The formula for repositioning aging buildings can vary, but the rationale is almost always the same — perceived opportunity to extract more value from a slipping asset. Whether an iconic Class AAA commercial tower facing younger competition, suburban back-office space losing its anchor tenants or functionally challenged warehousing, investment managers work from the same premise.
“The only thing we really care about is the bottom line,” Greg Spafford, managing director with LaSalle Investment Management, told seminar attendees at the recent PM Expo in Toronto. “It’s our responsibility. It always comes back to (the fact) we are fiduciaries. We have to look after our investors’ money.”
Nevertheless, investors themselves frequently have environmental, social and governance (ESG) requirements that are factored into decision making. This can also translate into asset improvements that help deliver better returns.
“Sustainability has to be distilled into something financial,” Spafford said. “If a building is green, does that mean it is going to lease for more money? If a building is green, does that mean it won’t be vacant as long?”
Spafford and co-presenter, Fabienne Lette, a financial analyst with LaSalle Investment Management, used examples from their own business to illustrate various successful repositioning scenarios. Capital investment to help differentiate buildings from others in the same property class and/or geographic locale has proved successful. However, both presenters reiterated that, ideally, they’d prefer to do nothing — a situation that tight markets, such as those in Calgary in recent years, sometimes afford.
“That may have resulted in investors not having to spend a lot of capital to keep buildings full,” Lette observed, while noting that falling oil and gas prices may change that picture.
Covering the gamut from incremental upgrades to comprehensive overhauls, Spafford and Lette contrasted projects that have benefited from tapping into new demand in niche markets versus those in defensive mode to hang on to their traditional dominant status. In the case of vacant Class B space on the edge of Toronto’s downtown financial district, Spafford saw the potential to lure creative professions from smaller buildings.
“Lots of tenants are getting pushed out of brick-and-beam for condo development or they’ve just outgrown it,” he reported.
Repositioning occurred through a conscious effort to create a ‘cool’ ambience in what had been rather staid space housing financial services administration. Forging a partnership with the first incoming tenant — an architecture firm — LaSalle committed capital to the firm’s fit-out in exchange for an agreement to show the new-look space as a model suite to other prospective tenants.
“They knew what they wanted and we just gave them money,” Spafford explained.
Moving toward the top of the city, the first steps in transforming a commercial complex at the intersection of major highways fell into what he typifies as the “no-brainer” category.
“In the first month we were in, we had the trees pruned and the garden overturned so the place looked better,” he recounted. “It’s about trying to make people feel better about where they work.”
Conducting deferred maintenance and implementing operational improvements are likewise no-brainer measures.
“If they’re older buildings, chances are there are building systems that are going. As you replace them, put in something better,” Spafford advised. “By managing and maintaining things better, you can be more competitive just through small incremental investments, and we’re not breaking the bank here. When you get double or triple payback for variable speed drives or better lighting, it’s easy for the asset manager to make that decision.”
The investment managers opted to pursue LEED for existing buildings (EB) in both cases, but for somewhat different reasons. Downtown, it was considered necessary, while in the suburbs, it was a market differentiator seen as a draw for corporate tenants with ESG requirements.
“Generally in Toronto, LEED is a cost of entry,” Spafford acknowledged. “It puts you on the same level as other players.”
Turning to mega-projects, Lette cited Cadillac Fairview’s $360-million redevelopment of the Rideau Centre retail mall in downtown Ottawa — an intervention, she maintained, aimed at ensuring a property functioning at its highest and best use would continue to do so well into the future. Clearly, such decisions aren’t made lightly, as Lette tallied several other associated costs such as operational downtime during renovations and potential spinoff losses for commercial retail units if the mall’s anchors are affected.
“It’s more than just a $360-million renovation. It’s a reduction in income,” she said. “It’s a very expensive and time-consuming process. If you’re spending $360 million, how much extra rent do you need? How much downtime can you afford?”
Recent major redevelopments of traditional star-performer office towers fall into the same category. Conventionally seen as automatic addresses for leading blue chip tenants, owners/managers of once dominant buildings now face the choice of lowering rents or upping their game to take on aggressively emerging new competition.
“You don’t get to this point of decision making unless you have a big problem,” Spafford reflected — noting that a drop in income-per-square-foot can be equivalent to vaporizing hundreds of millions of dollars of asset value. “Instead of vaporizing it, they’ve decided to spend it.”
Barbara Carss is editor-in-chief of Canadian Property Management.
