THE ECONOMY OF DOWNTOWN EDMONTON: 1994 Background Report on the Economy of the Downtown Prepared for the Downtown Plan Review
Prepared by: Downtown Planning Group Planning Services Branch Planning and Development Department June 1994
Table of Contents EXECUTIVE SUMMARY PART 1:
INTRODUCTION
PART 2:
OBSERVATIONS
2.1
Economic Activity Levels (a) Metropolitan Context (b) Downtown Activity Level
2.2
Downtown Real estate Market Conditions (a) Office Space (b) Retail Space (c) Apartments
2.3
Land Values and Property Assessment (a) Current Land Values (b) Recent Trends in Values (c) Historical Context (d) Comparison of Values by Area (e) Property Tax Assessments
2.4
Development Economics/Prospects (a) Feasibility of Development (b) Residual Land Values (c) Development Timeframes
PART 3:
ANALYSIS
3.1
Cyclical Economic Effects (a) World Oil Prices Global Economic Cycles (b) (c) Fiscal and Monetary Policy
3.2
Socio-economic Changes (a) Ageing Population (b) Technological Change
3.3
Changes in Real Estate Markets
3.4
Summary of Analysis
(i)
PART 4: STRENGTHS AND WEAKNESSES 4.1
Introduction
4.2
Strengths Centrality (a) Vacant Space (b) (c) Prestige Amenities (d) Educational Institutions (e) Cultural Facilities (f)
4.3
Weaknesses Parking (a) (b) Land Costs
PART 5:
PROSPECTS
5.1
Metropolitan Growth Rates Population (a) (b) Employment
5.2
Projected Development Activity (a) Office Space (b) Retail Space (c) Housing
5.3
Impact on Land Values and Tax Revenues (a) (b) (c)
PART 6:
Direction of Change in Land Values Land Values Downtown vs. Other Areas Future Downtown Property Tax Revenues
CONCLUSIONS
6.1
Conclusions
6.2
Implications
6.3
Directions for Future Policy Development
Tables 2.1.1 Population of the City of Edmonton, the Edmonton Metropolitan Region Planning Area and the Province of Alberta 1981 to 1993 2.1.2 Full and Part Time Employment in the Edmonton Census Metropolitan Area 1981 to 1992 2.1.3 Trends in Number of Firms Downtown and Other Area of Edmonton 1988-1992 2.1.4 Alberta Provincial Government Employment 1972-1993 2.1.5 Trends in Number of Retail Firms Downtown and Other Areas of Edmonton 19881992 2.1.6 Attendance at Downtown Events 1993 2.2.1 Office Absorption and Vacancy, Downtown Edmonton 1982-1992 2.2.2 Office Inventory and Vacancy, Downtown Edmonton 1989-1993 2.2.3 Overall Vacancy Analysis for Shopping Centre 1992 2.3.1 Minimum and Maximum Land Values Sub-Areas of Downtown Edmonton in Current Dollars, 1978 and 1993 2.3.2 Minimum and Maximum Land Values Sub-Areas of Downtown Edmonton, 1978 and 1993 in Constant 1993 Dollars 2.3.3 Comparison of Midpoint Land Values in Sub-Areas of Downtown Edmonton, 1978 and 1993 2.3.4 Comparison of Minimum Land Values Sub-Areas of Downtown Edmonton, 1978 and 1993 2.3.5 Midpoint Prices for Suburban Benchmark Properties, 1978 and 1993 2.3.6 Ratio of Midpoint Land Values Central Core vs. Suburban Benchmarks 1978 and 1993 2.3.7 Ratio of Minimum Land Values Central Core vs. Suburban Benchmarks 1978 and 1993 5.1.1 Projected Future Population - City of Edmonton and Edmonton Region
Figures 2.1.1 Total Real Weekly Wage Bill - Edmonton Ch.M. 2.1.2 Inflation and Unemployment - City of Edmonton 2.2.1 Office Vacancy In Downtown Edmonton By Class 2.2.2 Consumer Price Index, Construction Costs and Colliers Index 1982-1992 2.3.1 City of Edmonton Property Assessment 1915-1919 2.3.2 Downtown Edmonton Land Price Increases in the 1970s 2.3.3 Minimum Land Values - Downtown and Suburban Edmonton 1978 and 1993 3.2.1 Comparison of Total Metropolitan Employment and Occupied Downtown Office Space Indexes 1971-1992 5.1.1 Projected Total Employment, Edmonton Census Metropolitan Area 1992 to 1998
Maps 2.1.1 Edmonton Metropolitan Region 2.1.2 Major Market Shares of West Edmonton Mall and Downtown - 1990 2.3.1 Generalized Range of Land Values - 1993 2.3.2 Generalized Ranges of Land Value - 1978 2.3.3 Change in Land Values - 1978 to 1993
(iv)
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
EXECUTIVE SUMMARY Introduction In 1994 the City of Edmonton initiated a comprehensive review of the Downtown Area Redevelopment Plan which was prepared in the late 1970s and adopted in 1981. The objective of the review is to develop a new or substantially revised plan to guide development in the Downtown until the turn of the century. This background report discusses the economy of the Downtown and describes the economic context of the plan review. Downtown Edmonton plays a vital economic role as the centre of the largest metropolitan market in the Prairie Provinces, and the focal point of a trading area of approximately two million people. The Central Business District provides a livelihood for 2,200 businesses and 63,000 individuals. There are 6,300 Downtown residents. There are 8,300 students attending Downtown educational institutions and another 30,500 students at the University of Alberta, one LRT Stop outside Downtown. The commercial, institutional and residential properties in the Downtown represent an investment of over $2.6 billion by public and private landowners. The economic health of the Downtown has a direct impact on all taxpayers in Edmonton, wherever they live and work. The Downtown accounts for 23% of the total non-residential property tax revenue in the City of Edmonton. Thus, any weakening of economic activity and property values in the Downtown increases the burden on tax payers in other areas of the City. Conversely, anything which strengthens economic activity and property values in the Downtown directly benefits tax payers in other areas. Observations Historically, economic activity in the Downtown has mirrored the boom and bust cycle of the regional economy. Since the adoption of the existing Downtown Plan, both the Downtown and its trading area have endured significant economic setbacks. At the regional level, total employment in the Edmonton metro area declined by 12% in just two years after the downturn of 1981, and did not recover to its former level until 1988. Within the Downtown, employment levels have been adversely affected by staff reductions and decentralization by the area's largest employer, the provincial government. It is estimated that the number of provincial government employees working in the Downtown decreased by about 9,600 positions or 55% from 1982 to 1993. Other major public and private sector employers in the Downtown also cut back their payrolls during the 1980s. Reliable figures on employment levels among the hundreds of smaller businesses in the Downtown are not currently available, but estimates based on traffic counts indicate that total employment in the Downtown has remained essentially unchanged since the current Downtown Plan was adopted. The real estate market in the Downtown has naturally been affected by the lack of growth in economic activity. The rate of increase in occupied office space in the Downtown slowed -I-
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
from 13.6% annually in the 1970s to 2.5% in the 1980s. Occupied office space decreased by 1.8% annually during 1990-1993. As a result of this soft demand, the overall vacancy rate for Downtown office space has risen from 0.5% in 1981 to 16.4% in 1993. Net effective rents for Downtown office space have dropped by more than 50% in real (inflation-adjusted) terms from the boom years of the late 1970s. As a result of the persistent softness of the office leasing market, all contemplated high rise office developments have been on indefinite hold for several years. Buyer interest in vacant sites for new high rise projects has all but evaporated, and land values have dropped significantly as a result. In real terms, the market value of vacant land in the Downtown, depending on which sub-area the property is in, has dropped by between 38 and 80%. The drop in Downtown land values has affected different sub-areas of the Downtown in varying degrees. In general values in the peripheral areas of the Downtown, such as the Warehouse District and the MacKay Avenue apartment area, have dropped less than those in the central core of the Downtown. In other words, the gap in land prices between the core and the periphery of the Downtown has narrowed. The same pattern is evident when prices for vacant residential, industrial and commercial parcels in suburban areas are compared to Downtown land values. The gradient of land prices, which has traditionally declined rapidly with increasing distance from the central core, appears to be flattening. Analysis The weakness of economic growth, the leasing market, and land values in the Downtown in the recent past is the result of several factors. Some of these are cyclical in nature and will probably be reversed eventually when there is a sustained recovery in the global economy. Others are structural in nature and will likely continue to affect the Downtown for the foreseeable future. The cyclical causes include: the level of oil and natural gas prices on world markets; the rate of growth in the western industrialized economies; and the budgetary and interest rate policies of the federal and provincial governments. The structural causes include: the reduced number of new entrants into the labour force due to the aging of the baby boom; the increasing tendency to do business over long distances using new information technologies such as cellular telephones, modems and fax machines;
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
_ _ _
the growing popularity of new forms of office and retail accommodation currently available only in suburban areas; the increasing popularity of alternative forms of work space such as offices in the home, the "virtual" office, and office "hoteling" ongoing organizational restructuring in both the private and public sectors; and the movement of more and more companies towards the "paperless" office where space needs change radically in terms of amount and form.
The structural factors that have constrained the growth of the Downtown economy in the recent past have by no means run their course. In many respects, their effects are only beginning to be felt. The implications of these structural trends are particularly crucial for the Downtown. The familiar phenomenon of a high rise fmancial core evolved primarily because of a business need for physical proximity, to permit the negotiation of deals and the exchange of documents. As business practices evolve to take full advantage of communication technology, physical proximity will become increasingly less important. The business need for physical proximity which has drawn financial and administrative activity to the Downtown in preference to other areas, and has sustained the high densities and land values characteristic of downtown's in the 20th century, will be less and less important as we move into the 21st. century. As the Downtown's built-in advantage in attracting business continues to be eroded by technological change, it will have to compete with other locations on a much more even footing in order to attract its share of economic activity. Competitive Position In competing with other areas to attract business activity, the downtown has certain strengths and weaknesses. Its main competitive advantages are: _ -
-
a more central location, better accessibility by road and transit, and access to a larger labour pool than any other location within the metropolitan trading area; a wide variety of excellent office and retail premises for lease at reasonable rental rates; the unique prestige of a downtown address and more opportunities for personal contact with key decision makers; a choice of shopping, dining, entertainment and recreation amenities not found anywhere else in the region; unmatched accessibility to post-secondary educational institutions, including access to the University of Alberta in minutes by LRT; and a wealth of cultural opportunities including the Citadel Theatre, Art Gallery, and numerous cultural festivals.
