Toronto office boom shows no sign of abating

The GTA is in the midst of an office building boom, with 24 office towers under construction comprising seven million square feet and another 77 buildings “that are queued up and would like to start,” said Sandy McNair, president of Altus InSite.
“Clearly they are all not going to start, but there is 13 million square feet in those. To say that we are in a development cycle would be an understatement.”
McNair moderated a panel discussion at May 28's Land & Development conference in Toronto which included executives from Allied Properties REIT, Cadillac Fairview Corp. and the HOOPP pension fund.
In his introduction, McNair said that based on a comparison with other cities, it doesn't appear Toronto is at risk of being overdeveloped.
Currently, the city has office space per capita of 30 square feet per person, about one-half the figure for Calgary and Ottawa.
“That is really a function of what proportion of the jobs in your city is white collar and also what kind of density of office space” is present, he said.
The Altus president also pointed out that 13% of GTA’s office space is pre-1960, 55% of it was built from 1960 to the late '80s and 15% was built since 2000. Currently 3.9% of existing inventory is under construction.
Analysis shows the common downtown versus suburban new development argument is incorrect. Even with the urbanization trend evidenced by developments in Toronto’s so-called “south core” below the railway tracks, the suburbs have largely held their share of new projects.
“Both the suburbs and downtown are growing at the expense of mid-town,” said McNair.
None of the 77 proposed new office developments for the GTA in pre-leasing mode is proposed for Toronto’s mid-town, he added.

Menkes' developed Telus tower at 25 York Street in Toronto
What is driving development?
Much of the southward push of development into Toronto’s new downtown south core was driven by big employers simply maxing out their space in existing top tier towers, noted Robert Armstrong, principal with Avison Young Commercial Real Estate.
“The market, particularly in the downtown area, got to the point where there was no room for any tenants to grow or redesign or recreate their space,” said Armstrong. “A lot of the professional firms got to the point in their towers, Commerce Court, First Canadian Place and other buildings, that there was nothing else that they could do to right-size, not so much downsize.”
New technology, such as wireless communications, and the opportunity to consolidate divisions into one location, is also making it more attractive to move out of an existing tower into a new building such as Menkes’ Telus tower.
It is not driven by a flight to cheaper rents, however, he said.
“Price hasn’t been a huge factor,” said Armstrong. “Pricing from a tenant’s point of view is probably lower down south of the tracks. When you come south of the tracks, you do save on the operating costs and taxes, but the net rents are higher, so they offset.”
Allied REIT’s take
Allied REIT, which has built itself up largely by redeveloping older factory and office buildings with great bones, (it has 13 million square feet of space in Toronto east and west of the downtown core), views the flight to the new office space as a part of the war for talent.
“To me it is all about the talent and the new compelling designs of these buildings,” said Tom Burns, executive vice-president and chief operating officer of Allied. “If you are sitting in an existing building and you have an opportunity to move into a brand new building with a fresh start and it is not going to cost a great deal more, you are making a branding statement about your company and you are helping to attract staff.”
Allied’s traditional loft and factory redevelopment focus has shifted recently with “four or five” developments now underway in Toronto.
One of those is an intensification project, 134 Peter, at the corner of Peter and Richmond Streets where it is building 250,000 square feet around an existing 50,000 square feet older brick and beam building.
“It is state of the art, high ceiling, raised floor, floor to ceiling glass, all kinds of updated HVAC systems,” Burns said.
To an extent, Allied has been swept into the Toronto boom.
“The markets have expanded into our territories on the fringe of downtown and it is giving us opportunities to intensify our sites,” he said. “We have got four or five projects that we are looking to intensify.”
Burns expects his buildings to attract tenants “that don’t necessarily need to connect to the PATH,” the underground passages ways that branch out from Union Station to the downtown towers.
“These are companies that are looking for something a little bit different.”

One York Street in Toronto developed by Menkes with HOOPP investing and also occupying space in the building
Money talks
Capital looking for a return is perhaps the biggest driver of the office boom, said Lisa Lafave, senior portfolio manager of Real Estate with HOOPP.
“There are six major pension plans in Canada, all have growing liabilities” in the form of its boomer-aged contributors gearing up for retirement and a low-interest rate environment, she said.
“When you put cap rates in the range of five and actuarial rates of return that you have to get in the sixes, 6.5, the numbers simply don’t work. So it is pressuring us to seek more return and it is driving the new development largely.”
That push for returns prompted HOOPP to back developments in Toronto’s downtown core as well as major suburban properties, she said.

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