Toronto Offices Passing NYC on Cheap Funding: Mortgages
Toronto will add more prime office space in 2014 than almost any other city in the Americas as developers take advantage of low borrowing costs to meet demand from companies such as Google Inc.
More than 1.59 million square feet of so-called triple-A space will be added in Toronto next year, according to data from Cushman & Wakefield Inc., the world’s largest closely held real estate brokerage firm. That’s more than in New York and trails only Mexico City, Cushman said. Investments from pension funds and real estate investment trusts, as well as borrowing costs in some cases more than 2 percentage points lower than in 2007 have helped fund development as well as acquisitions.
Rising demand led to a record high price for an office building in Canada when a group of pension funds paid C$749 ($750) a square foot for the Brookfield Place-TD Canada Trust Tower on Bay Street in December, according to RealNet Canada Inc., a Canadian real estate data firm.
“It’s expensive right now and this kind of office space should command a premium for the next few years until much more supply comes onto the market,” Pierre Bergevin, chief executive officer of Cushman & Wakefield in Canada, said in a phone interview. “The Toronto market, let’s face it, is relatively closed.”
Commercial real estate prices have been rising in Toronto as companies tap an urban workforce living among the 51 condominiums that have been built since 2009. The city, home to the country’s five biggest lenders, which control about 80 percent of the nation’s bank assets, has more high rises under construction than any other metropolis in the world. It’s the second-largest North American financial services center after New York.
Canada’s REITs and pension funds are taking advantage of low-cost funding to purchase and finance development of commercial real estate. Dundee REIT and H&R REIT bought Scotia Plaza, Canada’s second-tallest office building, from Bank of Nova Scotia (BNS) for a record C$1.27 billion in May.
Dundee said it financed the purchase in part with a C$650 million 3.45 percent seven-year mortgage bond. By comparison, H&R, Dundee’s partner in the deal, paid 5.66 percent for 10 years of mortgage financing in September, 2007. Toronto-based Dundee also raised C$300 million with an equity offering, adding to the $5.12 billion that was raised by REITs in 51 initial public offerings and secondary sales in Canada last year. The $500 million raised from seven REIT IPOs in 2012 was the most for any industry, according to data compiled by Bloomberg.
The Standard & Poor’s/TSX Capped REIT Index (SPRTRE) of 15 Canadian REITs rose 0.3 percent as of 1:06 p.m. in Toronto. The index had climbed 9.7 percent in the past 12 months, compared with a 2.1 percent gain for the S&P/TSX Composite Index.
Real estate developers also are benefiting from a rebound in the commercial mortgage-backed security market. Brookfield Office Properties Canada LP raised C$525 million of bonds using the leases on the Bay-Wellington Tower, adjacent the Canada Trust Tower on Bay Street. The December deal was the second of 2012 and only the third since 2007, after the CMBS market slammed shut in 2008.
Ten glass-encased high-rise office towers are slated to open by the end of 2017, financed by pension funds, real estate investment trusts, and private developers. RBC Waterpark Place, which will be the headquarters of Toronto-based Royal Bank of Canada (RY)’s consumer-lending unit, is being developed by Oxford Properties and the Canada Pension Plan Investment Board, the country’s biggest pension fund.
The largest prime office tower opening in the next decade is the Richmond Adelaide Centre, also developed by Oxford Properties, a unit of Ontario Municipal Employees Retirement System. The futuristic-designed building will have Deloitte & Touche LLP occupy some of its almost one million square feet. A smaller office block at 134 Peter St. is under development by Allied Properties REIT.
There was no additional supply of Class-A office space in 2012 and only 100,000 square feet is due this year, according to Cushman & Wakefield. That pushed Toronto’s prime vacancy rate to 5.1 percent last year, close to its 2000 record low of 3.4 percent, according to the data. The vacancy rate will reach 7.6 percent in 2014, Cushman said. New York’s rate, at 7.2 percent last year, will remain unchanged at 7.4 percent in 2014. The city is adding 916,000 square feet of space in 2014.
Last year was a record for commercial sales transactions in Toronto. Investment in office, retail, and industrial properties reached C$13 billion, up 73 percent from 2009, according to RealNet data. About a third of that was office space. Total transactions were about 2,000 while the number of sales worth more than C$100 million reached a record 14 deals.
The most expensive deals are in the south core of the city. The Standard Life Tower at 121 King St. West sold for C$587 per square foot, or C$306 million, while the RBC Centre was C$495 per square foot, or C$300 million.
“What the area of the south financial district brings to the city of Toronto is the whole live, work, play environment,” said Peter Menkes, president of the commercial and industrial division of closely held Menkes Development Ltd. at One York’s ground breaking in January. The developer is also part owner of the C$375 million building.
The communications industry, including Google Canada’s marketing team, accounted for 16 percent of total tenants in Toronto for the past three years, according to data supplied by Cushman. The health of the country’s banking sector has largely sustained this demand at 26 percent of total tenants.
Google Canada and Coca-Cola Co. (KO) are among companies moving closer to the Toronto core.
“It’s about location, location, location and when we looked around, that’s always at the top of our list,” Chris O’Neill, managing director of Google Canada, said in a phone interview from his office on Richmond Street West. “The bottom line is that we’re fast-paced and a connected company and we really want to thrive in the downtown core.”
Google opened the new space in October, moving to five floors of an office building one block away from the Exchange Tower, home to the Toronto Stock Exchange. The tech giant outgrew its previous office in the city and wanted to find somewhere even more central for its 150 regular employees.
“Of course we look at the cost but to us, at the core of our culture is creativity and our people,” O’Neill said. “And it’s certainly worth it for us to make these types of investments.”
The company is leasing 89,000 square feet and occupies less than half of that, leaving room for growth in this location, with its meeting rooms in tents, free healthy snacks, and a mini outdoor golf course.
Prime property is not the only type set to hit the market. More than five million square feet of all office space, including prime, is forecast to be constructed in Toronto this year, according to CBRE Group Inc. (CBG), the world’s largest commercial real estate services firm. That could mean higher vacancy offsetting high demand for years to come.
“Lackluster” office leasing in 2013 will affect current development in Canada’s downtown office markets, said Ross Moore, national director of research for CBRE Group Inc. in Canada, in a research note. “Overbuilding is merely an emerging concern at this point, but this possibility should never be underestimated.”
“Where the sales prices may get affected is in vacant or newly- constructed buildings, or buildings with near-term lease expirations,” Dan Fasulo, managing director of Real Capital Analytics, Inc., said in a phone interview from New York. “Firms may get squeamish with an increasing vacancy rate and new space. They may lower sales prices in that case.”
The sale price for the 51-floor TD tower, located at Bay and Front streets with a view of the Toronto Islands and waterfront, is not likely to be repeated in the coming years, said Richard Vilner, commercial researcher for Toronto at RealNet, a Canadian real estate information firm.
“Can this record sustain itself?” Vilner said in an interview on Jan. 21. “It would be a huge surprise if it does. The additional square footage slated for release over the next few years would raise vacancy, driving office property prices down from the 2012 high.”
To contact the reporter on this story: Katia Dmitrieva in Toronto at email@example.com