The potential sale of a downtown Toronto office tower could set the market’s direction, says a leading analyst.

The Globe and Mail reported that the 20-storey building at 2 Queen Street East has been put back on the market after its three owners were unable to get the price they wanted in 2022.

“That’s a building that, I think, is being discussed and is seen as a bellwether,” said Adam Jacobs, head of Canadian research for Toronto-based Colliers. “There have been very few downtown Toronto buildings that have transacted. So, everyone’s been groping around in the dark [thinking]: Okay, there has to be one eventually. What is everything worth?”

The Toronto-based Canada Pension Plan Investment Board owns 50% of the building while the Alberta Investment Management Corporation and Toronto-headquartered Brookfield Asset Management each have 25% stakes.

The tower is not a “totally typical” downtown Toronto office building in that it is situated between a large hospital, St. Michael’s, and a shopping mall, the Eaton Centre, rather than in the Financial District. And, the property has the bad luck of being situated one block away from a portion of Queen Street that has been shut down for a number of years due to a massive transit expansion project that is “digging up the street.”

But the tower benefits from being located next to the Queen Street subway station and connected to other transit. The property is also located on the Path system, an underground walkway that enables people to bypass above-ground congestion.

“We’ve certainly found it’s always been key to be [a building owner or occupier] on the Path,” said Jacobs. “It’s even more key now because of the commuting challenges and parking challenges. If you’re on the Path, you go to Union Station, you get out, you walk all the way to your office without ever having to face the elements or deal with gridlock in the intersection or anything.”

The gridlock near 2 Queen Street East is typical of all of downtown Toronto, which is “a mess” due to transit and infrastructure upgrades that are underway, said Jacobs.

“There’s quite a construction traffic situation downtown,” he said. “I think there are some challenges in terms of the leasing and occupancy side of the building. It has nothing to do with the building itself or the amenities.”

The tower’s distance from the main part of downtown also poses a challenge, but Adams expects that CPPIB, AIMCo and Brookfield will find a way to make a sale work.

“It will be sold to some private investor that will surprise us all, because we’ve never heard of them, or they’re from Germany or Singapore or South Korea or something like that,” said Jacobs. “At least, that that would be my prediction.”

In other words, the property will not appeal to institutional investors, who have steered clear of office assets as the sector grapples with the effects of the COVID-19 pandemic and the hybrid work movement, among other factors.

“The buyer isn’t going to be Allied REIT or OMERS pension plan or Sun Life insurance,”: said Jacobs. “It’s going to be someone, maybe outside of the usual suspects.

“The challenge is, once the price gets into nine figures, it’s very hard for some of the private investors to make that [purchase] happen in terms of financing,” said Jacobs.

He believes that the expected sale of 2 Queen Streat East could help set the direction of other major Canadian major markets due to the lack of transaction activity in the office sector across the country,

“We’re just so thin on office transactions at the larger level,” he said. “A big Bay Street building [sale], right downtown, is also going to provide some clarity that cascades downtown to other areas.”

Photo: Colliers