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Future proofing: Strategic Group’s repurposing approach

The below article by Wallace Immen was published in the Globe and Mail. It explores the trend of repurposing older office buildings into new uses. Strategic Group’s leadership in office-to-residential repurposing is a perfect example of what is being done today and how it may be done in a post-COVID future. CEO Riaz Mamdani spoke with Mr. Immen about our strategy and how it is paying off. 

Future proofing: Upgrade fading offices or convert them to residential?

An aging 12-storey office building in Edmonton sat vacant after its tenants moved to a more modern building. The initial choices for landlord Strategic Group in a market with a glut of office space were to renovate in hopes of attracting enough office tenants to cover the operating costs or tear the building down and start fresh. But there was a third option: convert the building in a desirable location to a fully rented residential building.

It’s a reuse many owners of smaller, older buildings are contemplating across Canada in an office market destined to change in a post-COVID-19 economy, says Steven Paynter, principal at architecture and design firm Gensler.

“We’ve heard from clients in Toronto, Calgary and Vancouver that to future proof their buildings they will need enhanced air filtration, and more indoor and outdoor space for social distancing when they’re not working remotely,” along with elevator and energy efficiency improvements, Mr. Paynter says. “It means older Class B and C buildings might not be worth the investment to bring up to current needs.”

The shift to more modern and sustainable Class A buildings was happening even before the pandemic lockdowns. In Toronto, for instance, more than 10 million square feet in new office buildings is coming on stream in the next few years, according to data from commercial real estate information company CoStar Group Inc.

“A majority of that space is preleased; however, the tenants are coming from older buildings,” says Roelof van Dijk, director of market analytics for Canada at CoStar. Owners of downtown Toronto offices are already offering the most space for sublet in four years. There were 1.4 million square feet in leased downtown offices available for sublet in the three months ended June 30, more than double that of a year ago.

While the increase has so far only raised downtown office vacancy rates to 3.6 per cent, that’s the highest since the beginning of 2018. “We were expecting it to go up to 6 per cent before COVID-19 showed up, with the number of new commercial buildings coming on line,” Mr. van Dijk explains. “Now we are calling for somewhere between 7 and 9 per cent [in downtown Toronto]. Who’s going to take this space is the question mark.”

According to Mr. Paynter, “the answer can be that bad office generally makes for great residential.” Gensler has developed a scorecard to help asset holders evaluate conversion potential of underperforming buildings.

“A lot of hurdles that put buildings at a disadvantage in an era of open-concept offices, like small constrained floorplates divided into individual offices, can actually make them more desirable for residential,” he says. Once the interiors are removed, “you can get 10 to 12 units per floor in a good mix of sizes, which is what developers are mostly looking for in new residential buildings.”

Floors are thicker in commercial buildings and there are generally more and larger elevators than in a residential buildings. While a lot more plumbing and electrical needs to be added, office buildings tend to have higher ceilings, allowing addition of plumbing and ducts while maintaining a good ceiling height.

Once a building is vacated, “We can just go and attack the building all at once,” Mr. Paynter says. “It can take just a few weeks to remove a floor and a month to build it back. You’re seeing a 50 per cent savings over building new.”

Depending on the site, an office tower of up to 20 storeys could get converted in little more than a year.

A building still needs to have the right bones, though. If it isn’t easy to strip and rebuild, it may not be a strong candidate. Potential negatives include large lobbies, which can feel oversized, and very high ceilings, which would have to be lowered or they would feel very strange in a studio apartment, he notes. Very large floor areas and windows on fewer than three sides of the building area also drawbacks to dividing spaces into attractive residential units.

Calgary-based Strategic Group started planning residential conversions of four of its office properties as early as 2017 as the sagging oil economy deflated office demand in Alberta. “In Calgary we have a vacancy rate in excess of 26 per cent and even prior to COVID-19, we didn’t project a recovery of the office market for as long as 12 to 15 years,” says the company’s chief executive officer, Riaz Mamdani. “It created an opportunity to think a bit differently.”

The first project was e11even, an Edmonton building built in the early 1980s at 111 Street near Jasper Ave. It was completely vacant after the former tenant, Alberta Health Services, consolidated to a different building. That meant interior demolition could begin immediately rather than having to wait until leases expired.

“It’s certainly environmentally better. We have essentially changed 500,000 square feet of useless office space into places where people live and we’ve saved 50,000 tonnes of demolition material compared to tearing the buildings down and building new,” Mr. Mamdani says. “With a creative approach, we will have full occupancy earlier than waiting a dozen years for an office market recovery.”

(The strategy wasn’t enough to prevent 56 of Strategic Group’s 171 office, retail and residential properties from being placed under court-ordered receivership in January. While a court rejected Strategic’s appeal to restructure and put the properties under the supervision of receiver Alvarez and Marsal Canada Inc., Mr. Mamdani says he believes the residential strategy will ultimately help the portfolio recover.)

Residential conversion does entail some long-term risks as well, Mr. van Dijk cautions. If the downtown office market shows signs of rebounding strongly in coming years, it might be better to just hold onto a small building in a prime financial district location and ultimately build a bigger and better office tower.

