Toronto’s Office Capital May Be Checking Into Hotels

Jan 2,2025 3 Comments By The Lilly Commercial Team

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.

Source CoStar. Click here for the full story.

Comments

influencersginewuld | Jan 3,2025
Reply

I do agree with all the ideas you have introduced on your post They are very convincing and will definitely work Still the posts are very short for newbies May just you please prolong them a little from subsequent time Thank you for the post

hdhub4uin | Jan 14,2025
Reply

I have been surfing online more than 3 hours today yet I never found any interesting article like yours It is pretty worth enough for me In my opinion if all web owners and bloggers made good content as you did the web will be much more useful than ever before

hdhub4uin | Jan 14,2025
Reply

Fantastic site Lots of helpful information here I am sending it to some friends ans additionally sharing in delicious And of course thanks for your effort

FOR LEASE – Office – Toronto

Address: 88 Laird Dr, Toronto, ON M4G 3V1 Available area: 2,860 Sq Ft Whole building (excluding the ...

FOR SALE – Office – Mississauga

Address: 2155 Dunwin St 28, 31, 32 Available area: 4,059 Sq Ft Price: $1,700,000 Exceptional Opportu ...

FOR SALE – Land – Meaford, ON

Available area: 18.57 Acres Price: $1,275,000 Prime opportunity to own nearly 20 acres of vacant, fr ...

SUBLEASED – Industrial Space – Mississauga

Address: 1725 Matheson Boulevard, 2 Mississauga L4W1Z1 Available Area: 7,515 SF Lease Rate: $13.00 S ...

FOR LEASE – Industrial Space – Uxbridge

Address: 22 Anderson Blvd, Uxbridge, ON Available Area: 15,341 SF Lease Rate: $16.00 Per Sq Ft + TM ...

FOR LEASE – Office/Medical – Toronto

Address: 685 Sheppard Ave E, Toronto Available area: 3,901 Sq Ft – $23.50 Sq Ft Net + $17.68/2 ...

FOR SUBLEASE – Office Space – Oakville

Address: Unit 100 – 1415 Joshuas Creek Dr., Oakville Available area: 8,399 ...

FOR LEASE – Office Spaces – Scarborough

Address: 2300 Lawrence Ave E, Toronto Available units: #218 – 1,248 SF – $11.00 psf + $1 ...

Locations

RE/MAX Hallmark Realty Ltd., Brokerage
685 Sheppard Avenue East Suite 401, Toronto

Toronto

Riverdale Office

RE/MAX Hallmark Realty Ltd.

630 Danforth Ave
Toronto, ON M4K 1R3

Office: (416) 462-1888
Fax: (416) 462-3135