CPPIB, AIMCo and Brookfield put downtown Toronto office building back on the market

Two major Canadian pension funds and Brookfield Asset Management are trying to sell one of their downtown Toronto office buildings for a second time after failing to get the price they wanted in 2022, according to two sources.

The sale of the 20-storey property at 2 Queen St. E. is likely to be closely watched as it will test buyer appetite amid a multiyear downturn in the country’s commercial real estate sector.

Landlords are dealing with the shift to remote working and a slower-than-expected return to the office. The situation is being exacerbated by an abundance of new office space that has come on to the market since the pandemic started.

The office tower is fully leased and includes tenants such as CI Investments, Bank of Montreal and Bechtel Canada, according to the marketing materials viewed by The Globe and Mail. The tenants are paying about a third less than the going leasing rate for similar buildings and, according to the marketing materials, this means the new owner will be able to “capture meaningful rental upside over the coming years.”

Canada Pension Plan Investment Board (CPPIB), the country’s largest pension fund, owns half the building. Alberta Investment Management Corp. (AIMCo) owns 25 per cent and Brookfield Asset Management owns the rest.

The owners first put the tower on the market in the summer of 2022. At the time, the vacancy rate was rising quickly as tenants across the city were shedding space and new office skyscrapers were being completed. CPPIB and the minority co-owners could not get the price they were seeking and pulled the office building off the market, according to the sources this week. The Globe is not identifying the sources because they were not authorized to speak about the sale.

Spokespeople for CPPIB, AIMCo and Brookfield declined to comment.

The failed sale was a sign of how difficult the market has become for commercial real estate deals. Prior to the start of the pandemic, Toronto had an office vacancy rate below 4 per cent and was one of the most desirable cities in Canada for businesses to lease space. The strength of that demand attracted investors, making it relatively easy for owners to sell their buildings.

In 2019, there was $4.5-billion in office sales across the Greater Toronto Area, according CoStar, a Washington-based commercial real estate information provider. Last year, there was $3.1-billion. In the financial core, there were about $600-million in office sales in 2019 and $250-million last year.

Because there have been so few transactions, it has become difficult for buildings to be valued, but the sale of 2 Queen St. E. could help landlords gauge the value of their buildings.

“It is a quality building in downtown Toronto,” said Carl Gomez, chief economist and head of market analytics at CoStar. “This would give us a good understanding of where pricing is.”

The last significant office building deal to close in Toronto was in early 2022, when Crestpoint Real Estate Investments Ltd. bought 121 King St. W. for $379-million. But at the time of the sale, the office tower was not fully leased like 2 Queen St. E.

Since then, the real estate investment firm has been refurbishing the building, adding amenities like a lounge with a patio and installing a dramatic rockface in its lobby.

Almost all of Canada’s largest pension funds, including CPPIB and AIMCo, suffered sharp losses on their real estate portfolios last year. The funds saw billions of dollars shaved off their investments as high borrowing costs drove down valuations on properties, especially in the office and retail sectors. Meanwhile, investors have soured on the sector. Publicly traded real estate investments trusts such as Dream Office, Allied and Slate have all lost significant value.

Although their vacancy rates have risen, the performance of office buildings varies widely depending on their age, location and quality of their amenities.