2016 office condo report

INSIGHTS INFORMINSPIREENGAGEENTERTAIN

Office Condo Market Gaining AppealAn In-Depth Analysis of the Vancouver and Toronto Office Condo Markets.

OFFICE CONDO / INSIGHT REPORT PAGE 03

1. OVERVIEW

HISTORICALLY SPEAKING, OFFICE CONDO UNITS WERE TYPICALLY DEVELOPED IN A SMALL QUANTITY, IN SUBURBAN MARKETS AND GEARED TOWARDS PROFESSIONALS WITHIN THE MEDICAL INDUSTRY. OFFICE CONDO’S OPENED UP AN OPPORTUNITY FOR AN OCCUPIER TO OWN THEIR OFFICE SPACE WITH THE ADVANTAGE OF HAVING A FIXED AND CLEAR COST, FULL CONTROL OVER THE DESIGN TASTE WITHIN THE PREMISES AND MORE SIGNIFICANTLY HAVING TAX BENEFITS THAT A TENANT CANNOT TAKE ADVANTAGE OF. A FURTHER ADVANTAGE IS THAT AN OWNER WON’T HAVE TO WORRY ABOUT THE ANNUAL RENT INCREASES OR LACK OF FLEXIBILITY THAT IS USUALLY COUPLED WITH A LEASE CONTRACT. THE STRONG CAPITAL APPRECIATION OF COMMERCIAL REAL ESTATE, COUPLED WITH A LOW CANADIAN INTEREST RATE PRESENTS A CURRENT OPPORTUNITY FOR DEVELOPERS TO BUILD MORE OFFICE CONDOS AND SUBSEQUENTLY ATTRACT A MORE DIVERSE SET OF OCCUPIERS AND INVESTORS.

OVERVIEW.....................................................................................................................................

OWN VERSUS LEASE......................................................................................................................

METRO VANCOUVER OFFICE CONDO MARKET..................................................................................

TORONTO OFFICE CONDO MARKET.................................................................................................. THE ARRIVAL OF NEW OFFICE CONDO BRINGS THE OPPORTUNITY FOR UNIQUE OWNERSHIP.............

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OWN VERSUS LEASEVANCOUVER DOWNTOWN CLASS A OFFICE CONDO OWNERSHIP VS. OFFICE LEASING

OWNING SCENARIO OFFICE LEASING SCENARIO OFFICE

TOTAL SQ.FT. 3,000 TOTAL SQ.FT. 3,000

PRICE PER SQ.FT. (INCL. PARKING) $ 700 LEASE TERM 10

PURCHASE PRICE $ 2,100,000 NET RENT PER SQ.FT. $ 35

DOWN PAYMENT (20%) 20% - $ 420,000

TENANT IMPROVEMENT $ 70,000 MONTHLY LEASE PAYMENT $ 8,750

MORTGAGE AMOUNT $ 1,750,000 ANNUAL LEASE COST $ 105,000

INTEREST RATE 3.00% RENTAL COST $ 35

MONTHLY MORTGAGE PAYMENT $ 8,299 ANNUAL SAVINGS ON OWNING (OVER 10 YEARS) $ 54,156

ANNUAL MORTGAGE COST $ 99,584 EQUITY GROWTH DURING OWNERSHIP (10 YEARS) $ 640,024

MORTGAGE COST PER SQ.FT. $ 33 EQUITY GROWTH DURING LEASE (10 YEARS)

2.There have been significant increases in commercial lease rates over the past 10 years in Toronto and Vancouver. Intensifying urbanization, the desire for people and organizations to be located centrally, and a demand for space in higher quality buildings are

some of the factors attributing to the increase in lease rates. As lease rates continue to increase and Canadian interest rates remain low, firms have the opportunity to own their office space at lower or equal costs to leasing.

In the example above, a sale price of $700 per square foot is presented in comparison to a net lease rate of $35 per square foot. Comparable office buildings are used without associating additional costs in both cases, while using Vancouver’s market rates. Based on a standard 20% down payment at an interest rate of 3% and a 25 year amortized mortgage, the total mortgage cost per square

foot for owning an office equates to $33. This is a $2 per square foot savings versus leasing, which provides an annual savings (over a 10 year term) of $54,156. In addition to the annual savings, at a 10 year 3% compounding capital appreciation, owning an office could earn the purchaser about $640,000 in equity, while leasing gains no equity.

