THE CONDITIONS FOR CAPITAL INVESTMENT IN THE REAL ESTATE SECTOR: THE CASE OF OFFICE DEVELOPMENT IN TORONTO
lgal Chamey
A thesis subrnitted in conformity with the requirements for the degree of Doctor of Philosophy Graduate Department of Geography University of Toronto
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THE CONDITIONS FOR CAPITAL INVESTMENT IN THE REAL ESTATE SECTOR: THE CASE OF OFFICE DEVELOPMENT IN TORONTO
Doctor of Philosophy 2000
lgal Chamey
Graduate Department of Geography University of Toronto
This study presens an examination of office development in Canada and speclically in the Toronto
metropolitan region in the post-WWII era. The major purpose of this inquiiy is to document and analyze
the spatial patterns of office development produced by real estate devetopers in conjunction with
financial agents. The changing real estate sector in Canada during the last fiiyean provides the
backdrop for this research.
The major argument put forward emphasizes spatial limits that shape the geographic scope of office development. The heterogeneity of space prompts the production and maintenance of distinctive surfaces over which office development takes place. The idea of capital switching between circuits of accumulation is expanded to include switching practices within the real estate sector. This notion is introduced throug h the concept of 'three dimensions of capital switching'.
In the office development process, one of the major agents is the real estate developer. Developers perforrn two basic spatial tasks: they 'lock' capital into specific places by engaging in the development of office buildings, and they either continue to operate in customary locations or switch their operational preferences between different places. Wii respect to spatial fields of operations, a distinction between two spatial scales is made.
Uneven conditions experienced by different cities are a major stimulus for variable spatial practices experienced by developers. Wiiin the Canadian urban system, large developers prefer to invest in specific top-tier cities, particubrly Toronto and Calgary and to a lesser extent in Montreal and
Vancouver. The preferences of developers indicate that office development is spatially selective and based on specific regional and local conditions.
At the intra-metropolitan level, uneven conditions resut in a distinct spatial division of labour among the developers of office buildings. Office development in the Toronto area illustrates the ability of developers to pursue development in paiücular settings. Their practices result from compatibility with particular environments and with specific societal arrangements. This in tum produces and reproduces territories that are conceptualized as office development districts.
iii Acknowledgements
In sober-mined retrospect, when I arrived in Toronto in August 1996,l did not fully realize the scale and scope of punuing the Ph.D. quest. In punuing this enonous task, I was very fortunate to have tremendous help and constant caring and nourishing without which t could not have managed. I was fortunate to have an outstanding supewisor and a very supportive committee that enabled me to complete this project in four-years. I was also able to take full advantage of the excellent living environrnent and educational facilities in the City of Toronto, and the resources of the University of Toronto. I am deeply grateful to my Ph.D. supervisor. Professor Gunter Gad, for his support. professional guidance, and his generous nature. His caring and mindful attendance were essential for the completion of this project. Gunter has been professional anchor and friend throughout my Ph.0. program and I feel fortunate to have been able to work with him. I would also like to thank my PhD. committee memben, Professor Lany Boume, Professor Robert Lewis and Professor Susan Ruddick, for their interest, suggestims, and constructive cornments. Their input and support are deeply appreciated. Professor Ted Relph provided direction in the earlier stages on this dissedation for which I am grateful. I owe particular thanks to Professor Anne Haila of the University of Helsinki for acting as extemal examiner, and for her very strong interest in my research. Also, I have thanks to Professor Pierre Filion of the University of Waterloo for agreeing to be on the final examination committee. I would like to thank the Department of Geography at the University of Toronto that hosted me for four years and provided me with scholarships and teaching opportunities. Also, I am thankful for the staff that rnake this department such a pleasant place to study in. In particular, I am grateful to Marianne Ishibashi and Donna Jeynes for their willingness to help and their good spirit. I would like to thank the people who agreed to be interviewed for this research and shared with me their thoughts and ideas, and to Mark Knowles and Dean April of Royal LePage Commercial Inc. for their assistance in the process of data collection. Finally, I would like to thank Professor Amiram Gonen of the Department of Geography at the Hebrew University of Jerusalem who encouraged me to widen my horizons and pursue a Ph.D. program abroad, and for his ongoing interest in the progress of my research. Professor Bryan Massam of York University provided me with moral support in rny first two years in Toronto. Most of all, I would like to thank my family for al1 of the support they have provided over the years. Table of Contents
Abst ract
Acknowledgements
Table of Contents
List of Tables
List of Figures xiii
INTRODUCTION
THEORlZlNG OFFICE DEVELOPMENT
Principal Approaches 1.l. 1 Neo-classical approaches 1 .1.2 Political economy approaches 1 .1.3 Institutional approaches
Components of the Real Estate Development Process 1.2.1 Building cycles and their spatial aspects 1-2.2 Financial institutions and real estate development 1 -2.3 The state and real estate development 1.2.4 Real estate developers
Steps Toward a Theory of Office Development 1-3.1 The intrinsic dynamic of real estate capital 1.3.2 The 'three dimensions of capital switching' 1.3.3 Reciprocal relations: Real estate and other capitals
A Provisional Framework 2 RESEARCHING OFFICE DEVELOPMENT IN TORONTO: CONTEXT, APPROACH, METHODS, AND DATA
Context: The Conditions for Office Development in Toronto 2.1 .1 Population and employment growth 2.1.2 Municipal organization 2.1.3 The planning system 2.1.4 Taxation 2.1.5 General development issues 2.1.6 Office users in the Census Metropolitan Area 2.1.7 The scope for office development
The Research Process and the Use of Realist Method
Data of lnterest and Data Collection 2.3.1 Extensive data 2.3.2 Intensive research
THE CHANGING CANADIAN REAL ESTATE SECTOR
The Trajectory of Commercial Real Estate Companies in Canada 3.1 -1 Office development in the first half of the twentieth century 3.1.2 The formative era of modem developers: Entrepreneurial skills and 'extemal' capital 3.1.3 The golden era of office development: Expansion and the establishment of real estate powerhouses 3.1.4 The institutionalization of the real estate sector and the emergence of new entrepreneurs
Canadian-Based Real Estate Companies and Office Development in the United States
Office Development and Foreign lnveston in Canada
ldentifying Primary Office Developers and Owners in the Toronto Area
Unpacking Real Estate Developers 4 FlNANClNG OFFICE DEVELOPMENT AND THE ROLE OF FINANCIAL INSTlTUllONS 99
The Configuration of the Canadian Financial System and the Financial Arrangements in the Real Estate Sector 101
Sources of Financing Office Development: The Developer's Perspective 106 4.2.1 Olympia & York: Social networks, ingenuity and the provision of financing 108 4.2.2 Corporate sire and real estate financing 110
Financial lnstitutions as Investors in Office Buildings and as Developers 112 4.3.1 Banks and office development 114 4.3.2 Life insurance companies and office development 118
The Spatial Practices of Office Development and Ownership by Financial Institutions 122 4.4.1 Banks 123 4.4.2 Life insurance companies 126
The Spatial Limitations of Real Estate Capital 130
Financing and Financial Institutions: Concluding Remarks 133
THE THREE DIMENSIONS OF CAPITAL SWITCHING: LARGE CANADIAN REAL ESTATE COMPANIES AT THE NATIONAL SCALE 136
Switching Between Modes of Operation 138
Switching Between Property Types 140
Switching Between Locations at the National Scale 144 5.3.1 The geography of office building cycles in Canada 145 5.3.2 Office building cycles in Toronto and Calgary 150 Three Dimensions of Capital Switching and Building Cycles: Two Case Studies 5.4.1 The Trizec Corporation 5.4.2 Cadillac Fairview Corporation
Capital Switching and Real Estate Companies
FROM KING AND BAY TO MEADOWVALE: TORONTO'S OFFICE BUILDINGS AND OFFICE D
Preliminaries: Office Building lnventory and Spatial Frame of Reference
Toronto's Office Stock: A Synopsis
Office Districts in Toronto 6.3.1 The Financial District 6.3.2 Downtown and Midtown 6.3.3 Suburban Downtowns 6.3.4 Office Parks
Sequential Cycles of lnvestment within the Metropolitan Realm
The Changing Character of Toronto's Office Stock
THE SPATIAL PRACTICES OF OFFICE DEVELOPMENT COMPANIES AND OFFICE DEVELOPMENT DISTRICTS IN TORONTO
Spatial Selectivity among Real Estate Companies in Toronto 7.1 .1 Cadillac Fairview Corporation 7.1.2 lnducon Development Corporation
Office Development Districts 7.3 Area-Specific Case Studies of Office Development Districts 205 7.3.1 City of Toronto 206 7.3.2 North York 21 3 7.3.3 Mississauga 217
7.4 Uneven Surfaces of Office Development 225
CONCLUSIONS: SPATIAL F1X AND SPATIAL SWlfCHlNG OF REAL ESTATE CAPITAL
List of References
List of Interviews Table Paae
Type of data available on office building permits and office floor-space 60
List of interviews 66
Major themes and questions in interviews 67
The weight of the real estate sector in the Canadian econorny, selected years, 1966-96 71
The largest (publicly held) Canadian-based owners of real estate assets, selected years, 1971-99 73
A profile of the largest Canadian-based reai estate companies in their initial phases 76
The largest real estate investment trusts in Canada, 1999 83
Office portfolios of Canadian-based real estate companies in Canada and the U.S., selected yean, 1976-99 85
The largest owners of office space in the Toronto area, selected years, 1971-99 94
Debt-to-equity ratio, al1 industries and real estate, selected years, 1971-96 1O?
Banks involvement in the development and ownership of their head offices in Toronto 115
lnvestment of Canadian life insurance companies in real estate and mortgages, selected years, 1950-98 119
Bank of Nova Scotia and office developrnent joint ventures 124
ClBC Development Corporation and Royal Bank's owned office portfolio, 1998, 1999 125
Major developments by Canada's largest life insurance companies (for income-producing purposes), late 1970s to early 1990s 128
Office buildings developed by Manulife Financial for income-producing purposes, 1960s ta 1980s 129
x Table Paae
Spatial distribution of Manulife Financial real estate portfolio, selected years, 1960-99 133
Major switching practices of selected large real estate companies (by property type)
The largest owners of office space by the location of their Canadian office portfolio, selected years, 1975-99
The growth of office space in Toronto and Calgary, selected years, 1978-99
The Canadian office portfolio of Trizec, selected years, 1968-99
The Canadian office portfolio of Cadillac Fairview, selected years, 1968-99
A typology of office districts in the Toronto CMA
The growth of office space inventory in the Toronto CMA. selected years, 1954-99
Additions of new office space in the Toronto CMA, selected yean, 1954-99
Average size of newly constructed office buildings in the Toronto CMA, 1954-99
Average densities of office buildings in Metropolitan Toronto, 1991
Physical characteristics of office buildings in selected districts in the Toronto CMA, 1999 179
The inventory of office space in Toronto's Financial District, selected yean, 1961-99 181
The inventory of office space in the Suburban Downtowns, selected years, 1976-99 184
The inventory of office space in Office Parks in the Toronto CMA, selected years, 1971 -99 186
Additions of new office space along the Don Valley corridor, selected years, 1961 -99 190 Table
7.1 The operational spaces of selected mal estate companies in the Toronto CMA, selected years 197 1-99 (office portfolios) 196
7.2 The office portfolio of Cadillac Fairview in the Toronto CMA, selected years, 1975-99 200
7.3 Inducon's office portfolio in Office Parks in the Toronto CMA, 1 982 and 1991 202
7.4 Top developers and owners of office space built in the Financial District after 1960 209
7.5 Top developers of office space in the Mississauga City Centre, 1970-92 List of Figures
Paae
Downtown and north-south corridor office devetopers in the Toronto CMA
Suburban office developers in the Toronto CMA
Toronto Census Metropolitan Area
Connections between financial capital and real estate developers
The three dimensions of capital switching in Canada
Value of office building pennits in Canada, 1961-99
Value of office building perrnits in Ontario and Quebec, 1961-99
Value of office building permits in British Columbia and Alberta, 1961 -99
Net New supply of office space in Toronto and Calgary. 1969-99
Major office concentrations in the Toronto Census Metropolitan Area By the end of the twentieth century, office buildings had become the most prominent structures in many of the large rnetropolitan areas of the world. Office buildings are part of the iconography of the metropolis: the Empire State and Chrysler Buildings in New York, the Sean Tower in Chicago, the Transarnerica Building in S2n Francisco, or the Fint Canadian Place and the Toronto-Dominion Centre in Toronto. A Toronto-based development company, Olympia 8 York, and its office mega-project, Canary Wharf in London, England, provided the greatest spectacle of real estate promotion and subsequent collapse in the M decade of the twentieth century. However, skyscrapen and mega- projects like Canaiy Wharf are high profile elernents that mask a vast amount of less conspicuous and rarely publicized office developrnent. Office development has been uneven in space and time. There have been several cycles of office development in the twentieth century, bu? in ternis of magnitude, the boom of the 1980s was unprecedented. In some cities, such as Houston, Texas, more office floor-space was built in this one decade than in the preceding fiyean. Although the 1980s boom drew a lot of attention to global cities (Sassen, 1991, 1994) and to office development in cities like London (e.g., Diarnond, 1991; Zukin, 1992; Fainstein, 1994; Pryke, 1994a) and New York (Zukin, 1992; Fainstein, 1994), there have been many other cities where office development was prominent and attracted the attention of researchers. For instance, the booms in office development in Houston (Feagin, 1987, 1988), Dublin (MacLaran, 1993, 1996), Nottingham (Btyson, 1990, 1997), Melbourne (Beny, 1994), or Auckland (Moricz and Muiphy, 1997) and the research they generated can be rnentioned. However, across regions and urban systems and within large cities, office devebpment has been uneven. In order to understand uneven temporal and spatial development of the urban fabric in general, and office development in paiticular, many researchen have drawn on Harvey's (1982,1985) theory of capital switching between pnmary and secondary circuits of capital accumulation, and his notion of capital switching between places (Beauregard, 1991, 1994; Haila, 1991; Pryke, 1994a, 1994b). However, the notion of time scale under investigation is essential in the analysis of the built environment. Harvey's research on capital accumulation focused on long-terni history; however, other scholars such as Feagin (1987) and Beauregard (1991, 1994) were interested in shorter periods and as a result conclusions about switching practices are different from these proposed by Harvey. Harvey's conceptualizations have also implicated finance capital in the process of the production of the urban fabric, and as suggested by Warf (1994, p. 325) 'Yinance capital is not some passive actor in the construction of hndscapes, but an adive participant wilh a bgic of its ownn. Some limited research has punued this avenue as far as offce development is concemed (Feagin, 1987). Othen have not oniy considered the role of finance capital as an intennediaiy, but also as a direct participant in office development as financial institutions becarne developers and owners of office buildings (Des Rosiers, 1984; MacLaran, 1986; Lindahl, 1997). It has also been suggested that the role of financial institutions as lenden-usen and as ownen-uses might converge, and these institutions force their locational preferences on office development patterns (Piyke. 1994a. 1994b; LUieri et al.. 2000). Another strand of research has argued îhat real estate devebpers have ernerged as large-scale companies. and become multinational corporations with far-flung projects (Beauregard. 1989; Feagin and Parker, 1990; Sudjic, 1992; Knox, 1993, Logan, 1993; Olds, 1995; Beauregard and Haila, 1997). However, the literature on the uneven development of the urban fabric is not as straightforward as this paragraph may indicate. The notion advocated by Zukin (1992) and Knox (1993) that real estate developen have global reach that enables them to engage in development across regions with-in one country and beyond, and that real estate capital has limitless scope is somewhat extrente and should be questioned. Urban space is neither flat nor featureless. It has a highly articulated and changeable surface (Harvey, 2000). Institutions and sets of individuals are grounded in local settings. They respond to these specific settings and reproduce them, thereby contributing to the pennanently uneven structure of urban space. Indeed. several authon have argued that office development takes place in very specific historic and geographic settings as a result of the juxtaposition of specific requirements (Pryke, 1991, 1994a, 1994b; Beauregard, 1993; Ball, 1994; Leitner, 1994).
Office developrnent in Canada The configuration of the real estate development sector in Canada is an outcome of two parallel processes. At the macro scale, historical shifts in strategies of accumulation have resuhed in a number of changes. Entrepreneurial developen were the prominent agents of change at the fint phase of the development of the Canadian commercial real estate sector; largexale development companies shaped office development in a later stage, and rnost recently, financial institutions became the most important agents in the real estate sector. In the short nin and in ternis of ongoing process, real estate companies aiming to grow or to stay afloat have employed capital and spatial switching practices. There have been several office development cycles at the national level in the last fiiyears, and major urban areas were affected differently by them. Office developen have taken advantage of these cycles and have produced an extraordinary amount of office space in Canada's largest cities. Two cities stand out in tems of office development booms: Calgary in the late 1970s, and Toronto in the 1980s. Toronto is Canada's largest urban area mth by far the largest office floor-space inventoiy (145 million square feet in 1999 or 40 percent of the national office stock), and Calgary has the third largest office stock (42 million square feet in 1999). Toronto experienced consistent rates of growth in office space Mile Calgary had abrupt cycles of office development. To put the 1980s boom in perspective: in each post-WWII decade, office fbor-space doubled in Toronto. Between 1981 and 1991, this doubling meant an increase from about 74 to 142 million square feet of floor-space, which is almost the inventory of Montreal (the city with the second hrgest oftm inventory, 80 million square feet in 1999) and about the combined 1999 inventoiy of office space in Vancouver, Edmonton, Halifax and Winnipeg (68 million square feet). On the other hand. Calgary's history shows an impressive boom in a very short penod: office space more #an tripled between 1978 and 1982 (from 8 to 28 million square feet). Office development within the Toronto metropolitan region has been highly uneven. The towers of the socalled Financial District are a relatively minor part of a highly articulated landsape of office buildings and office districts. These districts include several distinct inner city areas, suburban downtowns, and a variety of office paiks. These districts are diierentiated by the age and size of office buildings, by development densities, and also by the physical, economic, and social fabric in which office buildings are embedded. Canadian and especially Toronto-based companies developed almost al1 of Toronto's office space. Within the Toronto region, most real estate companies have very specific fields of operation. Figures 1 and 2 show the different operational spaces of selected development companies in the Toronto Census Metropolitan Area (CMA, Statistics Canada definition of a metropolitan region). Cadillac Fairview and Olympia 8 York, two of the largest real estate companies in Canada. operated mainly in downtown Toronto. Marathon and Bramalea, smaller real estate companies, operated along Toronto's traditional North-South high-income sector. Other developers, such as Inducon, Menkes, Orlando, and Shipp, operated only in selected suburban municipalities. The broad picture of office development in Canada suggests that office development is not only uneven, but also carried out by agents with highly focused geographic preferences. Developen operate in highly specific locations. Knowledge of particular places and local opportunities encourage developers to be very selective. The major issue to be addressed in this study is the relationship between the conditions of developrnent. and the response to these conditions by specific types of agents who produce the built environment, especially office buildings and office districts.
Office development in the cities of the Canadian uban system, particulaily within the Toronto Census Metropolitan Area between 1950 and 2000, is the arena to be investigated. The following paragraphs outline briefly the major thesis, the approach, the specific research methods used, and the types of data collected. A final paragraph outlines the organizaton of the thesis.
Thesis The core of the thesis maintains that office development is spatially uneven, because capital requires spatial unevenness to create oppominiaes for future aaumulation, and because the practice of development faces important spatial barriers. Fiecomponents of the thesis contribute to distinct sub- arguments. Together, they describe the pradice of office development and support the core thesis.
1. Capital switching between primary and secondary circuits of capital accumulation is difficuk to track. and it may be a phenomenon that is leu important than some authois suggest. Instead, my focus is on the real estate sector which has an 'intnnsic dynamic' (Haila. 1991). This intnnsic dynarnic can be conceptualized as the Yhree dimensions of capital switching' within the real estate sector. This switching can occur between modes of operation, property types, and locations.
2. The built environment consists of physically discemible structures and the parcels of land they stand on. These real estate properties are by definition immobile and represent capital investment in concrete and fixed assets. However, capital is also elusive and nomadic; the 'globalkation hypothesis' with regard to real estate development relies on this guality (Berry and Huxley, 1992; Olds, 1995). The development, and the ownenhip, of real estate properties has become increasingly 'delocalized' and may be detennined by forces beyond the city's boundaries (Savitch, 1995; Beauregard and Haila, 1997; Baum and Liiieri, 1998, 1999). There seems to bel therefore, a paradox or an inherent contradiction between immobile properties and mobile capital. This contradiction can be reconciled by scrutinizing the reciprocal relationship between the abstract nature of capital and its concrete manifestation. On the abstract level, capital is intangible, a restless element of the global financial markets. Nevertheless, capital invested in real estate assets has to be fixed in definite places, at least for a limited period of time, thus fumishing capital concemed with office development with a spatial specificity.
3. Real estate investment, and especially real estate development. is fundamentally a local business. This 'local dependence' (Cox and Mair, 1988. 1989) means that real estate development has to build on local knowledge and local conditions. Unifom and perfect knowledge across space is unlikely to be attained, thus, developen have to decide where they want to put their development efforts. To be well inforrned and obtain valuable information, developers need to be well connected in their operational environment. Developers with spatially diverse interests have to familiame thernsehres in the local arenas in which they invest. This also implies that they negotiate with a variety of local interests, including specific local govemrnents.
4. Real estate development, including office development, is cyclical. In the case of office development, cycles are not identical across regions or across the Canadian urban system. Spatial differences in building cycles encourage soma developen to take advantage of opportunities that are created by uneven conditions.
5. Finance capital is essential for real estate development, and especially for office developrnent. The relatively large amounts of rnoney needed, the longevity of office buildings, and the gradua1 strearn of revenues require that office developen bonow heavily. While flows of money may be flexible in theory, they tend to be spatially concentrated in practice. Like the developer, the financial institution needs to know the specific urban conditions in order to assess nsk and avoid undue exposure.
Approach, methods, and data The approach adopted in this research rests on the political economy perspective. This approach explains social and economic processes through the investigation of structural conditions, which include the state and financial institutions as major components in the urban developrnent process. A political economy approach does not necessarily exclude the juxtaposition of structure and agency. The acknowledgement of structure and agency is essential in order to explain a process, which is highly influenced by individuals interpreting structural and local conditions. The theoretical contribution of this thesis is pnrnarily through ce-conceptualizing and re-interpreting the nexus between structure and agency in the particular sphere of real estate development. The realist method as developed by Sayer (1984) is used as a critical tool in this research. This methodology assigns the agent a critical role in reproducing structure, and it combines necessary and contingent conditions in expiainhg events. The multiplicity of events, mechanisms, and structures, provides a useful framework for the anaiysis of real estate and office development. Office development is not strongly theorized. Harvey provides a general frarnework for the analysis of the built environment, but in his level of abstraction he under-emphasizes the specific charaderistics of each part of the buiit environment and the agents that reproduce the structure in which new rounds of development take place. At the metime, day-today concepts like 'developer' are only vaguely defined. One way to analyze real estate development is through 'structures of building provision' (Ball, 1986). This method of anaiysis suggests that each development is the end result of a variety of social agents and mediating institutions. To be able to interpret office development as a particular segment in the buin environment means that exact definitions of the process and the agents are necessary. Sayer suggests that in a world that is stratified and differentiated, complex relationships need to be 'unpacked'. The realist approach emphasizes exact definitions of concepts and wams against the notion of 'chaotic conceptions', in which objects are grouped into categories that have little or no intemal logic or structural interaction. The idea of using exact definitions is crucial in the realm of office development. since the dynamic nature of this sector and the fact that in the process of development, a number of different agents are involved. These agents are ditficuit to categorke, because the functions they perfonn and the roles they play can be combined in different ways at different times. Hence, to understand office development, the use of well-defined concepts and the unpacking of everyday ternis are necessary to provide a sense of clanty. The term 'real estate developer', commonly used by joumalists, real estate industry professionals, govemment agencies, and academics, is a 'chaotic concept'. Academic writing considers the real estate developer as a key agent in the development process, but does not offer a consistent definition. The developer is sometimes conceived as the catalyst of development. This agent initiates, coordinates, manages and brings the development from the stage of concept to the point of completion (Marriott, 1967). Harvey (1985) uses the tenn 'speculativedeveloper, based on the idea that a developer sells land or makes improvements to land for speculative purposes only. This notion of the developer also fails to capture the cornplex functions performed by this type of agent. Within the development process four major types of agents are active: developers, land owners, financial institutions, and construction companies (Barras, 1979b). These roles can be embedded in one organization. For example, a developer may be the land owner and the construction company; a financial institution may assume the role of a lender, land owner, or developer. Pratt (1994) suggests that the view of the propecty developer as a unitary category is misleading: 'there are a variety of forms that the 'developet may take. The exact speclication of the developer will depend upon a whole range of contingent conditions and so cannot be identified a priory' (p. 203). In this thesis I use the term 'real estate company' to descnbe an organization that engages in various functions that are related to real estate development and investment, primarily development, redevelopment, and ownenhip of real estate properties. The terni 'developer' is used when the major activÏÏ of a real estate company is development. Development is improvement to land either through the production of new properties or the redevelopment of existing buildings. A major, but not exclusive, role of real estate companies is to develop real estate assets. However, real estate companies do not develop office buildings or other structures al the time, but they also engage in other operations. Real estate companies may engage in 'ownenhip' and 'trading' of real estate properties, but not necessanly in developrnent. The term 'real estate sector' is used to situate real estate development within a broad range of economic activity. It is a faidy loose terni, which coincides with that branch of the economy designated in the Canadian Standard Industrial Classification as 'Real Estate Developers and Operaton'. In addition to the traditional real estate mmpanies, financial institutions may assume the role of developer for a short or long period of time, and may peiform the role as ownea of office buildings. Since their main role, however, is not real estate development or ownenhip, the term 'financial institution' will be used as a distinct category. The causal connections, as suggested by the realist approach, can only be discovered through intensive research. In the real estate sector in general and in office development in particular extensive data is limited. This, and the fact that there are very few real estate companies whose major business is office developrnent, makes the use of intensive research very important. Research presented here relies heavily on data and information that were obtained through a multi-faceted collection process. Consequently, this thesis is primarily qualitative research based on insights gained through careful examination of a multitude of sources including newspapers, trade joumals, official company reports and company brochures. Information was obtained through semi-structured interviews with prominent participants in, and observes of, the commercial part of the real estate industry in Canada. Extensive data on building permits at different spatial scales and a comprehensive office building inventory for the Toronto Census Metropolitan Area were obtained.
Thesis organization Chaoter One provides a set of theoretical considerations, synthesizes major components of different approaches analyzing real estate, and re-conceptualizes office development by focusing on real estate companies. Three major approaches to real estate development are discussed: neoclassical, political economy, and institutional. From these approaches, selected components that are considered as cornentones for understanding off'ke development are chosen. The major part of this chapter consists of an analysis and synthesis of secondary Merature. Cha~terTwo outlines the condiions for offm development in Toronto. In order to establish a Toronto case study of office development, the physical, economic, and politml conditions will be addressed. stressing the crucial position of municipal organization. This chapter also provides the methodological framework. Realist methods are explained and related to the study of real estate development. In the last section of this chapter, the type of data and sources utilized are described in detail. Cha~terThree provides a broad historical account of the modem commercial real estate development industry in Canada. Focusing primariiy on the publicly heid real estate companies, which are abo the most spatially divenified companies, this chapter sketches the dynamics of this sector in Canada. This chapter also establishes a plaîform for the interpretation of the practices of office developen in the Toronto area by identifying major developen. This identification procedure highlights the role of local, Toronto-based, companies that have their main field of operation in the Toronto area. Cha~terFour addresses the role of finance capital and financial institutions in financing office development. In this chapter both the perspectives of real estate companies and financial institutions regarding real estate financing are considered. Financial institutions often undeaake office development for investment purposes and perform the same functions as real estate companies. This role, together with their spatial practices in the field of offie development and ownenhip, is a key cornponent of this chapter. Finally, I present some preliminary observations and thoughts on the role played by transborder capital flows in real estate development. Cha~terFihm investigates the practices of real estate companies using the conceptuaiization of 'three dimensions of capital switching' within the Canadian urban system. The investigation of the practices of real estate companies is positioned in the context of building cycles. Office building cycles at different scales and locations have spatially discrete patterns. I argue that office-building cycles shape the fields of operation of real estate companies at the scale of the Canadian urban system. The next two chapten move from the national to the metropolitan scale. The empirical findings of the case study of the Toronto Census Metropolitan Area are presented in chapten Six and Seven. Cha~terSix documents the development of the office building inventory in Toronto in the last fifty years. Contrary to a common perception based on the high visibility of a limited number of high-rise office buildings in Toronto's Financial District, the stock of office buildings is far more heterogeneous. It ranges from a large number of srnall and mid-size buildings to a limited number of large-scale structures. In ternis of spatial patterns, office buildings are grouped into office districts. These office districts provide a variety of operational fields for specialized office developen. Cha~terSeven articulates the argument of spatial selectN'i of office developen within the Toronto Census Metropditan Ares. The distinctive spatial operations of developen support the argument that real estate capital is highly specifc and embedded in particular spaces. The concept of 'office development district' is introduced; these districts sct as the spatial containers for different developen and at the same time are prduced and reproduced by real estate companies. CHAPTER ONE
THEORlZlNG OFFICE DEVELOPMENT
It is the purpose of this chapter to extract from the broader literature on real estate development and from specific writings on office development principal arguments, which help to understand office development across urbm systems and parkulariy within metropolitan areas. The structure of this chapter is as follows: first, principal literatures or approaches will be discussed. The neoclassical, the pollical economy, and the institutional approaches each contribute to the understanding of office development. There is considerable scope in synthesizing insights from these three approaches. The second part of this chapter focuses on distinct sub-processes or components of the real estate development process. These components are building cycles, the involvement of finance capital, the role of real estate companies, the role of the state, and issues which are related to the specific settings of real estate development within metropolitan areas. A third part of this chapter reconceptualizes office development by putting real estate development companies into a central position.
1.1 Principal Approaches Research on real estate development has relied on quite different approaches. The neoclassical approach with its focus on the demand-supply aspects of real estate development dominated until about 1970. Beginning in the late 1960s and the early l9ïOs, another set of approaches emerged and was employed to analyze real estate development. Scholars, drawing upon the writings of Man, became interested in the logic of capitalist accumulation as a major factor dominating the production of real estate properties. The forces of capitalisrn and its monolithic nature were unpacked in the 1980s by political econorny analyses and institutional approaches. From a thematic point of view, most of the early research was concemed with housing and less with commercial or office development. Starting in the 1980s, a growing proportion of research was focused on commercial real estate development, including retail, industrial, and office development.
1-1.1 Neo-classical approaches Researchers relying on neoclassical approaches have studied office development or 'office markets' by focusing on market forces. Neo-classical approaches used the demand-supply equilibrium concept in attempts to explain how office markets work (Fisher, 1992; DiPasquale and Wheaton, 1992; Clapp, 1993; 1992; Mills, 1995). Atternpts have been made to explain economk mechanisms, primanly price adjustments, that shape office markets (Rosen, 1984; Hekmm, 1985; Shilling et al., 1987; Keogh, 1994; Henneberry, 1999). Vacancy rates, for example, reflect the balance between demand and supply. and demand is detennined by macro-economk conditions, such as business cycles. Considerable arnount of research has been oriented toward modeling offii building cydes (Barras, 1983.1987.1994; Barras and Ferguson, 1985,1987; Wheaton, 1987; McGough and Tsolacos, 1997). Another research Stream mthin the neoclassical conceptual framework has been exploring the benefiis of portfolio diversification based on different propeity types and multiple locations (Hartzell et al., 1987; Eichhok et al., 1995; Hoesti et A., 1997; Hamelink et al., 2000). According to the neoclassical perspective. in a market economy, exchange takes place on the basis of prices determined by the interaction of supply and demand. In the case of real estate, rent is the price a tenant pays for occupying a paiücular space. The interaction of demand for real estate and the supply of rental propeflies detemine the level of rentals. Price is detemined by demand. and supply follows, rather than influences demand (Harvey, 1987). The real estate development pmcess is therefore demand-driven. Agents engaging in the development process are assumed to act in unison, collectively providing development at the right time, and reacting automaticalty to the structure of demand (Boume, 1976). The model implies the existence of a perfect market and the rapid elimination of any price differences. Both consumers and producen seek to maximire utility and profiiability, and in doing so they are unhampered by social. legal, or local constraints. However, recenüy some writers of the neoçlassical school have stressed the role of supply in structuring property markets (D'Arcy and Keogh, 1997; Nanthakumaran and Watkins, 2000). As Lichfield and Darin-Drabkin (1980) note, real estate developers operate on a profit- maximizing basis by considering alternative projects, and selecting among them on the basis of maximum profiiabiltty per unit of investrnent. Apait from rationality and profa maximization, there are severa! other assumptions incorporated in the demand-supply model. One such concept. perfect cornpetition, relies on a simplification of real estate markets by assuming that products are homogeneous, that there are large numbers of buyers and seilers, and that actors have perfect information. However, authon relying on neoclassical frameworks, have increasingly recognized urban specificity as a major condition shaping supply of and dernand for land and property. As Bakhin et al. (1988) observe, the property market is very imperfect. In practice, the property market is not one market but is divided into a number of sub-markets. Property itself is not homogenous and divisible into small and uniform units, but is instead heterogeneous and comprises different sles, each with their own characteristics Sites with different characteristics give rise to differential rents (Coakley, 1994; Rabianski and Cheng, 1997). In the simple case of a monocentric city, an integrated land market shapes the pattern of land use resulting from the interaction of land prices and location bids by the different sectors of the economy (Alonso, 1960). This bidding process leads to the emergence of districts, for exarnple, a financial district, a legal district, or a residential district (Archer and Ling, 1997). Land prices decrease consistently from the city's centre, because they reflect the value of accessibility which is maximized in the Central Business District. The land market described by Alonso (1 960) has a single continuous price gradient because it is integrated. Recently, this spatial integration has been questioned. The distinction between downtown and suburban districts within the metropolitan area and the idea of the 'polycentric city' (Ladd and Wheaton, 1991; Berry and Kim, 1993) indicate that in fact the land market is segmented for a variety of reasons. Evidence of multiple price gradients, mostly unaffected by proximity to downtown suggests that the market is not differentiated with respect to any single location, but that the market is segmented within the rnetropolitan area (Clapp et al., 1992; Hoch and Waddell, 1993; Hanink, 1997; Rabianski and Cheng, 1997). According to the neoclassical approach, the intensity of real estate development is shaped by the land value gradient or a series of land value gradients. Transportation lines, which converge at one location, give rise to what has been referred to as the 'peak land value intersection (PLVI). As a result of maximum accessibility, land values at the PLV1 are the highest in the city. Demand for space results in soaring land costs, which reflect the potential value of the land if built upon to the maximum allowable extent (Ford, 1994). In these locations, the cost of land is the major component in office or other real estate development. Capital is substituted for land as large amounts of capital are invested in the erection of more intensive land uses to compensate for high land values (Baume, 1967). In this case, large-scale office buildings are predominant as a resuH of financial calcu!ations emphasizing maximum retum on investment (Willis, 1995). The assumptions regarding a perfectly functioning market have been heavily criticized. Harvey (1973) argued that land prices in the CBD do not depend on locational advantage, because land owners want to achieve high rents. Similady, Ball (1985) suggested that large-scale financial institutions develop office buildings in high-priced locations in the city centre to minimize the risk of premature obsolescence. The property market is ubiquitous, and there is no formal organized marketplace, central agency, or instlution, where prices are quoted and publicly witnessed. tnstead of a large number of buyen and seller's, there are relatively few with sufficient finance to invest; therefore, financial institutions and property nvesbnent companies dominate the pmperty market. In some cases, there is no freedom of entry into the real estate market as would be expected under perfect market conditions (Markusen and Scheffman, 1977; Kostin et al., 1989), and as monopoly or oligopoly power occur, the geographic division of the market leads to imperfect cornpetition. Another criticism of neoclassical modek argues that maximizing pmfiiability may not be the prime objective of either the space user or the real estate developer. Also, changes in income and business conditions and the difficulties in obtaining up-todate knowledge may prevent the punuit of maximum profits (Momson, 1992). Criticism based on empirical observation about office development indicates that the high cost of land is not necessarily the reason for large-scale buildings. Feagin (1988) argues that despite the fact that land costs are only a small fraction of the total development costs, high-rise office buildings were erected in downtown Houston. Although it may be generally the case that land values and building densities are strongly related, the question of how land value surfaces are produced is not adequately addressed by the neoclassical approaches. Accessibility depends on both the articulation of the publicly produced transportation system and the spatial patterns of customers or input sources. These spatial pattems are long-lasting, and their expianations require a form of historical analysis that the subscfibers to the neoclassical approaches would rather stay away from. Contrary to the tenets of some of the neoclassical approaches, the supply of buildings is relatively inelastic, and the changes in the building stock and location are slow due to the durability of buildings and the small proportion of real property of any type coming ont0 the market at any one time (D'Arcy and Keogh, 1997). The property market is, therefore, in a constant state of disequilibrium. The actors who supply the market also do not necessarily respond to demand as assumed in the simple demand-supply relationship. Various factors, such as taxation, national interest rates, and govemment policy and subsidies, determine the framework of supply. Real estate developers do not constitute a homogeneous entity, but rather they make up a group of multiple agents with dÏfferent interests (Beauregard, 1993; Pratt, 1994). Finally, development often occun speculatively, only remotely related to actual demand. Development booms may be related to the sharp expansion of money supply, as was the case in the 1920s (Willis, l995), and more recently in the 1980s (Ball, 1994; Fainstein, 1994). A recent. and a useful, strand in neoclassical research is the application of portfolio theory. The use of portfolio theory in real estate analysis has emphasized the position of real estate assets as distinct financial vehicles that can be switched between products and places (Miles and McCue. 1984; Coakley, 1994; Hoesli et al., 1997). The reasons for capital switching are emerging opportunities, which corne about through a change in existing conditions, such as different retums on capital. Different investment vehicles, different property types, and different locations, possess different rates of retum. The purpose of this type of analysis is to detenine the optimal resource allocation within a company's investment portfolio. To combat the perils of unceilainty, diversifikation strategies, including different property types and different locations, are proposed. In this avenue of research an important topic is the investigation of the benefi of divenifikation at a number of geographic scales. Corporate Cnancial interests consider spatial diversifkation as an instrument that is mainly designed to optimize risk-return relationships (minimizing risk while maximizing retum) of real estate portfolios. lnveston have sought to divenify according to property type andlor according to geographical area. The logic of diversification baseci on property type lies in the belief that retums to each type are determined by different economic 'driven' (retail performance is diiven by consumer expenditure. office retums by growth of seMce employment. and industrial performance by manufacturing production). While there are common factors (like GNP growth and interest rates), it is assurned that these different 'divers' do not coincide across different regions, and hence spatial diversification is beneficial. However, the usefulness of the region as a unit of analysis has been the subject of much debate (Hoesli et al., 1997; Hamelink et al., 2000). Within portfolio theory, switching strategies between different property types have been considered as more beneficial than spatial diversification. Spatial diversification has been more problematic to conceptualize, since it depends on a number of scales and a multitude of definitions of regions. In general, analyses based on metropolitan statistical areas in the U.S. suggest that the largest urban areas are the favoured locations for real estate investrnent. However, the market is segmented: institutional investors prefer to invest in the largest urban areas while private investors have more dispersed geographical patterns (Shilton and Stanley, 1996; Lindahl, 1997). Overall, the principal shorkoming of the neoclassical approach is the absence of the public sector as a major participant in the real estate developrnent process (although the role of institutionai structure was addressed by some researches, for example, Bal et al. 1998). Real estate development is not driven entirely by market forces and an orderly function of real estate markets involves govemrnent participation. Also, neoclassical approaches emphasize the strong relationship between building intensity and land values. However, land value surfaces are modulated by accessibility, which is collectively produced through investment in infrastructure and through the interdependence of many land uses. There are also many exceptions. For example, high land values predominate in the inner city. but high-rise buildings do not materialize because of many factors. including social struggle over the built environment. There are interesting ideas embedded in portfolio theory. Real estate assets are seen as tradable assets that shift between property types and locations. In later conceptualizations I will draw strongly on this concept. 1.1.2 Political economy approaches Harvey's work (1978, 1982, 1985) on circuits of capital and the role of investment in the production of the built environment has provided the theoretical framework for a political economy approach, which focuses on the suppiy of capital as the driving force of real estate development. Harvey's initial argument suggests that in the long nin, in the absence of profitable investments in the primary (manufacturing) circuit of capital accumulation, capital will flow into the secondary circuit, where capital is deployed in the production of the built environment. Hanrey's contribution to understanding real estate development has been important in other respects. Harvey acknowledges the important role of the state in facilitating real estate development. Both the private sector and the state are part of the capitalist system. The different levels of the state (federal, intermediate, and local) provide the conditions of the continuous process of real estate production. At the local level, govemment regulation is needed in order for the speculator-developer to function (Hatvey, 1985, pp. 68-69). fia~eydiscusses the nature of uneven spatial development of the buift environment at different spatial scales, impiying that uneven development is an essential condition for capital circulation in capitalist economies (Harvey, 1985, pp. 19-20, 155-64). In addition, his idea of capital switching paves the way for the notion of spatial switching. Haivey acknowledges that capital can flow from one place to another (Harvey, 1985, p. 13). These switching practices, between circuits/sectors and places are crucial practices of real estate companies as will be demonstrated in later sections. Other researchen did not substantiate Harvey's argument conceming capital switching between circuits of capital accumulation. After research on the sources for real estate investment in Houston in the 1970s and l98Os, Feagin (1987, 1988) suggests that "financial institutions, both those inside Texas and those outside, channeled much surplus capital from a variety of sources into Houston real estaten (1987, pp. 182-83). Beauregard (1991, 1994) argues that primary-circuit capital may seek other outlets than the built environment. However, in spite of the difficuity of establishing a clear link between industrial and real estate capital in the short nin, Harvey's ideas remain influential in establishing an office development theory (see section 1.3). The recognition of the real estate sector as an independent or nearly independent sector of the econorny, which requires its own analysis, has led to an emerging research agenda within the political economy approach (Feagin, 1987; Haila, 1991; Beauregard, 1994; Fainstein, 1994; Leitner, 1994). In a preliminary outline. Haila (1991) argues that the real estate sector has an 'intrinsic dynamic' rather than being extemally driven by the switching of capital between different circuits of accumulation. This dynamic shapes investrnent patterns in real estate assets, and is based on the intemal characteristics of real estate pmperties, narnely tradabiiii, divisibili, and mobili. Real estate assets are tradable; they are bought and sold in the market. like other types of financial assets (Harvey, 1982). Although properties cannot be traded in small units in the same way as stocks (Coakley, 1994), they can be divided into large units because the ownenhip of properties can be shared by a number of investordpartners. In addition, the real estate sector is segmented into commercial and residential sub- sectors, and into distinctive property types, such as office, industrial, and retaü (Beauregard, 1994). It is further segmented spatialty. Some &ers acknowledge that the real estate sector is hrgely a 'local' business, ahough some components of this sector are beyond the local realm (Logan, 1993; Bryson. 1997). Other theonsts suggest that real estate properties have becorne increasingly 'delocalized', because some aspects of the real estate sector (architecture, reaf estate ownership) are shaped by 'global' forces (Sassen, 1991; Knox, 1993; Savitch, 1995; Beauregard and Haila, 1997). The complex spatial configuration of real estate investment is further segmented as a resuit of the spatial divergence of building cycles and the fact that at the level of urban systems different cities experience different building cycles (Leitner, 1994). Within the political economy approach, Marxist authors emphasize issues of land ownership and rent as core elements in their framework of explaining the production of the built environment (Harvey, 1982, 1985; Haila, 1988, 1990, 1991). lnstead of the assumption buik into neoçlassical land use rnodels, Marxist interpretations suggest th+ possibility of power in the han& of few land owners. (The existence of several kinds of land owners with distinct interests and modes of behaviour is recognized by Massey and Catalane, 1978.) In addition, it is suggested that land has a monopolistic character. Hanrey argued that there are monopoly prîvileges inherent in any fomi of private property in landn (1985, p. 102) and Logan and Molotch (1987, p. 23) have wnsidered land markets as 'inherently monopolistic'. This enables land owners to manipulate or control the land market by charging monopoly rent. The major critique of the political economy approach revoives around its high degree of generaiization and abstraction. More specifically, the relations between the general conception of the structunng dynamics of the development process and the specific interests and strategies of individual agents remain to be established. Much more attention needs to be given to the ways individual fins and agents interrelate, and how various economic and political factors. which govern their strategies, are incorporated into a structure-agency framework (Healey and Barrett, 1990). Also. the impossibility of documenting some assertions such as flows from the pnrnary to secondary circuit (Feagin, 1987; Beauregard, 1991; 1994) has attracted criticism (Ball, 1994). Also, there is little research on the role of transnational flows cf capital in real estate development (Logan, 1993). Regarding the idea of land rnonopoly, the fact of concentrated ovmenhip in real estate does not automatically mean that a condition of monopoly is attained; monopoly might only occur in locarued and isolated situations (Houghton, 1993; Fainstein. 1994).
1.1.3 Institutional approaches Advocates of institutional approaches argue that it is essential to understand the institutionai foms. relationships, and practices of the real esMe sector. The starting point s the institutional articulation of the real estate sector and the patterns of netwoiks and relationships between agents. This results in an institutional rnap of the development industry (Healey. 1992b). As Healey and Banett (1990, p. 93) argue: Wuch more attention needs to be given to the way individual fims and agents intenelate in the negotiation of parkular development projects and how, through these transactions, land and properly 'markets' are constituted and built environment invesbnent decisians madeg.
