Hotel buyer pool expands while office sees buy- and sell-side drop
From 2022 onwards, the share of office sales volume in Toronto has declined year over year. Toronto’s record-high office vacancy rate continues to expand, which coupled with rising operating costs, has shrunk the prospective buyer pool considerably. Meanwhile, existing office owners are deploying hold strategies with the hope that companies will return to pre-pandemic leasing levels, allowing them to avoid realizing the value declines that are showing in appraisals.
Conversely, Toronto hotel sales volume has increased as a share of total transaction volume over the same time period. On the surface, the combination potentially points to capital earmarked for office shifting to hotels, particularly as hotel industry participants have noted heightened interest in hotel opportunities from more traditional commercial real estate investors. The interest is largely driven by strong topline hotel operating metrics that have continuously reached record highs over the past couple of years, proving why it is seen as a good hedge. Additionally, hotels offer an alternative to office buildings and the potential for mixed-use developments with residential components.
Examining the office market reveals a slightly different story, indicating that a drop in transaction appetite on both the buy- and sell-sides may be impacting diminishing volumes.
Roughly 45% of the four- and five-star office space in Toronto’s central business district belongs to a relatively small number of large-scale institutional owners. These are well-capitalized firms willing to ride through a down market without disposing of assets. This concentration of ownership means there is also a concentration of exposure and a strong incentive to protect values by avoiding selling assets at a discount.
Appraisers generally base office valuations on rental income and capitalization rates. However, more recently, there has been a requirement to rely more on discounted cash flow valuations as the transaction evidence does not exist to accurately decipher a market cap rate, which has, in turn, added to the opacity of true office values.
A recent transaction that highlights the current dynamics of the office market is the sale of 2 Queen St., a prestigious five-star office building located in the heart of downtown Toronto which is currently under contract. Spanning 476,000 square feet, this property was brought to market during the summer at an undisclosed price and was one of only two office buildings over 100,000 square feet listed in 2024. In mid-October, CoStar confirmed that the sales agent identified a prospective buyer, which led to the asset being taken off the market.
Historically, trophy office assets would have generated significant interest, often without being formally listed. This shift indicates a notable decline in market liquidity. However, the identification of a buyer suggests that capital is still available for large-scale office transactions, provided the price is right.
On the other hand, hotel transaction volume as a percent of the total in Toronto has been rising over the past three years, reaching 9% over the first 11 months of 2024. In absolute terms, year-to-date volume increased 80% over last year to $297.3 million.
Roughly 95% of the activity is related to Morguard’s disposition of its 14-hotel portfolio in early January. Nine properties are located throughout the Greater Toronto area, predominantly near the airport. InnVest Hotels, the largest hotel owner in Canada, acquired 10 of the 14 hotels.
Morguard stated its motivation for the sale was to focus on its core real estate investments: retail, office, industrial and multi-suite residential. This strategy contrasts with those of others trying to enter the sector. On the other hand, InnVest made the acquisition based on its confidence in the Canadian hotel market and its desire to scale its vertically integrated hospitality organization, which includes all services through a hotel’s life cycle. The sale also demonstrates another trend occurring: the existing hotel ownership community doubling down on Canada’s hotels. This results in large hotel owners growing their portfolios, limiting disposals and few opportunities for new entrants to the sector.
Another reason for the growth trend in hotels is the depressed volume over the past few years. The lack of trades was primarily due to a gap between buyer and seller pricing expectations and higher interest rates. Despite recent policy interest rate cuts, the gap still exists because the relative cost of capital has not fallen by much, given that long-term interest rates remain range-bound. This, and the limited desire to sell, is continuing to limit trades beyond the portfolio sale.
If any opportunities arise, expect considerable interest to invest in Toronto’s accommodation sector, both from the existing hotel ownership community and new entrants looking to add hotels to their broader commercial real estate portfolio.
Examining underlying transaction data suggests that unique market dynamics for each property type drive this trend rather than a pure swap of capital flows from offices to hotels. However, if commercial real estate investors continue to pursue hotel opportunities, allocations may continue to skew in favour of hotels.
Slate Grocery REIT is refinancing US$500 million of its debt as the Toronto-based owner of American grocery-anchored retail property looks to take advantage of better terms.
The REIT is managed by Slate Asset Management, owner of a 5.6% stake in 166 US shopping centres. Slate Asset recently said it was shifting its focus from office to essential real estate.
