Office Condos Gain Popularity In Toronto’s Supply-Strapped Office Market
Commercial rental rates continue to rise and vacancy rates are hovering at a record low of 3%, according to Cushman & Wakefield. With relatively little new office supply coming to market until 2021, more companies are turning to a niche asset to own their office space rather than lease: office condos.
An emerging category
Office condos are a small, but growing, market in Canada. From 2010 to 2015, there were 177 office condo sales in 66 buildings in Toronto.
"Appreciation of office rents, low vacancy rates and limited options make office condos an attractive option, especially when there is a good financing market on the behalf of users to invest," Cushman & Wakefield Executive Vice President Jeff Thomas said.
Businesses often shy away from buying office space due to capital constraints or sizing considerations. But owning space gives companies greater control over the design of the work environment and the operating cost.
Office condos are a way to take advantage of an otherwise conservative Canadian commercial mortgage marketplace. While the average loan-to-value ratio ranges from 60% to 70%, office user-focused financing entities like the Business Development Bank of Canada provide financing options to users to purchase properties under flexible repayment terms, Thomas said.
In Toronto, office condos are also a way to acquire Class-A office space in prime submarkets without suffering from soaring rents. The city was recently named the fastest-growing tech market in North America. The swelling workforce has strained office availability in prime downtown areas, with tech commanding 20% of demand for office space.
Concern over the potential loss of employment space has fueled the growth of the Toronto office condo market, Thomas said. The City of Toronto enacted Amendment No. 231 in 2013, which requires the replacement of office space in any new development.
"This policy has come into place in the last year or two and it's starting to work its way through the development system," Thomas said. "The sales market is so thin with options that most developers are looking to pursue office condos."
Fifty Nine Hayden
Fifty Nine Hayden, Cresford Developments’ new eight-storey office project, promises to be one of the premier new commercial projects in the city, Thomas said. Steps from the Bloor–Yonge subway station between Downtown and Midtown Toronto, users and investors alike have the option to own their own space in a vibrant and growing community.
Development in the Bloor-Yorkville neighborhood is expected to bring 17,000 residential units online and already offers 2.3M SF of retail and 8.5M SF of office.
Fifty Nine Hayden is a rare opportunity to own, customize and name a Class-A commercial building, and it can be designed or retrofitted to suit specific commercial requirements. Comparable Class-A property near Yonge and Bloor streets is limited, Thomas said.
Cresford has also incorporated virtual reality into the marketing materials, giving prospective users the opportunity to walk through the space and view it as customized for different industries.
Other methods for evaluating office condos are still being developed, as the niche appeal of the market has created a knowledge gap.
"The market is not quite sophisticated enough to have an end user or even a broker evaluate the floor plan and the specs and determine if it is a good buy," Thomas said. "So there is a bit of a learning curve."
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