Healey (1992a) and Momson (1992) have provided expositions on institutional approaches to the reaJ estate industry. They argue that the focus of institutional approaches is pnmarily on identifying the type and composition of agents involved in the real estate development process and revealing the interests and strategies they adopt. The nature of the relationships which occur between acton, their actual roles, and the relative influence they enjoy in the negotiation of particular projects are analyzed in tum. Healey (1992a) presents an institutionai modei of the real estate development process that takes into account the complexw of the events and agencies involved in the process, and the diventty of forms the process rnay take under different conditions. At the theoretical level 'the critical issue here is to make the connection with the social relations expressed in the prevailing mode of production, mode of regulation, and ideology of society within which development is being undertaken" (Healey, 1992a, p. 37). Various authors have constmcted models about how the actors interact and how the development process operates. Drewett (1973) presents the simplest model with the focus on the developer. Arnbrose (1986) suggests a more complex model. There are three sets of agents in Ambrose's model: the finance industry, the state, and the construction industry. All three sets interact in the process of creating the built environment (Ambrose, 1986). Apart from depicting the development process, various researchers have written about the development process in ternis of the stages developers go through from initiating a scheme to its completion (Drewett, 1973; Cadman and Austin- Crowe, 1983; Ratcliie and Stubbs. 1996). Many of these stages and issues, such as finance, classes of developen, or landowners and real estate agents, within the development process have been elaborated on in depth by other researchen (Cadman and Au&-Crowe, 1983; McNamara, 1985; Ambrose, 1986). These works focus on agents and differ from the neoclassical and Manist approaches in being concemed with the details of how the davalopment process takes place, rather than makng generalizations and engaging in abstractions. Agents are not treated as homogeneous entities, but are clearly differentiated (O'Malley, 1989; Morrison, 1992). Institutional scholan have noted how developen interact with other intemediaries within the development process. How developers interact with the state was the focus of several studies undertaken by researchers of the institutional school (Ambrose and Collenutt, 1975; Lonmer, 1978; Ambmse, 1986; Healey, 1998a). The extensive attention given to the state is in contrast to the neoclassical literature, which ignores or downplays the role of the state in the supply-demand model, or the Manist literature, which regards the state as a mediator of capital flows between the primary and secondary circuits without providing analyses of its exact role. Institutional analyses have been criticized because they place too much emphasis on the actors and their interactions. They have also been cnticized for being too descriptive and for not adequately focusing upon structural factors which govem the behaviour of agents. The descriptive nature of some of the institutional analyses and the lack of attention to the economic and political conditions which constrain the actors in question, present major limits to their analytical ability. Structural factors have to be embedded in institutional analyses, since they affect the provision of real estate assets (Morrison, 1992).
1.2 Components of the Real Estate Development Process The real estate development process is shaped by various forces, and involves severai types of agents. Different elements in the approaches discussed in the previous section contnbute to the knowledge of this process. In this section I merge conceptualizations derived from various approaches. These concepts are fhen used in an attempt to construct a theory of office development, which will be presented in section 1.3. Four major elements are considered as pivotai in the literature on the real estate development process. (Capital switching was addressed before and will be included later in the conceptualization of the real estate sector.) These are building cycles, financing arrangements, the role of the state, and the role of real estate developers. Building cycles are the cumulative reflection of numerous actions that produce real estate properties. The differentiation of building cycles by property type and location is addressed, and macroeconomic forces shaping the development process are considered. As is demonstrated in this section, real estate development cannot proceed without substantial financing that is outside the realm of the Company that develops a parthlar propeity. As a result, real estate development depends on the availabiiii of financing. The state, at its various levels, is an essential part of the development process, since development occun in existing settings that are regulated by the state. In addition. development is place-specific and developen need to interact with the state level that is relevant. Finally, the indMduals or organizations that initiate, execute and manage the process are real estate developers. Their pivotai role as the shapen of the built environment has been recognized in the literature.
1.2.1 Building cycles and their spatial aspects Construction activity and investment in the built environment are subject to cyclical patterns known as building cycles. Building cycles play a major role in neoclassical and in Marxist approaches in explaining urban development. Kuznets (1930, 1958) first identified long investment or building cycles with a period of up to twenty-fie yean, and Hoyt (1933) documented the cyclical pattern of land prices in Chicago. Harvey's analysis of real estate development in the United States and Britain suggested that investment in real estate depended on the cyclical nature of the economies of these two countries (Hawey, 1985). Building cycles encompass a multitude of components that have to be separated. First, building cycles are a 'family of property cycles' (Barras, 1994). These cycles Vary in length from long cycles of 20-ta-30-year periods, to cycles spanning 9 to 10 years, and short cycles of 4 to 5-year duration (Barras and Ferguson, 1985; Barras, 1994). Second, instead of treating the built environment as a homogeneous product (Harvey, 1978), real estate products should be differentiated. Within the real estate sphere each product has a different cycle, which is especially apparent when residential and commercial development are compared (Ball, 1994; Barras. 1994; Beauregard, 1994; Keogh, 1994). Within the commercial sector an additional disaggregation is possible, namely between office, retail and industrial sub-secton. This is required, because different 'drives' propel each sub-sector (for example, office development is driven by the growth in office-based ernployrnent, Hoesli et al.. 1997). Building cycles are also shaped by govemment regulation. best exemplified by zoning bylaws. Govemments tend to enforce restrictive regulations during downtums, and introduce more liberal regulation during the uptums in building cycles. In an article titled 'The politics of real estate cycles', Weiss (1991) suggests that govemments intewene in the real estate sector during diierent phases of the real estate cycles as a resuk of pressure from the large-scale real estate companies. During boom tirnes, the status quo is prefened, while in downtum periods, the big developers advocate govemment intervention. Weiss explains the passing of zoning bylaws in Los Angeles and New York in the eariy twentietb century as the aftermath of a real estate downtum. He also attributes tax policies to buildings cycles, suggesting, for instance, that the 1981 U.S. tax ad, which offered financial incentives for developrnent, passed during the depths of a severe recession. Willis (1995) argues that govemment regulation woiks in tandem with building cycles. Height restrictions on buildings in Chicago in the late nineteenth and eariy twentieth centuries were shaped by the appropriate phase (boom or slump) in the building cycle. Office development has received a great deal of attention in the research on building cycles. Neoclassical economists attempted to model office-building cycles by examining demand and supply factors (Barras, 1983; Wheaton, 1987; Downs, 1993). To a large extent, the neoclassical analyses have failed to discem spatial variations of building cycles by suggesting a synchrony of subnational building cycles (regional and local) with national cycles as part of the notion of equilibrium (Easterlin, 1968; Gottlieb, 1976). A few studies explored the uneven spatial manifestations of building cycles (Leitner, 1994; Henneberry, 1999) suggesting, 'the particular cycles in each cw occurred in somewhat different times and reflected different local conditionsn (Wilfis, 1995, p. 169). Building cycles are not unifom geographically and have long endurance. The notion that building cycles should be considered in accordance with the geographic sale under investigation is increasingly recognized as an essential element in building cycle analysis, since local conditions affect the outcome of building cycles in different cities (Leitner, 1994). In examining office construction cycles in downtown areas of major U.S. cities, Leitner (1994) illustrates how local circumstances interact with wider financial and political trends to produce unique outcomes. Despite the trend toward convergence in the timing of office construction cycles between different cities, individual cities continue to show differences in the ways they are affected by and participate in national and international trends. Changes, such as econornic restruduring, growing demand for office space, the relative attractiveness of commercial real estate, and govemment regulations have differential effects on urban property markets. Cities experience different development cycles in tens of timing, length and volume, and in ways that reflect the specific conditions in these localities and their changing position within the larger urban system (Leitner, 1994). Henneberry (1999) provides a different interpretation of building cycles. He argues that property investment has become dislocated from user requirements, and that building cycles are not shaped by local conditions but rather by the preferences and decisions of major financial investors. In contrast to the political economy approach advocated by Leitner, he suggests a neotlassical approach to explain spatial variations of building cycles at the regional level. Based on Keogh's (1994) analysis, the propeity market is depicted as a set of three interrelated components: the user market, the investment market, and the development market. Each is a trading arena where the interaction of demand and supply determines the price. Changes in use values (rents) or in required rates of retum on property investment (yields) produce rapid changes in investment (capital) values. Developen who monitor the market on a regular basis will respond to these changes by increasing or decreasing development activii. Spatial differentiation is oniy a marginal component in this analysis (Keogh, 1994). According to Hennebeny, the timing of regional office building cycles is determined by the property price mechanism; in other words, the interplay between rents, yields and capital values. Each market has its own building stock, vacancy rates, and demand; thus rents minor the local economy. Rents and yields have locally ernbedded components. As a result, the manifestation of spatial differences is echoed through the property price mechanism. This argument cancels out the need to look at specific conditions, since the development is mediated through the property price mechanism. The explanation of spatial differences on the basis of the price mechanism is insufficient, because it does not reveal the origin of these cycles and why such differences persist. To explain building cycles at the regional or the metropolitan level, general economic conditions as well as conditions specific to the metropolitan areas in question have to be addressed. By combining these sets of considerations inter-metropolitan variations can be explained. Building cycles provide a general framework for the analysis of office development The argument that building cycles Vary across space contributes to the explanation of uneven office development. Also, spatially diverse building cycles indicate that there is a role for the local arena in shaping office development. The specific local conditions have to be revealed in order to understand the uneven investment in office buildings across urban systems and within specific metropolitan areas.
1.2.2 Financial institutions and real estate development Early Marxiçt writing on urban development has reasoned that real estate development is a 'by-product' of the capitalist production system (Lamarche, 1976). According to Lamarche, there is a specialized type of capital, 'property capital', whose sole function is to produce properties in order to increase the overall efficiency of the capitalist system. This definition puts an emphasis on pmperty as 'servant' to capital and not as a separate sphere of capital accumulation. These eariier conceptualizations were supeneded by Harvey's work on conceptualizing the flows of capital within the capitalist system. According to Harvey's general theory, capital invested in real estate originates mainly through industrial production. As a result of crises of overaccumulation in the 'productive' sectar of the economy, capital will flow into other circuits lodting for profitaMe investments. Harvey adds that through the mediation of financial institutions surplus capital accurnulating in manufaduring is channeled into the real estate sector (Harvey, IW8, 1982, 1985). However, Harvey does not elaborate on the role of financial institutions as mediaton; financial mediaton are perceived as instiîutions whose purpose is to channel capital in ways that wouM buttress the smooth functioning of the capitalist economy. Harvey, like &en from otfter viewpoints, also points out some of the specific characteristics of real estate development. These characteristics include high cost, longevity, a long tirne to collect revenue, and the possibility of putting up propeity as collateral. Therefore, long-terni financing is required and possible. Harvey's influential writing has stimulated ernpirical work on the financial sources used for investment in the built environment (Feagin, 1987; Beauregard, 1991, 1994; discussed in section 1.1.2). The financing aspects of office development were extensively explored in the United Kingdom. Barras (1979a. 1979b) and Catalano and Barras (1980) examined office development in the United Kingdom, particularly in London and Manchester. Based on this work, Barras (1979b, p. 50) attempts to distinguish between different fomis or practices of capital, which involves four different kinds of agents or fractions of capital: o commercial capital (the real estate development company); 0 financial capital (funding institutions); O landed capital (land ownen); and o industrial capital (the constniction company). In his model, Barras, contraiy to Harvey, ignores the role of the primaiy circuit, and treats industrial capital as primarily related to construction companies. No empirical work was done on the flows of capitals that eventually find their way into real estate development. Feagin (1987, 1988) is aware of the different fractions that constitute finance capital. Following Harvey's idea of capital switching, he claims that capital invested in real estate assets is the result of companies divedng profis into real estate using the mediation of finance capital. In the case of real estate investment in Houston, Texas, he argues that different types of finance capital were involved: "The pnmary source was finance capital, including commercial banks, insurance companies, investment trusts, and mortgage companies" (Feagin, 1987, 182). However, Feagin's interpretation of the role of financial institutions in the real estate development process is limited to their mediating role, channeling funds from various sectors into real estate, ignoring their role as ownenimreston in real estate assets. Other studies in the U.K. suggest that smaller developers have different financial arrangements than large developen. Large real estate companies depend on the 'global institutional investment market' and are able to tap the capital markets, while small developers depend on the conventional bank loan (Bryson, 1997; Lizieri et al., 2000). AIso, different requirements of financial institutions are driving specific spatial investment practices. The long-time horizon of life insurance companies and pension funds operating in the City of London result in reinforcing existing spatial configurations. These institutions impose their requirements on real estate companies. Banks, on the other hand, hold essentially short-terni commitments, thus they do not tie real estate investment to particular spaces, allowing real estate developen greater spatial flexibility (Pryke, 1994a). Several other studies have distinguished between major types of funding institutions, such as banks, Me insurance companies and pension funds, and their role in the real estate sector (MacLaran et al., 1985; OIMalley, 1989; Feagin and Parker, 1990; Logan, 1993). However, different fractions of finance capital involved in the real estate development process and their role in 'active' investrnent (ownership or development of properties for income purposes) remains a largely understudied topic. There are some important exceptions (for example, Des Rosiers, 1984; Pryke, 1994b; Lindahl, 1997). These studies distinguish between different financial institutions and their role in real estate development. Des Rosiers examines life insurance companies and pension funds; Pryke analyzes financial institutions; and Lindahl looks at institutional investon, foreign investon, and real estate investment trusts (REITs). lnstead of the idea of a generic capital market driving real estate investment, it has been suggested by Cindahl (1997) that real estate capital Ss comprised of multitudes of players, each with complex motivations and constraints" (p. 189). These motivations combined with extemal constraints shape the spatial practices of financial institutions (Pryke, 1994a; Lindahl, 1997). Rather than tiying to determine the aggregate flows of capital, a different approach to explaining financing mechanisms or financial instruments is used by writen close to real estate investment and development practices (Urban Land Institute, 1998). When considering the financial sources of real estate investment, the distinction between debt and equity should be made. Generally, debt financing is either short terni or long term, and is used to finance development when the lender has no equity interest in the property. Equity investment, on the other hand, represents a stake in a specific project or in a real estate Company (see details in Chapter Four).
1.2.3 The state and real estate development In general, there are three strands of literature about the importance of the state in real estate development. First, there is Harvey's insistence that involvement in real estate development is used by the state as a means to stabilize the capital accumulation process and thereby the capitalist system. Second, there is a literature which emphasizes the interest of the local state in local growth through real estate development. The literature on 'growth coalitions' foms an important part of this argument. Third, a number of theorists emphasize an inevitable structural necessity of state invoivement in urban development. The following paragraphs address the argument about shoring up capital accumulation very briefly. and then deak at length with the local state and local growth, and with the local state and its necessary involvernent in real estate development.
Shonn~UP ca~italaccumulation The state supports the capitalist system through the support of real estate development and different levels of government have different but important roles in faciliating and creating urban real estate development (Dear and Clark, 1981; Roweis and Scott, 1981). Harvey (1985, pp. 202-1 1) argues that post-WWII Kenynesian suburbanization was state-backed, debt-financed consumption to solve under- consumption problems. After the trauma of the 1930s Depression. the state intenrened with expansive fiscal and monetary policies. National govemments laid down mies for real estate development through planning legislation. taxation measures, provision of infrastructure, and planning regulation, and by granting exemptions of al1 kinds. Govemment participation has occurred even in an environment where laissez-faire is the core ideology. For instance, in Houston, Texas, a city lacking zoning bylaws, govemments provided massive infusion of funds into transportation infrastructure. which stimulated suburbanization. In addition, because of liberal depreciation allowances in the U.S. tax code, much office construction was carried out not only to make profits from leasing or selling office space, but also to Save substantial amounts in federal taxes (Feagin, 1984, 1988; Leitner, 1994; Shilling, 1997). In Ireland, the Urban Renewal Act and Finance Act of 1986 created designated areas for property developrnent. As a result, a large proportion of office construction in the late 1980s and early 1990 in Dublin was in the areas that received tax incentives (Maclaran, 1993; 1996).
Growth coalitions For local governments, real estate development in general and commercial development in particular is synonymous with economic growth (Rast, 1999). Commercial real estate development seems beneficial to local municipalities for a number of reasons. First, it increases the local tax base, since commercial uses (office, industrial and retail) pay taxes more than residential uses per unit of built area, while not utilizing social services. since the basic necessity for commercial uses is transportation infrastructure. Hence, commercial uses are major contributon to local revenues. Taxes paid by commercial uses allow local govemments to provide municipal services wiaiout substantially increasing residential taxes. Second, it is argued that there is a direct link between real estate development and employment growth. Real estate development creates jobs directiy in the construction process, through employment in the built premises (offices, shopping centres and industrial buildings), and by contributing to a multiplier effect. Recentiy, but also in the past, job creation has kenconsidered as one of the major responsibilities of local municipalities. Third, real estate investment creates tangible evidence of economic growth (Leher, 1990). A new building or a new shopping centre is a material proof of a dynamic environment, and can be used as parameters to indicate economic growth. Shopping centres or office buildings are being used as symbols of economic growth, and are used to portray rnunicipalities as 'successful' and growing locales; hence they help in attracting fumer investment. Fourth, no growth (stagnation) or slow growth means relative decline in comparison to other places. At times of devolution and downloading of responsibilities to the municipal level, growth is perceived as an imperatîve instrument necessary to keep the quality of life from detenorating. ln this context, local municipalities often attempt to lure investrnent by providing various incentives for potential investon (Kantor and Savitch, 1993). Fnially, growth is punued, since local decision-maken and real estate developers often believe in similar ideas and share common social networks. This nexus facilitates and enhances cooperation, and promotes the extraction of reciprocal gains accruing from real estate investment. For example, a case study of Croydon (a subuib of London) suggests a convergence of goals between the city council, the professional team of planners, and the local business elite, since al1 have similar interests (Saunders, 1979). Studies by Molotch (1976, 1993), Mollenkopf (1983) and Logan and Molotch (1987) have solidified the theory of growth coalitions (local governments and private enterprises) as promoters of real estate development. Their main thesis argues that local politics in the United States have revohred around land development dominated by pro-growth coalitions, in which real estate interests cany out a major rote. Real estate developers interact with local government as part of their business routine. They need building permb, zoning changes and infrastructure development. As noted by Molotch (1993, p. 32) "each such interaction influences implementation procedures, sets precedents for how things are done, establishes relations between officiais and citizens, and alten spatial relations and the social conditions the built environment imposes: Others have argued that 'the principal effect of growai coalitions is to bend the policy priorities of localities toward developmental, rather than redistributional, goalsn (Logan et al., 1997, p. 605). A related concept, 'spatial coalition', emphasizes shared social places as generators for solidification of alliances. A spatial coalition is 'an alliance which draws support from a variety of social classes, and which seeks to prornote what it defines as the interests of the area in questionn(Pichance, 1985, pp. 121-22). The precise demands of such coalitions vaiy, but generally they include the growth of the area. The rise of urban entrepreneurialism aaording to Leitner (1990, 1994). has increased the quanûly of commercial real estate in the United States. Federal policies (tax incentives) and aconornic restnicturing have urged uhan govemments to invest and subsidize large-sale real estate projeds. The basic purpose of these public subsidies, mainly provided in central cities, was to attract private investrnent to the deterbrating downtown areas, and to convert disinvestment environments into highprofile settings. In an attempt to redevelop their downtowns and compete with other cities, local govemments have raised capital to subsidize private commercial real estate projects. The effect was an increased availability of capital, which in turn encouraged real estate development (Leitner, 1990). The result in many cases was the construction of edifices, especially office buildings, that wen much larger than the actual demand for office space. In the late 1980s, this type of boosterisrn resulted in a fierce competition among cities and increased real estate speculation, tuming many projects into 'white elephants', which experienced record-breakingvacancy rates. In Canada, city politics are also about property and the enhancement of urban land values (Collier, 1974; Gutstein, 1975; Lorimer, 1978; Sancton, 1983). In the late 1960s and early 1970s, some authon proposed that city councils played the game according to developen' rules by being over- enthusiastic to fulfill the devekpen' requests (Caulfeld, 1974; Collier, 1974; Gutstein, 1975; Lorimer, 1978). However, unlike the United States, Canadian municipal politics are more regulated and constrained by provincial-level legislation and monitoring. The locus of pro-growth policy is often the province, rather than the local municipality. In ternis of planning issues, cities are subject to extensive provincial review. Therefore, Canadian cities are not in the same position as their U.S. counterparts in their ability to stimulate and direct growth (Garber and Imbroscio, 1996). Critique of the growth coalition theory is directed at two major points. First, govemments are not necessarily pro-growth al1 the tirne. Some govemments seek containment of further development (Kantor and Savitch, 1993). and anti-growth movements are also visible (Clark and Goetz, 1994). A number of attempts to curb development often triggered an interventionist public policy aiming to steer investment decisions as illustrated by London, San Francisco and Toronto. London pioneered a policy of encouraging office decentralization and banning commercial development. Constant efforts were made by the central govemment to divert further office development away from the South East of England. Beginning after the Second Wodd War, the idea of decentralization of activities from the South East has been a high pnority on the national agenda and a ban on office development in London becarne a public policy in the mid-1960s (Scott, 1996). In San Francisco, a series of growthcontrol inliatives set a lirnit for a city-wide growth on al1 commercial buildings and on the height of buildings since the early 1980s (Ford, 1994; Leitner, 1994). In Toronto, the Central Area Plan, introduced in the mid-1970s by a newly elected 'reform' council, attempted to liml office development in the tore area. In addition, local govemments (the City of Toronto and Metropolitan Toronto) promoted the idea of decentralking development to the surrounding municipalioes (Gad, 1979; Frisken, 1988). In the cases of San Francisco and Toronto, active citizens groups advocated containment and put this idea on the municipal agenda. In addition, the coherence of growth coalitions has to be addressed. The degree of coherence is one of the variables that influence the ebility of growth coalitions to detemine their development agenda. Some cities have busii?ess communities with an extremely high degree of coherence, whereas in other cities the business community is less organized and citizen groups are more influential (Leitner, 1990).
Structural im~eratives There are structural conditions that reguire the involvement of the state in real estate development. The political economy approach in urban studies has emphasized the role of the state in facilitating land development (Scott, 1980; Feagin, 1984; Harvey, 1985; Berry and Huxley, 1992) and the role of the state as an entrepreneur that initiates and controls land development (Haila, 1999a. 1999b). State intewention is considered a bocial imperative imposed by the selfsestnictive logic of capitalist society as it is mediated through urban space" (Scott, 1980, p. 170). Harvey (1985) argues that the state supports and provides the mechanisms that enable the developers to realize their monopoly rents and Vithout a certain minimum of govemmental regulation... the speculator-developer could not perfonn the vital function of promoter, coordinator and stabilizer of land-use changew(p. 68). Govemrnents are necessary for providing order in the market and enforcing the rules. Municipal governments are involved in protecting rights of way and property values, they mediate between conflicting public interests, and they engage in infrastructure provision and provide municipal services. These roles of municipal govemrnents are essential for real estate development. The notion of growth coalitions is a contingent manifestation of a necessary condition, since market forces cannot effectively and efficiently perform without municipal functions. One of the major roles of the political sphere in shaping real estate development is through settirig the ground rules in the form of zoning regulations. Govemment regulation manifested through land-use planning affects real estate development (Roweis and Scott, 1981). Conventional arguments suggest that zoning bylaws are used to restrict the built environment from the chaos created by real estate development companies. However, restrictive zoning bylaws are also used to protect real estate companies from the dire results of economic downtums, and are often advocated by the real estate companies themsehres. In late nineteenth century and eariy twentieth century Chicago, the height limit on buildings moved up and down several times in response to pressures from the real estate industry. The height restrictions passed in 1893 in Chicago and the 1916 New York zoning bylaw were enacted in the first phase of a real estate recession. Conversely, in the early 1920~~when the Chicago office market experienced high demand and low vacancies, the city passed a new bylaw that allowed higher buildings (Willis, 1995). Weiss (1987, 1991) explains that the nse of large-scale residential developen in the first half of the twentieth century in the United States was a result of community builden using the state to displace smaller speculative builden. Major builden worked with plannen to secure land use planning and regulation. Together they encouraged highquality development, which became an impassable bamer for small developen. Generally, large real estate development companies are more favourable toward public policy initiatives than their small-scale colleagues. Big real estate companies are better equipped to shape legislation and regulation for their om ends; consequently they are more likely to play influential roles in the policyrnaking process Weiss, 1991).
Urban s~ecificitvand real estate deveîo~ers Real estate development is not a private venture. As suggested in the previous section, real estate development inevitabiy requires the cooperation of private and public agents. The production of real estate involves individual parcels of land, knowledge of the specific market (supply/demand), and familiarity with the regulatory environment. Therefore, real estate development is mainly a 'local business'. Recently, it has been widely acknowledged that property markets are more segmented and differentiated than had been assumed in earlier period (Clapp et al., 1992; Hanink, 1997; Rabianski and Cheng, 1997; Healey, 1998a; Wolverton et al., 1998; Hamelink et al., 2000). In this type of venture, the real estate production process is embedded in local conditions (Wilson, 1991). In situ networks are indispensable for this process to take place. The importance of place and local conditions has preoccupied the urban literature in an era when global forces seem to be dominant, especially in industrial production and financial services. However, in the era of globalization, place also has been recognized as an important ingredient in economic performance as the specific conditions in localities have contributed to competitive advantages (Harvey, 1989; Amin and Thrift, 1992; Swyngedouw, 1992). The local 'institutional thickness', according to Amin and Thrift, has a decisive influence on economic development as place appean to become of critical importance to fins (Amin and Thrift, 1995). This position was stressed by Healey (1998b). who argued that Sn a world where integrated place-bounded relationships are pulled out of their localities, 'disembodied' and refashioned by multiple forces which mould them in different directions. the qualities of place seem to become more, not less, significant" (p. 1531). With regard to the real estate sector, global, national and regional economic forces rnay produce distinct spatial patterns of investment However, there appear to be strong links between the real estate sector and local economic conditions (Turok, 1992; Healey, 1994; Leitner, 1994; Ball and Wood, 1996; Hamelink et al., 2000). Urban specbity is even more impoltant in the real estate sector than in finance and industrial production, since it is concemed with investrnents which have a dimension of immobility. Beyond the distinct economic conditions, other localty embedded factors shape real estate investment. Real estate development is articulated differently at various places and times: The exact articulation of the practice of real estate development is contingent upon which acton are invoived and how they are organized, as well as the particular historical and spatial contexï (Pratt, 1994, p. 204). In this context, the idea of 'local dependence' advocated by Cox and Mair (1988, 1989) is of importance. Cox and Mair define 'local dependence' as 'a relation to locality that results from the relative spatial immobility of some social relations, perhaps related to fixed investments in the buiit environment or to the particulaiization of social relationsn (Cox and Mair, 1989, p. 142). To succeed in real estate development, deveiope~ have to be embedded in local power centres, and have to rely on positive experiences with local professionals (planners) and decision-makers (politicians). These relations are indispensable to businesses which depend entirely on local conditions. Many if not most other businesses are less spatially fixed. To facilitate the real estate development process, operational spaces have to be detemined and defended. The formation of these spatial relations is time consuming and expensive. As a result, the importance of iocal dependence intensifies. Cox and Mair's idea of local dependence is mainly related to localities or municipalities. However, urban specificity depends on a particular geographical scafe; hence local dependence is possible at the intra-municipal as well as at the inter- municipal level. The involvement of real estate companies in local politics in order to enhance their own private businesses has been widely acknowledged. First, investigative joumalism tends to fonis on and over- emphasize the scandalous and illegal aspects of this nexus. Here real estate developen are depicted as capitalist villains appropriating public money for their own gains. A similar line of reasoning was also pursued by the advocates of the 'conspiracy approach', which culminated in the 1970s in Britain and Canada, and to lesser extent in the Unes States. These authon insinuated that the relationship between local govemments and private businesses is 'cooperative'; this cooperation enhances accumulated profits of private cornpanies. The state. represented by local municipalities, was pomayed as a coconspirator who destroyed the 'good' (usually old) urban fabric and restnictured the built environment for the gain of the developers (Barker et al., 1S73; Caulfield, 1974; Collier, 1974; Ambrose and Colenutt, 1975; Gutstein, 1975; Lonmer, 1978). However, devebper-government relations need to be seen as a necessary element in the production of buiit commodities that are essential to the suivival of the capitalist mode of production. Without close-ties, common social networks, shared beliefs, and common goals, real estate development is unlikely to occur at the sale and scope experienced by major cities. Govemrnents are an integral part of the smooth functioning of real estate production; they hold the 'keys' that enable developrnent. In the same way that capital is considered the raw material of development, govemment regulation is a 'manual' attached to each devekpment. The essence of these relations is not embedded in persona1 misderneanon, but deeply established in the daily practices and the structure of relations in a profit-maximiring culure which needs a 'cooperative mode' to make real estate a profitable business. Moreover, it is important to bear in mind that these practices do not reflect only the developers' interests. There is a twoway rebtionship. Govemments strive to promote their own objectives and they 'use' real estate as a major vehicle to accomplish their goals, namely advance their political agenda.
1.2.4 Real estate developers Literature on the real estate sector identifies the real estate developer as a pivotal agent in the deveIoprnent process: The developer is like an impresario. He is a cataiyst, the man in the middle who creates nothing himself, maybe has a vague vision, and causes others to create things. His raw material is land and his aim is to take land and improve it with bricks and mortar so that it becornes more useful to somebody else and thus more valuabte to himn (Mamott, 1967, p. 24).
'In fact, of the groups invoived in urban deveiopment, developers, since they are lead agents in this process, are the most important" (Beauregard, 1989, p. 262).
Thr property developer, not the planner or the architect... is primariiy responsible for the cunent incarnation of the western cRy" (Sudjic, 1992, p. 34).
Marriott (1967) was one of the first authon to emphasize the role of the developer in the real estate development process. lnstead of focusing on the demand side or on abstract forces that shape development of the built environment, he focuses on the developer, the provider of real estate properties, as the key agent in the development process. The focus of the politiil economy approach on the importance of the supply side in real estate development is at the abstract level, reducing agents to objects that are manipulated by structural forces (Harvey, 1985). However, some agents are powerful enough to influence the production of the buiit environment (Logan and Molotch, 1987: Feagin and Parker, 1990; Wilson, 1991) and, therefore, real estate cbmpanies should receive attention. In an interpretation of the 1980s building cycle Beauregard (1994, p. 730) suggests: %il of this [the digagement of mal estate ban actMty from a demand-induced base] means that city building is lesand les responsive to human need and more and more driven by entrepreneurial fervor".
Necessav components in the framework of capital switching are the facilitators, the agents who engage in capital switching practices, and who have a significant role in shaping supply. Rather han scrutinizing structural factors as abstract forces, the recognition of agents as being the medium for the reproduction of structure is essential. Macroeconomic and political events create the conditions and set the stage for building cycles, but agents are the catalysts that take advantage of these conditions to mold place-and time-specific products (Mamott, 1967; Lorimer, 1978; Feagin and Parker, 1990). Structural and agent-based approaches are complementary interpretations, since interactions between economic conditions and agents' calculations explain the production of built space (Pryke, 1994a). As suggested by Healey and Banett (1990, p. 90) '. .. extemal pressures are reflected and affected by the way individual agents determine their strategies and conduct their relationships as they deal with specific projects and issues, and as they consider their future stream of activiiies". In addition, agents establish and nourish channels of capital flows. These channels will remain intact, particularly if a critical threshold is surpassed, and they will attract capital for fumer investment (Edgington, 1995; Lindahl, 1997). One of the major agents in the real estate development process is the entrepreneur or the developer that initiates and coordinates the development process. The developer is considered not only a passive actor in the real estate development process, but also a proactive agent who makes things happen (Mamott, 1967; Chamberlain, 1972; Logan and Molotch, 1987; Haila, 1991). For example, according to Sudjic (1992) and Fainstein (1994), Olympia 8 York Developments, the largest Canadian-based real estate Company in the late 1980s, was a major cataiyst for the development of the Battery Park City (World Financial Center) in New York and the Canary Wharf project in London. Other agents, such as local governments, financial institutions, and real estate broken are extremely important, but the developer embodies the act of development and the developer's practices 'fuse' the reciprocal relationships between structural conditions and the agency's perceptions (Whitehead, 1987; Fainstein, 1994; Lindahl, 1997). This does not mean that the real estate developer is the sole force of speailative development, but the developer's ability to exploit specifn conditions, such as easy credit and optimism of the funding institutions, makes the developer the agent who practices and implements development. The speculative developen are market promoters, coordinaton and stabilizen, and are "integnl and essential to the workings of the capitalist economy" (Harvey, 1985, p. 68). This position of the developer as an opportunity hunter is crucial in taking advantage of dierent phases during building cycles and different cycles across properties and places. Logan and Molotch (1987) and Haila (1991) have constructed a typology of the real estate agents involved in the real estate development process. Their typdogy distinguishes between two 'poles' of development agents: casual and structural. The casual developer is a passive player in the real estate market and the profid helshe receives rests on accidentally owning the land or property at the right place at the right time. The developer's passiveness is reflected in the fact that the future building is designed for a specific client. The structural developer, on the other hand, is a pmactive player who predicts development trends and gambles on predictions. The real estate developer, who uses mostly bonowed capital to execute development, is not an entirely rational calculating agent; often decisions are based on guesses and faith in future conditions (Feagin, 1987; Fainstein, 1994; Haila, 1999a). In some cases, this type of speculative developer even attempts to manipulate the market for hisher own purpose (Haila, 1991). Des Rosiers (1984) outlines four major functions perforrned by a developer. First, helshe is a coordinator who assumes diverse operations such as negotiating land purchase, obtaining planning permissions, assembling a development team, taking major decisions regarding planning and construction, and leasing or selling the new property. The second fundion is assessing risk. In a volatile environment, the complex development process has to be offset by being able to assess the market. The developer is also a maket 'insider' who has market knowledge. Accurate knowledge, which is generated through an information network, is pivotal for the developer's power. Finally, the developer is responsible for the acquisition of development funds from extemal sources (Des Rosiers, 1984, pp. 599-600). The behaviour of developen changes according to the phases of the building cycle. Whitehead (1 987, 1996) suggests four phases in the real estate development cycle: recovery, expansion, stagnation and collapse. As the cycle progresses from market recovery to collapse, the role of the developer diminishes and spatiat behaviour changes. At the recovery phase, the developer is the spatial trailblazer, as opportunities are perceived when there is no clear picture of the future (O'Donnetl, 1989). As the recovery tums into expansion and the market becomes crowded, some developers leave the specific market to look for 'greener pastures' that offer higher potential pmfi. At the stagnation phase, the financiers, who strive to salvage their investment, take the reins from the developers (Whitehead, 1996). The developer is able to identify opportunities by conceivhg an original project and creative financing. During real estate uptums, new entrants enter the development business, because secuiing financing is easier and investors are willing to take greater risks (Ball, 1994). However, 1 is not only reading the market well that assists developers, but al- the exploitation of oppominities created by policy incentives (Harvey, 1985; Momson, 1992; Kennedy-Skipton, 1993). For example, in Glasgow, the concentration of office devekpment in the city centre is the direct resuit of a sequence of office policies and plans. These plans are essentially centralist and also protectionist policies, whereby major office developments are to remain in the central area and are not be located outside 1. These policies reinforce the tendency of the real estate cornpanies to concentrate their interests in the city centre (Momson, 1992). Moreover, since the 1980s, real estate devekpers have shared with local govemments the values of enhancing economic performance. Real estate is no longer considered as a parasitic business and real estate companies have become more invoived in the planning process, achieving more room for speculative maneuvers (Haila, 1991). The components discussed in this section (1.2) situate agents, which are considered having an important role within the structural framework they operate in. This notion is put forward by Wilson (1991, p. 41 1): 'Powerful individuals are authos of their own woilds and not simply respondent. in a predetemiined world. Their actions, however, are influenced by prevailing ideologies, roles, and production of relations. This social inheritance provides the context within Aich humm actions operate. Local restnicturing influences are therefore bonded to structural forces".
Building cycles, financing arrangements, and the roles of different levels of the state reflect the major structural conditions that affect the actions of real estate companies. Building cycles provide the macroeconomic conditions in which individual real estate companies work. Financing is also a structural condition as different types of sources and arrangements are possible. All levels of the state are necessary for the smooth functioning of real estate production. Each component contributes to the formation of a framework that enables to interpret and explain the development of space. This framework is sketched in the next section. 1.3 Steps toward a Theory of Office Development The literature reviewed here contains relatively Ile on office development. However, office development is pait of the wider sphere of real estate development, and theoiy about real estate development can be used as a base for conceptualking the way office buildings are being produced and traded. Although the literature on real estate development is impressive in its sweeping generalizations, it is often diffiiult to relate specific local events to the structures discussed. On the other hand, there is a great deal of wnting on specific elements of real estate development. In the following pages I will draw together various arguments found in the literature on real estate developrnent, and outline a framework for understanding office development through real estate development. The statements below also contain many insights gained during my research on office development in Toronto and more broadly in Canada. The framework constnicted here focuses on fractions of capital identifiable as specific industries and fims. The real estate sector and especially real estate developers are pivotal in this framework. However, the role of other industries or types of fimis is also extremely important. Also, the framework never strays from the structural conditions in which real estate developers and other participants in office development ad. In this framework, two major aspects of real estate development are discussed: the flow of investrnents within real estate capital and the flow between real estate capital and other secton and industries. Conceptualizations on the logic of real estate capital is derived from the work of Harvey on circuits of capital, and critique raised by Beauregard (1991, 1994), Feagin (1987, 1988), and Fainstein (1994), and what Haila (1991) defines as the 'intrinsic dynamic' of the real estate sector. In addition, the frarnework suggested below acknowledges the two-way flow of capital between real estate capital and other kinds of capital. Real estate draws capital, but at the same time explores extemal niches for investment. An essential part of a theory of office development is the consideration of the role of the state and the importance of local conditions for understanding office development. Since this aspect was discussed in detail in section 1.2.3, no further statements are included here.
1.3.1 The intrinsic dynamic of real estate capital Before engaging in the discussion of investment flows within real estate capital it is necessary to define what 'real estate capital' is. Paraphrasing Harvey (1985), real estate is fixed capital invested in the buitt environment. Real estate capital is stored in land, in existing improvements to land (built structures) or potential improvements (land use regulations). In addition, real estate capital is accumulated by real estate companies, which through the process of development produce development profi. Development profi reflects the diierence between the costs of producing a structure and its value after completion. Another type of profi (or los) is based on the market value of the real estate company in the stock market. As a resutt, real estate capital is both property and Company specific. Following Haila's argument that the real estate sector possesses an intrinsic dynamic (1991). fie statements that relate real estate capital to the economic conditions are suggested. First, the prerequisite for real astate development is fund availabilii (not necessarily demand); real estate development is a highiy leveraged (especially long-terni) business and sizeable amounts of capital in the form of either eguity or debt are sought constantiy (Des Rosiers 1984). Second, real estate cornpetes for financing in the general capital market (Leitner, 1994). lnvestment in real estate is one of several channels of capital investment and it has to compete with these channels, such as stocks and bonds (other than stocks and bonds of real estate cornpanies). This pattern was obsenred recently in Canada. Soanng cash flows and profis of real estate companies were not reflected in their stock prices, which have remained stagnant or have continued to decline. One expknation for this anomaly is the competition of real estate with other sectors of the economy. The flow of capital into intemet- related companies in the late 1990s made little capital available for investment in real estate companies. even though they were trading well below their asset vslues. Third, real estate investment has to obey requirements set by financial markets. The dependence on extemal financial sources compels real estate companies (those of them who raise capital through capital markets) to comply with stipulations set by financial ifitermediaries, such as financial institutions, rating agencies, and financial analysts. Fourth, real estate cornpanies tend to scan and monitor the financial market in general, and the real estate market in particular, on a regular basis, and rnove capital from low yielding products and places to higher yielding products and locations (Leitner, 1994). Among publicly-traded real estate companies, which are under the continual scrutiny of their shareholders, investment switching is a cornmon practice, since shareholders often look at short-terni performance. Thus, real estate companies, in addition to developing new properties, tend to trade in existing assets. Flh, real estate capital is not entirely flexible. Real estate investment involves sizable investment in immovable assets; to harvest maximum capital gains, capital has to 'incubate' in a specific place for some time. To maximize gains accruing from economies of scale, large real estate companies, although having spatially diverse operation;, have a limited number of locations in which they operate. The geographic scope of small companies is even more limited; they are highly concentrated in 'niche' markets taking advantage of knowing the local business arena and the political terrain. 1.3.2 The Yhree dimensions of capital switching' Three major considerations guide real estate companies in their capital switching strategies in order to achieve maximum rental Stream and capital appreciation or to obtain development gain (the difference between the cost to erect a property and its market value on completion). I refer to these considerations as the Wree dimensions of capital switching'. Oppoilunities within each dimension of switching are punued constantly and simultaneously as real estate companies reanange their investments by mode of operation, type of propeity, and location. First, real estate cornpanies have to detenine the mode of operation: that is, either the acquisition or disposition (trade) of existing properties or the production of new propeities. Second, the twe of ~ro~ertyhas to be considered. Within the reai estate sector, capital is able to rotate between different property types. A cornmon distinction is made between residentiaf and commercial properties. Another distinction is anchored in the difference between types of commercial real estate properties. Location is the third dimension. A basic feature of the real estate market is its spatial segmentation (Logan, 1993; Blyson, 1997). Real estate companies operate at different spatial scales, and consequently may posses different motivations for engagement in the property developrnent pracess. Thus, optimization of capital gains in the real estate business involves 'spatial literacy'.
Deveto~mentand acquisition: Complementarv ~aths In the introduction of this dissertation, a distinction between developers and ownershnvestors of office buildings was made. In addition to developers and ownerslinvestors (actual developers and buyers and sellers of office buildings), developers can be further disaggregated. In the literature on the real estate sector, the classification of developers into two distinct groups is based on the time horizon of their development projects. There are the 'trading developers' who build, lease and seIl schemes for development profi (short-term developers), and 'property investment companies', who build schemes in order to retain thern (long-ten developen) and who achieve profi through capital appreciation and rental incorne (O'Malley, 1989; Momson, 1992). Real estate companies that are entrepreneurhl in their early phases tend to depend on either extemal capital (debt or equity) or proceeds from previous developments (retained eamings) to finance developments andfor acquisitions. The main goal of the real estate Company is to erect a structure and obtain the development gain in order to use this capital for new ventures. This creates an accumulation effect. which fuels the continuous production of real estate assets. Each successful development enables the commencement of successive projects. and allows the company to engage in larger projects in multiple locations. Typically, this group of developen does not have enough capital to hold these assets for a long period; therefore, these projects are sold after completion to their respective tenants or to other investors. On the other hand, real estate companies with the backing of large corporations are able to pursue larger scale developments and retain the ownership of the pmpeiües they develop. Nonetheless, the distinction between two modes of operation, development and acquisition, has significant implications for the conceptualization of the real estate sector. Drawing on Manist thinking and using the concepts of 'surplus value' and 'ckculation of capital', a distinction between development and acquisition of real estate assets is punued. Surplus value, according to Harvey (1973),"is that part of the total value of production which is left over after constant capital (which includes the means of production, raw materials and instruments for labour) and variable capital (labour power) have been accounted for" (p. 224). The production of a new property invohres three major components that may increase or decrease the value of a property. Fint, the traditional surplus value embodied in a building is created through labour, either labouren invoived in the construction process or other professionals, such as architects, engineen, plannen and consultants. Second, negotiation gains, such as re-zoning or increasing denstty, are obtained through bargaining with the local govemment. Finally, market gains (or losses), which involve the appreciation (or depreciation) of the market value of buildings over time. These three components reflect the development profit. Retained profits from each development enable the developer to continue in the process of development and acquisition and, consequently, to accumulate capital. In addition, if the property is retained as an 'incorne-producing' property, the developer is able to extract rents on a regular basis. On the other hand, acquisition is more likely to create a different kind of value, 'exchange value'. Harvey (1982) argues that capital exists as a commodity fom when it is frozen in a finished product. But since capital is a 'value in motion', it must be continuously transfoned into money capital. The difference between market prices at different points in time creates the 'exchange value'. This is attributed to appreciation in value over time, often a result of extemal-to-the-property conditions, such as inflation and escalating rental rates (rather than direct capital investment executed by the property owner). The developrnent and the acquisition/dispositÎon of real estate properties are two sides of the same coin; real estate companies execute both strategies as they restructure their holdings. In generai, during uptums of the building cycle, cornpanies prefer development over acquisition. For example, in the office market, as demand for space rises, vacancy rates diminish and rental rates escalate. At the same time, the rate of transactions in existing office properties is minimal. Consequently, development is pursued. As the market hits recession, the extent of development is reduced and during severe rccessions development is almost abandoned. Many real estate companies and ownen of properties expenence financial diffïnuloes as vacancy rates soar and rental rates plunge. As a result, these companies are not able to service theif debt. Hence, selected pmperties are put on the market for sale, and acquisition/disposition becornes the dominant practice in the office sector.
Product selection: The arowina s~ecializationwithin the real estate sector Properties that are developed or acquired by an organization for the purpose of its own use are usually considered stable and outside capital switching practices. However, exchange-value properties an acquired or developed for the purpose of generating an income strearn thmugh the collection of rent; real estate companies hold these propeities for income-producing purposes. lntemal characteristics of income-producingproperties determine their rnaiket value and attainable rental rates. Generally, newer buildings command higher rents than older buildings; older buildings need major capital investments to bring them to the rental levels of the newer buildings. Large-scale projects are relatively scarce commodities, attracting premier tenants and commanding high rents. Therefore, they are considered lucrative long-terni investrnents. On the other hand, smaller buildings are considered to be opportunities for a quick profit. Since there are more small properties available than larger ones. smaller properties are easier to trade and are regarded as short-term investments.
, Real estate companies tend to rotate capital within their portfolios by upgrading their holdings. This practice involves the construction of new buildings and shifting tenants from their old prernises to the newer buildings. Some office space users retain long-ten relationships with their space providers (the real estate companies). These close relationships enable real estate developers to build a new building knowing that they will be able to convince tenants to move to the new development. The shuffling of tenants is either a result of the tenant's growing space needs that cannot be accommodated within their old office premises or a resuit of inducements made by the developer. These practices enable real estate companies to retain development gains and at the same time increase the rental stream, since newer buildings command higher rents than older ones. In addition, real estate companies prefer to own highquality properties. The highest quality properties in the office- building sector are class 'A' buildings. Over the long run, class-A office buildings experience lower vacancy rates, and are therefore more resistant to slumps in rental income than lower quality buildings. Hence, these high-quality properties are either retained through developrnent or acquired. Within the real estate sector, capital is able to rotate between different property categories. The most common distinction is made between residential and commercial properties. Residential properties include land development and different kinds of housing, such as single detached houses, apartment buildings or condominiums. Industrial buildings, shopping centres, hotels and office buildings are the prime categories within the commercial sub-sector. Capital is often shifted to commercial development since it is considered more lucrative by virtue of dealing with corporate tenants rather than individual renters. In addition, corporate tenants are not subject to rent control regulation (Feagin and Parker, 1990). Developers who acquire the expertise, capital and ties to local 'power centres' (politicai and business), are able to tackle more complex land uses, such as major shopping centres and multi use developments. Furthemiore, as a result of concentration and the creation of large-scale conglomerates, the average scale of development has increased significantty (Knox, 1993). Some large-scale projects acquire distinctive characteristics that make them unique and prestigious, and the scarcity of these types of properües inflates their values, making them highly desirable among real estate companies.