“In today’s financing environment, our ability to refinance half a billion dollars of debt at such favourable economic terms reflects the strength and quality of our underlying real estate portfolio and the confidence our lenders have in the long-term growth and outlook of our business,” said Joe Pleckaitis, chief financial officer of the REIT, in a statement. “We strategically executed this refinancing to ensure we have ample liquidity available in order to maintain the strength of our operations over the coming years.”
Slate said it had entered into a new credit facility on Oct. 21 that is made up of a US$275 million revolving credit facility and a US$225 million term loan facility set to mature in January 2028.
The facility was completed with a syndicate of both existing and new institutional lenders at interest rate spreads similar to the maturing debt facility.
Slate Grocery also said it is in advanced stages with lenders to refinance another US$138 million of upcoming debt maturities, something it expects to be completed during the fourth quarter.
Following the refinancings, the REIT’s forecasted weighted average interest rate across its portfolio, coupled with the REIT’s interest rate swap contracts in place, will be 4.8%, it said.
But analysts cast doubt on REIT’s forecast, encourage distribution changes
Allied Properties, one of the country’s largest office real estate investment trusts, continues to face pressure to lower its distribution as questions persist about its debt.
The Toronto-based REIT reported its earnings for the third quarter and said its portfolio’s occupancy and leased areas were 85.6% and 87.2%, respectively, as of Sept. 30.
The REIT that owns almost 15 million square feet of space also said it renewed 60% of its leases maturing in the quarter. Its average is 70% to 75%.
“Our urban workspace portfolio continued to outperform the market,” said Cecilia Williams, president and CEO of the REIT, in a statement. “With demand rising in Canada’s major cities, we expect our leasing activity to accelerate over the remainder of the year and into 2025.”
On the debt front, Allied noted that before the end of the quarter, it completed an offering of $250 million of unsecured debentures for four years at 5.534% per annum, using the proceeds to repay short-term, variable-rate debt.
The REIT has also obtained a commitment for a $63 million first mortgage on 375-381 Queen St. West in Toronto for a term of five years at about 4.7% per annum and a $100 million first mortgage on 425 Viger St. West in Montreal for a term of five years at approximately 4.9% per annum. Net proceeds will be used to repay short-term, variable-rate debt over the remainder of the year.
‘Difficult operating environment’
Allied and development partner Westbank Corp. has also obtained a $180 million first-mortgage financing commitment on 400 West Georgia in Vancouver for five years at approximately 4.75% per year, with net proceeds to be used to repay the current short-term, variable-rate facility.
“These three financings will materially reduce Allied’s annual interest expense and extend the term-to-maturity of its debt,” the REIT said in a statement.
While Allied is addressing debt maturities, Raymond James analyst Brad Sturges said the REIT continues to face a near-term investment risk on its loan exposure for development with Vancouver-based Westbank.
“We seek improvements in a few key areas before we become more constructive on Allied’s near-term total return prospects, like: 1) a clear recovery in underlying Canadian office leasing demand and supply fundamentals; 2) greater sustainability in its monthly distribution rate; 3) improving balance sheet strength with a reduction in financial leverage metrics towards target levels; and 4) minimizing dilution and/or impairment of Westbank-related development projects and loans,” the analyst said in a note.
Mark Rothschild, an analyst with Canaccord Genuity, said the challenging operating environment the REIT has faced is likely to continue in 2025.
“Our fundamental outlook for Allied remains unchanged,” Rothschild said in a note to investors. “The REIT continues to face a difficult operating environment and has a significant amount of debt maturing at rates lower than the cost of financing.”
He also encouraged Allied Properties to reduce its distribution even though management has said it has no intention to do so.
Rothschild also doubts Allied’s forecast about leasing activity accelerating in 2025.
“Canaccord Genuity believes that with new supply coming on-line and no material improvement in demand for office space, it will be difficult for the REIT to grow occupancy materially over the next year,” said Rothschild.
Located in the McMaster Innovation Park, OmniaBio’s new facility the largest of its kind in Canada
OmniaBio Inc. announced the opening of a new cell and gene therapy (CGT) manufacturing and artificial intelligence facility, making it Canada’s largest contract development and manufacturing organization facility dedicated to cell and gene therapy.
The new 120,000-square-foot facility is located within the McMaster Innovation Park close to the U.S. border and Canada’s largest international airport.
