Don’t get Vincent Chiara wrong. Like many investors in the real estate industry, he still has doubts about the future of office buildings.
But as Chiara snaps up these properties, rapid-fire, in cities across Canada, he’s convinced that he has caught onto something that everyone else has missed: Prices have now plunged so much that in many cases they’re actually below the value of the land itself.
To Chiara, whose Montreal-based Groupe Mach has shelled out more than C$1 billion ($750 million) on this bet since March 2020, this makes for a classic buy-and-knock-down trade. The gap between the price tag and the value of the land, he said, helps cover the cost of the demolition and paves the way for the construction of something — primarily, apartments — that is in hot demand in Canada and, more broadly, across much of the world.
“If there’s enough buffer between the price I paid and the value of what this property is sitting on, then I’m land banking,” he said. “If some of these office assets go sideways, then we’ll redevelop them.”
The reason this might work is that Canada’s big cities, like many others around the world, have a housing shortage. That means land that can be used to construct new homes carries a premium.
Chiara uses a visit to Mach’s most recent purchase, a 1980s-era campus of blue glass towers and green courtyards in Toronto’s suburbs, to explain: Mach paid C$165 million for the property, but not before checking how many apartments could be built on the land. With the potential for 2.5 million square feet (232,260 square meters) of residential space, Chiara estimates the empty land would be worth C$250 million — a premium to his purchase price, which he said could cover the cost of demolishing the office buildings entirely.
It’s what has driven Mach to become the second-biggest buyer of office buildings in Canada since the start of the pandemic, according to Altus Group data. The dozens of office buildings the company has bought put it second only to Blue Owl Capital Inc.’s Oak Street Real Estate Capital, which spent C$1.2 billion on just one marquee property in Calgary.
If more developers start to make the same calculation as Chiara, it could put a floor under office values. It’s just a question of how much of a discount is needed to make those redevelopment deals worthwhile. And though quirks in the Canadian office market may mean the math starts to work there first, a similar process could be what helps a bottom start to form for such assets around the world.
“This whole strategy of redevelopment, I don’t think it’s just a Canada strategy. You can also employ that on a global basis,” said Raymond Wong, a vice president of data solutions delivery at Altus in Toronto. “If this really works in other countries, other institutions and developers might look at having a more proactive strategy.”