TORONTO AND VANCOUVER DOWNTOWN OFFICE LEASE RATE - 2005 TO 2015$28.13

$29.22

$35.39

$31.00

$37.00$36.00

$21.02

$24.92

$27.87

$23.00

$33.00$34.00

$14.10

$18.38

$22.82

$15.00

$25.00$27.00

$8.84

$16.33$18.30

$10.00

$18.00$19.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Toronto Vancouver

Toronto and Vancouver Downtown Office Lease Rate - 2005 to 2015

AAA A B C

$28.13 $29.22

$35.39

$31.00

$37.00 $36.00

$21.02$24.92

$27.87

$23.00

$33.00 $34.00

$14.10

$18.38$22.82

$15.00

$25.00$27.00

$8.84

$16.33 $18.30

$10.00

$18.00 $19.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Toronto Vancouver


AAA A B C

$28.13 $29.22

$35.39

$31.00

$37.00 $36.00

$21.02$24.92

$27.87

$23.00

$33.00 $34.00

$14.10

$18.38$22.82

$15.00

$25.00$27.00

$8.84

$16.33 $18.30

$10.00

$18.00 $19.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Toronto Vancouver


AAA A B C


IN ANALYZING THE OFFICE CONDO SALES COMPARABLE, THERE WERE SEVERAL CHARACTERISTICS THAT TOP-PRICE OFFICE CONDO HAD IN COMMON:

> Central location close to transit

> Steel or reinforced concrete frame with reinforced concrete and concrete block

> Glass wall façade

> Two elevators – if building a mix-use building, two elevators designated to just the office portion

> Underground parking

> Amenities such as fitness room, change/shower facilities, and shared outdoor spaces

> Flexibility in condo size with the ability to combine smaller units to create larger spaces

OWN VERSES LEASE2.

COLLIERS INTERNATIONAL RESEARCHED WHAT INDUSTRY AND BUSINESS SIZE CHARACTERIZES MOST OF THE OFFICE CONDO USERS. THE RESULTS INDICATED THAT THE TYPICAL OFFICE CONDO USER TENDS TO BE A SMALL TO MID-SIZED BUSINESS SUCH AS ENGINEERING, LAW, CONSULTING, ACCOUNTING AND CONTRACTING FIRMS WHO ARE LOOKING TO BUILD EQUITY. BY INVESTING IN THEIR OWN REAL ESTATE THESE COMPANIES FOREGO.

BEING BOUND TO STRICT LEASING CONTRACTS. OWNING OFFICE SPACE ALSO ELIMINATES THE CHALLENGES THAT CAN OCCUR EVERY TIME A COMPANY’S LEASE EXPIRES, SUCH AS NEGOTIATING NEW TERMS, OR HAVING TO RELOCATE IN SEARCH OF A BETTER DEAL. THESE FACTORS, COUPLED WITH A LOW CANADIAN INTEREST RATE IS WHY MANY BUSINESSES ARE CURRENTLY EAGER TO BUY AND OWN THEIR OFFICE SPACE.


ACROSS METRO VANCOUVER THE OFFICE CONDO MARKET HAS EXPERIENCED A SIGNIFICANT INCREASE IN INVESTMENT VOLUME FROM 2006 TO 2015. WHILE THIS TREND CAN BE SEEN ACROSS THE METRO AREA, OFFICE CONDO DEVELOPMENTS IN THE CITY OF VANCOUVER IN PARTICULAR ARE GROWING TO A GREATER EXTENT AND ATTRACTING INVESTORS DUE TO THE INCREASING LEASE PRICES PER SQUARE FOOT YEAR-OVER-YEAR.

The above chart provides a breakdown of office condo sales from 2010 to 2015 across different markets. Although most of the markets display the trend of an increase in sales volume, the Broadway Corridor market recorded the highest sales volume with just over $90M in 2014. This can be attributed to Orca West Development’s Neelu Bachra tower, which was completed in 2014. As one of the first new office condo developments in the highly desirable Broadway Corridor, this development set a precedent for a high quality office condo product within a walking distance to the Canada line subway, reaching an average price per square feet of $862.

Recent demand for office condos has been mixed between investors and end-users. New projects across various municipalities in the region have experienced an influx from professional end-users, such as medical, and investors looking for capital appreciation and cash flow. With a low interest rate environment and strong demand for ownership, we expect to see more demand from end-users, particularly those in the professional and technology industries. That said, Metro Vancouver continues to experience strong interest from local, national, and foreign capital, in which office condo projects will continue to be an attractive investment to these groups.