Built with financial support from Invest Ontario, OmniaBio’s new biomanufacturing facility in Hamilton accounts for an overall project investment of over $580 million and is expected to create 250 skilled jobs. The new facility is designed to meet specialized cell and gene therapy manufacturing needs by using advanced technologies such as robotics, biosensors and machine learning, helping to reduce costs, improve product quality and increase production rates compared to conventional CDMO approaches.
OmniaBio will collaborate with pharmaceutical and biotech companies and academic centres to offer a range of services from process, analytical and associated AI development to commercial manufacturing.
The new facility’s first commercial-stage customer, Medipost plans to manufacture its allogeneic umbilical-cord-blood–derived mesenchymal stem cell (MSC) product, Cartistem, which is used to treat patients with osteoarthritis caused by degeneration.
Initially founded by Canada’s Centre for Commercialization of Regenerative Medicine (CCRM) South Korean stem-cell therapeutics developer Medipost Co., Ltd. joined CCRM in the partnership owning OmniaBio.
Since Ontario scientists discovered stem cells in the 1960s, the province has emerged as a leader in life sciences research and development. Today it has Canada’s largest concentrations of life science firms with close to 2,000 companies ranging from multinational pharmaceuticals to startups.
In a statement, OmniaBio CEO Mitchel Sivilotti said, “OmniaBio is partnering with clients to make these essential therapies more accessible and affordable for patients in North America and worldwide. This new facility puts us in a unique position as a specialist commercial CGT manufacturing leader tackling the toughest disease challenges head-on by combining an experienced team with advanced tools and solutions.”
“This facility is a game-changer as it will keep revolutionary companies in Canada and attract global leaders to our ecosystem. With manufacturing, we have the ingredients to see the ecosystem thrive,” added Michael May, president and CEO of CCRM and the chair of OmniaBio’s board.
Global investment firm to accelerate move into other commercial property sectors
Global alternative investment firm Slate Asset Management says it plans to increase its holdings in several commercial property types as it distances itself from the office sector.
The Toronto-based company that said recently it would terminate its management deal with publicly traded Slate Office REIT is further decoupling itself from the office sector by selling an 11-property portfolio in Canada partially owned by the parent company.
In turn, Slate Asset Management said it is “accelerating its focus on essential real estate” and will continue to invest globally in various property types and across the risk spectrum. Slate Asset has a global real estate portfolio that includes grocery, residential, industrial and logistics and healthcare properties it classifies as essential.
“Our decision to sharpen Slate’s focus on the theme of essential real estate will allow us to redeploy capital, expertise, and resources to asset classes within our portfolio that we believe are highly defensive and generate the best risk-adjusted returns for our investors,” said Brady Welch, co-founding partner of Slate Asset, in a statement.
Welch, who founded Slate Asset with his brother Blair Welch, also serves as CEO of the office REIT. Slate Asset has a 10% stake in the trust that has a portfolio of 50 buildings, including three in Chicago, but has breached its debt covenants and now has a market capitalization of just over 50 million Canadian dollars.
Slate Asset said its 20-year-old platform has a real estate portfolio that is more than 80% invested outside of traditional office spaces. Slate Asset is the largest shareholder of Slate Grocery REIT, a company that owns 116 properties across the United States.
“We believe this is an opportune time to direct our team’s collective energy into the areas of our business that are best positioned to drive value for our partners,” said Brady Welch.
Blair Welch, who remains CEO of the grocery REIT, said the company believes the office market’s outlook will improve but focuses on opportunities to scale its investments in other sectors.
“Our well-established platforms in the US, Canada, and Europe will enable us to continue deploying capital strategically and opportunistically in asset classes that align with this thematic focus on essential real estate,” Blair Welch said in a statement.
CFO Capital finances $52M transaction for five buildings in Markham
Smart Investment Ltd. has acquired the Woodbine Corporate Centre in Markham, Ont. from Slate Office REIT and an unnamed minority partner for $52 million.
The 359,563-square-foot complex is spread across 12 acres just north of Steeles Avenue East and is comprised of:
three office buildings at 7030, 7050 and 7100 Woodbine Ave.;
a flex office building at 55 Idema Rd.;
and an industrial building at 85 Idema Rd.
The Woodbine Corporate Centre was built in 1984 and renovated in 2011. It provides easy access to public transit and Highway 404 and is close to amenities along Woodbine Avenue.
