Business
2023 could be turning point for office-to-housing conversions: Colliers
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This year could be pivotal for Canada’s office market as developers increasingly eye empty and underused office buildings to help solve the country’s worsening housing shortage, according to Colliers Canada. And one recent conversion in downtown Calgary could serve as a successful playbook.
“2023 could mark a shift in how excess office towers are to be treated,” real estate consulting firm Colliers said in a report.
“Several markets have either announced or have already begun converting certain office towers into residential spaces. This may have a ripple effect on the office construction pipeline if projects are put on pause or even cancelled outright.”
The report, which was released on Mar. 30, said the national office vacancy rate was 13.3 per cent in the first quarter this year, a slight increase from the prior three-month period. It’s also significantly higher than the pre-pandemic first quarter of 2020, when the national office vacancy rate was roughly eight per cent.
Calgary’s conversion ‘experiment’
The challenges and ultimate success of an office-to-housing conversion are on full display in Calgary.
Meet Neoma, an 82-unit affordable housing building that was renovated from an office building in the city’s downtown. It’s owned and operated by affordable housing provider HomeSpace and was renovated by PCL Construction.
HomeSpace bought the building for $4.7 million in 2020 from Artis REIT (AX-UN.TO) and the fast-tracked 12-month renovation of the building costs $30 million. It officially opened in September last year.
“Converting office towers into housing is no easy task,” said Emily Campbell, communications advisor at HomeSpace.
“I would say it was a long, kind of, experimental process to gut the building.”
Canada is staring down a worsening housing crisis while, at the same time, many office towers sit underused thanks to the prevalence of remote work, so it might seem fitting to convert some of these office buildings to help fill the housing need.
Data from commercial real estate firm Avison Young have found that as much as 30 per cent of office towers across Canada, or more than 3,000 properties, are candidates to be converted into housing.
There are roughly three to five different elements that need to align in order for a building to be the perfect prospect for a conversion, Scott Pickles, principal and Canada consulting leader at Avison Young, tells Yahoo Finance Canada. He is also a registered architect.
Whether housing fits with the building owner’s business strategy, financing, location and the work needed to overhaul the building all need to be considered, Pickles says.
The shape of the building and the floor plates, or the structure and layout of an individual floor, also determine if the space can be divided into liveable and desirable apartment units.
Converting electrical and plumbing systems for residential needs can be stymied by whether the elevators are in the right spot, he says.
Older buildings, particularly those built pre-1990, often are better candidates than newer ones, Pickles says, not just because they’re more likely due for upgrades and renovations, but because they tend to have more equity built up and therefore the ability to fund renovations through new debt.
In the case of the Calgary conversion, HomeSpace’s Campbell says the organization looked at “so many” buildings before landing on this one that fits the bill for a residential conversion. Even then, dividing up the floor plan was a “struggle.”
The building sat empty for two years before HomeSpace purchased it.
One of the biggest risks going into the renovation, according to Rob Mitschke, the PCL Construction project manager tasked with the massive overhaul, was understanding where to start.
Everything, from the foundation to the roof, including the original materials used in the construction, structural integrity, building codes, plumbing, electrical, stairwells, elevators (the list goes on), needed to be assessed, he told Yahoo Finance Canada.
“You’re not dealing with an empty field where you dig a hole and build whatever you want. You have to understand your starting point,” he said.
Because of the tight schedule, different phases of the renovation were happening all at once.
“We didn’t have the luxury of completing our demolition, clearing the building out and then starting construction,” Mitschke said.
“So we were simultaneously removing the outside of the building, reinstalling the outside of the building at the same time, floor by floor, gutting the inside of the building, demolition top down and then also starting construction all simultaneously which, given other circumstances, you may give a little space between those items,” he added, jokingly.
The project was funded by the federal and Alberta governments and the City of Calgary, among other public and private donors.
The 10-storey building features a family emergency centre, transitional housing and affordable one, two and three-bedroom units, which are geared towards families.
Monthly rent is 30 per cent below market rates and proportional to residents’ income.
The newest real estate trend?
Mitschke says he has since been approached by “multiple other developers” and is “engaging on a number of [office] buildings” to determine the viability of converting them into housing.
The Calgary office market has a staggering vacancy rate of roughly 28 per cent, according to Colliers data. This is the result of multiple oil price collapses in recent years that ravaged energy companies.
Meanwhile, HomeSpace’s Campbell says residents of the Neoma building are grateful to have a safe and stable place that addresses the root causes of what led some to housing insecurity in the first place.
An added bonus is it brings vibrancy back to downtown Calgary, she says.
