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telecommunications

Wires connecting servers installed by telecommunications and IT companies in the building located on 151Front Street. Owned by Allied Properties REIT, the place is dedicated to rent space to companies in need of high volumes data storage and traffic. Toronto September 08, 2010. (Fernando Morales/The Globe and Mail)Fernando Morales/The Globe and Mail

Pedestrians hurrying past 151 Front St. West's modest brown brick exterior see only a street-level restaurant and ordinary shops.

But hidden behind tinted windows on the upper floors are the phone and Internet servers that enable millions of Canadians to talk, text and teleconference. The seven-storey building, two blocks west of Toronto's Union Station, is the country's largest telecommunications hub.

Among its attributes: 26 backup generators, five of them so huge they had to be lowered through the roof; dozens of security cameras; and an entry corridor designed to trap intruders between locking doors.

The guardian of those fortified doors is an unlikely one: Allied Properties REIT, a mid-sized real estate investment trust with no prior experience in providing such high-tech space. But Allied's chief executive officer, Michael Emory, saw the value of this unique property, where rents can hit $100 a square foot - much higher than even most of the iconic high-rise office buildings a few blocks to the east.

Despite those high rates, the building - described by one telco executive as the "premier facility" of its kind in the country - is nearly full. Mr. Emory, who bought 151 Front St. West for $192-million in 2009, has an ambitious plan to extend that value: He's turning another of Allied's buildings, 905 King St. West, a few minutes away, into another top-notch data centre and linking the two buildings underground by fibre optic cables.

To minimize traffic disruption during construction of the link, most of the wire will run along nearby railway lines where underground cable space already exists. The Front Street building backs onto the tracks, meaning only minimal construction will be needed to lay the cable a few blocks north from the tracks to 905 King.

Once the two buildings are connected, tenants in the King Street property will share virtually the same data speeds and capacity as those in 151 Front, where occupants include the country's three major telecom players - Bell, Rogers and Telus - as well as upstart wireless providers such as Wind Mobile.

For the telcos, the hub at 151 Front is an essential "co-location" space. Despite stiff competition between these players, their wires must connect so that anyone who sends an e-mail from Bell's network, for example, can have their message delivered to someone using that of Rogers or another competitor. This happens in the "meet-me room" - no bigger than the average master bedroom, but chock full of cables and equipment so vital to Canadian communication that video cameras monitor every square inch.

Mr. Emory is aware that his company seems an improbable provider of such high-tech space. "On its face, 151 is a little bit different from what we typically do," he says. In truth, it marks a bold acquisition for a company better known for owning small office buildings that have been retrofitted from industrial or manufacturing uses. Among Canadian REITs - which buy income-generating assets such as shopping centres, office towers and hotels and pay out that income to unitholders - Allied is recognized for sustainable payout ratios and conservative management.

That conservative approach paid off as the trust built up cash in recent years, waiting while the recession pushed down building values. Last year, when a smaller company decided to give up 151 Front to focus its attention elsewhere, Allied was ready to buy.

"There is absolutely no question that this building would have been out of our range before the credit crisis," Mr. Emory said at that time.

But the Front Street building, and the transformation of the King Street property, represent an excellent business strategy for the trust, which has a market capitalization of just under $1-billion. For starters, Allied has a slew of other Toronto properties within walking distance of the two telecom hubs. Most are low-rise red brick buildings that are technologically inferior to the city's skyscrapers. At 905 King, tenants of these other buildings can lease space to store their servers at a nearby location.

The opportunity may lure more businesses away from the well-known office towers and into Allied's aesthetically pleasing offices, complete with high ceilings and entranceway arches. Allied has refurbished these gems over the past few years, helping turn King Street West into a thriving community that is home to such companies as Cossette Communications. Upscale restaurants have also opened and the area's supper clubs are now popular destinations for weekend partiers.

As for Allied's bottom line, more space in 905 King means more profit. About 40,000 square feet should be ready for occupancy early this year. An additional 20,000 square feet will be available in late 2011 after a remaining tenant's long-term lease expires. The 60,000 square feet of space could generate as much as a 35-per-cent return on investment for Allied, according to analysts' estimates, because rent is expected to be $60 to $100 per square foot.

But Allied isn't the only firm that benefits from the telecom hubs. The data centres' tenants get floors fortified to hold heavy loads such as their expensive servers, plus backup power sufficient to double the normal usage - insurance against blackouts like the one that hit downtown Toronto last summer.

Ken Campbell, chief executive officer of Wind Mobile and a tenant of 151 Front, is impressed with these attributes, as well as the building's security and the controlled chaos of the "meet me" room. "It's the premier facility for co-location" in Canada, he says.

New condos and office towers going up during Toronto's development boom also benefit. Once completed, properties such as the 53-storey Ritz-Carlton and the 46-storey Festival Tower will have the fastest Internet connections possible because telcos will connect these towers directly to the hubs, rather than peripheral routing stations in the suburbs that slow data transmission.

These direct connections will enter through one of 151 Front's 25 fibre optic entry points, which branch off from the railway tracks south of the building. Historically, Canada's telecommunications network ran along the railroad, and the building's proximity to the tracks is the main reason 151 Front was first wired during construction in 1954.

Long before e-mail, building owner Canadian National/Canadian Pacific Telecommunications used 151 Front to facilitate Telex transmissions, whose wires ran along the railroad. Once the fax machine took over, however, the building's special attributes were no longer needed and it was used as regular commercial space.

However, previous owners Trizec Properties Inc. and Northam Realty Advisors Ltd. saw the building's potential. Trizec started upgrading it in 1997. In 2004, Northam bought 151 Front for $76-million and started its own upgrades, which helped to generate an almost 200-per-cent return when it sold the building to Allied.

The King Street property has a similar history because it was once the home of Netcom Canada, one of the country's first dial-up Internet service providers. After cable and high-speed Internet all but wiped out dial-up connections and Netcom was wrapped into AT&T Canada, the building was also used as regular commercial space.

When Northam put 151 Front up for sale in 2009, Mr. Emory enlisted the technical expertise of one of his tenants, engineer Vello Ehvert, who brought him up to speed on the building's potential and explained the shortage of server space downtown.

Although he helped Mr. Emory see the potential in 905 King, Mr. Ehvert says he was simply acting out of self-interest. "People say you can stick your server in India or South America," he says, but "servers aren't completely hands-off. I want my servers close to where I am so if there's a problem I can be there in five minutes."

He acknowledges that at first it seemed a bit strange to be advising a real estate company to solve this problem, but he changed his mind because "they're not selling you technology," he says. "They're selling you real estate designed for technology."