Calgary-based Ayrshire Group has acquired the former Shell Canada building in downtown Calgary for $92.5 million, making a calculated return to the office market by targeting a property fully leased to Canadian Natural Resources Ltd. under a new 15-year agreement.

President Graham Gooch said the acquisition reflects the company's focus on stable, long-term cash flow from creditworthy tenants rather than a bet on a broader recovery in downtown office real estate.

The 683,000-square-foot building was purchased for about $135 per square foot, well below the estimated cost of more than $600 per square foot to construct a comparable property. 

Gooch said the strength of CNRL's lease covenant, combined with the substantial investment in tenant improvements and the landlord's work to accommodate the energy company, helped make the deal attractive.

Ayrshire had largely exited the office sector in recent years and has not made other recent office acquisitions, but Gooch said the company is looking for further opportunities, particularly properties backed by creditworthy tenants and long-term leases.

The acquisition followed a competitive-bid process

The group evaluates potential investments against financing costs and competing opportunities, he said, adding that the building's capitalization rate was significantly higher than Ayrshire's cost of debt.

The acquisition also provides exposure to rental income with contractual escalations designed to help protect against inflation, while positioning the company to benefit from the property's location near the planned Green Line LRT expansion in Eau Claire.

Gooch said the property, located at 400 4th Ave. S.W., was purchased from Canadian real estate giant Cadillac Fairview.

“There were over 21 bids, primarily private bids, with a few institutional buyers. People were really attracted to the covenant and the term of the CNRL lease. We bought it for just over list price as part of a second round,” noted Gooch. 

“CNRL is among Canada's 10 largest companies. They're one of the largest energy-producing companies in the world. They've got a market capitalization of more than $140 billion. When we looked at the risk profile of that occupancy, it really resonated with us.”

The building has been in the heart of Calgary since 1977.

“Our capital pools were really interested in finding credit-tenant-occupied buildings where there (are) defensible long-term cash yields," Gooch said. "This building is across the street from the Green Line expansion in Eau Claire. So, from a transit perspective, it's well located. It's a little bit outside the density and traffic of the central downtown core."

He added: "We were a little bit shy investing in office because the capital required to release existing vacancies or accommodate expiring tenants just erodes the cash flow.

“But the building was acquired substantially below replacement cost.”

Ayrshire’s other office property in Calgary, Railway Street Corporate Centre, is in the south part of the city.

The growing appeal of real assets

“We have a strong appetite for growth," Gooch told RENX. "The key metric we look at is where cap rates are relative to the cost of our financing, to the extent that we can see attractive positive leverage. In this case, the cap rate was significantly higher than our cost of debt.

“I think real assets can be a hedge in such an inflationary environment. We've got an infinite amount of alternatives as a private investment firm. We're not siloed into any particular asset class, so we're always looking at opportunities relative to other opportunities.

“The public equity markets are flying, and taking some chips off the table and reallocating to real assets where you've got defensible long-term cash flow and inflation-protected rental rate escalations felt like a good risk-adjusted bet."

Gooch said it is difficult to predict what is going to happen in the office space in Calgary but Ayrshire is looking for opportunities, particularly buildings with credit-tenant or long-term lease profiles.

“There are some positive signs that office conversions are ongoing and expanding," he said. "The A and AA buildings are performing better than the B and C product. The momentum around working from the office versus working from home seems to be increasing."

For the former Shell building, Gooch said the retail spaces at street level and the Plus 15, Calgary's system of climate-controlled, covered skybridges that connect buildings, are about 20,000 square feet and will be important considering CNRL has more than 2,000 employees in the building.

“It's been vacant," Gooch said. "All the retail tenants left, so we're starting from scratch, so to speak. There'll be a food concept there that we're hoping will provide an amenity for CNRL's employees."

Last year, in a RENX story, Ayrshire Group said it was moving ahead with three purpose-built rental projects within its expanding Housing Impact Fund strategy to build affordable housing for Alberta’s booming rental market.

The developments – The Galloway in Calgary’s Beltline, Copenhagen Block on the former Danish Canadian Club site, also in the Beltline, and Lyric near the National Music Centre in East Village – are to deliver almost 800 rental units.

The company, which evolved from the private family office of ARC Financial co-founder Phil Swift, is a socially driven real estate investor that blends traditional returns with community impact - aligning profit with purpose.