From:
http://www.theglobeandmail.com/servl...Entertainment/
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The boom that came out of nowhere
A year ago, no one would have predicted that a building frenzy would hit downtown. Now, industry watchers say 'there's a buzz out there'
ELIZABETH CHURCH
REAL ESTATE REPORTER
It's been almost two decades since someone planned to add a major new office tower to Toronto's skyline. So long, in fact, that many had begun to believe it would never happen again. The risks were too big, they said, the demand too weak and the costs far too high to make it worthwhile.
You don't hear that talk any more.
Almost overnight, it seems, Toronto has found itself with a small-scale building boom on its hands and this time it's offices, not condo towers, that are being planned. In the next three years, at least two, and likely three, major towers will be constructed. The 43-storey RBC Centre will rise up beside a new Ritz-Carlton Hotel south of Roy Thomson Hall. Work on a revised version of the long dormant Bay-Adelaide Centre is expected to begin this summer and plans are in the works for a new tower south of the tracks near the Air Canada Centre.
"I'm amazed at the change of thinking in just one year," says Paul Morse, senior vice-president of leasing for Cushman & Wakefield LePage. "For the first time in 20 years the office market is contributing to the growth of this city."
The new commitment to downtown office space, which comes after years of white-collar job migration to Markham and Mississauga, is good news for Toronto, industry watchers say.
"These are people who are placing a big-money bet on downtown Toronto," says William Strange, a professor of real estate and urban economics at the University of Toronto's Rotman School of Management.
"It's their job to place that bet intelligently."
The idea that downtowns are doomed because the Internet allows employees to do their work anywhere is proving not to be the case, he says.
"Downtowns are all about people being close to each other so that they can be more prosperous. The finance industry is not in Toronto as an act of charity. It is here because of the labour force, because of their proximity to other people they need to work with."
Indeed, being close to clients was the main reason Royal Bank of Canada settled on a downtown location for the 2,500 workers who will move into the newly named RBC Centre when it is completed in 2009. Chitwant Kohli, the bank's head of real estate, says about half of these workers are part of a joint venture business called RBC Dexia Investor Services, which serves pension and mutual funds. Royal Bank has a major office complex west of the city, but a suburban location was not appropriate for this unit, he says.
Mr. Kohli says the bank's move to a new building represents mostly a transfer of existing jobs, rather than the creation of new ones. The bank is moving staff from the Toronto-Dominion Centre to the new site, both of which are owned by Cadillac Fairview Corp., the real estate arm of the Ontario Teachers Pension Fund. But he say the new facility is attractive because it offers room for expansion, especially for Dexia.
"We have plans to grow that business. This gives us the flexibility to address future needs," he says.
Major real estate decisions, Mr. Kohli says, take years to implement and require companies to make calculated bets about the future. "You have to gaze into a crystal ball and see what the business will be like in 15 years."
The move is a bet by the bank on that future, he says, but it is a relatively small bet, since its 15-year lease in the new building accounts for only 10 per cent of its office space in the Toronto area.
If the handful of new office projects are going to be viable, clearly they must do more than shuffle workers from existing buildings to new towers.
Developers say they are taking their cue from existing tenants who want modern space, filled with the latest technology and the cost savings this can provide. Part of the thinking behind Cadillac Fairview's decision to build was the need to keep existing tenants from moving to the new buildings of rivals.
Professional firms -- particularly lawyers, accountants and financial service professionals -- are also showing new commitment to downtown by hiring more employees and leasing more space. Vacancy rates in the downtown core shrank to 6.8 per cent at the end of March from 8.9 per cent at the same time last year.
Leasing activity is now soaring, with the market moving quickly to fill empty space. In the last six months, demand has increased 150 per cent from the levels seen in the previous three months, says Stuart Barron, head of research at Cushman & Wakefield LePage.
"There is a buzz out there," he says.
All that is pushing up rents and making new construction a realistic option.
"Rates in existing buildings are at the level that there is no longer sticker shock when tenants look at new buildings," says John O'Toole, an executive vice-president with CB Richard Ellis in Toronto.
Amid all the activity, there even are signs that a few companies are ready to bring office jobs back downtown, consolidating their operations in the core, rather than in a suburb. Telus Corp. is in talks for a new downtown Toronto location and word is the new office will involve just such a move.
Mr. Barron says unless there is a recession in the next two years, the Toronto market should have no trouble absorbing the 3 million square feet of new space that will come to the market when all three towers are built. Together, they will only increase downtown office space by about 5 per cent.
Still, Prof. Strange at the University of Toronto cautions that the city can't afford to take development for granted and assume that the future of the downtown is assured. High taxes or other barriers, he says, could easily turn the trend.
"It would be terrible if the lesson we learn from all this is we don't have to pay attention to this stuff," he says.
"The fortunes of cities can change. We can't take them for granted.
"Fifty years ago Detroit was a great city. Now it's desolate."