Toronto MaRS Centre Phase 2 | 112.77m | 20s | Alexandria | B+H

[mrjun18]

"Second phase of MaRs tower nearly empty"

http://www.thestar.com/business/real_estate/2014/05/30/second_phase_of_mars_tower_nearly_empty.html

 

[argus]

"Second phase of MaRs tower nearly empty"

http://www.thestar.com/business/real_estate/2014/05/30/second_phase_of_mars_tower_nearly_empty.html

I suppose, but two years down the road when it's mostly occupied, this crisis will be forgotten. At least it's there - unlike the gas plant.

 

[College Park]

I suppose, but two years down the road when it's mostly occupied, this crisis will be forgotten. At least it's there - unlike the gas plant.

Exactly. Phase I took a couple years to fill too. Most towers (condo and office) sit idle for a year or so as interior finishes complete, and retail can take 4-5 years to fill. Tenancy is a big business decision, and not every discovery business or enterprise can or will disrupt their business to move just because MaRS II is ready.

In more serious concerns - the ground plantings were put in late Fall, and serious winter kill occurred. So ugly....

 

[TOareaFan]

Exactly. Phase I took a couple years to fill too. Most towers (condo and office) sit idle for a year or so as interior finishes complete, and retail can take 4-5 years to fill. Tenancy is a big business decision, and not every discovery business or enterprise can or will disrupt their business to move just because MaRS II is ready.

You have just pointed out why this deal would never have been made in the private sector and needed propped up by taxpayers. To borrow money from a bank (or other real estate lenders) to construct an office building a certain level of pre-leasing is required. This building was built on spec and that is very unusual in our market place (even pension funds who often build without financing typically won't put a shovel in the ground until they reach a significant level of pre-leasing).

You may think that "most towers sit idle for a year or so" but the reality is that is not the case. This one will, though, because they tapped into the only source of capital that has no market knowledge/experience....the gov't.

 

[junior43]

I suppose, but two years down the road when it's mostly occupied, this crisis will be forgotten. At least it's there - unlike the gas plant.

Didn't Wynne say she's filling the rest of the tower with civil servants? So, it is now fully occupied - just not with the people it was intended for.

 

[taal]

A LOT of incorrect assumptions above ... 'most office towers sit empty for a couple years' ... not even close to being true, there is a different between empty waiting for the interior and empty because the space was not leased.
Go back a couple pages, I already made the point this building is nearly half empty, that is unleased.

I do think this was a mistake, office buildings are never developed until they lease a significant enough portion, why did we lend money to the private sector so this could be 'bypassed' ... rather if we just waited, even if it took years, the space would have naturally been leased ... OR NOT ... and if not, the project should have been downsized ..

The problem is this building also contains a lot of non-medical traditional office space, but leasing that in this area is very difficult, rents here are higher, and there aren't really any advantages. MARS 1 was so much smaller of a building, at least at this point in time it seems they built just way too much space.

 

[TOareaFan]

Didn't Wynne say she's filling the rest of the tower with civil servants? So, it is now fully occupied - just not with the people it was intended for.

It is a requirement, by law, in Ontario that if a building is to be owned by the provincial government it has to be at least 51% occupied by government.....add that minimum, to the 31% currently occupied (a number I read somewhere yesterday but can't find) and it could be still 18% vacant.

That said, to meet the 51% level that would require around 400,000 square feet of office space being government......do we really have that much space coming up for maturity in the short term (government leases tend to be longish) and if we don't are we going to have to write cheques to get out of leases .

 

[junior43]

It is a requirement, by law, in Ontario that if a building is to be owned by the provincial government it has to be at least 51% occupied by government.....add that minimum, to the 31% currently occupied (a number I read somewhere yesterday but can't find) and it could be still 18% vacant.

That said, to meet the 51% level that would require around 400,000 square feet of office space being government......do we really have that much space coming up for maturity in the short term (government leases tend to be longish) and if we don't are we going to have to write cheques to get out of leases .

Totally agree. I just read an article stating the 51% thing after posting. On top of your concerns which are all valid, what happens when MaRS does need to expand once they reach 49%? Does the province then start moving people back out of it? It appears to me we'll be juggling a lot of civil servants around in the upcoming years.

 

[TOareaFan]

Totally agree. I just read an article stating the 51% thing after posting. On top of your concerns which are all valid, what happens when MaRS does need to expand once they reach 49%? Does the province then start moving people back out of it? It appears to me we'll be juggling a lot of civil servants around in the upcoming years.

