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Office Towers Sprout

In the early 1990s, investment in Toronto commercial real estate development was more or less stagnant, except for an uninterrupted ripple of high-rise condo towers on the city's waterfront and throughout the downtown core.

These days, however, the city is in the midst of a revival, with three new towers encompassing 3.1 million sq. ft. under construction a few blocks apart in Toronto's CBD.

The timing could hardly be better, with the vacancy rate for Class-A downtown office space a projected 6.8% in the second quarter, virtually unchanged from the same period last year, according to CB Richard Ellis.

Institutional real estate equity firm Halcyon Real Estate Partners LP, based in Boston, owns a 20% stake in the 32-story, $250 million Telus Tower near the waterfront. (Prices are in Canadiandollars unless otherwise noted).

Halcyon is developing the 780,000 sq. ft. tower in a joint venture with Toronto-based Menkes Developments Ltd. and Hospitals of Ontario Pension Plan (HOOPP). Telus, a Vancouver national telecommunications company, will occupy about 440,000 sq. ft., or 60% of the total rentable area.

Why Toronto? “It's the fourth or fifth largest metropolitan market in North America,” says Martin Zieff, a Halcyon co-partner. “It has a very diverse and dynamic economy with great demographics, a strong economy, and a broadly based real estate market. It's a positive opportunity.” The market also is a magnet for global capital and historically has provided attractive yields.

The $400 million, 1.2 million sq. ft. 43-story RBC Centre is being developed by Toronto-based The Cadillac Fairview Corp. for lead tenants RBC Financial Group and RBC Dexia Investor Services. While most of the space will be taken by these tenants, over the past few months other corporations have signed leases accounting for 98.5% of the leasable space.

The $290 million, 50-story Bay Adelaide Centre also has landed its lead tenant. KPMG, an audit, tax and advisory firm signed up for 250,000 sq. ft. of the 1.2 million sq. ft. structure. The tower is the first of three phases of a combined 2.6 million sq. ft. on two city blocks being developed by Brookfield Properties Corp.

Previous owners had built six unfinished stories of the elevator shaft and an 1,100-stall underground parking garage, when they pulled the plug during the 1991 real estate market meltdown. The abandoned project, known locally as “the stump,” was demolished in 2006.

All three new buildings were designed to obtain the silver Leadership in Energy and Environmental Design (LEED) certification standards upon completion in 2009. LEED is the North American standard for the design and construction of environmentally sustainable buildings.

Betting on Toronto

In addition to Telus Tower, Halcyon has invested an undisclosed amount in the $85 million Lumiere, a 30-story, 330-unit joint project developed by Menkes and Lifetime Urban Development near the financial district and slated for completion in early 2010.

The fund also holds an undisclosed interest in the glamorous $325 million Four Seasons Residences under construction in midtown. The 265-room hotel and 125-condo project sits around the corner from the city's answer to Park Avenue.

Halcyon Ventures LP was formed in December 2004 by and Zieff and Mark Potter, whose initial fund closed with equity commitments of (US) $152 million. Its Halcyon Real Estate Partners Master Fund LLC closed in July 2006 with commitments of (US) $303 million and has since grown to (US) $350 million, according to Zieff.

“Toronto offered attractive yields relative to comparable cities in North America,” says Zieff. “We could buy buildings for half the replacement cost in Toronto before the office market recovered in the early 2000s, so there is attractive arbitrage on a relative basis. Toronto has been a great thing for our firm.”

It has apparently been a great thing for other firms as well. The City of Toronto released a report prepared by Standard & Poor's in May stating that there were 83 high-rise buildings under construction in Toronto that month — far more than Boston, San Francisco, Atlanta, Miami, and Chicago, and surpassed only by 124 buildings in New York.

The New York of Canada

Toronto is to Canada what New York is to the U.S. It's the banking, investment, and real estate capital. The city is also a retail, education and cultural center as well as a transportation hub for road, rail and air travel. It offers a busy port handling 2.6 million metric tons annually.

Over the past five years, Toronto has attracted a growing number of U.S., German, Israeli, Australian and other international investors who consider Canada's commercial real estate a bargain, with cap rates for downtown Class-A office buildings at 6.35% as of late June.

Now, Toronto's expanding downtown is booming as never before. “It's cool to be downtown again, and executives in charge of where they're located think of that. You're only as good as your workforce,” says John Sullivan, executive vice president of The Cadillac Fairview Corp.

It seems to be working. Sullivan says Royal Bank of Canada, the anchor tenant in RBC Centre, initially signed up for 400,000 sq. ft. then bumped it up to 500,000 sq. ft. It has now signed for 625,000 sq. ft., more than half of the leasable space in the building.

