Record-breaking years of growth in Canada’s life-sciences sector has turbocharged the demand for laboratory real estate in an acutely undersupplied market.
These market fundamentals have attracted the attention of investors, who, prior to 2020, had no real presence in a class of real estate traditionally owned by universities and hospitals.
“It’s definitely the hot asset to be chasing right now,” says Robin Buntain, a principal at Avison Young’s Vancouver office, specializing in sales and leasing.
“The investor community wants to diversify away from the softening office market,” he says. Lab and medical manufacturing real estate – national vacancy for which “is basically zero” – is the new “sweet spot for investors. It’s fascinating how quickly this has happened.”
Now, nearly 5.4 million square feet of purpose-built lab space is proposed or expected to be delivered across three Canadian cities by 2027, according to a new report by commercial real estate firm JLL.
While Toronto dominates the life-sciences market in Canada in terms of existing building inventory, “Vancouver leads in future supply – with more than double the amount of new space in the works compared to Toronto,” says Scott Figler, JLL’s national research manager for capital markets in Canada.
Driven by technological leaps in areas such as personalized health care, regenerative medicine, genomics and synthetic biology, not to mention a global pandemic that ushered in historic levels of funding for some companies, “Vancouver has seen the most life-sciences job growth in Canada,” says Mr. Figler. “The city has seen more than 7,000 new jobs in the past 10 years, compared to Toronto, which has added around 3,000.”
Vancouver’s planned 2.9 million square feet of lab space nearly equals its entire existing market.
About 80 per cent of this development – spearheaded by some of the most prominent names in the industry, including Beedie, PC Urban and Westbank – will be located in the burgeoning Innovation District, just south of the downtown core.
Mr. Figler says optimism about the wave of new supply in Vancouver as well as across the country comes with caveats.
It is currently “far more expensive” for developers to lock in financing and build than it was a year ago, owing to rising interest rates and lofty construction costs, he says.
Lab space, he adds, can be the most costly of all real estate classes to construct because buildings typically require at least double the structural frame strength, compared to offices, in order to support lab equipment weight and to eliminate vibrations which could ruin sensitive experiments.
Ceilings must be at least 14.6 feet high (compared with the office industry standard of 10 feet) to accommodate large equipment, such as autoclaves and cold storage, and its ventilation – and more power is required to run it. (Standard research facilities can draw triple the watts per square foot compared to computer-filled office space, according to Stanford University’s Laboratory Standards and Design Guidelines.) In addition, backup generators are essential in case of power outage.
“A lot of times you can tell by looking at satellite images and the HVAC [heating, ventilation and air conditioning] system on top of a building – if it looks really souped up, that’s a good indication that it’s a lab building,” says Mr. Figler.
Elevated development costs and a tenant pool comprised in part by unproven biotech startups, can make investment risky, he says.
To thrive, investors and developers “have to think like scientists,” he adds.
“Developers who are successful aren’t just projecting costs and revenues,” he explains. “They have in-house scientific understanding; they understand what the tenants are working on and are able to assess the probability of, say, a certain gene therapy getting clinical trial approval or another round of venture capital funding.”
For Montreal developer Jadco Corporation’s first life-sciences complex in the city’s downtown core, called Inspire Bio Innovations, the 35-year-old company partnered with anchor tenant, global clinical research firm CellCarta, for phase one of the project. Then it hired CellCarta’s senior vice-president to manage the next two phases of the $350-million, 450,000-square-foot state-of-the-art laboratory.
“At CellCarta, I became an expert in facility systems,” while supervising lab development in many countries, says Normand Rivard, managing partner of life sciences and innovation at Jadco.
“There’s nothing more precious than a blood sample from a patient with a rare disease,” he says. The building and the mechanicals to protect it are crucial and “Jadco takes that very seriously.
“We want to build the best facility with everything that a biotech or pharma company needs to perform their delicate and critical operations.”