METRO VANCOUVEROFFICE CONDO MARKET

3.

OUTLOOK ALTHOUGH THE 2015 OFFICE CONDO MARKET RECORDED LOWER SALES VOLUME IN COMPARISON TO 2014, IT IS MORE AN INDICATION OF A LACK OF QUALITY PRODUCT IN THE MARKET THAN OF A LACK OF DEMAND. YEAR OVER YEAR THE DOWNTOWN AND THE BROADWAY CORRIDOR MARKETS CONTINUE ATTRACTING THE HIGHEST PURCHASE PRICES, WHILE DEMAND CONTINUES TO SURGE FOR INVESTORS AND END-USERS. IN TERMS OF SQUARE FEET SOLD, THERE IS A LARGER AMOUNT OF TRANSACTIONS OCCURRING IN THE SUBURBS THAN DOWNTOWN DUE TO A LARGER PRODUCT BASE. FURTHERMORE, THE AVERAGE SIZE OF OFFICE CONDO UNITS SOLD IS ALSO LARGER IN THE SUBURBS. THE SIZE OF OFFICE CONDOS SOLD WITHIN THE CITY OF VANCOUVER AVERAGED 1,710 SQUARE FEET, WHILE SALES IN THE SUBURBS AVERAGED 2,393 SQUARE FEET. THE DIFFERENCE IN THE NUMBER OF SALES BETWEEN THE MARKETS ACROSS METRO VANCOUVER ALSO DEMONSTRATES THE LIMITED SUPPLY IN THE CITY OF VANCOUVER WITH ONLY 30 SALES TRANSACTED COMPARED TO 126 IN THE SUBURBS.

SALES VOLUMEPER YEAR PER MARKET

METRO VANCOUVER OFFICE CONDOVOLUME & DEAL COUNT

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Strata Office Volume and Deal Count: 2006 - Q3 2015

Sales Volume Deal Count

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Strata Office Volume and Deal Count: 2006 - Q3 2015

Sales Volume Deal Count

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TORONTOOFFICE CONDO MARKET

4.

IN THE PAST SIX YEARS, THE TORONTO OFFICE REAL ESTATE MARKET HAS NOT ONLY SEEN A SIGNIFICANT INCREASE IN THE SALE ACTIVITY OF OFFICE CONDOS, BUT ALSO AN INCREASE IN THE DEVELOPMENT OF NEW OFFICE CONDO PROJECTS. DEVELOPERS IN TORONTO ARE DIVERSIFYING THEIR PORTFOLIO AMONG DIFFERENT REAL ESTATE ASSETS SUCH AS OFFICE BUILDINGS, HOTELS, MIXED-USE RETAIL AND RESIDENTIAL REAL ESTATE. OFFICE-CONDO BUILDINGS ARE NOW BEING ADDED AS AN ADDITIONAL ASSET TO THEIR PORTFOLIO.

THE DEMAND FOR OFFICE CONDOS IS TYPICALLY FROM PROFESSIONAL SERVICE FIRMS AS END USERS, OR LOCAL AND INTERNATIONAL INVESTORS SEEKING A SOLID AND PREDICTABLE CASH FLOW. WHILE THIS DEMAND VARIES ACROSS MARKETS AND BUILDING TYPE, THE INCREASED OFFICE LEASING PRICE PER SQUARE FOOT AND THE DESIRE TO OWN HAS TRANSFORMED THE OFFICE CONDO MARKET INTO A HIGHLY SOUGHT AFTER INVESTMENT.

THERE WERE A TOTAL OF 177 SALE TRANSACTIONS RECORDER FROM 2010-2015, THROUGHOUT 66 DIFFERENT BUILDINGS IN TORONTO. THE MAJORITY OF THESE OFFICE CONDO UNITS WERE SOLD IN BUILDINGS THAT ARE CLOSER TO THE MAJOR TRANSPORTATION LINES LOCATED IN THE DOWNTOWN AND THE CENTRAL MIDTOWN MARKETS, AND WITHIN A CLOSE PROXIMITY TO THE MAJOR HIGHWAYS IN THE CITY.