Genesis of demand

These three new towers, along with office space vacated by their tenants, may well satisfy most of the demand in the short term beyond 2009, when the buildings are expected to open. Sandy McNair, president of InSite Real Estate Information Systems based in Toronto, describes the 3.1 million sq. ft. of new space as “significant, but on a percentage basis not huge and, in fact, modest compared with economic and white-collar job growth.”

Indeed, employment in the financial services sector rose by 5,000 jobs in 2006 for a total of 583,900 jobs, according to the S&P report. Between 1996 and 2000, about 135,000 jobs were added in the city, which helped reduce the surplus space, according to Donald Eastwood, general manager for economic development, culture and tourism for the City of Toronto.

But the recession following the terrorist attacks on 9-11 put everything on hold. “Things began turning around at the end of 2003, with a robust growth in health care, business and financial services pushing the demand and now employment on the waterfront,” Eastwood says.

It isn't just job growth that is driving demand for new space. Corporations have run out of room in which to put employees. The approximate 240 sq. ft. of office space per worker five years ago has shrunk to 190 sq. ft. at banks, accounting and law firms located downtown.

“They hired more people but didn't grow the space, and you can only pack people in so tight, particularly expensive people,” McNair adds. The new towers will fill up, he says, because tenants feel they won't be saddled with the costs of building upgrades for another decade, unlike tenants who renew leases in older buildings and are faced earlier with higher maintenance and improvement expenses.

Rising inventory, rising rents?

Rents in the new towers range from the high $20s to mid $30s per sq. ft., which their owners hope will increase to a range between the high $30s to $40 per sq. ft. as space fills up, McNair says.

In the meantime, potential tenants are waiting to see what moves the Bank of Canada will make regarding interest rates, commodity prices, the impact of an uneven U.S. economy and reduced global competitiveness inspired by the rising value of the Canadian dollar — almost at par with the U.S. dollar.

While downtown development was stagnant from the early 1990s, office development in the suburbs was quite healthy. Approximately 13 million sq. ft. of space in small 100,000 to 300,000 sq. ft. office buildings were built over the past seven years in the greater Toronto area, according to McNair.

That, together with the previous suburban office space inventory of 29 million sq. ft., brings the current suburban inventory to 42 million sq. ft. Added to Toronto's existing 60 million sq. ft., the combined inventories come to 102 million sq. ft.

Will rents for available space in the three new towers rise or fall as competition for tenants heats up? “Rents tend to move pretty homogeneously. Vacancy rates in office markets across Canada are below 10% and some are 5%, so there is little reason for landlords to undercut another,” explains McNair.

When the three new buildings are completed, there are bound to be some “lumpy quarters” as the market settles down, but McNair expects it will be stable again within two years.

“But if three more [office towers] start up all bets are off.” McNair notes that Toronto-based GWL Realty Advisors, which has $9.8 billion in assets under management in Canada, owns a site across from the Telus Tower and is looking for an anchor tenant to warrant the construction of a 600,000 sq. ft. office tower.

John O'Toole, executive vice president of CB Richard Ellis in Toronto, agrees there will be no lack of demand from financial and professional service firms when the new buildings open.

“Many tenants are taking sublease space downtown, whether it's renewal or relocation, but as a percentage of occupied space it's the lowest it's been in seven years,” he says. “The vacancy rate in the greater Toronto area is near an all-time low, and it's been increasingly difficult for tenants to find large blocks of contiguous space over the past 12 to 18 months.”

Business infrastructure

As tenants return to Toronto's central business district, there has also been an abrupt shift in attitude within the private sector and development community about green building practices that lead to cost-effective and more efficient office space, O'Toole notes.

“Employee appreciation, efficiency and comfort issues are becoming increasingly important, as are employee attraction and retention,” he says.

Tenants and developers have confidence in the future of the city, Eastwood adds, but the city has to do its part by upgrading its transportation infrastructure. That would help bring more people downtown and accommodate the business community, particularly if Toronto builds a long-awaited, high-speed rail link to Toronto International Airport, where an expansion was recently completed at a cost of $4.4 billion.

The city is nearing completion of a $165 million downtown underground heat exchange system drawing on cold water from Lake Ontario, which pipes heating and cooling to office buildings at a much reduced cost.

Ontario has committed more than $2.6 billion in subway extension and improvements to the Union Station transport hub downtown. A $17 billion redevelopment of the waterfront is under way with city, federal and provincial governments' participation. (See story below)

Development is no longer just mass, height and interior spaces, Eastwood says. “Torontonians are awakening to the fact that urban design impacts the quality of life in the city.”

