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Toronto’s downtown office market has a long-standing history of pension fund-backed owners and developers that have prudently controlled the supply of office space. Over the past decade the city's office towers have become much sought-after investments on the global stage.
Toronto has witnessed a significant surge in occupier demand in the past five years, particularly from the tech sector, which has helped foster rapid rental rate growth and further compress capitalization rates in the downtown office market.
These pension funds today own close to 70% of the market. While such consolidated ownership might raise some eyebrows, it’s a key reason for the stability of the Toronto office market in tumultuous times. This is particularly appealing to international investors, if they can get in.
Institutional investors are patient and have deep pockets. These investors typically have longer horizons for their investments and are less sensitive to changes in cash flow. CBRE Toronto Downtown Managing Director Jon Ramscar notes that this is why there haven’t been any large swings in key office metrics in the wake of COVID-19.
"By not lowering rental rates, the landlord is able to mitigate the negative impacts to the future value of its portfolio and ultimately preserve the long-term value of its committed capital base for its pensioners.”
“An institutional landlord can manage a short-term cash flow hit by offering a reprieve on rent collection versus lowering rates, for example. That’s actually good for the tenant because it helps them get through this event-based challenge. At the same time the landlord is adhering to its fiduciary responsibility to its pension investors. The landlord is able to mitigate the negative impacts to the future value of its portfolio and ultimately preserve the long-term value of its committed capital base for its pensioners.”
The major selling point of Canadian commercial real estate as an asset class is its stability and consistency. “Commercial real estate is well known for its long-term performance versus stocks and bonds. It’s typically not as fast-moving or volatile an asset class as those in the public market space,” says Ramscar.
It’s a similar story in Vancouver, where the market at one point had been as much as 65% owned by Canadian pension fund landlords. But with the 1.5 million sq. ft. Bentall Centre having been sold to U.S.-based Hudson Pacific in 2019, today that concentration is closer to 50%. “Vancouver is actually more aggressive with its office-rents right now due to the market’s underlying land and supply constraints and the international demand that’s focused on a city with a an attractive lifestyle and an availability of highly qualified and affordable talent,” Ramscar says.
Both markets have been attracting attention from international investors in recent years, he adds. “Canada has traditionally been seen as a tale of two Cities: Toronto and Vancouver, but Montreal is flashing brighter on people’s radar. If anything, the stability of these markets is an even bigger sell now in times of uncertainty.”
There’s no shortage of international capital looking at the Canadian market at the moment. “The challenge is,” Ramscar says, “we don’t have much product and we don’t have much availability with large institutions happy to go long on Canadian office in our largest cities.”