MAIN OFFICE CONDO PROJECTS IN THE CITY OF TORONTO:

1. 4050 Yonge Street, Yonge Park Plaza – Easton Group – Planned2. 4773 & 4789 Yonge St, Hullmark Centre – Hullmark & Tridel – 2014 Built3. 135 Yorkville Avenue – Camrost Felcorp – Planned4. 7 St. Thomas – St. Thomas Developments – Planned5. 130 Queens Quay E, City of Arts – Daniels Corp – Planned6. 1133 Yonge Street – mixed-use – Conversion7. 334 Adelaide Street West – mixed-use – 2014 Built8. 117 Peter Street – mixed-use – Under Construction

NOTE: OTHER BUILDINGS CONTAINING OFFICE CONDOS AND LEASED OFFICES (OR OFFICE LISTINGS BEING MARKETED AS FOR SALE OR LEASE) WERE NOT INCLUDED IN THIS LIST.


OUTLOOK THE OFFICE CONDO MARKET IN TORONTO IS TAKING OFF AND THE DEMAND IS INCREASING AS THERE ARE A FEW NEW OFFICE CONDOS CURRENTLY UNDER DEVELOPMENT ACROSS THE CITY. CURRENTLY, THE OFFICE CONDOS THAT ARE AVAILABLE OFFER A WIDE VARIETY OF DIFFERENT OFFICE SPACES, WHICH CAN ATTRACT A DIVERSE SET OF USERS AND PRIVATE INVESTORS. THE CENTRAL NORTH MARKET HAS THE MOST ACTIVITY AS IT HAS RECORDED 49 OFFICE-CONDO

The above chart provides a detailed picture of the transacted office condo sales from 2010 to 2015, broken down by the different markets across the city. Sale activity remained steady year after year until it surged in 2015 recording close to $87 million in sales volume, particularly in the Central North market. The other spike in

TORONTOOFFICE CONDO MARKET

4.

SALES VOLUME PER YEAR PER MARKET

Midtown office condo sales took place in 2010. This was due to 2 sale transactions that took place at 101 Bloor Street West, where half of the building was sold to KingSett Capital, a private investor and the second half of the building was purchased by Ontario College of Teachers, a user.

Since 2010 there has been a mix of purchasers’ identities buying office condos, from public investors to private investors, users, institutions and developers. However, the main two groups that seem to be the most active in the office condo market every year are private

investors and users. Even though investors typically purchase larger units than end-users, the latter have recorded more transactions every year. In 2015, 74% of the office condo sales were purchased by users, while the remaining 26% were purchased by private investors.

TORONTO OFFICE CONDO MARKET VOLUME & DEAL COUNT PER PURCHASER IDENTITY

SALES IN 2015 AND IS OFFERING 43% OF THE CURRENT OFFICE CONDO AVAILABILITY. THE CENTRAL NORTH IS A VERY WELL CONNECTED MARKET WITH SUPERIOR TRANSIT ACCESS TO TWO MAIN HIGHWAYS: THE DVP AND HWY 401, TTC SUBWAY, GO RAIL AND A PROPOSED LRT. THIS MARKET ALSO HAS DIRECT ACCESS TO BOTH THE CITY OF TORONTO AND YORK REGION’S WORK FORCES AND TALENT POOLS DUE TO ITS CENTRAL LOCATION.

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Toronto Office Condo MarketVolume and Deal Count per Purchaser Identity

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Toronto Office Condo MarketVolume and Deal Count per Purchaser Identity

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Sales Volume per Year per Market



VANCOUVER SILVER

Located in the urbanizing inner-city submarket of Burnaby, Silver is a 38-storey mixed-use tower developed by Intracorp. As one of the tallest towers in Burnaby, Silver will contain 284 residential units, 5,862 SF of main floor retail and 10,852 SF of office space.

TORONTO/NORTH YORK YONGE PARK PLAZA

Looking at a hypothetical scenario with ownership versus leasing in Burnaby addresses the opportunity and affordability of purchasing an office condo. With Class A office lease rates in Burnaby on the higher end of $30 per square foot and a comparable office condo selling at $550 per square foot, the mortgage payment would break down to $26 per square foot. When compared to leasing, this represents a cost savings of $4 per square foot or approximately $109,000 over a 10 year period.

High lease rates in Burnaby, coupled with a low Canadian interest rate and proven capital appreciation with office condos, provides a great opportunity for end-users to own their space and build equity in a strong performing asset.

