Sun Life Financial Inc. is going to move out of the Toronto tower that has been its head office for 30 years, a sign of what many real estate experts say is the slow migration of the country's biggest financial district.
The insurer told employees Monday that it plans to move its downtown work force of roughly 1,400 people to One York Street, a new building that will open in 2016 near the city's waterfront, south of the bustle of the traditional financial district.
Sun Life will take a 30-per-cent stake in the building, which is expected to cost about $375-million to build. The other partners are Menkes Developments Ltd. and the Healthcare of Ontario Pension Plan (HOOPP).
The move comes as a boom in office construction across Canada slowly reshapes the downtown cores of major cities.
Calgary and Vancouver are also seeing high amounts of construction in and around their business districts, posing a new challenge to older towers.
The building frenzy is occurring despite a demand for office space that softened in 2013. Vacancies are forecast to rise notably this year on a national level.
"Nationally, there is a 22-million-square-foot development pipeline of new buildings under construction, representing about 4.5 per cent of existing inventory," Royal Bank of Canada analysts say, adding that they are "almost certain that supply will exceed absorption over the next one or two years."
In Toronto, the traditional bank towers have long been considered the safest investment for commercial real estate owners because of their low vacancies and high rents. But that's starting to change as a number of splashy new office towers are built. "Rental growth is likely to stall and some of the older Class A towers … will likely have to make significant investments in building improvements, along with a reduction in their rents and significant increases in their leasing incentives," RBC real estate analysts wrote.
Royal Bank itself is moving more than 4,000 employees to a new building by the waterfront, which will become the headquarters for its Canadian banking business, starting later this year.
Toronto's downtown office sector, which pulled through the financial crisis in decent shape, had its poorest results since 2003 in the fourth quarter of last year, according to brokerage Avison Young. The average availability rate downtown is 10.1 per cent, while King Street and Bay Street, "traditionally the two most prestigious addresses for business in Toronto and arguably all of Canada" have availability rates of around 11 and 12 per cent, it says.
Sun Life owns 150 King Street West, the tower that currently serves as its head office, and will be looking to lease the roughly 150,000 square feet of space it is vacating.
The company will take 300,000 square feet of space in One York Street, which will be renamed the Sun Life Financial Tower. Among the attractions are better proximity to Union Station, a major transit hub, and updated facilities with bells and whistles such as a backup power generator.
Sun Life's operations at 225 King Street West will also move to the new building. By moving employees from two locations to a single site the company will reduce the number of conference spaces it needs, and save the time people spend travelling between sites.
The company will be paying a higher net rent in the new building, which it plans to move into in 2017. But because newer buildings are more energy efficient, don't require the same maintenance, and can fit more workers, the company expects to save money overall.
"I think it's a shift," says Peter Menkes, president of the commercial and industrial division of Menkes. "When we attracted Telus [to an office building south of the financial core] in 2006, people said it will be difficult to get financial companies to come to the south of Union Station, because they're just so used to King and Bay."
Older towers are increasingly having trouble competing because it's difficult, if not impossible, to retrofit them so that more workers can fit on each floor. Problems include the need to expand fire stairwells.
"Today we're able to design buildings to be 120 square feet per person," Mr. Menkes says, adding that buildings designed in the 1980s were closer to 300 square feet per person.
"Sun Life found that when they designed their space in our building, versus where they are now, they were able to get about 10 per cent more efficient, needing that much less square footage."
This is Sun Life's second trailblazing move. In 1976 the company surprised Quebec's businesses and government by relocating its head office from Montreal to Toronto because of the strict French language policies laid down by the Parti Quebecois. Its exodus was followed by full or partial moves by more than two dozen other companies.
Editor's note: An earlier version of this article said some of Sun Life's operations will move from 225 King Street West. In fact, Sun Life is vacating the building.