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Sudbury Rocks, Regina Rolls Resource Demand Revives Dormant Real Estate Markets
March, 2008
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GOOD TIMING FOR DOWNTOWN REVITALIZATION
Buoyant economies present opportunities for new downtown business ventures and public amenities in Regina and Sudbury. City Councils in both cities have adopted revitalization schemes to push public and private investment in areas poised to reverse the decline of recent decades.
"Regina is definitely going through a period of prosperity and we want to make sure the downtown area is a beneficiary of some of that renewed prosperity in the community," says Barry Braitman, Manager of Planning Policy & Research with the City of Regina. "We don't want all the growth to be directed to the peripheral areas."
The City is developing a new plan for downtown Regina, but will also jumpstart initiatives this year with a $1-million public investment to create a plaza on a section of 12th Avenue bordering the Victoria Park - an iconic green space in the heart of the downtown.
"It is one of the nicest downtown parks that I've seen in any Canadian city," Braitman maintains. "Regina's downtown isn't a downtown that is oriented to a main street. It is a downtown that is oriented to a town square, and the town square is really Victoria Park and the streets that border it."
Other aspects of the planning process will focus on the neighbourhoods surrounding the central business district and ways to increase residential density. The City already has a longstanding five-year property tax exemption program for any new residential development in the core, whether created through conversion or new construction. However, downtown neighbourhoods still number only about 1,000 households.
"The high density office core is quite a compact area and the good part of that is it's very focused and has a lot of energy and integrity as an urban space. The downside is it does leave areas on the periphery of the central business district where the development isn't at the level we would like to see," Braitman reflects. "Probably the main thing [required] is to have a critical mass of population in the area that starts to support the services that then attract more people to move into the area. The significant one that we are missing at this point is food retail - a grocery store - which we don't have right now in the downtown area."
Investors making property improvements in downtown Sudbury are eligible for property tax rebates funded through the tax increment, which is the extra property tax revenue the municipality gains when a property's assessed value increases. This increment, or a portion of it, is turned back over to the property owner/developer for 10 years following the property improvement. "The only criteria, essentially, is to take an under-performing building or vacant lot and invest in it," explains Mark Simeoni, a Senior Planner for the City of Greater Sudbury.
Last summer, City Council also adopted a pilot incentives program for the downtown. This provides grants of up $5,000 for feasibility studies and design drawings, grants of up to $15,000 or 50% of the costs for façade improvements, grants of up $2,500 for new signage, and building improvement loans of up $50,000. Development proponents are also eligible for a 100% rebate of building permit and planning application fees.
Thirty-nine proponents, representing $1.5 million worth of projects, applied for the initial $250,000 allotted for the pilot program. City officials are now monitoring and assessing project results before deciding how to continue.
Zoning and planning parameters also allow for flexibility. "It's easier to gain permissions in our downtown than any other geographic of the city," Simeoni says.
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By Barbara Carss
Boom towns dot the map of Canada these days as worldwide demand for a range of commodities drives resource based economies. Rapid take-up of long vacant office space and serviced industrial land defines the recent real estate market in two of the most striking examples - Regina and Sudbury.
In the west, Regina is reaping the benefits of surging markets for potash, uranium, oil and gas. The Conference Board of Canada reports that 2007 was the best year for growth in three decades. The city's unemployment rate is forecast to drop to an unprecedented 4.1% this year. Last year was one of only three since the mid 1980s when new arrivals outnumbered departing residents, and this net in-migration is projected to continue with Regina's population expected to nudge up to about 204,000 in 2008.
"No components of the economy are struggling at this point," observes Dale Griesser, President of Avison Young Commercial Real Estate (Sask.) Inc. and Chair of the Board of Directors of the Regina Downtown Business Improvement District. "The last six months have been exceptionally active. At the same time, costs for land, services and labour remain comparably much lower than in Alberta so we are very, very appealing for new businesses that have need to relocate or expand."
In the east, the price of nickel and other metals underlies major gains in Sudbury's economy. Employment and incomes in the mining sector are on the upswing, creating spinoff benefits throughout the city. The two so-called majors - Vale Inco and Xstrata - and a handful of junior mining companies are expanding existing operations, bringing mothballed facilities back into production and/or opening up new deposits. This, in turn, has drawn more support services that require both industrial and office space.
"There was a time when they prayed for nickel to get to $3 a pound. Now it's around $12," says Paul Reid, a Business Development Officer for the City of Greater Sudbury. "There is all kinds of exploration activity occurring here in the basin. We've had expansion in our existing mining support sector and we have had new businesses coming into town. The service sector, the engineering firms, all those shops are expanding."