Strategically located in the heart of the Yonge York Mills office marker, Yonge Park Plaza, a mixed hotel-office building with a LEED Gold design, will boast more than 250,000 square feet of office space with highly customizable units ranging from 720 square feet to more than 42,000 square feet. The project will also consist of over 20,000 square feet of prime retail space, suitable for restaurants and shopping. With direct access to the TTC subway, the site should be attractive to purchaser’s similarly to the other office condos in the Central North market that have been highly demanded. Yonge Park Plaza project will be a great addition to the area that has strong demand by professional services firms for quality office space. While the project has yet to be launched, we expect strong demand from both end-users and investors, locally and abroad.

THE OPPORTUNITYCURRENT OFFICE NET LEASE RATE IN THE YORK MILLS AREA IS APPROXIMATELY $20 PER SQUARE FOOT. THE MARKET FOR AN OFFICE CONDO IN A HIGH QUALITY BUILDING IS AROUND $700 PER SQUARE FOOT. WITH THE ASSUMPTIONS LISTED IN THE TABLE ABOVE, THIS PROVIDES AN OPPORTUNITY FOR A USER OR INVESTOR TO PURCHASE AN OFFICE CONDO UNIT AT A LESSER COST THAN LEASING. SUPPORTED BY LOW INTEREST RATES, THE OFFICE CONDO PROVIDES A SAVING OF $3 PER SQUARE FOOT OVER LEASING, WHICH RESULTS IN A $93,750 SAVINGS OVER A 10 YEAR PERIOD.

BURNABY CLASS A OFFICE CONDO OWNERSHIP VS. OFFICE LEASING

OWNING SCENARIO OFFICE LEASING SCENARIO OFFICE

TOTAL SQ.FT. 3,000 TOTAL SQ.FT. 3,000

PRICE PER SQ.FT. (INCL. PARKING) $ 550 LEASE TERM 10

PURCHASE PRICE $ 1,650,000 NET RENT PER SQ.FT. $ 30

DOWN PAYMENT (20%) $ 330,000

TENANT IMPROVEMENT $ 70,000 MONTHLY LEASE PAYMENT $ 7,500

MORTGAGE AMOUNT $ 1,390,000 ANNUAL LEASE COST $ 90,000

INTEREST RATE 3.00% RENTAL COST $ 30

MONTHLY MORTGAGE PAYMENT $ 6,592 ANNUAL SAVINGS ON OWNING (OVER 10 YEARS) $ 109,016

ANNUAL MORTGAGE COST $ 79,098 EQUITY GROWTH DURING OWNERSHIP (10 YEARS) $ 502,876

MORTGAGE COST PER SQ.FT. $ 26 EQUITY GROWTH DURING LEASE (10 YEARS)

Mortgage is based on a 3% interest rate, 25 year amortization and a 20% down payment. Actual mortgage payments will be dependent on qualification of buyer OAC. Equity built assumes 3% annual appreciation. All information provided by this table is for information purposes only and no reliance should be placed on this information for any possible legal purpose or any circumstance where loss or damage could arise as a result of reliance on this information.


THE ARRIVAL OF NEW OFFICE CONDO BRINGS THE OPPORTUNITY FOR UNIQUE OWNERSHIP

5.

THE COMMONALITIES BETWEEN GOLDEN HOUSE IN VANCOUVER AND YONGE PARK PLAZA IN TORONTO, ARE THE FLEXIBILITY BETWEEN UNIT SIZES AND THE EMERGENCE OF HIGH QUALITY DESIGN FOR OFFICE CONDOS. HISTORICALLY, OFFICE CONDOS WERE OF LOWER QUALITY, LOCATED OUTSIDE THE CITY CORE, AND DESIGNED FOR A SPECIFIC TYPE OF TENANT OR INDUSTRY. NOW WITH INCREASED DEMAND FOR OWNERSHIP, INVESTORS AND END-USERS CAN PURCHASE HIGH QUALITY OFFICE UNITS LOCATED IN HIGHLY DESIRED NEIGHBOURHOODS. FOR INVESTORS, THE PRODUCT CAN OFFER A SOLID, CONSISTENT CASH-FLOW AND AN OPPORTUNITY TO DIVERSIFY THEIR PORTFOLIO. WHILE FOR END-USERS, CURRENT LOW INTEREST RATES CAN MAKE THE PRODUCT MORE AFFORDABLE THAN LEASING, AND THE STRONG CAPITAL APPRECIATION CAN PROVIDE SOLID EQUITY GROWTH THAT WILL BE BENEFICIAL WHEN CONSIDERING RETIREMENT AND SUCCESSION PLANNING.

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2016 office condo report

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Transcript of 2016 office condo report