The principal competitive disadvantages of the Downtown in relation to other areas are as follows: -3
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
unlike most competing commercial areas, the Downtown offers very little free parking for customers or employees; occupancy costs for businesses are higher in the Downtown than in other areas, largely because of higher property tax costs; land costs in the Downtown are higher than those in suburban commercial areas. Prospects Forecasts indicate that the recent pattern of slow economic growth in the Edmonton metropolitan area will continue into the next century. Population growth rates are projected to be under 1% per year during the 1990s, and the region's employment base is expected to grow by less than 1% annually. Based on projected economic growth rates and current Downtown vacancy levels, it is expected that the market for additional office space and other forms of accommodation within the Downtown will continue to be soft for the balance of the 1990s. Net absorption of office space during 1993-1998 is expected to average about 60,000 square feet per year. This represents a growth rate of less than 0.5% annually. If this growth rate continues, it would take 28 years (or until the year 2021) before the Downtown office vacancy rate drops below 5% if no existing buildings are removed from the office supply inventory. Based on existing and expected conditions in the commercial leasing market, there will be little or no impetus for the construction of new high-rise office towers or multi-tenant shopping complexes in the Downtown before the year 2000. Commercial development activity will likely consist primarily of single purpose, single user buildings, or renovation and conversion of physically sound but economically obsolete structures for new uses. Residential development activity is expected to generate a net increase of about 270 dwelling units during 1992-2000, unless that the City actively promotes housing development in the Downtown. This represents an average of about 30-35 units per year, and a growth rate of slightly less than 1% per year. Land values in the Downtown are not expected to recover to any significant extent in the foreseeable future. Prices are unlikely to keep up with inflation and may decline further before they bottom out. The gradual reduction of the difference between land values from the central core to suburban areas is expected to continue. The percentage of total municipal tax revenue generated in the downtown is likely to go down over the long term, because the aggregate value of the assessment base will not increase as rapidly in the Downtown as in other areas. However, this trend will be partly self-correcting. To the extent that land values and property tax levels in the Downtown come closer into line
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
with other commercial areas in the region, the prospects for leasing existing vacancies and developing new projects will improve. Future Directions Making the most of Edmonton's Downtown in the economic context of the 1990s will require a coordinated set of public policies and private initiatives developed through a process of public discussion. Some of the priorities which must be addressed by stakeholders include: (a)
developing fmancially viable prototypes of market-driven, low rise commercial and residential projects;
(b)
formulating planning policies and development controls that respond creatively to current conditions;
(c)
emphasizing shopping, entertainment and cultural amenities as the draws to attract business to the Downtown;
(d)
addressing the real and perceived parking problems in the Downtown;
(e)
encouraging the provincial government to reinvest in the Downtown; and
(f)
emphasizing the intrinsic importance of the Downtown to the entire metropolitan area.
5
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 1: INTRODUCTION Edmonton's Downtown area is of vital economic importance to all Edmontonians. It provides a livelihood for 2,200 business and 63,200 employees working in government, finance, personal services, retailing, entertainment, tourism and higher education. There are also 6,300 Downtown residents and 8,300 full and part time students attending education institutions located in the downtown and another 30,500 students located one LRT stop away at athe University of Alberta. The City of Edmonton recovers a major portion of the costs of operating all municipal services through the property and business tax revenues collected in the Downtown, which helps to keep down the cost of property taxes for residential ratepayers in other areas of the City. The importance of the Downtown in financing the operations of the City of Edmonton is illustrated by the fact that the Downtown accounts for only 0.4% of the land area and 1% of the population within the City limits, but generates 11% of the City's total property tax revenues. Downtown properties owned by public and private interests represent a $2.6 billion investment not including a massive investment in roads, LRT facilities and other infrastructure. More significantly, Downtown accounts for 23.2% of the City's non-residential property tax revenues. This is vitally important to all Edmontonians because a strong non-residential property tax base is the key to minimizing property taxes for homeowners throughout the City. It is estimated, for example, that a 10% decrease in Downtown property values would increase the property tax burden borne by property owners in other areas of the City by $5 7 million per year. Thus, the economic health of the Downtown affects the pocketbooks of all Edmontonians, whether or not they personally use the facilities and services offered in the Downtown.
6
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 2: OBSERVATIONS This part of the report will summarize observations about various dimensions of the economy of the Downtown. Analysis of causes and projections for the future will be left to later parts of the report. 2.1
Economic Activity Levels (a)
Metropolitan Context Downtown Edmonton is the financial and administrative centre of the metropolitan Edmonton region shown on Map 2.1.1. The region includes the communities of St. Albert, Sherwood Park, Fort Saskatchewan, Leduc, Spruce Grove, Stony Plain, Devon, Beaumont and Morinville in addition to the City of Edmonton. With a metropolitan population of over 840,000, Edmonton ranks as the fifth largest market in Canada (after Toronto, Montreal, Vancouver and Ottawa) and the largest in the prairie provinces. In addition to the metropolitan market within commuting distance of downtown, Edmonton's trading area includes the northern half of Alberta, portions of northeastern British Columbia and northwestern Saskatchewan, and much of the Northwest Territories. The total population of the trading area served by downtown Edmonton is on the order of 2,000,000 people. The economy of Edmonton and its trading area has been built on the development of renewable and non-renewable natural resources: agriculture, forestry, mining, and oil and natural gas extraction. Transportation and wholesale and retail trade have always played a central role in the Edmonton economy. Education, health care, public administration, construction and tourism are also major employers. As of 1992, the metropolitan economy employed 370,000 people. Historically, Edmonton's economy has alternated between rapid growth and relative stagnation. The area experienced very rapid economic development during the period from the beginning of permanent agriculturally-based European settlement in the 1880s until just before the outbreak of the First World War in 1914. This was followed by a long period of stagnation and recession that lasted through the 1920s, the Great Depression of the 1930s and the Second World War from 1939 to 1945.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Map 2.1.1 Edmonton Metropolitan Region
Showing: St. Albert, Sherwood Park, Fort Saskatchewan, Leduc, Spruce Grove, Stony Plain, Devon, Beaumont, Morinville and space in between.
8_
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
The discovery of recoverable oil reserves near Leduc in 1947 triggered a new period of economic expansion which lasted over 30 years. The collapse of the world oil market in the early 1980's brought the post-Second World War expansion to a crashing halt, and ushered in another slow growth period that has lasted to the present day. Table 2.1.1 Population of the City of Edmonton, the Edmonton Metropolitan Region Planning Area and the Province of Alberta - 1981 to 1993
City of Edmonton % Change
Edmonton Metropolitan Regional Planning Area Population
% Change
Province of Alberta
Year
Population
Population
% Change
1981
532,246
1982
551,314
3.58
727,420
1.66
2,322,300
3.78
1983
560,085
1.59
739,961
1.72
2,346,500
1.04
1984
564,000
0.70
745,104
0.70
2,341,600
-0.21
1985
570,165
1.09
753,417
1.12
2,347,800
0.26
1986
573,982
0.67
759,427
0.80
2,375,278
1.17
1987
576,249
0.39
761,252
0.24
2,377,700
0.10
1988
*N/A
*N/A
763,033
0.23
2,388,700
0.46
1989
583,872
*N/A
775,767
1.67
2,423,000
1.44
1990
605,538
3.71
801,518
3.32
2,472,500
2.04
1991
616,741
1.85
823,163
2.70
2,545,553
2.95
1992
618,195
0.24
827,138
0.48
2,568,200
0.89
1993
626,999
1.42
840,854
1.66
2,574,763
0.26
2,237,724
715,512
Population Change 1981 to 1993 Population 94,753
% Change 17.80
Population
% Change
Population
% Change
125,342
17.52
337,039
15.06
*N/A - Not Available Source: City of Edmonton Planning and Development Department, Policy and Information Branch Statistics Canada Edmonton Metropolitan Regional Planning Commission
9
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
The severity of the downturn experienced by the Edmonton economy in the 1980s and 1990s is reflected in a variety of statistical indicators. For example: •
From 1982 to 1992, the population of the Edmonton Metropolitan Region increased at an average rate of about 10,000 persons or 1.29% per year. The population of the City of Edmonton increased by an average of about 6,800 persons or 1.15% per year. This is a far cry from the 1971-1982 period, when the average annual increase was 10,300 for the City of Edmonton alone, and the City's growth rate was 2.11% per year.
