Trading activity in Toronto’s office market have been relatively muted, but Chris Luxton remains busy.
An associate vice president and co-founder of Colliers’ Urban Property Advisors team, Luxton is a veteran in the niche segment with more than a decade of sales experience. Despite the slowdown, his team has been actively engaged with buyers and sellers of midrise and boutique office properties, as well as assets slated for conversion.
He sat down with Green Street News to discuss his corner of the office market, what’s driving deals and how owners’ attitudes are changing.
You focus on a niche sector of the office market. How is it performing in comparison to the broader market?
Transactions are certainly slower. The process of finalizing deals is taking longer because they are being more heavily scrutinized in all facets, whether that’s in due diligence or whether that’s by lenders who are going to potentially finance these transactions. Overall, trade volume is without question down, from a quantitative standpoint.
“The process of finalizing deals is taking longer because they are being more heavily scrutinized in all facets”
But what we are seeing is that good assets — well-located, well-priced assets — they’re certainly trading. There are buyers out there. There’s capital in the market, and they’re looking to place it.
It’s just a matter of whether or not you’ve got sellers who are aligned with today’s market and have realistic expectations.
Those assets that are trading right now, what qualities do they have?
Properties that the buyers believe in, or have competence in, for long-term plays. Whether that’s value-adds through stabilization, additional density or location. These are the assets that seem to always get the most attention, no matter the market cycle.
“If the seller is being advised accurately and [is] in fact in touch with a realistic market valuation for the property, it will get attention”
If the asset is not a Class-A or top-quality asset, as long as there is an upside to it in some regard, and it is priced accordingly, it’s going to get attention. If the seller is being advised accurately and [is] in fact in touch with a realistic market valuation for the property, it will get attention.
You still see some very challenging but well-located assets trading as a result. The sellers with unrealistic expectations will continue to have a challenges moving their properties.
When the office market at large is quite quiet, what’s leading to deals in your niche?
There are a lot of private owners in our space. They’re not being driven by the same motivations that may impact institutional ownership groups, REITs or pension funds like placing capital or moving out assets that are in short-term funds.
The private capital, mid-market space is mainly made up of private owners, so it’s always driven consistently by that private ownership and often times their life decisions. Whether that’s wanting to hold long-term and generate cash flow for the family or holding for a set amount of time and disposing accordingly.
It’s always distinct factors that depend on that individual or that family or that group.
What are the trends influencing the market right now that you expect to persist?
The uncertain economic landscape is still a major driver. There are owners out there that are looking at having to refinance at today’s rates that are less attractive than their current obligation. There are assets, like larger office buildings, that are still dealing with the impact of the work-from-home trend, which is causing vacancies.
“There are owners out there that are looking at having to refinance at today’s rates that are less attractive than their current obligation”
Looking at the market as a whole, there is more availability in the downtown office market. That is driving competition and aggressive deal structures in the leasing market, which are in turn resulting in owners being more willing to dispose of assets that they may have had a longer-term view of in the past.
Do you think that that will lead to more buildings being put up for sale in the near or mid-term?
Will there be a surplus or more properties on the market? I think that there certainly are more available assets in our space right now than there were in 2019.
I think that’s because when we were at the peak a lot of people didn’t want it, or didn’t expect it, to ever end. So owners kept holding and kept driving more value into an asset as far as what they felt they could achieve in a future sale.
Now, owners are more willing to move off a property if it does align with their life decisions, whether that’s death, divorce, family decisions [or] a feeling of satisfaction that they have realized good value over time.