With completion for the centre set for late 2027, no tenants have yet signed on.
“But there’s already very high level of interest,” says Mr. Rivard. “We’re confident we’re going to fill the building in a flash.”
In Vancouver, Low Tide Properties, which already operates five life-sciences buildings, calls itself the city’s largest landlord in the life-sciences space. The company, which also owns multifamily properties, is set to add another eight-storey, 218,000-square-foot life-sciences building, Lab 29, in the Innovation District.
Low Tide views itself as “a partner” for tenants, says Adam Mitchell, vice-president of asset management and development.
It’s critical that the infrastructure at those buildings is working flawlessly so tenants don’t have an interruption during a major experiment, says Mr. Mitchell.
“Our building operators have specialty training in running a life sciences building,” he says. “We’ve also had good staff continuity, so they’ve been able to hone those skills and make sure that they’re adding a value to the property.”
Architecture and design firm BDP Quadrangle committed to move to a new office in downtown Toronto in 2019, just a few months before the pandemic lockdown introduced everyone to the alternative universe of working remotely.
The timing could have been better, but it proved to be an opportunity.
Before the firm moved in last fall, it was already clear that, with many employees working remotely, the company could get by with less space than planned and has since subleased half of one of its two 20,000-square-foot floors in the Well at Front and Spadina.
Caroline Robbie, principal at BDP Quadrangle, says the upheaval provided an opportunity to experiment with strategies aimed at managing the company’s 232 employees toward what is likely to be a hybrid future.
Furnishings and technology were designed to be moveable to adapt to changing needs; employees are free to work in any area that suits their preferences. On a typical day, between 75 per cent and 80 per cent of the office is fully occupied.
Even pre-pandemic what we’ve always said is don’t let a crisis go to waste. The pandemic provided an opportunity to re-examine everything we took for granted about workplace design.
— Andrea McCann, associate and lead interior designer at BDP Quadrangle
That attendance is significantly higher than in many offices across Canada, and after a year of wait-and-see in the aftermath of the pandemic, companies are experimenting with what is being called “micro-architecture,” adding furnishings and amenities that make coming into the office worth the commute, says Lisa Fulford-Roy, senior vice-president of client strategy for CBRE in Toronto.
“Without changing anything in the work environment, it will be very difficult for employers to signal that the purpose of office has shifted to engagement and is not necessarily for activities that employees could do at home,” she says.
It’s also the landlords who need to be concerned that if a building doesn’t offer amenities companies are going to need going forward, tenants will be looking to move.
CBRE’s Canada Real Estate Market Outlook 2023 highlighted re-evaluations of space requirements in the tech industry and financial sectors that have seen sublet space rise nationally for three consecutive quarters, to equal 3.4 per cent of existing office inventory.
According to the report, the overall national office vacancy rate increased to 17.7 per cent in Q1 of 2023, with vacancies rising in both downtown and suburban segments.
“Even prepandemic, what we’ve always said is don’t let a crisis go to waste,” says Andrea McCann, associate and lead interior designer at BDP Quadrangle. “The pandemic provided an opportunity to re-examine everything we took for granted about workplace design.”
The company is continually consulting with its teams to understand their needs and the evolving ways they use office space, she says. “We want to learn where people tend to congregate and whether we need more meeting spaces, casual spaces or something entirely different that we haven’t figured out yet.”
Flexibility has become a key feature. While there are traditional work areas with unassigned desks, many of the work areas are flexible to do double or triple duty.
Video monitors are on stands with wheels to allow for easy relocation. Workspaces that have good city views and natural light can be enclosed with curtains for soundproofing and privacy during meetings. Even a podcast room is set up with broadcast-quality sound and lighting for presentations.
Tech additions include a booking system to reserve and track workstation and meeting-room use. BDP Quadrangle went a step further and created a calendar of every event that is happening in the days ahead.