Slate Office REIT’s web page for the property listed 12 immediately available spaces totalling 63,019 square feet at the three Woodbine Avenue office buildings.
New owner and Slate’s sale proceeds
Smart Investment is a Markham-based real estate investment and management company owned by Tim Gu, who is involved in a number of ventures. Gu is also the chairman of service uniform provider Unisync Group Limited, the co-owner of hat and apparel company Tilley, the owner of WillowWood School, and president of apparel and hosiery company E.Star International Inc.
Woodbine Corporate Centre has become the second-largest property in Smart Investment’s commercial real estate portfolio, which includes eight industrial properties, three office properties and five retail properties. All except Winnipeg’s 371,425-square-foot Garden City Shopping Centre are based in Ontario.
Slate Office REIT owned a 75 per cent share of Woodbine Corporate Centre and received $39 million for the property, according to information released with its Q3 financial results on Nov. 7.
A $45.3 million mortgage on the Woodbine Corporate Centre had been refinanced with a two-year, $50-million mortgage in August 2023.
CFO Capital facilitated financing for acquisition
Markham-based CFO Capital facilitated the financing for Smart Investment’s acquisition of Woodbine Corporate Centre.
The company has expertise in debt structuring, underwriting and sourcing financing for commercial real estate. Its lender pool includes banks and other funds from Canada, the United States and Europe.
CFO president Mark Kay told RENX he had a nondisclosure agreement and couldn’t provide details on Woodbine Corporate Centre’s financing arrangements. He was able to say there are challenges with the debt sector when it comes to office, but Smart Investment was pleased with the way it worked out.
“There’s been a moratorium on office lending,” Kay noted, discussing the financing sector in a more general sense. “Most institutional lenders are shy of lending against office because there’s no clear direction on when that market is going to come back.”
Institutional lenders being on the sidelines for office transactions has created opportunities for CFO.
“We’ve been working with all the banks and credit unions for assets that are not performing or meeting their financial covenant,” Kay explained. “We can look at providing some alternative financing or restructuring their debt.”
Slate Office REIT’s portfolio realignment continues
Slate Office REIT owns interests in and operates a portfolio of workplace assets in North America and Europe.
In addition to its sale of Woodbine Corporate Centre, the REIT also revealed in its Q3 report that it received $14.3 million for its share of selling a property at 114 Garry St. in Winnipeg.
Slate Office REIT has completed nearly $103 million in dispositions (at its share) for the year up until Nov. 7 after announcing in 2023 it was realigning its portfolio and looking to sell certain assets to raise liquidity and reduce debt.
The REIT continues to have discussions with lenders to resolve current defaults and refinance its debt to more favourable terms, according to Slate’s third-quarter disclosure.
Kay said CFO isn’t a lender to Slate Office REIT.
Lending and trading in other asset classes
CFO is involved with providing financing solutions for every commercial real estate category, and they’re not all struggling like some aspects of the office sector.
Kay called purpose-built rental apartments the “golden child right now across Canada with the help of the CMHC (Canada Mortgage and Housing Corporation).”
Hotels are right behind apartments in terms of activity, according to Kay, who called them a hedge to inflation.
“Hospitality is super strong right now,” Kay said. “We’re doing a lot of construction right across Canada and acquisitions are taking place.”
Kay said the industrial and retail asset classes are still healthy but there haven’t been a lot of transactions. He expects to see more once people get a better handle on where five-year capitalization rates will settle.
A strong demand for well-located, essentials-based retail has resulted in RioCan Real Estate Investment Trust (REI.UN-T) achieving a record high retail committed occupancy rate of 98.6 per cent, the REIT announced as it delivered its Q3 2024 results.
“We find for our sites, which are all primary market located (and) all in the high-growth markets, retailers are hungry for space,” RioCan’s chief operating officer John Ballantyne told RENX in an interview following the release of the results.
Ballantyne noted no significant new retail has built over the past four to five years in Canada, “nor do we foresee any retail of substance being built over the short term.”
In addition, population growth and a four per cent decrease in retail GLA per capita due to the intensification of sites, have heightened demand for retail, particularly essentials-based retail, he said.
“Not only are (retailers) becoming more aggressive in demand for any vacant space that we have, but they’re also affording themselves to pay a little bit more rent on the renewal side from existing leases.”