“Downtown was starting to feel a little bit dangerous because there’s nobody around. As soon as people clear out of work at six o’clock, Calgary downtown was pretty dead. So, to bring people in creates a sense of safety and security and just brings life back to downtown, which has been struggling,” Campbell said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
Business
Brent may rise toward $100/bbl as Saudi output cut could worsen supply gap – analysts – Yahoo Finance
By Florence Tan
SINGAPORE (Reuters) – A global shortfall in crude oil supply is set to deepen in the third quarter as the world’s top exporter Saudi Arabia pledged extra output cuts from July in a move likely to push Brent towards $100 a barrel by the end of the year, analysts said.
Oil prices jumped more than $1 a barrel on Monday as the Saudi energy ministry said on Sunday its output would drop to 9 million barrels per day (bpd) in July from around 10 million bpd in May, the kingdom’s biggest reduction in years.
The voluntary cut pledged by Saudi is on top of a broader deal by the Organization of the Petroleum Exporting Countries and their allies including Russia to extend production cuts into 2024 as the group seeks to boost flagging oil prices.
“Saudi Arabia has a track record of delivering on material cuts,” RBC Capital’s Helima Croft said in a note.
“Hence, we would expect the full 1 million bpd unilateral cut to hit the market in July, nearly doubling the true physical reduction we have seen from the producer group since October.”
The move has paved the way to tighter supplies and put a $70 a barrel floor under prices, analysts said, however the Saudi cut is not likely to drive prices sharply higher immediately as it will take time for inventories to be drawn down.
“With Saudi Arabia protecting oil prices from sliding too low by cutting production, we think oil markets are now more prone to a shortfall later this year,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note.
“We think Brent futures will rise to $85/bbl by Q4 2023 even with a tepid demand recovery in China factored in.”
Goldman Sachs analysts Daan Struyven and Callum Bruce said the “moderately bullish” OPEC+ meeting partly offsets some bearish risks to the bank’s December 2023 price forecast of $95 a barrel, including stronger-than-expected supply from Russia, Iran, and Venezuela, and weaker-than-expected Chinese demand.
ANZ said the potential for a strong rally in crude prices had risen sharply as supply is expected to tighten significantly in the second half of the year if the U.S. Federal Reserve pauses interest rate hikes and macroeconomic headwinds ease.
“Investors are likely to add bullish bets, comfortable that Saudi Arabia and OPEC will provide a backstop should the market hit any hurdles,” ANZ analysts Daniel Hynes and Soni Kumari said in a note, maintaining their year-end target of $100 a barrel for Brent.
However price gains may be limited in the short term until there are signs of tightening in the physical market, they added.
By contrast, the United Arab Emirates was allowed to raise output targets by around 200,000 bpd to 3.22 million bpd while Russia, African and other smaller producers cut their quotas to bring them into line with their actual production levels.
“ADNOC’s investment in expanding spare capacity and its Murban (price) benchmark has fueled concerns that it might eventually look to exit the producer group and fully monetize these investments,” RBC’s Croft said.
“Affording it the 200,000 bpd quota adjustment for 2024 seems to settle the issue of its OPEC membership for now.”
(Reporting by Florence Tan; Editing by Sonali Paul)
Brent prices could hit $100 by the end of this year as the new 1 million bpd production cut Saudi Arabia announced on Sunday would further tighten the oil market, analysts said after the OPEC+ meeting this weekend.
The OPEC+ producers decided to keep the current cuts until the end of 2024, while OPEC’s top producer and the world’s largest crude oil exporter, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July, to around 9 million bpd. The Saudi cut could be extended beyond July, Saudi Energy Minister Prince Abdulaziz said on Sunday, describing the announced reduction as a “Saudi lollipop.”
“With Saudi Arabia protecting oil prices from sliding too low by cutting production, we think oil markets are now more prone to a shortfall later this year,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note carried by Reuters.
Even if China’s oil demand is not as strong in the second half of this year as expected, Brent Crude futures are set to rise to $85 per barrel by the fourth quarter of 2023, Dhar added.
Early on Monday in Europe, Brent Crude traded at $77 per barrel, up by 1% on the day.
ANZ analysts Daniel Hynes and Soni Kumari reiterated their $100 per barrel Brent target for the end of the year, saying that “Investors are likely to add bullish bets, comfortable that Saudi Arabia and OPEC will provide a backstop should the market hit any hurdles.”
“The oil market now looks like it will be even tighter in the second half of the year,” ANZ noted.
