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‘50% correction’: Why Canada’s office real estate sector is heading for a reckoning



Publicly traded office real estate trusts have seen their values drop precipitously in recent months as a combination of high interest rates and rising vacancies in the wake of the pandemic have sent tremors through the sector. Now Carl Gomez is waiting for the other shoe to drop.

The chief economist at commercial real estate analytics company CoStar said valuations for privately held office real estate assets in Canada, mostly held by large institutional investors such as pensions, are “not adjusting to reality” and face a reckoning that could see their values, too, cut by as much as half.

“The total return on (office) REITs has seen almost a 50 per cent correction,” he said, referring to the combination of unit price declines and cuts to distributions.

“I think there’s a disconnect … between what’s happening in the private market and what’s happening in the public market, which is already sensing that these changes (in valuation) need to occur.”


Cash flows at risk

Gomez said public investors seem to be acknowledging that changes to capital market conditions as well as “structural changes related to the nature of how we work — including hybrid and work-from-home” mean that valuations must adjust.

“Cash flows are at risk,” he said.

Among the publicly traded real estate investment trusts operating in the space that have already been punished is Slate Office REIT, which reduced its monthly distribution to one cent from 3.3 cents in April. True North Commercial REIT, which owns properties in British Columbia, Alberta, Ontario and the Atlantic provinces, announced a 50 per cent reduction to its monthly distributions in March to shore up cash to improve the trust’s capital profile. The unit prices of both REITs plummeted and are still off by more than 40 per cent.

The question of whether privately held assets will meet the same fate has been swirling ever since commercial real estate was thrust into the spotlight by market watchers who see it as one of the most vulnerable sectors to current interest rate and inflation trends, as well as credit tightening in the wake of a pair of bank failures in the United States.

“You can’t talk about vulnerable asset classes in Canadian real estate without addressing office first,” said Victoria Girardo, senior vice-president of real estate lending at Canadian Western Bank.

“The sector is facing considerable headwinds including high vacancy rates,” she said, as large numbers of workers continue to work in part from home. At the same time, rising interest rates are putting pressure on landlords, particularly when renewing loans or refinancing properties.

“High debt costs are eating up a much higher portion of rents from a shrinking tenant base,” said Girardo, adding that refinancing and renewal problems are further complicated by declining property values.

High-profile defaults

Toronto-based investment giant Brookfield Asset Management spooked some market watchers by defaulting on US$750 million in loans tied to two Los Angeles office towers in February and, later, a further $161 million on a portfolio of office buildings largely located around Washington, D.C. Girardo also cited PIMCO-owned Columbia Property Trust’s default on US$1.7 billion in notes secured by seven buildings in some of the largest U.S. cities, one of the largest office defaults since the start of the COVID-19 pandemic in 2020.

While Gomez said those defaults may have been affected by additional stresses in the United States, such as tighter borrowing conditions, and can be handled by large players such as Brookfield and PIMCO, the Canadian sector is not immune to the factors driving such decisions.

Equity analysts at CIBC Capital Markets recognized the challenges in a report April 12, in which they broadly reduced price targets across the office REIT segment of the market, citing “erosion in both sentiment … and fundamentals.”

At the time, the four Canadian Office REITs the CIBC analysts covered were trading at an average 41 per cent discount to net asset value, suggesting investors were already somewhat soured on the office sector.

While the analysts, led by Dean Wilkinson, emphasized that their outlook covered only the next 12 months and was “not an overtly negative perspective on the long-term prospects for office properties per se,” others aren’t so sure.

“I think in the short-run, investors are well capitalized. However, we will see impacts in the long run,” said Erkan Yonder, associate professor of real estate at Concordia University’s John Molson School of Business.

“It might not lead to (a) high number of bankruptcies, but I suspect that … the vacancy problem (could) lead to strategic defaults.”