An area dubbed the Back Alley has become one of the more popular spaces in the office for impromptu discussions. “In a traditional office design, this would have been the big boardroom area that everybody would dread going into because it’s in the centre of the floor and doesn’t have windows, but people now use it for group meetings and critiques and break-room sessions and celebrations,” Ms. McCann says.
For concentration and focused discussion, another interior space, the Black Box, is devoid of colour or any distraction. “We intentionally designed this space to be simple,” Ms. McCann explains. “And while other parts of the office are full of natural light, with windows and views, we kept the Black Box as a visually quiet space to allow high-profile meetings to feel focused and purposeful.”
The Oasis, a quiet zone designed to inspire and reinvigorate, has lounge furnishings, abundant plant life and some of the best views of city, while a break room and kitchen area – the Community Hub – was deliberately left unfinished with mobile tables and chairs that can be easily rearranged.
The plant life that extends from the Oasis throughout the office is proving to be an incentive for attendance. About 20 employees who may not have the space at home to grow plants have volunteered to tend them and it has become one of the reasons they like to come in regularly, Ms. Robbie says.
“The amount of press around what the workplace of the future will look like was so overwhelming that we’ve seen business leaders just frozen with fear because these can be huge investments,” Ms. Robbie says.
“It’s going to be a couple of years before we really see how this cycle that started in 2020 is resolved,” she adds, “so, I think everybody needs to calm down and not expect to have all the right answers but continue to test and try new things. The experiment needs to continue.”
Allied Properties is selling its urban data centre portfolio in downtown Toronto to a Japanese telecommunications company for more than $1B.
Allied Properties Real Estate Investment Trust announced on Wednesday that it has entered into an agreement to sell its network-dense, carrier-neutral urban data centre portfolio to KDDI Corporation for $1.35B, $118M above International Financial Reporting Standards (IFRS) net asset value.
The portfolio consists of freehold buildings at 151 Front Street West and 905 King Street West, as well as a leasehold at 250 Front Street West. The properties are connected thorough high-count, diverse fibre, which, according to Allied, enables them to “support more telecommunication, cloud, and content networks than any other data centre portfolio in Canada.”
The sale, which is subject to Competition Act approval, is expected to close before Q4 2023. Allied plans to use roughly $1B of the proceeds to retire debt, while the remaining funds will be directed towards upgrade and development activity through early 2024.
“The sale proceeds will enable us to fund near-term growth, primarily in the form of upgrade and development completions, while maintaining unprecedented levels of liquidity and targeted debt-metrics,” said Michael Emory, Allied’s Founder and Executive Chair.
“In the longer-term, we plan to take advantage of a broader range of funding opportunities than we have in the past. Regardless of how we fund growth going forward, we’ll remain fully committed to our distribution program.”
After exploring a “variety of monetization alternatives” for the urban data centre portfolio in the second half of 2022, Allied determined the best course of action, both financially and operationally, was to sell it in its entirety.
A comprehensive sale process began in January 2023, with Scotiabank and CBRE as exclusive agents. The companies contacted 97 potential buyers across the world, which culminated in final bids on June 2.
KDDI is a Fortune 500 company that owns and operates data centres in more than 60 cities across the United States, Europe, and Asia through its subsidiary, Telehouse. The data centre company hosts more than 1,000 connectivity partners, including major mobile and content providers.
The company’s global data centre operating capabilities make KDDI “an ideal successor owner-operator” for Allied’s urban data centre portfolio, noted Emory.
“[This is] an exciting investment which will enhance connectivity capabilities for Canadian businesses,” said Yasuaki Kuwahara, Member of the Board, Senior Managing Executive Officer, and Head of Business Solution at KDDI.
“With many North American organizations accelerating their digital transformation and innovation initiatives, we’re delighted to be able to play a part in their success, offering reliable, scalable, flexible, and secure services to modernize and future-proof IT environments.”