Location The differences between places govem the financial performance of seemingly similar real estate assets. At the national scale, real estate companies maintain their spatial presence in selected cities (markets) across a country by maintaining a continued presence. They use regional offices, which anchor their presence, and nourish alliances with locally influential agents. On the other hand, local real estate companies are likely to be spatially conservative, having a higher level of dependence on weli- defined territories. For small real estate companies, 'local dependence', resulting from the relative spatial immobility of social relations (Cox and Mair, 1988) is far more important than for large companies. The limited operational territory of small companies is also a result of limited equity and a finite leverage capacrty (Bryson, 1997; Lizieri et al., 2000). This is specially the case with modem office buildings; the high cost and the complexity of large-scale office buildings (necessw for parking structures, expensive electrical, plumbing, mechanical and security systems) usually limit these buildings to the core of large urban areas. The focus of large real estate companies on downtown office concentrations in large rnetropolitan areas is further enhanced by the availability of data on these markets in relation to smaller cities or suburban areas (Lizieri et al., 2000). Only the well-financed and well-established developers can undertake these types of projects. These factors segment the spatial reach of real estate capital. The renowned real estate mantra 'location, location, location' appears to play a primary role when considenng capital switching. A basic feature of the real estate sector is its spatial segmentation (Logan, 1993; Bryson, 1997). Real estate companies operate at different spatial scales and consequently may posses different motivations for engagement in the property development process. Space is not uniforni; different places embody diverse characteristh, such as economic structure and employment growth, which are crucial to the functioning of the real estate industry. The differentiation between places govems the financial performance of seemingly similar real estate assets, thus spatial Iiteracy is crucial. At the intra-rnetropolitan level a clear distinction emerges between the urban core and the periphery (Hughes et al., 1992; Archer and Smith, 1993; Hanink, 1996, 1997). The urban core is the densest area within the metropolitan realm in ternis of existing real estate properties per land area. The intemal advantages of the core, such as high accessibiliîy and agglomeration, make it attractive to selected types of activities. As a result of demand and the scarcity of land, land values in the core tend to be high. To make economic sense, core areas necessitate intensive, large-scale, and technically complex development (usually invohring redevelopment), which is also the most capital consuming development. Only real estate companies with substantial resources are able to develop or acquire properties in this area. Land values in suburban locations, on greenfield sites, tend to be lower and therefore development is less dense, smaller in scale, and less complex. Suburban development is less capital consuming than core development (Ball, 1996). ln this suburban arena, the participation of developers with fewer resources is feasible. A crucial factor that affects the ability of real estate companies ta develop office buildings in the built environment is the extent of extemalities invoived in the developrnent process. There is a continuum of extemalities which ranges from development on greenfield sites to redevelopment of the existing urban fabric. In inner cities, especially in downtown areas, land ownership is fragmented among several owners, and in order to erect a medium to large-scale office building land assembly is necessary. Development adjacent to other properties may result in conflicting interests with other owners. Redevelopment in an existing urban fabric rnay antagonize to public interests, such as preservation of historic sites. Also, redevelopment in an existing fabric, in which limitations on the transportation capacity are conspicuous, has an immediate impact on traffic. Finally, negotiations are necessary and take long tirne. Legal advice is usually necessary. All this results in expensive projects. In Canada, inner cities tend to introduce soma restrictions on redevelopment and the public outcry in 'sensitive' areas may delay redevelopment. The opposite situation prevails in the case of greenfield development. Suburban greenfield sites present the least possible extemalities. The developer of an office building usually develops on a site which is situated at a considerable distance from potentially conflicting uses, such as residential neighborhoods. In addition, the developer might own a large parce1 of land on which helshe erects a building. In this way, the dependence on other land owners is minimized. In Canada, the negotiation process with suburban municipalities is less complex than with inner cities. Suburban developers are embedded in the municipaliies in which they operate; they are part of the community and well recognized as contributors to the success of these localities.
1.3.3 Reciprocal relations: Real estate and other capitals Haivey's arguments that capital switches between the primary and the secondary circuits provide important insights into the practices of fractions of capital. The production of real estate capital is possible through two major processes. First, real estate developen with minimal initial capital (entrepreneurial developen) use retained eamings combined with small leverage to punue real estate development. This type of development involves the construction of rektively small properties, in which the developers usually do not retain ownenhip interest. They use their labour qualifications (vision and expertise) to accumulate capital. The second type of real estate capital is produced through the direct involvement of financial, industrial or mercantile capitals. This condition results in a real estate Company that is backed by large capital (financial, industrial, or mercantile). The backing of extemal capital facilitates further leverage and enables much iarger developments. Although it is often difficult to document and determine the sources of capital used for real estate development, obseivations on the practices of Canadian real estate companies provide evidence for the invohrernent of different fractions of capital in real astate development. The history of the real estate sector in Canada shows that finance, industrial and mercantile capitals were stimulators and financiers of real estate development at various times. All these capitals used leverage to finance real estate development; the extent of these capitals' invohrernent in real estate is difficult to measure, but it would be reasonable to suggest that without initial capital onginating in the financial, industrial and mercantile spheres, subsequent leverage would not have been possible. In his formulations on circuits of capital, Harvey argues that investment in the built environment that preceded each of the global crises of the 1930s and the 1970s was as a kind of lastditch hope for finding productive uses for rapidly overaccumulating capital" (1985, p. 20). For Harvey, investment in the built environment is a one-way flow of capital. Fainstein (1994) criticizes this notion of circuits. She argues that Hanrey's 'use of the tenn 'circuit' indicates that once capital moves into this realm [real estate] it will stay there" (p. 222). But, capital invested in real estate assets is not 'locked' in, rather it is stored in these assets and it can be used to generate investment in other sectors. Since the idea of capital switching between the primary and secondary circuits failed to produce 'hard' evidence in the short run (Feagin, 1987; Beauregard, 1991, 1994), 1 is suggested that the behaviour of real estate does not counter the movements in other parts of the economy, rather patterns of real estate investment directly correspond to situations in the economy in general. Real estate properties cm be used as collateral for bormwing and since the capital invested in these properties is mostly bonowed, real estate properties are extremely leveraged instruments. This leverage can be fumer extended to investments in other secton of the economy. Real estate companies bonow large sums of capital for development, and are able to establish multiple lines of credit that provide them large leverage. They are able to invest in secton extemal to real estate by using leverage on top of leverage. Bonowing money is made possible based on the assets of real estate companies that most of their cost was financed through debt. This leverage exemplifies what Harvey calls 'fictitious capital', capital that is financed through credit and debt (Harvey, 1982). As a result, Harvey considen real estate as an absorbent rather than a generator of capital. Fainstein (19941, on the other hand, argues that real estate development creates value. The increase in land value resulting from development, changes unproductive spaces into productive ones, hence development is not fictitious. These two contradictory approaches can be reconciled. Although mal estate capital is produced through debt instruments, the final outcome is not fictitious since it facilitates the continuous process of production. This juncture with 'real' production may resuft in some real estate companies switching some of their capital into the 'productive' secton of the economy. Often large real estate companies merge their real estate capital with investments in other sectors and the distinction between these types of capital is bluned. In these instances loans obtained by a real estate company may not be assigned to specific purposes but the general purposes punued by the real estate company. As companies grow in size bey are able to obtain larger loans which may be directed to various purposes; this allows them to diversify into fields not related to real estate. These financing practices result in capital crossing the 'boundaries' of real estate capital. This move is facilitated since capital is considered as a pure financial asset (Harvey, 1982, 1985; Haila, 1988, 1990). Urban land has been increasingly treated as pure financial asset; this means that instead of focusing on its use value, developers and owners of real estate assets treat it as another financial asset that can be bought and sold according to its market value (Harvey, 1985). As a financial asset, real estate capital does not have to cling to real estate assets, but can explore other alternatives. This feature of tradability may result in flipping capital from primary to secondary circuit and vice versa. These practices are related to temporal position of real estate capital. During recession, real estate companies prefer to invest in non-real estate assets. to hedge against negative affects experienced by the real estate sector. The increasing embeddeness of real estate within other sectors of the economy has facilitated the conditions for real estate capital to seek the most efficient niches within and outside its domain. These conditions necessitate complex calculations that have to be considered by real estate companies. One set of cakulations involves situating investrnent within the 'three dimensions of capital switching'. Figuring what is the best available mix of considerations is a continuous task perfomed by real estate companies. Second. capital is switching back and forth to and from real estate. Fractions of capital that are not real estate related engage in investrnent in real estate and occasionally, real estate capital is seeking outlets outside its 'traditional' scope. Several aspects of these complex calculations are addressed in this dissertation.
1.4 A Provisional Framework In this chapter, I have attempted to reanange supply-side components as shaping the production of real estate properties into an analytical framework. This type of analysis draws on combining structural requirements and actions performed by prominent agents. A number of elements are emphasized in this framework. First, the uneven surface of structural conditions, which is a fundamental requirement for the reproduction of the capitalist system, is responsible for variabilii in the development of real estate properties. Second, this uneven surface is mediated by institutional intervention and public arrangements perfomed by the various layers of the state. The state is an imperative elernent in this system. Finally, the vehicle for the implementation of the development process, the agent that cames out this endeavour, is the private real estate Company. This chapter clarifies how the structural conditions of real estate deveiopment are reflected in the daily operations and practices of real estate companies. The real estate company translates various processes and signals into concrete buiit products. This type of compnay is an investment channel that gathen information and expertise to deploy capital in real estate in selected products and in selected locations. The focus on the real estate company and its operational procedures enables the integration of a conceptual process into concrete manifestations and back to abstract levels. CHAPTER TWO
RESEARCHING OFFICE DEVELOPMENT IN TORONTO: CONTEXT, APPROACH, METHODS, AND DATA
This chapter has three components. First, as asserted in the previous chapter' real estate development is highly dependent on specifii urban settngs. Therefore, the conditions and the specific context for office development in Toronto during the last fiie decades are outlined. The second section presents the research approach and methodology chosen. Research procedures rely strongly on 'realist' method and techniques. The last section disuisses data sources and data collection.
2.1 Context: The Conditions for Office Development in Toronto Toronto, as Canada's largest metropolitan area and its foremost business centre, presents an excellent opportunity for the study of office development. The size and the cornplexity of Toronto's urban area and the generally high rates of population and employrnent growth prevailing for the last fie decades have provided ample scope for divenity with respect to office development. These features of growth were complemented by institutional arrangements and planning interventions that have influenced development in the Toronto metropolitan area since 1950 (Filion, 2000). Office development has been a major component of growth in the Toronto metropolitan area. Nevertheless, office development was not uniform across the urban region, as some districts were much more sought out than othen. In order to situate office development in the Toronto context, several important features of the urban region have to be described. First, it should be stated that the Toronto area grew strongly in the last fifty yean. Secondly, it should be pointed out that the Toronto urban area is politically fragrnented and that planning and urban development have taken place in a politically fragmented region with particular socio-political cuitures. Finally, as Canada's most important business centre, Toronto has experienced high rates of employment growth in a variety of activiiies that are office space usen. The Toronto urban area in this study is the Toronto Census Metropolitan Area (CMA) as defined by Statistics Canada. The Toronto CMA includes the former Metropolitan Toronto (as of January 1998, the City of Toronto) and 21 local or 'area' municipalities sunounding Metropolitan Toronto (Figure 2.1). Akhough a more recent definition of the urban area includes a larger territory, Greater Toronto Area (GTA), I use the CMA, since most office development in the Toronto area has been limited to the Census Metropolitan Area. 2.1.1 Population and employment growth Growth, as one of the prime factors to trigger and sustain urban development, has been one of Toronto's main features. When the municipality of Metropolitan Toronto (commonly refened to as Metro) was created in 1953, the population of the area was approximately 1.2 million, slightly more than half of which were living in the City of Toronto. The boundaries of the Metropolitan municipality enclosed 622 square kilometers, essentially coinciding with the 1951 boundaries of the Census Metropolitan Area (CMA). Unlike the fied boundaries of Metropolitan Toronto, the CMA boundaries were moved outward over time to encompass the rapid growth and geographic spread of Toronto's population. In the early 1990s, the CMA boundaries encompassed several sunounding 'regional' and 'area' or local municipalities beyond the Metro boundaries: arnong others Markhm and Richmond Hill in York Region, Mississauga and Brampton in Peel Region, Oakville in Halton Region and Pickering in Durham Region (Figure 2.1). By 1991, the CMA boundaries contained 5,580 square kilometers and 3.9 million people. A wider definition of the Toronto region, which includes the former Metropolitan Toronto and additional four regional municipalities, was adopted in the 1990s. The so-called Greater Toronto Area (GTA) encompasses a larger territory than the CMA boundaries and had a population of 4.2 million in 1991. In 1996, the CMA had a population of 4.4 million and the GTA had a population of 4.7 million. Pnor to 1976 the Toronto CMA was the second-largest metropolitan area in Canada after Montreal. Since the rnid-1970s, Toronto has become the largest CMA in Canada. Over the last four decades, most of the population growth has occuned outside the City of Toronto, fint in suburban municipalities within Metropolitan Toronto and then in the outer or CMA suburbs. Over the last quarter century most of population growth was in the four regional municipalities sunounding Metropolitan Toronto (Frisken et ai., 1997). Parailel to population growth, empIoyment has expanded considerably between 1951 and 1991 from about 527,000 to 2 million jobs. While job growth occuned in al1 three parts of the CMA (the City of Toronto, Metro subuhs, and outer suburbs), it was more vigorous outside than inside Metro, resulting in considerable employment deconcentration. For example, in spite of absolute increase in employment, the share of the City of Toronto in al1 CMA jobs declined sharply from 48 percent to 31 percent between 1971 and 1991; the share of jobs located in the outer suburbs more than doubled, from 17 percent to 35.5 percent (Gad. 1979; Frisken et al.. 1997). However, employrnent growth has not been as smooth as population growth. A number of recessions in the late 1950s, mid-1970s, and early 1980s were accompanied by stagnation or decline in employrnent. A protracted recession in the early 1990s led to very severe losses of employment. with a recovery visible only in the late 1990s. Figure 2.1 : Toronto Census Metroplitan Am In total, substantial population and employment growth since 1951 have set Toronto apart from many other cities in North America and Europe. For the Toronto area as a whole the challenge has been to manage growih rather than to attract it. Concerted efforts by the metropolitan and regional govemments to attract population or employment were largely absent over most of the last fie decades.
2.1.2 Municipal organization Wiihin the Toronto area three tien of govemment manage services and municipal issues. First, the Province of Ontario has a crucial role in municipal Me. The Province has the power to change and restructure local municipalities, and it has used this power repeatedly to amalgamate a number of municipalities into larger entities. The amalgamation of the six municipalities foning Metropolitan Toronto into the new City of Toronto in 1998 is the most recent manifestation of this power. The Ontario Planning Act sets out the conditions for uhan development and stipulates provincial govemment 'approval' of 'official plans'. Through the Ontario Municipal Board (OMB), which is the highest tribunal to rule on planning related decisions, municipalities are subject to extensive developrnent review. In addition, the province has an important role in transportation issues. For example, in the case of Toronto, it has had, until recently, the overall responsibility for the major expressways, for the commuter rail and bus senrice (known as the GO system), and it played a significant role in subsidizing both capital investment and the operations of Toronto's transit system. However, since 1998, the Province has ceased ta fund transit and some expressways in the Toronto area (Filion, 2000). Toronto's reputation as an urban success story is often finked to the formation of the Municipality of Metropolitan Toronto in 1953. This regional rnunicipality was a two-tier federation of 13 (later six) municipalities, partially govemed by an 'upper tier' rnetropolitan council. Metro's original mandate was to provide physical infrastructure (water supply, trunk sewer facilities, arterial roads) to suburban districts experiencing rapid growth, and to relieve the central city, the City of Toronto, of its housing problems. Later it resurned responsibility for policing, public school finance, and social services. Metro's responsibility for sorne expressways, roads, and transit, together with its power to redistribute taxes, were crucial for office developrnent. Metro was in charge of managing the arterial roads, certain expressways, and it also supplied, through the Toronto Transl Commission, an integrated system of subway, bus and streetcar services (Scott, 1980; Frisken et al., 1997; Filion, 2000). Although the local municipalities collected taxes, the needs of Metro were levied against them, and debenture financing for Metro fiself and al1 the lower-tier municipalities was placed in Metro hands (Lemon, 1985). At the local level, the 13 (later six) metropolitan rnunkipalities controlled the local roads, provided senrices that were not provided by Metro, and formulated their own land use plans. Outside Metropolitan Toronto, four regional govemments (Durham, York, Peel and Halton) were established in the 1970s. These govemments were given limited responsibilities in comparison to Metro. The antagonism of outer suburbs towards al1 foms of metropolitan govemment caused the provincial govemment to shy away from a new metropolitan administration (Filion, 2000). Within these regional governrnents, local municipalities function in relative independence of each other, united only as members of two-tier regional structures, in which the upper-tier regional councils have relatively few powers de jure (Frisken et al., 1997). De facto powers are even smaller, since regional councils are strongly influenced by the coalitions of councillors and mayon elected at the level of the 'area' or lower level rnunicipalities.
2.1 -3The planning system In Ontario, each municipality has to prepare an official plan. An official plan is a public statement which defines basic goals, objectives and directions for the physical dwelopment of a municipality. It is prepared and 'adopted' by the municipality and gets its final 'approval' from the Province. In the case of two-tier municipal govemments, the Ontario Planning Act stipulates that the plans of the Municipality of Metropolitan Toronto and the regional municipalities take precedent over the plans of the 'area' or lower level rnunicipalities. Subdivision approval at the regional level and land use controls (zoning bylaws) at the lower level are other features of the planning system under the Ontario Planning Act. These stipulations reflect notions of the rational-comprehensive planning model. In planning practice, however, there is very lime topdown planning. In most cases, the lower level municipalities had official plans in place before the formation of the two-tier system of municipal govemment. Also, because of the considerable weight of the lower level municipalities, regional plans can only be made with the cooperation of these lower level municipalities. As Lemon (1996, p. 252,263-66) has pointed out, large scale or comprehensive planning has been largely rejected in Ontario in general, and in Toronto in particular. This does not, however, negate a very strong role of the state, both provincial and municipal, in urban matten. Lemon (1996, p. 263) characterizes this strong public involvement in urban affain as 'management' rather than planning. Apart from passing enabling legislation in the form of the Planning Act, the Province of Ontario has a critical role in the Ontario planning system. Official plans of area (lower level) and regional rnunicipalities must be submitted to the provincial Ministry of Municipal Affairs and Housing for final approval. Although the Ministry interferes to some extent in 'planning', the more frequent and more important interference comes through the Ontario Municipal Board (OMB). This body of appointed 'judges' is a quasi-judicial provincial agency with various responsibilities for oveneeing municipal affairs. The OMB is the final tribunal on planning issues, and it can overtum decisions made by rnunicipalities. (OMB nilings could be appealed to the Ontario Cabinet until a revision of the Planning Act in 1983.)
2.1.4 Taxation One of the fundamentai powers of municipalities is their ability to collect property taxes. These taxes are used to provide a wide range of municipal services. From the beginning, Metropolitan Toronto raised rnoney for operathig costs and debt repayment by levying charges on mernber municipalities based on the size of their assessments. This way, assessrnent-rich municipalities paid more per capita than poorer municipalities. The redistribution of property tax helped to prevent inter-municipal disparities in the quality of services and allowed the poorer municipalities to have a higher standard of local services than their own tax base would have made possible. The City of Toronto had the highest total assessment per capita, and it has also experienced an increase in that assessment relative to other municipalities. This meant that the City of Toronto had always paid a larger share (relative to population) of Metro costs than any other Metro municipality. This issue has contributed to a debate about the redistribution of property taxes within Metro. Because of the financial strength of the City of Toronto, based on its substantial business district, the City of Toronto has drawn a much larger share of its revenues frorn taxes on non-residential properties than other Metro municipalities. The high non- residential tax base allowed the City of Toronto to spend more on local services than other Metro municipalities, without taxing residents at a higher rate (Frisken et al., 1997; Todd, 1998). Although both residents and businesses pay property taxes, residents, not businesses vote, therefore making local govemments geared toward encouraging more non-residential development as an important source of tax income. The rnunicipalities outside of Metropolitan Toronto have stniggled with the same problems that had been faced by the rapidly growing Metro suburbs in the 1940s and 1950s: high expenditure for basic infrastructure. Property taxes for residential uses in the municipalities outside Metropolitan Toronto are, therefore, higher than in the Ctty of Toronto. On the other hand, taxes for industrial and commercial properties are relatively low in order to attract businesses, and provide a 'balanced' assessment base. In eariier decades, the stniggle over attracting businesses has largely concemed industrial enterprises. In the 1980s and 1%Os, however, competition for the non-residential tax base has shifted to a considerable degree to office developrnent. 2.1 -5 General development issues As a resuk of being a high growth region wiai a two-tier govemment, well-estabiished and well-defined growth coalitions in Toronto were less pronounced than in regions experiencing lower growth and lacking rnetropolitan govemments. The two-tier govemment (metropolii and local) contributed to the fragmentation and the weakening of growth coalitions. The role of the Metropolitan govemment in redistnbuting benefis across the metropolitan area is in contrast to the role of growth coalitions seeking local development (Logan et al., 1997). Nevertheless, in the Toronto area, various coalitions have emerged at the local municipality level. The Metropolitan govemment provided a physical infrastructure for urban expansion. and in its eariy days it opened up large subuhan tracts for private residential and industrial development. The City of Toronto got help with housing, especially high-rise public housing that was accommodated in Metro suburbs. The provincial government supported this policy indirectiy by placing restrictions on development based on the availability of infrastructure (Frisken et al., 1997). Over time, Metro's planning goals shifted. Beginning in the 1970~~more emphasis was placed on a multinodal urban structure in conjunction with the policies promoted by Metro suburbs and the City of Toronto. Metro suburbs advocated office decentralization in order to attract more office development to the suburbs; concunently, the City of Toronto attempted to control and 'deconcentrate' office development. By the late 1980s, Metropolitan Toronto faced considerable competition for office development and off ice-based employment from several of the outer CMA municipalities. A major study was conducted by the Metropolitan Planning Department. and subsequently the 1994 Official Plan for Metropolitan Toronto relaxed the rules for office location in former industrial areas. This responded to demand for more convenient accessibility by car and more liberal parking facilities. In the 1990s. the conflict over commercial developrnent and employrnent locations had shifted to differential business taxes between Metropolitan Toronto and the outer suburbs. In this case, the various municipal govemrnents in Metropolitan Toronto combined voices with the Metropolitan Toronto Board of Trade to urge a reduction in property tax differentials. The City of Toronto. as the core municipality or central city was clearly prodevelopment until the late 1960s. It encouraged both high-density residential and commercial development in Toronto's central area. In this effoit the City was assisted by the Downtown Redevelopment Advisory Council. in which large downtown employers and land owners played a major role. The rise of the 'reform' rnovement in the late 1960s and early 1970s. and the election of a 'refon' council in 1972. changed the development environment. In the 1970s. and especially for a limited period in the mid-1970~~the planning agenda of the CRy of Toronto focused on restrictive measures. The Central Area Plan ('adopted' by city council in 1976 and 'approved' by the Ontario Cabinet in 1979) was the strongest move by the Cty of Toronto to shape the downtown area (see section 7.3.1). This plan attempted to contain development by reducing densities in the Central Area. Office development was severely affected by downzoning (Frisken, 1988; Gad, 1999). The emerging planning strategy heM that the further development of new office space in the Central Area should be limited in relation to the capacity of transportation facilities that already existed or had been committed pnor to the plan. According to the plan, growth in future office employment was to be managed by deconcentration and the establishment of suburban city centres (Frisken, 1988). In the 1990s, the 'downtown' coalition which includes various large firrns (banks and retailen), media and politically connected law firms, has been organized around the Toronto Board of Trade. This coalition pushed for the amalgamation of municipalities in Metropolitan Toronto in order to gain tax reductions (Todd, 1998). However, as will be shown later, implernentation of restrictive coalitions varied according to economic circumstances. It can be argued that a coalition of residents' groups and some business interests put emphasis of the quality of growth rather than stopping growth. Outside the Cdy of Toronto, distinct alignments between municipal govemments and large- scale developers were noticeable during the era of rapid expansion in the 1950s. In large-sale expansion projects, the cooperation of a municipality is essential. In the eady 1950s, one of the leading entrepreneurs in Canada, E.P. Taylor, commenced the development of the first large-scale suburban subdivision in Canada in the Don Mills area of Toronto's suburb of North York. In this case the municipality and developer shared an interest in developrnent and the rnunicipality involvement became "nothing more than a passive rubber stampn(Sewell, 1993, p. 95). The development of Downtown North York (later North York City Centre) exemplifies the role of different levels of govemments as promoten of development. Until the late 1970s, the Metro Bcrough of North York had no highly visible centre. The extension of the south-north Yonge Street subway line to Sheppard Avenue and the desire of the municipality to create its own city centre were in conformity with the deconcentration policy adopted by Metropolitan Toronto (Matthew, 1989; Municipality of Metropolitan Toronto, 1989). In the initial phases of development in the 1970s, office development depended heavily on the initiatives of municipal and federal govemments to build and occupy major office structures. One of the first office buildings in the future North York City Centre was the North York Board of Education (1970). It was followed by the North York City Hall and the largest office building in North York at that time, which was occupied by the Department of Public Works of the Government of Canada. In the 1980s, local developers and developers with vested interests in the area, became highly invohred in the development of the City Centre and together with North York's high-profile mayor (Mel Lastman) pushed for development. (A more detailed account of the public and private agents creating North York's City Centre will be provided in section 7.3.2.) Outside Metropolitan Toronto, development has been strongly promoted by large private real estate developers. The case of Mississauga City Centre is an outstanding example. The idea of developing a city centre in Mississauga was initiated by the largest landowner in Mississauga in the 1960s and 1970s (Lorimer, 1978). Bruce McLaughlin, who had assembled a large land bank, had the ambition to build the centre of the new Town of Mississauga (a number of municipalities were combined in 1967 to fom the Town of Mississauga). When McLaughlin appeared before the Mississauga tom council to present his plans for the City Centre in 1969, the town council was extremely supportive. However, with the election of a 'reforrn' council in 1973, Mclaughlin had to wait until the re-election of a prodevelopment council in 1976 for his plan of the City Centre to be adopted (a detailed account will follow in section 7.3.3). Development issues, especially those related to office development, in other municipalities have been less visible. However, the practice of favouring industrial and commercial development in order to increase the assessment base seems to have been penrasive over the last couple of decades. The general liberal zoning for 'industrial areas' is an indication of the attempts to increase the real estate tax base and revenues. Growth coalitions are, thus, at work in a selective fashion, and they are time and space specific as the Toronto urban region experienced different phases of growth promotion and growth management.
2.1.6 Office users in the Census Metropolitan Area The time period 1950 to 1990 witnessed an enonnous growth of the kinds of jobs which are housed in office buildings. All sectors of the economy contributed to the growth of office-based employment. By the mid-1990s, about one third of al1 employrnent in Metropolitan Toronto was classified as 'office employment' by Metropolitan Toronto Planning Department (Metropolitan Tomnto Planning Department, unpublished tables). Several authon, especially Gad (1985, 1991a), have commented on the vast array or great divenity of office space usen. There is a large number of office establishments in the metropolitan region. In the central part of the City of Toronto alone there were more than 4.800 establishments in 1971 (Gad, 1979, p. 293) and in Metropolitan Tomnto there were about 32,000 in 1988 (Gad, 1991a. p. 436). These office establishments range from very small ones (1-3 employees) to very large ones with several thousand employees. The size distribution is highly skewed toward smaller establishments. Large establishments with more than thousand employees are relatively rare and are largely confined to public sector, utility, and bank and insurance company offie establishments. Since around 1970, a process of 'back office' formation has resulted in the spatial fragmentation of the larger head and regional offices (Huang, 1989). There were also signifiint changes in labour force composition, which, together with an increasing geographic spread of the places of residence of the labour force, led to new kinds of geographies of office location. Since the 1950s, both female labour force participation and professional- managenal jobs have increased stmngly (Huang, 1989). These two trends together led to a considerable increase in the percentage of female managerial-professional employees in the Central Area (Huang, 1989) and the decentrakation of some offices or parts of offices taking advantage of a relatively flexible female labour force supply in the outer residential areas (Huang, 1989; Gad, 1991a, pp. 43841; Gad and Matthew, 2000). In Toronto, the processes of central district specialization and suburbanization have created different types of office clusters (Gad, 1985). Highorder financial services, media, and some business services (law fimis, accounting and management consuking fimis) remain relatively central, hileother types of office space users have dispened across the metropolitan region. Gad (1985, 1991a) argues that there are three kinds of suburban offices: small offices that serve largely localized suburban markets, offices that exploit the suburban advantage of high accessibility by car (for example, manufacturing company head and sales offices, engineering consultants), and back offices and similar offices that take advantage of the flexible female labour force in the suburbs. Gad suggests that 'the various spatial patterns of industries, establishment size, status, occupations, and other aspects, such as gender of employees or commuter patterns, combine to produce quite distinct office nodes in the Toronto area. It is tempting to see an intra-urban set of regions emergingn (Gad, 1991a. p. 441). Other authors support this notion of a diversity of office nodes in the Toronto area. Matthew (1992, 1993a, 1993b) argues that within the suburban realm each centre or concentration has developed a measure of specialization.
2.1.7 The scope for office development This brief portrait of the post-Worid War II Toronto region indicates the enormous scope for office development over several decades. Strong growth of Toronto's economy coupled with growing diversification is reflected in a huge variety of office establishments. Thus, demand for office space of different kind has been very strong. In the context of a growing urban region, office establishments have spread across many different types of locations. This spatial spread was supported by a public growth management system, which provided a wide range of infrastructure for urban development. However, within this general framework, municipalities with different interests and growth dynamics provided ample opportunity for different niches of office development. It is quite apparent that municipal fragmentation and other spatially differentiated conditions made it possible for office developers to exploit these niche markets. Finally, it should be pointed out that oppominities for office development are also accornpanied by constraints. The physical and social conditions for office development Vary greatly. Aithough Toronto is not an old city, there are substantial areas of nineteenth century development. Redeveloprnent of an earlier fabric, even if it consists of offices that have already replaced earlier commercial and residential buildings, has increasingly faced resistance. Traffic generation is resisted too, especially by older elite and new professional classes in inner city neighborhoods. Extemalities are also highly visible in and around some of the new 'suburban downtowns'. Replacement of older buildings and the impact of new developments on surrounding single-family residential neighborhoods have led to many conflicts. In the outer suburbs, on the other hand, land use conflicts, especially involving office development. are less frequent. Development in large greenfield industrial or business parks or socalled 'employment areas' is well isolated; hence, conflicts between residential groups and office development are almost un known .
2.2 The Research Process and the Use of Realist Method In ternis of approach, that is questions raised, assumptions made, and the broad theoretical framework, the reseamh presented in this thesis is grounded in the political economy tradition. The rnethods of research are grounded in the 'realist' framework explicated by a geographer, Andrew Sayer (1984). Pratt (1994) was one of the few researchers to use the realist approach in the analysis of real estate development. This section outlines why this paiticular approach and this method are appropriate for research on office development in the time period 1950-2000 in the particular setting of Toronto. Urban development is well theorized within the political economy approach. This approach draws attention to structural conditions within capitalist economies and societies. It also draws attention to the role of the state in urban development. Unless a strictly Marxist structural version is adopted, the role of the local state in urban development is problematized. Also, the approach perrnb the investigation of the relationship between structure and agency. The outline of the political economy approach and its particular relevance and application in this study have been provided in section 1.1.2. In the following paragraphs, I will briefly outline why realist method is appropriate for this research project. It is not my intent to review this method, but to outline its basic features and to demonstrate why it is particularly suitable for research on office development in the case of the Toronto study. Realist methodl as developed by Andrew Sayer (Sayer, 1984, 1987; see also Cloke et al., 1991), is founded on a critical response to posiovism. Sayer rejeds the notion that the workl is made up of discrete events that can be measured as specific phenomena. Instead, he suggests that it is a stratified and differentiated worid of complex relationships that need to be 'unpacked'. Realist method emphasizes exact definitions of concepts. It wams against 'chaotic conception', in which objects are grouped into categories that have little or no intemal logic or structural interaction. The 'setvice sector' is mentioned as an example of a 'chaotic conception' (Cloke et al., 1991). Pratt (1994, pp. 207-8) argues that an industrial estate is a chaotic conception, and as such it is not appropriate to develop an autonomous theory of industrial estates. Rather, he claims Tt was considered more appropriate to identify the processes and mechanisms that give nse to the 'eventl of an industrial astate, and to explain their development in the specific places and times with recourse to the structures of provision and the contingent conditions pertaining therew. Chaotic conceptions are visible in research on office development. ûffice development is a particular component of the 'real estate sectot, which has its own characteristics separate from other real estate activities. Grouping office development with residential or even retail development resuits in oversirnplification of office development. For example, office buildings have different usen, location characteristics and agents invoived than in retail facilities. Also. the common terni 'developer', which is attached to companies invohred in office development, fails to differentiate between agents that are involved in devefoprnent and other related functions such as investment and ownership. A number of dualities govem the realist approach. First, the distinction between necessary causai powers and contingent conditions is introduced. The notion of contingent conditions argues that the existence of two objects does not necessarily indicate some kind of relationship between the two objects. In order to identify causal power a relationship has to be in place. This relationship is the necessary condition. An example, used by Sayer to illustrate this relationship, is the relation of landlord and tenant. The existence of one necessarily presupposes the other (Sayer, 1984, p. 82). The identification of this type of relationship enabies exposing causality because the necessary condition already exists. The second distinction is between the abstract and the concrete. The realist approach considers the empirical study of contingent relations as concrete research. Concrete research is required in order to discover the actual contingent relations under which the causal mechanisms are triggered. Abstract or theoretical concepts are used to unravel the necessary conditions by abstracting from concrete objects. According to Sayer, concrete research permits the abstraction of necessary relations. Embedded in his conception s the notion that the relationship between abstract and concrete is reciprocal and dynamic, as both interact and modify each other. In the beginning, the conceptualizations of concrete objects are likely to be superficial, and in order to understand their diverse determinations they need to be abstracted first. When each of the abstracted aspects has been exarnined, it is possible to combine the abstractions to form concepts which grasp the concrete nature of their objects (Sayer, 1984, p. 81). Finally, structure and agency are addressed. The realist approach considers structure and agency as embedded in the context of necessary and contingent. Structure is generally identified with We necessary, while agency is the generator of contingent conditions. However, the causal powen of structures will not always be realized and not al1 contingencies are simply a matter of human agency (Cloke et al., 1991). Sayer (1984, pp. 219-28) also distinguishes between 'intensive' and 'extensive' research. In intensive research the primary questions concem how causal processes work out in a particular case or a small number of cases. Extensive research is concemed with discovering some of the common properties of the population as a Mole. In this study, I examine a specific field within the real estate sector, office development, and the major question is how offii development comes about in the spatial practices of selected large and medium-sized real estate developen operating in the Toronto metropolitan area. This is reseanh of contingent relations geared to discover the conditions under which the causal mechanisms are triggered. The role of agents is investigated by studying their practices. An investigation of a limited number of cases requires particuhr techniques. These include qualitative methods, semi-stnictured interviews, and a strong reliance on regular documentation of the subject matter. These techniques permit the detailed study of the individual finn in its causal context, and, in tum, this enables the researcher to establish the connections between the necessary and the contingent. Land has a necessary role for the creation of capital gains through the construction of various structures. However, the creation of capital gains does not occur at al1 tirnes in al1 places, but rather in particular instances (exemplified by building cycles) and in specific places (sometimes in downtown and often in suburban settings). This argument is advocated by Fainstein (1994) suggesting that in relation to real estate development Virtually al1 values exist in combinations and are increased or lowered, based on the context in which they are used" (p. 223). Certain causal powen are argued to exist necessarily by the virtue of the characteristics and fom of the objects that posses them, but it is contingent whether these causal powen are released or activated. In the case of real estate development, it depends on numerous factors, such as a particular type of demand, zoning regulations, access to capital, and a 'spark' of an entrepreneuriai developer, wbether a building materialires in a certain place. Extensive research, on the other hand, would deal with office development in a different manner. It would ask whether there are general characteristics and patterns to be discovered over the whole population, and adopt techniques, such as large-scale forrnal questionnaire suiveys and descriptive and inferential statistical analysis, to uncover reguhrities. Evidently, then, in this case pattern and regularity are possible indicaton of causality. For the purpose of the study of office development, extensive research is unsuitable for a nurnber of reasons. First, what constitutes a developer is a fair question, and since a developer assumes a number of roles, the categoiy 'developer' is problematic. Second, there is no formal account of the total population of office developers. Third, the process of devebpment is complicated because it involves a large number of different types of agents and hence cannot be separated from contingent conditions. Finally, there are a few large real estate companies operating as office developers, which are also publicly held. Extensive research on a small population of two or three-dozen companies does not make rnuch sense. However, rnethods and procedures used in extensive research are employed as well. Attempts are made to use extensive data as much as possible. Building permit data for Canada and b provinces and data on investment of financial institutions in real estate are used. Also, comprehensive data on the office building stock in Toronto is used. Some of these extensive sources are analyzed in order to discover regularities or relationships. Intensive and extensive procedures differ also in the type of account produced. In intensive research, the groups to be researched should be such that the members of the group relate to each other either structurally or causally, thus permitting interpretation of causality through an examination of actual connections. This is vitally important in the case of the real estate sector, which is highly heterogeneous. In the case of real estate development, the examination of relations between developers and financiers and between developers and local municipalities makes it possible to distill the causal conditions that trigger, facilitate and enhance office development. In extensive research, the groups employed are taxonornic, i.e. those that share formal attributes, but do not necessarily connect or interact with each other. The account produced would describe 'representative' generalizations which lack explanatory possibilities. However, both research procedures have inherent weaknesses. Extensive research is a weaker explanatory tool as this type of research lacks sensitivity to detail and it has a limited explanatory power with regard to the identification of causal mechanisms by stressing general patterns. The main weakness of intensive research methods is the lack of representativeness. It may, therefore, be susceptible to the problems of over-extension of concrete research (Cloke et al., 1991). As a result, both approaches are used in this thesis, although the emphasis is on intensive research.
2.3 Data of lnterest and Data Collection The general question about how office buildings were produced in Toronto over the last half century requires answen to specific questions and the manhaling of specifk data. The following questions regarding the agents, the office stock, govemment policies, and financing practices are at the core of this study: Who are the agents responsible for office development in the Toronto Census Metropolitan Area, and what are their spatial practices? How do agents responsible for office development act within the framework of the 'three dimensions of capital switching'? How has Toronto's office stock developed since 1950? What are the different types of relationships between govemments and developers? What are the financing practices of real estate developen and what is the role of financial institutions in office developrnent? Given the political economy approach, including the theorkation of office development, and the realist methodology chosen, the data required and the methods of data collection are as follows. Extensive data on real estate companies and office development is relatively scarce in published form. This type of information cannot be found in census data or specific annual surveys such as on manufacturing (Statistics Canada series on Manufacturing Industries of Canada). No cornprehensive industry directories like the Canada Legal Directory or the Canadian Law List or the National List of Advertisers are available. Unlike in the case of sorne sectors in the economy, the total size of the real estate sector is questionable (see section 3.1). Further, it is a highiy cornpetitive sector. This sector indudes numerous small, privately held companies that do not reveal their real estate holdings or other business characteristics. As a result. a combination of information sources has to be used to identq real estate companies involved in office development.
2.3.1 Extensive data Office develo~mentand office buildinas Two kinds of data sources are used here: building pemits and office floor-space (Table 2.1). In Canada. no agency collects data on office buildings or building completions at the national or the provincial levels. Therefore, I use office building permits as indicator measuring office development at the national and the provincial levels.
Table 2.1 Type of data available on office building permits and office floor-space
Spatial unit Office building permits Office floor-space (Statistics Canada) (Red estate brokers) National Value, 1961-99 (Annual) Not Available (2)
Provincial Value, 1961-99 (Annual) Not Available
Census Metropoiiîan Available but expensive to obtain Detailed data is available for Toronto (by district for 1964-99,
Area (not used) by individual buildings for 1971, 81,91,99), and for Calgary
(by dirçtrict for 1985-99, by indiiual buildings, for 1988,
1999). Aggregate for other major Canadian CMA's
Municipal Available for certain municiialibjes The same as for CMA's
for recent years (1)
Notes: (1) In some municipaiiies, offibuilding pemits at the municipal level are embedded in commercial building pemits. In the 1990s, these municipalities have disaggregated the commercial cornponent into office, retail and industrial. (2) In the late 1990s, Royal Le Page has started to compile the national stock of office buildings. Basically, this list includes the six-largest metropditan areas in Canada.
Data on building penits was obtained from Statistics Canada publications that incorporate statistics on al1 types of building pemits. Specifically, the dollar value of office building penits issued in Canada and selected provinces for the period 1961-99 are used (Statistics Canada, Building Penits, Catalogue No. 64-203; for 1998-99. CANSIM Matrix No. 4073). For Calgary, office building data (office building inventory) was obtained from a report prepared for the City of Calgary, newspapers, and a commercial real estate brokerage finn (Royal LePage office in Calgary). Comprehensive data on Toronto's office stock was obtained through the reports of Royal LePage (fonerly, A.E. LePage). This Company has created a database on Toronto's office buildings. which goes back to the late 1950s. Royal LePage used to publish annual reports in Toronto's Office Leasing Directory, and also in the publications Real Estate Market Review, and the Annual Real Estate Suivey. These reports provide detailed data on the Toronto office inventory by a wide range of spatial units. Also, I obtained from Royal LePage lists of office buildings for four time cross-sections, namely 1971, 1981, 1991 and 1999. Data in these lists of individual buildings includes the address of buildings, the year of construction, and office floor-space in each building. The 1999 list includes also nurnber of floors in each building. By using this data I was able to reconstruct Toronto's office inventory in four cross-section years and changes over the decades: l971-8l, 1982-92, 1993-99; these periods of eleven years correspond approximately to building cycles. Two problems arise with this type of data: the definitions are vague, for example, what constitutes office space, and some degree of inconsistency of the measurement of floor-space. Other data sources were used to venfy the accuracy of the Royal LePage data. For example, several municipalities have their own databases on office buildings (1 used data from North York and Mississauga). However, these data sources are themsefves incomplete, because municipalities rnay include only a sample of the largest office buildings (North York) or do not include buildings exclusively occupied by the owner or a single tenant (Mississauga). In addition, they often use outside sources, which rely on surveys by real estate brokers.
Real estate companies Extensive data on real estate cornpanies and especially on those engaged in office development is scarce. Statistics Canada produces aggregate statistics on 'real estate operaton and developers' based on the Standard lndustnal Classification (Statistics Canada, Canadian Standard Industrial Classification for Companies and Enterprises, 1980, Catalogue No. 12-570E). This category includes a wide range of cornpanies that are related to real estate. These cornpanies are engaged in: a land development and construction of residential and non-residential buildings; acquisition, assembly, subdivision and servicing of land; ownership and operation of buildings. Real estate associations provide only general and partial data. One of the prominent real estate associations, the Canadian lnstitute of Public Real Estate Companies (CIPREC), published annual reports on its members between 1970 and 1996-7. These reports mainly include the publicly traded cornpanies, which are also the largest. A major problem with Statistics Canada data and the data of CIPREC are that they do not differentiate between the types of real estate companies. All real estate companies, large and small, commercial and residential, developers and traders, are included in the general category of real estate companies. Financial institutions and mal estate investment Real estate assets of financial institutions, mainly banks and life insurance companies, are measured through mortgages and direct investment in real estate properties. A study by Des Rosiers (1984) is a rich source for information on mal estate investment by life insurance companies and pension funds in Canada in the 1950-1980 period. Aggregate data for this thesis on life insurance companies is attained from the Canadian Health and Liie Insurance Association. This source breaks down the assets of insurance companies into their major components and provides historical data. In addition, reports of the Superintendent on Financial Institutions provide similar data but at the individual Company level. Finally, more recent annual reports (the second haif of the 1990s) of individual life insurance companies provide a breakdown of mortgages and real estate investments by product type (residential, industrial, retail, and office), and occasionally location (city or downtownlsuburbs).
2.3.2 Intensive research Real estate campanies No documentation of the history of commercial real estate in Canada as a whole exists at the moment. Documentation put together for this thesis is based on knowledge gained through intensive research on the rea! estate sector. Specifically, it is based on a few books published on urban development and related issues scrutinizing Canadian real estate developers in the 1960s and the 1970s. However, the more recent boom experienced by the real estate development sector in the 1980s did not trigger intensive inquiry with the exception of several books on the Reichmann family, the owners of Olympia & York. Accordingly, additional sources had to be used. These include media files, biographies. and annual reports of real estate companies. Media files consist of an abundant number of newspaper clippings primarily from the Globe & Mail, Financial Post, the Toronto Star, and the Mississauga Business Times, and from trade joumals, such as Canadian Building and BuiMng Managemenf. Approximately 1500 newspaper items from 1969 to 2000 were used. These items were of unequal weight. Many were advertisements or simple press releases indicating the start of a building. Others were features on developers: still othen were on municipal policies conceming office development. The major articles used are listed in the bibliography under the heading 'Newspaper and Magazine Articles'. I was able to use an extensive collection of newspaper clippings on urban development assembled by Professor Gunter Gad, Department of Geography, University of Toronto over the time period 1969 to 1998. From the middle of 1998 onward my own clipping files have covered office development in Canada. A major and valuable source used extensively throughout this research consists of the annual reports of publicly traded real estate companies. Between 1970 and 1999, the largest real estate companies in Canada, except Olympia & York, were at some stage of their corporate existence publicly listed companies. The number of public companies varied over this time pend between ten and twenty. Although public companies represent a small segment of the total number of real estate companies in Canada, their signifimce is greater than their number. Publicly listed companies are the largest in tems of assets, in diversification of the products they deliver, and in their national and international spatial scope. The largest real estate companies are the 'powerful land-interested acton' (Feagin, 1982; Feagin and Parker, 1990) and they have more impact on office development than smaller companies. (Also, almost any information on private companies is limited and difficuit to corne by. Collecting systematic andlor in-depth data is almost impossible). The annual reports include two components that are of major significance to this dissertation. First, they provide the real estate portfolio owned by a specific company, and second, they elaborate on the cornpanies' decisions and explain their actions and their understanding of the business environment. In total, I examined annual reports of approximately fifteen companies for each year of the time span in which these companies were publicly listed. A few companies have reports for the last thirty years. For example, Trizec Corporation was a publicly listed company since its incorporation in 1960; 1 was able to review the thiity annual reports of this company issued between 1969 and 1999. Other companies were public for shorter periods, such as Cadillac Fairview (1975-87 and 1997-99) and Oxford Development Corporation (1975-79 and from 1987 onward). For private companies, data was obtained through collection of newspaper articles and advertisements, professional joumals, company brochures, corporate web sites, and face-to-face interviews.
