Mixed-Use in Alberta: The Conversation

Kevin Gardner of Canada ICI recognizes that mixed-use developments face some challenges in Alberta’s two major real estate markets, Edmonton and Calgary. He also sees how these multi-purpose buildings can foster vibrant Canadian neighbourhoods where people live, shop, and work in a concentrated area.

In a recent interview, the Senior Director of Mortgage Origination of Canada ICI in Edmonton described how mixed-use development can densify desirable urban and suburban areas. “Investors, developers, and municipalities have experienced the benefit of well-designed, mixed-use developments. At the most basic level these properties integrate various amenities within a single mixed-use property. It’s an asset class that’s well established in thriving markets like Toronto and Vancouver but less established in Calgary and Edmonton.”

He went on to make this prediction: “We will see more mixed-use development in major markets after the pandemic; however, some limiting factors pose challenges. These factors include land availability, construction costs, local transit and infrastructure quality, as well as the challenge of attracting residents to Alberta cities thereby creating the need for more mixed-use developments.”

How are developers thinking about mixed-use developments?

Supply and demand drive mixed-use developments, and inevitably which asset classes are located within the property. Mixed-use developments are like a puzzle and developers work to put the pieces in place to drive a return and to align the stakeholders, customers, and the community.

With the push to densify core areas comes an increased demand for quality residential units. Kevin put it this way: “In Alberta, the condo market is slow, so most developers are considering main floor commercial retail units with residential rental suites above. Very few developers are considering office space within the asset given the over-supply.  Demand for condo rental units in the short-term is challenging given the pandemic, and so is the lack of economic growth within Alberta’s major markets. On the flipside, mixed-use assets have a long development cycle (from planning to construction to occupancy), so we need to consider what our market will look like in three to ten years.  Although we are coming out of a pandemic, financing is available, so developers want to take advantage of it.”

Kevin Gardner indicated one more factor responsible for determining development in Alberta’s markets. “Another factor driving mixed-use developments in our market is effective financing of the asset on spec as a result of the residential rental nature.” Kevin then further commented, “Most of the revenue for mixed-use developments is generated from the residential component. The risk associated with lease-up of residential is manageable from the standpoint of developers and lenders.”

Mixed-use developments succeed best where there is a lot of pedestrian traffic and temperate weather. While Edmonton and Calgary can’t choose their weather, they can contribute to the walkability of their denser urban areas by widening sidewalks, creating public spaces where people can congregate, and easing access to quality public transit, which reduces the need for parking.

When discussing the importance of pedestrian traffic to the sustainability of mixed-use properties, Kevin noted, “Our market is investing heavily in quality public transit crucial to successful mixed-use development.  Transit hubs allow greater access to the commercial tenants, which have historically struggled in urban areas without these hubs and with limited parking. A commercial space needs to be located where people are walking.”

Mixed-use success stories

Kevin Gardner shared a couple examples of mixed-use successes in the Canadian real estate market, first citing the Raymond Block, located on Edmonton’s bustling Whyte Avenue.

“Raymond Block includes multi-family rentals above its commercial floor and proves that if the location is desirable, the residential units will rent quickly and be sustained.” Kevin admitted that filling up the residential piece of a mixed-use building is not where the challenge lies, saying, “Deciding which commercial tenants will rent the main floor or floors takes time and strategy when planning mixed-use developments.” The commercial space on the main floor attracts residents to the floors above. Mixed-use developers need to be clear about the demand for rentals in the building and the neighbourhood long before they start construction.

Kevin told about another successful mixed-use project that also depended upon deliberately choosing and then securing the right tenant for the main floor: “We financed a development with a major grocer and a bank on the main floor, and with residential suites above the commercial space. If a development plans to incorporate a bank or something out of the ordinary, such as a library, developers need to find and secure those tenants before development plans can be completed.” Kevin added, “And those types of tenants can be tough to find but also tend to stay around for a long time. Once they are found, tenants like that have certain requirements that need to be incorporated into the building’s design.”

Construction costs potentially limit development

Kevin cited cost of construction as the biggest challenge currently facing mixed-use development projects in Alberta’s real estate market. He explained that the need for underground parking contributes to the expense of construction, stating, “This province’s major markets, Edmonton and Calgary, are car-centric. In Alberta’s climate and in areas of greater density, underground parking is a requirement. Developers need to strike a balance between providing enough parking for residents and shouldering its cost.”

Kevin talked about how construction costs make it difficult for developers to justify developing mixed-use buildings. “If the margin is too narrow, then developers have little financial incentive for mixed-use development. Equity investors need a better return on a development versus what they’d make on a comparable building purchased in today’s market.” Kevin made a good point when he asked, “Why would a developer take years of construction and development risk for the same return they could earn by purchasing a similar quality asset?”  Investors need to yield a comparable premium in Alberta’s market versus what they can make in Toronto or Vancouver.

The future of Alberta’s mixed-use market

In the future, developers and their investors will need to collaborate with municipalities to create reasons for companies to set up shop in Edmonton and Calgary. Kevin believes it’s important to start the conversation by asking, “Successful and innovative companies want to exist and work around each other, so how can we share our story and incentivize these companies to come to Edmonton and Calgary?” Mixed-used development can promote the growth of the kind of vibrant Canadian communities that attract innovative companies and professionals alike. It’s time to talk about how the mixed-use asset class in Edmonton and Calgary can contribute to and thrive within the next evolution of these Alberta cities.