Key elements of RioCan’s Q3 activity
During a Tuesday conference call with analysts, RioCan president and CEO Jonathan Gitlin said “market fundamentals favour retail real estate.” Premium real estate is limited, and this situation will likely persist due to tough zoning laws and high construction costs, he said.
During Q3, RioCan finalized 1.28 million sq. ft. of leases, including 251,000 sq. ft. of new leases.
The REIT was able to lease 10 vacant sites stemming from the failures of Bad Boy and Rooms + Spaces, which occupied 161,000 sq. ft. in its centres, to retailers such as Longo’s, Winners, HomeSense and No Frills. The new leases feature 23.9 per cent higher base rents.
RioCan also said traffic at its The Well mixed-use development in downtown Toronto is exceeding expectations, with average traffic of 160,000 to 200,000 people per week. The Well’s retail space is 95 per cent leased.
During the quarter, RioCan reduced its workforce by about 9.5 per cent or about 50 employees. Its workforce now numbers about 450.
Ballantyne said the move was due in large part to a decision to significantly reduce construction spending and to the implementation of a new Yardi accounting system through which it realized some efficiencies.
Halt on new construction still in force
“We’ve halted the start of new construction, and we don’t intend to start physical construction of mixed-use properties any time soon,” Gitlin said. “We continue to drive value from rezoning and enhancing existing entitlements, but will not initiate any capital-intensive projects for the foreseeable future.”
Development spending on mixed-use projects which were in progress prior to the reduction in new construction starts, is expected to be between $250 million to $300 million. Development spending for retail in-fill projects is expected to be between $30 million to $40 million.
Ballantyne said RioCan has been very active in development over the past five to 10 years and will be ready to resume its construction activities when capital becomes a bit cheaper and demand continues to increase, especially for residential product.
Gitlin said despite a significant amount of focus on RioCan’s presold condo units and the associated risks if they don’t close, “we do not view this as a material risk.” While Canada’s condo market is under strain and it is difficult to dispose of unsold inventory “it’s important to note that RioCan is not relying on the disposition of unsold inventory to achieve our balance sheet objectives.”
He said RioCan has presold about 90 per cent of the 2,500 condo units from the six active condo construction projects it will complete through 2026 to buyers that passed credit checks and gave average deposits of about 19 per cent.
RioCan expects to generate sales revenue of approximately $607 million between the remainder of 2024 and 2026 from these condominium and townhouse construction projects.
“The vast majority of these condo sales were concluded before the market peaked and the closing prices are below market value,” Gitlin said. “In addition, interest rates have decreased and will likely continue to do so. This makes carrying costs for our purchasers more viable and will help facilitate transactions.”
Strada multifamily sale in Toronto
RioCan also announced that after quarter end, the REIT and Allied Properties REIT agreed to sell Strada, a 62-unit multifamily property at 555 College St. in downtown Toronto, for $24 million for RioCan’s 50 per cent interest.
“That was really opportunistic,” Ballantyne said, noting RioCan received an unsolicited offer with a very attractive evaluation from an undisclosed buyer. “It was an opportunity to monetize a piece of our residential portfolio.”
Ballantyne added that RioCan’s strategy over the last 10 years has been to make its portfolio better by “disposing of assets that we believe don’t have the proper growth profile” often due to their location, or by injecting capital into real estate it owns, or by improving tenant mixes.
As of September 30, 2024, RioCan’s portfolio was comprised of 186 properties with an aggregate net leasable area of approximately 33 million square feet.
What happens when a commercial tenant has the option to purchase the property it is leasing, but the parties cannot agree on the value? The simple answer is to do what the lease says.
If they don’t, it can result in the loss of a very valuable asset.
In an interesting dispute, the Ontario Court of Appeal was asked to settle a contentious disagreement over the purchase of two commercial properties in Whitby. The properties were leased by the Tenant, a car dealership operator, from the Landlord, which owned and previously operated the dealerships for 18 years.
The properties were part of a 2015 deal where the Tenant bought the car dealerships for approximately $30 million, with leases allowing continued operation on the properties. Importantly, these leases included an option for the Tenant to purchase the properties, with the purchase price to be set by averaging two appraisals — one chosen by each party.
The facts of the case
In 2020, the Tenant, after failing to renew the leases in time, opted to exercise its purchase rights as its only option to stay on the properties. This move initiated a series of events that led to disagreement and eventual litigation.