•
From 1981 to 1983, the number of full time jobs in the Edmonton Census Metropolitan Area (CMA) decreased from 310,900 to 273,500, a loss of 37,400 positions or 12% of the full time employment base in just two years (Table 2.1.2). The decrease was partly offset by the addition of 5,400 part time positions, which increased from 42,100 in 1981 to 47,500 in 1983. The net effect was a loss of 32,000 jobs or 9.1% of the total employment base from 1981 to 1983. Table 2.1.2
Full and Part Time Employment in the Edmonton Census Metropolitan Area - 1981 to 1992 % Change
Part Time Employment
% Change
Total Employment
% Change
Year
Full Time Employment
1981
310,900
1982
295,100
-5.08
44,900
6.65
340,000
-3.68
1983
273,500
-7.32
47,500
5.79
321,000
-5.59
1984
279,200
2.08
48,500
2.11
327,700
2.09
1985
280,500
0.47
52,400
8.04
332,900
1.59
1986
285,200
1.68
51,700
-1.34
336,900
1.20
1987
289,800
1.61
54,200
4.84
344,000
2.11
1988
298,200
2.90
57,300
5.72
355,500
3.34
1989
306,000
2.62
58,200
1.57
364,200
2.45
1990
309,700
1.21
57,100
-1.89
366,800
0.71
1991
314,000
1.39
56,000
-1.93
370,000
0.87
1992
306,900
-2.26
63,100
12.68
370,000
0.00
21,000
49.88
17,000
4.82
42,100
353,000
Employment Change - 1981 to 1992 -4,000
-1.29
_
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
It was not until 1988 that the total number of jobs in the CMA recovered to 1981 levels. The number of full time positions did not come back to the 1981 level until 1991, and then only briefly. As of 1992, there were 4,000 fewer full time jobs in the CMA than in 1981. From 1981 to 1992, the total number of people working increased by 4.8%, but their total inflation-adjusted employment earnings decreased from $176.7 million in 1981 to $159.3 million in 1992, a decline of 9.8% in real terms (Figure 2.1.1). This means that the purchasing power of the average employed worker in the CMA declined by 14% in real terms. .
From 1981 to 1984, the unemployment rate in the City rose sharply from under 5% to over 13% (Figure 2.1.2).
After gradually decreasing to under 8% by 1990, the unemployment rate increased once again, to 9.5% in 1991 and 11.0% in 1992. This level was only slightly below the national average of 11.3%. Despite the variety of discouraging statistics that can readily be quoted, there are positive economic indicators as well. For example: .
The Edmonton market registered the highest rate of increase in house prices in Canada from 1991 to 1992.
•
The development of new industrial and residential subdivisions in the suburban areas of Edmonton and surrounding communities has continued in spite of slow overall growth.
•
In 1993 Edmonton was named by the Globe and Mail Report on Business Magazine as one of the five best places in Canada to do business.
•
From 1983 to 1992, full time employment increased at an average rate of 1.29% per year, and part time employment grew at 3.21% per year. During this nine year period, there were 33,400 full time and 15,600 part time jobs created, for an overall increase of 49,000 jobs over nine years or 1.59% per year.
In summary, downtown Edmonton is at the hub of a metropolitan economy experiencing modest positive growth.
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Figure 2.1.1
Figure 2.1.2
- 12 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(b)
Downtown Economic Activity Downtown Edmonton is home to 2,170 businesses, or 12.2% of the total of 17,807 businesses located within the City of Edmonton, at the end of 1992. Compared to the City as a whole, the downtown has a heavier concentration of establishments in the following sectors: • • • • • •
Communications and utilities; Finance, insurance and real estate; Business services; Educational services; Health and social services; and Food, beverage and accommodation.
In recent years, there has been a net decrease in the number of businesses in the downtown, in contrast to other areas of the City. Table 2.1.3 Trends in Number of Firms Downtown and Other Areas of Edmonton 1988 - 1992 Year
Downtown
Other Areas
City Total
Percent Downtown
1992
2,170
15,637
17,807
12.2
1988
2,350
15,599
17,949
13.1
Change
(180)
38
(142)
% Change
-77%
0.2
-0.8
Source: City of Edmonton Planning and Development Department, Policy and Information Branch. As shown in Table 2.1.3, the number of businesses in the downtown decreased by 180 firms or 7.7% from 1988 to 1992, while the number of businesses in the rest of the City increased by 38 firms or 0.2% during the same period. Total employment within the downtown is currently estimated at approximately 63,200 jobs, or about 17.1% of the employment base of the Census Metropolitan Area.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
The following sections discuss four important aspects of the downtown economy: (i) administrative employment; (ii) retail sales; (iii) the hospitality industry; and (iv) the post secondary education sector. (i)
Administrative Employment Rapid growth in administrative or "white collar" office employment provided the impetus for much of the downtown building boom of the 1970s. This growth included both the public and private sectors, as the provincial public service grew rapidly, federal and civic payrolls increased, and utility and energy firms expanded their regional office functions in downtown Edmonton. Since the downturn in 1981, the picture has changed dramatically. Several major private employers, e.g. Imperial Oil and AGT Limited, implemented major staff reductions in the 1980s, and layoffs continue to occur in the private sector as corporations struggle to minimize overhead costs. Public sector employment growth levelled off due to limited financial resources, and staff reductions are beginning to take place as the municipal government strives to achieve zero increases in property taxes, and the provincial and federal governments struggle with deficits that have risen to levels that alarm ordinary citizens as well as business leaders. Employment at the City of Edmonton declined about 10% from 10,700 to 9,700 full time employees, between 1982 and 1993. (Edmonton Telephones employee count of approximately 2,000 is not included). Perhaps the most significant change has been the reduction in the provincial government payroll. The number of full time salaried provincial government employees in Edmonton peaked in 1981 at approximately 19,300. Thereafter, it declined to about 11,600 by 1993, a reduction of some 7,700 employees or 40%.
The impact on the downtown was greater, due to the relocation of several departments from the downtown to suburban locations in Edmonton. It is estimated that the number of provincial government positions within the downtown declined from about 17,100 in 1982 to 7,800 in 1993, a reduction of about 9,600 positions or 55%. This is in sharp contrast to the period from 1972 to 1981, when the provincial government workforce grew by 94% in nine years.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.1.4 Alberta Provincial Government Employment 1972-1992 Total Alberta Provincial Government Employment
Alberta Provincial Government Employment in the City of Edmonton
Year
Positions
Change
1972(a)
18 821
N/A
1973
21,127
12.3
1974
24,878
17.8
1975
27,364
10.0
1976
29 388
7.4
1977
30 904
5.2
1978
31,203
1.0
1979
32,394
3.8
1980
33,607
3-7
17,812
N/A
1981
36,502
8.6
19,346
8.6
1982(h) 1983
35,878
-1.7
19,015
-1.7
32,429
-9.6
-9.6
1984
31 „607
-2.5
17,187 16,436
1985
30 856
-2.4
16,045
-2.4
1986
27,413
-11.2
14,803
-7.7
1987
25,291
-7.7
13,657
-7.7
1988
25,260
-0.1
13,640
-0.1
1989
25,656
13,854
1.6
1990(c)
25,315
1.6 -1.3
13 670
-1.3
1991 1992 1993
24,865
13 427
-1.8
12 915 11,606
-3 8
23 916 21 421
-3.8 -10.4
Positions
Change
Alberta Provincial Government Employment in Downtown Edmonton
Estimate % of City
Positions
Change
1
-4.4
-10.1
67
7,776
Sources: 1.
Change
Province of Alberta, Public Service Commission Annual Reports.
9,63_5
-55
I EDMONTON: 1994
to full-time salaried positions. Excluded are part time and referred to as wage positions in the Public Service tssification.
ms ionton
forward exclude NAIT, SAIT and Alberta Hospitals in moka, which were included in totals for previous years.
Ity Total
Percent Downtown
377
8.69
610
10.81
!33)
39.06
.5%
ment, Policy and Information
Ls bf rather sluggish. an increase of 5.5% in 1992 quite make up for the 7% math of the introduction of the Reliable statistics on consumer specific subareas of Edmonton servation, and the statistics on ragraph, would suggest that the ishness of consumer spending. heir hopes for a rebound in to be another tough year in
. retailers or landlords would the downtown retail sector has with the major enclosed areas. According to the retail by the Planning and )rmance of the downtown is )93. This is approaching the -Lich is about 27% above the lat primary trading area of
1
0 forward exclude Alberta Treasury Branches, which were for previous years.
