One of the oldest commercial blocks in Toronto is about to get a new lease on life as an office complex. It’s unique not only for the heritage elements that will be restored, but also because it’s being built on a purely speculative basis.
Carttera Private Equities Inc. is starting construction on its 18-storey 65 King East project without signing any major anchor tenants. Normally a developer would have a significant portion of a building leased before starting work, but Carttera is betting that in Toronto’s hot commercial real estate market, space in the innovative project will be booked before it is completed in late 2020.
It’s a bet that’s got more than just a hunch behind it, says Werner Dietl, executive vice-president the Toronto Downtown Office of CBRE Ltd., which is marketing 65 King. Toronto has had the lowest downtown office vacancy in all of North America among major cities for almost two years running. Vacancy is at a record low 2.9 per cent, which is prompting a wave of new development across downtown Toronto and 1.8-million square feet of it is speculative, he explains.
“It starts with the tenant demand. In Toronto in general, and in the downtown core specifically, there has been an almost insatiable demand for office space that has outpaced supply over the past four years. A big factor is that Toronto has done a good job in attracting talented people and that attracts fast-growing creative, tech and financial services industries. Canada’s immigration policies and affordable dollar are other factors that have global companies thinking of expanding here.”
From an investment viewpoint, there’s risk, but it’s manageable, Mr. Dietl notes. “Traditionally you don’t get financing without a core tenant. But a lot of pension funds and private equity are prepared to go forward because they feel that’s going to put them in an opportune position to grab tenants who don’t have the time to wait two to three years for a building to be built: It’s ‘what do you have available today?’ They believe the supply is going to remain low and demand is going to rise along with rents” in the foreseeable future.
There’s room for a few more commercial buildings in Toronto, and the downtown core specifically, based on the supply and demand we’re seeing now, says Dean Cutting, a principal with Carttera in Toronto.
Carttera decided the time was right to start its project at 65 King Street East, but it’s actually been a long time in planning. It took more than four years to assemble the row of stores on the south side of King, to the east of the King Edward Hotel. What became known as Victoria Row has a history dating back to 1842. The retail block was originally designed by John G. Howard, who later became Toronto’s official surveyor and whose former estate became High Park.
Most of the buildings in the row were altered several times over the years and Carttera has been working with the city’s Heritage Preservation Services to plan a restoration of four of the facades to their historic looks, Mr. Cutting says. The interiors are not heritage and will become modern office and retail spaces. The entrance to the office complex will occupy a corner that has been a parking lot for decades. A heritage wall in the lobby of the building will pay homage to the row’s history.
The row includes the Albany Club, which is not part of the development. A well-known steak house, the Tom Jones that’s on the southwest corner of the block, was also not purchased and will continue to operate as a restaurant. Carttera is also the majority owner of the 60 Colborne condominium at the rear of the block that is just being completed.
Above the three-storey facades, the new building will step back and a glass office tower will rise to a total height of 18 storeys and there will be 257 parking spaces.
The complex was designed by IBI Group Architects and WZMH Architects. Among the innovations are the many roof terrace spaces on eight levels of the building, for a total of 18,000 square feet of outdoor space with panoramic views and natural light. “It’s an admission that workplace wellness is the next frontier in office space design,” Carttera says in its promotion. The project is targeting LEED Gold certification.
An earlier proposal by another developer to build a 47-storey mixed-use tower on part of the block was nixed by the city because of a bylaw that prohibits casting a shadow on nearby St. James Park. Amenities like the park and easy access to the King subway station that’s a block away and the Financial District should be strong selling points for future employees, Mr. Dietl adds.
It’s taken more than three years to get the needed planning approvals, and building and heritage permits, and construction is finally beginning. Restoration work is starting in July on the King Street facades and demolition of interiors and excavation is scheduled to begin in September for a planned completion in late 2020.
“It’s a lot more complex, to put a site like this together and build something of this scale than it would be in a green field, but in the long term for Carttera and our investors, we think it is going to be one of the most attractive buildings in this part of the city,” Mr. Cutting says.
Other planned Toronto towers
There are other developers who are not waiting for tenants to sign up before moving ahead with downtown office complexes.
Cadillac Fairview announced a new 46-storey tower at 160 Front Street West before publicly naming a tenant. It’s now been revealed that the Ontario Teachers’ Pension Plan will occupy nine floors of the tower in a move from their current head office in North York. The project at the northeast corner of Front Street and Simcoe Street will begin construction in 2019 and when it opens in 2022 will be the city’s eighth tallest commercial tower.
Another office project that has zoning approval but no firm anchor tenants is Allied Properties Real Estate Investment Trust’s 48-storey Union Centre, designed by Sweeny & Co. Architects. It’s planned for 20 York Street, west of Union Station, with no firm start date.