Identification of office develo~ers To substantiate the argument that multiple office developen have particuhr spaces in which they operate, the identification of as many office developers as possible in the Toronto area was needed. This was one of the most challenging tasks, since there is no single source that has this type of information. The task was further complicated as a result of the large number of office buildings constructed in the last thirty yeais. ln 1999, there were more than 1200 office buildings in the Toronto metropolitan area; in comparison, in 1969 there were only 350 office buildings. Many buildings have passed on to new owners and it is very cornplicated to identify the original developer. A large nurnber of sources was needed to accomplish the identification of office developen and to match them to particular buildings (details in section 3.4). Financial institutions and office development Most of the sources on the involvement of banks and life insurance companies in real estate financing and development do not differentiate between types of real estate assets (residential, industnal, office and retail) or whether buildings were developed or acquired by these companies. Annual reports, except for providing aggregate figures of mortgage and real estate investment, also do not indicate the type and location of these investments. Only since the late 1990s have annual reports of selected Me insurance companies differentiated the mortgages by real estate product (residential, retail, industrial or office) and provided information segmented by property type on the real estate portfolios owned by these companies. These companies are the largest Me insurance companies and the most actively involved in commercial real estate. They include Manulife Financial, Sun Lie, Great-West Life, and Canada Life. ln addition, 1 collected items (newspaper articles, advertisements) on the involvement of financial institutions in real estate investment. One life insurance company, which was the most active in real estate development over much of the 1970s and 1980s, Manulife Financial, is examined in detail. I obtained data on this company through access to intemal reports and interviews with company executives. Data on Manulife Financial includes the company's detailed real estate portfolio broken down into office, retail, industrial, and residential assets. In addition, the office portfolio is differentiated by location, including information on individual office buildings in Canadian cities. For banks, information is based on a nurnber of sources. Unlike annual reports of life insurance companies, which provide some information on their real estate exposure, the annual reports of banks are structured in such a way that real estate is embedded in other business segments. A variable degree of information was obtained on three Canadian banks. The Canadian Imperial Bank of Commerce (CIBC) real estate subsidiary, ClBC Development Corporation, which was active in real estate between the late 1980s and the late 1990s. published a number of intemal reports. The publicity regarding the sale of the Royal Bank real estate portfolio in late 1999 provided the extent of the bank's ownenhip of office buildings. Finally, through the archives of the Bank of Nova Scotia, the bank's Staff Magazine. and annual reports, information on its involvement in real estate was collected.
Municipal c~overnmentsand office develo~ment Information on municipal niles was gained through the examination of official plans. Official plans express the policies and intent of municipalities regarding their physical development. Selected official plans in the Toronto metropolitan area were scrutinized (City of Toronto, North York and Mississauga). These plans provide the platform for development which is then translated into specific zoning bylaws. Based on statements in these offiiial documents the policies that directly or indirectly shape office developrnent were exarnined. Municipal practices are diverse and flexible. Practices are more diicult to assess than policy documents sucb as 'OffÏÏal Plans'. During the process of prepanng an official plan revision, submissions to the council by different individuals and organizations are made. These submissions reflect the concerns of interest groups. In this study, submissions to the North York City Council regarding the amendment of the city's office policy are examined. Staff Reports (professional opinions of the planning deparbnents in municipalities) on planning issues and reports by hired consultants are another source of information. Finaliy, articles in the Globe & Mail. the Toronto Star, and the Mississauga Business Times on issues such as land use rezoning, amendments to official plans, and the interaction behveen developers and municipalities are used.
Interviews Interviews as dialogues with industry insiders are an important strategy in economic and social geography (Schoenberger, 1991; Clark, 1998; Cochrane, 1998: McDowell, 1998). Schoenberger (1991, p. 188) notes the contribution of inteiviews to the understanding of corporate strategies: The richness of detail and historïcal complexity that can be derived from an intewiew-based approach alkws one to reconstnrct a coherent representation of how and why particuiar phenomena came to be. In this sense, the method can greatly ampli and complement information derived from more conventional approachesn.
Case studies and individuai observations offer the opportunity to reflect upon stylized facts or conventional interpretations of economic and social change. Although 'sacrificing' to some extent representativeness and statistical generalization, this type of insight is valuable, especially in the compact and highly interconnected real estate sector. One important element of this sector is informal knowledge networks that facilitate obtaining information through intensive social networks. This is reinforced by the fact that it is a highly compact sector in terms of the number of major players functioning as the pivots in the real estate development field. The total population of the publicly held real estate companies that have been engaged in commercial real estate developrnent in Canada, and specifically in office development, is small. I have interviewed the former and present senior executives of most large Canadian real estate companies. In addition, interviews with smaller players, such as privately held and foreign companies, were conducted. Financial institutions involved in real estate were also interviewed. Interviews with a brokerage firm and a real estate consultant were designed to provide additional insights. Most of the interviews were ananged by telephone. The majority of the chosen executives expressed their willingness to engage in a short interview (30 minutes). The large and publicly traded cornpanies were the most cwperatnre, whereas privately-held companies tended to be more secretive and less willing to participate in interviews. Initial interviews generated personal introductions to executives in other companies. The interviews were mostly with senior executives, from the chief executive officer or president of a company to vice presidents. In several companies, interviews with leasing directon were conducted. In total I have conducted 29 interviews (Table 2.2). In the end of the reference section, a detailed list of interviewed persons and interview dates is provided.
Table 2.2 List of interviews
Type of Number of Number of company companies interviews Pubticly listed 7 15
Privately held 3 4
Foreign 1 1
Life insurance 1 4
Banks 2 2
Brokerage firrn 1 1
Consultant 1 1
Advisor 1 1
Total 18 29
The interviews were camed out between May 1999 and April 2000, with the majority of interviews undertaken between May and July 1999. Most of the executives interviewed had muitiple experience in different real estate companies. In other words, they held positions in more than one real estate company throughout their professional career. Furaier, some switched positions between the public (local govemments) and the private sector, for example, from a position in a municipal planning department to a position in a real estate company. These muliple employment positions are advantageous to my research for two reasons. First, although I interviewad a Iimited number of executives, their multiple expenence provides hsights that are beyond their cuvent position or the last position that they held. Second, this enables them to reflact on the industry from a broader point of view. In addition to completing information on the corporate histoiy, the major themes in the interviews included the following areas: corporate criteria for locational decisions regarding development at different spatial scales at different times, the critena for engagement in different types of property development and investment, the sources of financing, and the importance of specifc municipal settings (Table 2.3).
Table 2.3 Major themes and questions in interviews
Theme Specific questions Locational decisions How did the company choose specific sites? What is the dierence between downtown and suburban devebpment? What is the importance of creating 'presence' in a particular location? What are the motives for diversification at the national or international levels? How did the company's spatial strategy change over time? Types of real estate investments What are the reasons for devebping offie buildings? Matcauses the shifting of investment between different types of properties? Matare the criteria for development and what are the criteria for acquisition? Did the company develop speculative buildings or did it custom-built? Matare strategic assets and properties that draw on changing opportunities? Financing What were the Company's major sources of financing? How did financing affect the type and scale of development? Ooes oie company have permanent financial partners? Matcriteria are ernployed by financial institutions for the provision of loans? Urban setting How does the company 'know' where to develop? Matare the advantages of staying in the same place? What is the role of the local municipality in the process of office development?
Prior to undertaking interviews, extensive research on office development was conducted. It allowed questions to be formulated in the language used in the real estate sector. In addition, each interview was preceded by extensive research undertaken on the specific company or companies under investigation. For each organization in question, a specific schedule was tailored by drawing upon background research on that specific organization. This familiarity and knowledge assisted in establishing credibility and allowed dealing with specifn issues. Interviews were open-ended, with questions prepared in advance; however, I was responsive to issues raised during the interviews and often changed the questions according to the direction the interview was taking. The interviews have provided a set of rich infornation and helpful ideas for this research. In general, the interviewees were quite straightforward about strategies, relationships with municipal govemrnents, and financing. However, since I underplayed the importance of financing in the eady stages of this research, I was able to attain less information than ! hop& to get. Also, when I touched upon this issue, it was often diffiiult for the penons interviewed to remember the specifcs of financing arrangements. Otherwise, most of the interviewees had a good recollection of events, and since some of them are not currently in the forefront of the business they were veiy open. Interviews with former executives tended to be long (about an hour) and, therefore, encompassed a larger number of issues. Some problerns arose with the currently active persons due to time limits (about 30 minutes) and their reservations regarding current information. Interviews with private companies were the most problematic since they attempted not to reveal detaik, and I felt that they were holding back information. AI1 interviews were typed in their entire length and cornpletely transcribed. Each interview produced between 3 and 4 pages of typewritten notes. CHAPTER THREE
THE CHANGING CANADIAN REAL ESTATE SECTOR
The changing nature of the Canadian real estate sector in the twentieth century has received little attention. There have been only a few studies which include the history of real estate developers in the first half of the centuty (Gad and Holdsworth. 1984, 1987a, 1987b). hile research in the 1960s and 1970s had been, to a large extent, aimed at exposing the 'conspiracy' surrounding real estate development (Collier, 1974; Gutstein, 1975; LorÎmer, 1978). A major part of the more recent knowledge on real estate developers is based on the exceptional case of Olympia & York (Sudjic, 1992; Crilley, 1993; Fainstein, 1994; Ghosh et al., 1994). This chapter explores the development of the Canadian real estate sector, the role of Canadian developers outside Canada, and the role of foreign developers in Toronto. The real estate sector in Canada in general and the sub-sector engaged in offm development in particular has changed drarnatically over the last half a century. Changes at the industry level, such as sire, propeity type, and modes of operations are complemented by changes in the spatial arenas of operations. This chapter is made up of four sections. The first section outlines the four major phases of the real estate sector's history through the examination of the major real estate companies in Canada. Since Canadian-based real estate companies have been very active in the United States, section two provides a concise account of these companies' operations in office development in the United States. Foreign real estate companies also formed subsidiaries in Canada and were invoived in the real estate sector; this aspect is discussed in section three. Finally, as this study focuses on Toronto's office development, section four identifies the major real estate companies that have been active in office development in the Toronto metropolitan area. The chapter concludes with an attempt to use knowledge generated frorn documenting the history of the real estate sector to sketch a typology of the diverse and changing character of real estate companies.
3.1 The Trajectory of Commercial Real Estate Companies in Canada During the twentieth century. and particulaily in the last forty years, the Canadian real estate sector has grown in scale and scope and has experienced a senes of important changes. Before World War II, financial institutions and large usen of space camed out most office development. During the two decades after the War, the vast majonty of the contemporary brgest commercial real estate companies in Canada were established. During the next phase, between the eariy-1970s to the late-1980s, Canadian real estate companies consolidated and divenified, and becarne sorne of the largest real estate companies in Notth America. Finally, during the 1990s, the sector has restnrctured as some of the largest real estate companies disappeared and institutional investors have taken a commanding position. Before sketching the history of the real estate sector in Canada, its relative weight in the Canadian economy needs to be addressed. Detemining the overall size of the real estate sector is problematic for a nurnber of reasons. First, do you measure the sector by the value cf the real estate properties or by the assets of the real estate companies? Do you include land in this calculation or only the value of the built structures? Miron (2000, p. 156) estimates the size of the real estate sector in Canada by using the total value of land assets and the value of the built structures (residential and non- residential). Based on his calculation, in 1997real estate assets amounted ?or 28 percent of al1 assets (which range from property to saving accounts to equity stocks) in Canada. Using this method, in the penod of 1966 to 1991 the share of the real estate sector was even higher: between 32 to 35 percent (Table 3.1). Second, focusing on the non-residential component of the real estate sector would result in a smaller share of the real estate sector in the economy. Considering business (not including govemment) gross investment in the fom of construction of new buildings and additions, repairs and renovations of existent buildings (not including land) as a percentage of the GDP brings the share of the real estate sector down to 4 to 8 percent in the period 1966-1996. Finally, if we want to focus on real estate companies, which companies are to be included in this sector? Statistics Canada uses the Standard Industrial Classification (SIC) to define 'real estate operators and developers'. This is a very expansive definition, since it includes companies that are not directly related to real estate development and ownership. As a resuk, a large number of fitms are included in this category. For example, in 1971 there were over 26,000 fimis defined as 'real estate operators and developers', and in 1986, 55,000 firrns. Also, large owners of real estate assets such as, life insurance companies and pension funds are not included in this definition. Using the definition of operators and developers results in the real estate sector accounting for 5 to 8 percent of the assets of al1 companies in Canada between 1966 and 1996 (Table 3.1). To provide estimations on the relative role of the real estate sector, Statistics Canada suiveys are used: National Balance Sheet Accounts (Catalogue No. l3-214), Corporation Financial Statistics (Catalogue No. 61-207, later Financial Statistics for Enterprises, Catalogue No. 61-219) and National Economic and Financial Accounts (Catalogue No. 13-001). The first sunrey, National Balance Sheet Accounts, provides data on total assets in Canada. The second survey, National Economic and Financial Accounts, enables the calculation of the percentage of investrnent in non-residential structures in relation to the GDP of a paiticular year. Using the third survey, Corporation Financial Statistics, makes it possible to calculate the relative weight of the assets of 'real estate operaton and developers' in relation to total corporate assets.
Table 3.1 The weight of the real estate sector in the Canadian economy, selected years, 1966-96
Year Real estate sector as a Invertment in non- Real estate cornpanier (3) as a % of total assets (1) residential structures as % of total coiparate assets a % of GDP (2) 1966 31.6 7.0 5.3
Notes: (1) Real estate assets include land, residential and non-residential structures. (2) Annual investrnent by the business sector. (3) Assets of real estate operators and developers. (4) 1997 figure (Miron, 2000, p. 156). Sources: Statistics Canada, Corporation Financiat Statisticç, Catalogue No. 61 -207 (1971, fW6, 1981, 1986); Financial Statistics for Enterprises, Catalogue No. 61 -219 (1991, 1996); National Ewnomic and Financial Accounts, Quarterfy Estimates, 1961-1992 and Third Quarter 1998, Catalogue No. 13-01; National Balance Sheet Accounts, Annual Estimates, Catalogue No. 13-214.
The share of the real estate sector in total assets has been quite stable in the period 1966 and 1991. Its most severe decline was in the 1990s: it decreased from 32 to 28 percent of total assets between 1991 and 1997. The highest values of the other two indicaton occuned at different times. The peak of investment in non-residential structures was in 1981 (7.8 percent) while the assets of real estate operaton and developen peaked in 1991 (8.2 percent); both reached their lowest values in 1996. High inflation in the earîy 1980s contributed to the relative increase in the value of non-residential structures; the aftermath of the 1980s building boom is reflected in the increased share of real estate operaton and developen' assets in the economy in 1991. The slowdown in real estate development in the eady- to-mid 1990s resuited in low values of both indicators in 1996. lnvestrnent in non-residential structures includes investrnent in shopping centres, industrial buildings and office buildings, but also schools, hospitals, and infrastructure, such as highways, bridges and sewen. Office buildings consist only a small fraction of investment in non-residential structures. An coarse estimate would indicate that investment in office buildings is likely not more than 1 percent of annual GDP, that is a very small pait of the economy and very much out of line with the high visibility of office buildings. Table 3.2 provides a list of the largest Canadian-based ownen of real estate assets in the last thirty yean. Our ability to construct a detailed history of the real estate sector in general and of office development in particular encounten several problems. First, information regarding the assets of real estate companies is available only for the publicly listed companies, which are generally the largest. The assets of the twehre-largest real estate ownen increased six-fold between 1971 and 1999 (in constant 1992 dollars) and their share in the real estate sector (total assets of 'real estate operaton and developen' as defined by the SIC) grew from 15 percent in 1971 to 46 percent in 1999 (Table 3.2). The 1980s office building boom is not shown in Table 3.2 since at that time the economy as whole experienced expansion; as a resuit, the share of investment in non-residential structures remained almost unchanged. The increase in the 1980s and 1990s is a result of the large real estate companies becoming even larger, and because life insurance companies and pension funds became increasingly large owners of real estate assets (and listed in Table 3.2); however, life insurance companies and pension funds are not included in the definition of 'real estate operators and developers' under the Standard Industrial Classification. Privately owned real estate companies are not listed in Table 3.2, since no systematic information is available. One Company that is missing and should with no doubt appear in this list is the privately-owned Olympia & York, one of Canada's largest real estate companies between the mid- 1960s and the early 1990s. A second problem is that figures for the share of office properties (in dollar value) of the total real estate assets of companies are unavaiiable for the period between 1971 and the early 1990s (available only for the late 1990s). Nevertheless, based on the analysis of the annual reports of twehre-large companies, it is suggested that office properties have gained importance during this period. For instance, in 1971 four companies owned more than three office buildings each, while nine did in 1991. Table 3.2 The largest (publiciy held) Canadianbased ownen of real estate assets, selected yean. 1971-99, $ million (1)
Trizec 4,321 Bramalea Caisse (5)
Cadillac 1,092 Nu-West 4,287 CF (2) Brooùîield
Manulife 1,048 Daon 4,025 Manulife
Campeau 2,396 Marathon OMERS (6)
Marathon 731 Oxford @O) 2,377 Cambridge B.C Pension (7)
Sun Lie 719 Carrna 2,149 Markborough Cam bridge
MEPC 382 Brarnalea 1,964 BCED (3) Oxford
Bramalea 373 Marathon 1,849 Sun Life Manulife
Oxford 36 1 Sun Life 1,263 Campeau Teachers (0)
Western 353 Manuliie 1,053 Confed. Life (4) Sun Life
McLaughlin 349 Markborough 973 Oxford Riocan
Total 9,542 Total real estate 62,000 owners (9) % of 15.4 owners Notes: (1 ) AI1 asset values are adjusteci to the Consumer Price Index (1992=lOO). Not included in this table is Olympia 8 York Developments, which in 1981 and 1991 was probably the largest real estate Company in Canada. (2) Cadillac Fai~ew;in 2000 as a result of the purchase of Cadillac FaiMew by the Ontario Tea&ers Pension, and the consolidation of the two portfolios, it assets grew to $9.3 billion (Globe & Mail, May 25,2000). (3) Daon changed its name 10 BCE Devebpment Corporation in 1986. The asset value of BCED is for 1990. (4) Confederation Life. (5) Caisse de Depot et Placement du Quebec (pension fund). Caisse owns 73 percent of Cambridge. (6) Ontario Municipal bard Employrnent Retirement System (pension fund); OMERS is the single-largest shareholder of Oxford. (7) National Posf, December 11,1999. (8) Ontario Teachers Pension Plan Board was the single-largest shareholder of Cadillac Fairview until it acquired full ownership in early 2000 (Globe & Mail, Match 27,2000). (9) The SIC group 'reaf estate operators and developers' (Statiçtics Canada, Corporation Financial Statistics, Catalogue No. 61 -2O7,61-219). Sources: Canadian lnstitute of Public Real Estate Companies, Annual Reports; Company Annual Reports; Annual Reports of Pension Funds. In Table 3.2 the same hrge real estate companies appear throughout the 1971 to 1991 period, but there are a few newcomen and othen disappear between 1971 and 1981. However, the most significant change was in the 1990s. when for the fint time four of the largest owners of real estate assets were pension funds. In addition, in this thirty-year period, two life insurance companies were among the largest ownen of real estate properties. Real estate assets owned by publicly held real estate companies are for incorne-producingpurposes. The vast majonty of real estate assets owned by pension funds, and the majonty of real estate assets owned by life insurance companies are also for income generating purposes. Banks are not listed, since their major real estate properties are for their own use rather than for incorne purposes. Banks rent out space in their head office buildings. but their total real estate portfolios are generally not investment driven.
3.1.1 Office development in the first half of the twentieth century Even though there has been relatively little research on office development in Canada in the first half of the twentieth century, it is possible to discem some characteristics of the businesses engaging in office development (Gad and Holdsworth, 1984, 1987a. 1987b; Gad and Matthew, 2000). Gad and Holdsworth (1987a. 1987b) examined office buildings and their occupants in Toronto's old office district, which was, until the second half of the hventieth century, the prirnary office district in Toronto (approximately 98 percent of Toronto's office space in 1951). Erecting office buildings solely for investment purposes (incarne-producing properties) constituted a small segment of the real estate development sector before the Second World War. Until that time, owner-occupiers, such as banks and life insurance companies, devebped office buildings, which were usually multiple-occupancy buildings. Building owners occupied variable portions of the floor-space while excess space was leased to various kinds of office-type tenants (Gad and Holdsworth, 1987b). This practice was developed to seive as an additional income for the company's main business, not as the chief source of revenues. Building owners could justify occupying an expensive site by building at a high density, renting out space, and collecting revenues. Real estate companies developing office buildings for primarily investment purposes were active to some extent by erecting small-to-medium size, multiple tenant buildings. In the 1920s and to lesser extent in the 1930s, other developers/owners emerged, especially newspaper and utility companies. Also noticeable were speculative office developers, whose buildings did not cary developerlowner or anchor tenant company labels. In their first phase in the late 1910s and early 1920s. the company Yolles and Rotenberg (known later as YBR) built theatres on a contract basis, and then diversified into industriaüwarehouse loft buildings. In the 1920s. they branched out into developing speculative office buildings at the expanding western edge of Toronto's office district, in an area that was then rnainly occupied by factories and warehouses.
3.1.2 The formative era of modem developers: Entrepreneurial skills and 'external' capital During a single decade, between the mid-1950s and the mid-1960s, most of the large Canadian real estate developrnent companies were fonned. Usually, these companies staited as developen of single projects, either residential or commercial, targeting specific tedories. The role of financial institutions as developen diminished as real estate development companies gradually became the dominant providen of commercial space. Also, during this period, some of the largest local developen in the Toronto area were created. The emergence of large and divenified real estate companies in Canada is a postwar era phenomenon. Most of Britain's largest property cornpanies were founded immediately after WWll (Scott, 1996). MEPC (Metropolitan Estate and Property Corporation) and Hammenon Property Investment and Development Corporation, two companies to 'invade' the Canadian real estate market in the 1950s and the 1960s, were a product of this process. Similady, in the United States, the largest divenified real estate companies were formed or developed out of rapid expansion after the War. Examples include Webb & Knapp (associated with the fint commercial mega-developer, William Zeckendorf), Trammel Crow (established in 1948)' and G. Hines lnterests (1957). In Canada, the emergence of large and divenified commercial real estate companies staited a decade later. All the cunent diversified real estate companies invokred in the commercial real estate sector were fonned between the mid-1950s to the mid-1960s. Although some have disappeared, restructured or rnerged with other companies since, their core identity can be traced to this period. The large Canadian real estate companies that were founded in ths 1945-1965 period are listed in Table 3.3. Two major types of real estate development companies were established in this phase: entrepreneurial-based companies and spin-otfs from large non-real estate corporations. Companies based on a combination of entrepreneurial skills and 'trial and error' practice usually started with a single project (residential or commercial) and as a resutt of their successes, the founders went on to develop other real estate projects. This type includes a few of Canada's prominent companies: Campeau Corporation, Cadillac Development Corporation, Oxford Development Corporation, and Olympia 8 York Developments. The initial lack of capital forced this type of Company to punue a strategy of 'build and seli'. Buildings were sold immediately after completion. In this case almost no risk was invohred, since the sale of the pmperty was guaranteed by rental agreements prior to construction.
Table 3.3 A profile of the large Canadian real estate companies in their initial phases
Company Year Major real Geographical Type of Corporate affiliation forrned estate area of company business operation Campeau 1949 Residential Ottawa Entrepr.
Cadillac 1953 Residential Southem Ontario Entrepr.
Brarnalea 1957 Land, Resideritial Toronto suburbs Entrepr.
Faim-ew 1959 Retail, CMice Toronto Corp. spinoff Seagram (1)
Olympia 8 York Late 1950s Industrial Toronto suburbs Entrepr.
Trizec 1960 Office Montreal Foreign U.SN.K. interests (2)
Oxford 1960 Office Edmonton Entrepr.
Cambridge 1960 Retail Southem Ontario Entrepr.
Marathon 1963 Land Westem Canada COQ. spm-off CPR (3)
Daon 1964 Residential Western Canada Entrepr.
Markborough 1965 Residential Toronto suburbs Corp. spinoff Canadian corporations (4) Notes: Entrepr. - Entrepreneurial. Corp. spin-off - Corporate spinoff. (1) Seagram Distilleries. (2) A U.S.-based real estate company and two British insurance companies. (3) Canadian Pacific Railways. (4) The company was founded by 16 major cornpanies and financial institutions. Sources: Companies' Annual Reports, Goldenberg, 1981, and other sources (newspapers, joumals, biographies).
The other type of real estate Company was a fim based on the financial support of one or several larger companies from the industnal or the financial sectors. Large sums of capital were accessible either through intemal sources or through loans based on the credibility of the parent company. These real estate amis were investrnent diversification vehicles of large corporations: Fairview Corporation nas the real estate am of the largest Canadian distillery, Seagrarn Distilleries. fonned to provide a hedge against inflation; Marathon Realty, the real estate ami of Canadian Pacific Railways, was created to acquire and develop those lands of Canadian Pacific not required for railway purposes; Trizec Corporation was formed as a partnenhip between a U.S. developer, William Zeckendorf, and two British-based insurance companies. In their early stages (until the late 1960s) six out of the eleven companies listed in Table 3.3 were primarily land and residential developen; the other five were developen of office, retail and industrial properties. The spatial focus of most of the companies was on specific regions or cities. In later stages these companies dive~ifiedin ternis of development type and location. Except for Olympia & York, al1 companies were publicly held companies since their formation or in later stages. Some of the most prominent privately held companies can also trace their origin to the 1950s and 1960s. In the Toronto area, companies like H&R Devebpments, Inducon Development Corporation, Orlando Corporation, S.B. McLaughlin, and Shipp Corporation were either fomed or expanded during this phase. Most of these companies were primarily residential developen in the urban fringe in their eady phase. For instance, Shipp and Mcbughlin were land and residential developen in the western edge of the Toronto Census Metropolitan Area (Etobicoke and Mississauga). Two of the fint developen of office buildings in suburban Toronto commenced office development in the 1960s. Inducon, mainly an industrial developer, built its first office building in the mid-1960 in North York; Orlando built its fint office building near Toronto's International Airport in the late 1960s. Later, primarily in the 1970s and 1980~~these companies became developers of office buildings. Financial institutions, such as banks, trust companies, and life insurance companies, the prominent office developers in the pre-WWII ara, became less important as developers of office buildings as the newiy established developers gained control. One of the few financial institutions to becorne an active developer was the Manufacturers Life lnsurance Company, which launched its first speculative office development in Toronto in the mid- 1960s. During most the 1950s and throughout the first haH of the 1960s there was relatively little office development in Canada. This situation changed in the late 1960s as white-collar jobs stimulated office developrnent. By the early 1970s, office development was growing rapidly and the newly forrned real estate companies began to capitalize on the increased demand for office space. lllustrative of the growing scale and importance of office development in Canada was the formation of Trizec Corporation to execute the development of the Place Ville-Marie complex in Montreal in the early 1960s (Collier, 1974; Lorimer, 1978). When completed in 1962, it was the largest office complex with the largest office tower in Canada. Place Ville-Marie was followed by a similar-size project in Tomnto, the Toronto- Dominion Centre, developed in the mid-1960s by the Fairview Corporation and the Toronto-Dominion Bank. Each of these two projects involved a mulple-building complex at a magnitude not seen before in Canada and two companies that henceforth belonged to the set of the largest Canadian real estate development corporations.
3.1.3 The golden era of office development: Expansion and the establishment of real estate powerhouses In the 1970s and 1980s a new phase omned in the structure of the commercial real estate industry in Canada. This phase was characterized by rnergers and acquisitions and by the changing character and volume of foreign investment. In addition, companies increasingly emphasized commercial development and divenified spatially across Canada and into the United States. Unlike the previous round of office development, which was strongly related to increasing demand for office space, the 1980s office building boom and to lasser extent the 1970s boom, were related to supply-side considerations. In the midst of the glut of office space in the eady 1980s in Calgary, for example, real estate companies continued the development process. In the late 1980s, when the construction of office buildings reached unprecedented heights in Toronto, some developers still pursued development. This occurrence supports the argument raised by several authors (Beauregard, 1994; Fainstein, 1994; Downs, 1998) that office development was fueled by available financial capital that was searching for profitable investments. On the eve of the 1980s boom, Canadian-controlled companies had secured their dominant position in real estate developrnent. In 1981, in contrast to the 1970s, al1 real estate companies were rnainly developen or owners of commercial portfolios (shopping centres, industrial buildings, office buildings and mixed-use complexes). Residential properties constituted a diminishing segment of their total real estate portfolios as some prominent real estate companies disposed of their residential assets. ln the eariy 1980s, push-pull factors downgraded the position of land and residential properties for real estate companies. High inflation, and consequently high interest rates, made holding large unproductive land banks an unrewarding channel of investment. In addition. the highly regulated tenant-landlord relationships and signs of an expanding economy encouraged companies to shift corn pletely into commercial development. As a result, leading real estate companies like Cadillac Fairview, Campeau, and Daon disposed of their land and residential holdings in the earfy-to-mid 1980s. Mergers and acquisitions within the real estate sector enabled the consolidation of the real estate industry and the creation of large companies. In this process it allowed them to gain dominance in multiple markets across Canada. Trizec's growth strategy invohred acquiring smaller companies and using their assets and market dominance to penetrate new markets. In 1970-1, the acquisition of two real estate companies allowed Trizec to establish a presence in western Canada, particularly in Calgary and Vancouver. The Oxford Development Group adopted a smilar strategy. In the late 1970s, in an acquisition spree in Canada and the United States, Oxford bought several companies, including Y&R Properties, one of the largest office development companies in Toronto. The prime component of the consolidation process in the real estate sector was the 1974 merger of Cadillac and Fainriew into Cadillac Fairview Corporation. This merger created Canada's largest public real estate Company. The merger movement was associated with increasing Canadian control of real estate and a decline in foreign control of Canadian real estate. During this phase, Canadian developen also expanded their operations into the United States and by the late 1980s more than half of their office portfolio was south of the border (section 3.2). Sirnilar to their practices in the first half of the twentieth century, financial institutions, particularly banks and life insurance companies, resmerged as important developers of office buildings. Banks were invohred as developen, joint venture partnen or investon in the construction of their head office buildings, or even through the establishment of a real estate subsidiary (CIBC Development Corporation, the real estate subsidiary of the Canadian Imperia1 Bank of Commerce). In the 1980s, life insurance companies joined the boom in office development by becoming developen of buildings, primarily for income-producing purposes, across Canada (see Chapter Four). In addition, private cornpanies thriving rnainly in the suburban areas of Toronto became an important component of the office developrnent sector. Developers that were until the 1970s primarily residential and industrial developers diversified into office development. Suburban real estate developers founded in the 1950s and the 1960s as developers of industrial areas began erecting office buildings in the suburbs. lnducon Development Corporation and Orlando Corporation continued to develop office buildings in the Toronto area in the 1970s and especially in the 1980; by the late 1980s lnducon becarne the largest office developer in suburban Toronto and one of the largest developers in the Toronto CMA. Further, real estate companies that were mainly engaged in residential development diversified into office developrnent. McLaughlin, the largest landowner in Mississauga and the developer of the Mississauga City Centre. built his first office building in 1970. Shipp, another developer with a residential origin, began the developrnent of a three-building office complex in Etobicoke in the early 1980s.
3.1.4 The institutionalkation of the real estate sector and the emergence of new entrepreneurs The deep recession in the real estate market of the early 1990s resulted in a major restnicluring of the real estate sector. This invohred the demise of some of the largest Canadian developers, such as Olympia & York, the reconfiguration of other companies, such as Trizec, and the stronger participation of pension funds in real estate as major investors in real estate assets and real estate companies. Also, new playen, focused on the reuse of older buildings, appeared on the scene. In Uie early-to-mid 19Ws, the office market in Canada experienced its worst slump ever: the value (in constant dollars) of offi building pennits issued in 1995 were at the same level as in 1970 (Statistics Canada, Building Pennits, Catalogue No. 64-203). Most of the prominent real estate companies of the previous three decades experienced various levels of difficulties. Soaring and unprecedented office vacancy rates in the Canadian cities in the early 1990s caused low rents (even negative net rents, since the owner of an unoccupied building has to pay for operation costs like hydro and taxes). Real estate companies were not able to senrice their debts. As a resu, real estate companies either restnictured their office portfolios by disposing of properties in order to reduce debt, took new partnen as major shareholden, or went bankrupt. The most spectacular resut of the slurnp was the collapse of Olympia & York in 1992; however, many other companies followed including Bramalea Limited, Campeau Corporation, Marathon Realty, and lnducon Development Corporation. On the other hand, beginning in the eady 1990s and gaining momenturn throughout that decade, pension funds became major ownen of office properties and of publicly listed real estate companies. especially as life insurance companies and banks reduced their real estate investrnents. At the present time, the two largest Canadian-based real estate companies constihite elaborate 'reincamations' of former organizations. Brookfield Properties Corporation is the product of the restructuring of the real estate holdings of the EdperBrascan Group, a conglomerate with holdings in industrial, resource and financial companies. The Group has been involved in real estate since the mid-1970s, when it acquired control of Trizec Corporation (until then a foreign-owned company). In 1994, EdperBrascan sold its ownership interest in Trizec to Horsham, a holding company of Bamck Gold (Canada's largest gold mining company). Also, in the late 1980s, the EdperBrascan Group acquired BCE Development Corporation (BCED). In the eariy 1990s, the restnicturing has led to the consolidation of the portfolios of BCE Development Corporation and the major properties held by Olympia 8 York Developments (including the World Financial Center in Manhattan), under the roof of Brookfield. TrizecHahn Corporation is the reincarnation of Trizec (formed in 1960) reinforced by an infusion of capital from Bamck Gold in the mid-1990s. The majority of the current real estate assets of both companies, Brookfield and TrizecHahn, is in the United States; in 1999,56 percent of Brookfield's and 78 percent of TrizecHahn's office portfolios were in the United States (Annual Reports, both companies). In mid-2000 TrizecHahn sold the rnajority of its Canadian office portfolio, making its U.S. office portfolio and to a lesser extent, its European portfolio, the company's entire office holdings (TrizecHahn Corporation, Press Release, June 8,2000). Since the mid-1990s. several financial institutions have reduced their exposure to real estate. whereas other investon have become the prime force in the commercial real estate sector. Following the 1990s slump, life insurance companies began to consider real estate developrnent and investment as a highly risky business. The real estate portfolio of Manulife Financial, the most active life insurance Company in office development (in the 1990s. over 80 percent of its real estate pomolio was comprised of office buildings). reduced its real estate assets from ten percent of the company's invested assets in 1992 to six percent in 1997 (Manulife Financial, Annual Reports). Similady, while London Life had 12 percent of its investments in real estate in 1992. the Company had reduced its real estate exposure to three percent by 1998 (Dominion Bond Rating Service, 1999). Banks followed this trend by considering real estate as noncore assets. Consequenüy, in the kte 1990s. two of the major Canadian banks (Royal Bank and CIBC) sold their non-branch office buildings and one (Bank of Nova Scotia) sold part of ils real estate assets. Two main institutional investon became dominant forces in the real estate sector. Athough being involved in real estate in the 1970s and 1980s. pension funds had become the most important investors in real estate at the end of the 1990s. Pension funds :ook advantage of the growing availabiltty of properties as real estate developen became stranded by the devaluation of their properties and as their cash flow dropped. Wiih their long-temi perspective, little need to get into debt. and real estate considered as an efficient hedge against inflation. pension funds were extremely active in the acquislion of commercial real estate properties. By the end of the 1990s. the pension funds were described by the Globe & Mailas the 'big kids on the block' (Globe & Mail. November 14,1998). Pension funds not only acquired already existing office buildings (and shopping centres) but also invested in publicly traded real estate companies. In the 1990s, the Ontario Teachen Pension Plan Board became the single largest shareholder in Cadillac Fairview with a 22 percent equity stake; in December 1999. it acquired the remaining 78 percent and became the Company's sole owner (National Post, December 2. 1999). The Ontario Municipal Employees Retirement System (OMERS) became the single largest shareholder in Oxford Properties Group in 1998; OMERS participated in the acquisition of the Royal Bank portfolio in 1999. Quebec's largest pension fund, the Caisse de depot et placement du Quebec, acquired a 73 percent equity stake in Cambridge Shopping Centres (one of the largest shopping centre developers) and a 48 percent stake in Bentall Corporation (Globe & Mail, December 3. 1999). By 1999, pension funds were prominent ownen of both real estate properties and real estate companies in Canada. Canada's four largest public pension funds were among the twelve largest owners of real estate properties (Table 3.2). In the late 1990s. pension funds through their association with real estate management companies began to engage in office development. Penreal Capital Management, a manager of real estate investrnents for a gmup of pension funds, is the developer of the new 800,000 square feet office complex for the Royal Bank in Mississauga, and OMERS as a partner of Oxford Properties Group, is active in the development of an office building in Calgary. Unlike large pension funds that have their own real estate ans, mid-sized pension funds use segregated funds that are managed by Me insurance companies or professional management cornpanies in order to invest in real estate properties. One such management Company is QWL Realty, a wholly-owned subsidiary of Great-West Lie Assurance Company. GWL Realty owns and manages real estate assets on behalf of 150 mid-sized and small pension funds; its major segregated fund had over $1 billion of managed real estate assets (National Post, April 16, 1999). Another emerging force in the Canadian real estate sector since the eariy 1990s have been real estate investment trusts (REITs). A RElT is a mutual fund form of ownership of pooled capital that provides smali investon with the opportunity to invest in and own real estate assets. If RElTs meet certain requirements, they can pass realized gains through to shareholden and take tax deductions for the distributions, thus avoiding a double tax (Urban Land Institute, 1998). Typically. a RElT is fonned by a Company that owns or manages real estate properties. RElTs purchase existing properties and occasionally they are invoked in development. The RElT issues a security, called a 'unit', which can be bought and sold by investors. Each unit entitles the owner to a proportion of the net annual revenue from the RElT properties (Miron, 2000). In Canada, the relative recovery of the real estate market in the second half of the 1990s and the abundant supply of properties for sale prompted the formation of real estate inveçtment trusts. The number of RElTs grew from fie in 1996 to twelve in 1997 (fiancial Post, January 3, 1998). In terrns of asset size. RElTs are much smaller than the largest real estate cornpanies; for instance, RioCan, the largest RElT in Canada, has $2.2 billion in assets in 1999 dollars (the equivalent of 2 billion in 1992 dollars), which ranks it only at the twelfth place among the largest Canadian ownen of real estate assets (Table 3.2). RElTs are not developen, their main objective is to acquire and manage real estate assets. Generally, RElTs tend to specialize in one type of na1 estate (Table 3.4). Most of Riocan's properties, for example. are retail propeities, while Canadian Hotel lncome Properties (CHIP) specializes in hotels, and RESREIT in apartment buildings. Some REITs, like Morguard, H&R and Summit have more diversified holdings. In the late 1990s, a shortage of quality properties for sale. high property prices, and the desire to maintain the appreciation of the unit value, encouraged some RElTs to enter the development arena by financing the construction of shopping centres and office buildings. As suggested by the chief executive officer of the H&R REIT: Ytls going to become imperative to get into development to stay in businessn (Financial Post, June 6, 1998). H&R, which has the largest offi portfolio among RElTs (over three million square feet of office space), has provided financing for the development of an office cornplex for Bell Mobility in Mississauga and for a new head office for TransCanada Pipelines (TCPL) in downtown Calgary (H&R REIT, 1998 Annual Report). Not oniy is this one of the largest developrnents since the earfy 1990s (aknost one million square feet), it is also the first large-sale office development financed by a REIT. H&R REIT was created in 1996 by acquiring rnost of the real estate holdings of the privateiy-held real estate Company H&R Developments (Globe & Mail, December 5, 1996). The developer of the TCPL building is HIR Developments hile the REIT provides construction financing and has an option to purchase the building upon completion at cost (HBR REIT, 1999 Annual Report).
Table 3.4 The largest real estate invertment trusts in Canada. 1999
RElT Year fomed Assets Principle property types owned ($ million) RioCan 1994 2,161 Retail
Legacy 1997 1,066 Hotels
H8R 1996 941 Office, industrial, retail
Summit 1996 923 Retail, industrial, office
Morguard 1997 838 Retail, off~e,industrial
CPL 1997 7?4 Nursing facifies
CRElT 1993 730 Retail, industrial, office
CHlP 1997 606 Hoteis
RESREIT 1998 489 Apartment buildings
Royal Host 1997 385 Hotels and resorts
Cominar 1998 294 Industrial, office, retail
Source: Real Estate lnvestment Trusts, Annual Reports.
Midst the institutionalkation of commercial real estate in Canada new kinds of entrepreneurial forces have re-emerged. However, since these new kinds of entrepreneurs have not erected standard office modemist office towen, they have not received much attention in reseaich on and writing about office developrnent. The companies in question are small and are primanly engaged in the re-use of older commercial-industrial buildings located at the fringes of the downtom office districts. These companies take advantage of demand for 'alternativepoffi space generated by professional businesses, such as architects, graphic designers, cornputer software and multimedia fimis. These types of businesses reject the traditional office tower-type of space and prefer old buildings in which mechanical systems are upgraded but architectural features kept almost unchanged. This phenomenon is visible in the areas west and east of Toronto's downtown and in Vancouver (see sections 6.4 and section 7.3.1). The developers of such buildings include small companies (often owned by architects) buying one or two old industnal or general commercial buildings and refurbishing them as office buildings. The only Company of this type that can be considered as medium-size is Allied Canadian Corporation, which owns approximately one million square feet of office space on the fringes of Toronto's downtown. Allied acquired 17 commercial-industriaI loft buildings in 1998 and is in the process of 'upgrading' these buildings to office standards. The financing for Allied Canadian 7s coming from. ..a Toronto money manager that directs about $500 million in assets for weaithy individuais" (Globe & Mail. October, 15, 1998). Otherwise, information on the size and scope of this type of devebper remains unknown at this stage.
3.2 Canadian-Based Real Estate Companies and Office Development in the United States Until the rnid-1970s. Canadian-based real estate development companies developed office buildings mainly in Canada. Starting in the mid-1970~~most of the large Canadian-based real estate development cornpanies (and also medium-sized companies) began to purchase andlor develop office buildings in the United States (Goldenberg, 1981; Feagin and Parker, 1990). An analysis of the geographic distribution of their office portfolios shows that in the decade between 1976 and 1987 the focal point of the Canadian companies shifted dramatically from Canada to the United States. In 1976 approximately 90 percent of their office portfolio was in Canada and the remaining in the United States; a decade later, in 1987. only 48 percent was in Canada and 52 percent in the U.S. (Table 3.5). By the 1990s. although the share of U.S. assets for al1 Canadian companies together has rernained almost unchanged. only two large Canadian-based real estate development companies. TrizecHahn and Brookfield. had a substantial share of their office properties in the United States. This is in stark contrast to the mid-1980s. when almost al1 of the hrgest Canadian companies owned office propecties in the United States. Table 3.5 Office po~oliosof Canadian-based real estate companies in Canada and the U.S., selected yean, 1976-99 ('000 square feet)
1976 1987 1999 Company Can. U.S. Total Can. U.S. Total Can. U.S. Total
08Y (1) 8,500 O 8,500 13,000 27,000 40,000 O O O
Trizec 10,255 4,072 14,327 14,105 14,070 28,175 14,118 50,162 64,280
CF (2) 5,634 O 5,634 8,370 6,960 15,330 14,323 O 14,323
Oxford 2,602 O 2,602 5,100 10,000 15,100(5) 23,139 1,243 24,382
Marathon 3,500 O 3,500(4) 6,570 2,064 8,634 O O O
Campeau 4.51 2 O 4,512 7,231 862 8,093 O O O
Bramalea 193 O 193 3,893 3,334 7,227 O O O
Brookfield (3) O O O O O O 9,047 15,504 24,551
Total
Percentage
Notes: The order of the companies is based of their 1987 total portfolio. (1) Olympia 8 York, an estimate based on numerous sources. (2) Cadillac Fai~ew. (3) Brookfield assumed the omership of several office properties of several companies including Oiympia 8 York and BCE Development Corporation. (4) Globe & Mail, 2 May 1977. (5) An estimate of 1986 figures. Source: Annual Reports of Companies.
A combination of push-pull factors, including intemal characteristics and extemai contingencies, resulted in a shift of the operations of Canadian companies from Canada to the United States in the 1970s and eariy 1980s (Goldenberg, 1981; Urban Land Institute, 1985). First, with a much larger nurnber of urban 'markets' in the United States than in Canada, the U.S. provides more opportunities for real estate development. For a country with a relatively small number of major urban centres, Canada had produced a considerable number of large-scale developers. This in tum resulted in a very competitive environment, and forced Canadian real estate companies to look for opportunities elsewhere. Second, switching of capital into and within the real estate sector is not achievable without the active participation of financial institutions. In contrast to banks in the United States, where banks are regionally based, Canadian banks have national and even international scope. These banks had previous expenence of lending money to Canadian developen either through debt financing or thmugh joint ventures. The branches of Canadian banks in the United States participated in ananging financing for the development of office buildings and the expansion of Canadian-based developers into the United States. Third, in many U.S. cities, planning regufations were bss rigorous than in Canada, and the previous experience of Canadian-based real estate companies in dealing with local rnunicipalities and the complex process of development in Canada schooled them in the mechanism of local planning. Fourth, unlike Canadian municipales, U.S. local authorities were able to attmct developen by offering different types of incentives. The rise of urban entrepreneurialism (Leitner, 1990, 1994) and the competition between municipalities f~rinvestment combined with the attempt to redevelop their declining downtown areas has resuited in generous incentives to lure experienced Canadian-based real estate developen. Finally, specific conditions in the United States made investment in real estate attractive. Cornpetitive prices in the U.S. followed by a real estate decline in the mid-1970s made expansion in the U.S. a sensible strategy (Goldenberg, 1981). The investrnents of Canadian-based real estate companies in office buildings were mainly in the fastest growing regions, namely Southern and Western United States. California and Texas were the prime investment arenas. The principal cities for investment in office buildings were the major centres within the oil and gas corridor, Houston, Dallas and Denver. Other cities in the Sunbelt, such as Los Angeles and Atlanta, were also preferred investment arenas. The DallasFort Worth area illustrates the role of Canadian-based companies. At the peak of the office building boom in 1989, three of the largest Canadian companies, Cadillac Fairview, Bramalea, and Olympia 8 York, owned approximately eight million square feet of office space in the Dallas-Fort Worth area. Wfih the exception of Olympia & York. Canadian-based real estate developen have not invested in Manhattan, the hrgest office market in the US. This market was at the brink of collapse in the mid-1970s as a result of the city's financial malaise. In 19ï7, however, Olympia 8 York made a deal dubbed the 'deal of the century' (Foster, 1993) by buying nine office buildings in Manhattan for $350 million (U.S.). By 1981 the value of these buildings had tnpled to $1 billion (Goldenberg, 1981) and by the late 1980s Olympia & York had developed its largest real estate project in Manhattan, Battery Park City (including the World Financial Center). At that tirne, the New York office portfolio of 08Y contained more than 24 millions square feet of office space. Following the 1990s real estate slump, rnost Canadian-based real estate companies have totally withdrawn from the U.S. office market. A highly cornpetitive office market in the U.S. has prompted Oxford to refocus on Canada as early as the mid-1980s, and as a result of restnicturing, Cadillac Faiwiew was left only with its Canadian office portfolio by the mid-1990s. Other companies, such as Olympia & York, Campeau, Bramaela, and Marathon went banknipt and other companies absorbed their portfolios. A few companies have continued to focus on the United States. The majonty of the office porifolio of the two largest Canadian-based real estate companies (TrizecHahn Corporation and Brookfield Pmpeities) is in the US. This phenornenon indicates a differentiation between companies. Bargain prices of high quality office buildings in the US. have attracted developers that were able to channel capital from other segments of the real estate sector into the ownership of office buildings. TrizecHahn sold its entire U.S. shopping centre portfolio in 1998 and shifted the proceedings to the acquisition of office buildings, mainly in the U.S. The collapse of their Canadian counterparts in the early 1990s has provided the rneans for Brookfield Properties to becorne the owner of one of the most prestigious office complexes in Manhattan, the World Financial Centre, fomerly owned by Olympia 8 York.
