, Nova Scotia real estate consulting firm, that province's capital city is finally recovering from a terrible decade for landlords. "Usually when a recession hits, building owners will hold their rental rates and let vacancy rates rise," he says. "but in the 1990-91 season, Purdy's Wharf lost its nerve and reduced its rates, and everyone else in the city followed their lead. So even though we have seen a 40% increase in rents over the past year in Halifax - to about $18 a square foot - we are still below market. You can't build new space for that kind of money, so you won't see much new space until we reach $20."

Another factor depressing downtown rental rates is urban sprawl. Once the obvious place to set up shop, downtowns are facing stiff competition from the outskirts. According to Bill Greenwood, principle of Greenwood Lane Inc., a Halifax commercial brokerage and development company, the city can expect to see much of its future building activity in suburban settings. "There are a huge number of businesses that want a Class A type of space, but don't have to be right downtown, next to their lawyers and bankers and such," he says. "There's a great demand for campus-style space in the surrounding industrial parks." Greenwood says these sites also help workers to better enjoy the city's much-touted quality-of-life advantages, which include green spaces, recreational areas, and plush residences.

Tim Banks, president of Charlottetown, Prince Edward Island - based APM Group, says the strong economy is opening development opportunities in smaller centres, in some cases, for the first time. He points to the new Atlantic Superstore in Montague, P.E.I. as a prime example. "Ten years ago, it's questionable whether anyone would have even considered that sort of move," he says. "Retailers are becoming much more sophisticated in creating targeted products for different types of markets. And that's good for the communities."

Hot markets and cool heads. Paul MacNabb, vice-president of Fredericton, New Brunswick-based Greenarm Management Ltd., a property management and commercial real estate firm active across New Brunswick, says the competition for the best real estate in the province can have a positive effect on New Brunswick in the long run. He says the tight market, from a landlord's perspective, is a good thing. While property owners aren't necessarily charging higher rents than they did a few years ago, they are achieving lower vacancy rates and are under less pressure to offer inducements to attract tenants. "It means a little more money in their pockets," he says.

He expects creativity, rather than a new building boom, to take root in the province. "My instinct is that there isn't the need," he says. "If you look at the new businesses that are coming to New Brunswick that really gobble up space-call centres, back-end service providers, businesses like that-you'll find they aren't necessarily looking to be downtown."

Clearly, the commercial real estate industry is content to enjoy the good times, thanks to its earlier investments. In fact, MacNabb's opinions on New Brunswick could act as a caveat for the entire region. "Economies have cycles; the good times never last forever," he says. "The damage that happens when we bottom out is often compounded by overbuilding. So far, I haven't seen that happening, and I expect to see the restraint continue.

- Mark Higgins
Article from
January/February 2001, ATLANTIC CHAMBER JOURNAL