Are new standards leaving you with an unrentable building?

AACI, FRICS | Vice President, The Regional Group of Companies Inc.
  • Aug. 26, 2015

The modern office bears little resemblance to the old. Private offices and even cubicles have given way to communal workspaces without assigned seating. The traditional boardroom has become a “collaboration space.”

John ClarkIt’s part of a trend toward densification. Employers with large workforces want to use their space more efficiently and reduce leasing costs by packing more people on a floor. In some instances there are more bums than there are seats to take them in light of the growing trend toward teleworking. When employees do come into the office, they log in at the nearest available workstation.

This is the reality for my nephew who works for a multi-national accounting and advisory firm. Even the public sector has jumped on the bandwagon, as demonstrated by the federal government’s new Workplace 2.0 fit-up standards.

But packing more people on a floor puts added strain on a building’s design and operation. The HVAC system may need an overhaul to handle the increased load and ensure occupant comfort. Existing elevators, stairwells and emergency exits may no longer meet building code requirements for occupant loads.

No longer up to snuff

Such busy places also need other features to create the illusion of space and avoid claustrophobic perceptions that erode productivity and can spike absenteeism. Higher ceilings, more natural light, lighter interior finishes and fewer walls need to be in the design. If you’re the owner of an older building with low ceilings, there may be nothing you can do to attract this tenant demographic.

This creates some substantial challenges for older buildings that may fall into the categories of class B or C. Buildings built for government tenants under old standards are especially vulnerable as they often feature low ceiling heights, bland exterior designs, limited or almost no parking and large floor plates that are difficult to subdivide into smaller units without leaving someone stuck in the middle without a window.

Tenants willing to lease an office without a window or enough parking for their staff and clients likely won’t expect to pay much.

In some cases, the best scenario is a retrofit and bringing the building up to today’s standards, at least, as far as it’s economically viable to do so.

But that viability depends on whether the building structure physically can be retrofitted, how well constructed the building was in the first place, and how well it has been maintained. Stakeholders must weigh the cost of a retrofit against the expected return in terms of the leasing rates that can be charged and the number of potential tenants.

At 169 Lisgar in Ottawa, for example, property manager District Realty, in response to a softer commercial market and growing demand for more living options downtown, has taken 30,000 square feet of office space once used by the federal government and others and converted it into high-end apartments.

The building will continue to have about 110,000 square feet of office space and 10,000 square feet of retail, creating a mixed-used property that has stabilized its revenue base through diversification.

Time for the wrecking ball?

But as I’ve written before, sometimes the only recourse may be to call in the wrecking ball and start afresh.

If a retrofit is cost-prohibitive, the building has a gloomy future of diminishing or negative returns. In some situations, the addressable market of potential tenants is small and the only way to entice them may be with discounted lease rates that may or may not cover the cost of keeping the lights on.

The modern office isn’t only about densification, either. Outside the multi-nationals with large white-collar workforces and government departments, smaller businesses want something fresh and new, too, but in a different way.

Take Canada’s e-commerce darling, Shopify, and its new digs here in Ottawa at 150 Elgin St., Performance Court. It’s a mixed-used development that features a Winter Garden and a first-floor art gallery as a lobby (my artist daughter-in-law has one of her works on display there).

In this case, the focus is on open and uncrowded workspaces rather than densification. Tenants like Shopify that gravitate here want something hip and trendy, not a dinosaur from the ’80s. Don’t confuse “retro” with “old.”

Maybe it’s time for an assessment appeal

So what’s the discontented owner or manager of a building showing its age to do?

In addition to the hard number-crunching required to weigh the merits of retrofit versus demolition, take another look at your property tax bill. Ask yourself if, based on your current market prospects, the taxes you’re paying on the property still pass the test of fairness.

If you’ve lost anchor tenants such as government because you no longer meet their standards, or if you’ve discounted your lease rates to retain tenants, the value of your property as a revenue generator has slipped, perhaps by a substantial margin.

That means the fair market value of your property has also fallen. Your property taxes are determined by an assessment that’s based on fair market value.

So if your property is no longer the cash cow it once was, odds are it’s no longer worth as much on the market. That means your tax bill should be lower.

While it may be meagre consolation, it’s still a sum of money that should remain in your pocket. Your chief recourse is to file an assessment appeal. As always, sooner is better because these things can take months, if not years, to wind their way through the system.

But regardless of whatever breaks you may be able to win on your tax bill, a loss of market value paints the same dim picture: the property in question is nearing the end of its useful life. If a retrofit can give it a fresh start, great; otherwise, the quicker you cut your losses, the better.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I’m also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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