To be clear, if this plan goes forward, this building kinda ceases to be part of MaRS.....it will be a government building (owned by the government with any outside tenants paying rent to the government) with a (very) few overflow tenants from the research centre. So I doubt there would be future shuffling (although you never know....on April 11, this government was telling the media they were sellers of real estate.....now they have just become buyers again).

I have a wee bit of experience in real estate lending and what I can't understand from the media reports is why we are trying to fix a default on a $234 million loan by buying the place for $317 million......if it is worth $317 million they should be able to find a market solution without using taxpayer money.....if it is not worth that then you could just foreclose on the Infrastructure Ontario mortgage and the taxpayer could own the place without putting out new funds.

 

[junior43]

To be clear, if this plan goes forward, this building kinda ceases to be part of MaRS.....it will be a government building (owned by the government with any outside tenants paying rent to the government) with a (very) few overflow tenants from the research centre. So I doubt there would be future shuffling (although you never know....on April 11, this government was telling the media they were sellers of real estate.....now they have just become buyers again).

I have a wee bit of experience in real estate lending and what I can't understand from the media reports is why we are trying to fix a default on a $234 million loan by buying the place for $317 million......if it is worth $317 million they should be able to find a market solution without using taxpayer money.....if it is not worth that then you could just foreclose on the Infrastructure Ontario mortgage and the taxpayer could own the place without putting out new funds.

Thanks for that info on RE lending. I didn't know we'd get it in a default, I thought the US company would.

 

[TOareaFan]

Thanks for that info on RE lending. I didn't know we'd get it in a default, I thought the US company would.

In Ontario there are, essentially, two remedies available to lenders in the event of default. The most commonly used is Power of Sale....wherein the lender does not ever take title to the property but forces a sale.....the proceeds of the sale firstly go to the lender to pay their mortgage, accrued interest and costs....any balance over that gets, either, paid to the owner of the project or any subsequent encumbrances (eg. second mortgages)........in a foreclosure, the lender petitions the court to take title to the property in settlement of their debt and, regardless of the value of the property, the debt is expunged.

The reason POS is so common in Ontario compared to foreclosure is 3-fold:

1) It is generally quicker
2) If there is any hint of equity in the property above what the lender is owed the borrower/owner can fight foreclosure in court and essentially force it to POS
3) Traditional mortgage lenders are not that interested in owning real estate (they don't have "loan to own" programs). So even if the value is less than their outstanding debt they would rather get the money back quicker, write off the loss and move on and get the balance of the money working for them again.

So, if this property is worth (in the market) what the government is paying ($317 million) then why would either MaRS or the IO (through a POS) not just sell it for that? IO (i.e. government ....ie us) would get all our money back and MaRS would get $83 million back to invest in MaRS I or just take as "profit"). If it is worth something between $234 million and $317 million that still makes sense and there is no cost to the taxpayer and MaRS gets "something".

If the property is worth $234 million (or less) the government could just foreclose, eliminate the debt (may be a "write off" of the amount less than $234 million it is worth) and the government owns the building (which they now tell us is a "good idea").

What they are doing, though, makes no sense at all.....particularly as they themselves stated on April 11 that they were looking to sell real estate.

 

[whatever]

This tower was built to be research/lab space, wasn't it? So what's the cost differential between what it cost psf to build this tower vs what it would've cost to build a standard office tower? If they just fill this with clerical workers haven't they effectively built a massively expensive lab facility for no reason at all?

 

[interchange42]

TOareafan: great post!

TOareafan:
What the quote re: selling real estate not in the context of surplus lands? They's also stated in the last couple of years that they believe that they would save money on real estate in TO by building instead of leasing. That was the idea behind the (at least temporarily) shelved 40-ish storey tower planned for 880. It's only shelved at the moment because they're trying to reduce capital outlay for new buildings (e.g. cancelled Six Points area courthouse, etc.). Moving some offices into MaRS II as leases come up would be a very good stop-gap until such time as 880 may still be needed.

whatever:
It is possible that the MaRS II building may yet be needed for lab space as the medical research industry expands here, but they seem to be overbuilt for the time being. Based on when leases are up for other gov't offices in nearby buildings, MaRS II may fill up bit by bit from both gov't and med research, and it's possible that later on the gov't offices may yet move out again to a new (880 Bay or other) building and allow MaRS to eventually become fully what it was meant to be.

42

 

[TOareaFan]

TOareafan:
What the quote re: selling real estate not in the context of surplus lands? They's also stated in the last couple of years that they believe that they would save money on real estate in TO by building instead of leasing.

