The Race to the Top

After a decade in idle, developers are gearing up
to build the city's next skyscraper

By Shannon Black

For eight years, pigeons have rested on the angle irons jutting from the sides of a stump of a building in the city's financial core.
         Since 1992, this four-sided concrete billboard on Adelaide Street, now covered with a Hospital for Sick Children mural, has represented the sum total of the 50-floor, 1.3-million square foot Bay-Adelaide Centre -- the foundation of a project that fell short.
         In its way, it has also been a symbol of the lack of a market for new office space downtown.
         For years, developers and general contractors have wondered aloud when the next high-rise office tower would be built in the city's financial core, and who would get to construct it. It's not a prestige game like it was in the free-spending 1980s, but a downtown skyscraper is still the ultimate project.
         And now there are signs that the city could soon have a new skyline to go along with the new millennium. Since the start of the year, commercial rental rates in the financial core have jumped 10%. Since the end of April, the vacancy rate has dropped to below 5% from 5.8%. Unemployment rates are low. The economy is strong.
         Suddenly, all three of the city's biggest developers have projects almost ready to go: TrizecHahn has been waiting eight years to finish off the Bay-Adelaide Centre. Oxford Properties Group Inc. is working out the details to build a controversial 40-storey skyscraper behind the facade of the historic Concourse Building, also near Adelaide and Bay streets. And O&Y Properties Corporation will build 18 storeys above an old bank building at 2 Queen Street East.
         The time to spend $300 per square foot on a Class A building and sell it to investors as a reasonable risk is here again.
         "Our tenant list is expanding all the time now. People are going for showings and we've got offers," says Bud Purves, senior vice-president of development at TrizecHahn. "It's like the old days with the red phone to Moscow," says Mr. Purves. "I've got a red phone to PCL Constructors [the company that will build the tower]."

Skyscraper is a relative term. In Mississauga, for instance, the Royal Bank's twin tower office is a "skyscraper" though it stands only nine storeys.
         'In Toronto, a skyscraper is a building that would have some architectural prominence in and of itself, as well as augmenting a skyline so the population in a general area would be aware of it," says Mr. Purves.
         Gord Thompson, a senior vice-president at Oxford Properties Group Inc, pins 40 storeys as the cutoff for a skyscraper. He says there are less than 10 of them in the city.
         "Having a building that's 40, 41 storeys, puts you in that upper echelon of major office towers." An extra 20 storeys creates an enhanced identity to a certain point, he says, but the pursuit of grand projects has passed. "Twenty years ago, everyone wanted to have a very, very tall, very large building," he recalls.
         The main TD Bank tower, Commerce Court, Scotia Plaza, First Canadian Place and the Bank of Montreal tower were all beyond 1.2-million square feet. They essentially redefined the Toronto skyline and confirmed the city's stature as the country's economic heart. It seems there was more at stake than leasing office space back then.
         "I don't think it's an ego contest anymore," says John Levitt of O&Y Properties Corporation. "I think in the good old days there was some of that, but I don't think it's that way now."
         These days, the view of developers and lenders is more balanced, says Mr. Thompson. "They would like to build a significant building, but they want to build a building that actually can get built. And that's a big issue in today's world."
         "Whoever gets their building up first is going to sell it out first," says Mark Fazio, manager of business development at Ellis-Don, the construction company pegged to build O&Y's 2 Queen East.
         "Certain tenants need their space by a certain time period," agrees Joe Watson, at PCL Constructors. "In that case, it's not the tallest one, it's the first one that meets the criteria."
         But if it's a race to the top -- and some competitors say it is while others say it isn't -- it may all ready have been won. The major criteria -- building a skyscraper in the financial core -- eliminates the O&Y project, which is both a boutique of an office building at 350,000 square feet, and it's in the boonies at Yonge Street and Queen Street East.
         "People who talk to us don't seem to be interested in that project," says Mr. Purves, who thinks the Bay-Adelaide Centre will be an easy sell, even to tenants on the other side of Adelaide Street West in Scotia Plaza, which is rated AAA by commercial agents, and leasing space for just over $30 per square foot.
         Oxford Properties' plan for 100 Adelaide Street, on the other hand, is only 10 storeys smaller and just a few short blocks away from Mr. Purves' long-delayed project.

In terms of being the first one completed, the advantage lies, so far, with TrizecHahn. The Bay-Adelaide Centre is already "at grade," meaning the foundation is built up to street level. "If you're talking getting a building going and you're out of the ground, that's the biggest time commitment," says Mr. Watson. "You can rattle these off at a floor a week [once they're at grade]."
         Adding on an extra 10 weeks for the 10 storeys above what Oxford Properties plans could still leave TrizecHahn in first place, unless Oxford gets approval from the city in time for an immediate start. But the project has been dogged by controversy surrounding plans to gut most of the interior of the Concourse building, an Art Deco gem with a mosaic over the main entrance that was done by a member of the Group of Seven.
         Oxford Properties has been given the green light to carry out the demolition, and has promised to preserve the building's facade and first three floors.
         From start to finish, the project will run about 30 months, says Stuart Smith, executive vice-president and chief operating officer of Oxford Properties Group. (O&Y, meanwhile, is aiming for a fall start and completion in early to mid-2002.) But Mr. Smith downplays the importance of being first, and isn't ready to take second place until he has to. "I think there is some value in being first, but I think the projects are different," he says.
         While they may be vying for some of the same tenants to meet their pre-leasing requirements of about 50% occupancy before starting the projects, Mr. Smith suggests that a smaller building like his -- 720,000 square feet --will be more comfortable for some companies. Call it the big fish in a small pond variable.
         "I think traditionally it's always hard when you're building a skyscraper," says Keith Reading of Colliers International, one of the city's biggest commercial real estate brokerages. "When you just start it, it's tough for tenants to see that building on the horizon. There's a leap of faith they have to take that it's going to be completed by a certain date.
         "When the building's closer to completion, you see more action. It's more tangible. They can get a feel for what it's like to be there."
         None of the developers will be putting on their hardhats until they reach their pre-leasing targets.
         "We work with considerably less leverage than we did in the '80s," says Mr. Smith. "I think everyone's more managed."
         Still, the commercial real estate market in the core has tightened up so much that Mr. Reading expressed his surprise that developers hadn't started moving already.
         "Even buildings like Atrium on Bay that really had trouble finding tenants for a while, all of a sudden they're starting to lease space as well," he says. In the meantime, the developers are taking their time. Financial security comes first.
         Oxford is partnered with a pension fund for the Concourse Building project and will have to prelease at least 40% of the 720,000 square foot building before breaking ground.
         TrizecHahn has partnered with CN Pension Fund and is looking to lease closer to 50% of its 1.3-million square foot building before resuming construction.
         Neither of them are there just yet. But, says Mr. Purves, "The market is finally telling me things I'm really liking to hear."

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