The Landlord’s appraisal, done by Colliers International Group Inc., valued the properties at $31,200,000 based on an assumption that the highest-and-best use of the land would include rezoning for residential development. The Tenant’s appraisal, conducted by Equitable Value Inc., assessed the properties at $11,746,000 based on current zoning and commercial use.
The stark difference between these appraisals resulted in a midpoint of $21,473,000.
The parties disagreed on the validity and fairness of each other’s appraisals, with accusations that each side’s valuation was tailored to serve their interests: the Landlord’s to maximize sale proceeds, and the Tenant’s to minimize the purchase cost. The Landlord subsequently obtained additional appraisals that placed the value between $24,500,000 and $27,480,000, further supporting its higher valuation.
Despite ongoing disputes, the Landlord indicated readiness to close the deal at the midpoint price of $21,473,000. However, the Tenant refused, arguing the Landlord’s appraisal was speculative and invalid. The Tenant attempted to close by tendering only $11,746,000 — the value from its own appraisal — while unilaterally holding the balance of $9,727,000 in trust with its lawyer, pending resolution of the appraisal dispute.
The Landlord rejected this approach, stating the tender was non-compliant as it did not match the agreed midpoint price, and returned the funds.
The court’s ruling, and the appeal
The Tenant then sued to enforce the sale at its tendered amount, or at alternative prices it calculated based on its interpretation of fair value. The Landlord countered with a request to declare the options void and remove any registration related to the purchase from the land title, while also seeking vacant possession.
The lower court judge initially ruled in favor of the Tenant, finding both appraisals were compliant with applicable standards and the Tenant’s partial tender was valid given the dispute over the purchase price. The judge ordered specific performance, setting the price at the midpoint of $21,473,000.
However, on appeal, the decision was reversed.
In doing so, the court emphasized the strict nature of option contracts. Once exercised, an option creates a binding purchase and sale agreement, requiring adherence to its terms.
The court found the Tenant breached the contract by failing to tender the full amount of the purchase price. The Tenant’s approach of tendering part of the payment and holding the rest in trust was deemed insufficient and unilateral, leaving the Landlord justified in refusing to convey the title.
The court rightfully stated that, if the Tenant was permitted to proceed that way “it would mean that vendors would be required to convey property in any circumstance where, as here, the purchaser disputes the purchase price, potentially resulting in a substantial part of the proceeds of sale being held up indefinitely, pending years of litigation.”
It was also pointed out “the Landlord did not agree to the funds being held in trust, and the funds were not even placed in trust irrevocably, but were later returned to the Tenant, which used them to purchase other car dealerships.”
Given that the appeal court sided with the Landlord, the Tenant also tried to argue that, despite breaching the agreement, it should not lose its right to purchase the properties. The court disagreed and noted the parties were both sophisticated and “engaged in elaborate, protracted, and hardnosed negotiation.”
It was also noted the Tenant could have protected itself by tendering the purchase price and then suing afterward for the disputed appraisal. Instead, the Tenant “engaged in a strategy to enable it to acquire the properties at substantially below fair market value. The strategy failed. There is no reason that it should be relieved of the consequences.”
Ultimately, the appeal court declared the purchase options null and void, ordered their removal from the land registry, and awarded costs to the Landlord.
The moral of the story, and a parting thought
The short moral of the story is that, given the nature of the lease clause, both sides produced valid appraisals and they were required to buy and sell the property at the midway point. If a buyer fails to honour that agreement, it will lose the right to purchase.
However, this scenario also raises questions about what could potentially happen in this situation. As in, what if one side gets an appraisal and is unreasonably high or low and could not be any sort of fair representation of the value of the property. If that were to happen, it would not be reasonable for the other side to meet them halfway.
The better strategy may be that, when negotiating an option-to-purchase clause, it may be best to require both sides to obtain a single, third-party appraisal of the property and agree to buy and sell at the appraised value, rather than require them to meet halfway.
Renovations at 40-year-old, 540,000-sq.-ft. tower to make it more competitive in challenging Toronto market
Crestpoint Real Estate Investments Ltd. has revamped its office building at 121 King St. W. in downtown Toronto and renamed it Roserock Place in an effort to give it more of an identity.