wincial total within City of Edmonton from Public Service ual Reports. total within downtown area approximate only, as estimated rernment staff. Ltistics do not include the effect of the further reductions in tment spending and employment initiated by provincial )94. These additional cutbacks will result in further decreases )loyment corporate and government restraint, there has been little if any downtown employment since 1981. Comprehensive statistics iy place of work are not currently available, but estimates based adicate that the total number of jobs in the downtown Ind institutional as well as office jobs) is currently ,200 and has held steady in the range of 60,000 to 65,000 over
town retail sector includes 554 establishments, or 8.7% of the ?.,s in the entire city. on Table 2.1.5, the ranks of downtown retailers decreased by or 14.1% from 1988 to 1992. This compared to a net )f 142 outlets or 2.4% in other areas of the City, indicating that own bore the brunt of the retail attrition in the City during this
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.1.5 Trends in Number of Retail Firms Downtown and Other Areas of Edmonton 1988 - 1992 Downtown
Other Areas
City Total
Percent Downtown
1992
554
5823
6377
8.69
1988
645
5965
6610
10.81
Change
(91)
(142)
(233)
39.06
% Change
-14.1%
-2.3%
-3.5%
Source: City of Edmonton, Planning and Development Department, Policy and Information Branch Consumer spending in the early 1990s has been rather sluggish. Provincial Statistics for Alberta indicate an increase of 5.5% in 1992 (not adjusted for inflation). This did not quite make up for the 7% decline that occurred in 1991 in the aftermath of the introduction of the federal Goods and Services Tax (GST). Reliable statistics on consumer expenditures in the downtown and other specific subareas of Edmonton are not currently available, but casual observation, and the statistics on retail attrition quoted in the preceding paragraph, would suggest that the downtown has been affected by the sluggishness of consumer spending. Downtown retail landlords indicate that their hopes for a rebound in 1993 were not fully reali7ed, and it proved to be another tough year in the industry. While downtown retail sales are not what retailers or landlords would like them to be, the sales performance of the downtown retail sector has actually been fairly strong in comparison with the major enclosed "regional" shopping centres in suburban areas. According to the retail impact model developed and maintained by the Planning and Development Department, the sales performance of the downtown is 21% above the regional average, as of 1993. This is approaching the performance of West Edmonton Mall, which is about 27% above the regional average. The model indicates that the primary trading area of
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
the downtown consists of the central and eastern portions of the City, as shown in Map 2.1.2 One of the problems affecting downtown retailers, as well as traditional enclosed regional shopping centres, is the trend away from Department Store Type Merchandise (DSTM) retailing. DSTM refers to the range of merchandise traditionally found in the department stores and specialty shops typical of downtown areas and enclosed malls. The DSTM merchandise mix includes a heavy emphasis on womens' and mens' apparel and other "fashion" goods. The marketing approach employed with DSTM retailing has traditionally emphasized selection and convenience rather than low price. The DSTM sector of the retail industry flourished in the 1970s when the baby boom generation was in its twenties and its purchasing power was growing every year. However, with the ageing of the baby boom generation and the decline in purchasing power in the 1980s, consumers took more and more of their business to high volume, low price retailers operating from strip malls or freestanding buildings on suburban arterials. Stores such as Leon's Furniture Warehouse, Toys "R" Us, Costco, and Eagle Hardware are among the prominent examples of these "big box" retailers. The increasing popularity of this form of retailing presents a particular challenge for the downtown, since it lacks (or at least is perceived as lacking) a supply of land suitable for such premises. Hospitality Industry The hospitality industry (broadly defined to include accommodation, dining and entertainment for tourists, convention attendees, and visitors from within the trading area) is an increasingly important component of the downtown economy. Downtown boasts an outstanding Convention Centre, which is capable of hosting conventions of up to 5,000 delegates and averages about 475,000 visitors per year. There are ten major hotels downtown and approximately 3,000 of Edmonton's 8,500 hotel rooms are located within the downtown core. In addition, there is a large number of restaurants, lounges and clubs.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Another key element of the hospitality industry is the variety of festivals and special events staged downtown every year. These include the First Night on New Year's Eve, the Works Festival, the Street Performers Festival, and the Dreamspeakers Festival, in addition to many Klondike Days events. These various events attract thousands of visitors to the downtown each year as shown on Table 2.1.6. Table 2.1.6 Attendance at Downtown Events - 1993
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Event First Night Festival Family Day Teen Festival The Works Jazz City Street Performers Festival Sunday promenade Taste of Edmonton Other Klondike Dreamspeakers Festival Santa Claus Parade Christmas Lights Downtown Local Heroes Total Visits
Attendance 35,000 15,000 18,300 124,000 49,100 153,000 200,000 170,000 392,200 27,700 12,000 10,000 10,000 1,011,770
Producer Various Organizations Downtown Business Association Edmonton Teen Festival Alberta Part Art Society Jazz City Society Edmonton International Street Performers Festival Klondike Days Association Klondike Days Association Klondike Days Association Aboriginal Film Makers Association of Alberta Downtown Business Association Downtown Business Association Downtown Business Association
(iv) Higher Education The downtown is home to four major post secondary educational institutions: Grant MacEwan Community College, Alberta College, Alberta Vocational College and Athabasca University. Among them, these four institutions attract a large number of students, instructors and staff to the downtown on a daily basis. The largest of the downtown colleges is Grant MacEwan Community College, located in a four block campus on 104 Avenue. This new complex, which opened in 1993, accommodates diploma programs in health care, business and other disciplines which had previously been housed at the College's temporary downtown facilities in 107 Street Plaza, or at its suburban Mill Woods, Jasper Place and Cromdale campuses. The total Full Time Equivalent (Frh) enrolment at the new downtown campus is 5,000 students, an increase of 3,000 F IE or 150% over the numbers at 107 Street Plaza.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Alberta College with 1,800 full and part time students and Alberta Vocational College with 1,200 full and 300 part time students are long established downtown institutions specializing in adult education. Athabasca University is primarily a correspondence university, but has recently begun offering a limited number of courses at its premises on 107 Street. In addition, as a result of the extension of the LRT line to the University of Alberta in 1993, 26,000 full and 4,500 part time students are four subway stops away from Jasper and 101 Street. Downtown is now effectively just as close to this market of students, faculty and staff as the Whyte Avenue commercial strip. 2.2
Downtown Real Estate Market Conditions (a)
Office Space The downtown office leasing market in Edmonton, as in many other cities, has traditionally been a vivid indicator of the ups and downs of the local economy, and a comparison of office leasing trends in the 1970s and 1980s underscores this point. During the 1970s, Edmonton's downtown office market experienced very rapid growth; total occupied office space more than tripled, from 2.7 million square feet (sq. ft.) in 1971 to 9.7 million in 1981. This represents an annual growth rate of 13.6% and net absorption on the order of 700,000 sq. ft. annually, reflecting the rapid increase in administrative employment during the period. During the period from 1981 to 1992, by contrast, total occupied office space increased from 9.7 million to 12.7 million sq. ft. This translates to a growth rate of 2.5% and net absorption of less than 300,000 sq. ft. annually, and reflects the slower economic growth and more stable administrative employment levels of the 1980s. Downtown office vacancy rates during the 1980s followed a pattern remarkably similar to the movement in total metropolitan employment. As a result of the strong demand for office space in the 1970s, the overall vacancy rate as of 1981 stood at 0.5%. This shot up to about 24.7% by 1983, as the completion of office projects initiated in the 1970s coincided with the contraction of Edmonton's economy and employment base.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.2.1 Office Absorption and Vacancy Downtown Edmonton 1982 - 1992 Net New Supply (Square feet)
Absorption (Square feet)
Vacancy Rate (Percent)
Year
Inventory (Square feet)
1982
11,532,529
1,068,946
(173,151)
13.0
1983
13,353,378
1,820,849
10,591
24.7
1984
13,084,140
(269,238)
161,274
22.0
1985
13,484,691
400,551
513,300
20.5
1986
13,713,691
229,000
518,286
18.1
1987
13,716,829
3,138
304,368
15.9
1988
14,202,294
485,465
577,487
14.7
1989
14,162,294
(40,000)
227,039
12.8
1990
14,890,294
728,000
801,012
11.7
1991
15,076,580
186,286
(115,395)
13.6
1992
14,896,934
(179,646)
(275,200)
14.4
1993
14,896,000
(294,000)
16.4
0
Source: Colliers Macaulay Nicolls Inc. Canadian Real Estate Review 1992-1993, 1993-1994 From 1983 to 1990, the vacancy rate edged down gradually to about 11.7%, and then climbed to 16.4% by end of 1993. Current conditions indicate continuing softness in the office leasing market. Absorption has been negative for three years in a row. Table 2.2.2 shows similar information from Graeme Young and Associate. Figure 2.2.1 shows vacancy by class of building.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.2.2 Office Inventory and Vacancy Downtown Edmonton 1989 - 1993
Year
Total Inventory
Total Occupancy
Growth
Vacancy
1989
12,886,000
11,152,000
450,000
1 ,734 ,000
1990
13,466,000
11,769,000
617,000
1,697,000
1991
13,526,000
11,781,000
12,000
1,745,000
1992
13,625,000
11,471,000
(310,000)
2,154,000
1993 (to June 30)
13,628,000
11,234,000
(237,000)
2,394,000
Source:
Graeme Young and Associates Alberta Real Estate Forecast, Third Quarter, 1993
Rental rates for downtown office space are low in historical terms. Current rents as of the first half of 1993 are in the range of $8.00 to $10.00 per square foot per annum for class A space, according to estimate published by Colliers Macaulay Nicolls Inc., one of the major commercial brokers active in the Edmonton market. Rents for Class B and C space are in the ranges of $4.00 $6.00 and $2.00 - $4.00 respectively. These figures are for the "face rates" specified in the lease contracts, but inducements of various kinds (e.g. fixturing allowances or rent-free periods) currently in the range of $12.00 to $23.00 per sq. ft. can reduce the tenant's - 23 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
effective occupancy cost by another 30-40%. This means that Class A space can be leased at an effective net rent in the range of $5.00 to $7.00 per sq. ft. Space of similar quality would have leased in 1978 at a face rate on the order of $14.00 per sq. ft. with minimal if any inducements, which would be equivalent to a $30.00 per sq. ft. in today's currency. The low level of office rents in real terms is borne out by the Colliers Index of net effective Class A downtown office rents, reproduced in Figure 2.2.1. This graph, in which each variable is indexed to 1978 =- 100, indicates that effective rental rates, after holding steady for several years at a little over 50% of their 1978 levels, have declined since 1991. In fact, the 1993-94 survey published by Colliers indicates that the net effective rental rate for office space in downtown Edmonton as of 1993 was zero!
(b)
Retail Space The downtown retail leasing market reflects sluggish consumer spending and the attrition of retail outlets in recent years. Statistics on shopping centre vacancy rates published by Colliers Macaulay Nicolls indicate that the enclosed downtown shopping centres connected to the indoor pedway network have a somewhat higher vacancy rate than their suburban counterparts.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.2.3 Overall Vacancy Analysis for Shopping Centres 1992 Type of Shopping
Description of Shopping Centres
Vacancy
1.
Neighbourhood Centres
9.14%
50,000 to 150,0000 square feet gross leasable area anchored by supermarket on drugstore.
2.
Regional Centre
3.42%
Centres with 400,000 to 1,000,000 square feet gross leasable area, anchored by one or more department stores (includes West Edmonton Mall).
3.
Community Centre
4.64%
150,0000 to 400,000 square feet gross leasable area anchored by a junior department store, discounter or variety.
4.
Downtown Centres
5.02%
Centres connected by indoor pedway.
5.
Small Neighbourhood
15.4%
Centres Source:
Same as Neighbourhood Centres, 50,000 square feet or less.