Like Gomez, he sees trends including continuing vacancies alongside an uptick in subleasing as an indication tough times lay ahead, with newer buildings in good locations having the best shot at withstanding them.

But what Gomez sees as an inevitable adjustment or “revaluation” in privately held office real estate — unless trends in interest rates and hybrid work suddenly reverse — could be slowed by a concentration of office real estate ownership in Canada.

“A good chunk of office buildings, particularly in the downtown office buildings, are in the hands of well-capitalized investors like pension funds,” Gomez said. “They’re resisting taking write-downs right away (because) they’re not feeling distressed like some of the REITs, which are a little bit more leveraged and need access to capital to keep them going.”

Another drag on a forced reckoning is that, so far, there has been little actual trading of assets to set new “comparables” on which valuations are based, he said.

Cadillac Fairview has $40 billion in assets largely concentrated in office and retail properties.
Cadillac Fairview has $40 billion in assets largely concentrated in office and retail properties. Photo by REUTERS/Chris Helgren

Two of Canada’s largest commercial real estate investment and development companies — Cadillac Fairview, with $40-billion in assets largely concentrated in office and retail properties, and Oxford Properties, which has an office portfolio of more than 23-million-square-feet in Canada, the U.S., the United Kingdom and Europe — are owned by the Ontario Teachers Pension Plan and the Ontario Municipal Employees Retirement System (OMERS), respectively.

Jo Taylor, chief executive of the Ontario Teachers Pension Plan, said in an April 5 interview that office occupancy was holding up relatively well in Teachers’ portfolio through Cadillac Fairview, particularly in desirable “class A” buildings in major cities, adding that Cadillac’s investment model is not predicated on external financing.

But even these coveted high-end office complexes in Toronto suffered in the first quarter, as the Canada’s largest city contended with “an influx of availabilities both in direct and sublease space … including space in Class A towers,” according to a report by real estate services firm Jones Lang Lasalle Inc.

In the April interview, Taylor acknowledged that there had been no recent “marquee disposals” in commercial office real estate that would establish “comparables” for future asset sales based on current conditions.

In the meantime, capitalization or cap rates — a key measure of a building’s value based on the income it generates from rent, taking into account the costs associated with the building — are being scrutinized by market watchers as they assess the situation and risks.

Average cap rates rode down from around seven per cent in the early part of the decade to about five per cent as interest rates fell. But they haven’t reversed course despite the rapid rise in interest rates, said Gomez.

“If net operating income goes down, your cap rate should go up, but what we’re seeing is that they haven’t adjusted by as much, if (at all),” he said.

“Those cap rates are, for the most part, staying sticky, mainly because of the appraisal lag.”

‘Significant’ writedowns coming

In late March, Jim Keohane, a director at Alberta Investment Management Corp. (AIMCo) who spent eight years at the helm of the Healthcare of Ontario Pension Plan (HOOPP), predicted “significant” write-downs were coming on office and commercial real estate as owners and lenders digested the effect of rising rates and lingering vacancies and their impact on traditional metrics including cap rates. The higher financing costs combined with lower rents would have a steeper impact on valuations than rising rates alone, he said.

Gomez said the spread between current average cap rates and 10-year government bond yields is another strong indicator that a revaluation is likely coming to the office segment.

The spread is a proxy for the level of risk taken on by investing in real estate instead of bonds, he said, and it would be expected to stay the same or even widen with new perceived risks — such as vacancy rates in some markets rising above 10 per cent, double what they were before the pandemic. Instead, the typical 400-basis-point spread has shrunk to around 200 basis points as interest rates have risen, he said.

Rising subleases

Rising subleases are also among the signs he sees of a reckoning on the horizon. These suggest that while landlords are still getting their full rents, companies are reassessing and reducing their space needs, and aren’t likely to occupy as much on lease renewal. Toronto showed the biggest absolute increase in sublets by square footage in the first quarter of 2023 from the previous year, according to an online presentation Gomez made April 19, while Vancouver’s increase was highest in percentage terms, at 55 per cent.