Goldman Sachs, which sees Brent at $95 per barrel in December, described OPEC+’s meeting as “moderately bullish” to its forecast and offsetting some bearish downside risks such as higher supply from sanctioned Russia, Iran, and Venezuela and weaker-than-thought Chinese demand.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
Tsvetana Paraskova
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
The relentless rally in big tech, options positioning and bets on a Federal Reserve pause following a mixed jobs report put stocks on the verge of a bull market.
An advance of roughly 1.5 per cent for the S&P 500 extended the benchmark’s surge from its October low to nearly 20 per cent. A gauge of megacaps like Tesla Inc. and Apple Inc. saw its sixth straight week of gains — the longest winning run in since July 2021. Broadcom Inc. climbed after predicting that sales tied to artificial intelligence will double this year.
As stocks rose, Wall Street’s “fear gauge” plummeted to pre-pandemic levels. The Cboe Volatility Index, or VIX, dropped below 15 from an average of 23 in the past year. The risk-taking mode also drove the Russell 2000 index of small caps — the home of several regional banks — up about 3.5 per cent
“The impressive run for equities continues to drive retail investors into the market,” said Mark Hackett, chief of investment research at Nationwide. “Investors have spent much of the past three years obsessed by the Fed, inflation, and payrolls, though volatility around those reports has settled, reflecting a less emotional market. This is bullish, as less reactivity is a sign of a healthy market.”
Options Positioning
To Andrew Brenner at NatAlliance Securities, the melt-up in equities has a lot to do with one thing: positioning.
“Options traders were off sides,” Brenner said. “We think they get back onsides next week, and the rally will run out of steam.”
Indeed, the stock advance doesn’t mean the market isn’t facing headwinds, according to Quincy Krosby, chief global strategist at LPL Financial.
Among the risks, she cites the potential ramifications of the deluge of Treasury notes — approximately US$1 trillion — to be auctioned as the US department replenishes its general account following a debt-limit deal. that could ignite a significant sapping of liquidity from financial markets, she noted.
“That the Fed has telegraphed that June 14 is off the table for a rate hike no doubt reflects its concerns regarding the potential for increased market volatility stemming from dissipating liquidity,” Krosby said. “Still, today’s across-the-board rally confirms that the market doesn’t see an impending recession despite the incessant calls for one.”
Signs of labor-market slackening in May despite a pickup in hiring could strengthen the argument from Fed Chair Jerome Powell and other officials that they should take more time to assess incoming data and the evolving outlook before raising rates again.
Wall Street’s reaction to the latest jobs report showed bets that another Fed hike is likely in the bag — but that wouldn’t necessarily happen in June.
Two-year yields, which are more sensitive to imminent central bank moves, jumped 16 basis points to 4.5 per cent.
Some 25 basis points of tightening were fully priced in across the next two meetings for part of the trading session Friday. Around 9 basis points was priced in for June, indicating a less than one-in-two chance of any hike being at this month’s meeting.
“The key question now is: can they wait until July or does this monster payrolls number trigger another burst of urgency?” said Seema Shah, chief global strategist at Principal Asset Management. “Perhaps the report details, with the unemployment rate rising and average hourly earnings growth slowing, tilts the decision to July.”
The Fed should be open to raising interest rates by a half percentage point in July if it opts to hold off from tightening this month, former Treasury Secretary Lawrence Summers said.
“We are again in a situation where the risks of overheating the economy are the primary risks that the Fed needs to be mindful of,” the Harvard University professor said in an interview with Bloomberg Television’s David Westin on Friday.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.4 per cent as of 4 p.m. New York time
- The Nasdaq 100 rose 0.7 per cent
- The Dow Jones Industrial Average rose 2.1 per cent
- The MSCI World index rose 1.5 per cent
Currencies
- The Bloomberg Dollar Spot Index rose 0.2 per cent
- The euro fell 0.5 per cent to US$1.0708
- The British pound fell 0.6 per cent to US$1.2450
- The Japanese yen fell 0.8 per cent to 139.97 per dollar
Cryptocurrencies
- Bitcoin rose 1.4 per cent to US$27,251.37
- Ether rose 2.1 per cent to US$1,908.83
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 3.69 per cent
- Germany’s 10-year yield advanced six basis points to 2.31 per cent
- Britain’s 10-year yield advanced four basis points to 4.16 per cent
Commodities
- West Texas Intermediate crude rose 2.7 per cent to US$71.98 a barrel
- Gold futures fell 1.5 per cent to US$1,965.20 an ounce
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Brent may rise toward $100/bbl as Saudi output cut could worsen supply gap – analysts – Yahoo Finance
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