Colliers Macaulay Nicolls Inc. Retail Market Summary, 1992 According to the Colliers survey, a total of 75,000 sq. ft. or 5.0% of the total inventory in the downtown centres was vacant as of late 1992. This compared to an overall average of 3.4% for seven enclosed suburban regional shopping malls (including West Edmonton Mall) and 4.6% for seven suburban community shopping centres. These statistics reflect only the centres connected to the indoor pedway network. With the completion of Eaton Centre and the expansion of Edmonton Centre during the 1980s, there was a centralization of downtown retail activity within the enclosed shopping complexes, resulting in weaker demand for storefront locations, and increased vacancies, on traditional shopping streets such as Jasper Avenue as well as Jasper and 100 Street (once regarded as the 100% corner) that have remained unoccupied for several months, a situation that would have been hard to imagine 15 years ago. Similarly, the portion of Jasper Avenue west of 103 Street experiences relatively high vacancy and turnover. Statistics on current retail rental rates in the downtown are not readily available. However, a report of leasing conditions in Edmonton published by Royal - 25 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
LePage notes that net retail rents in the city declined by approximately 10% during the first six months of 1993, and that the decline was accompanied by generous tenant inducements. These observations would presumably apply to the downtown as well as other areas. (d)
Apartments The existing housing stock of the downtown area has about 4,500 units accommodating a population of approximately 5,750 residents. The majority of these units are located in the McKay Avenue Area, south of 100 Avenue between Bellamy Hill and the Legislature grounds. Another 540 people live in short term accommodation such as the YMCA and YWCA. Vacancy rates for downtown apartments were slightly above the city-wide average of 6.8% as of October 1993. Average rental rates for two-bedroom apartments are in the neighbourhood of $600 per month, about 17% below 1981 level (after adjusting for inflation) and well below the economic rents that would be required in order to justify new construction of conventional rental apartment housing on a large scale Additional background information on the apartment market in and around the downtown may be obtained from the Downtown Housing Strategy Report.
2.3
Land Values and Property Assessment (a)
Current Land Values The general pattern of current land values in the downtown is shown in Map 2.3.1. The overall range in values goes from a low of about $20 per square foot of land to a high of around $150 per square foot. These figures are generalized ranges indicating the "going rate" for typical parcels. Individual properties may have values above or below the ranges indicated if they have exceptional advantages or disadvantages in terms of parcel size, configuration or relationship to surrounding land assemblies. Land values differ between specific sub-areas within the downtown, based on factors such as traffic exposure, existing and potential land uses, and permitted densities. Within the downtown, there are five distinct sub-areas which can be identified based on land values and related characteristics. They are generally delineated as follows: 1.
The central core, extending from the south side of Jasper Avenue north to 104 Avenue, from 97 Street to 103 Street: This is the area with the highest land values, ranging from $50 to $150 per square foot.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(b)
2.
The Jasper Avenue western corridor, including properties on either side of Jasper Avenue from 103 Street to 109 Street: Values are in the range of $40 to $75 per square foot.
3.
The warehouse district, including lands north of the Jasper Avenue corridor to 104 Avenue, from 103 Street to 109 Street: General range from $20 to $50 per square foot. Values are higher to the east of 105 Street, ranging from $20 to $50, compared to a maximum of $30 to the west of 105 Street.
4.
The 100 Avenue corridor, including properties on the side streets north and south of 100 Avenue, from 101 Street to 109 Street: Values west of 105 Street ranging from $20 to $50 per square foot. Higher values are reported east of 105 Street, from $30 to as much as $100 per square foot for areas closer to the central core.
5.
The MacKay Avenue apartment district to the south of the 100 Avenue corridor, from 101 Street to 107 Street: Values are generally in the range of $20 to $40 per square foot.
Recent Trends in Values The trend in downtown land values over the last 15 years can be clearly seen by comparing current values to those observed in 1978, when the downtown construction boom was in full swing, and the City was in the process of preparing the Downtown Area Redevelopment Plan that was adopted in 1981 and has remained in place (with some amendments) to the present day. Map 2.3.2 shows the generalized pattern of land values in the downtown in 1978. Comparing this map to Map 2.3.1, it is apparent that land values have decreased significantly. In every area of the downtown, the low end of the range of values was higher in 1978 than in 1993, and in most cases the maximum values in 1978 are also above the comparable figures for 1993. These observations are based on figures in current dollars, (i.e, with no adjustment for inflation). When the 1978 values are restated in equivalent 1993 dollars to account for inflation, the comparison is even more striking. In every case the maximum 1993 value is lower in real terms than the minimum 1978 value.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Tables 2.3.1 and 2.3.2 indicate the magnitude of the decline in land values. Table 2.3.1 indicates the change in current dollars (i.e., with no adjustment for inflation) in the minimum and maximum values in each part of the downtown. The minimum values show decreases ranging from 20% to 61%. The change in maximum values ranges from a decrease of 40% to an increase of 33%. Table 2.3.2 shows the changes in inflation-adjusted dollars. On this basis, both the top and bottom ends of the value range in each area show decreases at least 38% in real terms between 1978 and 1993. The minimum values in several areas show decreases of more than 80% in real terms. Table 2.3.1 Minimum and Maximum Land Values Sub-Areas of Downtown Edmonton in Current Dollars, 1978 and 1993 (Change Measured in Current Dollars) 1978 AREAS Central Core Jasper Ave. West Corridor Warehouse District East of 105 Street West of 105 Street 100 Avenue Corridor East of 105 Street West of 105 Street MacKay Avenue Area
Change in Change in Min. Value Max. Value MAX _ $ % $ % $150 ($70) -58% ($15) -9%
1993
MIN $120
MAX $165
MIN $50
$100
$120
$40
$75
($60)
-60% ($45)
-38%
$51 $35
$70 $50
$20 $20
$50 $30
($31) ($15)
-61% ($20) -43% ($20)
-29% -40%
$60 $51 $25
$75 $60 $30
$30 $20 $20
$100 $50 $40
($30) ($31) ($5)
33% -50% $25 -61% ($10) -17% 33% -20% $10
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Table 2.3.2 Minimum and Maximum Land Values Sub-Areas of Downtown Edmonton, 1978 and 1993 in Constant 1993 Dollars (Change Measured in Constant 1993 Dollars) 1978 AREAS Central Core Jasper Ave. West Corridor Warehouse District East of 105 Street West of 105 Street 100 Avenue Corridor East of 105 Street West of 105 Street MacKay Avenue Area
1993
Change in Min. Value $ % ($207) -81%
Change in Max. Value $ , % ($203) -58%
MIN $257
MAX $353
MIN $50
MAX $150
$214
$257
$40
$75
($174)
-81%
($182)
-71%
$109 $75
$150 $107
$20 $20
$50 $30
($89) ($55)
-82% -73%
($100) ($77)
-67% -72%
$129 $109 $54
$161 $129 $64
$30 $20 $20
$100 $50 $40
($99) ($89) ($34)
-77% -82% -63%
($61) ($79) $24
-38% -61% -38%
The changes in land values in various sub-areas of the downtown from 1978 to 1993 are summarized in graphic form in Map 2.3.3 which shows ranges of value for each sub-area in constant 1993 dollars. The central core area shows the largest decreases, with both the minimum and maximum values declining by more than $200 per square foot, in 1993 dollars. Values along the western portion of Jasper Avenue also show a steep decline, on the order of $180 per square foot in 1993 dollars. The smallest change in absolute terms, on the order of $30 per square foot in 1993 dollars, was in the MacKay Avenue area. The implications of the dramatic changes in land values are discussed in Part 6 of the report. (c)
Historical Context In order to put the recent decline in downtown land values in perspective, it is useful to review the historical fluctuation of land prices since the early development of Edmonton a little over a hundred years ago. Over this period, the price of land in the downtown has fluctuated widely, in a dramatic reflection of the booms and busts in the local economy. During the period of rapid economic development around the turn of the twentieth century, there was intense speculation in real estate and land values continued to increase. For example, in the 1880s, commercial lots on Jasper Avenue were available for $25 a lot or $0.33 per square foot in the case - 30 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
-31 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
of interior lots, and $35 a lot or $0.47 per square foot for corner lots. By 1912, land on Jasper Avenue was reportedly trading at prices of up to $10,000 per frontage foot. This equates to $66.67 per square foot, or more than 140 times the values of the 1880s. The booming real estate market of the early twentieth century crashed in 1914, and the aggregate assessed value of real estate dropped by more than 50% between 1915 and 1919 as shown in Figure 2.3.1. The recovery of the market was delayed by the lack of economic growth in Edmonton in the 1920s, the Great Depression of the 1930s and the virtual freeze on civilian investment during the Second World War. It took 48 years (until 1962) before assessed values recovered to their 1914 levels! The post-Second World War era saw a return to increasing land values in the downtown. A pattern of slow but steady appreciation during the 1950s and 1960s set the stage for the rapid escalation in prices which coincided with the downtown construction boom of the 1970s. As indicated in Figure 2.3.2, the price of land increased five or six fold in some areas of the downtown during the 1970s boom. This upward trend in prices continued until the early 1980s when the economic downtown triggered another downward correction in the market.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(d)
Comparison of Values by Area
This section discusses the changes in the relative relationships in land values among various parts of the Downtown between 1978 and 1993. In addition, it explores the relative change in land values between the Downtown and other parts of the city during the same period. The changes in relative value between different parts of the downtown are illustrated in Table 2.3.3. Table 2.3.3 Comparison of Midpoint Land Values Sub-Areas of Downtown Edmonton 1978 and 1993 Midpoint Values 1978
Percent Change
1993
Percentage of Central Core Price 1978
-29%
N/A
1993
Central Core
$142.50
$100.00
N/A
Jasper Ave. West Corridor
$110.00
$57.50
-47.7%
77%
57%
Warehouse District East of 105 Street West of 105 Street
$60.50 $42.50
$35.00 $25.00
-42% -41.2%
42% 30%
35% 25%
100 Avenue Corridor East of 105 Street West of 105 Street
$67.50 $55.50
$65.00 $35.00
-3.7% -36.9%
47% 39%
65% 35%
McKay Avenue Area
$27.50
$30.00
+9.1%
19%
70%
The comparisons in this table are based on the midpoint of the range of value in each sub-area. The table shows that midpoint values in some sub-areas have dropped less rapidly than in the central core, and as a result the spread in land prices between these areas and the central core has narrowed. For example, midpoint values in the MacKay Avenue Area were about 81% below those in the central core in 1978, but by 1993 the gap had narrowed to 70%. In some other sub-areas, the opposite is true. For example, the spread in midpoint values between Jasper Avenue West and the central core has increased from 23% in 1978 to 43% in 1993. In certain other sub-areas, the percentage decrease in midpoint - 33 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
values has approximated the decline in the central core, and the gap in price has changed only minimally, (i.e., by less than five percentage points). When this analysis is repeated in Table 2.3.4 using the minimum values in each sub-area rather than the midpoints, all areas show either a minimal change or a significant reduction in the price gap relative to the central core. Table 2.3.4 Comparison of Minimum Land Values Sub-Areas of Downtown Edmonton 1978 and 1993 Percentage of Central Core Price
Minimum Values 1978
1993
Percent Change
1978
1993
Central Core
120.00
50.00
-58.3%
N/A
N/A
Jasper Ave. West Corridor
100.00
40.00
-60.0%
83%
80%
East of 105 Street
51.00
20.00
-60.8%
43%
40%
West of 105 Street
35.00
20.00
-42.8%
29%
40%
Fast of 105 Street
60.00
30.00
-50.0%
50%
60%
West of 105 Street
51.00
20.00
-60.8%
43%
40%
25.00
20.00
-20.0%
21%
40%
Warehouse District
100 Avenue Corridor
McKay Avenue Area
In order to compare price trends in the downtown with other areas of the city, experienced appraisers were asked to estimate typical 1978 and 1993 prices for four hypothetical suburban properties: 1. 2. 3. 4.
