Quote:
Originally Posted by esquire
That would be an interesting Free Press feature... profiles of who owns some of these surface lots.
Generally I think that the more permanent a lot is allowed to become the more likely it is that it will stay, but as pspeid says, Harvard is a big enough operator that the development potential of the site probably outweighs the modest stream of income that comes from the lot.
I oppose the application personally, but I wouldn't get bent out of shape if it were permitted.
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I've always wondered about the economics of surface parking lots versus development downtown. In general, I don't think we see the prevalence of surface parking lots in Winnipeg because they are relatively profitable compared to say, an office building, but rather because they are essentially risk-less investments (especially in Winnipeg where demand is strong) with next to no costs associated with them. Let's go through a mathematical example to see what I'm talking about
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Parking Lot Economics:
Let's assume for a moment Harvard Developments was allowed to expand their 59 spot surface lot at 416 Main and add an additional 36 spots on the vacant property beside it (which doesn't currently have an address as far as I can tell).
Based on 2019 tax rates and the city's assessment base, I'd estimate that those two lots combined would pay the city around $25,000 in property tax per year (note: contrast this to the $1.18 million that 201 Portage will pay on a plot of land roughly double the size). Let's double the municipal tax amount to (roughly) account for school taxes as well.
From Impark's website, the going rate for a monthly pass on 416 main is $240, so minus PST and GST, the revenue is $211 per month, per spot. Let's assume the general maintenance per spot is $200 per year. Tally all this together for the 95 spot surface lot, and we get the following:
- Total Operating Costs: $101,468
- Total Annual Revenue: $273,600
- Total Annual Net Profit: $172,131
Office Building Economics:
So basically the surface lot owner pockets $170k, per year, by owning a piece of land covered in concrete or gravel, with the only maintenance involving probably hiring a company to come sweep the lot once or twice a year with the occasional electrical repair.
In order to get this lot developed in to something else, it's obvious that the expected annual net profit of some sort of new investment (with likely much higher risk) needs to be higher than $170k in this scenario, if my math is right.
Would another building similar to 201 Portage on those two surface lots net $170k per year? Most likely. According to Cushman and Wakefield's Q2 2018 report, the low end cap rate on Class A office space in Winnipeg is around 5.5%, which, if I am interpreting this correctly, means a building built at a cost of $200 million would need to have a net operating income of around $11 million per year to be financially feasible and attractive to real estate developers (after all other costs are paid).
201 Portage, as an example, is around 505,000 sq.ft. in size. If the gross rental rate is around $36 per sq.ft. per year (reasonable based on some quick research about 201 Portage), the the entire tower if at full capacity generates around $18 million per year. How much does it net, minus operating costs? That's something I don't know but based on the existing market, it's probably between 5.5% and 6.5%.
Is it reasonable to assume that another fully occupied office tower on those surface parking lots could generate more return on investment than a surface parking lot? Of course, since a new structure would only need to generate around $200,000 or more per year in net income. If the cap rate 5.5% and the net income is $200,000, then the building needs to bring in at least $3.7 million per year, which at $36 gross rent per sq.ft. means around 100,000 square feet of rentable space. Since the surface area of those two lots is around 30,000 square feet, there's a good chance you'd only need a building that's about 4 stories or higher (fully occupied) to make a profit greater than the parking lots themselves - maybe (if I'm doing this right, but I'm sure this math is way more complicated in real life and I'm over simplifying things.)
However, as we all know, that would only occur if there is enough tenants to fill the office space. So obviously there is money to be made, but only if tenants can be lined up with is always a risky endeavor - except in Calgary, where massive vacancy rates haven't seemed to put much of a dent in real estate development contrary to all logic.
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