Why the imminent opening of Nova Centre is great news if you’re looking for Class A space in Halifax at a good price
Starting in mid-October, more than 200 Bank of Montreal employees in Halifax will migrate from their current downtown offices to new workspaces in the $500-million Nova Centre. The Nova Centre, a long-delayed retail, convention, and office complex situated on a city block in downtown Halifax, will finally begin housing office tenants this fall.
The building will serve as BMO Financial Group’s Atlantic Canada headquarters, with a 4,200-square foot branch on the main floor. BMO, which paid for naming rights on the Nova Centre’s business tower, will also occupy a floor and a half of offices—36,000 square feet at a price of roughly $25 per square foot per year (the typical price for Class A office space in downtown Halifax).
Overall, the Nova Centre—which has created controversy because of its partial government financing and negative impact on nearby businesses during its delayed construction, will house 19 floors of offices, in two towers, totalling up to 300,000 square feet of office space. Project developer Joe Ramia, president of Argyle Developments Inc., says the Nova Centre, when opened, will offer “triple-A” office space—the best in the city.
“There is no other building that can offer what this building can offer, from energy efficiency to amenities,” he said in an interview. “This is the most technological building in Atlantic Canada.”
Yet the building is also forecast to further boost the city’s near-record and double-digit office vacancy rate. The rate currently sits at 16.5 per cent—the highest in 15 years. Excess construction of new office space is a major factor in the increase. And more is coming.
Supply shock to the office market will likely occur when Nova Centre comes online, followed by Queens Marque in 2019/20. Vacancy rates are anticipated to rise to surpass 20 per cent,” noted a first quarter report from Cushman & Wakefield, a real estate services firm. (Queens Marque is a significant mixed-used AAA development on the Halifax waterfront.)
In June 2016, Turner Drake & Partners Ltd., another commercial real estate advisory firm, expressed concern about the city’s climbing office vacancy rates in downtown, noting that the vacancy rate for Class A office space (the top tier) “remains unsustainably high”. “As vacancy rises, net rents slow, stagnate and even decline,” the firm noted.
Then, in December, a Turner Drake press release employed a liberal use of exclamation points to describe the current situation:
“This year, an additional 350,000 square feet of new office space is to be brought on stream; vacant office space will climb to over one million square feet… the equivalent of 1.5 Purdy’s Wharfs!” the release noted, referring to the city’s iconic waterfront business towers. “One fifth of all office space in the Central Business District will then be vacant; a post-war record!”
The release positioned the high vacancy rate as a positive: a low-rent opportunity for out-of-province businesses. “TENANTS: HALIFAX NEEDS YOU!” the release shouted. “It’s a renter’s market for office and industrial space users. There has never been a better time for tenants to find a good deal.”
In reality, though, the high vacancy rate is not attracting outside businesses.
“We haven’t seen much evidence of that,” said Alexandra Baird Allen, manager of Turner Drake’s economic intelligence unit, in an interview. “It’s not a situation where if you build it they will come.”
Instead, existing Halifax companies— looking to upgrade or switch locations—are filling the new office space. BMO, for example, is leaving both the Bank of Montreal tower and Purdy’s Wharf in favour of consolidation in the Nova Centre. “We’re outgrowing the space we have,” said Jamie Loughery, a BMO vice president for Atlantic Canada. The accounting firm Grant Thornton, the only other announced Nova Centre tenant, is leaving Cogswell Tower in Scotia Square.
Nova Centre developer Joe Ramia says he has secured tenants from outside Halifax, though they haven’t been announced yet. “We’re talking to a lot of people from out of this market,” he said. “Some have already signed.”
Ramia says Nova Centre will house between 200,000 and 300,000 square feet of office space. “We haven’t determined how much we are bringing to the market because we have the opportunity to do something else,” he said.
Despite that flux and imprecision, Ramia said 70 per cent of the office space is leased. “We haven’t really marketed this building and the response has been great,” he added. “We’ve been very fortunate with where we are on leasing.”
But according to Turner Drake’s Baird Allen, the fact that Nova Centre is still seeking tenants can be taken as a sign that demand is lacking. “It certainly could be a sign… that the demand isn’t there,” she said.
Then there’s the prospect of a 20 per cent vacancy rate in Halifax’s Class A office market. “It’s definitely a concern that the vacancy rate would be that high,” she added.
In the 1990s, during a period of over supply and high vacancy rates, Purdy’s Wharf was actually paying tenants two dollars a square foot to set up in its buildings, just to ensure operating expenses were covered. (The tenants saved on rent but covered the buildings’ operating expenses.)
“Barring an unforeseen global financial crisis—another one—I don’t think we’re in danger of that happening again,” she said. “But it’s certainly worth noting that it has happened in the past. It’s not outside the realm of possibility that (it) could happen again.”
Of the lingering high vacancy rate, she concluded: “There’s a risk and danger of over supply”.
The current flood of Class A office space, combined with stable or falling rent prices, will likely prompt some renters to jump to better spaces—say from old Class A stock to new Class A stock, or from “no frills” Class B space to Class A, or from Class C up to Class B. Baird Allen calls it a “dog eat dog” situation, with landlords “stealing” tenants from other buildings.
So who are the losers in such a market?
“Every square foot leased in (the Nova Centre) is a square foot that is coming from another building,” said Bill MacAvoy, managing director for Cushman & Wakefield Atlantic. He points to Purdy’s Wharf. The two towers, built in the 1980s, have long been the marquee Class A office space in Halifax, home to big law and accounting firms. “Purdy’s will be under some leasing pressure,” MacAvoy said in an interview. “It will defend itself very well.” (Purdy’s Wharf management declined an interview request).
Ian Munro, chief economist at the Halifax Partnership, the city’s economic development organization, says the owners of lower-end office space will likely suffer in a market dominated by good prices and a high vacancy rate. Unwanted Class C office space will likely be repurposed, turned into apartments or condos, or even demolished.
Concluded Munro bluntly: “If you happen to be the guy who built all the old crappy space, well obviously that’s not good for you.”