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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.
Cadillac Fairview has $40 billion in assets largely concentrated in office and retail properties.

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.
The Loft Building in Calgary is one of five more downtown buildings designated by the city for conversion to residential units.

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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Real eState lays off real estate team and shutters business unit – TechCrunch



Digital mortgage lender is exiting the real estate business.

The struggling fintech startup laid off its real estate team on June 7, multiple sources confirmed to TechCrunch. The company is said to be shifting from an in-house agent model to a partnership agent model.

One person who was impacted by the move told TechCrunch that the agents had received “little to no severance…after getting a more than 50% salary cut in November in order to ‘ensure’ our jobs to come.”


TechCrunch reached out to, which declined to comment on the record. It is not clear how many people were impacted.

The news is not shocking considering that rumors of’s plans to exit the real estate business have swirled for some time as the housing market has experienced a major slowdown driven by rising mortgage interest rates. As early as April of 2022, TechCrunch reported that it was suspected that all of Better Real Estate could be scrapped. The unit was at one time the “baby” of the company, sources said, and where a big chunk of investment dollars were going to go toward in 2022.

Better had been vocal about its desire to build out its purchase experience and move beyond digital lending to help people find and purchase homes — hence changing its name from Better Mortgage to just Better. It was also working to expand value-added offerings like title and homeowner’s insurance as part of its product suite.

“They wanted to touch every part of home ownership,” a source close to the company who preferred to remain anonymous told TechCrunch at the time. “The company invested resources in building out consumer experiences and agent-facing tools for the Better Real Estate business, including its first native mobile app, not all of which came to fruition, given the trajectory of the business.”

Better Real Estate aimed to be competitive with the likes of Zillow and Redfin, and the company had reportedly followed the same salaried-agent model. has been making headlines for its layoffs since it first gained notoriety by laying off about 900 employees over Zoom on December 1, 2021. It  has since been laying off smaller groups very systematically, say sources. Last August, TechCrunch also reported the fact that had conducted its fourth round of layoffs since the previous December.

The company is not exactly known for its tactful approach to letting employees go. In less than a nine-month period, it let go of thousands of workers, saw numerous senior executives step down and delayed a SPAC that it still claims to be working toward.

In March, TechCrunch reported’s SPAC deal with Aurora Acquisition Corp. got a new lease on life, extending its timeframe to close the transaction through the end of Q3 2023.

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Got a news tip or inside information about a topic we covered? We’d love to hear from you. You can reach me at Or you can drop us a note at Happy to respect anonymity requests. 

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Real eState

Co-ownership deal struck for large heritage home



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Keller Williams Realty

2223 E. 11th Ave., Vancouver

Asking price: $2,149,000 million (March 6, 2023)

Selling price: $2,099,900 (March 9, 2023)

Days on market: 3


Taxes: $7,080.82 (2022)

Listing agent: Connie Buna, Keller Williams Realty

Buyer’s agent: Noam Dolgin, Heller Murch Realty

What they got

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The 2,867-square-foot house has four bedrooms on the main floor and upper floor, and two bathrooms.Keller Williams Realty

This heritage house built in 1912 is in the desirable Grandview-Woodland neighbourhood on Vancouver’s east side, within walking distance to Trout Lake and schools.

The 2,867-square-foot house is situated on a standard 33- by 122-foot lot, with four bedrooms on the main floor and upper floor, and two bathrooms. There’s a legal two-bedroom suite in the basement, as well as a mature garden.

The action

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One couple will live in the basement and half of the main floor, and the other will live on the third level and the other half of the main floor.Keller Williams Realty

The purchasers were two couples that entered into a 50/50 co-ownership agreement with a shared mortgage. One couple will live in the basement and half of the main floor, and the other will live on the third level and the other half of the main floor, says realtor Noam Dolgin, who specializes in co-ownership deals.

“They are taking this large heritage house in a great location and turning it into two solid livable suites, and taking advantage of that to bring their price point down instead of paying $1,100 per square foot for half a duplex or a townhouse,” Mr. Dolgin says.

The agent’s take

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Keller Williams Realty

Mr. Dolgin said the couples met while attending one of his East Vancouver co-ownership property tours. He said the majority of his business is bringing like-minded buyers together to purchase houses and divide them, but with shared yard space. It’s the equivalent of strata ownership, but without the added cost.

“They connected, the timing was right. They wanted the same location, the budgets were similar,” he says. “There was some negotiation around the price.”

The sale completed May 31.



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Ottawa real estate: Home sales in Ottawa up 6 per cent in May | CTV News – CTV News Ottawa




The Ottawa Real Estate Board says home sales were up six per cent in May 2023 compared to a year prior, marking the first year-over-year unit sales volume increase since early last year.

New data released by OREB shows that members sold 1,939 residential properties last month, compared to 1,830 in May 2022.

“Typically the highest-selling month, May’s transactions did not disappoint,” said OREB president Ken Dekker in a news release. “This month we saw the first year-over-year unit sales volume increase since February 2022.”


There were 2,822 new listings in May, down nine per cent compared to May 2022 but up 32 per cent from April 2023.

Average sale prices are down year over year, the OREB says. House prices declined seven per cent to an average of $745,902, but on-par with prices in April 2023, when it was $747,123. Average condo prices dropped six per cent from 2022 to $442,859, which is also down two per cent from April 2023.

OREB says year-to-date average home sale prices are at $727,728, a 12 per cent drop from 2022. Condos are averaging $428,394, a nine per cent decrease.

However, the prices in May mark an increase over where prices were at the end of last year, Dekker says.

“We are not seeing steep price escalations yet. May’s average prices stayed on par with April’s, although prices are well over what we saw at the end of 2022,” he said.

Dekker suggested the average sale price could surpass last year’s figures for a month over the same month in the latter half of 2023, provided interest rates did not increase. But on Wednesday, the Bank of Canada raised its overnight rate by 25 basis points to 4.75 per cent on Wednesday, its first increase since pausing hikes in January.

The central bank’s key interest rate has not been this high since April 2001.

Dekker says throughout 2022, there was a correlated drop in sales every time there was an interest rate hike.

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