3.3 Office Oevelopment and Foreign lnvestors in Canada In Canada, very little is known about foreign investment in the real estate sector in general and in office development in particular. A few case studies provide limited insights into this arena. In this thesis, findings on foreign investrnent in office development are based, to a large extent, on the absence, rather than evidence on the presence of this type of investment. Intensive study of the office development sector in Toronto has only revealed limited foreign participation in office development projects. Foreign involvement in office development in Canada predated the expansion of Canadian developers into the United States. The first foreign real estate developers, mostfy British-based, to enter Canada anived in the 1950s and 1960s and their operations included development of office properties as well as the purchase of existing buildings and land. The withdrawal of most of these companies in the mid-1970s resulted in a void of foreign investment until the late 1980s and early 1990s,when most of the new foreign real estate investon became buyen of troubled propeities. In the 1960s and 1970s. British-owned companies were the most dominant foreign operators in real estate in Canada. These companies included Trizec, MEPC, Bramalea, Rank. Abbey Glen, Hamrnerson and Slough Estates. Foreign control took two forms. One was the London-based holding company, which concentrated on ownership of income-producing pmperties. The other fon was the development company, which specialized in buying land and developing residential and commercial properties. A number of foreignswned companies, in particular MEPC, Bramalea, Trizec, and Hammenon were the most active firms in Canada in the last thirty years. The first foreign real estate company to launch a Canadian operation was the British-based MEPC in 1954. By the 1970s, MEPC Canadian Properties was one of the largest commercial real estate companies in Canada (in 1971 it ranked seventh largest among public real estate companies) with properties (office, industrial and retail) in most major cities across Canada. The company was a developer and an owner of real estate properties as indicated by the president of MEPC '8asically we are an investment company... sometimes the investment market is diy and we have to build, but we prefer buyingn (Building Development, December 1971, p. 14). The forerunner of Bramalea was fomed in 1957 in order to change a rural area near the town of Brampton into the area known as Bramalea. In the late 1950s. a British syndicate bought the company (Bayton) and changed its name to Bramalea. Bramalea was mainly a residential developer up to the mid-1970s. when Canadian entrepreneurs acquired the company. In 1960, Trizec was formed to serve as a vehicle for the development of Place Ville-Marie in Montreal. This singlepurpose company combined US. (William Zeckendoif, an American real estate mogul) and British capital (Eagle Star Insurance). Trizec went on to develop other commercial properties across Canada and in 1971 it ranked as the top publicly held real estate Company in Canada in ternis of assets. Hammenon Canada, a subsidiary of Hammenon (U.K.) began its Canadian operations in 1969. Hammerson focused on two Canadian cities, Toronto and Calgary. Its largest project in Canada was the Bow Valley Square in Calgary. (Hammenon had also developed and acquired office buildings in Vancouver.) In the mid-1980s, Hammerson bought the entire real estate portfolio of a large Canadian developer (SB. McLaughlin). This portfolio consisted of a regional shopping centre, a number of office buildings, and large land holdings, primanly in the suburban municipality of Mississauga. This purchase made Hammenon the largest landowner in Mississauga. fo some extent, other foreign investors and developers have been active in office development. Two German-based companies, York-Hannover and Polaris, developed office buildings mainly in Mississauga (Milner, 1991), and in other cities in Canada. In the early 1990~~York-Hannover, together with a NorthYoik-based developer were planning an ambitious office complex in downtown Toronto, but as a result of the 1990s recession it did not rnaterialize (Financial Post, October 7, 1992). ln the 1990s, German investon bought a number of office buildings in Toronto's suburbs from troubled Canadian developers (Financial Post, April 21, 1993). For example, they acquired an office building from the largest office developer in suburban Toronto that went bankrupt (Inducon), and another office building in North York City Centre from another developer (Bramalea). The only building developed by a German investor in Toronto's Financial District was a relatively small building (100,000 square feet); another building was in the Financial District renovated by German investon in the mid-1990s (Globe & Mail, July 11, 1995). Asian developers have been absent from office asvelopment in Toronto (even in Vancouver, their prime target for real estate investment in Canada, they have mainly invested in tourism and leisure-related activities, see Edgington, 1996a, 1996b). Two exceptional cases of Japanese investment in office building in Toronto invohred aquisitions of partial ownership in office buildings in the Financiaf District. In 1986, Nippon Me acquired a minonty interest in the Richmond-Adelaide Centre and a year later, Mitsui 8 Co. acguired a 50-precent interest in an offne building on Adelaide Street (Toronto Real Estate Board, 1988). In the mid-1990s, when the office vacancies in Toronto were extrernely high and developers and ownen of office buildings defaulted on their loans, several Hong Kong investors bought fie buildings in Toronto's Financial District (Toronto Star, Decernber 29. 1994). These buildings were older and smaller than the newer and larger office towers erected in the Financial District. In the course of this research f was able to identify only one case in which Asian (Hong Kong- based) Company was the developer of an office building in Toronto. Cheng Yu-tung, the chaiman of one of the largest publicly traded real estate companies in Hong Kong, New Worid Devetopment, buiit an office building in downtown Toronto (University Avenue on Dundas Street) in the eariy 1990s (Financial Post, November 6, 1991). In the mid-1990s, Hong Kong investon bought controlling interests in two Toronto-based real estate companies, Oxford Pmperties and Camdev (FManciaI Post, August 7, 1996). In the late 1990s, Oxford became the hrgest owner of office space in the Toronto metropolitan area. In the 1980s, a trickle of new foreign investors arrived in Canada. In contrast to the first phase of foreign participation in real estate, this phase invohred a smaller sale of foreign investment, a different set of agents, and a change in the field of operation. In the 1970s, foreign investors were involved in commercial real estate as active developers, primarily initiating developrnent of new shopping centres, industrial buildings, and office structures. This almost disappeared in the 1980s as foreign-owned companies moved into propeity trading (buying and selling), leaving development to the Canadian fimis. One of the few exceptions was Prudential Insurance of Amerka. Prudential has been a major agent (developer and owner) of real estate assets in the U.S., and by 1981 it was the fourth- largest developer of tall buildings (over 25 stories) in the U.S. (Urban Land Institute, 1985). Prudential ventured into real estate investment in Canada as well; its most pmminent office developrnent in Canada was the Consilium Place in Scarborough (a complex of three buildings developed in the 1980s). When Prudential sold its Canadian real estate pomolio in 1997, it included 51 properties with almost six rniflion square feet (Colliers, 1998). The U.K.-based Prudential Assurance was involved in office development in suburban Toronto, through joint ventures with one of the largest suburban developers, lnducon Development Corporation (Globe 8 Mail. October 11, 1988). Generally, foreign investors entering the Canadian real estate sector since the late 1980s have been short-terni playen who acquired companies and assets or engaged in joint ventures. In 1987, a consortium of U.S. pension funds, headed by the Chicago-based JMB Realty, acquired Cadillac Fairview. ln addlon, opportunity-seeking investon (socalled 'vulture funds') moved into Canada in the eariy 1990s to capitalize on its depressed real estate market (Globe & Mail, April 29, 1994). These investments are the complete antithesis of the British investrnents, which were characterized by a long- term perspective. In contrast, the perspective of the 1990s investon was short-terrn, attempting to make a quick profit. In the 1960s and the 1970s, foreign real estate developers were pioneen in developing large- scale office buildings in Canada. The first massive injection of foreign capital and expertise into commercial real estate in Canada was in the late 1950 and eariy 1960s with Trizec's Place Ville-Marie project (over Smillion square feet) in Montreal. This was a project of a scale not seen in Canada before, and it paved the way for other large-sale projects (e.g. the Toronto-Dominion Centre in Toronto). Toronto's initial signifiant exposure to foreign developen was in the early 1970s, when foreign-owned companies developed mutti-use structures, including two multi-use complexes (office and retail) at the intersection of the two subway lines on Yonge and Bloor Streets. One of the first large-scale office buildings in the suburbs, the Sheppard Centre in North York, was built by a British- owned subsidiary (Rank City Wall Canada) in the mid-1970s. In the mid-1970s a shift in foreign investment occurred as most of the major British-owned companies disappeared almost completely from the Canadian arena (except for Hammerson) and Canadian capital bought out their real estate portfolios. Two major reasons account for the British pullout and the Canadian takeover. First, a decline in the real estate market in Britain in the mid-1970s propelled many developers to seIl their Canadian real estate holdings to raise cash to be used in Britain. Second, legislation at the federal and the provincial levels faced foreign real estate investors with restrictions, and they started to have to pay higher taxes than Canadian companies (as a result, some foreign companies becarne nominally Canadian, Milner, 1991). These events discouraged British investors from investing in Canada (Canadian Buildingl June 1976; Canadian Business, October 1976). The pullout of British-owned companies from Canada in the mid-1970s resulted in Canadian capital buying out foreign-owned real estate companies. In 1974, Canadian money purchased control of Bramalea from the British-based Eagle Star lnsurance Company (Canadian BuiMing, June 1976). Two years later. English Property, sotd control of Trizec to Canadian investors (Goldenberg, 1981). MEPC, the veteran of the British-based companies in Canada, sold its real estate portfolio to a group of Canadian pension funds in 1977. In the kte 19Ws, the last big British-owned real estate Company, Hammenon Canada, sold its offkehetail portfolio to a Canadian pension fund. Two reasons may explain why foreign real estate companies were not involved in development and ownenhip of office buildings at a large sale during the development boom of the 1980s. First, the Canadian market became crowded and highly cornpetitive as additional companies joined the development arena. The well-established, wellorganized, and closely-knit set of Canadian companies overshadowed foreign companies (Kostin et al., 1989). This included the strong link between major Canadian banks, life insurance companies and the largest real estate companies. Second, foreign investment was also constrained because of the scarcity of suitable office properties for sale (Milner, 1991; Edgington, 1998). It has been argued that Japanese investrnent in North America showed veiy little interest in Canadian cities, including Toronto and Vancouver (Edgington, 1996a. 1996b). Japanese investon considered Canadian cities as second or third lier 'world class' cities, falling behind cities like New York and Los Angeles (Edgington, 1998). In addition, domestic and other international real estate markets were booming, so Canadian pmperty was only one of many investrnent possibilities. 00th Asian and European investon were interested in Toronto's Financial District. However, bamen to entry into this district, limited their involvement to buying smaller and older office buildings; they were not able to purchase almost any large office building in the Financial District and focused their efforts on the subuhs. In general, there was little office development by foreign real estate companies after early British expertise, entrepreneurship, and capital left Canada; the major fon of foreign participation in the 1980s and the 1990s was pnrnarily trade in office buildings.
3.4 ldentifying Primary Office Developers and Owners in the Toronto Area The final purpose of this chapter is to identify the developers who are responsible for creating and owning Toronto's stock of office buildings. So far this chapter has examined the real estate sector in Canada at the national level. However, as argued in Chapter One, specific conditions are important in shaping real estate development in any given location, and each crty has its local developen in addition to developers that operate on a wider regional or national basis. By examining the Toronto case, the role of national and local developers is demonstrated. For this purpose, identifying major office developers in the Toronto is needed. 92
Several problems arise when attempting to identify the developen of office buildings in Toronto. First, a considerable number of developen were entrepreneurs whose single office building constitutes their sole office development. Since it was a one-of-kind development. other Yootprints' are missing, and the ability to identw developen based on one building is extremely difficult. Second. most of the developen were privatelyswned companies, which did not have to release information about their ventures. Therefore, information was voluntariiy released, and is found mainly through extensive scrutiny of media coverage (newspapen, professional magazines, and advertisements). Third, tracking dom the original developer of tradable commodities (real estate assets) is difficult, since office buildings usually change hands. Finally, while one Company envisions an office development, it is occasionally implemented by another. Adding to this problem of associating projects with respective developers is the fact that ownership and partial ownership of real estate properties are common practices. In these cases it is unclear whom to attribute the venture to: the initiator or the implementing agent? Compiling an inventory of Toronto's office buildings built between 1950 and 1999 preceded the identification process. Using Royal LePage surveys of al office buildings in the Toronto CMA, an office inventory for Toronto was constructed. Office buildings, according to Royal LePage, include al1 office space in buildings containing more than 20,000 square feet of net rentable area, most of which are used for office facilities. The following sources were used to match office buildings to their respective developers: Annual reports of public real estate companies; Advertisements in publications of real estate brokerage companies (e.g., Royal Lefage, Colliers); Real estate professional newspapen and magazines (Real Estate News, Canadian Builder/Building, Building Development, Building Management); Real estate information supplien (Toronto Office Guide, lnsite Real Estate Information Systems); News pape n (Globe & Mail, Financial Post, Financial Times); Local newspapen and magazines including both articles and advertisements (Toronto Star, Mississauga Business mes, Mississauga Business Report Magazine); City planning reports and office inventory surveys (Toronto, North York, and Mississauga); Annual reports of the Canadian lnstitute of Public Real Estate Companies; Popular literature on the real estate industry (for example, the history of the largest Canadian real estate companies by Goldenberg, 1981, and the extensive documentation of the Olympia & York story: 'Master Builders', 'Towers of Debt', and 'Too Big to Fail') 4 Printed matters and brochures of real estate companies;
4 Web sites of real estate companies; and a Personal communication (intenriews). 1 was able to match approximately 400 buildings out of a total of 1200 buildings to respective developerdowners. The resuit of the identification proces is presented in Table 3.6. It was impossible to determine whether the owner was the developer of the specific building in some cases; hence, this table shows both developen and owners of office buildings. In addition to the presence of nationally diversified and well-established developers, such as Cadillac Fairview and Olympia 8 York, several locally based developers like Inducon, Menkes, and Orhndo make up the second tier of developen. Until the eariy 1970s. office space was being rapidiy added to the office stock by only a handful of developen who owned considerable office portfolios. Most companies actually developed the office buildings that they owned. Four companies stand out as the hrgest developen of office space in Toronto before 1971. Wiih the major offii cornplex, the Toronto-Dominion Centre, the largest was Fairview. The most experienced developer of office space in Toronto (active since in the 1920~)~Y&R Properties, had a major stake in office development. The operational space of both Fairview and Y&R was in Toronto's 'old office district', the area south of Queen Street (in 1976 designated as the Financial District). Olympia & York, which was in the midst of office development of its Flemingdon Park property in North York and the eariy phases of development in Toronto's downtown, was ranked third. The fourth of the largest companies was Manufactures Lie (later known as Manuiiie Financial), a life insurance Company with an active role in office development. Other developers were significantly srnaller in ternis of number and size of buildings they developed. Between 1971 and 1981, Toronto's office space doubled, and offii development was diffused among a larger nurnber of developers. In 1981, Cadillac Fairview and Olympia 8 York remained by far the largest developen in Toronto. However, several additional companies became significant players in this sector. In the late 1970s Oxford Development Corporation acquired Y8R Properties to become the third largest owner of office buildings in Toronto, while Trizec and Marathon Realty entered the Toronto market. Several residential developers, such as Bramalea Limited, Menkes Developments, and the Shipp Corporation ventured into office development during the l98Os, while other suburban developers diversified their operations from industrial to office development (Inducon and Orlando). During the 1980s. Toronto experienced its most signifiant growth of office space in absolute terrns. The cornpletion of approximately 70 million square feet of office floor-space between 1981 and 1991 involved the participation of a greater number of developers and the expansion of existing companies.
Table 3.6 The largest ownen of office space in the Toronto Area, selected years. 1971-99 ('000 square feet)
Developer 1971 1981 1991 1999 CadiHac Fai~kwCorporation (1) 3,000 5,100 7,500 9,250
Olympia & York Developments (2) lnducon Oevebpment Corporation
Bramalea Lirnited
Brookfield Properties Group (3)
ClBC Deveiopment Corporation (4)
Manulife Financial
Royal Bank
Marattion Reaity
H&R Developments (5)
Sun Life Financial
Oxford Properties Group
Menkes Developments
Shipp Corporation
Orlando Corporation
TrizecHahn Corporation
Harnrnerson Canada
Y&R Properties
Total 9,100 24,650 47,100 16,050 Total office space in Toronto 35,600 73,800 142,100 146,300 % accounted for 26.4 33.4 33.1 31.5 Notes: The order of companies is based on the 1991 portfolio. N/A - not available. (1) The 1971 portfolio includes the combineci portfolio of Fai~ewand Cadillac. (2) The successor of Olympia 8 York, O&Y Properties was formed in the second haif of the 1990s. (3) The 1991 portfolio includes the portfolio of BCED. (4) ClBC developed the Commerce Court compfex in the early 1970s; however, the real estate subsidiary, ClBC Development Corporation, was formed in 1989. (5) In 1996 most of H&R Developments properties were acquired by H&R REIT. Source: See text. In 1991, the top position was still occupied by Cadillac Faiwiew and Olympia & Yoik, but they were followed by a senes of signifiant medium-sued developen. Bramalea and Marathon, for example, as well as sorne suburban-based cornpanies (Inducon, WR Developments, Menkes, Shipp, and Orlando), ernerged as important developen in the 1980s. Over the course of the 1990s, however, there was a shift back to the concentration of office property ownenhip into a small number of hands owing to either bankniptcy or the selling of portfolios. Firms such as Olympia & York, Inducon, and Bramalea disappeared after the early 1990s, and the portfolios of Marathon, the Royal Bank, and Shipp were sold to other companies. Cunently, the largest owner of office space in Toronto is pnrnarily a buyer of office properties. Oxford Properties Group developed only 5 percent of the office space it owned in 1999 in the Toronto metropolitan area: the major part of Oxford's office portfolio was acquired in massive waves of purchases executed mainly in the 1996-99 penod. Brookfield Properties acquired control of BCED after the collapse of the real estate market in the early 1990s, and as a resuit inherited its portfolio, which includes one of the largest office complexes in Toronto, BCE Place. In addition, it acquired control of selected properties owned by Olympia 8 York. Among the top-tier companies, Cadillac FaiMew remained thé only owner of office space who had actually developed the rnajority of its holdings. Among the financial institutions, Manulife Financial has been the major developer of office space in Toronto. Privately owned developers, such as Menkes and Orlando were able to survive the 1990s collapse and continued to hold and develop office properties through the late 1990s.
3.5 Unpacking Real Estate Developers Some general insights regarding real estate developers can be drawn based on the descriptive staternents made above. The conclusions of this chapter are interpreted at two levels: defining developers, and frarning their changing characteristics Unpacking the term 'real estate deveioper' is the first task. Real estate development and investment is a complex business venture consisting of a multitude of arrangements and practices. lnstead of understanding real estate developen as perfoming only one function, their role shouM be broken down into major componentç, which can be situated along an 'investment continuum'. The major factor underiying the construction of this continuum is the degree of nsk exposure. This role is divided into four core functions ranging from the Ieast exposed to the most risk-exposedventures. The four functions are as follows. a At one end of the continuum, at its least risky side, stands the develomr for a fee ('Manager'). This type of developer has the least risk involved in a real estate development, since the investor/owner/user amges the financing for the projec?, and the developer has no equity in the property. Generally, the developer has almost no capital at stake because the investor will pay the development fee no matter whether the project is successful cr not (fully or partially leased). This is the case when the developer for a fee is short of cash, and does not have sufficient capital to invest in the project, or when shehe is chosen to act as manager in the development process which was already conceived by another organbation. Real estate companies tend to perform a number of functions simultaneously. For example, Y&R was the developer for fee for the Royal Bank Plaza in Toronto's Financial District, and Cadillac Fairview was the developer of the CBC complex in downtown Toronto and the head office of Hewlett-Packard in Mississauga.
O Investors in real estate companies ('lnvestorsl) are more exposed to nsk than developers for a fee, because they have equity invested in these companies. The prime incentive to invest in real estate companies is to receive dividends that are based on the company's performance, usually influenced by cash flow and the market performance of the company (its stock value). The capital gains of this group depend on the performance of the entire real estate portfolio of a specific real estate company. Since publicly listed real estate companies have divenified po~olios,the risk is usually spread across a multitude of properties and locations. In a depressed real estate market, when the value of the company's shares is less than its total real estate porffolio, it is often more profiiable to buy company shares instead of real estate properties (individual or packaged). The price of a building is based on its appraised value, whereas buying shares is based on the market capitalization. which in the case of a depressed real estate market might not reflect the full value of the companyls assets. Cornpanies that fit this category of investors include primarily pension funds and life insurance companies.
O Buven of existina ~rooerties('Buyers') incur more risk because their equity is tied to a particuhr property or several properties. Buyen of real estate properties expect to gain through the cash flow generated by the respective propetlies: the income Stream which is based on the property's rental rates. Since real estate assets are divisible in terms of ownership, the ownenhip of buildings can be divided between a few investors. The larger the ownership interest, the higher the risk, but in tum, the potential retum is also higher. Buyers that acquire fully leased properties with creditworthy tenants are subject to less risk than buyers of partially leased buildings. Most of the real estate companies are both buyers and developen of real estate properties at the same tirne. At certain times they prefer to buy and in other penods they develop. In the 1990s. when almost no development was undenvay, companies engaged in buying and selling office buildinçs. The most prominent and aggressive buyer of office buildings in Toronto in the 1990s was Oxford Properties Group, which increased ih office floor-space in Toronto seven-fold between 1995 and 1999. In mid-2000, the brgest Quebec pension fund acquired from Trizeciiahn the largest office complex in Montreal (Place Ville Marie). a The most risk-exposed group of investors is the ownerdevelo~ers('Developers'). This type of Company, similar to 'investoa' and 'buyen', retains equity in properties, but in addition, it has to incur the nsk of not leasing in full the property that is under construction. The major incentive for developen to engage in development is to obtain the development profit, which is the difference between the initial outlays for a project and its value upon cornpletion. A property that is under construction experiences the highest degree of risk Wiiin this category, speculative developen, developers that launch a project with no tenants committed for at least portions of the property, are exposed to the highest degree of risk. This risk can be reduced through some pre-leasing, that is, leasing parts of the property before construction starts (a common requirement of the lending institutions). Uncertainty enhances risk, but at the same time increases potential gains if the property is fully leased. By taking partnen, co-developen have partial ownership of properties, therefore, risk is proportional to their ownership interest. Soiedevelopers have the ownership majonty in a property, thus they are subject to the rnajority of risk related to the property or properties under construction. During the 1970s and the 1980s, when Toronto experienced a constant process of office development, most of the real estate companies were acting as developers. To name a few, they included Olympia & York, Cadillac Fairview, Marathon, lnducon and Menkes. The last type of developer epitomkes the traditional developer. The real estate developer gathers together the necessary resources for and orchestrates a particular type of development in order to satisfy an existing or anticipated demand for a specific type of property. Hekhe acquires sites for developrnents, organizes building plans, obtains finance, acquires planning permission, arranges construction, and the leasing or sale of the property (O'Malley, 1989). An organization can perfom one or more of these functions at the same time, or switch between these roles. The type of risk can Vary between different projects; in one development the organization can act as the project manager. whereas in another venture the organization assumes the role of ownerdeveloper. Another level of generalization concerne the intemal development of real estate companies. The intemal development of real estate cornpanies is strongly related to their prior experience. Most office developers can trace their beginnings to the construction of nlatively small, less complex projects. Through the experience in the production of residential or industriallwarehouse projects, an organization diversifies, expands, and begins to tackle more complex land uses which consume considerable financial resources and invoives higher levels of expertise. The emergence of most real estate development companies specializing in office development is aîtributed to reaching a level of 'fully developed' companies. OKidevelopment of a considerable sale is an advanced type of real estate production, and only highly experienced and well-financed organizations can be in this business on a regular basis. The office devekpment sector is intertwined and embedded in the more broadly defined operations of real estate devekpment companies, which include development and acquisitionldisposition, and other products, such as industrial, retail and residential assets. Specifically, the development and ownenhip of office space becarne a major segment of assets of the publicly held companies. Office development has also contributed a growing share to the portfolios of privately held companies as they divenified into office development. In Canada, Canadian-based real estate cornpanies have been the major developen and ownen of office space, whereas the role of foreign companies has been relatively marginal. A general tendency of the office development sector over the last forty yean has been a gradua1 transformation from entrepreneurial-based companies to large real estate corporations and finally to a sector thît is now increasingly dominated by large institutional investors. Over this time period, and especially between the early 1970s to the late 1980s, Canadian- based companies have emerged as sizeable organizations operating across Canada, as well as at the international arena, mainly in the United States. Large real estate companies expanded their spatial extent from being relatively local companies operating in selected markets, to companies that cover major urban centres across Canada, and selected centres in the United States. Nonetheless, their spatial operations were channeled ta selected urban centres. Within the local scale, the large Canadian-wide office developen are also the largest developen in the Toronto area. However, in Toronto, a substantial amount of office space has been developed or owned by local real estate companies. These companies have different operational spaces within the Toronto arena than the large developers (as suggested in the Introduction; see Figure 1 and 2). Financing office development is examined in Chapter Four, and a scnitiny of the spatial practices of real estate companies is analyzed in detail in chapters Five and Seven. CHAPTER FOUR
FlNANClNG OFFICE DEVELOPMENT AND THE ROLE OF FINANCIAL INSTITUTiONS
"Developers will develop as much as lenders will lend" (A reai estate industry observer)
"Financial institutions are more important in this business [real estate] than in any other business" (A real estate industry observer)
Financiat capital, through the specific financial institutions, such as banks and life insurance companies, plays a crucial role in real estate development in general and office development in particular. The literature discussed previously (section 1.2.2) has drawn attention to crucial connections between real estate development and the financial sector. It is quite clear that developers rely on extemal financing, and it is also clear that finance capital is showing different faces since it can act as lender, engage directly in real estate development, or engage in the purchase and sale of developed office properties. The broad connections between real estate development and the financial sector visible in a variety of countries can also be observed in Canada. Based on the literature and specific research on Canada, a general pattern of relationships between financial institutions and real estate developers can be constructed (Figure 4.1). Developers' equity or debt is raised from various sources (financial institutions, other extemal sources andlor capital markets). On the other hand, financial institutions can either be indirect participants by providing debt capital through different instruments, or be developers andlor owners of properties. Financial institutions can becorne property ownen by buying properties (or acquiring them through the default of bonowers), by joining developers on a joint venture basis, or by becoming developers themselves. This chapter will focus on the specific articulation of these connections in Canada. Part of the set of relationships is spatially differentiated, especially visible at the national level, but also at the local level. Less clear are the spatial patterns of financial flows at the international scale. Further, the principal relationships and their spatial manifestations tend to change over time. OTHER 1 EXïERNAL MARKETS
Repayment Debt
DEVELOPER
Equity/ Defauit Repayment Debt Partnership (Foreclosure) (Short terni/ Long term)
FINANCIAL INSTlTUlION
Equity
FINANCIAL 1INSTITUTION AS A 1 DEVELOPER 1
Figure 4.1 : Connections between financial capital and real estate developers There are fie parts to this chapter. First, an overview of the relationships between the Canadian financial system and the real estate sector are sketched. The particular financial structure in Canada shapes the type and sape of involvernent of financial institutions in real estate. Second, an outline of financing office development from the perspective of the office developer is provided; that is, an attempt will be made to show what sources of financing developen draw on. The third section provides an analysis of the financial institutions, primarily banks and life insurance companies, explaining their various types of participation in office development. The spatial practices of financial institutions are discussed in section four. Finally, a preliminary sketch of the role of international capital in real estate developrnent is presented.
4.1 The Configuration of the Canadian Financial System and the Financial Arrangements in the Real Estate Sector As real estate developments increased in site, complexity and cost, and as new financial instruments emerged, financial arrangements have become a more critical element in real estate development (and in the trading of real estate assets). The finite amount of equity owned by real estate companies, the desire to share the nsk embodied in development, and the eagemess to invest in multiple projects, has contributed to the growing dependence on financial sources from outside the real estate Company. For this reason, it is important to understand the structure of the financial system which real estate development draw on. Until recently, the Canadian financial systern had operated under a regulatory regime defined by the 'four pillars'. Each core function of the financial system, with its own financial institutions and regulatory authority, constituted a 'pillar'. Chartered banks, trust companies, insurance companies, and investment dealers operated under rules that defined their activaies nanowly and allowed no overlap. Chartered banks, for exampte, could accept short-term deposits and provide business loans. The securities industry participated in transactions of secondary equities and underwrote new stock issues. Trust companies managed estates and trust funds and provided mortgage financing. Insurance companies sold insurance policies. With every review of the Bank Act (between 1954 and 19971, cornpetition was encouraged and demarcation lines between 'pillars' have became increasingly bluned as individual financial institutions extended the range of seivices they were allowed to provide (Dobilas, 1996; Majury, 1999). Within this framework, each of the components of the financial system has a unique role with respect to real estate development Trusts companies have been primarily engaged in the provision of residential mortgages, although, occasionally, they have been invoived in commercial development (for example, Canada Trust provided a rnortgage for First Canadian Place). lnvestment dealers, including financial analysts, have a different role. Fint they act as stock traders and underwnten, and enable raising capital for real estate companies and real estate projects. In addition, financial analysts that are part of the investment firms provide recommendations and analyses of the performance of publicly traded companies. Fimis like Memll Lynch, ClBC Wood Gundy, RBC Dominion Securities, and Nesbitt Burns monitor, on a regutar basis, the performance of publicly traded real estate companies and make recommendations regarding the performance and outlook of these companies. The most important institutions of the Canadian financial system for the commercial real estate sector, however, are banks and iife insurance cornpanies.
Financina new deveio~ment Very little has been written in Canada about the principal methods of real estate development financing by banks and insurance companies. However, there are some useful discussions on practices in the United States (Knigrnan and Furiong, 1993; Downs, 1998; Urban Land Institute, 1998) and the United Kingdom (Pryke, 1994a); these are used as starting points. Menconsidering the financial sources of real estate investment, the distinction between debt and equity is important. Generally, debt financing is either through short-terni loans (construction loans) or through long-temi loans (in the real estate industry the term is 'permanent loan'). In the case of debt financing, the lender has no interest in the property. Equity investment on the other hand, represents a stake in a specific project or in a real estate Company. Debt and equity investors differ in the amount of risk they accept. Consequently, they require different levels of retum. Debt investors generally are more risk averse; they are less willing to invest in risky projects. Lenden usually provide the majonty of financing for completed developments that have creditworthy tenants secured by long-term leases. Wirental income streams in place, backed by financially sound tenants, such properties have a iow-risk profile. Equity investors invest in riskier projects, or in risky portions of projects, but they require a higher rate of retum on these investments. The interests of the equity investors are subordinate to the clairns that lenders have on the venture's assets; therefore, the outstanding debt on the project will be always paid in full before equity investon receive any retum on their investment. mus, equity investment in a real estate project is much riskier than debt investment. When the property performs poorly, equity investors are in the riskiest position. But when it performs well, they receive benefiis in the form of cash flow generated by the project, property value appreciation, and tax advantages. Historicalty, the primary sources of long-terni debt financing (permanent loans) for office development have been life insurance companies and pension funds, with commercial banks playing a limited role. Life insurance companies tend to provide long-ten mortgages (15-30 years) on leased buildings in order to match their long-terni liabilities. Much of the principal balance is amortized during the life of the mortgage. Life insurance companies are able to invest large sums of capital in long-tem mortgages, because their cash flow is contïnuous and predictable. They receive a constant flow of funds from premium payments, and can accurately predict their future outlays from actuarial tables (Krugman and Furiong, 1993; Urban Land Institute, 1998). Commercial banks traditionally have been the primary source of construction financing. Banks have avoided long-term real estate mortgages, because the matunty of such loans has not matched the short-term duration of their primary liabilities. Large portions of banks' deposits take the form of demand deposits payable on the demand of the depositor. Hence, bank funds must be more liquid than those of other financial intermediaries, and they have concentrated their investment in construction funding, which also has a relatively short-terni matunty (Krugman and Furiong, 1993; Urban Land Institute, 1998). Traditionally, banks have refused to make a construction loan on a new project unless the borrower proved it had a long-terni mortgage cornmitment that would take the bank out of the deal when construction was completed. In their eagemess to get business, especially in the 1980s, however, banks began making construction loans without takeouts (long-term financing) in place, extending the duration of construction loans into periods nomally associated with long-term mortgages (Downs, 1998). Developers usually arrange the permanent financing before they seek a construction loan. When a permanent financing commitrnent is in place it is much easier to obtain a construction loan. Thus, a takeout cornmitment impraves the construction lendets risk position. The interest rates on construction loans are typically higher than on permanent loans, giving the developer an incentive to replace the construction loan as soon as possible. In addition, in the case of bank short-term loans, the bank might ask for the repayment of its loans at any given time, or the disposal of the propeity, while long-terni financing is protected for the developer, as long as principal and interest are paid. This division of labour between financial institutions resub in different financial arrangements conceming development and investment in office buildings.
The financina of acquisitions Apart hmbanks and life insurance companies, pension funds have assumed an increasing role in real estate financing. As noted in Des Rosiers' study (1984) on the participation of Canadian life insurance companies and pension funds in the real estate sector, real estate investrnent represented a small fraction of only about one percent of their assets until the late 1970s. However, Des Rosiers also obseived the phenomenal growth in real estate investment by pension funds in the late 1970s and early 1980s. Basicaily, there are two ways pension funds can invest in real estate: for their own account or through pooled funds (most of the pooled real estate vehicles in Canada started in the eady 1980s). Pooled funds (segregated funds) are investrnent vehicles organized by life insurance companies or financial managers. Pension funds buy shares or blocks and the prmeds are invested in real astate (Canadian Buiiding, October 1985). Generally medium and small pension funds either do not have the expertise needed for engagement in real estate ownenhip or they are simply too small to acquire properties and prefer to share ownership of properties. These pension funds use segregated funds that acquire assets for the account of a pool of investors in order to invest in real estate. Beginning in the eady 1990s. the large pension funds have been the most active financial institutions in the real estate sector. In 1989, OMERS (Ontario Municipal Employees Retirement System) formed a real estate subsidiary, OMERS Reaity, and began to acquire pmperties across Canada (Canadian Business, November 1996). After the early 1990s real estate recession, many pension funds took advantage of depressed prices of the shares of public real estate companies, expecting thern to increase in value. In Ontario, legislation allowed pension funds to invest in riskier assets such as stocks, bonds and real estate (Globe & Mail, October 1, 1991). This made it possible for one of Canada's largest pension funds, the Ontario Teachen Pension Plan Board, to acquire a 22 percent interest in the Cadillac Faiwiew Corporation, the third largest public real estate company in Canada. Other pension funds also acquired equity stakes in major real estate companies. The largest Canadian pension fund, Caisse de depot et placement du Quebec, acquired a 73 percent equity stake in of one of the largest shopping centre owners, Cambridge Shopping Centres, and 48 percent of a Vancouver-based commercial development company, the Bentall Corporation. OMERS has become the largest single shareholder of Oxford Properties Group (Globe & Mail, December 3, 1999). Life insurance companies and banks, apart from acting as financial intermediaries (i.e. lenders) also act as investors in and developers of office buildings. The most active financial institutions in this respect are life insurance companies. Until the 1970s, life insurance companies in the U.K. largely pursued the traditional form of investment in real estate, fixed interest mortgages. These were and still are considered to give a guaranteed retum while not invohring the institution directly in real estate development. However, realizing potential gains of real estate investrnent, life insurance companies have shifted more of their assets to direct investment and devekpment (Barras, 1979b). In Canada, until the 1970s, life insurance companies were mainly debt providen. Beginning in the late 1970s and gaining momentum in the 1980~~life insurance cornpanies realized that real estate development companies were making large profis; as a result they engaged in direct investment through equity investment in office buildings and in acting as devekpers (Financiai mes, October 31, 1983). The participation in equity investment can be dided into ownenhip of assets, joint venture development, and development solely by Cnancial institutions. In the first phase of their involvement in the real estate sector, institutions, primarily life insurance companies, tended to acquire partial or full interest in existing office properties. This is the least risky business, because the building is cornpleted and the level of occupancy is known. In this case, financial institutions profit from the rental income of these properties and their appreciation. The next step is teaming up with an experienced real estate developer. Joining developen in this case is a prudent move, since real estate development involves expertise that most financial institutions lacked. Under this arrangement financial institutions and developers shared the risk of development, and in addition to sharing the rental stream and capital appreciation, they profited from the development gain (the diffennce between the cost to build the project and its value after completion). The most extreme move as far as financial institutions are concemed, is to becorne sole developer. This practice is limited to a small number of large financial institutions; this is the riskiest business, but also potentially the most rewarding. In this case, financial institutions can collect the whole development gain, and be in full control of the development. The last route of acquiring office properties to be discussed is the route of foreclosure. When bonowers fail to service their debt and default on their mortgages, lenden are entitled to foreclose the propeity that was used as collateral. This is typically the case when rents are low and vacancy rates are high, and it is typically the lender's last resort of claiming hisher loan. Lenden are reluctant to start foreclosure proceedings that can take a long time and eventually become a liability on their balance sheet. By foreclosing properties, financial institutions become unwillingly property owners. Generally, institutions hold foreclosed properties for the short-terni, disposing them as soon as possible. This was the situation during the real estate recession of the early-to-mid 1990s. The value of foreclosed properties held by Sun Lie Assurance Company (one of Canada's largest life insurance cornpanies) doubled between 1993 and 1995 from $42 to $83 million. However, in 1997 it declined to $46 million and by 1999 to $24 million, as a large part of these properties was sold (Sun Life Assurance Company, various Annual Reports). In observed practice, most of the equity invested in real estate by life insurance companies is through the acquisition of full or partial ownenhip of completed projects. Life insurance companies take ownership position in existing properties and not in properties under construction. The risk invotved in such a property, especially speculative development, and the need to potentially incur short-term or long-term losses, is too risky for these companies. Only a few of the brgest companies have become active playen in the area of direct development, either through joint ventures of by being sole developers.
4.2 Sources of Financing Office Development: The Developer's Perspective Information on the financial sources used for office development by real estate investon that are also financial institutions is difficult to come by. The cornpetitive nature of real estate development and the fact that the paiticipants do no! have to report on their ventures makes the sources of finance highly confidential. As indicated in the previous financing is divided into two types: agurty and debt. The focus of the real estate literature is on debt financing, and the general nile is that banks provide short-ten financing and life insurance cornpanies provide long-tem mortgages. In tens of debt, very little is known about the specifii of loans to real estate companies as a whole. Equity financing, in which investors acquire interest in office buildings, is also hrgely undocumented. To explore the issue of financing, information on a number of companies is used here. These examples include evidence from a variety of newspaper aiticles, annual reports, and interviews conducted in the course of my research. These observations do not provide a comprehensive account. Nevertheless, together with insights gained from international literature on office development financing, they provide important insights into this highly secretive part of real estate developrnent. The high dependence of the real estate sector on boirowed capital is reflected in a cornpanson of real estate companies al1 other companies. In Canada, real estate companies (as defined by Statistics Canada, see section 3.1) employ higher ratios of leverage than al1 industries as a gmup. The debt-to-equity ratio is used to illustrate this dependency. The debt-to-equity ratio is the ratio of total liabilities to total equity. The higher the ratio the higher dependency on debt. While al1 industries had an average ratio of three, real estate companies had a ratio that ranged between four and almost six (Table 4.1). The case of Olympia & York is often used to illustrate the divene and multinational resources available for real estate cornpanies; however, large sale and spatially diverse developers and smaller and local developen use different sources of financing. As argued by Bryson (1997), the financial requirements which large and smaller developen have to accommodate are different; hile large-scale developers need to obey the requirements set by capital markets, local developen need to satisfy only the cost of conventional bank loans. Table 4.1 Debt-to-equity ratio, al1 industries and real estate, setected years. 1971-96
Year All industries Real Estate
Sources: Statistics Canada, Corporation Financial Statistics, Catalogue No. 61 -207; Financial Statistics for Enterprises, Catalogue No. 61-21 9.
Smaller developen engage in less capital-intensive ventures, thus using less complicated and more tradlional sources of financing; large-scale developers, on the other hand, have to combine several sources and satisfy the conditions attached to these types of funding. In the same vain, Des Rosiers1 study (1984) on Canadian life insurance companies and pension funds suggests high dependency of developen on these institutional investon. In this case, the granting of funds was heavily dependent upon meeting rental requirements and profitability thresholds set by life insurance companies and pension funds (Des Rosiers, 1984, p. 667). Des Rosiers (1984) undertook the most comprehensive study on financial institutions and their real estate investment in Canada. He showed that the majority of the corporate funds of real estate companies in the period of 1968 to 1981 came from external sources (this pattern continues to dominate in later periods too). Using a sample of 31 real estate companies of different sires, he concluded that external funds constituted between 75 and 88 percent of the corporate funds. About haIf of the total funds were deriied from long-term debt and approximately 20 percent from short-terni debt. The prominent external sources of long-tenn finance were mortgage loans from life insurance companies and pension funds. This research is the first of its kind providing empirical evidence regarding financing of real estate in Canada. However, Des Rosiers grouped together different types of real estate companies, hence it is not possible to separate residential developers from commercial developers. Although making a distinction between different types of developen according to the risk associated with investrnent, he does not use this distinction to demonstrate how it affects the reliance on different financial sources. In addition, he suggests that preferential links' between developen and lenders detemine financial parlnenhips (p. 662). but he does not develop this argument. In order to discover these preferential links, selected practices are studied in this research.
4.2.1 Olympia & York: Social networks, ingenuity and the provision of financing Olympia & York (O&Y) grew from a small company into a real estate giant; parallel to this development, its sources of financing changed. After the company's colbpse in 1992, a window of opportunity for understanding the practices of real estate financing was open, because information of the financing arrangements of the world's largest developer were revealed. These sources include court documents of the bankruptcy proceedings, reports on the unprecedented debt of O&Y that caused massive losses for almost ail major Canadian banks (and foreign banks as well), and the public fascination of the rise and fall of this real estate empire. However, to understand the financial practices of Olympia & York we have to go back to the cornpany's early days. In its eariy stage in the 1960s. O&Y was a developer of warehouses and industrial structures in the Toronto suburbs. At that time, the practice of OBY was to develop and then seIl the buildings to speclic usen. Since most of the buildings were small, no major financial arrangements were needed. In its first large-scale real estate development, the purchase of 600 acres (Flemingdon Park in the Borough of North York) in the mid-1960s, O&Y had to bonow the full amount of capital to finance this project. Half of the amount came from the Bank of Nova Scotia, which was one of the lenders to the banknipt U.S. developer, who was the previous orner of this site, and the other half came from the Oelbaums, a Toronto family prominent in the development business (Foster, 1986, p. 19; Stewart, 1993, p. 43). Like every developer, Olympia & York financed its office buildings with a short-terrn loan obtained from a bank and then refinanced its office buildings through a long-tem mortgage obtained from a Ile insurance company. In the 1960s, a dramatic change in financing took place as O&Y started to use a new technique of mortgage bonds. A small Toronto investment dealer, specializing in bond financing, pioneered a technique that enabled Olympia 8 York's to cut financing costs by accessing the bond market, which until that period, had been almost the exclusive domain of top-rated govemments and corporate credits. The innovation of this method was the 'net net lease', which obligated the tenant not only to pay rent, but also cover al1 operating costs. Under this type of lease, the only financial exposure was that a tenant would go broke and be unable to live up to its lease obligations. But if the tenant was a govemment agency or a triple-A corporation, the risk of default was slim. This investment dealer was able to convince several institutional investors that there was no real difference between buying bonds floated by an established company or buying first-mortgage bonds issued by a developer and backed by the a 'net net lease'. This instrument was advantageous from two points. First, it allowed developen to borrow at a substantially lower interest rate Vian with conventional long terni financing. Second, it extended their leverage by enabling hem to obtain loans of as much as 100 percent of the appraised value of the building, instead of a maximum of 75 percent to which insurance companies were limited by law (Bianco, 1997). Using first mortgage bonds, Olympia & York financed some of its office buildings in Canada. The case of the Shell Data Centre built by O&Y in Flerningdon Park in the mid-1960s is used to illustrate this point. O&Y was able to persuade Shell to pay above market reds by granting the company an option to buy its building at a price that declined to zero over the twenty-fie year duration of the lease. The value of the Shell Canada lease was $3.3 million, while the cost of the building was $2.5 million. By issuing $3.3 million in first-mortgage bonds, O&Y was able to pay off highcost construction loans with cheaper debt and have an excess of $800,000(Bianco, 1997). For the purchase of the Star Building, part of the site of the future Fint Canadian Place, 08Y forrned a joint venture with a financial institution, North American Life. The construction financing of O&Y's largest office development in Toronto, First Canadian Place, was partly financed through retained eamings from other projects and from a consortium of Canadian banks led by the Canadian lmperial Bank of Commerce. The long-ten mortgage for the project was issued by Canada Trust (Stewart, 1993; Bianco, 1997). In later stages, OBY relied primarily on bank loans. public debt and commercial paper, usually at rates available only to highquality corporate bonowen (Globe & Mail, March 26, 1992). O&Y was one of a handful of real estate companies that were able to seIl commercial paper by using its properties as collateral. In 1984, O&Y first issued short-terni debt to finance part of its inventory of office buildings. O&Y launched a program of 30 to 90-day commercial paper notes to finance some of its U.S. properties, because it believed that interest rates would decline. When O&Y collapsed, the list of borrowers included major foreign and Canadian banks. The list of Canadian lenders included the Canadian lmperial Bank of Commerce (CIBC), Royal Bank, the Bank of Nova Scotia, the Bank of Montreal, the National Bank, and Canada Trust. Together they held about $2.5 billion (U.S.) in O&Y debt (Globe 8 Mail, March 26, 1992). The notion that access to large pools of capital by real estate developers is restricted and highly confined to selected real estate companies is illustrated by the case of Olympia & York. Access to capital is facilitated through an extensive social network obtained thmugh a variety of accumulated encounten. In their first large project, the acquisition of Flemingdon Park, the Reichmann's, the ownen of OBY, a Toronto-based family, used a connection with another prominent Toronto family. In the case of the purchase of the Star Building, Paul Reichmann had previous connections to one of the senior executives of North American Lie. Among Canadian banks, Olympia & York had established long lasting and very strong ties with the Canadian Imperia1 Bank of Commerce. 08Y began dealing with ClBC in 1956 and eventually, in 1986, Paul Reichmann was invited to join the ClBC board (Foster, 1993). Even after ClBC endured a giant loss as a result of the collapse of O&Y in 1992, ClBC was willing to provide b successor, 08Y Properties, with over $20 million to reclah the ownenhip of the First Bank Tower in the First Canadian Place office complex (Globe 8 Mail, August 6, 1999).