One of the most prominent examples of this trend was Shopify Inc.’s decision to abandon plans to move into The Well, a new retail, office and residential development on the west side of Toronto’s downtown. This put 350,000 square feet up for sublease, adding to 87,000 square feet of sublease space already available in the new building that was put up by other tenants who pre-leased space prior to the pandemic being declared in March 2020.

Other worrying trends such as shorter leases at renewal are starting to take hold, he said, suggesting these sector pressures show no signs of easing any time soon. And there are some that aren’t even on the radar yet.

“We’re starting to see an increase in the amount of incentives … so there’s a lot of discounts, free months’ rent,” Gomez said. “So the net effective rent that the landlord is getting is much lower than the base (rent) value … and that doesn’t necessarily get captured in the data.”

Some markets have had a head start when it comes to grappling with a glut of office space.

Calgary, hit hard by the last energy downturn, is offering grants to convert vacant office space into housing and has approved at least 10 projects under consideration as part of a downtown incentive program, said Girardo, the Canadian Western Bank executive.

Those projects face challenges including floor sizes and mechanical systems that are not conducive to residential units, and difficulty estimating renovation costs.

“Grants help remove some barriers but not all,” Girardo said.

The Loft Building in Calgary is one of five more downtown buildings designated by the city for conversion to residential units.
The Loft Building in Calgary is one of five more downtown buildings designated by the city for conversion to residential units. Photo by Jim Wells/Postmedia
For Gomez, these attempts to retrofit or overhaul the sector are playing out against the “slow burn” of changing fundamentals, including what he sees as a protracted increase in vacancy over the foreseeable future due to both supply and demand issues.

Unlike the 2008 financial crisis, when the lending taps were turned off and building owners went into immediate distress, he expects this market drama to play out over a longer period of time.

“Office valuations simply haven’t adjusted (this time) … even though market expectations of all the cyclical and secular trends have,” he said.

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Luxe $9m South Yarra sanctuary for sale with six-car basement garage – –



The South Yarra property feels very secluded, every with its proximity to Chapel Street.

A winning collaboration by some of the best in the business has produced this luxurious modern sanctuary in a prized lifestyle location.

High-end builder Agushi teamed with celebrated Workroom architects and Nathan Burkett Landscape Architects on the private inner-city residence.


The four-bedroom, five-bathroom house at 12 Rockley Rd, South Yarra has hit the market with a $9m-$9.5m asking price.

Largely crafted from concrete – which even features on the sculptural curved staircase that links the home’s three levels – and marble, it delivers sophisticated interiors with carefully framed garden views.

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When at home, a mirrored lift, infinity pool with in-floor cleaning and a six-car basement garage provide the ultimate in convenience.

But it is the state-of-the-art automation that paves the way for a lock-up-and-leave lifestyle.

The technology has been a game-changer for vendor and interior designer Georgie Coombe-Tennant and her husband, Mark.

It has transformed the way they live, doing away with the need for front door keys and allowing them to turn on the oven remotely, let the postie in the gate while sitting on a ski lift or turn on the sprinkler from Europe.

A skylight runs from the outdoor entertainment area into the dining room.

Grey Damastas marble is paired with chocolate toned timber in the kitchen.

The curved concrete staircase is a standout feature of the home.

“We had always had old traditional homes and renovated them, and we just felt like it was time for something modern,” Mrs Coombe-Tennant said.

“We saw Bear (Agushi’s) work and my expression for his work is that everything is so resolved.

“He has not left a single detail out of it. If you think of something you would need in a home it’s there.”

She has delighted in decorating the home, which she said offers loads of space despite having a townhouse feel.

“I found the home is so easy decorate and furnish because you have got this beautiful blank canvas and you can put any amount of colour or neutrality into in,” she said.

