Brookfield Office Properties Inc., encouraged by low vacancy rates in Toronto's financial district, said it plans to begin construction on a second office tower of the city's Bay Adelaide Centre.
Brookfield announced professional services firm Deloitte as the anchor tenant, committing to lease about 43 per cent of the 980,000 square feet of space in the planned 44-storey building.
The new Bay Adelaide Centre East will be adjacent to the existing Bay Adelaide Centre building, which was completed in 2009 and is now 95 per cent leased.
"Strong fundamentals and low vacancy in Toronto's financial core signify the market's willingness to support new office development," said Jan Sucharda, president and chief executive officer of the Canadian operations of Brookfield Office Properties Inc.
The move to build another large office tower adds more sizzle to Toronto's scorching real estate scene. The downtown is already crowded with condominiums recently completed or under construction, along with a number of new high-end hotels.
Deals are also flying. Across the street from the site of the new Bay Adelaide Centre, the landmark Scotia Plaza tower sold for $1.27-billion in May and marked the highest price ever paid for a Canadian office building.
All the action has some observers worried the market could be overheating. But Brookfield says it has done its research. Spokesman Andrew Willis noted that in Toronto there are roughly 20 financial services, accounting and law firms with leases that will expire in the next few years, making them suitable tenants for the new tower. And if enough of them want to move, Brookfield's property at Bay and Adelaide has room for a third, 600,000 square foot tower. The real estate developer is currently seeking a lead tenant for that building.
For nearly two decades, Toronto saw very little new supply of skyscrapers. But with borrowing costs low and the Canadian economy stable relative to other major economies, development money is piling in. Vacancy rates in the city's historic towers are practically negligible, and a number of recently constructed towers have filled up shortly after their construction.
Anchor tenant Deloitte will consolidate its employees from across five different office towers into 17 floors of the new building. Deloitte has committed to a 15-year lease of 420,000 square feet. Construction is expected to be complete in 2015 or early 2016. That will be just after the Royal Bank of Canada's new 30-storey, 930,000-square-foot Canadian headquarters in Toronto will be finished.
Other cities are booming as well. On the east side of Calgary's downtown, H&R Real Estate Investment Trust built the 58-storey Bow, and cities such as Vancouver, Edmonton and Ottawa all have strong office markets with low vacancy rates. The office sector has gotten so hot that Dundee REIT, a venerable real estate company, is planning to shed its industrial properties to focus solely on office buildings.
Even with a few new towers going up, real estate companies aren't worried about a supply glut in a few years time. "There's just such a need for space that it looks like rents are going up," said Michael Cooper, chief executive officer of Dundee REIT.
He added that reactions to the financial crisis have "been more about fear than about anything else, so people haven't taken excess space. Generally, tenants are jammed."