4.2.2 Corporate size and real estate financing Information on many of the financial sources used by a wide range of real estate companies was revealed in the eariy 1990s. At that tirne, many of the real estate companies went through major financial difficulties, which resulted in court deliberations and the diffusion of information to the media. However, the financial sources for small and medium-sized companies are less well known. Since smaller and medium-size companies are usually privately held, knowledge about their financing practices is largely inferential. Some examples and fragments of knowledge about the sources of financing can be provided here. The North York-based developer Cammst Development Corporation lost control of its major office building to Sun Lie in 1994 as a result of missing several mortgage payments. (The total mortgage obligations amounted to $60 million). Sun Life owned the majonty on the mortgage of this project. In addition, the Toronto-Dominion Bank had a mortgage on another office building developed by Camrost (Financial Post, March 8, 1994). A similar case is provided by the affairs of the York-Trillium Development Group. This North York-based developer used mortgage funds from Confederation Life and Canada Trust for the acquisition of the land for the York-Mills Centre in North York (Globe 8 Mail, July 30, 1991). The bankruptcy of one of the largest suburban developers in Toronto, lnducon Development Corporation. in 1992, also provides soma indication of the sources of financing used by a mid-sized Company. According to couit documents, lnducon owed money to a large number of creditors, including many of the largest banks and life insurance companies. The largest creditor was the Royal Bank; the second largest was Confederation Life (Globe & Mail, March 31, 1992). Although Inducon's financial sources invohred the largest financial institutions, the scale of its debt is quite different frorn that of the large developers. While Cadillac Fairview's total debt was $7.5 billion and Bramalea's debt was $4.9 billion, Inducon's debt was 'only' $175 million (Globe 8 Mail, March 31,1992; Decernber 23,1992; December 31, 1994). Real estate devekpen of different sizes tend b use different financing modes. In the eady stages of a developer's life cycle entrepreneuriafdevelopers are short of capital; they do not have substantial retained eamings from previous developments, and hence they engage in the build-and-seIl practice. According to this practice, the developer builds a building for an investor or the user of the office building for a fee. In this case the development is done on a ground lease held by the owner or the investor, and hence it does not require significant capital outlay by the developer. The Oxford Development Group in its eady stages provides an excellent example. The founder of Oxford. Donald Love, had conducted business with the local manager at the Royal Bank in Edmonton. The bank manager inforrned Love that the bank was looking for new premises in Edmonton. Love went to see the bank executive in charge of premises, and as a result Oxford developed a series of Royal Bank buildings across Canada. During the mid-to-late 1960s, Oxford also developed office buildings for the Bank of Montreal and the Canadian Imperia1 Bank of Commerce (Goldenberg, 1981; an interview with the founder of Oxford). The pattern was vety simple; Oxford would lease the land from the bank, build the building and lease the prernises back to the bank. Oxford also ananged financing for these projects, but it was quite simple, since the bank could guarantee the debt. For a developer that is an am of a major corporation and is seeking 10 retain the property, financing is possible through the parent company or through a joint venture partner. Because of the financial strength of the parent company, Cemp (a vehicle to manage the fortune of the Bronfman family gained through whiskey distilling), Fairview was able to arrange short-term bank financing for the development stage of its office buildings. In a later stage, Fairview sold its mortgage bonds, which were based on the value of the tenants' leases (Building Management, February 1966). The joint venture between Fairview and the Toronto-Dominion Bank in the Toronto-Dominion Centre was facilitated through a public offering of long-terni notes guaranteed by the Toronto-Dominion Bank and Fairview. A major advantage of a bank being involved in office development was that the bank would guarantee the long-terni debt or provide the deficiency agreement on the debt. When a bank puts a guarantee on debt, it ranks equally with deposits, which means that the company does not have to file a prospectus, which takes a long time (intenriew with a former president of Cadillac Fairview). Large companies also use a variety of sources (see the case of Olympia & York). Court documents from 1994, when Cadillac Faitview was seeking court protection, revealed that the largest Canadian life insurance cornpanies were Cadillac Fairview's major mortgage pmviders, these included Sun Life, Manulife. Canada Lie, Great-West Life, Mutual Lie, and the US.-based Prudential lnsurance Company (Globe 8 Mail, December 31, 1994). It is of interest here that fiie of the life insurance companies providing mortgages to Cadillac Fairview were Canadian companies, and it is also important to mention that only foreign Company included, Prudential Insurance, had a substantial underwriting business when the mortgages were provided. The high degree of concentration within the Canadian financial system, in which fiebanks and about a dozen large life insurance companies control short and long-term financing, and the limited number of large developen results in close-knit netwoiks between financial institutions and developen. This notion was suggested in the case of Toronto's Financial District. A report prepared by the New York-based financial services firm Salomon Brothers in 1989, asserted that %uildings in the financial core are owned for the most part by a closeiy knit group of well capitalized developen and banks" (Kostin et al., 1989, p. 16). As indicated in this section and as will be argued in later sections, banks and developers and 1;fe insurance companies and developen, have established and maintained long- term relations and partnerships. With regards to the spatial practices of office development financing, the absence of data on this theme limits the abiltty to provide conclusive arguments. However, preliminary findings suggest that the financial sources for office development in Canada are mainiy domestic. In the case of debt financing, the requirement set by the financial institution to match assets and liabilities by spatial units (in Canada, by provinces or regions) limits flows between regions and certainly between countries. The share of direct real estate investrnent in total assets of financial institutions is quite small; consequently, the need of the financial institutions to import capital from outside a distinct political jurisdiction that regulates its financial institutions is limited. In addition, currency risks (lending in US. dollars and receiving cash flow in Canadian dollars), and taxes imposed on capital movements limit the extent of the free flow of capital across international boundaries (see section 4.5).
4.3 Financial Institutions as lnvestors in Office Buildings and as Developers Office buildings have been one of the preferred properties for investment and development by financial institutions. Financial institutions have three major incentives to engage in office development. From the point of view of being office space users, these institutions are large employers. Thus, acting as developers of their own premises makes sense from an econornic perspective. Second, since financiaI institutions occupy a variable share of their head-office and regional office complexes, development might generate additional revenues through leasing space to tenants. Other authors have put more ernphasis on the symbolism of large office buildings. Owneahip of their prestigious office buildings seived also as an image promoter for financial institutions (Domosh, 1988, 1992, 1996). Financial institutions have historicaliy been developen andlor ownen of office buildings. Banks and life insurance companies in Canada were invohred as either ownen or to lesser extent as developen of their head and regional offices. These financial institutions occupied only a portion of the total office floor-space, and rented out space to tenants (Gad and Holdsworth. 1987b). During the post- WWll era offices grew tremendously in sire, and financial institutions realized that office development could be profitable. As a result, starting in the 1960s and culminating in the 1WOs, financial institutions became strongly invohred in office development. By erecting a building that was identified with the corporation, a material embodiment was created; this physical monument acted as a symbol of corporate presence in a specific location (Relph, 1987; Feagin, 1988; Zukin, 1991). This function was especially irnpoitant for financial institutions which attempted to paint themsehres as sound and safe corporations. Dornosh (1988, 1992) suggests that one of the reasons for the construction of skyscrapers in Manhattan in the late nineteenth and eady twentieth centuries was symbolism. This was especially the case with life insurance companies. These companies needed to justify their excess proffis and lack of any apparent material product. By constructing impressive office buildings, they were able to present to the public a civic-minded corporate identity, and their buildings were the material manifestation of that identtty. Beyond the symbolic significance of buildings, there is a functional purpose. In Canada, a country with an integrated financial system, the scope of major banks and life insurance companies is national; therefore, there is also the need for regional offices in major metropolitan areas. Regional offices in a oumber of cities require physical presence. and this in tum results in demand for office buildings. The involvement of financial institutions in office development included three major ways. The first method was hiring a real estate company with an expertise to deal with large-scale office development. In this case the financial institution kept the full ownenhip in the project. The definition of 'developer' in this case is broad. Most financial institutions lacked the expertise needed for the development process, expertise which has been acquired by developers (such as dealing with land assembly and planning regulations), hence they preferred to hire experienced developers to act on their behalf as project managers. However, in this case the institution might be considered the developer in the sense that it decided on the type of development, the location, and it retained the full ownership of the project; the professional developer was merely a hired expert with no stake in the development. The second method was partnering with a real estate company for development. In this case, the real estate company developed the project and assumed partial ownenhip. Especially in the 1970s and 1980s. financial institutions often fonned joint ventures with establkhed real estate developen; if successful, these partnenhips might have lasted for a long period of tirne. In the case of joint ventures, developers and institutions shared the ownership of the pmjects developed. The combination of access to capital via the financial institution and the expertise of an established developer enabled the development of large-scale projects. Finally, the financial institution can became a semi-integrated real estate Company. Financial institutions could act as a semi-integrated real estate developen by having a real estate development department; these institutions tended to outsource certain professional functions to hired experts (engineers, architects, planners and leasing broken). This was the exceptional case for financial institutions participation in the real estate sector. On the participation spectnim in the real estate development industty, the 'developer' position indicates the highest degree of invohrernent and risk (see section 3.6). Generally, financial institutions which are more consewative organizations than real estate cornpanies, abstain from this direct form of invohrement. Real estate development requires knowledge and expertise that is not central to the business of these institutions. There are two sections in the discussion on financial institutions, one deals with banks and the other examines Me insurance companies.
4.3.1 Banks and office development Historically, banks have been large usen of office space. especially of large-sca!e downtown buildings. Partly as a resul?of their need for space and partly because the inclination to generate additional profits (and to guarantee space for future expansion), banks engaged in the development of large buildings, using a variable portion of the total office space they developed. Between the 1960s and the 1980s, al1 the big-fie Canadian banks were invohred either as sole developers, joint venture partnen, or as partial ownen in the construction of their head office complexes in Toronto (a similar pattern was evident in their regional offices in Canada, see section 4.4.1). The cases of the Royal Bank (sole owner employing developer for fee) and the Toronto- Dominion Bank (joint venture, partial ownenhip) were illustrated earlier. In addition, the Canadian Imperia1 Bank of Commerce was the sole developer and owner of its head office cornplex, the Bank of Nova Scotia used a developer as joint venture partner and retained partial ownenhip, and the Bank of Montreal had 25 percent eguity in the ownership of its head office (Table 4.2). Table 4.2 Banks involvement in the development and ownership of their head offices in Toronto
Bank Role in development Owmship at the time of development Toronto-Dominion Partnenhip with Cadillac Fairview Paitnership 50150
Cl BC Developer Owns 1M) percent
Bank of Montreal lnvestor Minority interest (25 percent)
Royal Bank Hired a developer Owns 100 percent
Bank of Nova Scotia Partnership with Campeau Minonty interest
-. Source: Various sources.
The development of the Royal Bank Plaza in Toronto, the de facto head office of the Royal Bank (de jure, the head office is in Montreal), illustrates the nature of relationship between a bank and a hired developer. In 1972, afîer meeting with a number of major developers, the bank appointed the Toronto- based Y&R Propeities (one of the well-established office developen in Toronto) to act as its agent and developrnent manager for the construction of the Royal Bank Plaza in Toronto's Financial District. The cornplexity of development prompted the bank to assemble a project team, in which Y&R had a pivotal role. In this case, as pointed out by one of the bank's officiais, the distinction between the developer and the owner was made: '...the developer would lend his expertise to a prospective owner for a fee. Up to this time, the developer usually held direct interest in the project and developed it on this basisn (Canadian Building, September 1975). For the purpose of rnanaging the Royal Bank Plaza, the Bank formed its wholly-owned subsidiary, Globe Realty Management in 1974. The role of Y&R was especially important as the mediator and the negotiator with Toronto City Hall. The Royal Bank with its head office in Montreal at the time was a newcorner in Toronto's Financial District (Although the bank had office buildings in the area before, they were not at the size of a large-scale project). The bank used the expertise of a real estate brokerage fim to assemble the land, and being inexperienced in handling development; the bank needed an expert that was able to deal with this large-sale project. In this way, the bank rnaximized the potential benefis gained through knowing the 'niles of the gamet. An exarnple for another type of relationship is the long-terni connection between the Toronto- Dominion Bank (TD) and Fairview (later Cadillac Fairview). In the early 1960s after the merger of the Dominion Bank and the Bank of Toronto, the TD contemplated the idea of developing a new head office building in Toronto. The City of Toronto urged the bank to consider a development of a whole downtown complex instead of only a head offibuilding (Collier, 1974). As a result, Me bank teamed up with Fairview to develop the largest office complex in Canada, the Toronto-Dominion Centre (fie buildings and over 4 million square feet of office space). In this case an equal partnenhip was fomed, where the bank owned 50 percent of the project and the developer owned the other half. The initial connection between the TD bank and Fairview was faciiitated through the mediation of a prominent Toronto investment dealer. The bank executives were impressed with the quality of development demonstrated by the development company as well as the company's expertise; moreover, the financial credentials of the developen (their association with the Bronfman family) helped to forge this partnenhip (intewiew with a former president of Cadillac Fairview). In this case it is clear that the bank wanted to build a large project that would be an income producing property because only a small portion of the Toronto-Dominion Centre senres as the bank's head office, hile the vast majonty of office space was rented to various tenants. The only Canadian bank that had aspirations to become an integrated real estate developer was the Canadian lmperial Bank of Commerce (CIBC). In the late 1980s, the Bank attempted to cash in on the real estate upswing by establishing a real estate subsidiary, ClBC Development Corporation. The creation of a real estate am was an attempt to change its traditional rote in real estate from a lender to a major owner and potentially a developer. The Bank announced the formation of its real estate subsidiary at the peak of the real estate cycle in 1989 (Toronto Star, January 11, 1989). The original purpose of the subsidiaiy was to manage the Bank's existing real estate podfolio and eventually expand into real estate development. According to a ClBC executive, the Bank's properties contributed an insignificant share to its profils; by establishing the subsidiary, the Bank aimed to rationalize its assets and generate more profits from its real estate portfolio (Globe & Mail, January 11, 1989). The mandate of ClBC Development Corporation was threefold (CIBC Development Corporation, intemal documents): o Maximize the value of selected bank properties by creative redevelopment and on-going management; o Build a portfolio of prime office and mixed-use income properties through acquisition, development and joint ventures; and o Capitalire on synergies between the corporation's expertise and the comprehensive activities of the bank for long-terni returns. By the late 1990s, ClBC Development Corporation was a full secvice real estate company employing more than 400 people and performing the major functions of a real estate development Company: leasing, investrnent and development, property management, and corporate real estate (CIBC Development Corporation, intemal documents). In 1990, a year after the subsidiary was fonned, it outbid the two largest real estate companies in Canada, Olympia 8 York and Cadillac FaiMew, to build a proposed Ontario Hydro headquarters complex in Oowntown North York. CIBC Development Corporation planned to finance, develop, own and manage the 24million square feet, three-tower office complex (Toronto Star, March 10, 1990; Globe 6 Mail, August 26, 1991); however, the real estate meltdown in the early 1990s caused the project to be mothballed and eventually abandoned. In the late 1990s, the ClBC Devekpment Corporation developed a few small office and industrial buildings in Mississauga and Brampton. The company's main business was real estate leasing, property management, and acquisitions of real estate assets. Development never took off as planned. The latest phase regarding the role of banks in both office development and ownenhip signak a dramatic tumaround is visible in the 1990s. The banks dissociated themseives from the ownership of big office buildings, and they definitely, at least in the foreseeabk future, abandoned the development business. In the late 1990s, three major Canadian banks disposed of most of their real estate assets as part of their strategy to re-deploy assets in the banks' core businesses. The banks considered real estate as a non-core business in an era of growing competition and specialization. It was suggested that electronic banking is replacing buildings and real estate investment. A vice-president of the Royal Bank admitted, 'Ecommerce will be one of the uses of money we make from a [real estate] sale" (National Post, July 31, 1999). In September 1999, the Royal Bank sold its entire office portfoiio to a consortium of Oxford Properties Group, OMERS and GE Capital (Toronto Star, September 23, 1999). The Bank of Nova Scotia sold properties that were not used by the bank. The bank's senior vice- president of real estate indicated that *we [the bank] do not belong in the real estate business per se. We are not developen. What we are is an institution that uses real estaten (Globe & Mail, June 17, 1999). The most recent move was by CIBC. In August 1999, ClBC put its real estate division on sale; by December of 1999, seven premier office complexes were sold to a British Columbia pension fund (Globe & Mail, August 13, 1999, December 1 1, 1999). When a bank needs a new facility (office or office-like building), it prefers to have a design-built building for a long lease period put up and owned by a real estate Company. The new Royal Bank office complex (800,000 square feet) in Mississauga illustrates this point. The Bank used a developer, Penreal Capital Management (a manager of pension fund real estate assets), to develop its new two-tower office project The bank leases the building, which is owned by pension funds. 4.3.2 Life insurance companies and office development The life and trust companies and pension funds will control the development industry in the next decaden (Senior Vice-President. Reaity Advisory Group. Toronto-Dominion Bank, Globe & Mail, September 21,1982).
The changing role of IL insurance companies in the real estate sector matches the position and the character of development cycles. Barras (1979b) suggested that successive development cycles in London since the early 1950s modified the structure of the real estate sector and the nature of the relationship between developers and financial institutions. In the late 1950s and early 1960s, bridge financing from banks was in short supply and real estate companies were forced to tum to life insurance companies. These institutions began to appreciate the retums from properiy ownership during the 1960s. and by the 1970s, life insurance companies were in a commanding position with regard to nearly al1 aspects of real estate investment and development. Financial institutions engaged in active development as joint schemes became a common funding arrangement; as a result, development profit and rental income were shared between the developer and the funding institution (Barras, 1979b). In Ireland, 'institutional' investon (life nisurance companies and pension funds) also becarne involved in the process of development, in some cases using developers but reducing the developer's role to the status of a project manager working for a fee. or by establishing their own development departments (MacLaran, 1986). In Canada, the involvement of life insurance companies in real estate ownership and mortgage provision increased markedly between 1950 and 1980: from approximately 20 to more than 40 percent of invested assets (Table 4.3). In the 1950s. most life insurance companies had either no real estate at al1 or had no more than one percent of their total assets in property. which was probably their head office building and some regional office buildings. By 1960, the situation had already evolved toward greater involvement of larger life insurance companies in property investment, although the process was still in its eaily stage. It gathered Pace during the 1960s and the 1970s (Des Rosiers, 1984). In 1980, several large companies had invested significant amounts of capital in real estate. Two of the larges?companies, Manufacturen Life and Sun Life, had more than eight percent of their funds in real estate assets (excluding mortgages). When real estate development was growing at a rapid pace, the average share of real estate in the assets of life insurance companies increased from four percent in 1980 to 5.1 percent in 1990 (Canadian Life and Health lnsurance Association, 1998). However, paradoxically, the peak (6.3 percent) of the share of real estate investments of assets of Me insurance companies was in 1992, when the recession was well underway. This was mainly a resutt of life insurance companies foreclosing assets after their ownen defaulted on their mortgages.
Table 4.3 lnvestrnent of Canadian life insurance companies in real estate and mortgages, setected yean, 1950-98 (percentage of total invested assets)
Year Real estate Mortgages Total
1998 3.3 19.2 22.5
Source: Canadian Life and Health Insurance Association, 1998.
During the late 1960s and eariy 1970s. the growing sire of development schemes compelled Canadian real estate companies to increase their reliance on extemal funds from life insurance companies and pension funds, especially since long-terni financing through these institutions was abundant and relatively cheap. However, these institutional investors shifted away from straightforward mortgage lending to funding based on participation patterns as inflation was nsing and real estate investment was recognized as an efficient hedge against inflation. As life insurance companies discovered that real estate development was a profitable business, which suited their long-term objectives, they began to actively seek development opportunities. Life insurance companies approached this arena by first converting conventional mortgages into 'participation' and 'convertible' mortgages. A participation rnortgage can mean participation in cash flow or in the project's ownership as well as cash flow. In convertible mortgages interest payments are made to the institution during the building's early yean, then the ternis are switched to give the lender an equity positicn, or even an option to buy out the developer (Financial Post, October 24, 1981). The role of life insurance companies in real estate operations increased steadily as îhese companies moved from indirect and passive to increasingly direct and active involvement. This transition led Goldenberg (1981) and Des Rosiers (1987) to conclude that the control of the real estate sector was shifting away from entrepreneurial capital (real estate companies) to agents of finance capital (Me insurance companies and pension funds). Until the early 1980s, the steadily increasing involvement of life insurance companies in real estate investments was largely through the acquisition of existing properties, but during the 1980s. life insurance companies began to play an active role in development. The growing attraction of office development, especially the promise of development gain retained from the development of new properties, prompted a growing competition between real estate developen and financial institutions. Life insurance companies either initiated developments, made developers joint venture partners, or conditioned funding by obtaining a partial ownership in a project. The clearcut distinctions between developers (real estate companies) and financiers (life insurance companies) began to blur as life insurance companies expanded their real estate operations (Des Rosiers, 1987). The move of life insurance companies from debt financing towards direct investrnent (most pronounced in the 1970s and 1980s) signaled the relative lessening of their role as financial intennediary and their increased role as active investors. Empirical evidence covering a thirty-year period (1950-1980) provided by Des Rosiers (1984) support the argument that the involvement of life insurance companies in direct real estate investment (either through property ownership or developrnent) had increased dunng this period. In the postwar era, these companies shifted a larger portion of their investments into real estate and decreased their share of mortgage lending (Des Rosiers, 1984). Most of the largest Me insurance companies in Canada became involved in commercial development, particularly in office development during the 1980s. Life insurance companies entered into the arena of developrnent as a result of the continuous expansion of the real estate market, and their eagemess to exploit opportunities; in addition, the scarcity of propeities for sale also prompted their involvernent in development. The upswing in the real estate cycle in the earîy-to-late 1980s enhanced the attraction of real estate investment for life insurance companies. Companies with no previous experience in real estate development began to initiate developments. For example, North Arnencan Life initiated a large office development in North York in partnership with Xerox, and Canada Life teamed up with ClBC in a joint venture to develop an office building in Hamilton (North Arnerican Life and Canada Life, Annual Reports). When life insurance companies engage in office development, they usually do it jointly with real estate developen. These relations are further cemented into long-terni financial partnerçhips between real estate companies and life insurance companies. In these cases, life insurance companies provide the developers with either debt or equity financing, or both. Great-West Lie Assurance Company had a long-term relationship with the Oxford Development Group. Between 1963 and 1979, Great-West was a majcr equity and debt provider for Oxford's real estate projects along with Confederation Life and Canada Trust (Goldenberg, 1981). Great-West provided part of the financing for development of new office buildings as well as acquisition of individual properties, real estate portfolios, and real estate companies. Another long-terni relationship was cemented between Mutual Life of Canada and the Shipp Corporation. These two cornpanies have been partnen since the mid-1960s in residential and commercial real estate development at the western edge of the Toronto rnetropolitan area (mainly in Etobicoke and Mississauga). The life insurance company that has been highly exposed to real estate investment is Manulife Financial (previously Manufacturers Life). Its share of invested assets in real estate had grown from 4-5 percent in the mid-1960s to almost 15 percent (then, the maximum allowed by law) in 1974. In the late 1980s and eady 1990s its share was at 9-10 percent and dropped to 6 percent in the aftenath of the real estate recesçion in the mid-to-late 1990s as the Company decided to reduce its real estate exposure (Manulife Financial, Annual Reports). Up to the mid-1950s Manulife's participation in real estate was primarily through debt financing (mortgages). Beginning in the mid-1950s. the company had increased its involvement in equity investment. In the mid-1960s the wmpany decided to invest in real estate through direct development, making it a unique enterprise among life lnsurance companies in North Arnerica. It became active in office development as an integrated developer without adopting specialized developers as partners (Manulife Financial, intemal documents). The activities of life insurance companies have been highly regulated by rules of the Governrnent of Canada. These rules outline the type and proportion of investments allowed to life insurance cornpanies. In the 1970s. the limit on life insurance companies' investment in real estate was 15 percent of a company's total assets. During the 1980s boom, life insurance companies lobbied the federal govemment to permit them to devote up ta 25 percent of their assets to real estate, and the industry's association, the Canadian Life and Health Insurmce Association, suggested that the 15 percent limit %il! prove confining to some companies in a vey few yearsn (financial Times, October 31, 1983). In the most recent round of govemment regulation, which came into effect in 1992, no fixed limits on real estate investment were imposed but rather a 'prudent' approach was suggested for adoption by the life insurance companies. Under this revised legislation the board of directors of each life insurance company is responsible for 'prudent' investrnent decisions. This revision came Mer insurance companies experienced the high-risk aspects of real estate investrnent and development; as a result, the share of their real estate declined from 6.3 percent to 3.3 percent of their assets rather than rising to above 15 percent (Canadian Life and Health Insurance Association. 1998). During real estate slumps, life insurance companies have been parlaying their real estate expertise into investor advisory services. Sun Lie and Great-West Lie are two examples of companies who shifted their focus from purchasing properties for their own account to providing services, such as real estate management, to outside investon (Financial Post, June 29. 1992). When there are signs of recovery, some venture into development Although GWL Realty Advison, the wholly-owned real estate am of Great West Cie, had no prior experience in development, the company commenced its first office project in 1998 (Finsncial Post, January 29, 1998). Favourable conditions in suburban office markets with low vacancy rates provided the platforrn for suburban office development in Toronto, Calgary and Edmonton. The company's ability to act as a developer is further enhanced by the fact that a number of its key executives have experience in real estate development. For exarnple, both the company's president and its senior vicegresident were with Trizec Corporation, one vice president was with Cadillac Fairview, and another vice president was with a commercial real estate brokerage firm (GWL Realty Advisors, 1997 Pomolio Review).
4.4 The Spatial Practices ot Office Development and Ownership by Financial Institutions Real estate investments of financiai institutions have distinct spatial patterns. These patterns are based on the fact that these institutions are major users of office space and capitalize on real estate being an income-producing asset. Barras (1979a) in a study of office development in the United Kingdom, suggested that large and medium-sized life insurance companies and pension funds had a clear preference for London and the South-East markets. This spatial pattern was grounded in the strategy and the time horizon adopted by these investors. Martin and Minns (1995) suggest in relation to pension funds that the concentration of economic power in and around London transfers wealth disproportionately to the South East of England. They attributs this core-periphery tendency to institutional requirements for Iiquidity that discourages long-term investrnent in regions outside the South-East. Henneberry (1999) attributes the sequential pattems in the 1980s office boom, with London leading the boom and other regions peaking later, to the preferences and decisions of major institutional investors. Liie insurance companies and pension funds are considered as consenrative institutions. interested in long-ten income growth, whereas banks are short-terni investors which require higher retum on investment, and are, therefore, willing to take greater risk in real estate investment (Banas, 1979a; Des Rosiers, 1984; Pryke, 1994a. 1994b). In the case of the City of London, the financial core, the 'Square Mile', was considered as the familiar and safe environment that life insurance companies and pension funds were operating in; therefore, their functionai needs have reinforced investrnent requirements from real estate companies developing new office space. Banks, on the other hand. hold essentially short-terni commitments (assets and liabilities). thus they did not tie real estate investment to particular spaces, allowing real estate developers greater spatial flexibility (Pryke. 1994a). Financial institutions have preferred to invest in large propetties in a few locations, generaily large cities, since monitoring of these properties is less complicated than of properties in smaller centres. Therefore, medium and smaller urban areas cannot support this scale of development, and are largely ignored by financial institutions. This point highlights the conflict between concentration and diversification strategies. Diversification. investment in different places and products at the same time. is perceived as a measure to minimize risk, hence geographical and product diversification is considered positive. However, in the Canadian context, only several large urban areas are able to sustain larger projects providing good retums per square foot (economies of scale). In addition, smaller cities create smaller real estate markets; these are more volatile and shallow markets, and are slow to recover, whereas the bigger the market the less risk involved in investrnent. The likely outcome will be diversification within the limited frarnework of the larger urban areas (interview with a general manager of real estate in a life insurance company).
4.4.1 Banks Beginning in the 1960s. banks deviated from their traditional role as providers of short-term financing and became equity investors in joint ventures with real estate developers and other investors. Seeking office development was 'justified', because the banks needed networks of regional offices and office space to accommodate their main branches. However, in most of the office developments that the banks were involved in, the actual space occupied by the banks' offices was marginal. Most of the big five Canadian banks participated as equq investon in the development of office buildings for both their own use and for income producing purposes. For instance, the Bank of Montreal developed an office building in Winnipeg in the early 1980s to house its Manitoba-Saskatchewan Division. However, the regional office occupied only one-third of the available office space with the remainder leased to tenants (Canadian Building, September 1981). One of the most active Canadian banks in office development was the Bank of Nova Scotia. In the 1970s and 1980s, the bank sought joint ventures in office development projects for the purpose of income-producing propeities. The bank was active in almost al1 of the hrgest cities across Canada (Table 4.4).
Table 4.4 Bank of Nova Scotia and office development joint ventures
City Period Project Size Partner (square feet) Vancouver Eariy-to-mid 1970s Vancouver Centre 400,000 Fmous Players, Birks
Calgary Mid-1 970s Scotia Centre 600,000 Trüec
Edmonton Eariy-to-mid 1980s Scotia Place 550,000 National Trust, pension funds
Winnipeg Late 1970s-early 1980s Winnipeg Square 600,OoO TNec
Toronto Mid-to-late 1980s Scotia Plaza 1,500,000 Campeau
Montreal Late 1980s-early 1990s Tour BNE 300,OOO Monit (hldeveloper)
St. John Mid-1 970s-late-1 970s Brunswick Centre ~,~ Trizec and other partners
Sources: Scotiabanker (Bank of Nova Scotia Staff Magazine); Tritec Corporation, Annual Reports.
In al1 the office buildings in which the bank was a joint venture partner, it occupied the lesser part of the available office space. The reason for these joint-venture developments was to acquire equrty interest and to take advantage of the benefis embodied in real estate assets. Table 4.4 also shows the long- terni relationship between the bank and Trizec (three buildings were built as joint ventures). In addition, the Bank of Nova Scotia was a minonty holder of the Canadian Company (Carena Properties) that purchased Trizec Corporation (the Trizec case is discussed in section 5.4.1) from its British owners in 1976 (Goldenberg, 1981). The portfolio of ClBC Development Corporation, the real estate subsidiary CIBC, illustrates similar type of practices as the Company was geared toward investment in real estate for income- producing purposes. The spatial practices presented by CIBC Development Corporation reflect a preference to Canada's fie largest rnetropolitan areas. These areas accounted for more than 97 percent of the company's office portfolio; in particular, this portfolio is favourably disposed towards the Toronto area: over 54 percent of the total portfolio was concentrated in this metropolitan area (Table 4.5). Table 4.5 ClBC Development Corporation and Royal Bank's owned office portfolio, l998,l999
ClBC ûevelopment Corporation (1) Royal Bank Metropolitan area Office space % of total portfolio Mcesprte % of total portfolio (WC square feet) (üûû square feet)
-- Toronto 3,729 54.5 2,721 55.9 Calgary 1,124 16.4 47 1.O Edmonton 750 11.0 144 2.9 Montreal 716 10.5 146 3.0 Vancouver 341 5.0 198 4.1 Hamilton 180 2.6 O O Ottawa O O 401 8.2 Winnipeg O O 21 7 4.4 London O O 180 3.7 Halifax O O 174 3.6 Regina O O 112 2.3
Other O O 531 (3) 10.9 Total 6,8«) 100.0 4,871 100.0 Notes: (1 ) 1998 figures. (2) 1999 figures. (3) These includes cities with properties of les than 100,000 square feet eah: Thunder Bay, Saint John, Brandon, Moose Jaw, Saskatoon, Lethbridge, Prince George, Kamloops, New Westminster, Victoria, and Guelph. Sources: ClBC Development Corporation, Property Portfolio; Oxford Properties Group, written communication.
The office portfolio of the Royal Bank presents a different spatial pattern with a wider dispersion across Canadian cities (Table 4.5). Except for a similar large portion of the Royal Bank's portfolio in Toronto (almost 56 percent of the bank's total portfolio), the spatial patterns of the Royal Bank are different from those of the Bank of Nova Scotia and CIBC. The high-profile of Toronto in the portfolios of al1 three banks is a result of the banks having their head office complexes in Toronto. Commerce Court (2 million square feet), Royal Bank Plaza (1.5 million square feet) and Scotia Plaza (1.5 million square feet) are located in Toronto's Financial District. Apart from that, each bank has different spatial practices. ClBC Development Corporation is a specialized real estate fim that owns major bank premises, and rnulti-tenant office buildings that are owned for revenue purposes and are leased to various tenants. In 1997 the company acquired four office buildings in the Mississauga City Centre (800,000 square feet). ClBC was not a major tenant in any of these buildings (interestingly, the Royal Bank is one of the major tenants in two of the four buildings). In Calgary, the company co-owned one of Calgary's largest office buildings, Gulf Canada Square (1.1 million square feet); in this building ClBC was not a major tenant (CIBC Development Corporation, 1999). The Bank of Nova Scotia, although not as aggressive as ClBC in punuing offa development, was invoived as a parbier in office development, primady in major Canadian cities (Table 4.4). The Royal Bank portfolio, on the other hand, consists mainly of office buildings in which the bank is a major tenant. The portfolio consists of a large number of small buildings; out of the bank's 33 buildings, 21 are less than 100,000 square feet (in comparison, the ClBC portfolio includes only four small buildings out of a portfolio of 18 buildings). The Royal Bank portfolio is much more dispened than the ClBC or the Bank of Nova Scotia office podfolio. Approximately two-thirds of the Royal Bank portfolio is in fie of aie largest metropolitan areas (Toronto, Montreal, Vancouver, Calgary and Edmonton), whereas a majonty of the Bank of Nova Scotia portfolio is these metropolitan areas, and in virtually al1 of ClBC Development Corporation portfolio is in these metropolitan areas. The reason for the 'discrepancy' beîween these office portfolios is a result of the different approaches toward real estate adopted by the banks. ClBC decided, in the late 1980s, to become an active player in the real estate sector, mainly through management of the bank's premises, and ownership of real estate assets for income-generating purposes. Real estate was perceived as an under-perfoning asset and the bank aimed to maximire the value of its properties. Thus, the company's focus was on prime properties that generate high rents and high retums. These are large properties located in the largest Canadian metropolitan areas. The Bank of Nova Scotia punued office development in the 1970s and 1980s when office development was in high demand. The bank attempted to take advantage of these favourable conditions and becorne a partner in real estate projects. The Royal Bank acted mainly as a user of office space, owning properties that are needed for the bank's functions. Hence, the bank had a large number of srnall-size buildings in a variety of cities across Canada. The bank's portfolio consisted of buildings in small cities such as Thunder Bay, Brandon, Moose Jaw, and Kamloops; in al1 of these cities, the bank owned small buildings, each less than 50,000 square feet in size. This represents a spatial pattern of ownership of office buildings that matches the bank's spatial functional configuration. Although having similar functional needs, Cl0C and Royal Bank considered real estate in different ways; while Cl0C attempted to become active in real estate development, the Royal Bank regarded its office buildings mainly for use purposes.
4.4.2 Life insurance companies The financial strategy of life insurance companies is to match assets and liabilities; in this process they also attempt to match their assets and liabilities spatially. In cases where the Company does not have much business in a specific province, it prefen to have a minimal level of real estate investment in that province. Lie insurance companies, as a result of being national in scope, need regional offices, and in the past wanted to be visible in the places they operated in. Consequently, buildings were often built to provide the company with 'presence' (an interview with a vicegresident in the real estate division of a life insurance company). However, more recentiy this matching process has been accompanied by the intemal logic of real estate investment, which prefen investment in centres which are large and have potential growth. Currently, at the metropolitan level, the largest urban areas with considerable growth rates, such as Toronto, Vancouver, Calgaiy and Edmonton, are considered attractive for investment. These areas reach a certain size threshold. This results in market depth, which allows life insurance cornpanies to invest in large projects (large projects are missing from smaller scale cities). In addition, some large metropolitan areas, such as Montreal, are considered less attractive because their growth prospects and stabildy are not considered satisfactory (interview with a general manager of the real estate division of a Iife insurance company). Until the 1980s, the majonty of life insurance companies were primarily either debt providers or CO-ownersof office buildings; only one life insurance company, Manulife Financial, developed office space for income-producing purposes. In the 1980s some life insurance companies canied out their first ventures in the office development arena as sole or joint venture developers; these developments were usually large-scale projects. Sun Lie developed three major office complexes, one in Toronto's Financial District (a two-building complex), one in Calgary's downtown (a three-building cornplex), and another in Edmonton. London Life teamed up with several otber investars ta develop College Park and 33 Yonge Street in downtown Toronto, and with Cadillac FaiMew to develop a three-building complex in North York. North American Life developed jointly with Xerox a two-tower office complex in North York (Me insurance companies, Annual Reports). The spatial patterns of the developments carried out by Iife insurance companies reveal a clear preference of the largest cities, and specifically the Toronto area. Dunng the 1980s, Toronto was the focal point of office development in Canada. Although other cities experienced development surges, Toronto was clearly the chosen location. This tendency was reflected in the primary position of Toronto on the agenda of life insurance companies (Table 4.6). Large-scale downtown developments were common features of projects invohring life insurance companies. The need for large pools of capital secured by the relatively stable downtown environment prompted the involvement of life insurance cornpanies in downtown projects. One exarnple is the development of the Bentall Centre in downtown Vancouver. This complex includes four office buildings with 1.5 million square feet of office space buiit between 1966 and 1981 (in 2000, the fiih building is under development, the partner is a pension fund, OMERS). Bentall Corporation teamed up with Great-West Life as an equity paitner to develop the Bentall Centre. In addlon, Great- West provided the mortgage for the project, and becarne the primaiy tenant in one of the Centre's buildings. Bentall could not get a mortgage without a prime tenant. The solution was that Great-West became the prime tenant and provided the mortgage. Great-West also took an equity position; this way it could enjoy both worids: it would collect interest payrnents as the moitgage provider, and share the development gain as an equity partner (Gutstein, 1975).
Table 4.6 Major office developmenh by Canada's largest life insurance companies (for income-producing purposes), late 1970s to early f 990s
Company. . Toronto Montmal Calgary Vancouver Edmonton (head office) Manulife 2550 Victoria Park, Centre BC Gas Building; Manulife Place (TO~O) North York Manuvie 51O Bunard
Sun Life Sun Life Centre Sun Life Sun Life Plaza Sun Life Place (Toronto) Plaza
Canada Me Canada Life Building, (Toronto) Scarborough
London Life 33 Yonge; (London. Ontario) Cdege Park; Yonge Corporate Centre, North York
Mutual Life Shipp Centre, (Waterioo) Etobicoke; Mississauga Executive Centre, Mississauga
Bentall Centre
Crown Life 160 Bloor E.; (Toronto) 175 Bloor E.; Gateway Centre, Markham
North Arnerican Life North Arneiican Life (Toronto) Centre, North York
Confederation Life One Mount Pleasant; (foronto) Airway Centre, Mississauga Sources: Lie insurance companies Annuai Reports, newspapers and personal communication. However, joint ventures between life insurance companies and developen were not limited to downtown projech. Inducon, a suburbiui Toronto office and industhal developer, formed joint ventures with life insurance companies at the midst of the office development boom in the 1980s. lnducon fomed a joint venture with Confederation Life for a development project in Mississauga, and with Prudential Assurance in Etobicoke and in Mississauga (Globe & Mail, October 11, 1988). A joint venture between Manulife Financial and Orlando Corporation, one of Toronto's largest suburban industrial and office developers, was formed to facilitate the development of one of the largest business paks in Canada, the Heartland Business Park in Mississauga. Manulife acquired the land, more than 1200 acres, and Oriando acted and still acts as the developer. These observations indicate that those life insurance companies, like real estate development companies, are highly opportunistic agents. Although most of their real estate investments are in downtown developments, they invest in different locations based on available opportunities. Manulife Financial was the most active of the Me insurance companies in the area of office development in Canada; it developed more than 4 million square feet of office space (Table 4.7).
Table 4.7 Office buildings developed by Manulife Financial hrincome-producing purposes, 1960s to 1980s
City Office space % of total Notes on changes ('000 square feet) portfolio Toronto (1) 1,100 25.9 3 small buildings (150,000 square feet) were sold in 1991 Edmonton 800 18.8
Vancouver 12.9 One building çold in 1995 (350,000 square feet); another building (200,000 square feet) purchased in 1999
Calgary 500 11.8 One building (80,000 square feet) sold
Ottawa 450 10.6
Halifax 250 5.9 Portfolio sold
St. John's 250 5.9 Half of the portfolio sold
Montreal 4.7 Another building (200,000 square feet) was acquired in 1999
Winnipeg 150 3.5 Portfolio sold
Total 4,250 100.0 Note: Excluding Manulife Financial head office complex (1.5 million square feet). Source: Maunlie Financial 2000, Personal and wntten communication. The first office building developed by Manulife in 1965 (50,000 square feet) was in Toronto; it was followed by an office building in Calgary, completed in 1967 (276,000 square feet), and another office building in Toronto was completed in 1969. In the 1970s, Manulife constructed office buildings in Toronto, Calgary, Ottawa and Winnipeg. The most prominent development was the Manulife Centre in Midtown Toronto (Bloor/Bay), a mixed-use complex of residential, office and retail uses. During the 1980s and the eady 1990s. contrary to Me actions of other life insurance companies, Manulife's developrnent focus shifted fiom Toronto to other cities. Manulife built office buildings in Vancouver, Calgary, Ottawa, Halifax, Edmonton, Montreal, and St. John's. The development of Manulife Place in Edmonton was the single largest office building developed by Manulife in Canada. As in the case of other real estate companies and life insurance companies, this was an attempt to capitalize on the expanding economy of Alberta in the late 1970s and early 1980s. During the 1980s. Manulife developed a total of 2 million square feet of office space across Canada. In addition, the company developed office buildings in the U.S., primarily in Washington DC, Los Angeles, Chicago, and San Diego and shifted its main focus to the United States (see next section). Following the severe recession in the early 1990~~Manulife decided to seIl a significant portion of its real estate holdings. The risky nature of real estate has prornpted this move as the concentration in real estate %as higher than we [Manulife] would like compared to the industv (Manulife Financial, senior vice-president, Globe & Mail, April 3, 1995). The assets that Manulife sold were the smaller office buildings in the medium-sized and smaller cities (Winnipeg, Halifax and St. John's), and smaller buildings in the largest 'markets' (Toronto and Calgary). Wiihin the metropolitan areas, Manulife investments in office buildings are favourably disposed toward downtown areas. In the 1980s, the oversupply of office space in suburban markets propelled Manulife to concentrate on 'prime' downtown opporlunities in cities with stable and divenified economies' (Manulife Financial, 1989 Annual Report). Statistics on the value of the company's office buildings indicate that in the 1990s (1992-99), downtown office buildings constituted on average more than 80 percent of the value of the total office buildings in Canada owned by Manulife (Manulife Financial, intemal company reports).
4.5 The Spatial Limitations of Real Estate Capital In conformity with the notion that the spatial reach of capital is almost without limits, Olympia 8 York is often used as the archetypal development company employing global capital (Logan, 1993; Ghosh et al., 1994). However, even in the case of O&Y, close links were obsenred between the places in which capital was invested and places where the lenden were kcated. In other words, Canadian lenden were primarily exposed to Canadian real estate properties; U.S. and Japanese lenders were collateralized mainly by US. assets; and European banks were mainly exposed to the Canary Wharf project (Ghosh et al., 1994, p. 11). Moreover, Olympia 8 York is an exceptional case. Most Canadian developers acquire thek funding from domestic sources. Based on a number of case studies, it is reasonable to suggest that Canadian banks and Canadian life insurance companies are the major providers of debt and equity financing for office development in Canada. Information on foreign investment is partial. However, insights gained through a careful examination of published material and interviews with industry insiders make it reasonable to suggest that the role of foreign capital in Canadian office development has been limited. The notion that most of capital invested in Canadian real estate is domestic was also supported by a senior executive of a life insurance company: The major sources of capital are quite provincial, they [financial inçtihitions] want to lend money in the place that they know. There is not a bt of desire of a U.S. lender to come to Canada and leam the laws of Canada, and leam about the real estate market. When you do it, you tend to lose money. Capital tends to stick close to home. In Canada, the role of foreign capital is very marginal. Most of the debt in this market is controlled by life companies, pension companies and the banks" (an inte~ewwia, a VicePresident of Canadian mortgages at one of Canada's largest life insurance cornpanies).
