Income Property Newsletter – February 2008

This month I’d like to look at a segment of the Toronto real estate market that I haven’t discussed too much in the past. As you know, at Plex we are very active with duplexes, triplexes and multiplexes as well as “fixer-uppers” that may have profit potential. One other area that I have also done a lot of business in the past is with mixed-use buildings – retail storefronts with two or three apartments and/or offices above.

Most of these properties are on popular retail strips like Queen, Bloor, College and obviously Yonge St. There are also little strips like the Forest Hill Village, the shops on Bayview south of Eglinton or at the top of Coxwell in Leslieville. Many neighbourhoods have retail strips that offer every good and service imaginable. Some areas are more known for specialties – for instance restaurants on the Danforth, or on College in Little Italy. Most of the time these buildings fall under the I.C.I. umbrella (commercial rather than residential) even though there may be residential rental apartments above the main floor retail space.

These properties can be quite interesting for someone looking to live-in or for the absentee investor. These mixed-use buildings have been similar to strictly residential properties over the past few years insofar as lower bottom-line returns and negligible cap rates. My advice is to make sure that if you buy a mixed-use building that your main floor retail tenant is on a long lease and that their business is strong, unless of course you have a business to operate out of the main floor yourself. Most of the properties derive the bulk of their income form the main floor lease and it would be difficult to immediately make up that rent if the tenant splits. It is much easier to find a residential tenant than a commercial one. Remember too that every user is going to want to build to suit, so that cost is likely cost you months of free rent. Also, most of these properties are on busy main streets, so keep that in mind if you intend to live in it.

Some of my clients have asked where the commercial market is going since each month my comments seem to be more focused on the residential resale side of the equation. Unlike houses in the prime areas of the core, I think that the prices of commercial properties may start to come down a little. It is believed that REITs (real estate investment trusts) are great indicators of where the commercial market is going. Experts say that the overall commercial prices have already started to drop and there may have been as much as a 5% decline last year, with potentially more of a drop to follow. This is quite interesting because there is no indication that this is happening yet on the residential side.

So does that mean that a storefront with two units above it will be a better buy this year than a regular triplex? Quite often I will highlight duplexes or triplexes that trade for over-asking and comment on how the investment value gets thrown out the window.

I’d like to look at some of last year’s activity that may shed light on what’s happening with these kinds of properties:

Here are all the sales in C01 west of Yonge Street south of Bloor, specifically categorized as stores with apartments or offices above. These include shops on Bathurst, Ossington, Dundas West, Queen West, College St and others.

Field Count Mean

(Average) Median Mode Low High

List Price 37 $860,951 $689,000 n / a $325,000 $4,100,000

Original Price 37 $884,735 $699,900 $799,000 $325,000 $4,700,000

Sold Price 37 $825,486 $680,000 n / a $325,000 $3,900,000

% List 37 96.27 97 98 82 117

Taxes 36 $8,877 $6,648 n / a 2226.7 $55,000

Bedrooms 0 n / a n / a n / a n / a n / a

Washrooms 17 3.6 4 n / a 1 6

Days On Market 37 61 44 n / a 3 232

Note that only six of the thirty-seven sales were over a million dollars. The largest sale which would skew the numbers up was a whole block of College near Spadina that sold for $4M. Most sales are in the five to six range but they tend to be further west towards Dufferin. Obviously to closer to Yonge, the more expensive the buildings become.

Here’s the same analysis for mixed-use buildings on the east side of the DVP. These would include sales on the Danforth, Broadview, Gerrard, Pape, Coxwell St. Clair East & many on Queen Street East.

Field Count Mean

(Average) Median Mode Low High

List Price 61 $566,926 $469,000 $549,000 $245,000 $1,499,900

Original Price 61 $575,039 $485,000 n / a $259,000 $1,499,900

Sold Price 61 $528,146 $444,000 n / a $231,000 $1,350,000

% List 61 93.66 95 95 64 106

Taxes 60 $8,251 $7,910 $3,642.84 $1,500 $25,554

Bedrooms 0 n / a n / a n / a n / a n / a

Washrooms 26 3.3 3 3 1 8

Days On Market 61 53 41 n / a 7 255

The average sales prices are lower than on the west side. The highest sales here are Queen St in the Beach and prime larger buildings on the Danforth. Again the average for a small building with one apartment above seems to around $500K.

I think that the bottom line is if a mixed-use building is throwing off better numbers than a completely residential multiplex and has good lease(s) in place, then it should be considered seriously. I prefer all residential just from a rentability point of view but remember that investment real estate is all about the returns. If cap rates start to get noticeably stronger on mixed-use buildings, I will start steering more of my clients in that direction. It hasn’t happened yet, but as I pointed out earlier, it may.

I’d like to wish you all a Happy Valentine’s Day, especially to all the single folks out there that feel snubbed at this time. If you’re single go out and buy something for yourself – I suspect you can probably afford it more anyway. Enjoy the cold too folks because it doesn’t look like it is going anywhere fast.

P.A.

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