There is an article from the CBC on April 11 with regards to the assets that the government was looking to sell that I have linked previously......it was not just the CBC who had that story.....for variety, this time, I will link an April 30 story in RENX (a widely read electronic newsletter in the commercial real estate sector.

http://renx.ca/ontario-government-set-to-conduct-review-involving-potential-sale-of-assets/

Of real interest here is that one of the targeted for sale buildings happens to be across the street from MaRS and this quote from Minister Sousa:

“The government’s priority is to invest in jobs . . . not real estate,” Sousa said in his speech.

One month later, facing an embarrassment, investing in about 800k s.f. of real estate across the street from a similar sized building you listed for sale is "a good idea"?

That was the idea behind the (at least temporarily) shelved 40-ish storey tower planned for 880. It's only shelved at the moment because they're trying to reduce capital outlay for new buildings (e.g. cancelled Six Points area courthouse, etc.). Moving some offices into MaRS II as leases come up would be a very good stop-gap until such time as 880 may still be needed.

3 comments on that:

1. paying $317 million for a piece of real estate seems a strange way to reduce capital outlay
2. I am not sure at all how soon after purchase of a piece of real estate by the province that a building has to be 51% occupied by government ...but I imagine it is a fairly short period of time (otherwise what's the point of the law)......but to meet that law we have to move 400,000 s.f. of people from other locations.....I doubt that we have that amount of people in buildings under short enough leases that we can move them without incurring lease cancellation clauses (or continue to pay on the space we vacate to make MaRS 51% government occupied.
4. There seems to be an inherent theme in there that 880 will be needed because government will always grow its civil service.

whatever:
It is possible that the MaRS II building may yet be needed for lab space as the medical research industry expands here, but they seem to be overbuilt for the time being. Based on when leases are up for other gov't offices in nearby buildings, MaRS II may fill up bit by bit from both gov't and med research, and it's possible that later on the gov't offices may yet move out again to a new (880 Bay or other) building and allow MaRS to eventually become fully what it was meant to be.

42

Converting lab space to office space and back again is a dubious proposal and likely very expensive.

Again, all this seems to be being made up on the fly....for what reason I do not know but 1 month after the government clearly stated it was not investing in real estate, it is now proposing to buy a 31% occupied building to, seemingly, fix an issue with a $234 million mortgage default......and if the building is worth more than $234 million, this government problem with the defaulted mortgage could be remedied by a POS and the market will deal with it.....if it is worth $234million or less we could foreclose and own the building.....it is not clear why the discussions are around the government buying it for $317 million.

 

[innsertnamehere]

my understanding is that the floors are largely just concrete shells right now, there wouldn't be much to "convert" to office space. Lab space largely just means better ventilation, higher floors, and larger load bearing structural elements, none of which really need to be changed for office space.


I'll copy pasta a post I made on reddit about the issue:

Heres the run down on it:
The Province has been looking for some new office space for a while, 3 or 4 years ago they submitted an application to build a ~40 floor office building to house consolidated employees, but eventually backed down presumably because the finances didn't match. So this tells us that they aren't just inventing a need for an office building to justify this.

Then, you get to the issue of MaRs. They have a brand spanking new office building literally across the street from Queens Park, sitting empty. They can't find the tenants, and have serious financial troubles. The province gave them a $234 million loan for it, hoping to encourage the expansion of MaRs which acts as a business incubator. It didn't work. Which gets us to our current situation.
The province can:

A) say "screw you", let MaRs file bankruptcy, and lose all money they are owed on their loan. The province still needs an office building, there is now an entire empty complex (not just a building, because remember, the entire MaRs organization went under) across the street which the province does not own, and the important function of MaRs in our economy is lost.

B) They purchase the building from MaRs, fixing their financial problems. (this creates the "bailout" situation) Thing is, its not like the province would then own an office building it doesn't know what to do with. You see, they have been looking for some new space for a while now. So in this situation, you get the office building the province was looking for at firesale prices (considering $234 million of the $317 million dollar purchase price is a loan they will default on unless you go through with the purchase), you save MaRs, and you no longer have an abandoned office complex across the street from Queens Park with the province shopping around for space.

Option B is the only rational choice, and because it is not your standard purchase, and because it involves spending money, the PCs are obviously against it. (A major feature of the PCs platforms is selling the provinces office buildings and renting them back to pay for transit, which obviously doesn't work as well as you would think it would as you have to start paying lease after the sale)

Essentially what is happening is the province can either spend $317 million, move some employees around (which they have been thinking about for a while), consolidate some space, or lose $234 million. In that set of circumstances, it looks more like an office building that the province is buying for $83 million. Its obviously not an ideal situation of which you can question why the liberals even allowed the $234 million dollar loan to go out in the first place, but it is what it is and what the province is doing today is the best way to move forward. Making lemonade out of lemons so to speak.