Preliminary findings suggest that the provision of foreign capital as debt financing for office development projects in Canada has been moderate in size. An interview with the executive vice- president of a major Canadian bank revealed that there are great risks in using foreign capital for real estate development. The fact that the cash flow of an office building in Canada is in Canadian dollars makes lending in any foreign cunency susceptible for exchange rate fluctuations. Although information of debt financing is partial, the absence of information on significant foreign financing may suggest that it is unusual in the case of office development. Among the largest office buildings developed in Canada in general and in Toronto in particular, the only reported foreign capital (debt financing) was used in the case of Place Ville Marie in Montreal, where financing was obtained from Metmpolitan Lie and Eagle Star, a British insurance company, around 1960 (Zeckendorf, 1970, p. 179). On the other hand, foreign direct investment for the acquisition of real estate assets and to lesser extent the development of new structures seems to be more prevalent than foreign debt financing. The reason for this might be that direct investment is more visible. and therefore easier to detect than debt financing. In order to develop office buildings, foreign investors prefer joint ventures with Canadian developers. Prudential lnsurance of America, the co-developer of the Consilium Place in Scarborough, had a haIf interest in this project; a Toronto-based developer, Equity Development Group, owned the other haL The Prudential Assurance Company of the United Kingdom was a partner of lnducon in office development in Etobicoke and Mississauga (Globe & Mail, July 28, 1983; Financial Post, September 19, f 990). The extent of foreign participation in office development in Canada has been marginal and was mainly through the acquisition of office buildings. Edgington (1996a, 1996b) found that among Japanese investon in Canadian real estate, investment in office buildings between 1985 and 1992 was scant, and it was through the acquisition of existing office buildings. In total. Japanese investon acquired six office buildings in Canada (three in Vancouver and three in Toronto), while their main investment was in hotels and resorts in western Canada (Edgington, 1996b. p. 26). Even when foreign developers engage in office development in Canada. it does not necessarily mean that they utilize foreign capital; often they may use Canadian financing. The mortgage for the York Centre (known later as Aetna Centre) located on King and York Streets at the heart of Toronto's Financial District (developed by Olympia & York) was provided by the U.S.-based Prudential Insurance Company of America (Globe & Mail, January 1, 1993). However, since Prudential lnsurance had large Canadian operations and collected prernium incomes in Canada, it is quite possible that the mortgage funds acquired by Olympia & York were Canadian funds. Hammerson Canada, one of the major foreign developers in Canada, used foreign capital as construction bans (short-term financing), while long-term financing was raised in Canada (interview witb a former president of Hammerson Canada). In addition to Canadian real estate companies operating outside Canada. primarily in the U.S. (see section 3.2), Canadian financial institutions were involved and still are in real estate investment in the United States. In the boom years of the 1980s, Canadian banks provided financing for selected office development projects in the U.S., and in the 1990s, several Canadian pension funds purchased real estate properties in the U.S. However, the rnost active financial institutions in this field have been life insurance companies. Canadian life insurance companies do not limit their investments to Canadian assets, and their real estate investments are not an exception. Des Rosiers study (1984) shows that between 1960 and 1980 the share of real estate investment by Canada's largest life insurance companies in Canadian real estate decreased from 91 to 68 percent of their real estate investments. Data on the geographic distribution of real estate investments is scarce for the period between 1980 to the mid-1990s; however, detailed data on one Company, Manulife Financial, is available (Table 4.8). Table 4.8 Spatial distribution of Manulife Financial real estate portfolio, selected years, 1960-99 (percentage of book value)
Year Canada United States Other
1999 39.8 60.1 O. 1
Sources: 1960 to 1980: adapted from Des Rosiers (1 987); 1985 to 1999: Manuiife Fuiancial Reports.
Between the 1960 and 1980, the share of investment in Canadian real estate was on a constant decline from 97 percent of the total portfolio to 56 percent. In the 1980s, the share of Canadian investment stabilized on 55 to 60 percent of the company's real estate portfolio. However, since the early 1990s' the share of the Canadian portfolio was on the decline, and by 1999 it reached 40 percent of the company's real estate portfolio. In the early 1990s a newly revised Canadian legislation goveming life insurance companies was introduced. Under the new legislation, instead of fixed limits on investment (until then a lima of 15 percent was applied to investrnent in real estate assets), the companies' boards of directors are responsible for ensuring that the company makes sound and prudent investment decisions. Manulife guideline mix set an upper limit of up to 60 percent of the real estate investment in Canada and the same limit for investment in the United States. The U.S. office market seems to have more growth potential. In addition, Manulife owns larger assets in the US.: the book value of two buildings that the company owns in Washington DC is more than 20 percent of the company's total real estate portfolio; these assets are considered core assets.
4.6 Financing and Financial Institutions: Concluding Remarks This chapter addressed two major themes: the sources of financing in the office development sector and the role of financial institutions as facilitators and developers. Real estate cornpanies use a vanety of financial sources in their office development ventures, but three sources stand out as the most impodant ones: banks as the providen of short terni financing, life insurance companies, and pension funds as facilitaton of long term financing. A portion of large real estate companies is able to tap capital markets. Large cornparies are able to raise capital at magnitudes that enable participation in large-sire projects and a large number of projects. The participation of financial institutions in the real estate sector has two principal dimensions. First, these institutions control large pools of capital collected from various sources, such as deposits and premiums that are placed in their domains. This empowers them to direct investrnent into and out of different investment channels, including real estate. The flexibility of their investments depends on their ability to match assets and liabilities both fiscally and spatially. Institutions that control long-temi assets tend to be more involved in real estate than institutions with short-terni assets. In the case of short-term financing, the role of institutions is mainly to mediate the flow of capital between secton, products and locations, ensuring the smooth flow of capital. Generally, financial institutions prefer to lend money for office development in areas that they perceive as established office districts. However, economic conditions and the position of the building cycle have a signifiant impact on lending practices. In times when the real estate market experiences growth, location is perceived as a less important issue; in this case capital is looking for opportunities without setting clear-cut spatial limitations. Development could proceed without tenants that are committed to the project. When the market is 'soft' financial institutions tend to be more careful, and would finance development in projects with substantial pre-leasing. Very little is known about the connection between financial institutions as debt providen and real estate companies; however, more information is available on their role as equity investon or as developers on their own account. Over the last few decades, financial institutions became increasingly involved in real estate investment as stakeholders in real estate assets andor real estate companies. This direct involvement is beyond their traditional role as financial intemediaries. Ownenhip of propetties and companies, and investment in the developrnent of real estate assets, is feasible as a result of the process of profit accumulation. Parts of these profits have been directed to real estate investment. Owned real estate assets by Iife insurance companies (and pension funds) place them as prominent investors in commercial real estate assets (see section 3.1.4). The geography of real estate investment by banks and life insurance companies indicates that their spatial practices are quite similar to those of the largest real estate companies (see Chapter Five). In terrns of office development, these institutions focus on the largest urban centres, specifically on the Toronto region. Recently, office buildings owned by life insurance companies located in the smaller markets were sold to local investors, whereas life insurance campanies shifted their focus exclusively to the major metmpolitan areas that have deep (large) markets and have better prospects of growth. At the rnetropolitan scale, banks and life insurance companies prefer either to acquire or deveiop (with partnen) large office buildings, typically located downtown. Hidorically, downtown locations have provided a more secure investment. Financial institutions being risk-averse (contrary to developers who are more likely to be risk takers) perceived downtown as a less volatile environment and as a long-term iniestrnent (in addition, they are users of space in these locations). When suburban ventures were initiated, they were based on opportunlies; since they are smaller in sire and less costly, they are more tradable, and hence considered as short-tenn investments. Although suggestions in the literature of the growing invoivement of fonign investors in local real estate markets, this study has found littk evidence to support this argument. In the Canadian case in general and more specificaliy in Toronto, the impact of foreign investors and foreign real estate companies is quite modest. This finding and the strength of the Canadian real estate companies (ses Chapter Three) support the rationale of focusing on Canadian cornpanies; this issue is addressed in the next chapter. CHAPTER FIVE
THE THREE DIMENSIONS OF CAPITAL SWITCHING: LARGE CANADIAN REAL ESTATE COMPANIES AT THE NATIONAL SCALE
Three major considerations guide real estate development companies in their search for profits. These considerations can be summarized as the Yhree dimensions of capital switching' (see section 1.3.2). Real estate companies switch between different modes of operation, types of property, and locations (Figure 5.1).
Location
Figure 5.1 : The three dimensions of capital switching in Canada
In this chapter the switching between different modes of operation (developing or trading) and types of property (commercial or residential) will be briefly documented. The major part of the chapter will focus on spatial switching within the Canadian urban system. It will be argued that spatial switching at this scale is strongly related to building cycles. Thus, a major part of this chapter will explore building cycles in Canada at the national and provincial scales. Toronto and Calgary will be examined in detail, because they have gradually become the cities prefened by Canada's hrge real estate companies. Large real estate companies play a major role in switching of investrnent in office buildings beîween different cities. Also, more data is available on these large companies than on the smaller and the purely local ones (see section 2.3.2). The practices of the largest Canadian-based real estate companies are the focus of the following analysis. The largest real estate companies are also the most powerful ones (Spurr, 1976; Lorimer, 1978; Feagin, 1982; Weiss, 1987; Beauregard, 1989; Feagin and Parker, 1990). It was argued that the real estate sedor, in general, is becoming more concentrated and centralized (Knox, 1993; Logan 1993). Evidence of this concentration has been clearly show in the case of Canada (see section 3.1). Accordingly it is useful to scmtinize the largest real estate cornpanies. Because of these two reasons, two publbly held companies, Trizec and Cadilhc Fairview, will be used as case studies in order to explore spatial switching from the perspective of these important agents. The description of capital switching at the national or urban systems scale would ideally draw on extensive or systematic data regarding office development measured in ternis of capital outlays, building construction, or floor-space completed. This kind of systematic data is barely available (see section 2.3.1). As a resuit, a combination of sources and substitute indicators are used. Statistics Canada provides time series (1961 -1 999) of the dollar value of office building permits at the national and provincial levels (data at the municipal level is available upon request, although expensive). The annual crude dollar value was then adjusted to the price index of business investment in non-residential structures. Building permit data has two major deficiencies: not ail permits result in immediate construction (Wheaton, 1987; Leitner, 1994), and some buildings do not get put up at ail. However, the magnitudes of building penits and completions are "very similar, so most penits are in fact cornpleted" (Wheaton, 1987, p. 284). Moreover, building pemits constitute a sensitive 'seismograph' of changes. Soon after there are signals of a downtum in demand, the value of building pemits tends to diminish, while completions continue to be high; this is a result of the time iag between the approval of the building permit to completion of construction (approximately a two-year period, in sorne cases the time lag is much larger) that typifies office development. Since no official statistics on building completions exist, permits are the only data source for estimating national and provincial cycles. Data on office space completions for specific urban centres is available from real estate brokers who monitor the office market. The data for this study was obtained from Royal LePage Commercial Inc. Two metropolitan areas were scnitnized in detail, Toronto and Calgary. Data for the Toronto Census Metropolitan Area (CMA) and for Calgary from the late 1960s was obtained (1969-99). Between 1969 and 1978, Calgary data includes only the new supply for the downtown area, because until the late 1970s almost al1 office construction in Calgary was there. After 1979, data on new suppfy of office space is for the Ci of Calgary. Data on the developen and ownen of office buildings is available primarily for the large real estate companies (for Toronto, in comparison to Calgary, more information on local developen was attained in the field research). Although this data is biased toward the large companies, it provides an indication on the nature of office development since these companies account for a considerable part of office floor-space in rnost large Canadian cities. Data sources for identifying office developen are detailed in section 2.3.2 and section 3.4.
5.1 Switching Between Modes of Operation Real estate development companies that are entrepreneurial in their eariy phases tend to depend on either extemal capital (debt or equity) or proceeds from previous developments (retained eamings) to finance developments andlor acquisitions. Typically, this group of developers does not have enough capital to hold these assets for a long period; therefore, these projeds are sold after completion to their respective tenants or to other investon. If this type of developer is able to accumulate sufficient capital, helshe is capable of retaining properties for the long term. Each successful development enables the commencement of successive projects and allows the company to engage in larger projects in multiple locations. The main goal of this type of real estate company is to build a structure and obtain the development gain in order to use this capital for new ventures. A different type of a start-up real estate company is a Company that has the backing of large corporations. This position permits this type of Company to punue larger scale developments and retain the ownenhip of the properties developed (see section 3.1.2). For larger companies, development and the acquisition/disposition of real estate properties are two çides of the same coin; real estate companies execute both strategies as they restructure their holdings. In general, during uptums of the building cycle, companies prefer development over acquisition. For example, in the office market, as demand for space rises, vacancy rates diminish and rentai rates escalate. At the same time, the rate of transactions in existing office properties is minimal. Consequently, development is pursued. As the market hits recession, the extent of development is reduced. During severe recessions development is almost abandoned. Many real estate companies and owners of properties experience financial difficutties as vacancy rates soar and rental rates plunge. As a result, these companies are not able to sewice their debt. Hence, selected properties are put on the market for sale, and acquisitioddisposition becomes the dominant practice in the office sector. Two major Canadian-based real estate companies, Oxford Propecties Group, the Mth-largest Canadian real estate company with $3.4 billion in assets in 1999 (al1 figures are in Canadian dollars), and Cadillac Fairview Corporation, the third-largest wwi almost $5 billion, exemplify the modes of operation used by different companies in different phases of the corporate life cycle. Oxford was formed in 1960 as an entrepreneurial construction company in Edmonton, Alberta. In its first four years, Oxford developed properties (rnainly office buildings) for sale, based on agreements that it concluded prior to construction. In this early period, Oxford used the development profits of each project to initiate its next development Later, it teamed with institutional investors (two life insurance companies and a trust company) and this association provided the leverage needed for the development of larger sale office buildings in multiple locations (Oxford Property Group, personal communication; Goldenberg, 1981). The access to capital via association with powerful partners enables the pursuit of above- average projects in ternis of complexity and size. This type of company holds certain properties for long periods of time and uses them as collateral for future loans, and at the sarne time, as income-producing properties. The Fairview Corporation, founded in the late 1950s, one of the predecessors of Cadillac Fairview, was able to pursue the development of large-scale projects as a result of the backing by 'industrial capital' (in this case, the Montreal-based Seagram Distilleries). Moreover, Fairview used partners to finance and hold its large-scale developments. Its most notable development projects were joint ventures with powerful corporations. The Toronto-Dominion Centre in Toronto (the largest office complex in Canada, with more than 4 million square feet) was a partnership with the Toronto-Dominion Bank (one of the five largest Canadian banks). In two additional complexes, the Pacific Centre in Vancouver and the Eaton Centre in Toronto, Cadillac Faiwiew teamed up with the Toronto-Dominion Bank and what was then one of Canada's largest retailers, the T. Eaton Company (Cadillac Fairview Corporation, various Annual Reports; Goldenberg, 1981). Until the mid-1980s, Oxford had a balanced two-track strategy. It had developed office buildings across Canada and in the United States, and at the same time bought and sold existing properties. In the late 1970s, Oxford acquired one of Toronto's largest office developen, YBR Propeities, and a large office portfolio in the U.S. By the mid-1980s, before the collapse of the office market, Oxford had disposed of its entire U.S. portfolio as well as selected office buildings in Toronto, including its interest in the development of one of the largest office complexes in Toronto's Financial District, BCE Place (2.5 million square feet). Since the mid-199ûs, due to the continuous slump in the real estate market, the injection of new capital into Oxford, and the presence of new partnen, Oxford has adopted an aggressive acquisition strategy. In 1995, Oxford's total office portfolio was 7 million square feet and the Company's assets were $430 million (Oxford Properties Group, 1995 Annual Report). By 1999, Oxford's office portfolio had more than tripled to 24 million square feet and its asseh had increased eight-fold to $3.4 billion (Oxford Properties Group, 1999 Annual Report). Unlike Oxford's, Cadillac Fairview's focus in the 1970s and 1980s was on development; during this period, Cadillac Fairview developed office buildings; the acquisition of existing buildings was a less important component in the Company's strategy. However, during the period when the office market was depressed in the 1990s. Cadillac Fairview, as did al1 other Canadian-based real estate companies, shifted its mode of operation from development to acquisition and disposition (Cadillac Fairview Corporation, 1997, 1998 Annual Repo~s). Real estate companies engage sirnultaneously in the development and trade of office buildings. The balance between development and trade depends of the position of the building cycle at that tirne and the financial strength of the real estate company. Different phases in the building cycle generate distinct responses by real estate companies and the financial strength which depends on the stage in the life cycle of the real estate company and its business partners, determine the configuration of the company's mode of operation.
5.2 Switching Between Property Types Major shifts between property types as executed by selected large real estate companies are presented in Table 5.1. Wihin the real estate sector, the development of residential properties in the 1960s and 1970s constituted a substantial share of the activities of many diversified (engaged in residential and commercial development) real estate companies in Canada. Some of the major real estate companies trace their origins to residential development. Cadillac Developrnent Corporation was mainly a residential developer until the merger with Fairview in 1974; Campeau Corporation started its real estate business as a home-builder and was prirnarily a residential developer until the late 1970s; and Bramalea, originally a residential developer, expanded into commercial real estate in the early 1980s (Annual Reports of these cornpanies). However, beginning in the early 1980s. residential development was perceived as pmblematic among divenified real estate development companies. Residential developrnent. particularly apartment buildings, meant potential friction with muitiple tenants in a highly regulated environment. In contrast, commercial developrnent invotved a limited number of parties, namely corporate tenants in a largely unregulated environment (Feagin and Parker, 1990). Therefore, most of the divenifed real estate development companies tumed to commercial real estate portfolios, with residential propecties constituting a diminishing segment of their operations. This trend follows the perception that commercial assets are incorne-producing propeities with long-terni leases and price escalation clauses, while the residential rental assets are more volatile and less profitable.
Table 5.1 Major switching practices of selected large real estate companies (by property type)
Company From To When Daon Residentiat Commercial 1981
Cadillac Fairview Residential Commercial 1982
Campeau Residential Commercial 1983
Marathon Retail Office 1996
TrizecHahn Retail Office 1998
Source: Annuai Reports of companies.
By the mid-1980s, most of the divenified cornpanies in Canada had pulled out of residential development and focused on commercial development (several of the large residential developers experienced financial difficulties in the early 1980s). By 1981, as interest rates rose and residential mortgages becarne more expensive, Daon Developrnent Corporation (Canada's fourai-largest real estate cornpany in 1981) had decided to reduce its residential portfolio, and concentrate on land and commercial income properties (Dam Development Corporation, 1981 Annual Report). Also, coinciding with the skyrocketing interest rates, Cadillac Fairview disposed of al1 of its residential properties between 1982 and 1985 (Cadillac Fairview, 1982,1985 Annual Reports). In 1983, Campeau adopted a similar strategy by concentrating solely on commercial real estate operations and by disposing of al1 residential propeities (Campeau Corporation, 1983 Annual Report). In the late 1990~~with the reemergence of the residential market in Canada, some diversified companies retumed to investing in apartment buildings. In 1999, GWL Realty Advison, a wholly owned subsidiary of Great West Life Assurance Company, and the manager of real estate assets for small and medium sized pension funds, was attempting to sel1 some of its office buildings and acquire apartment properties (National Posi, April 16, 1999). Capital switching practices are not confined to shifting properties between the residential and the commercial realms; capital redeployrnent is likely to occur within the commercial domain too. In 1998, the Canadian-based real estate Company TrizecHahn Corporation sold its entire U.S. retail portfolio for $2.6-billion (U.S.) and re-deployed the proceedings in office properties (20 million square feet in the U.S. and six million in Canada), expecting to increase significantly its return on eguity. TrizecHahn's strategy was '... to rotate your capital to seIl out of lower-growth assets and buy into higher-growth ones" (TrizecHahn Corporation, 1998 Annual Report, p. 5). TrizecHahn initially tried to maximize the revenue stream from its shopping centre portfolio. However, as slow growth in retail sales and ever-increasing competition among retailen made it difficutt to generate above-average retums, TrizecHahn decided to sel1 its entire retail portfolio (TrizecHahn Corporation, 1998 Annual Report). The concurrent buying of office buildings was also advantageous for tax reasons. Under U.S. tax law, TrizecHahn had to reinvest those proceeds in the U.S. or pay capital gains taxes (Globe & Mail, September 4, 1998). This financial 'juggling' illustrates the tradability of real estate properties and the benefits that accrue from capital switching and tax laws. In eady 2000, TrizecHahn revealed a plan for another round of restructuring. The depressed Canadian real estate stock prices and its own depressed share price (TrizecHahn's stock pnce was trading at a 45 percent discount to the company's net asset value) were considered as the prime incentive for an anticipated sweeping restructuring. In June 2000 TrizecHahn sold the majority of its Canadian office portfolio (11 million square feet) totaling $1.7 billion. The proceeds will be used to buy the Company's shares, and to invest in technology ventures (TrizecHahn Corporation, Press Release, June 8,2000). Another type of capital switching occurs not strictly between types of properties but between properties of different age. Real estate companies tend to rotate capital within their portfolios by upgrading their holdings. This practice invoives the construction of new buildings and shifting tenants frorn their old premises to the newer buildings. Some office space users retain long-terni relationships with their space providers (the real estate companies). These close relationships enable real estate developers to build a new building knowing that they will be able to relocate tenants to the new develapment. This practice is either a nsuit of the tenant's growing space needs that cannot be accommodated within their old office premises or a result of inducements made by the developer. This practice enables real estate companies to retain development gains and at the same time increase the rental stream, since newer buildings command higher rents than older ones. In addition, real estate companies prefer to own highquality pmperties. The highest quality properlies in the office-building sector are class 'A' buildings. Over the long fun, cbssA office buildings experience lower vacancy rates, and are therefore more resistant to slumps in rental income than lower quality buildings. Hence, these highqualw properties are obtained eîther through development or acquisition. Despite its recent transformation in the mid-1990~~Cadillac Fairview retained ownenhip of its flagship projects: the Pacific Centre in Vancouver and both the Toronto-Dominion Centre and the Eaton Centre in Toronto. These constiMed its core portfolio. At the same time, Cadillac Fairview disposed of most of its srnaller, older, and freestanding office buildings (Cadillac Fairview Corporation, vanous Annual Reports). However, seiected office buildings, usually large-scale, are upgraded through continuous investment. Although the fint tower of the Toronto-Dominion Centre was completed in 1967, it is still classlied as class-A building as a result of renovations made by the ownen (Cadillac Fairview and the Toronto-Dominion Bank). This process of upgrading the Toronto-Dominion Centre has been pursued to keep tenants from moving to newer buildings in Toronto's Financial District. The importance of flagship properties was shown in one of the largest real estate transactions in Canada. In the second haff of 1999, the Royal Bank of Canada sold its real estate portfolio as a package. This included the Bank's head office building in Toronto and a large number of small-to medium-sized buildings spread across Canada. fhe main attraction to acguire the whole package was the Bank's 'gold-towered' head office complex in Toronto's Financial District. The capital value of the head office cornplex was over one-han of the total package, and it is 'one of Toronto's most distinctive office towers, instantly recognizable on the city's skyline" (Toronto Star, Septernber 23, 1999, D4). This distinctiveness was padayed into higher rents and capital gains. Also in 1999, 08Y Properties Corporation purchased the remaining 70 percent interest of the company's flagship, First Canadian Place (before it owned 30 percent interest). This purchase was made possible in part as a result of the disposition of interest in a smaller North York office building. O&Y acquired 51 percent interest in the North York office building in 1997; the Company raised the building's occupancy and increased retum on investment. Two years later, in 1999, it realized the gains and reinvested the proceeds in First Canadian Place (OBY Properties Corporation, 2000 Annual Report). The largest and the most distinctive office buildings are assets that real estate cornpanies prefer to keep. These companies dispose of propeities that they consider noncore, meaning that they produce less retum on capital and focus of the larger buildings which have better financial prospects. This philosophy is summarized in the strategy of 08Y Properties Corporation: "enhance value, realize capital appreciation and then redeploy the capital into new growth-oriented investrnent opportunities" (O&Y Properties Corporation, 2000 Annual Report, p. 27). 5.3 Switching Between Locations at the National Scale The spatial configuration of offi porîfolios controlled by Canada's largest real estate companies during the last 25 years shows a continuous supremacy of the top-level cities of the Canadian urban systern (Table 5.2). However, within the set of top-level cities, major shifts ocwrred over this 25-year time period.
Table 5.2 The largest owners of office space by the location of their Canadian office portfolio, selected yean, 1975-99 (percentage)
Year Toronto Calgary Montreal Vancouver Edmonton Ottawa Topsix share
. .-- - .. Notes: In 1999, the largest Canadian-based owners of ofiice buildings owned about 100 million square feet of office space. The largest real estate companies by their Canadian office portfolio: In 1975: Trizec Corporation, Olympia 8 York Developments, Cadillac Fai~ewCorporation. Oxford Developrnent Group, Campeau Corporation, Manufacture6 Life, Marathon Reatty, MEPC, and YBR Properties. In 1982: Trizec, Olympia 8 York, Cadillac Faiwiew, Oxford, Campeau, Marathon, Manufactures Life, Daon Development Corporation, Bramalea Limited, and Hammerson Canada. In 1989: Trizec, Olympia 8 York, Cadillac Fainriew, Oxford, Campeau, Marathun, Bramalea, Manufacturers Life, Hammerson, BCED Development Corporation. In 1999: TrizecHahn Corporation, Cadillac Fainiew, Oxford Properties Group, Brwkfield Properties Corporation, O&Y Properties, ClBC Development Corporation, Manulife Financial, BentaIl Corporation, H&R REIT, Canadian Real Estate lnvestment Fund No. t (GWL Reaity Advisors), and Dundee Realty Corporation. Sources: Real estate companies' Annual Reports. For Olympia 8 York Goldenberg, 1981; biographies and varbus newspaper articles.
In 1975, the two large concentrations of office portfolios controlled by the largest companies were in Toronto and Montreal; almost 57 percent of the office portfolio was in these two Census Metropolitan Areas. By 1982, Calgary and Edmonton's share had more than doubled from 11 percent of the portfolios of the large real estate companies in 1975 to 25 percent (Table 5.2). Correspondingly, the share of Toronto and Montreal had decreased to 47 percent of the companies' portfolios, with Montreal showing a particulariy steep drop in its share. After 1982, Calgary's share has remained at a constant level, while Toronto's share has increased substantially. During the mid-to-late 1980s, substantial office development occurred in Toronto; between 1982 and 1989 Toronto's share had increased from 35 to almost 43 percent of the companies' portfolios, while the shares of other cities, except for Edmonton, had decreased. Economic growth and massive office construction in Toronto in the 1980s, and a gradua1 econornic recovery in the second hatf of the 1990s have reinforced its position as the most attractive location for the largest real estate companies. Toronto's share has continued to increase and by 1999, almost 46 percent of the largest companies' portfolios were in Toronto. Ottawa's share has decreased sharply in the 1990s (as a resuit of the demise of two of the largest real estate companies with substantial office holdings in Ottawa, Olympia & York Developments and Campeau Corporation) while the shares of other cities have remained relatively stable. The analysis of the office portfolios of the largest real estate companies shows that their strategies are a result of surfacing opportunities during the different local building cycles and the strategy by real estate companies to create a critical mass in selected locations. Successful real estate developers are able to identify and take advantage of these opportunities by shifting some of their resources to the fast-growing regions, without ignoring their well-established investment nodes. Locations that present unsatisfactory performance (relatively low retum on capital) are susceptible to withdrawal or reduction of their share in the large real estate companies' portfolios. This leads to the channeling of resources to places that are expected to produce high growth rates and higher retum on capital than slower growing places. Nevertheless, where a channel is initiated and a critical threshold is reached, existing investment acts as a magnet attracting fuither investrnent, perpetuating the attractiveness of that setting (capital attracts capital, a process articulated in cumulative causation theory, see Myrdal, 1957; Clark et al., 1986). Thus, when a Company establishes a 'presence' in a city it is bound to stay in that location even if circumstances change, for example, a downtum in the building cycle. Therefore real estate companies juggle between seizing expected opportunities by moving elsewhere, and taking full advantage of present conditions by staying in their farniliar environments. Buildinq cycles reflect structural conditions which are in fact the sum of cumulative actions of space users and providers. They are used as a heuristic device that might exptain the switching practices of real estate cornpanies.
5.3.1 The geography of office building cycles in Canada Research on the geography of office building cycles in Canada is practically non-existent; however, inspiration can be drawn from other studies. Leitner's study (1994) on office building cycles in major U.S. rnetropolitan areas indicates spatial divergence between cities. Henneberryls investigation of British cycles (1999) suggests spatial convergence between different regions. Except for using different time frames, different spatial scales and different financial indicators, the basic distinction between the United States and Britain is found in the extent of spatial integration. While the U.S. regions have dramatically different structural and economic trajectories, which exhibit 'weak' spatial integration, Britain has a highly htegrated economy with much less marked regional differences (Hennebeny, 1999). In ternis of spatial integration, Canada's position is between that of the U.S. and that of Britain. On the one hand, the size and different structural trajectories rnake Canada similar to the U.S. On the other hand, the highly integrated financial system, a prerequisite for real estate development, makes Canada similar to Britain. This position suggests that spatial variations in building cycles are likely to exist in Canada. To substantiate this argument, building cycles at three spatial scales national, provincial and metropolitan are examined using the value of office-building pemits issued.
National cycles At the national level three office-buildingcycles were identified, each spanning about 13 years (Figure 5.2). The first cycle commenced in the rnid-1950s (not shown in the graph) and ended in 1970. Until the early 1970s, the value of office-building penits did not surpass the $1-billiodyear mark, except for the peak year of 1965. The second cycle commenced in 1971 and ended in 1983; during this cycle. the value of penits was at a significantly higher level, over $2 billion in each of seven years out of the 13- year cycle. During this cycle, 1977 and 1981 were the odd yean; however, these extreme years cancel each other out. The third cycle began in 1984 and ended in 1996. This is the 'classic' cycle with a distinct peak in 1989 and a clear trough in the mid-1990s. A new cycle is at its infancy as the value of office-building pemits has been on the rise since 1997. The late stait of office development in the postwar period in Canada was partially a result of institutional regulations. Up to 1954, residential development was privileged in the allocation of building materials, since under the National Housing Act, the construction of housing took priority over cornmerciai development. As restrictions on building materials for commercial real estate were lifted, commercial development was possible and more capital was channeled into c~mmercialdevelopment, namely industrial buildings, shopping centres, and office buildings. The second cycle (1971-83) is an unusual one, since it had a plateau rather than a distinct peak. This plateau lasted for almost a decade, from 1974 to 1982. During this time office building perrnits were almost at the constant level of approximately $2 billion annually. In this cycle, two years present 'abnormal' values: 1977 and 1981. The decrease in building perrnits in 1977 was a result of short-terni econornic recession. In addition, plans ta restrict downtown developrnent in the mid-1970s in several Canadian cities (Toronto, Montreal, Vancouver and Ottawa) created an atmosphere of uncertainty among real estate companies (Canadian Buildng, August, 1974; August. 1976). The increase in office building pennits in 1981 paralleled the oil and gas boom in Albeila, resulang in an unprecedented volume of building pemits in that province. In general, the rapid growth of producer services jobs (FIRE and business services) during the 1970s, which are housed primarily in office buildings, had encouraged the development of office space. Between 1971 and 1981 employment in producer services had increased by 91 percent; at the same time, total employment in Canada increased by less than 47 percent (Coffey, l996a). In addition, in the 1970s, the Canadian commercial real estate industry had been consolidated, and Canadian-based real estate companies expanded their operations at home and abroad (Goldenberg, 1981; see section 3.1.3).
Figure 5.2 Value of Office ~uildingPermits in Canada (constant dollars)
Soum: StabQtics Canada. BuWi pennik, Catalogue No. 64-203; for 1998-99. Statistics Canada. CANSIM Matrix No. 4073.
The third cycle (1984-96) reflects most clearly the expansion and contraction of the economy. Until the late 1980s, the Canadian economy was expanding; employment in producer services increased by more than 40 percent in the 1980s; in cornparison, total employrnent increased by less than 20 percent (Coffey, 1996a). A severe economic recession in the early 1990s coupled with an oveaupply of office space corning to the market (a resutt of speculative development), had resulted in the near collapse of office development by the mid-1990s. In 1996, the bottom year of this cycle, the dollar value of office- building pemits in Canada was at the sarne level as thirty yeaa earlier. Since 1997 office development has been showing signs of rebounding as the value of building permits has doubled between 1996 and 1999 (Figure 5.2).
Provincial cvcles Between the eariy 1960s and the late 1990s1the four largest provinces in Canada (Ontario, Quebec, British Columbia and Alberta) have accounted for, on average, 94 percent of the dollar value of office building pemits in Canada (Statistics Canada, Building Permits, Catalogue no. 64-203). The analysis of the provincial officobuildings cycles indicates that the four largest provinces have quite different cycles (Figures 5.3 and 5.4). During the last three decades. each of these provinces has expenenced different office building cycles as a result of different growth rates. Ontario, the largest Canadian province in terms of population, had two major peaks, which coincided with national cycles. Ontario's first significant peak was in 1973-75 (a smaller peak was in 1965), and its most substantial office building boom was in the second half of the 1980s (peaking in 1989-90). Among the four provinces. Ontario's 1980s peak was the most impressive (two-and-a-half times the volume of Quebec's peak). Ontario. as Canada's largest province mirron the Canadian econorny. Quebec, the second largest province, had a peak in office building pemits in 1965; however, its most significant peak was in 1976. This peak coincided with the development associated with the 1976 Olympics held in Montreal. Quebec's late-1980s peak was of a lesser magnitude than the 1970s peak and almost at the same level of its 1960s peak. The western provinces of British Columbia (B.C.) and Alberta had quite different building cycles. The third-largest province, British Columbia, had less abrupt cycles than Alberta. British Columbia's first office construction peak in the mid-1960s, and between the mid-1970s and the early 1990s, the value of permits fluctuated, atthough no significant peaks and troughs were experienced by the province. The 1980s boom in British Columbia was less extreme than that in Ontario and Quebec. Like Ontario and Quebec, office-building permits in British Columbia have been at a low level in the early-to-mid-1990s. Office building cycles in Alberta illustrate an abrupt boom-bust cycle. Between 1961 and 1999, Alberta had one major office-building cycle. Its zenith was between 1978 and 1982, when Alberta's building permits were higher than Ontario's. At the peak year (1981), the value of Alberta's office-building permits was 54 percent of the national total, while Ontario's share was 19 percent. This pattern is closely related to the performance of the petroleum industry, a key generator of Alberta's economy. After 1983, the value of office-building permits in Alberta plummeted; in 1993, the value of permits was at the same dollar value as in 1970. Unlike other parts of Canada, Alberta did not experience an off ice-building boom in the 1980s. The value of building permits in Alberta in 1989, the peak year of office building pemits in Canada, hardly reached one-tenth of the value of Alberta's peak year 1 981 .
Figure 5.3 Value of Office Building Permits in Ontario and Quebec (constant dollars)
ONTARIO - - *- - QUEBEC
Source: Statistics Canada, Building Permits, Catalogue No. 64-203; for 1998-99. Statistics Canada, CANSIM Matrix No. 4073.
Figure 5.4 Value of Office Building Permits in BrÏtish Columbia and Alberta (constant dollars)
1961 1966 1971 1976 1981 1986 1991 19% Sourœ: Statisücs Canada. Building Permits. Catalogue No. 64-203; for 1998-99, Statistics Canada, CANSIM Matrix No. 4073. The cunent building cycle, the fouith cycle, which commenced in 1997, is still a rather suggestive one. There are indications that a new cycle might be undemiay in al1 provinces. Ontario and Quebec are experiencing their highest increase in offiie building permits in companson to the 1996 trough; British Columbia is on a steady expansion route since 1995, and Alberta had a sharp increase in 1998 followed by a fall in 1999. Office building cycles experienced by these four provinces suggest that different 'engines' shape the Canadian economy at its regional scale and as resuit convergence and divergence pattems are discemible. Two major metropolitan areas, Toronto and Calgary, epitornize these patterns.
5.3.2 Office building cycles in Toronto and Calgary Different provincial cycles are demonstrated by distinct inter-metropolitan cycles. As suggested by Leitner (1994), individual clies are affected by and partmpate in national building cycles because "...location, that is, site and situation, charactenstics, remains an important factor in influencing the construction activity" (p. 799). The manageability and the complexity of the office development sector and the national scope of the large real estate companies make the Canadian case an excellent candidate for research. The examination of two cities (Toronto and Calgary) in isolation from the broader Canadian context, assuming that these cities are the onfy alternatives the large real estate companies consider, might be misleading. When the large na1 estate companies search for opportunities they scrutinize the Canadian arena as a whole, and since the mid-1970s. the US. market has been incorporated into their considerations. However, even for these companies space is not limitless and initial investment in a specific market attracts further investment to that market. In this case Toronto and Calgary were already major investrnent arenas for the two real estate companies discussed in this study, Trizec Corporation and Cadillac FaiMew Corporation, before the commencement of the 1970s and 1980s building cycles. In addition, during the 1970s and the 1980s large real estate companies had a clear preference towards investment in office buildings in Toronto and Calgary (Table 5.2). This, and the fact that obtaining deep knowledge of al1 major Canadian cities is beyond the scope of this study, makes these two cities the subject of this inquiry. An analysis based on the additions of office space in Toronto and Calgary since the late 1960s suggests three distinct pattems of office development (Figure 5.5). During the first decade, 1969-78, there was a big difference in absolute tenns between Toronto and Calgary. While Toronto had additions rneasured in millions of square feet, Calgary's additions were measured in hundreds of thousands for most of this penod. Ako, their cyclical pattems seern to be opposite; for example, while Toronto experienced a boom in 1971-72, Calgary additions were at low levels. For a short time in the 151
late 1970s and eariy 1980s (1979-82). both cSes exhibited similar patterns and the magnitude of office construction was almost at par; during 1980-82, Calgary had more additions of ofiice space than Toronto. However, between 1983 and 1992, the building patterns of Toronto and Calgary had diverged. Toronto had experienced continuous growth in office space and a major expansion between 1985 and 1991. On the other hand, Calgary's office development was on a minute scale throughout the 1980s, except for an addition of three large-scale office buildings in 1988 (Financial Post, September 20,
Figure 5.5 Net New Supply of Office Space in Toronto and Calgary
-2000 i Note: For Toronto. net new supply for the CMA~for Calgary, new supply for the downtown area (1969-1 978) and for the city (1979-1 999). Source: Royal LePage, Toronto Office Leasing Directory, various years; Royal LePage, Unpublished data. Urban Life Consultants (1979) Location of Office Employrnent in Calgary.
This analysis shows that Calgary's building cycles are very abrupt, reaching their unprecedented peak during the early 1980s when in a four-year period its office stock increased more than threefold, later experiencing only modest growth (Table 5.3). The growth of office space in Toronto was less dramatic, although between 1981 and 1991 its office inventory had almost doubled. Beginning in the early 1990s, Toronto has joined Calgaty in experiencing a long period of stagnation (Toronto even experienced an absolute decline in office stock, see Figure 5.5). In the late 1990s, particularly in 1998-99, both markets have been showing signs of recovery. In Calgary a number of major office buildings are expected to be completed in 2000-1 (Globe & Mail, August 3, 1999). In Toronto, construction is also on the horizon and is proceeding at a faidy rapid pace in several suburban municipalities (Daily Commercial News, October 1, 1999).
Table 5.3 The growth of office space in Toronto and Calgary, selected yean, 1978-99 ('000 square feet)
Year Office space Growth of office Offie space Growth of office space (1 97W00) space (1 978=100) 1978 60,352 100.0 8,400 100.0
Sources: Royal LePage, Toronto Office Leasing Directory, various years; Royal LePage, unpublished data; Financial Times,October 25,1982, p. Ag.
Toronto and Calgary are major destinations for investment in office buildings in Canada. Toronto's size and econornic divers* and Calgary's economic vibrancy and spectacular growth have prompted the perception amongst real estate companies that these two cities are attractive places for real estate investrnent. Toronto is the prime location of the largest companies in Canada; measured by total assets in 1989, alrnost 48 percent of the Canadian headquarters of financial corporations and 44 percent of non-financial corporations (service, manufacturing, and resource) were in Toronto (Semple, 1996). This figure is much higher than Toronto's share in Canada's total service sector employrnent (16 percent) or its share in producer service employment, of 26 percent of Canada's total (Coffey, 1996b). Toronto's prime role in the Canadian economy is also demonstrated by the fact that in 1998, 193 out of the largest 500 Canadian corporations had their headquarten in the Toronto metropolitan area (Financial Post Magazine, 1999). Calgary's growth has been more cyclical; the predominance of the oil and gas sectors has fumished Calgary with a high profile status among real estate investon. However, this dependency has also made Calgary highly susceptible to the fluctuations of oil and gas prices. The extreme dependence on the energy sector is reflected in the fact that between 70 to 80 percent of the office space is leased to energy-related fimis, either oil and gas companies or engineering and gas services companies (National Post, Febniary 10, 1999; Globe & Mail,, August 3, 1999). Like its counterpart in the U.S. Energy Comdor, Houston, Texas (Feagin, 1987), Calgary has experienced exbeme boom and bust in office construction cycles. This cyclical nature is directly linked to the volatile character of an oil- based economy.
Buildinas cycles and office deveio~ersin Toronto The most recent boom in office development in Canada, during the 1980s, was unique in the history of office development in Canada. First, the absolute magnitude of developrnent was unprecedented. Second, unlike in previous cycles, this boom-bust cycle was the most extreme, ffling into the classical model of buildings cycles. Finally, information on this cycle and the developen that took part in it are more accessible. In this boom, Toronto attracted developen that had no history of constructing office buildings in Toronto. Real estate companies of al1 sizes had seized the opportunity of the unprecedented boom, ranging from small and medium-sized companies to large companies. Minto Developrnents, one of the largest homebuilders in Ottawa, completed its sole office development in downtown Toronto in 1989. This move fitted the Company's decision to divenify away from its Ottawa base (Financial Post, July 17, 1989); in addition, it was clearly supported by the growth of Toronto's office market in that period. The Centennial Group of Cornpanies, a Halifax-based real estate company, was active only in Atlantic Canada until the rnid 1980s. In the mid 1980s, the company diversified into Toronto by building a suite-hotel and an office building, both in Toronto's Financial District (Canadian Building, 1988, 1989). In the mid-to-late 1980s, real estate cbmpanies specializing in particular regions re-allocated their resources making holdings in Toronto a significant portion of their portfolios. Unti! the mid-1980s. the ovemhelming majonty of Campeau's office buildings was in the Ottawa area (in 1984. almost 80 percent of its Canadian portfolio); no major development was outside Ottawa. By 1989, 56 percent of its portfolio was in Ottawa and 30 percent in Toronto (the remainder was in Montreal, Vancouver and Edmonton). During the 1980s, Campeau's strategy was to explore potential growth markets: "Strategically, the Corporation has sought to attain a more dominant position in selected growth markets rather than competing in centres all across the nationw(Carnpeau Corporation, 1980 Annual Report, p. 3). In accordance with this strategy it expanded into two major Canadian cities: Toronto and Vancouver (Campeau Corporation, 1982, 1988 Annual Reports). The commencement of its most ambitious project, Scotia Plata (part of the head office complex of the Bank of Nova Scotia; the Bank was also the joint venture partner in this project) in Toronto's Financial District in the mid-1980s. upgraded Campeau to the league of the Iargest real estate companies. It progressed fmm a residential developer to niche developer (mainly engaged in the construction of office buildings for the federal govemment) and to a divenified real estate corporation. Until1981, Daon Development Corporation (in 1985 acquired by Bell Canada Enterprises and with its name changed to BCE Development Corporation, or BCED) was active mainiy in Western Canada and the U.S. (Daon Development Corporation, 1981 Annual Report). By the mid-1980s, BCED had identified Toronto as the only market in Canada for office buildings (Globe & Mail, Febniary 22, 1986). The choice of Toronto as the best Canadian office market by BCED resulted in the commencement of its largest office development in Toronto. In 1984, BCED and Oxford Development Gmup announced a joint venture to develop BCE Place in Toronto, a 2.5-million square feet office complex (Globe 6 Mail, March 13, 1986). In 1986, Oxford sold its share in the BCE development site to BCED (BCE Place was completed in 1992). In addition to the interest in downtown Toronto, BCED had purchased a site in the Mississauga City Centre in 1985 for long-term deveiopment of one million square feet of office space after outbidding the Cadiliac Fairview Corporation (Globe 8 Mail, October 3, 1985). At the same time, foreign investon had partially redeployed their capital within the Canadian urban system by shifting their interests from other Canadian cities to Toronto. The fint office development of Hammerson (Canada) was in Calgary in the late 1960s. By 1982 Hammerson had completed a four-building compkx in Calgary (Bow Valley Square) and was ready to go ahead with another tower. The design for the fiih tower cornrnenced in late 1981, but as a result of the 1982 recession, development was put on hold. However, hile postponing the development of the fiih tower in Calgary, Hammerson had completed an office building in Toronto in 1983 (Hammerson's first office building in Toronto was redeveloped in 1971). Hammerson's involvement in the Toronto area continued in 1984. when it acquired a large property portfolio in Mississauga, which included 180 acres of land, four office buildings and a sizable shopping centre (Square One). During the 1990s real estate slump, companies largely abandoned office development, disposed of their noncore properties, and focused on their most valuable assets. Marathon Reaîty, the real estate am of Canadian Paclic Railways, has tumed itseif into a Company that focused on downtown office buildings in the early 1990s (Globe di Mail, March 4, 1996). Behveen 1993 and 1996, Marathon was in suivival mode seiling shopping centres, office buildings, and land to reduce its debt. The transformation has left Marathon with 4.8 million square feet of office space in 1995, about one- half of its portfolio size in the peak year, 1993 (Marathon Realty, 1993, 1995 Annual Reports). The result was a set of highquality, large-sale office buildings located in Toronto, Montreal and Vancouver.