a single family detached building lot in a new residential subdivision; a light industrial lot on the interior of an industrial subdivision; a strip commercial site on a major arterial road; and a regional shopping centre site.
The estimated prices for these four "benchmark" properties are summarized in Table 2.3.5. In each case, the land value has not kept pace with inflation. Land value has depreciated in the case of the light industrial lot. Nominal price - 34 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
increases in the other three cases are all under 60%, whereas cumulative inflation over the period was 114%. Expressed in constant (inflation-adjusted) dollars, the values for these suburban benchmarks show decreases ranging from 25% to 76% between 1978 and 1993. Table 2.3.5 Midpoint Prices for Suburban Benchmark Properties 1978 and 1993 (Per Square Foot) Current Dollars
Constant 1993 Dollars
1978
1993
Change
1978
1993
Change
Single family lot
$8.44
$9.67
+15%
$18.09
$9.67
-47%
Light industrial lot
$2.70
$1.61
-40%
$5.78
$1.61
-72%
Strip commercial site
$6.50
$8.00
+23%
$13.92
$8.00
-43%
Shopping centre site
$4.59
$5.97
+30%
$9.84
$5.97
-39%
The relative relationship of land prices in suburban areas and the central core of the downtown is show in Table 2.3.6. Table 2.3.6 Ratio of Midpoint Land Values Central Core vs. Suburban Benchmarks 1978 and 1993 1978
1993
Single family lot
17:1
10:1
Light industrial lot
53:1
62:1
Strip commercial lot
22:1
13:1
Shopping centre site
31:1
17:1
The table indicates that in most cases suburban values have decreased less than those in the downtown, and as a result the price gap has narrowed. For example, land in the central core was worth about 17 times the price of a single family lot in 1978, but by 1993 this ratio had declined to approximately 10 to 1. Similarly, the ratio between downtown core values and suburban strip - 35 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
commercial prices diminished from about 22 to 1 in 1978 to 13 to 1 in 1993. The one exception is the light industrial example. In this case, the ratio increased from 53 to 1 in 1978 to 62 to 1 in 1993. When the comparison between the downtown core and the suburbs is done based on minimum values rather than midpoints, each of the suburban examples shows a significant reduction in the price gap. Table 2.3.7 Ratio of Minimum Land Values Central Core vs. Suburban Benchmarks 1978 and 1993 1978
1993
Single family lot
15:1
5:1
Light industrial lot
52:1
31:1
Strip commercial lot
24:1
6:1
Shopping centre site
26:1
8:1
Moreover, the magnitude of the reduction is much more striking. For example, based on minimum values, the price ratio between the downtown core and the strip commercial benchmark decreased from 24 to 1 in 1978 to 6 to 1 in 1993. In general, the gap between the peak values found in the central core and those in other parts of the downtown and other areas of the city has decreased since 1978, because land values in the central core have dropped more rapidly in real terms than in most other areas. As shown in Figure 2.3.3, the overall effect has been a flattening of the classical profile of land values declining from the city centre. (e)
Property Tax Assessments The decline in land values within the downtown has inevitably affected property tax assessments. In the City of Edmonton, tax assessments on all properties are reviewed every seven years. The latest general reassessment completed in 1992, reflected assessed values as of 1991, and took effect starting in 1993. The previous reassessment was done in 1985, reflecting values as of 1984, taking effect in 1986.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
- 37 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
Due to the decline in land values in the downtown during the 1980s, the land component of the assessed value of most properties was reduced significantly in the course of the general reassessment completed in 1992. In most instances, the assessed value of improvements did not decline to the same extent as the land component but nevertheless the total assessed value of most properties either declined or increased significantly less than the overall average for the City as a whole. As a result, many properties in the downtown benefitted from a reduction in their annual property tax bill from 1992 to 1993, with properties in other parts of the City making up the difference to the municipal treasury. 2.4
Development Economics/Prospects (a)
Feasibility of Development The development of new high-rise commercial or residential projects in the downtown is not considered to be commercially viable under current market conditions (except possibly in the case of an owner-user or an investor with surplus equity funds and an extremely long investment horizon) for the following reasons: 1.
Office vacancy rates have remained stubbornly high in Edmonton and in many other North American centres.
2.
Owners with vacant space and tenants seeking to sublease surplus space are competing very aggressively for the limited number of tenants with good credit ratings.
3.
Net effective office rental rates are very low due to single-digit face rates and high inducement levels. Effective rents have declined to less than half of what they were when most of the existing stock of office buildings was constructed in the late 1970s and early 1980s, whereas construction costs have nearly doubled.
4.
Apartment rental rates are well below the economic levels that would be required to make new rental residential projects commercially viable.
5.
At the present time, lending institutions are extremely wary of real estate developments in general, and office projects in particular, and are applying far more stringent credit criteria than in the past.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
6.
(b)
Equity investors have become more cautious about real estate investments and have raised their expectations regarding minimum acceptable rates of return on investments, which has the effect of reducing the value of existing revenue properties and contemplated new projects.
Residual Land Values High vacancies, low rents and high construction costs for high-rise office and apartment projects have pushed residual land values down to the point that they are of limited relevance in today's market. The term residual land value refers to an estimate of the maximum price that a developer of a particular type of project could afford (or would be prepared) to pay for the land, and still make an acceptable profit margin on the development. It is termed a residual value because the analyst projects the expected value of the completed project based on probable rents, then deducts projected construction and interest costs as well as a target profit margin, and the remainder left over is the maximum price that the developer can afford to pay for the land. As residual values are estimates based on the projection of future costs and revenues, they have a number of interesting properties: 1.
The value obtained depends on the assumptions used, and is ultimately a matter of opinion.
2.
More than one residual value can be calculated for a single property at a given time. Each feasible alternative for the development of the property will generate a different a residual value. The actual market value of the property may or may not correspond to one of these residual values.
3.
Residual values go up or down as leasing conditions and development costs change, even if there are no sale of vacant land to indicate changes in actual market value. For example, if rental rates drop and construction costs do not, residual values go down.
4.
Residual values can decline to zero, or even become negative if leasing conditions are such that the trading values of revenue properties are below the current costs of constructing similar buildings.
Residual values can be used to determine the highest and best use (in the economic sense) of a parcel of land. In principle, the feasible development - 39 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
scenario that generates the highest residual land value is regarded as the highest and best use in the economic sense. Historically, the land use which generated the highest residual values was high-rise office development. As a result, the price of land in hot downtown real estate markets (where developers were the most active buyers) tended to be bid up to the ceiling represented by the residual value associated with office development. Clearly, these circumstances do not exit in downtown Edmonton today. The market for vacant land in the downtown is subdued at best. The few sales that have occurred have been to owner-users rather than developers, and the analysis of residual values has not played a role. Under current conditions, the likelihood is that residual values based on any short-term development scenario would be minimal or negative for high-rise development, and that the only way to generate a positive estimate of residual value for any form of high-rise development would be to assume that the property would be held until a return to more favourable leasing conditions at some point in the future. (c)
Development Timeframes Based on current conditions, it appears that the prospects for high-density development in the downtown in the future will depend on how long it takes for commercial and/or residential rental rates to recover to economic levels. The estimation of this timeframe is central to the determination of the economically highest and best use of land within the downtown. If rental rates can realistically be expected to recover to economic levels in a relatively short time, then intensive commercial development will still generate a positive residual value, and it will make economic sense to plan for additional high-rise development. On the other hand, if the recovery of the leasing markets extends beyond a certain timeframe, the residual values associated with high-rise development will be lower than those generated by lower density development options. In that case, it would make more economic sense to plan for lower density forms of development in the downtown. The underlying economic forces that will determine the timeframe are discussed in Part 3 of this report.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 3:
ANALYSIS
Part 2 of this report described the current state of the economy of downtown, noting a fairly consistent pattern of modest positive growth in most aspects of the downtown's economy over the past fifteen years. The purpose of Part 3 is to identify and analyze the economic forces that have brought about this slow growth pattern, in order to assess whether the same forces are likely to continue to act upon the downtown in the same way in the medium term future. The forces which have influenced the economy of the downtown may be grouped under three general headings: (1) cyclical economic effects; (2) socio-economic changes; and (3) structural changes in real estate markets. Each of these will be discussed in turn. 3.1
Cyclical Economic Effects There are three main cyclical forces that have influenced the economy of the downtown: (a) world oil price trends; (b) global economic cycles; and, (c) fiscal and monetary policies. (a)
World Oil Prices The downturn in world oil markets in the early 1985 had a devastating effect on the entire economy of Alberta, which further exacerbated the effect of the National Energy Program (NEP) negotiated by the federal and Alberta governments in 1981. The direct impacts on downtown Edmonton included layoffs of administrative staff by energy companies to reduce overhead, and downsizing of the provincial public service due to reduced royalty revenues. Depressed conditions in world oil markets are still holding back the Alberta economy. Oil prices have fluctuated within a fairly narrow range in current dollar terms (and have effectively declined in real terms) for over ten years. Looking to the long term future, it is reasonable to expect that real growth in oil prices will resume at some point, as existing reserves are exhausted. However, there does not appear to be any way of predicting when this will happen and Alberta's reserves of light oil are also in decline. Growth in sales of gas have increased activity in the energy sector and partially offset the reduction in revenues from oil production.
