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Hines Closes on 27-Story F1rst Tower High-Rise in Downtown Calgary

Houston Firm Plans Major Redevelopment for F1rst Tower in Oilpatch, in Face of Half-Full Building and Rising Office Vacancy Rate
April 11, 2018
Calgary's hard luck office market isn't scaring off an international real estate firm, which said Wednesday it acquired the 27-storey F1rst Tower even though it is only 51 percent leased.

Houston-based Hines, along with a subsidiary of real estate funds managed by Oaktree Capital Management out of Los Angeles, bought the 708,354-square-foot high-rise in the downtown east submarket of Calgary, and is planning a major redevelopment at the building home to Encana, Telus and TransCanada.

A report this week from CoStar Research noted the overall office market vacancy rate in Calgary fell 30 basis points in first quarter of 2018 from the end of 2017, but is still up 70 basis points year over to 15.3 percent. That rate is expected to climb in 2018 with the delivery of Telus Sky, a 761,235-square-foot, mixed-use tower currently under construction at 7 Ave. SW and Centre St. in Calgary's central core, in 2018. The downtown vacancy rate is more than 21 percent.

Increases in the vacancy rate from a year ago are being driven by new supply and the fact that many tenants that pre-leased space are now putting the space they no longer require on the sublet market, according to CoStar Research. Net asking rental rates fell 1.1 percent in the first quarter from the end of 2017 and 2.2 percent from a year ago to $16.92 per square foot.

In the face of those numbers, Hines and partner Oaktree are pushing ahead with a significant upgrade to the property at 411 1st St., part of the +15-connected office building network that connects the city's core through enclosed walkways. The group is promising a "comprehensive redevelopment" of the 34,000-square-foot +15-level - something it feels will drive tenants to the building.

No price was disclosed on the transaction or how much will be spent on redevelopment.

Syl Apps, managing director for Hines in Canada, told CoStar News that the company has a long-term plan for the Calgary office market that looks beyond the current vacancy rate.

“We are big believers in the city,” said Apps. “The underlying thesis is a long-term bet on the city of Calgary. To some extent, we see the current conditions in the market as an opportunity to allow us to grow our portfolio in a way we might have not otherwise been able to.”

Hines has one other downtown office building in the city, Prospect Place at 505 2nd Street SW, and a handful of other development projects it is currently considering in the city. The development projects are mostly multifamily buildings.

While Apps wouldn’t comment on how much Hines will spend on redeveloping F1rst Tower, he did say the goal is to bring it up to a “Class A building” because the building is almost 40 years old.

He said the property was purchased from a couple of Canadian real estate investment trusts and pricing it today based on vacancy rates probably doesn’t reflect the true long-term value of the asset.

“We want to add value to the asset,” said Apps, conceding in the near-term it will be hard to lease more space in the building.

New space being upgraded will include a tenant lounge/collaboration area, a café and food service area with the possibility for a differentiated food hall concept, an outdoor terrace, a fitness and wellness centre and a modern, flexible conference facility.

For more information on the transaction, please see CoStar Comp #4208236.

Garry Marr, Toronto Market Reporter  CoStar Group   
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