As well as three living areas and four bedrooms, the two-year-old home has the luxury of two home offices with desks crafted of the same grey Damastas marble that features in the lavish kitchen and bathrooms.

There’s a sense of privacy once you’re inside the gate.

Enjoy pool views from the main living room.

Gather around the sunken seating area.

The main open-plan living zone screams entertainer thanks to a series of full height sliding doors linking it to a covered outdoor dining space with a built-in barbecue, a conversation pit and north-facing sun deck.

A second ground floor lounge room provides another breakout space, perfect for curling up beside the fire.

Despite its proximity to Chapel St and Toorak Village, Mrs Coombe-Tennant said the home felt secluded.

“I guess with South Yarra people are always worried about noise and things like that but it’s very, very quiet, it’s really secretive. No one knows it’s here,” she said.

“Once we are in that front door you don’t hear a single sound, but you have got everything on your doorstep.”

It’s wall to wall marble in this bathroom.

The garage can accommodate six cars.

Built-in desks feature in both home offices.

RT Edgar Toorak director Sarah Case added that it was rare to find homes of this calibre created specifically for a lock-up-and-leave lifestyle.

“This home has every luxury we’ve come to expect from Agushi, who’s renowned solid concrete construction, superior quality, generous spaces and meticulous attention to detail, while providing for a modern way of living with a lift to all levels, stunning pool and six-car garage,” Ms Case said.

“From the magnificent marble kitchen to the beautiful bedrooms and the poolside outdoor spaces, every aspect has been thoughtfully designed to meet the needs of even the most discerning buyer.”

Mr Agushi said he prided himself on building homes with “over specced” insulation, glazing, solar panels and smart home integration.

Expressions of interest close on June 15 at 5pm.

According the latest Proptrack Home Price Index, national home prices continued to stabilise in April after rising for the fourth consecutive month, rising 0.14 per cent.

Sign up to the Herald Sun Weekly Real Estate Update. Click here to get the latest Victorian property market news delivered direct to your inbox.

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A grandmother's van life and where housing investors live: This week's top real estate stories – The Globe and Mail



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This week in real estate, the housing crisis pushes one grandmother to live in a van, and three reasons why mortgage refinances are

Here are The Globe and Mail’s top housing and real estate stories this week, with the lowest mortgage rates available in Canada today, commentary from our mortgage expert and one home worth a look.

The housing crisis chose van life for this 57-year-old grandmother

Terri Smith-Fraser, a nursing assistant, was renovicted from her Halifax apartment last spring when the cost of rent for her two-bedroom apartment more than doubled. Unwilling to be a burden on her adult daughters or find a roommate, she decided van life – usually associated with the young and adventurous – was her only viable option. Suddenly a bronze 1998 GMC Savana purchased in January, 2022, was home.

“I’m a grandma. I’m not a 20-year-old nomad snowboarder. I’m just your regular person who goes to work every day, and I live in a van,” Ms. Smith-Fraser told The Globe and Mail.


Three reasons why mortgage refinances are disappearing

Mortgage refinances have fallen off a cliff. They’re down by 32 per cent, according to the latest data from the Canada Mortgage and Housing Corporation (CMHC). People still need to refinance, but there are three reasons why they can’t, Robert McLister writes in his column:

  • Tumbling home values
  • Soaring rates
  • The stress test

And here’s what to do about it if you’re in this boat.

This week’s mortgage rates: Markets price in another dose of tough rate medicine

“Higher for longer” is again the buzzphrase in Canada’s rate market. So much for the mini-U.S. banking crisis, which drove rates lower for all of two months, McLister writes. Now we’re dealing with a U.S. debt ceiling mess and persistently disappointing inflation indicators, not the least of which is stubbornly low unemployment. Both those factors have been driving rates higher.

Four in five Ontario housing investors live in the province: Statscan

More than 80 per cent of individual home investors in Ontario live in the province, according to a new report from Statistics Canada. Just 3 per cent of individual home investors reside elsewhere in Canada and 16 per cent live outside of the country, reports Rachelle Younglai.