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Despite ongoing struggles in the office market, Canada’s commercial real estate sector is poised to see an “upswing in demand” as strong industrial and retail markets drive growth.
RE/MAX Canada’s 2023 Commercial Property Report, released on Thursday, details the “positive indicators” that emerged in the sector in Q1, even as investment activity remained cautious.
Q1 2023 marked the return of real estate investment trusts (REITs) to the market, which RE/MAX said is driving demand for industrial, multi-family, retail, and, to a lesser degree, office space, across Canada.
“I think the outlook certainly looks good, particularly when we look at industrial warehousing and, office is going to sort itself out,” Elton Ash, Executive Vice President of RE/MAX Canada, told STOREYS.
“The jury is still out, my crystal ball is still foggy, but there is a sense that a recession may have been dodged. From a long-term point of view, things are looking positive. There is an overall confidence in the Canadian financial sector.”
The “sweetheart investment,” as denoted by RE/MAX Canada President Christopher Alexander, was industrial, which outperformed nearly every other asset class and saw all markets report strong sales and leasing activity.
With property and lease values on the rise, investors and end users in British Columbia and Ontario began to look to other provinces for affordable distribution and warehousing facilities. As such, industrial sales have risen in a number of markets, including Edmonton, Calgary, and Halifax.
Although demand has softened in most markets from the peak levels seen in 2022, industrial inventory remains “extraordinarily low,” adding increased pressure on prices.
Despite the growth of online sales throughout the pandemic, the retail sector was “surprisingly robust,” with nearly 92% of markets reporting solid activity in shopping centres and storefronts. As a result, landlords are “pouring” investment dollars into major shopping malls.
There is also increasing interest in shared live-work-shop spaces, with the number of residential applications on commercially zoned properties on the rise across Canada.
Meanwhile, the office sector, which Alexander called the “most lacklustre segment,” continued to struggle as hybrid work models persisted. In an effort to reduce costs, some companies are looking to reduce their physical footprint, while others are seeking to create social spaces in the hopes of enticing employees back to their desks.
With demand dwindling, there is growing interest in repurposing office space — particularly Class B and C buildings — into residential housing. In what may be the “key to healthy, vibrant downtown cores,” 50% of markets reported conversion activity in the segment.
“Commercial office markets are experiencing a transformational shift in the aftermath of the pandemic,” Alexander said.
“The retrofit and renovation activity not only brings desperately needed residential product online, but it also supports the surrounding retail shops and restaurants, transit systems, and the overall health of our downtown neighbourhoods.”
The report points to a plan currently underway in Calgary, which provides a $75 psf subsidy to developers for converting office space to residential. To date, 10 buildings have been approved under the Downtown Calgary Development Incentive Plan, which will create more than 1,200 new homes.
However, red tape, in the form of zoning amendments, applications, and approvals, is a significant setback to conversions in many cities. Alongside development fees, red tape has also been a barrier in “all types of new construction.”
“All three levels of government need to come together to look at an overall real estate strategy, and figure out how we can speed up these commercial conversions,” Ash said. “That product is just sitting there, while the housing stock reaches critical levels across Canada. Even from a landlord and development perspective, let’s get some ROI.”
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Allied Properties REIT has announced an all-cash agreement to sell its Toronto-based Canadian data centre portfolio to Japanese telecom firm KDDI Corporation for $1.35 billion.
The portfolio includes freehold interests in 151 Front St. W. and 905 King St. W. and a leasehold interest in 250 Front St. W.
The agreement comes five months after Allied (AP-UN-T) announced its intention to sell the properties, which comprise a major hub for Canadian internet operability.
KDDI is a Fortune Global 500 company which owns and operates data centres in Asia, Europe and the United States through its subsidiary Telehouse.
As a carrier-neutral data-centre provider, Telehouse hosts more than 1,000 connectivity partners, including leading internet exchanges, Tier 1 carriers, major mobile, cloud and content providers, enterprise and financial services companies.