HUB CITIES
Both cities also benefit from a significant public sector presence that provides some diversity for weathering economic downturns. As the provincial capital, Regina is home to the Saskatchewan government and provincial Crown corporations. The University of Regina and the Regina Qu'Appelle Health Region are among other major employers.
"It's true that being the seat of government gives us a core industry that tends to be quite stable, but it is also possible to overstate the impact of government," suggests Barry Braitman, Manager of Planning Policy & Research for the City of Regina. "The majority of the labour force is non-government. Regina's role as a service centre has as significant economic impact as its role as a seat of government."
Sudbury is generally seen as the de facto capital of northeastern Ontario. With a population now hovering around 160,000 - up from the approximately 155,000 residents recorded in the 2001 Census - it is the largest centre north of Barrie and the urban conglomeration surrounding the Greater Toronto Area.
The city's post-secondary educational institutions, health care facilities, retail and distribution centres serve a sweeping outlying hinterland of towns, villages and resource extraction enterprises. The Ontario Ministry of Northern Development and Mines also operates out of headquarters in Sudbury.
"Sudbury embarked on this plan literally decades ago to become the Northern Ontario capital and there's no question it has achieved that," says Gregg Wassmansdorf, Manager of the Location Advisory and Incentives Practice with Colliers International. "The attraction of a place like Sudbury is that it is now big enough and diverse enough, with the stabilizing factor of the government activity, that more institutional money can be placed there with some certainty. The public sector can be a counterbalancing cycle to the wild ride the resource sector goes through."
CATCHING UP WITH THE TURNAROUND
Currently, landlords and developers are enjoying an upward trajectory they haven't experienced in some time. "Not that long ago in Sudbury we were looking at net rents of $12 per square foot whereas now they are up at $16 to $17 per square foot," reports Ed Masotti, President of Blue Spruce Development Corporation, a local specialist in developing and managing commercial buildings. "The economy in Sudbury is very strong. There hasn't been any significant office buildings built since about 1992 - and that's anything greater than about 20,000 square feet - so there is a real need for quality office space in the city."
His company will augment that supply with plans for Sudbury's first LEED (Leadership in Energy and Environmental Design) compliant office building. Construction of the six-storey, 72,000-square-foot building is set to begin in the spring of 2008 on a site within close proximity of the Sudbury Regional Hospital, which has been undergoing a major expansion and consolidation of services from other health care facilities in the city.
Masotti's speculative development signals his confidence in current market dynamics. "There is a lot of Class B and Class C space in Sudbury right now occupied by companies that are growing with no room to expand," he says.
He predicts the new Class A space will be sought by both the private and public sector. "With institutional and government tenants right now, they are pretty much mandated to go to green buildings first, if they are available," Masotti says.
Similar trends are apparent in sold-out industrial parks, as the City of Sudbury plays catch-up to get additional lands serviced and ready for development. While most of the office space is located within the traditional urban core, there is demand for industrial space throughout the sprawling 3,600-square-kilometre city, which was created in 2001 through the amalgamation of seven formerly separate municipalities.
"We are seeing development in all of the [former] towns. That's an indication of the strength of the market," Reid says.
Canada Mortgage and Housing Corporation (CMHC) found one of the lowest rental housing vacancy rates in the country - at 0.6% - in last October's annual survey of major Canadian centres. New hotel development is pending, and high-end retail is arriving - such as the 36,000-square-foot Harley Davidson dealership now under construction.
"Big consumer spending is way up so it is drawing a lot of the retail sector here too," Reid adds. "The restaurants are full and that's a sure sign that the money is going straight to the street."
DIVERSITY ADVANTAGES
Demographics are driving other kinds of investment that have resulted in the productive reuse of a number of abandoned retail spaces. "The fact that Sudbury is a strong French bilingual city has created a lot of attraction for companies that want to have call centres located outside Quebec," Wassmansdorf notes.
Beyond the urban centres of Montréal and Gatineau, Quebec residents are predominantly unilingual French speakers, leading many companies to search New Brunswick and/or Ontario for locations that can deliver a sizeable bilingual workforce. Recently released 2006 Census data reveals that nearly 28% or about 45,000 of Sudbury's residents are francophone. Although Ottawa boasts a much larger potential pool of workers with francophones representing 17% of the city's population, or about 187,000 people, other factors tend to weigh in Sudbury's favour.