The story is the same in British Columbia, Manitoba, Nova Scotia and New Brunswick, which does not reflect the spike in investor buying that occurred during the COVID-19 real estate boom. The study provides a window into investor buying patterns, which have come under scrutiny as home prices and rents have soared across the country.

Home of the week: An urban manse on Toronto’s Humber River

  • Home of the Week, 3 Riverside Trail,

    1 of 15

3 Riverside Trail, Toronto

From the street the home is an imposing two-storey stone manse at the top of a circular driveway with bay windows flanking the formal entrance. The foyer is a festival of detailed millwork and wainscotting that continues into the central hall and then into the formal rooms flanking the entrance. All of the doorways and windows in this space have modest arches, which adds a bit of Hobbit-like character.

The second floor has more of the original woodwork and arched windows, and the landing at the top of the stairs is generous enough for another formal sitting area with ravine views, and a balcony.

What do you think is the asking price for this house?

a. $2.89-million

b. $3.59-million

c. $6.69-million

d. $7.59-million

a. The asking price is $7.59-million.

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LACKIE: Busy Spring in Toronto Real Estate – Toronto Sun



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This has been a busy, bustling spring for the Toronto real estate market.

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There are people who will say it’s all an illusion. A perfectly coordinated dance between snake oil selling realtors and their greedy clients, all unified in pumping a market currently back on its heels as means of personal enrichment.


How does that saying go — never let the truth get in the way of a good story?

They will say it makes no sense that the market should have any signs of life at all given the rollercoaster of the last 18 months (slash, the three years since COVID, if we’re being honest) and that with rates high and staying there, and prices still high and mostly staying there, we are looking at the furthest thing from a healthy marketplace.

And perhaps it’s all relative — things feel particularly energized because in comparison to last fall, we are actually seeing some action out there.

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Houses in dodgy pockets fetching upwards of 20 offers, buyers seemingly undeterred by the needles on the street just steps away from the front door.

Cute houses in great pockets drawing multiple offers and landing peak-of-2022 prices.

  1. For years we have been hearing all about how the new flex is owning an investment property or two.

    LACKIE: Gap between haves and have-nots widens as gov’t shrugs

  2. Converting a single-family home into a multiplex rental dwelling is one way to add gentle density to an established neighbourhood, as demonstrated by this project in Toronto by Eurodale Design + Build.

    LACKIE: Make way for multiplexes Toronto

  3. Real estate for-sale sign.

    LACKIE: Blame the sellers, not just their agents

Sellers who may have wondered if the time-was-now realizing they didn’t want to miss their moment.

There are many utterly baffled that the market has held. That prices have held. That the pain of 2022 didn’t reset the playing field.

They are adamant that any attempt to explain it by pointing to how grossly insufficient our inventory levels are is really just distortion and manipulation. The idea somehow being that people can be scammed into engaging and thus what we are really looking at is a mirage.

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They think our problems will be solved if buyers simply stay home. Refuse to show up to houses that are underlisted. Refuse to engage in multiple offers. Refuse to pay a dollar more than list price. Refuse to pay realtor fees. Refuse to participate.

Legislate agents into listing at market value. Legally obligate sellers to accept any offer that meets the price they chose to list at. Cap realtor fees. The list goes on.


We apologize, but this video has failed to load.

Absent from all of this is the reality very much apparent on the ground: for all of the noise and anger, Toronto has not enough houses and more than enough willing participants who are capable of driving a marketplace.

By this time next week, we will have stats to support that the spring market is very much here and with it I expect we will note a sharp increase in transactions and a notable bump to average sale prices.

Is it a seasonal blip that will fizzle out as temperatures rise? Entirely possible. But even just a return to some seasonal rhythms in our marketplace would be a welcome return to normalcy.


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