The 40-year-old, 25-storey, 540,000-square-foot building was acquired by Crestpoint and an institutional partner for just under $380 million in 2022, Crestpoint executive vice-president and head of asset management Max Rosenfeld told RENX.
Rosenfeld said his company loved the location at King and York streets and that the building is connected to the city’s underground PATH system. It had also recently undergone some major infrastructure improvements, including the replacement of windows and boilers, and modernizing the elevators.
The tower had LEED EB Gold, BOMA BEST Gold, WiredScore Platinum, Fitwel Viral Response and Rick Hansen Foundation accessibility certifications.
“Our renovation to the lobby and the deconstructed granite wall, which is really an art piece in the lobby, was designed around giving it an identity,” Rosenfeld said. “Then we leveraged that into the brand Roserock Place and the ethos around that, which is creating community and connectivity between people in the building and moving through the building.”
Building additions and improvements
Roserock Place is the result of a collaborative effort between Crestpoint, property manager JLL, B+H Architects, custom architectural fabrication company Eventscape, POI Business Interiors and the Whitman Emorson design studio.
Among the new features of Roserock Place, which Rosenfeld said cost millions of dollars to implement, are:
a 22nd-floor tenant lounge and social club with a terrace to provide outdoor access, as well as a sports simulator, a library, focus rooms and a full-service bar, which also provides opportunities to create events and pop-ups;
a conference centre with multiformat meeting rooms and two combinable 30-person rooms;
five shower rooms and a bicycle storage area;
a rooftop garden and outdoor patio with drought-resistant plants and native vegetation;
a concierge service;
a custom Roserock Place app that enhances the tenant experience by serving as a hub for team initiatives, property experiences and feedback to facilitate communication between tenants and management;
and monthly activations focusing on health, wellness and cultural education programs.
“Function is really important, but feel is often overlooked,” Rosenfeld noted. “We have created a space that creates a good feeling. We want people to feel good when they step in our building and we want their last interaction to be a good one as well.”
Roserock Place is also targeting a 10 per cent reduction in energy use through the Eco-Tracker online utility monitoring system, and it has robust waste management and recycling programs.
Occupancy at Roserock Place
Roserock Place has a diverse group of tenants that includes insurance, public relations, real estate and technology companies, federal government agencies and others.
Roserock Place was 82 per cent occupied when it was acquired two years ago and that number sits at 73 per cent today. A tenant occupying 120,000 square feet was expected to leave when the building was purchased, and did subsequently move.
“To date, we’ve done about 76,000 square feet of new leasing activity and just under 100,000 square feet of renewals,” said Rosenfeld, who anticipates the improvements made at Roserock Place will increase occupancy. “It’s going to take some time, as the office market is still a bit challenged.”
Touring activity by prospective tenants has recently increased by 3.5 times, according to Rosenfeld.
Each Crestpoint office asset is viewed individually and no make-overs similar to those at Roserock Place are planned for any if its other properties. Smaller-scale renovations are taking place, however.
“We’re doing a full window reglazing replacement in a brick-and-beam property in downtown Montreal, lobby improvements in another building in Montreal, and we’re exploring some initiatives at one of our downtown properties in Vancouver,” Rosenfeld said.
Crestpoint’s office portfolio
Crestpoint has 20 office assets in its portfolio, which has more than $10.5 billion of office, industrial, retail and multifamily assets under management.
“We’ve spent a lot of time looking at our portfolio and examining what active steps we could take to improve it, and also looking at office assets that maybe didn’t fit with our portfolio any longer,” Rosenfeld explained. “So we’ve had a few dispositions, though nothing of any real significance.
“We’ve culled the portfolio and we really like the 20 assets, so we don’t have any plans for dispositions in the immediate term beyond what we’ve already done.
“We’d like to see the occupancy increase to above 90 per cent, but the rates are generally holding, the income’s pretty steady on those assets and we’re doing okay relative to what we’re seeing in the market because of the active asset management and solid plans to change perception of the buildings and increase occupancy.”
Crestpoint continues to monitor the office market but has no imminent plans to make any acquisitions either.
“We feel fundamentally that office is a really important part of the ecosystem,” Rosenfeld said. “We think there will be a recovery from this cycle and we will want to take advantage of that, but we haven’t seen anything overly compelling yet.”
Office space availability rose by 60 basis points to 20.8 per cent and the number of buildings with more than 50,000 square feet available increased to 240 from 229 during the past three months, according to Avison Young’s Q3 2024 Greater Toronto Office Market Report.