"When you compare real estate and labour costs in the GTA or Ottawa versus a place like Sudbury, you can save a lot of money locating a call centre in Sudbury," Wassmansdorf says. "They are generally moving in and retrofitting generic office space or converting old retail. What they're looking for is space with that kind of open, unobstructed layout - even in neighbourhood or community strip malls where you'd find an old grocery store anchor."
REDEVELOPMENT TREND
Developers have also been snapping up abandoned retail sites in Regina. Within the past two years, Harvard Developments completed a $19-million conversion of the former downtown Hudson's Bay store into approximately 80,000 square feet of Class AA office space, and another Regina based developer -101036033 Saskatchewan Ltd - has invested $5.5 million to redevelop the former Army & Navy department store at the prominent corner of 11th Avenue and Broad Street.
After sitting vacant since 2000, the transformed three-storey, 27,000-square-foot building will be home to the offices of the Canadian Food Inspection Agency and Canada's largest Tim Hortons outlet when it reopens this spring. Now renamed Broad Street Crossing, it complements two other high-profile new projects on the same street: the seven-storey, 118-room Wingate hotel; and the new 160,000-square-foot Saskatchewan Transportation Company (STC) bus terminal and head office.
Altogether, the three projects represent a $44-million investment in what's seen as the strategic Broad Street/Saskatchewan Drive gateway. "It was a dead patch of street with vacant, dilapidated buildings and it has been totally revitalized," Griesser says.
Century West Development Corporation has now targeted the last large vacant retail site in the city's core, with plans to turn a 128,000-square-foot former supermarket into office and retail space. A new hotel and additional retail are also slated for the surrounding 12 acres.
The developers will strip the building to its structural frame and rebuild to accommodate 50,000 square feet of office space and 75,000 square feet of retail. "What we are looking at is similar to big box stores - probably three or four retailers, each with 10,000 to 30,000 square feet," explains Francis Bast, President of Century West Development.
Like the former Army & Navy store, the building has been vacant for about seven years. The Albert Street site borders the CN rail line that forms the northern boundary of what has traditionally been considered Regina's downtown and is adjacent to a large tract that is projected for redevelopment when CN's existing intermodal facility moves to a recently announced new suburban location.
"That's part of what makes this good timing," Bast says. "Our downtown is changing quite a bit. There are more people moving in, rental rates are higher and there's almost no office space available."
POSITIVE PROJECTIONS
Griesser predicts new office construction is imminent in Regina's business district. The vacancy rate for Class A office space now stands at 3 to 3.5%, with Class B vacancy in the 4 to 4.5% range.
"Potential redevelopment sites are very limited at this point and the economics to support new office buildings in the downtown core, in my opinion, certainly exists," he says. "There are no large blocks of space in excess of 25,000 square feet and there is only one 25,000-square-foot block. There has been a very significant increase in office rents in the last 18 months. We expect a 40% increase in rental rates in both Class A and B over a two-year period [since 2006]."
Industrial land prices have jumped dramatically - from about $90,000 per acre in 2006 to $160,000 per acre in 2007 when all the remaining available industrial land within the city's boundaries was sold. The City of Regina is now working to develop a new phase of its industrial park, and Griesser predicts prices will surpass $200,000 per acre in 2008. "It's supply and demand that's driving that," he says.
A similar shortage of residential land within the city is expected to stymie some development or redirect it to municipalities outside Regina in the coming years. For 2007, however, CMHC reports housing starts well above the previous 10-year average. Last year developers broke ground for 800 single-family and 550 multi-family units. Analysts predict 750 single-family and 400 multi-family starts in 2008, while the average price for new single-family homes is forecast to climb from $284,500 in 2007 to $320,000 in 2008.
Until quite recently, newly constructed condominiums were primarily townhouses, but more than half of last year's starts were apartment units. Bast, whose company specializes in both commercial and condominium development, calculates apartment condominiums have to command at least $200 per square foot before they are economical to build, and CMHC reports the majority of new apartment units were in the $160,000 to $180,000 price range in 2007. "I think it is at that point now," he says.
Prior to the boom times, conversions of former rental buildings had created much of the condominium apartment supply coming onto the market. Lack of supply and low vacancy rates - which make it difficult to obtain municipal approval to convert rental housing - have now shut down much of this activity. CMHC recorded a 1.7% rental housing vacancy rate in October 2007, down from 3.3% in October 2006.
Prospective investors face similar supply challenges in all real estate sectors, but it hasn't necessarily discouraged them. "From local entrepreneurs to REITs, pension funds and institutional investors, they are all looking to get into the market, and we have more demand from out-of-province investors," Griesser reports. "We've got more buyers than product."
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