Albert Warson is a Toronto-based writer.



5.4 million

Source: Statistics Canada Population Estimates


Source: Statistics Canada Labour Force Survey


  1. Canadian Imperial Bank of Commerce
    12,000 employees

  2. Royal Bank of Canada
    11,000 employees

  3. The Toronto Dominion Bank
    11,000 employees

  4. The Bank of Nova Scotia
    10,000 employees

Source: City of Toronto Business Directory



6.6% vacancy, 1Q 2007

7.6% vacancy, 1Q 2006

$16.78 rent per sq. ft., 2Q 2007

$15.73 rent per sq. ft., 2Q 2006

Source: Cushman & Wakefield LePage


3.2% vacancy, 2006

3.7% vacancy, 2005

$989 monthly gross rent, 2006

$943 monthly gross rent, 2005

Source: Canada Mortgage and Housing Corp.


$445 sales per sq. ft., 4Q 2006

$421 sales per sq. ft., 4Q 2005

*sales figures for Canada

Source: International Council of Shopping Centers


5.4% vacancy, 1Q 2007

5.0% vacancy, 1Q 2006

$5.62 rent per sq. ft., 1Q 2007

$5.53 rent per sq. ft., 1Q 2006

Source: Cushman & Wakefield LePage


64.9% occupancy, March 2007

61.8% occupancy, March 2006

$138.86 average daily rate, March 2007

$133.86 average daily rate, March 2006

Source: HVS International


Shangri-La The 870,000 sq. ft. development will incorporate a 5-star hotel, 493 condos and two-story glass atrium/podium at the base of the 700-ft. tower.

Developer: Westbank Projects Corp. & Peterson Investment Group Inc.

Completion: 2009/2010

Cost: $430 million

The Film Festival Centre and Tower The building will become the Toronto International Film Festival's new 150,000 sq. ft. artistic and administrative headquarters with retail space on the lower levels. A 42-story condominium tower will top off the project.

Developer: Toronto International Film Festival Group, the King and John Festival Corp., the Daniels Corp., filmmaker Ivan Reitman and the Reitman family.

Completion: late 2009/early 2010

Cost: $129 million

Jazzed-up waterfront beckons investors

Toronto offers 2,000 bountiful, waterfront acres for master-planned, mixed-use communities. As new projects get under way on once-neglected stretches, the city hopes revitalization and solid returns will draw new investment from European, Australian and other foreign investors.

“We're also planning to go to the U.S. to look for developers and investors, but they need a large enough scale to justify establishing a beachhead in Canada,” says John Campbell, president and CEO of Waterfront Toronto, formerly the Toronto Waterfront Revitalization Corporation (TWRC).

An urban park with a colorful sand beach, yellow umbrellas and wooden deck chairs opened along the central Lake Ontario waterfront in early June. The (CDN)$10.2 million project had endured a bureaucratic maze since 2003.

It was part of a revitalization program budgeted in 1999 for $17 billion. In 2001, federal, provincial and municipal government landowners each kicked in $500 million to fund the TWRC. Zoning and land acquisition have been completed for the build-out that's expected to take 25 to 30 years.

But city residents grew impatient as years passed with little to show for the money. Just two miles east of downtown, abandoned industrial sites litter the waterfront near the shuttered terminal of a failed Rochester-Toronto ferry service. In contrast, the central waterfront offers high-rise condos, entertainment, shops, restaurants, office towers and hotels.

But the eastern waterfront is changing, and Campbell says new projects include the $100 million Filmport studio being built by city-owned Toronto Economic Development Corporation (TEDCO) in partnership with Toronto Film Studios.

TEDCO will add about $10 million to help remediate the severely contaminated soil and build foundations. The city council approved a $132 million loan to TEDCO to build a seven-story office building on the east-end lakefront, and Waterfront Toronto will contribute $12.5 million.

Other projects include East Bayfront, a $3 billion project on a 55-acre site, with 7,000 residential units, and 1 million sq. ft. of commercial space, and West Don Lands, an 80-acre site with 5,800 planned residential units and 1 million sq. ft. of employment space. It will be worth an estimated $2.5 billion.

“We're investing in the public realm first, and making sure residents will have the choice of taking light rail transit to work, rather than a car. If we want a sustainable city, we can't have workers driving 40 miles to their jobs,” Campbell says. “We won't be like a commercial development where they put all the public stuff in afterwards.”
Albert Warson

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