But if the office market is permanently altered by the pandemic, it could also slow the trend toward downtown high-rise living. “If people start working regularly from home, might people just prefer to live in larger places in the burbs for less if they don’t need to be downtown?” Mr. van Dijk asks.

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CEO Riaz Mamdani on the market forces behind residential rental construction

The below article was recently published by the CBC as a look at the unprecedented increase in new residential rental being built in Calgary. As we open UPTEN for new residents, Strategic Group is a perfect example of a company responding to this growing real estate market. 

Discerning renters driving force behind upscale rental apartment construction in Calgary
Rooftop lounges, inner-city locations and new buildings are in demand for savvy renters

The apartment rental options in Calgary are getting a little more upscale.

Some real estate industry analysts are expecting a growth in the supply of purpose-built rental units across Calgary as several large projects, including some new towers with major investment behind them, are coming online.

Altus Group says it’s currently tracking 11 towers under construction in the city centre region, which will represent about 2,800 new rental units.

“What is surprising though is the fact that we’re seeing as much confidence in the rental market in Calgary to get 11 developers to go ahead all at the same time and that, I think speaks to confidence long term,” said Matthew Boukall with Altus Group.

Boukall said four of those buildings will be completed by the end of 2020.

He says they’ve been tracking rental construction trends for several years, including a surge of project completions in 2016, and that other Canadian markets are seeing similar trends.

Boukall said this latest wave of large rental buildings is driven by shortages of higher quality rentals, consumer lifestyle choices and investment demand.

He doesn’t believe it’s directly related to the current weakness in the condo market.

Strategic Group, another developer, has just opened a new, 39-storey building in the Beltline called UPTEN.

CEO Riaz Mamdani says it includes 379 rental units with main floor retail and a rooftop lounge. He said they have been surprised by the level of interest in the first weeks.

“We’ve had hundreds of inquiries, dozens of tours and dozens of tenants that have committed to moving in in the next number of weeks,” Mamdani said, adding that the rental market is changing with the times.

“Tenants are becoming significantly more discerning,” Mamdani said. “The dilapidated apartments that are out there that were built 50 and 60 years ago that are the majority of the apartment universe in Calgary are starting to become functionally obsolete, and people have a desire to move into the inner city, they want to be in highrises, and they want to be in brand-new places with amenities.

“That’s the future of apartment residential rentals in all cities including Calgary.”

Mamdani said these renters are choosing to pay a flat rate to rent, rather than wade into the market, according to the company’s consumer surveys.

“Our tenants that are moving into our new projects — and keep in mind these aren’t inexpensive projects — these tenants can afford their own homes, they can afford their own condos, they’re choosing to move into our rentals because we give them certainty, they know what it is they’re going to pay,” he said. “They can save their equity elsewhere. They’re not risking their life savings to invest in a market that has as of late been quite volatile.”

Mamdani says millennials are influencing the rental market.

“So, it’s the approach towards risk. It’s the impact of the millennial thinking on home ownership. It’s the millennial desire to be in the downtown core,” he said. “We’ve done a number of projects in Calgary and Edmonton that are residentially focused, because of the trend that we’ve seen towards people wanting to live in brand new apartments in whatever market.”

Both Mamdani and Boukall agree the trend is unprecedented.

“We haven’t in the history of Calgary had this number of residential towers or this volume of residential units that’s going to be entering the market,” Mamdani said.  “Calgary is following worldwide trends where people are excited and happy to live in highrise towers. That’s what our residents are looking forward to. That’s the experience they want.

“They want new buildings, big buildings with infrastructure, with a concierge, with a level of service, with COVID-19 safety rules in place. They want all of the air exchanges that a new building with new technology allows you to do, in order to be safe and healthy.”

Mamdani believe this trend toward higher-end rentals with amenities will continue in Calgary and Edmonton, adding that an inner-city location is one of the main drivers.

“There is a demand for apartment buildings, notwithstanding the 1,100 units that have been delivered in Calgary over the last year, our vacancy rate has actually decreased,” he said. “That also is the same for Edmonton.”

(Pictured: One of the new suites in UPTEN)

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Keeping our residential communities safe and healthy

Together, we have all worked hard to limit the spread of COVID-19. As soon as the pandemic began, Strategic Group acted to keep all our tenants and residents safe and healthy. This included following public health orders and recommendations. We kept in regular contact with our residents and tenants to share what changes we were making and the latest accurate information from the governments of Canada and Alberta.

As we closed high risk amenities like gyms and common rooms, we also started a thorough cleaning program that included disinfecting high-touch areas like elevator buttons and door handles at least once a day. Our building technicians and maintenance teams were also equipped with disinfection materials to clean throughout our buildings as they went about daily operations. Our after-hours cleaning teams also did weekly deep cleans that included sanitizing all common areas.

Now that we are entering a new normal, we have reopened amenities while we continue to keep a heightened level of cleaning in the common areas of our residential communities. The pandemic is still with us, so we must be vigilant as we clean and sanitize our homes.

Of course, our response to COVID-19 must be a collaborative effort. Thanks to all our residents who practice social distancing, wash their hands often and well, and stay in their homes when they are not feeling well. We are deeply grateful that such considerate people chose to live in our communities every day. Together, we will ensure a safe and healthy future for all of us.

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