“With global data-centre operating capability, KDDI is an ideal successor owner-operator for our UDC portfolio,” Michael Emory, Allied’s founder and executive chair, said in the announcement Wednesday morning.
“We’ll work closely with KDDI over the next 18 months to transition local expertise in relation to the portfolio.
“We’ll also work collaboratively with KDDI as the site for Union Centre continues to evolve toward the large-scale development of urban workspace in the coming decade.”
Emory was also Allied’s CEO when the sale process was initiated in January. He has now stepped back from that role and Cecilia Williams has taken over as president and CEO.
The sale price, Allied reports, is $118 million above its IFRS net value. The REIT intends to use $1 billion of the proceeds to pay down debt and the balance to help fund its upgrade and development plans over the next two years.
The REIT will also make a special distribution to its unitholders as of Dec. 31 due to the significant tax implications of the sale. Details on the distribution will be determined at a later date.
Allied describes the data centres as “network-dense and carrier-neutral.”
“Allied has connected the properties through high-count, diverse fibre, enabling the portfolio to support more telecommunication, cloud and content networks than any other data-centre portfolio in Canada,” the announcement states.
The portfolio is unencumbered and the sale does not include 20 York S. or Skywalk, a 2.5-acre site for its Union Centre development that is zoned for just over 1.3 million square feet of urban workspace.
“As a public real estate entity committed to distributing a large portion of free cash flow regularly, we’ve funded growth primarily through equity issuance,” Emory said in the announcement.
“The sale proceeds will enable us to fund near-term growth, primarily in the form of upgrade and development completions, while maintaining unprecedented levels of liquidity and targeted debt-metrics.
“In the longer-term, we plan to take advantage of a broader range of funding opportunities than we have in the past. Regardless of how we fund growth going forward, we’ll remain fully committed to our distribution program.”
Allied acquired 151 Front in 2009 and has subsequently added 905 King and 250 Front to the portfolio.
It undertook a review of monetization alternatives for the portfolio through Scotiabank in the second half of 2022 before determining the best course of action financially and operationally was to sell the portfolio in its entirety.
Scotiabank and CBRE Limited led the sale process, contacting 97 potential buyers worldwide and conducting a multi-round process which culminated in final bids on June 2.
The sale is expected to close before the end of Q3 2023, subject to Competition Act approval and customary closing conditions.
Pending completion of the sale, Allied expects its total indebtedness ratio to drop to 32.7 per cent, its net debt as a multiple of annualized adjusted EBITDA to be 8.0x and its interest-coverage ratio to be approximately 3.0x.
Allied also expects its net debt as a multiple of EBITDA will decline steadily over the next three years as elements of its large-scale development activities are completed and the assets begin providing revenue.
“Our debt-metrics will be back within targeted ranges and will continue to improve as our upgrade and development activity drives EBITDA growth,” Williams said in the announcement.
“The transaction will also be accretive to FFO and AFFO per unit, as the interest savings will more than offset the decline in NOI resulting from the sale of the portfolio.”
Scotiabank, CBRE and Aird & Berlis LLP are acting as advisors to Allied in connection with the transaction.
BofA Securities, Borden Ladner Gervais LLP and Nishimura & Asahi are acting as advisors to KDDI in connection with the transaction.
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Primaris REIT has agreed to a “landmark” acquisition of the Conestoga Mall in Waterloo from Ivanhoé Cambridge for $270 million.
The 585,000-square-foot regional shopping centre sits on 49.8 acres of land and features a range of major retailers including HBC, Galaxy Cinema, Sport Chek, Indigo and H&M. It is shadow-anchored by a Zehrs food store with direct access to the mall.
One key feature of the centre is regionally unique retailers including Apple, Lululemon and Nespresso, with other notable tenants including Aritzia, Sephora, Aerie, Old Navy and RW & Co.
