The Globe and Mail wrote a very interesting article titled “In Toronto’s land war, condo builders are better armed” by Cole Burston. Here are today’s lighting points (three of the most important points):
- The demand fundamentals for residential units within the city has resulted in residential developers being able to far outbid office developers.
- Condo builders can get higher return (10-15%) and get their money out faster (~10 years) than an office developer who probably has to wait ~20-30 years (assuming a 3% cap rate for AA office space in the core of Toronto) and get far less return on their money (i.e. 3% cap rate).
- The disparity seems to be increasing. A recent transaction for 1323 Bay St., in Yorkville, sold for $380 a square foot (I presume this refers to $/buildable foot, more detailed data was not available), which is double what any office developer could pay for
- considering the fact that a condo sells for ~1100-1200/sqft in that area, that means that right out the gate, ~30% of their cost is land
- Lack of office space coming online means that future price in the office sector should increase.
- The office vacancy supply is already very tight. Altus Group’s 2018 Slate of the Market report states that office vacancy in Toronto fell for the first time in 6 years even though 2 million SQFT of space came online. Read JLL’s Q4 2017 Office insight report here.
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