Overall vacancy also continued to rise, up 40 basis points quarter-over-quarter and 160 basis points year-over-year to 14.4 per cent. Net absorption turned negative as occupied area declined by 686,000 square feet — reversing the gains made in the first half of the year.
The Greater Toronto Area’s suburban markets had respective availability and vacancy rates of 20.1 and 12.9 per cent. Both results outperformed the downtown market, where the respective numbers were 21 and 15.8 per cent.
“A lot of companies have a need to have suburban space as we move into this sort of new normal in terms of the return to office and remote work,” Avison Young principal and managing director for Ontario Joe Almeida told RENX.
“A lot of companies are keeping the suburban space because it offers them flexibility to have people in the office part-time and what-not. The rents are not necessarily moving up, but we are seeing some leasing activity, which is positive overall.”
Decrease in amount of available sublease space
The amount of space available for sublease declined quarter-over-quarter, but direct available area continued to increase as the total available area reached a new high of 39.3 million square feet. Twenty-one per cent of the total available space downtown was for sublets, compared to 17 per cent in the suburbs.
“A lot of term that was on the market has burned off,” Almeida explained, citing a major reason for the drop in available sublease space. “The other thing we’re seeing is some tenants taking their space off the market with the view that they don’t know if they’re going to need it, or if they’re growing into it at this point in time.”
Asking rental rates essentially held flat, with no sub-market average shifting by more than 10 cents per square foot. Average rates held steady for class-A and -B buildings, while trophy rates ticked down from a recent peak.
“I think that’s mainly a little bit of a blip,” Almeida said of the drop in trophy building rental rates. “There’s been an ongoing trend in the market for tenants looking for quality space and moving to better located and better amenitized buildings.
“We’re seeing that the vacancy rate in those buildings is much lower than what we’re seeing in the market overall.”
The level of activity in the marketplace among medium-to-large-sized tenants was perhaps the highest it has been at any time since the onset of the COVID-19 pandemic in 2020. More deals are expected in Q4 as momentum builds, potentially resulting in higher occupancy levels and positive absorption.
Workspace density is increasing again
Many companies were seeking greater efficiency and seating density for their staff before the pandemic. That was paused by pandemic precautions, with more demand for enclosed spaces or open collaborative areas, but the trend has begun to turn back toward greater density.
“As you adopt a remote work policy, it allows you to push that number further and further,” Almeida said, “but there’s only so far we can go with reducing the amount of workspace per person that makes sense.”
Several prominent employers — including the federal government, Canada Post, Canada Life and Manulife — have increased the number of days per week staff are required to be in the office. Amazon has ordered employees into the office five days a week starting in January.
More workers spending more time in the office should have the longer-term effect of increasing demand for space.
An increasing number of landlords are offering newly built, renovated or expanded amenity spaces in their buildings to attract and retain tenants and encourage people to be in the office more often. Examples include CIBC Square, Scotia Plaza, Roserock Place, 145 King St. W. and 33 Yonge St.
Office building construction and transactions
Carttera’s Portland Commons, newly completed in the downtown core, added 563,700 square feet of space to the office market during Q3 2024. (Courtesy Carttera)
Carttera’s Portland Commons, at 530 Front St. W. in the west end of the downtown core, was completed in Q3 and its 563,700 square feet of space were fully available.
“If they had finished that building a few years earlier, they’d probably be sitting on a fully leased building right now, just like The Well,” Almeida said. “Timing was really their only problem.”
Almeida noted potential tenants have been looking at Portland Commons and he expects the first lease to be signed “in the not too distant future” since it’s “a very high quality product.”
Just four office projects, totalling approximately two million square feet, remain under construction.
The biggest office transaction of the quarter was IBM’s sale of its 156,546-square-foot property at 3600 Steeles Ave. E. in Markham, which also has food and beverage outlets on site, to Triple Properties for $115 million.
“That was surplus space for IBM that they’ve been trying to figure out what they’re going to do with for quite some time,” Almeida said. “It’s just another example of a major employer coming to a realization that the market is there and there’s an opportunity for them to deal with rationalizing their space — and they took advantage of the opportunity.
“I think we’re going to see more and more of that in the next little while as interest rates continue to come down. Hopefully 2025 gives us an environment where there’s more and more of these types of transactions happening.”