(b)
Global Economic Cycles To a certain extent, the state of the downtown economy is simply a reflection of the periodic cycles of expansion and recession that affect the economies of all industrial nations. The early 1980s and the 1989-1991 period were both recessionary periods at the national and international levels. The faltering -41 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
recovery which was supposed to have started (according to Statistics Canada) is the spring of 1991 may finally take off in 1994, and if it does the economy of downtown Edmonton should also benefit. (c)
Fiscal and Monetary Policy The firm determination of the Bank of Canada to hold down inflation and prop up the Canadian dollar by maintaining high real rates of interest throughout the 1980s has had a dampening effect on economic activity at the national and local levels. As the Bank's long-standing objective of reducing inflation to near zero has finally been achieved, there is some prospect that the tight monetary policies of the recent past may be relaxed to a certain extent in the near future. This should have a positive effect on economic growth in the downtown as well as the national economy because increased access to credit encourages new investment. However, concerns over national unity and government debt may continue to push up interest rates.
3.2
Socio-economic Changes Irrespective of the cyclical economic factors discussed above, there are two important long-term socio-economic trends that are acting to limit or reduce the rate of growth in traditional office employment: (1) the ageing of the population; and, (2) the technological and structural changes that are transforming the nature of administrative work. (a)
Ageing Population One of the factors underlying the rapid growth of the office space in the 1970s was the expansion of the labour force as the baby boom generation came of age. During this period, the growth in occupied office space in downtown Edmonton outpaced growth in employment in the Edmonton C.M.A. as shown in Figure 3.2.1. During the 1980s the opposite effect occurred; the growth in occupied office space lagged behind growth in employment. The effect of this demographic trend is expected to increase in the future. Projections indicate that by the turn of the century, the number of people in the 55-64 age group in Edmonton will outnumber those aged 20-29. The number of people leaving the workforce may approach the number entering. Reduction in labour force growth, and to resulting levelling off of labour force numbers, will mean reduced demand for office accommodation.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(b)
Technological and Structural Change The advances in information technology during the 1980s, such as personal computers, modems, fax machines and cellular telephones, are gradually bringing about revolutionary changes in how organizations and individuals do business. The overall effect of these innovations is that information and documents can be transmitted across town or across the country almost instantaneously. This gives organizations greater freedom in choosing office locations. In addition, it tends to reduce the total amount of space required, because electronic information storage reduces the need for filling cabinets and certain types of employees (for example, sales people and analysts) can work at remote locations included offices in their homes. The specific impact of these changes on the downtown is that it is no longer imperative for businesses to be in close proximity to one another or to have all - 43 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
of their staff at one central location. No one absolutely has to be downtown any more. As a result, the alternative of suburban locations with lower occupancy costs becomes attractive to more and more organizations, and downtown landlords must compete more directly to attract and retain tenants. The effect of these technological changes is just beginning to be felt. Many of the new devices have been on the market less than ten years, and organizations are still in the process of integrating them into their work routines. Moreover, decisions on premises often involve multi-year commitments. As existing leases roll over, more and more firms will explore the new alternatives made possible by communications technology. In addition to technology driven changes, the current trend towards "contracting out" is resulting in downsizing of permanent staff complements in both public and private organizations and the growth of firms that provide contract services. 3.3
Changes in Real Estate Markets Structural changes in the nature of the urban real estate market are also having an effect on the rate of growth and development in the downtown. Over the past twenty years, there has been a blurring of the traditional distinction between commercial and industrial accommodation, and the downtown has faced increasing competition for commercial retail and office tenants from new forms of accommodation developed in suburban areas. For example, the concept of an industrial park has given way to the business park in which many of the buildings may consist primarily of office space. In addition, businesses and developers in suburban areas have created new types of hybrid facilities combining commercial and industrial features on the same site. Warehouse retailing is one example of such a combination, providing storage space and showrooms under one roof. Another example is the office/warehouse or "flex-space" in light industrial areas, combining administrative offices with storage or production space. Looking to the future, it can be expected that this type of competition will increase as users and developers continue to search for new ways to economize on occupancy costs.
3.4
Summary of Analysis The slow growth observed in the economy of downtown Edmonton in the 1980s and early 1990s can be attributed to cyclical economic factors, long term demographic and technological trends, and changes in the structure of real estate markets.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
The cyclical economic factors which have been limiting growth at the national, provincial and local level can be expected to turn around at some point. However, the longer term causes relating to demographics, technology and structural changes are expected to continue for the foreseeable future. As a result, when economic growth resumes, it is not expected that traditional downtown office employment will surge the way it did during the boom of the 1970s. Changes in communications technology and real estate markets have greatly reduced the built-in advantage that the downtown traditionally had in attracting commercial development. There is no longer any imperative to locate downtown. In the economy of the 1990s nothing is promised, and the downtown must compete with other areas more directly than ever before in order to attract economic activity.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 4: STRENGTHS AND WEAKNESSES This section discusses the strengths and weaknesses of the Downtown in competing with other locations in the metro area to attract economic activity. 4.1
Introduction
In the preceding section, it was argued that the downtown's traditional built-in advantages in attracting economic activity no longer apply today, and will not be restored in the future. Thus the downtown must compete with other areas in the metropolitan market for its share of limited economic growth. This section will discuss the competitive strengths and weaknesses of the downtown. 4.2
Strengths
The main competitive strengths of the downtown may be summarized as follows: (a)
Centrality Downtown is the most central location possible for businesses serving the entire metropolitan market. Unlike the core areas of cities such as Vancouver, Toronto, New York or San Francisco, Edmonton's downtown truly is at the geographic centre of its metropolitan trade area. Our downtown is easily accessible by an uncongested road network, and no other part of the city offers comparable accessibility by public transit. Thus the downtown affords companies access to a larger labour pool than any other area.
(b)
Vacant Space Due to the overbuilding of commercial space in the past and the slow economic growth of recent years, the downtown has a large inventory of vacant office and retail premises available at net rental rates comparable to suburban locations. Under current market conditions, businesses considering a downtown location can choose from a wide selection of office and retail premises at reasonable rates.
(c)
Prestige While locating in the downtown is no longer an absolute necessity for most businesses, there is still a certain prestige or psychological appeal associated with a downtown address. This is enhanced by the high quality of architecture evident in many of Edmonton's recently built or renovated office towers. In addition, the Downtown offers more opportunities than any other area for
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
frequent face-to-face contacts among key decision-makers in the business community. (d)
Amenities The downtown offers a level of dining, shopping and recreational amenities not available anywhere else. It has by far the widest variety of restaurants in the city, for business entertaining as well as for employees. Through the pedway network, downtown businesses and employees can reach a full range of retail establishments on foot, in climate-controlled comfort, all year round. In suburban areas, comparable shopping facilities are available only in free-standing shopping centres, and are accessible from office employment areas only by car. Finally, with its location next to the river valley, the downtown offers opportunities for the fitness-conscious which most suburban employment areas cannot match.
(e)
Educational Tnstitutions For knowledge-based industries, the downtown offers better access to post-secondary educational institutions than any other major employment area in the city. As cooperation between the academic and business communities increases, this unmatched accessibility to institutions of higher learning will assume greater importance.
(f)
Cultural Facilities The downtown has unique cultural resources, such as the Citadel Theatre and the Art Gallery, which add to the prestige and amenity of the downtown. During the summer, there are several cultural festivals, such as the Works, which further enhance the interest and appeal of the downtown. The importance of these unique cultural opportunities is obvious for companies seeking to address quality of life issues in the recruitment and retention of personnel.
4.3 Weakness The principal competitive weakness of the downtown are as follows: (a)
Parking Perhaps the biggest problem with the downtown in most people's minds is the availability and cost of parking. As Edmonton is a North American city and most of its population lives in suburban neighbourhoods, people are accustomed to parking for free within a comfortable walking distance of the shop, office or
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
plant to which they are going. This option is simply not available, for all practical purposes, within the downtown today. The parking problem has much to do with perceptions and feelings as with dollars and cents. For example, parking coupons offers by downtown merchants to their customers may fully cover the cost of parking. However, this reimbursement is available only if the customer actually makes a purchase. Since there is no such requirement in suburban shopping malls, the perceived difficulty of parking remains a major competitive disadvantage. (b)
Occupancy Costs While net rental rates in the downtown are broadly comparable with those in suburban areas, the costs charged to commercial tenants for their proportionate shares of the property taxes and operating costs paid on their behalf by the landlord are significantly higher in the downtown than in suburban areas. The main reason for this is the higher level of property taxes per square foot of floor area in the downtown. In addition, many companies must also consider the cost of employee parking in computing their total occupancy costs.
