Today we present another guest post from Dean Macaskill, Senior Vice President at Lennard Commercial Realty. Dean has worked as a commercial realtor since 1980 and has years of industry insight into the Toronto real estate market. Having been through three cycles in the business, he has seen the highs and lows. He shares some of his insider information and insights with UrbanToronto on a semi-regular basis.
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As I wrote my Q4 Investment report a few weeks ago, I noticed something rather intriguing. As I sorted through the office sector sales for the quarter, two things stood out. Firstly, there were 72 transactions in the quarter. A normal quarter sees around 30 to 40 sales over $1 million. What was more astounding were the number of office condominium sales. I counted 40 sales of office condominiums out of the 72 office trades. This only accounts for sales in excess of $1 million, there may have been more.
Back up to the early 1980s. There was a building constructed at Carlton and Jarvis offering office condominiums. This was going to be the future of office accommodation, we were told. It didn’t fly off the shelf at the time although they may have been right, just slightly premature.
What was also significant was the number of larger companies taking sizable space within these condo spaces. In the past, one would think of a small doctor’s office or an accountant as a typical buyer.
Two things have helped sell the office condo market. Firstly, there are numerous office tenants out there that are desperate to own their own space. In the 39 years that I’ve been an agent, at least yearly I’m asked to find a building to buy. It’s normally an exercise that ends in the tenant leasing as options are few, location is poor and many of these buildings are not efficiently laid out.
Secondly, the cost today for a freehold building has exceeded $1,000 per square foot from mid-town to downtown west. Then there are the cost of renovations as many of these haven’t been touched for thirty years or longer. Buyers also have to compete with high rise land investors who can easily outbid an office user in these high demand neighbourhoods given the density that they can achieve along these boulevards.
So, faced with these battles, the office condo has established a beachhead in the office sector. For buyers, the pricing is, generally, far less per square foot than a freehold property. In addition, the space is far more efficient versus a converted Victorian with two sets of stairs and 4 floors of walk-up space over 7,000 square feet. There is also the added bonus of buying into a brand new building with brand new mechanicals that can be designed to an owner’s needs.
Taking a look at some recent deals, the Who’s Who of buyers includes Tricon Capital, who purchased 15,329 square feet at 7 St. Thomas Street in the Bay and Bloor neighbourhood, for $13,315,900 or $869 per square foot in late 2017. The Daniels Corporation purchased 24,686 square feet in their building at 130 Queens Quay East. They paid $13,858,737 or $561 per square foot for an uninterrupted view of Lake Ontario. Joining them was Artscape, who relocated their head office into the building, occupying 35,379 per square feet and paying $527 per square foot or $18,639,941. In addition to their head office, Artscape operates one of their collaborative artist’s facilities out of this space. Lastly, Core Architects saw the light, literally, and moved into 16,666 square feet at 130 Queens Quay East, paying $9,900,000 or $594 per square foot.
Other significant deals sees plastic surgeon Dr. Cory Torgerson nip/tucking his way to 59 Hayden Street at Bloor and Yonge, acquiring 12,825 square feet for $10,177,341 or $784 per square foot while the College of Chiropractors of Ontario are taking a crack at condo ownership within the same building, paying $10,450,000 for 12,825 square feet, a value of $815 per square foot.
Moving up to Yonge and Summerhill, Timbercreek Asset Management acquired 33,750 square feet within 1133 Yonge, a former freehold office building totally renovated and converted to office condos. Timbercreek paid $20,151,286 for 33,750 square feet or $597 per square foot.
As you can see, there is quite a range of users who bought into this model of ownership and they actually paid prices that would be considered well below market had they acquired this real estate under freehold title.
We do note that prices are rising. I can rhyme off a number of deals in excess of $1,000 per square foot in the Bloor/Yorkville neighbourhood. Like having a celebrity wear your new line of designer clothing, these “first adopters” with pedigree covenants will be the ambassadors of change for acceptance of this form of ownership. If you’re contemplating this avenue for your next office, you might want to jump on it now before it becomes haute couture.
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