David Tallman: Welcome to "Hard Hats and Quick Chats." And today we wanted to discuss probably the most topical property type coming out of the pandemic: office. However, we wanted to do it from the lending perspective. And for that reason we're joined by Tom Harder, Head of the Mortgage Investment Strategy.
Tom Harder: Thank you for having me.
David Tallman: Thank you, Tom. And to provide perspective perhaps from the other side of the coin, the ownership side, we're also joined here by Michael Ostrander, Portfolio Manager on the Real Estate Strategy.
Michael Ostrander: Hey, Dave, thanks for having me.
David Tallman: Thank you, Michael. So Tom, I'll start with you. Coming out of the pandemic, the future use case of office, let's say became under question, people working from home. However, your team just made a sizable mortgage investment in the Vancouver office market. What gave you the conviction to move ahead with that?
Tom Harder: Yeah, there's a multitude of factors that we looked at. It's never just one factor, but when we look at the quality of the real estate that secured that investment that you're talking about, this is a building that was completed in 2022. It was built to a lead platinum level and it was very well leased to credit tenants such as Deloitte, as well as Apple. And we just felt that given the market noise and given the lack of lending appetite in the office market, we could provide an accretive risk adjusted return for our clients that was very well-supported by best-in-class real estate and phenomenal ownership group as well as incredible leasing.
David Tallman: Okay, and I understand that this isn't your only mortgage investment, the Vancouver office market. What other exposure do you have in that particular area?
Tom Harder: Yeah, so we've also recently funded a mortgage secured by what used to be the Canada Post building in Downtown Vancouver. That building over the last number of years has been completely repositioned. They've added 223 story office towers on top of the previous building, and fully renovated the interior. The building itself is fully leased on a very long-term basis to Amazon. And really what we're seeing with the Amazon decision as well as the investment that we made in the Deloitte Summit building is the tenants are looking to find best-in-class office space for their employees. And what they're looking for is amenities, proximity to major transportation routes, as well as being in a hub where employees want to be and want to be able to work and have access to a vibrant work culture. And so, they're really upgrading, we're starting to see a lot of the tenants upgrading from B and C buildings, and moving and transitioning into higher quality buildings that are able to offer their employees the amenity package that they need.
David Tallman: Yeah. And so Deloitte Summit, the Post, fantastic, however very close together, what gave you so much comfort in that particular area?
Tom Harder: Yeah, so we've done a lot of work over the years in that region at that node and a lot of due diligence talking to other building owners, understanding the leasing. But really what gave us the most comfort is being able to look to our real estate partners, and the ownership positions that they've had for many, many years in that node. And we've been able to see how their equity interests in those buildings have outperformed the market in a variety of cycles, both ups and downs, and continue to be able to benefit their portfolio by having those investments in this specific sub-node.
David Tallman: Okay, yeah. So quick Hard Hat disclosure, the mortgage team does not lend to the real estate team, however, information is shared. Michael, how about you share some information, what you're seeing in that particular sub-node in terms of leasing activity?
Michael Ostrander: Absolutely. So right across the street from Deloitte Summit is one of the real estate equity strategies largest office holdings being TELUS garden. So this is a half a million square foot office property that is LEED platinum certified, truly Class AAA office building that includes actually a koi pond and a grand piano in the koi pond in the lobby.
David Tallman: Koi pond, nice.
Michael Ostrander: So really interesting property. It also has 30,000 square feet of retail along Robson Street, which would be one of the most sought-after retail locations in the city of Vancouver. And this property's been close to, if not 100% occupied since we acquired it a number of years ago.
David Tallman: Okay, and this isn't your only office asset within that particular sub-node, right? What else are we seeing there?
Michael Ostrander: No, if you walk a few blocks down closer to the water, we actually own as well Waterfront Hub. And this is a two-office building complex that's located right across the street from Waterfront Station. And, originally, we just owned 333 Seymour, which we've owned in the portfolio for decades. And beside it, we always had this adjacent piece of vacant land. And so back in 2018 when the Vancouver office market was hitting historically low vacancy rates, we decided to kick off development.
David Tallman: Yeah, so you didn't know the pandemic was coming.
Michael Ostrander: Our crystal ball did not show the pandemic happening. And so, when we completed the building in 2021, we were facing a really challenging leasing market as decision makers were really putting their office need decisions on hold for a period. However, those decision-makers have come back to the table. And what we're seeing is, again, that flight-to-quality from the B and the C space to the Class A and above, AAA in our case. So we've seen a lot of leasing activity in the past 12 to 18 months, and we're now sitting at around that 80% committed occupancy rate, which actually allowed us to go out and get the property financed to a high quality lender and get really great pricing, which when we talked to our mortgage team about, they were very supportive of taking this asset to market and gave us really good insights about what we could expect.
David Tallman: Excellent. Okay. So what I'm hearing is flight-to-quality, understand that, also hearing significant momentum in the Vancouver market, wouldn't be too dissimilar from what we saw coming out with the global financial crisis with Vancouver kind of leading that rebound all the way back then, and it's similar today, Toronto is lagging. Tom, what are you seeing with your mortgage investments in the office market there?
Tom Harder: Yeah, for sure, we're definitely seeing Toronto lag, but we're definitely also seeing improvements in the office market in Toronto. Over the last 12 months, we've seen significant leasing momentum, but you got to focus on the Class A properties, and not be distracted by the noise in the Class B and C markets 'cause they are still struggling. But in the Class A properties where we have our investments in the portfolio, so think 1 York Street or Bay Adelaide Centre, we're seeing significant leasing momentum and growth. For example, in the Bay Adelaide Centre, prior to the pandemic, tenants when they were renewing or new tenants coming into that complex were typically in that $35 per square foot range, we're now seeing lease rates in and around $50 a square foot, really speaking to that flight to the best possible building in the market or one of the best possible buildings in the market, and the importance of focusing on the real estate to make sure that it's located in the right location, has the right amenities, and is able to attract tenants so that they can attract the right employees to grow their business. And that's really sort of the thesis of how we're continuing to invest in the office market.
David Tallman: Yeah, $35 to $50 is incredible, and not something we've been reading in the headlines, but it just shows when more is available for tenants, they're able to pick their spots and they're choosing higher quality. But I would be interested in what we're seeing in other markets and also, Michael, like, is it worthwhile for investors to step outside of the major markets that we've already discussed, particularly in office? Does it make sense to move into some of these other smaller markets?
Michael Ostrander: Absolutely. And Toronto and Vancouver will always play an important stabilizing force for any well-diversified Canadian real estate or mortgages portfolio. However, if you're able to step outside of the GTA and the GVA, there are a lot of opportunities to go after and achieve higher yields. So a good example of this is for the real estate strategy in Saskatoon. So if you go back pre-pandemic, the Saskatoon office market was really under-supplied in terms of new high quality product. There really hadn't been any new development in the office market for a number of decades. And so we saw an opportunity to go out and construct brand new Class AAA, lead platinum certified office space. And now we have a two-tower office complex of about 400,000 square feet of office space that's 99% leased. And again, I think it speaks to giving tenants the options where they didn't have them before. And so we built it and they came and it's a great story for the strategy.
David Tallman: Oh, that's incredible. And I would like to talk about maybe other property types, but that's all the time we have, so thanks you too. And thank you to our viewers, really appreciate it. And of course, if you have any questions, please do not hesitate to reach out to your relationship manager and we will get back to you as soon as possible. Thanks a lot and have a great day.
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