(c)
Land Costs Land costs in the downtown are higher than in any other areas. While the relative difference between the downtown and other areas appears to be diminishing, it remain substantial and is not likely that the gap will ever close entirely. Thus, land prices are and will continue to be a major handicap for the downtown in competing with suburban locations for new development.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 5: PROSPECTS This section outlines expected future trends in economic activity and real estate markets in the Downtown. 5.1
Metropolitan Growth Rates (a)
Population The recent trend of modest population growth is expected to continue into the 21st century, according to forecasts published by the Edmonton Metropolitan Planning Commission (EMRPC) and the City of Edmonton Planning and Development Department Table 5.1.1 summarises the forecasts of these two planning agencies for the Metropolitan Region and the City. The EMRPC estimates that the population of the City of Edmonton will grow at a rate of between 0.90% and 1.57% between 1992 and 2001, and the City's Planning and Development Department projects a rate of increase of 0.9% for 1992-2002. Table 5.1.1 Projected Future Population EMRPC Projection
City of Edmonton Projection
City of Edmonton 1992 (Actual) 2001 2011
618,200 670, 000 to 711,000 701,000 to 809,000
618,200 668,400 N/A
Edmonton Metropolitan Region 1992 (Actual) 2001 2011
827,000 894,000 to 973,000 938,000 to 1,100,000
N/A N/A N/A
Growth Rate, City of Edmonton 1992-2001 2001-2011
0.90% to 1.57% 0.45% to 1.30%
0.9% N/A
Growth Rate, Edmonton Metropolitan Region 1992-2001 2001-2011
0.87% to 1.82% 0.48% to 1.53%
N/A N/A
Source: City of Edmonton Planning and Development Department, Policy and Information Branch, 1994 Edmonton Metropolitan Regional Planning Commission (EMRPC), Demographic Studies Report No. 6: Future Population Estimates, 1991-2011, February, 1992 - 49 -
THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(b) Employment Employment forecasts prepared by the City's Forecast Committee indicate that total employment in the Edmonton Census Metropolitan Area will increase from 370,000 jobs in 1992 to 391,000 in 1998 as shown in Figure 5.1.1. This represents an average increase of 3,500 jobs per year, or a growth rate of 0.9% per year. Figure 5.1.1
5.2
Projected Development Activity Based on the modest rates of economic growth forecast for the metropolitan area as a whole and existing vacancy rates in the downtown, it is expected that the demand for additional accommodation in the downtown over the next few years will not be strong enough to generate large amounts of new construction activity. Current expectations for various kinds of accommodation are discussed briefly in the sections which follow.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(a)
Office Space The City's Forecast Committee expects that the downtown office vacancy rate will decline gradually from 15% in 1993 to 13% in 1998. This reduction of two percentage points implies net absorption of about 300,000 sq. ft. over five years, or an average of 60,000 square feet per year. This represents approximately one tenth of the average annual absorption during the boom period when most of the existing supply was constructed or commenced. Given this level of absorption, it can be expected that no major new office towers will be built until at least 1998. In addition, given that several existing projects (e.g., Manulife II and the Journal Building) already have planning approval for additional office towers, it is entirely possible that no new sites will be developed for office towers until after the turn of the century.
(b)
Retail Space Quantitative forecasts of future absorption and construction of retail space in the downtown are not published by any public or private agency. However, there is an oversupply of retail space in the Edmonton market generally and in the downtown specifically. The weakness of the street-oriented sector in the downtown is readily apparent. In addition, there is a significant number of vacant or underutili7ed retail premises in some enclosed downtown shopping complexes, such as Commerce Place, the 101 Street Building and McCauley Plaza. Under these circumstances, it seems reasonable to assume that no major new multi-tenant retail complexes will be initiated for a number of years. Rather, it is more likely that the retail development which takes place over the next few years will resemble the single-tenant projects of the recent past, e.g. A & B Sound, Hop's Leather Goods, Sony Store.
(c)
Housing The Downtown Housing Strategy Report published by the City of Edmonton in July 1994 projects that approximately 270 additional housing units will be developed in the Downtown during the period from 1992 to 2000, assuming that the City follows through with policy measures to promote residential development. Compared to the existing housing stock of 4,500 units, this represents an increase of 6% over 8 years.
5.3
Impact on Land Values and Tax Revenues The prospects of modest economic growth and weak demand for new accommodation in the downtown have fairly clear implications for future land values and tax revenues as follows:
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(a)
Direction of Change in Land Values There is likely to be continued downward pressure on downtown land values in the short term. Prices are expected to decline in real (inflation-adjusted) terms, and possibly in nominal terms as well. There are two main reasons for projecting a level or downward trend. First, there appears to be a certain stickiness in price movements, as owners tend to hold on in the hope that better economic times will return. Second, current values in the downtown are still several times those in suburban areas, even though the density of developments actually occurring recently in the downtown is closer to suburban rather than traditional downtown forms of development. This would suggest that there is still a further adjustment to come.
(b)
Land Values Downtown vs. Other Areas Given that Downtown will continue to experience downward pressure on land prices, whereas the gradual growth of the metropolitan economy will generate additional suburban development, it is expected that land values in suburban areas of the city will recover more rapidly and that the current price gap will continue to narrow over time.
(c)
Future Downtown Property Tax Revenues As the price differential between downtown and suburban properties is expected to narrow, it can be anticipated that the percentage of total municipal tax revenue generated in the downtown will go down over the long term. However, two additional points should also be noted. First, general reassessments are done on a fixed cycle, currently every seven years. The last general reassessment only came into effect in 1993. Thus, unless the provincial government amends the legislation regarding the reassessment cycle as it has proposed to do, no major shift in the property tax burden will occur until the turn of the century. Secondly, the downward trend in land values is partly self-correcting. If downtown property taxes come down in relation to those in other areas, the problem of high occupancy costs will be mitigated, demand for space in the downtown will strengthen, development activity will increase, and the downward pressure on land prices will be stemmed and perhaps reversed.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
PART 6: CONCLUSIONS, IMPLICATIONS AND FUTURE DIRECTIONS 6.1
Conclusions (a)
The metropolitan trading area served by downtown Edmonton is experiencing modest economic growth.
(b)
Administrative employment and office space absorption in downtown Edmonton were adversely affected during the 1980's by depressed conditions in the energy industry and by the loss of some 8,400 provincial government jobs as a result of downsizing and decentralization.
(c)
In real (inflation adjusted) terms, office rental rates in downtown Edmonton are less than 50% of what they were in 1978.
(d)
Major enclosed retail complexes in the downtown have an average vacancy rate of about 5% and the vacancy rate for street oriented retail is believed to be higher.
(e)
Since the late 1970s, land values in most areas of downtown Edmonton have declined in nominal terms. In real (inflation adjusted) terms, values have dropped by 38 to 81%.
(f)
The differential in land values between the downtown and the suburbs has narrowed since the late 1970s, making the downtown more competitive from a cost standpoint.
(g)
Construction of new office developments is currently not fmancially viable due to high vacancy rates, low real rents and tight credit requirements for real estate ventures.
(11)
The current slow growth of the downtown economy is the result of structural changes as well as cyclical factors. Due to slower labour force growth, new information technologies, and increasingly competitive real estate markets, the next economic recovery will not generate the same kind of growth in the downtown as the boom of the 1970s.
(i)
Due to information technology, there is no longer as compelling a reason for businesses to locate in the downtown, and downtown must now compete with other areas directly to attract and retain economic activity.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
6.2
6.3
(i)
The main strengths of the downtown are its central location, its access to a large labour pool, its inventory of vacant commercial space, and its shopping, dining, recreational, cultural and educational amenities. Its main weaknesses are parking, occupancy costs and land prices.
(k)
Projections indicate a continuation of modest growth, weak demand for commercial accommodation, and downward pressure on land prices.
Implications (a)
The commercial office core which currently extends from about 97 Street to 103 Street is unlikely to expand beyond this area in the foreseeable future.
(b)
Commercially viable opportunities to develop additional sites for high rise office towers are not likely to arise again until well into the next century.
(c)
The new developments which are built in the downtown during the balance if the 1990s will likely be at lower densities than traditionally associated with downtown locations, with a low rise built form and in some cases a suburban appearance.
(d)
Adaption of existing buildings for new uses will be increasingly important as physically sound Class B and C office buildings become functionally obsolete.
(e)
Residential development may come to be seen as fmancially viable use of land in the downtown because of the weak demand and long holding periods associated with a commercial development scenario.
Directions for Future Policy Development Making the most of Edmonton's Downtown in the economic context of the 1990s will require a coordinated set of public policies and private initiatives, which can be defined only after a process of extensive public discussion. However, the economic analysis presented in this report clearly points to certain directions and priorities which must be addressed by the stakeholders as the new Downtown Plan is developed. These include the following: (a)
Downtown land owners should be more flexible in exploring investment scenarios involving low-rise commercial and/or residential developments as an alternative to the traditional ideal of high rise office development, which will likely not be financially viable for many years to come.
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THE ECONOMY OF DOWNTOWN EDMONTON: 1994
(b)
Planning authorities should be more receptive to non-traditional "suburban" development proposals which may represent an attractive interim (10 to 20 year) land use and bring more consumers into the downtown by providing better parking.
(c)
Public and private stakeholders in the downtown should continue to invest in preserving, enhancing and promoting the unique shopping, entertainment and cultural amenities of the downtown, as these will be crucial in attracting businesses to come downtown by choice rather than out of necessity.
(d)
All stakeholders need to cooperate in inventing, testing, revising and refmimg innovative approaches to the management and pricing of the Downtown's inventory of parking spaces, so as to counter the persistent public perception of a parking "problem" in the downtown.
(e)
Efforts must be made to encourage the provincial government to re-investing in the downtown, by bringing back some of the administrative employment that was decentralized in the 1980s, or at least maintain the percentage of the provincial government workforce located in the heart of our capital city.
(f)
There is a need to recognize and emphasize that a healthy and vibrant downtown is intrinsically important to the prestige and the economic, social and cultural development of the whole city, and indeed the entire metropolitan area.
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