Office tower a sign of new 'cycle'

For the past decade, the concrete elevator stump at the corner of Bay and Adelaide Sts. in Toronto's financial core was more than just an eyesore. It was a symbol of Toronto's diminished economic fortunes. Yesterday, Toronto Mayor David Miller and Brookfield Properties Corp. CEO Ric Clark took symbolic sledgehammer blows to the stump to pave the way for an urban park in Canada's priciest commercial district. As first reported last week in the Toronto Star, Brookfield announced that the long moribund Bay-Adelaide office complex would finally be built with accounting firm KPMG LLP taking 250,000 square feet as the anchor tenant. "Frankly, this stump represented a failure," Miller said at the ceremony. "And now we're in the most significant development cycle as a city in more than a decade." The $300 million Brookfield project is the third office building announcement this year — signifying a vote of confidence from the business community in Canada's largest city. While there has been no shortage of condominium cranes, conspicuously absent has been the commercial skyscrapers that define the city's downtown. But solid job numbers and strong economic growth have given developers the kind of courage absent since the late 1980s. Earlier this month, Menkes Developments announced it would be building adjacent to Union Station with Telus Corp. as the lead tenant. That announcement came on the heels of RBC Financial Group and RBC Dexia Investor Services, who said they would move into the Cadillac Fairview Corp. tower in the city's entertainment district. By 2009, more than 3 million square feet of new office space is set to be built in the downtown core, which has raised a question that few would have thought to ask only a few months ago: Can Toronto's downtown handle all that additional space? "That's certainly a lot of supply to come in all at once," Raymond Wong, national director of research for CB Richard Ellis, said in an interview. If no new product were to be built, then the vacancy rate would have plummeted to 4.7 per cent, Wong estimated. With three buildings due in 2009, the vacancy rate shoots back up to a forecast 10.6 per cent. Vacancies over 10 per cent are considered a tenant's market. One reason for a higher vacancy rate is that two of the three new towers will simply be relocating their staff from other downtown locations, which leaves a hole in existing space, Wong said Another reason is that after signing their anchor tenants, the race is now on between the three buildings to sign up more than a million square feet of additional tenants — equal to one skyscraper — to fill their buildings. Wong estimates that it will take about two years for the market to work through the additional space. "In the long run it's great that tenants who had to look to mid-town or the suburbs for large blocks of space now have more choice," Wong said. "The developers are giving a vote of confidence to Toronto and are betting that the city will be economically sound moving forward." Brookfield, a Toronto developer known for erring on the side of caution, doesn't foresee a problem with the additional square footage. "I believe we can handle the extra space, by the time these buildings come on line it'll be close to 20 years before we've had any significant addition to the office stock," Brookfield CEO Clark said in an interview. "And we've all made great progress in pre-leasing our properties before they're done, so I think the market is going to be ready for it." Keith Reading, vice-president of research at Colliers International, said the additional new space would represent a 6 per cent increase in inventory in the downtown core. "If you did that in Montreal you'd have problems, but I think the Toronto office market will be strong enough to handle it," Reading said. The 1.1 million square foot, 50-storey Bay Adelaide Centre West Tower, penned by Toronto's WZMH architects, will be on the northeast corner of Bay and Adelaide St. Part of the development includes an urban park where the stump is now located. The design integrates the 11-storey historic 1926 façade of the former National Building, which will be restored. Phases two and three of the project, which can house an additional 1.5 million square feet and will likely be a mix of office, retail, hotel and residential, will come on line as the "market demands," Clark said. Rob Brouwer, KPMG's managing partner for the GTA, said yesterday the firm, which will occupy the first 10 floors of the building, chose the site because it was "important for KPMG to have a strong presence in Toronto. ... This is a landmark building that will help to define Toronto's skyline." The last major tower to be built in the city was BCE Place at Bay and Wellington in 1992. Since then, the recession, overbuilding and the technology crash in 2000 caused a glut of space on the market. Meanwhile, higher taxes in the downtown core caused a migration of office space to the outlying areas.