“This landmark transaction is the culmination of months of collaboration with Ivanhoé Cambridge, and further validates and demonstrates support for Primaris’ platform, strategy and value proposition,” said Alex Avery, Primaris’ CEO, in the announcement. “Since the inception of Primaris REIT, we have been very clear about the significant opportunity to acquire additional market-leading Canadian shopping centres.
“Primaris is uniquely positioned as a potential buyer, with institutional scale as the third largest owner-operator of enclosed shopping centres in Canada with pro forma assets of approximately $3.5 billion, a very well capitalized balance sheet, a differentiated financial model and a mandate for growth.”
Conestoga Mall is the leading enclosed shopping centre in the Kitchener-Waterloo region, which is located just west of the Greater Toronto Area.
The property is adjacent to Conestoga station on the 19-station ION light-rail mass rapid transit system.
It boasts an annual all-store sales volume of $180.8 million and has 94.4 per cent in-place occupancy.
Ivanhoé Cambridge also completed a major $46-million redevelopment of the property in 2018.
“Conestoga was identified early in the process of evaluating potential acquisition targets for a number of notable characteristics, including its leading market position, strong sales performance, mass rapid transit connection and its attractive location within a growing market,” said Patrick Sullivan, president and chief operating officer for Primaris, in the announcement.
Primaris management feels that, similar to its existing portfolio, Conestoga Mall offers the opportunity for significant NOI growth potential in coming years. The property is currently unencumbered.
Two areas it identifies in the announcement are to lease up 58,000 square feet of vacant of “temporary tenanted” space, as well as converting tenants on preferred leasing deals to standard leases.
“Our team is very excited to add Conestoga Mall to our property portfolio, with significant income growth potential consistent with the growth we see ahead for our existing assets. With new and exciting retailers unique in the market including Apple, Lululemon and Nespresso, Conestoga Mall is amongst the top-15 most productive malls in Canada and will be highly accretive to Primaris’ overall portfolio quality.”
Rags Davloor, chief financial officer of Primaris, said in the announcement. “Our differentiated financial model, including very low leverage, a low payout ratio and significant retained free cash flow is a major strategic advantage for Primaris.
“We are very pleased to be able to execute a transaction of this quality while preserving our industry leading financial metrics within target ranges.”
Ivanhoé Cambridge embarked on a strategy to divest some of its retail properties several years ago as it moved to further diversify its holdings and reduce exposure in the sector.
“We are very pleased to have executed this transaction with Primaris REIT, given their commitment to continue to unlock the full potential of this established shopping mall in the Kitchener-Waterloo area,” Annie Houle, head of Canada at Ivanhoé Cambridge, said in the announcement. “Primaris REIT’s defined business strategy, experienced management platform and prudent capital management supports this new investment.”
The acquisition is to be financed via $165 million in cash; $25 million of series A units of the trust at a price of either (the lower of) $21.49 per unit, or the NAV per REIT Unit disclosed in the trust’s most recently published financials; and $80 million of exchangeable preferred units in a new limited partnership.
The transaction is expected to close in July, pending a series of conditions including the approvals of the Toronto Stock Exchange and under the Competition Act (Canada).
CBRE acted as real estate advisors and TD Securities acted as financial advisors to Ivanhoé Cambridge. Real Asset Strategies Inc. is acting as investor relations advisor to Primaris REIT.
Primaris is Canada’s only enclosed shopping centre focused REIT, with ownership interests primarily in enclosed shopping centres in growing markets.
Its portfolio totals 10.9 million square feet valued at approximately $3.1 billion at Primaris’ share.
Ivanhoé Cambridge develops and invests in real estate properties, projects and companies around the world.
Ivanhoé Cambridge holds interests in 1,500 buildings, primarily in the industrial and logistics, office, residential and retail sectors. Ivanhoé Cambridge held $77 billion in real estate assets as of Dec. 31, 2022 and is a real estate subsidiary of CDPQ, a global investment group.
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