A solution to YXE downtown office vacancy

As reported in our first quarter Saskatoon office survey, we currently have over 400,000 SF or 16.7 per cent vacancy in our Saskatoon downtown competitive office market.

Those numbers do include the vacancy within River Landing’s 185,000 SF East Tower which is nearing completion.

The numbers do not however reflect 40 per cent of the space yet to be leased within the 300,000 SF Nutrien Tower which has just recently started construction.

Once that additional vacancy is accounted for, we will be reporting core area vacancy in excess of 20 per cent.

Saskatoon’s office market is in transition.

The demand for new Class “A” inventory is coming from users already present.

There are not enough new tenants entering the market and the “flight to quality” is projected to continue.

Let’s talk solution.

A solution exists

A common solution that often enters the conversation is simply “reduce rental rates.”

There is another option that provides a more permanent fix. That solution is repurposing Class “C” buildings into either hotel, residential rentals or residential condominiums.

Class “C” buildings are best suited because they typically have the lowest cost base, possess the most inherent functional obsolescence, and will therefore be affected the most by this transition.

We are still a few years away from returning to the highs in revenue per available room that we last saw in 2014 in the Saskatoon hotel sector. Therefore, hospitality conversion is not likely to pencil.

The City of Saskatoon is keen to see an increase in residential density within the core area and offer incentives to encourage repurposing of existing vacant property.

Herein lies the logical solution.

Let’s look to Regina as an example

We researched Regina where their office sector represents around 50 per cent of their total commercial real estate development (Saskatoon’s office sector is close to only 25 per cent of the total inventory).

We estimate that since the year 2000, there has been approximately 375,000 SF of office space repurposed to residential use (1803, 1867 & 1914 Hamilton Street, 1839 Scarth Street and 1901 Victoria Avenue).

That represents almost our entire current vacancy.

I don’t represent this to be an easy solution. It requires relocation of existing tenants and a significant commitment of capital.

We see ongoing chronic vacancy in Class “C” office property.

The options are: do the work and pay the price now; or endure the pain for many years to come.

Another issue worth mentioning

I know I said I was going to talk “solution” but as a final note I just couldn’t let this opportunity to rant a bit about Innovation Place.

Their website states, “Innovation Place helps grow Saskatchewan’s tech sector and provides a supportive environment for start-up and early stage technology companies.”

There is truth to that statement. As a university-related technology park, it serves a useful purpose to our education and business communities.

Where the disconnect takes place is they have approved occupants such as engineering firms who would be much better suited to downtown office buildings.

Firms who, if not permitted to occupy space in Innovation Place, would have gone a long way to fixing our current downtown vacancy issue.

A mistake made by a previous provincial government that has not yet been fixed by any subsequent administration.

I welcome your comments, or any thoughts you may have on other potential solutions to the challenge we face in core area office vacancy.

This issue, without intervention, will be with us for some time.

Posted by Barry Stuart

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