Buildina cycles and office develo~ersin Calaaw Calgary has the largest office inventory in Westem Canada; in 1999 it had 42 million square feet, 7 million more than Vancouver (35 million) and twice as much as Edmonton, which had the second largest office inventory in Alberta (Royal LePage, 1999). Most of Calgary's office stock was built during the econornic boom (oil and gas driven) of the late 1970s and the early 1980s. Between 1978 and 1982, the golden era of real estate development in Alberta, Calgary's office stock experienced a phenomenal growth. The growth was so immense that in 1981, the peak year in Calgary's office building boom, the value of office building permits was the second largest in North America, exceeded only by New York (Whitehead, 1987). The overwhelming confidence in Calgary's pmspenty was illustrated in the planning of a 75-story office building in the early 1980s (Trade and Commerce, August 1981). This building, scheduled for a 1984 completion, was the 'victim' of the early 1980s recession that hit Calgary in 1982. During its burst of growth, a total of 22.5 million square feet of new office space was added to Calgary's inventory, more than tripling its 1978 inventory (Royal LePage, unpublished data). In cornparison, between 1986 and 1991 (the peak of the office building boom in Canada) only 3 million square feet were added to Calgary's office stock (Royal LePage, unpublished data); this figure represents merely 10 percent of its 1985 inventory. At the same time 47 million square feet were added in Toronto, representing 51 percent of Toronto's 1985 inventory (Royal LePage, Toronto Office Leasing Directory, 1984, 1992). Calgary did not fully recover from its early-1980s bust of office construction. Notwithstanding this, confidence in Calgary's economy was renewed in the second half of the 1990s as the construction of a number of large-scale office buildings has awarded Calgary the tale 'Western Canada's head office capital' as it has the second-highest (or third-highest, after Toronto and Montreal) number of head offices in Canada (Globe & Mail, August 3, 1999). Despite attempts at economic diversification, Calgary's volatihty is still based on being a predominantly an oil-based city; this is best illustrated by the insight of a Calgary real estate broker: 'ln Calgary, the mood seems to change week by week, according to oil pricesw(Globe & Mail, August 3, 1999). Real estate developers navigate their operations by switching capital in accordance with 'hot spots' created during building cycles. Like Houston in the 1980s (Feagin, 1987), Calgary was the Canadian 'hot spot' in the late 1970s and eariy 1980s as many developers flocked to that city. Calgary reinforced its position as the energy capital of Canada as many oil and gas companies accompanied by ancillary service companies expanded their operations in Calgary (Royal LePage, Toronto Office Leasing Directory, Fall 1979). In this booming economy, companies based in western Canada, foreign companies, and the largest Canadian-based companies expanded or pioneered office development in Calgary. Due to the dominance of the energy sector in Calgary, a common feature of office development was joint ventures between real estate companies and oil and gas companies. In this arrangement, oil companies hold full or partial ownenhip of the office buildings. Partnenhips such as Daon and Chevron, Trizec and Husky Oil, and Canada Square and Gulf Canada, resulted in joint developments. Furthemore, oil and gas cornpanies were the prime tenants in these buildings. In the Toron fo-Dominion Square, the main tenants were Dome Petroleum and Home Oil; in the Calgary Place tower, Mobil Oil Canada and Canadian Superior Oil were the main tenants; in the FMh and Fifth tower, Texaco Canada and C.D.C Oil and Gas were the major tenants (Oxford Development Group; Trizec Corporation, Annual Reports, various years). Concunently, foreign companies expanded their investments in Calgary. Hammenon (Canada) commenced its enteprise in Calgary in the late 1960s completing two out of four buildings in their Bow Valley Square complex before the late-1970s boom (1972 and 1975) and two additional buildings in the midst of the boom (1980 and 1982). Another British-based company, Rank City Wall, cornpleted a medium-site office building in Calgary in 1977 (at the same period, it was also active in office development in the Toronto area). In addition, the largest office complex in Calgary (the twin- tower Petro-Canada Centre, 1.6 million square feet) was developed in the early 1980s by the partnership between a major oil company, Petro-Canada, and a foreign investor (ARCI). ln the late 1970s, major Canadian-based real estate companies have either expanded their operations in Calgary, such as Marathon Realty, the real estate am of Canadian Pacific Railways, or entered Calgary for the first time. The prime example of a new entrant to the Calgary market that 'coincided' with the building boom was Olympia & York Developments (O&Y). Until the mid-1970s, 08Y major areas of operation in Canada were Toronto and Ottawa. Following the shortage of office space in Calgary and a favourable potential for growth, 08Y funneled capital to this prornising territory. However, OBY was able to target Calgaiy as a result of previous relations with a major oil company. The previous relationship between O&Y ana Shell Canada through the construction of Shell's data centre in suburban Toronto in the 1960s (see section 4.2.1) paved the way for the development of the Shell Centre in Calgary in 1977. The next project of O&Y, the Esso Plaza (1.5 million square feet), was completed in 1981 (OBY completed another building in Calgary in 1988). Other companies that did not have previous expenence in Calgary followed this move: Cadillac Fairview, Campeau, and Sun Liie Assurance Company. Sun Life's three-building complex (over one million square feet, completed between 1981 and 1984) was one of the largest-ever developments taken by a life insurance Company in Canada. When the recession hit Calgary in March 1982, many projects were either canceled or put on hold. By late 1982, as the racession deepened, the construction of 22 buildings (with a total of 17 million square feet) at different development phases was either delayed or canceled (Calgary HeaM, October 5, 1982). Although very few office development projects were commenced during the slump in office development in the 1980s. large real estate companies remained in Calgary, and in the late 1980s they renewed their interest in the city. In the late 1980s, Oxford. TNec and Olympia & York completed office buildings in Calgary (Financial Post, March 2, 1987). However, when the market had continued to expenence stagnation in the late 1980s and the fint haif of the 1990s. several companies like Cadillac Fairview and Hammenon sold their office buildings in Calgary. Until the early 1970s. large Canadian office developen were active in vety defined and limited territones, confined mainly to the two largest centres, Toronto and Montreal. These included Olympia 8 York, Cadillac Fairview, and Trizec. As a resuk, before the boom of the late 1970s and early 1980s, only local and regional developen operated in Calgary. Following the boom, most of the large Canadian real estate companies launched operations in Calgary. In Toronto, most of the large developen were present before the 1970s. In both cities, large companies developed the largest office buildings, and once they reached a certain threshold, these cornpanies have maintained their presence in these cities.
5.4 Three Dimensions of Capital Switching and Building Cycles: Two Case Studies To demonstrate the interaction between building cycles and developersl practices, two firms will be examined in detail. The two companies under investigation, the Trizec Corporation and Cadillac Fairview Developrnent Corporation, illustrate the shifting practices of real estate companies resulting from the different metropolitan building cycles experienced by Toronto and Calgary. The investigation also shows the particular paths adopted by these companies. Trizec and Cadillac FaiMew have been two of the largest Canadian public real estate companies during the last three decades. In 1999, the total assets of TrizecHahn Corporation (the successor of Trizec) were $12 billion, and the assets of the Cadillac FaiMew were almost $5 billion. Both companies have had divenified commercial propeity podfolios (shopping centres, office buildings, and multi-use complexes) situated in various cities across North Arnerica. During this time period they switched between modes of operation, becoming traders during building cycle downtums and retuming to development when signs of recovery were detected. When downtums had severe effects on certain property types, Trizec and Cadillac Fai~ewdisposed of these properties and developed or acquired other types in uptums. In a similar way, aiey shifted their spatial focus across different locations.
5.4.1 The Trizec Corporation The practices of Trizec have changed substantially since its incorporation in 1960. In its early phase, Trizec was mainly a developer and owner of propeities for the long terrn; in its most recent phase it is a 'dealer', buying and selling properties based on short-ten opportunities. Further, Trizec went from being a single-purpose developer to a diversified developer (office buildings, shopping centres, retirement lodges) to mainly an office owner. Finally. it has divenified spatially. From being heavily Montrealsriented in the 1960s and early 1970s. Trizec had diversified into Calgary in the 1WOs, and to Toronto in the 1980s. Since the eariy 1980s, these three cities have accounted for about threequarten of Trizec's Canadian office portfolio (Table 5.4).
Table 5.4 The Canadian office portfolio of Trizec, selected yean, 1968-99, percentages (1)
City 1968 1975 1982 1989 1999 Montreal 100.0 (2) 59.1 35.6 21.7 36.1
Toronto O 2.6 11.0 28.1 16.2
Calgary O 17.2 25.6 24.6 24.3
Edmonton O 7.1 4.2 10.3 7.0
Vancouver O 8.8 6.0 4.1 3.8
Ottawa O O O 0.6 7.4
Other O 5.2 17.6 10.6 5.2
Total 100.0 100.0 100.0 100.0 100.0 Total rentable space 3,900 9,500 14,000 21,800 16,200 ('000 square feet) Notes: (1) lncluding buildings under construction. (2) In 1968, viitually Trizec's entire office portfolio was in Montreal. Source: Trizec Corporation and TrizecHahn Corporation, Annual Reports. Until the late-1960s, Trizec had office buildings only in Montreal, epitomized by its flagship complex, Place Ville-Marie (3 million square feet of office space). The Montreal portfolio was essentially its entire portfolio (Trizec Corporation, 1968 Annual Report). Following the purchase in 1970-71 of two real estate companies with major holdings in Western Canada, its scope had expanded to include Calgary, Edmonton and Vancouver (Trizec Corporation, 1970 Annual Report). However, until 1978, Montreal propetties continued to hold more than one-half of Trizec's Canadian office portfolio (Trizec Corporation, 1978, 1979 Annual Reports). Coinciding with the beginning of Calgary's real estate boom in the mid-1970s, the booming of Alberta's oil and gas sector and the decline of Montreal as a financial centre, Trizec raised its stakes in Calgary. In 1976. Trizec's ownenhip changed and the Company moved of its executive office to Calgary and in 1980 al1 head office operations were consolidated there (Goldenberg, 1981). During Calgary's boom period (late 1970s to eady 1980s). Trkec had completed three office buildings in Calgary. These three projects increased Trizec's office poiffolio in Calgary from 1.6 million square feet in 1975 to 3.8 million in 1983 (Trizec Corporation, various Annual Reports). The high dependence on the energy sector was demonstrated by the fact that in al1 three buildings the major tenants were oil and gas companies, and in one of the three projects an oil Company was a partner. Calgary's focal position in the Company's strategy and the confidence in its future was best expressed in the President's message in the 1981 Annual Report: We believe Calgary will continue to be the focal point of real estate development in Canada during the next fie yean" (Trizec Corporation, 1981 Annual Report, p. 4). This confidence was also expressed in launching Trizec's largest-ever project in Calgaiy, Banken Hall. in 1980. The completion of this two-tower complex (1.8 million square feet) was expected in 1984. However, the recession of 1982 put this development on hold (Calgary Herald, October 21, 1982). The groundbreaking for the first tower was in late 1986 (completed in 1989). after vacancy rates of class-A buildings in the core had dropped below the 10 percent mark. The construction of the second tower started in 1998 (completed in June 2000) as vacancy rates of class-A office buildings in Calgary's core have dropped to almost an all-time low of 1.4 percent in 1997 (Financial Post, June 5,1998; Royal LePage, unpublished data). Until the late 1970~~Toronto's office market was of secondary importance to Trizec. In 1971, Trizec developed its first office building in Toronto, a medium size building on the periphery of Toronto's Financial District. In the late 1970s, Trizec, with a Toronto-based developer as a partner, had initiated the construction of the first phase of a f -3-million square feet project in Toronto's downtown, the Atrium On Bay (first phase completed in 1981, second phase in 1984). Realizing in the early 1980s that Calgary was experiencing a severe slurnp, and since the Company thought further diversification was needed, Trizec had tumed to Toronto. Consequently, Trizec's stake in Toronto's market rose substantially from 11 percent of its Canadian office portfolio in 1982 to 28 percent in 1989 (Table 5.4). During the mid-19805. Trizec focused its office development effoits on major financial centres in North America. Toronto, along with New York and Los Angeles, was considered such a centre. Trizec identified these cities as "markets offering long-terni potential due to their strong financial service-based economies and their consistent record of overall growth' (Trizec Corporation, 1986 Annual Report, p. 13). The importance of Toronto as an office development node was recognized through the establishment of a regional office in Toronto in 1984; until then the Eastern Canada regional office was in Montreal and Toronto only had a small office in charge of shopping centre planning (Trizec Corporation, 1984 Annual Report). More importantly, in 1984, Trizec invested in the Toronto-based real estate Company Brarnalea Limited (Trizec Corporation, 1984, 1988 Annual Report). One of the major assets of Bramalea was its Toronto portfolio, in particular, the substantial office portfolio. In 1983 over one-haif of Bramalea's Canadian office floor-space was in Toronto and a number of projects were at the planning stage (Bramalea, 1982, 1984 Annual Reports). Trizec, which had a very small portfolio in Toronto, wanted to capitalire on Toronto's fastexpanding office market. Trizec's incremental increase in Bramalea ownenhip between 1984 and 1988 reflects its growing interest in Toronto. In 1984 Trizec acquired 31 percent ownenhip interest in Bramalea, it increased its share to 65 percent in 1986, and to 70 percent in 1988 (Trizec Corporation, various Annual Reports). In 1987, Trizec launched its 'crown-jewel' development in Toronto, a 57-story building, the Bay-Adelaide Centre, Iocated at the heart of the Financial District. When construction started in late 1989, Toronto's office market was already beyond its peak. Vacancy rates of class-A office buildings (the type of buildings that the Bay-Adelaide had to compete against) in Toronto's Financial District increased from 3.1 percent in 1987 to 7.8 percent in 1989 and to more than 17 percent in 1993 (Royal LePage, Toronto Ofice Leasing Directory, various yean). As a resuit, the Bay-Adelaide Centre, consisting of an underground parking garage and partial elevator core, was rnothballed indefinitely (Globe 8 Mail, August 19, 1993). In the late 1990s, the Canadian office market has show some indications of recovery, including lower vacancy rates, higher rental rates, and higher absorption rates. Consequently, the interest of the T ;izecHahn Corporation (under new owners since 1994 and a new name since 1996) in Toronto and Calgary rebounded. In 1998, the vacancy rates of class-A office buildings in Toronto's Financial District and in Calgary's Core were 5.1 and 2.6 percent respectively, down frorn 20.3 and 17.2 percent in 1992-93 (Royal LePage, Canadian Office Guide, 1999; Royal LePage, 1993, 1999). The second phase of Calgary's Banken Hall (800,000 square feet) was completed recently, however, Toronto's Bay-Adelaide Centre is still on hold, since no anchor tenants have been found so far. In addition to spatial switching of capital, particularly between its largest Canadian office nodes in Canada, Montreal, Calgary and Toronto, Trizec maintained holding its largest pmperties in these cities. Despite slower growth rates in Montreal than in Toronto and Calgary, Place Ville Marie was an indispensable piece of property in Trizec's portfolio. To a large extent, the existence of this Ylagship' property has established a threshold in Montreal that is not easily relinquished. Place Ville Marie and its 'satellite' projects in Montreal have produced Trizec's core portfolio that has lasted since the company's incorporation regardless of the position of building cycles or Montreal's overall growth potential. These one-of-a-kind projects are virtually non-tradable. In Toronto, on the other hand, Trizec did not have an 'anchor' property, hence the Company acted as an opportunistic entrepreneur, cashing in on the expanding market. Following this rationale, when Toronto's market collapsed in the eariy 1990s, the Company disposed of most of its properties. In the case of Calgary, offie development was highîy sensitive to local building cycles, but unlike in Toronto, a severe and long downtum did not prevent Trizec from keeping rnost of its buildings during the lengthy recession. Similar to Montreal, Trizec had reached a critical mass (defined by real estate companies as 'presence') in Calgary with some high- profile properties; its high stakes and the prospects or recovery from the oil crisis encouraged Trizec to keep its presence in Calgary. Like many other real estate companies, Trizec was engaged in simultaneous operations of development and trading of properlies. Until the early 1990s. Trizec was both a developer and trader of office buildings, with the development elernent accounting for the majonty of its operations. ûffice markets experienced periods of up and downs, and in these cyclical conditions, Trizec navigated by developing buildings when markets had growth prospects and hatted development when markets experienced recession periods. Development in the booming years in Calgary, while halting the development of Bankers Hall and the Bay-Adelaide Centre during the downtum of building cycles are exarnples of these practices. Downtum periods are characterized by dispositions of noncore properties. In 1991 Trizec had 6.2 million square feet of rentable space in office buildings in Toronto. Following the eariy 1990s downtum it disposed of it holdings in Bramalea Limited, and in 1992 it had only 1.7 million square feet of space in Toronto (Trizec Corporation, 1991, 1992 Annual Report). At the same time, its office portfolio in Calgary remained intact, suggesting that Calgary's prospects at that time were better than Toronto's, and Trizec's presence in Calgary was much more important than in Toronto. TrizecHahn, the successor corporation to Trizec, also engaged in switching between propecty types as in 1998, when it disposed of its entire U.S. retail portfolio and, wiUi the proceedings, bought office buildings (see section 5.1.2) Investments of real estate companies are not limited to real astate properties. Consequently, in 2000, TrizecHahn acquired control of a telecommunications company. This is part of its recent philosophy of divenifying into the high-tech sector and divesting al1 of its office buildings in Canada (Globe & Mail, March 28, 2000). Finally, in June 2000 TrizecHahn sold the majority of its Canadian office portfolio, except for the Bay-Adelaide site in Toronto.
5.4.2 Cadillac Fairview Corporation Cadillac Faiiview is the result of an amalgamation of a commercial developer (Fairview) and a residential developer (Cadillac) in 1974. The Fairview Corporation was a developer of shopping centres and office buildings, white the focus of Me Cadillac Development Corporation was on apartment buildings. After the merger, the company disposed of its residential properties and focused on commercial development, and became, for the most part, a developer of properties and to a fesser extent a buyer and seller of real estate holdings. Until the amalgamation, Faiwiew's interests in office development were in Toronto (although the capital originated partially from Montreal-based Seagram Distilleries). In 1973, Fairview had 76 percent of its office space in Toronto (Fairview Corporation 1973 Annual Report). After the amalgamation, Cadillac Fairview diversified into other Canadian cities: Edmonton, Halifax, Winnipeg and Calgary, but the rnajonty of its Canadian office portfolio remained in Toronto (Table 5.5). The Toronto-Dominion Centre, Cadillac Faiwiew's 'flagship' complex in Toronto, illustrates the practices that have been shaped by the combination of building cycles and local conditions. The first office building in this five-building complex was completed in 1967 (the fih tower was completed in 1992 bringing the total office space in the complex to more than 4 million square feet). The scale of the first tower, 1.3 million square feet, signaled a breakthrough in office development in Toronto. In 1966, the year before the first tower was completed, the total office space in Toronto's downtown core was only 9.2 million square feet (A.E. LePage, Office Space Market Suwey Metropolitan Toronto, 1966). In the mid-1960s, it was a big risk to build this size of building; however, until that time, Toronto's office market had not experienced any major slump, but had been on a continuous path of growth. Fuither, the plan to develop this project was promoted by the City of Toronto as part of its efforts to enhance downtown redeveloprnent. The City encouraged Faiwiew not just to develop a building but to build a large-scale complex (Collier, 1974). In the eariy 1960s, the Toronto-Dominion Bank was looking for a new head office, and the partnenhip with a development company having the backing of a major corporation (Seagram Distilleries) seemed perfect. The combination of a cash-rich real estate developer, a tenant with clout, and the support of the local govemment facilitated the commencement of the largest office building at that time (the Toronto-Dominion Centre is jointly owned by Cadillac Faiwiew and the Toronto-Dominion Bank).
Table 5.5 The Canadian office portfolio of Cadillac Fairview, selected years, 1968-99, percentages (1)
City 1968 (2) 1975 1982 1987 1999 Toronto 85.0 72.7 71.9 70.8 65.1
Ottawa-HuIl O 10.8 O O 5.5
Vancouver O 9.8 13.8 14.6 10.7
Montreal 15.0 6.7 O 4.8 3.5
Edmonton O O 5.4 3.7 6.8
Calgary O O 8.9 6.1 6.4
Other O O O O 2.0
Total 100.0 100.0 100.0 100.0 100.0 Total office space 1,800 7,000 7,100 10,500 14,300 ('000 square feet) Notes: (1) Including buildings under construction. The 1968 portfolio is of the Fai~ewC~rporation. Source: Cadillac Fai~ewCorporation, Annual Reports; Fainhew Corporation, 1973 Annual Report.
The next two buildings in the Toronto-Dominion Centre were completed during the period of almost uninterrupted growth of office space in Toronto (late 1960s and eariy 1970s). Plans for the fourth tower were presented as early as 1973, parallel to the construction of the third tower (Globe & Mail, June 7, 1973). However, a short-term recession, the anti-development atmosphere at Toronto City Hall and the construction of competing towers, such as First Canadian Place (2 million square feet) and the Royal Bank Plaza (1.1 million square feet) in 1975-6, put the construction on hold. In this case, the ability of a developer to analyze the situation and take a 'calculated risk' by initiating development at the right time indicates the importance of the developei's judgement. A decade later, in 1983, despite an ovenupply of office space in Toronto, Cadillac Faiwiew decided to go ahead with the fourth tower. Due to the eariy 1980s slump, construction costs were lower, and although substantial leasing was not accomplished and long-terni financing was not ananged, Cadillac FaiMew decided to build the fourth tower (Globe 8 Mail, September 23, 1983). In fact, the completion of the fourth tower in 1985 coincided with the uptum of the offce market and it was 95 percent leased before occupancy commenced (Cadillac Fairview Corporation, 1985 Annual Report). The account of the fmh tower illustrates Wong' judgement by the developer. The construction of the fifth tower commenced in 1988, at the peak of the building cycle. Consequently, when the building was completed in 1992, leasing was stumbling as an enonnous oversupply of office space was delivered into Toronto's office market. Cadillac Fairview did not close its eyes to opportunities outside of Toronto. When Alberta's economy seemed buoyant in the late 1970s, Cadillac Fairview rushed into this territory of prornising grouvth. Until the mid-1970s, Cadillac Fairview did not have any office building in Alberta. Faiwiew already owned an office building site in Calgary in the eariy 1970s. However, the Company's position at that time was that it %il1commence development of an office building... as soon as market conditions warrant'' (Fairview Corporation, 1973 Annual Report, p. 15). Beginning in the mid-1970s the company was pursuing development opportunities in Calgary (Cadillac Fairview Corporation, 1976 Annual Report), and between 1977 and 1980 Cadillac Fairview completed îwo buildings in Edmonton and two in Calgary. In 1980. the company identified a strong demand in Calgary and decided to acquire additional sites for development (Cadillac Fairview Corporation, 1980 Annual Report). At the peak of Alberta's building cycle in 1981, Cadillac Fairview had approximately 14 percent of its office poitfolio in Edmonton and Calgary combined, compared with no office space in 1976 (Cadillac Fairview Corporation, 1976-1981 Annual Reports). In the eady 1980s. Cadillac Fairview was planning to pursue large-scale office development in Calgary, but the 1982 recession stopped any further development (Guirnond and Sinclair, 1984). In the second half of the 1980s, as Toronto's market was experiencing an explosive growth, Cadillac Fairview refocused its development efforts to Toronto while disposing of its office b~ildingsin Calgary (Cadillac Faiwiew Corporation, 1987, 1998 Annual Reports). However, in the late 1990s. the Calgary office market has shown signs of rebounding, and Cadillac Fairview has renewed its interest in Calgary by acquinng two office buildings in Calgary (Calgary Herald, February 10, 1998). Cadillac Fairview's long term focus on Toronto and its limited interest in Calgary implies that it has a two-track strategy. On the one hand, the concentration on the Toronto market indicates that Toronto has been a structural (long ten) investment for the company. On the other hand, investment in Calgary and Edmonton was considered an opportun@ resulting from unique local cycles. In Toronto, Cadillac Fairview has reached a threshold that makes it one of the primary landlords in the Financial District and in the surrounding Downtown area. This cluster strategy has generated operational synergies resulting from economies of sale and greater tenant fiexibility. Cadillac Fairview was a late entrant to Calgary and as such it has not been able to create a 'presence' of the same magnitude as it has in its home territory. Besides spatial switching, Cadi!lac Fairview practiced switching between modes of operation and between property types. Although being primarily a developer and a long-term holder of properties, it was involved in buying and selling of buildings. Parallel to the development of office buildings in Toronto in the late 1960s and early 1970s, Cadillac Fairview acquired two office buildings in Montreal. On the other hand, FaiMew's first office buildings developed in Toronto in the eariy 1960s were sold in 1981-82. The disposition of these buildings was at the time when office development was in recession. In the early 1980s Cadillac Faiwiew also switched its property composition by disposing of its residential portfolio (see section 5.1.2).
5.5 Capital Switching and Real Estate Companies The practices of real estate cornpanies cannot be analyzed without examining pivotal conditions related to the real estate sector. A major structural component influencing the considerations of real estate companies, office building cycles, and in tum the practices of these companies were addressed in this chapter. The conclusions of this analysis are at three levels. The fint conclusion confimis the notion that building cycles are place-specific: different spatial scales and locations experience different office- building cycles. Therefore the practices of real estate companies are likely to be influenced by these cycles. By trying to capitalize on distinct building cycles, some real estate companies shift a major portion of their investments to fast-growing areas (high profit potential), and often reduce or relinquish their investments in other areas. However, this type of Company continues to focus on the core investment arenas despite the fact that other areas might experience faster growth. The limited degree of spatial integration between Canadian regions generates a variety of building cycles at different spatial scales and places. Each of the two spatial scales investigated, the national and provincial, has its particular cycles; within the provincial scale, variations between provinces have a tendency to penist for the long tem. Ontario and Quebec present quite similar patterns of office-building cycles (although the magnitude is different); British Columbia has a few similarities with the patterns experienced by the two large eastem provinces, while Alberta exhibits a unique pattern. This dissimilanty is partially echoed at the metropolitan level as the office building cycles of Toronto and Calgary converged during the late 1970s and diverged during the 1980s. Spatial and temporal unevenness are not a short-terni phenomenon eventualiy leading to a spatial equilibnum. Examining a time series of almost four decades of offi building cycles in Canada at the national, provincial and inter-metmpolitan levels suggests that uneven pattems of real estate investment are a petmanent phenomenon embedded in urban development. The tact that temporal and spatial switching of capital is both sequential and simuftaneous, depending upon the scale at which one focuses and the time period of the analysis" (Beauregard, 1993, p. 59), leads to permanent spatial disequilibrium. Contrary to a common perception that large cities as a group attract real estate investment, this chapter shows that within the top-tier cities in Canada some attract more real estate investrnent by large real estate companies that other cities in this tier. Toronto and Calgary have been prime destinations for the largest developen and owners of office buildings. Montreal and Vancouver, on the other hand, attracted far less investrnent by the large Canadian real estate companies. Since even the largest real estate companies cannot stretch their operations to include al1 large cities, they tend to focus on a few preferred locations. The preference of particular cities is determined by a variety of reasons. These include factors extemal to the Company, such as economic growth, facilitating environment, and type of demand, and intemal factors like financial strength, local market knowledge, and path dependency. This embedded inequality is fuither enhanced and solidified by agents as they shape the spatial switchinglfix of capital. Because there are multiple agents with different interests that act as intermediaries, capital does not switch from one location to another simply by following the patterns of building cycles. The logic of these agents is shaped and influenced by macro conditions. but the preconditions embedded in each organization play a major role in this process. The establishment of 'local presence' (reaching a critical threshold) in specific locations prompts continuous capital funneling to these 'designated' places. Concurrently, switching oawn between properties at a particular location (for exarnple, between retail and office buildings or between newer and oMer properties in the same city), and between properties that did not reach a critical threshold in a specific market, and hence are more likely to include tradable praperties. The cases of Trizec and Cadillac Fairview illustrate this argument. Both companies have an anchor investment in specific locations: Trizec has Place Ville Marie in Montreal and several large buildings in Calgary; Cadillac Fairview has the Toronto-Dominion Centre and the Eaton Centre in Toronto. This firmly established local presence and the ownership of one-of-a-kind assets, restrict the movement of their investrnents. Even when Montreal and Calgaiy experienced stormy periods, Trizec has continued to hold these proparties. This indicates that reaching a certain level of investment transforms real estate into a form that is perceived as fixed by a Company for a long period of the. CHAPTER SIX
FROM KING AND BAY TO MEADOWVALE: TORONTO'S OFFICE BUILDINGS AND OFFICE DISTRICTS
The urban silhouette with its soaring skyscrapen next to the CN Tower contributes to the image of Toronto at home and abroad. But large office buildings at King and Bay are the proverbial tip of the iceberg. There are only eight office buildings with 40 to 72 floon and only another fourteen with 30 to 39 floors. The vast rnajonty of the more than 1200 office buildings in the Toronto Census Metropolitan Area (CMA) are relatively unassuming buildings. Although they do not receive much attention, they are extremely important. They provide accommodation for tens of thousands of businesses and hundreds of thousands of employees. All office buildings together accounted for about 36 percent of employment in Metropoiitan Toronto in 1996 (Metropofitan Toronto Planning Department, unpublished tables) and for about 25 percent of employment in the CMA. The smaller office buildings are treasured by and fought over by municipalities that value their contribution to the municipal tax base. The spread of office buildings acrcss municipal boundaries and the different forces and denslies of these various buildings have been more and more contentious among planners and municipal politicians. In this chapter I describe the characteristics and locations of Toronto's office buildings. The core of this account is data avaibble on individual buildings provided for this study by Royal LePage, a Toronto-based real estate bmkerage finn. The chapter includes a section on 'preliminaries', which deals with the definition of office buildings, the scope of the data, and the basic spatial units chosen for aggregating individual buildings. The two major sections of this chapter focus on documenting the changing inventory of office space in Toronto and provide evidence for the notion of office districts. Toronto's office stock has accrued over several phases, each with different conditions for development and different physical resuits in the fom of buildings. Although office buildings are scattered across many locations, there are distinct nodes or districts noticeable. The description of these office districts is important, because they are the fields of operation for different kinds of developers. The final section illustrates spatial switching of capital within the realm of the largest office parks in the Toronto CMA. 6.1 Preliminaries: Office Building lnventory and the Spatial Frame of Reference There is no explicit definaon of what constitutes an office building. The undedying notion, used by real estate businesses as well as urban planners, is of a building, which does not house rnachinery other than that sitting on desks. This machinery is used for the manipulation of words and data. This excludes buildings used for storing goods or for conventional residential purposes. Universities, churches and places where people stay overnight (hotels) are also excluded from the definition of office buildings. However, a theoretically-based definition of office buildings is missing. Typically, in most databases dealing with office buildings the definition of an office building is considered self-evident and any explanation considered redundant. Largely for practical reasons, the customs of the agencies providing data are accepted here.
Data on office buildinas There are no official data on office buildings. Leitner (1994) acknowledges this problem in her research on office building cycies in major downtown areas in the United States. As a resut, she used data maintained by commercial real estate broken. Municipalities within the Toronto CMA do not have any systematic data on office buildings which would provide a good picture of the office stock. Municipalities rarely define office space or collect data on office buildings. In planning documents, office space is usually embedded in the larger category of commercial or mixed uses. Also, municipalities rely on private consultants, who in tum rely on data from real estate brokers. Since there is no official enumeration or suivey of office buildings in the Toronto metropolitan region, data collected by real estate brokerage firms, especially Royal LePage, and Colliers are used here. Royal LePage defines office buildings as "office space in buildings having as their prime funclion the provision of office facilitiesn (Royal LePage, 1982). No additional explanation is provided regarding the criteria used to determine what office space is. Nevertheless, Royal LePage is the only source that has compiled and rnaintained an outstanding set of data on the office building history of Toronto since the eady 1960s. In order for a building to be included in the Royal LePage inventory, it has to have at least 20,000 square feet of net rentable office area, which is the floor-space that can be rented to and used by tenants. Over the years, surveys became more detailed in ternis of information provided, and Royal LePage changed the number and the boundaries of the districts for which it published data to reflect temporal shifts in office development. In 1977, it added the City of Mississauga to the surveys, and in subsequent years the boundaries of the suweyed area were further stretched out to include the expanding metropoiiian area. Data from commercial real estate agents have to be handled with care. Royal LePage data has certain characteristics Al1 office buildings with more than 20,000 square feet were recorded. A typical 20,000 square feet building is a four-storey building of about 50x100 feet floorplates. Office space above stores or in shopping plazas is not included. Royal LePage surveys categorize buildings by market classifications designated as A, B, and C. These distinctions roughly parallel quality and pria levels for office space which directly competes for the same tenants in the sarne district. The Royal LePage survey includes both 'cornpetitive' and 'noncompetitive' buildings. Cornpetitive space is cornprked of multi-tenant buildings with office space offered for lease in the short term. Non- cornpetitive buildings are occupied by building ownen or by long-terni core tenants; these buildings include govemment office buildings. Most other real estate brokers do not include noncompetitive buildings since they are not considered a part of the leasing market they are interested in. Floor-space data in Royal LePage surveys is about net rentable floor-space; this excludes walls. elevator cores, and areas that are not included in the rent. This is different from municipal practices, which are used for density (floor space index) calculations. Density calculations use gros floor-space, thus, there can be differences between space recorded in municipal documents and Royal LePage tabulations. Royal LePage data is far from complete or consistent. Often it is difficult to detenine the exact function of the spaces recorded. Built space can function both as office and industrial space, and drawing the line is difficuk. This problern of definition becornes more acute in the newer types of buildings that are by definition 'hybrid' or 'flex' buildings combining several functions, or in which functions change over tirne; therefore, making clearcut definitions is often inadequate. In addition, 'questionable' buildings are often included in Royal LePage data as office buildings, such as the Ontario parfiament buildings, which are to a large extent an assembly space rather than office space. On the other hand, buildings converted from wholesale and manufacturing to office use are often not included in the Royal LePage surveys.
Spatial units of analvsis: Office districts The availability of data on individual office buildings for 1971, 1981, 1991, and 1999 facilitates the construction of spatial units (Table 6.1). Figure 6.1 provides the essential reference map. For the analysis of this chapter I divided the inner city into the Financial District, Downtown (excluding the Financial District), and Midtown (which includes office clusters around major subway stations at Yonge and Bloor, Yonge and St. Clair, and Yonge and Eglinton). Table 6.1 A typology of office districts in the Toronto CMA
District Type of district Office flooispece, 1999 (square feet) Financial District lnner City 32,000 Downtown lnner Ciîy 27,300 Midtown lnner City 18,000 North York City Centre Suburban Downtom 6,700 Scahrough Town Centre Suburban Downtown 3,600 Mississauga City Centre Suburban Downtown 3,500 Airport ûffii Park 8,000 WoodbinelSteeles OKce Park 5,700 Woodbinekiighway 7 Office Park 5,550 Consumers Road Office Park 4,800 Don MiIls Office Park 4,700 Meadowvale OffiPark 2,800 Highway 427 ûffiie Park 2,600 Hurontano Office Park 2,550 Duncan Mill ûffice Park 2,400 Dispersed Lacations 18,400 Total office spacc in Toronto 148,600 Source: Royal LePage (2000) Toronto Offce Space Market, Statistical Summary Year-End 1999.
The Financial District has more than half of the downtown office space, and, therefore, a distinction between the Financial District and the surrounding downtown area had been fonned. lnstead of using the definitions of Metro Noith, East, and West as provided by Royal LePage, I divided suburban districts into two types, Centres and Office Parks. Each of these districts was compared with the definitions delineated of the 1976 Toronto's Central Area Plan, the Metropolitan Toronto Official Plans, and the City of Mississauga Official Plan. These districts have distinct physicaf characteristics. Dispersed locations are clusten of office buildings in which the total office floor-space is less than 2 million square feet or areas in which office buildings that do not fonn clusten.
6.2 Toronto's Office Stock: A Synopsis The Toronto metropolitan area experienced rapid growth in office space between the 1950s and the early 1990s (Table 6.2). Toronto's office inventory more than Mpled during the decade-and-a-half between the mid-1950s and the eaily 1970s, but 'only' doubled in each of the two decades between 1971 and 1991. In this twenty-year period from 1971 to 1991 Toronto's offÏce stock expanded by almost 110 million square feet of new offi space. Net additions to the office stock made in the 1990s were very modest.
Table 6.2 The growth in office space inventory in the Toronto CMA, selected yean, 1954-99
Year Number of buildings Floor-space ('000 square feet) Office stock Net additions 1954 NIA 10,000 -
1999 1,229 148,600 6,700 Source: Royal LePage (formeriy AE. LePage) Toronto Office Leasing Directory, various years.
In the early 1950s, alrnost al1 office floor-space in Metropolitan Toronto was in the City of Toronto, and by 1961, the share of the City of Toronto had dropped only slightly to 93 percent of total office space (Gad, 1985), with the most significant concentration in the 'old office district (the future Financial District). By 1991, the City of Toronto had only 52 percent of the CMA inventory; the remaining was in municipalities both within and outside Metropolitan Toronto. Office suburbanization to designated centres and selected office parks resuited in a multi-nodal pattern of office districts. This process of office dispersal started in the inner suburbs (North York, Scarborough and Etobicoke), and continued in municipalities outside Metropolitan Toronto, mainly Markham in the nodh and Mississauga in the west (Figure 6.1). These numbers show that at the intra-metropolitan level there were districts that experienced faster growth than others, and hence their share of the metropolitan stock increased. In the following section, a spatial-temporal picture of office buildings clustered in the different office districts of the Toronto CMA will be shown by using three characteristics of office buildings: additions of office floor-space, average building site, and the building density (Floor Space Index, FSI). New office space In the time period under scrutiny (1954-99), 1135 office buildings of at least 20,000 square feet each were built in the Toronto CMA. The information is based on Royal LePage surveys of individual offi buildings in the Toronto Census Metropolitan Area at four points in time: 1971, 1981, 1991 and 1999. These sunreys include the year in which each building was built and the total office space of each building. This enabled the constnicüon of data that would correspond to office building cycles. Rather than strictly limiting data to a tan-year frame, longer or shorter periods were employed according to the hythms of net additions of office space. Table 6.3 summarizes these findings.
Table 6.3 Additions of new offie space in the Toronto CMA, selected years, 1954-99 ('000 square feet)
District 1954-70 197141 1982-92 1993-99 Total additions Financial District 7,500 10,000 11,000 100 28,600 Downtown (1) 4,050 6,200 10,800 1,550 22,600 Midtom 6,800 6,850 4,100 100 17,850 Office Park 3,700 10,400 22,900 3,000 40,000 Suburban Downtowns NIA 3,850 9,400 500 13,750 Dispsrsed Locations 1,600 6,000 &O00 450 16,050 Total 23,650 43,300 86,200 5,700 138,850
--- Notes: Since this table is based on individual building data, there are several discrepancies between tfiis data and the annual publications of Royal LePage. (1) Downtown excludes the Financial District. NIA - between 1954 and 1970 a negligible amount of office space was buiit in suburban downtowns. Sources: A.€. LePage (1971) Toronto, Office Space Sunrey; AE. LePage (1980) Toronto, Office Space Sunrey; Royal LePage (1991) Toronto, Market Survey Report: Royal LePage (2000) Toronto Office Space Market, Statistical Summary, Year-End 1990.
During these four and a half decades, the spatial patterns of office development have changed drarnaticalfy. The earlier pattern of downtown and midtown orientation was transfomed to an almost even distribution of office space between the core and the suburban realm. Most of the City's office space was and still is contained within the Central Area (as defined by the 1976 Official Plan), which includes the Financial District, Downtown and Midtown. In 1971, 82 percent of Toronto's office space was within the City; in 1981 it decreased to 66 percent, and in 1991 only 52 percent of Toronto's CMA office floor-space was within the City boundanes. This situation has remained unchanged in 1999 (Royal Le Page, various suweys). During the 1980s cycle (exîended from 1982 to 1992. buildings completed in 1991-92 were a product of the late 1980s development cycle) more office space was added to the Toronto area than in any previous decade. In the 1980~~more than 66 million square feet were added, representing 50 percent of al1 postwar additions (Table 6.3). In the 1970s (1971-81), 32 percent of the postwar office- building additions were made, 14 percent in the 1954-70 period, and during 1993-99, only 4 percent of the postwar stock was added. If conversion to other uses and demolition are taken into account, the net addition is less than 4 percent during the 1993-99 period. In the 1954-7û period virtually al1 addlions of office buildings were in the City of Toronto; the Financial District was the prime beneficiary of office development (41 percent of the new space). The 1970s were the defining decade in which the dominance staited to shift from the Financial District to the office parks, and by the 1980s construction outside Toronto's Central Area exceeded that within the Central Area. In the 1970s, the share of the Financial District and office parks in offce development was equal; in the 1980s. 34 percent of the additions were in office parks while only 17 percent were in the Financial District. In the 1990s (1993-99) more than one-half of the additions in Toronto were in office parks. (Their share rises as the 1990s proceed, and by the late 1990s virtually al1 construction of office space was in office parks.) This shift paralleled population growth patterns; suburban rnunicipalities, initially those within Metro Toronto and later municipalities outside Metro experienced far greater growth rates than the City of Toronto. However, this shift to office parks abo contradicts planning policies of Metmpolitan Toronto, which attempt to channel office development into suburban downtowns rather than to office parks.
Buildinci size Despite the massive office development in Toronto during the 1980s, the largest office buildings, on average, constructed in Toronto in the postwar era were built in the 1970s (Table 6.4). Until the late 1960s, only the City of Toronto (the combination of the Financial District, Downtown and Midtown) had a substantial office inventory; within these boundaries the largest office district was the Financial District, and on average it had the hrgest office buildings. In the 1970s (1971-81). the average size of office buildings constructed increased considerably; it more than doubled in the Financial District, and doubled in the Downtown. The largest office buildings by far are found in the Financial District. The average building constructed in the Financial District in the 1970s had more than 500.000 square feet of office space, while the average in the Downtown district, the district with the second largest office buildings, was only 200,000 square feet. With the expansion of the suburban realm in the 1980s, the average building constructed in the suburban downtowns has surpassed the average office building size in the Downtown district (223,000 venus 192.000 square feet).
Table 6.4 Average size of newly constructed office buildings in the Toronto CMA, 1954-99 ('000 square feet)
District 1954-70 197141 1982-92 1993-99 Average financial District 227 502 422 WA 357
Downtown (1) 101 200 192 NA 169 Midtown 89 140 111 NIA 109 Suburban Downtowns NIA 167 223 NIA 205 Office Parks 71 92 89 99 89 Dispersed Locations 44 77 69 NIA 68 Average 90 138 124 129 122 Notes: (1 ) Downtown excludes the Fmancial District NA- between 1954 and 1970 a negligible amount of space was buiit in suburban downtowns; in 1993-99 oniy 14 office buildings were buiiî in the CMA (except office paris), îherefore the average size for each district was not calculated. Source: Same as Table 6.3.
Buildings in office parks and in dispersed locations retain the smallest office buildings (smaller than 100,000 square feet), and their average sue has remained almost unchanged throughout the 1971-99 period. During the 1980s (1982-92), the average building size had dropped in al1 districts except in the suburban downtowns (an increase of 30 percent). The decline in average size was most noticeable in the Financial District and in Midtown; in these two districts it dropped by more than 15 percent.
Densitv Density is analped bÿ using a sample of 300 office buildings completed between 1951 and 1991 in Metropolitan Toronto (Metropolitan Toronto, 1993). In the City of Toronto buildings with over 100,000 square feet of office space in which office space constitutes more than 50 percent of the total floor- space were included. Buildings with more than 50,000 square feet were utilized in the case of the suburban municipalities within Metropolitan Toronto. As expected, the highest densities are recorded in the Financial District, followed by the densities in the Downtown and Midtown districts. Outside the old City of Toronto densities were significantly lower (Table 6.5). The average density in the Financial District was 13.6 times the lot; high densities were recorded also in the Downtown and in Midtown (9.3 and 7.5 respectively). Densities in suburban downtowns lagged the City of Toronto denslies with an FSI of 2.5. Office parks and dispersed locations fell behind suburban downtowns as the typical density was about one times the lot.
Table 6.5 Average densities of office buildings in Metropolitan Toronto, 1991
District Density Financial District 13.6
Downtown 9.3
Midtown 7.5
Suburban Downtowns 2.5
Office Park 1.1
Dispersed Locations 1.1
Source: Metropolitan Toronto (1 993), 1991 Office Data Bank
The density or Floor Space Index (FSI) is a very complex indicator which may be deceptive. In general, density is calculated by dividing the gross floor area (above and below grade) of a structure by the size of the site on which the building is erected. However, complex methods of density calculations can result in a variety of densities, particuhdy in the case of large-scale projects. lnstead of taking into account the actual site on which the building is constructed, a larger parcel may be considered for the purpose of density calculations. Two examples illustrate this case. The Simpson's Tower located on the southeast corner of Queen and Bay (in the Financial District) was completed in 1969. Its total gros floor area is 653,000 square feet and the site area is 22,600 square feet, hence the density is 28.9 tirnes the lot. Two reasons rnay explain this extremely high density. First, one argument might suggest that the entire city block bounded by Queen, Yonge, Richmond and Bay should be considered as the developrnent site, since the retail component on this site did not use the full density allowed. The other explanation suggests that in the 1960s the City of Toronto was not as strict in limiting densities as the 'reform' council in the mid-1970s. A similar approach was adopted by the City of Toronto in the late 1980s as it declared that the Bay-Adelaide Centre is pait of a 'super-bbck' (par! of the 'super-block' includes the site of the Simpson's Tower), hence allowing the developers to gain extra 700,000 square feet (Toronto Star, November 5, 1988). The second example is the Scotia Plaza building, which was completed in 1989. The approval of this project was made public, especially after a rival bank, the Toronto-Dominion objected to the 'excessive' density of the Scotia Plaza project (see Chapter Seven). According to the highiy publicized debate, the densrty of the Scotia Plaza was 16 times the lot. However, the adual FSI is much higher. The total floor area is 2,300,000 square feet and the lot sue is 97,000 square feet, therefore the density is 23.7 times the lot coverage. Again, dsnsity depends of site definitions.
6.3 Office districts in Toronto Office buildings in the Toronto Metropolitan Area are not evenly dispersed but strongly clustered in srnall areas, largely delineated through planning instruments such as 'Official Plans' and zoning bylaws. These territories are identified here as office districts on the basis of principal location, characteristics of buildings, and planning history. The ofiice districts are presented in Table 6.1. Before the districts are descnbed in detail, a systematic comparison of selected districts based on building characteristics is provided in order to illustrate the systematic variety of the offke buildings fabric (Table 6.6). The spatial configuration of office clusten and their intemal characteristics illustrate a diverse office inventory in terrns of the size, height, and the age of office buildings. Examination of fie exemplary districts reveals core-periphery gradients based on these building characteristics (Table 6.6). The further away a district is from the core, the smaller, lower and newer are the buildings. The composition of the office building stock in the Financial District, which is also the oldest office district, points out that it has by far the largest office buildings in ternis of floor-space (more than 300,000 square feet), in terms of height (more than 25 stories) and also the largest share of 'older' buildings. The Midtown district has fewer large-scale buildings, few high-rise buildings, and a considerable number of 'old' office structures (built before 1970). Office buildings in the largest suburban downtown, Downtown NoRh York, are newer and larger than buildings in the Midtown Toronto. However, buildings over 25 stories are absent from Downtown North York. The dominant features in the Consumers Road district, one of the oldest office parks, are low-rise buildings (73 percent with fewer than 11 stories), almost no buildings of more than 300,000 square feet, and very few buildings that were built before 1970. The features of office parks are magnified in the newest office park in the Toronto CMA, the WoodbineMighway 7 district. All office buildings in this office park are Iess than 300,000 square feet in site, fewer than 11-stories high, and there are no buildings that were built before 1970 (the first buildings were built in the mid-1980s). Table 6.6 Physical characteristics of office buildings in selected districts in the Toronto CMA, 1999
Building Financial Midtown Downtown Consumers Wwdbind characteristics District North York Road Highway 7 No. % No. % No. % No. % No. % No. of buildings 105 100 150 100 29 100 33 100 69 100
Buildings with less than 33 31 98 65 8 28 100,000 square feet
Buildings with more than 32 30 16 11 11 38 200,000 square feet
Buildings of less îhan 1 1- 23 22 106 71 12 41 stories
Buildings of more than 25- 25 24 3 2 O O stories
Buildings completed before 57 54 67 45 2 7 6 18 1970 Source: Royal LePage (1999 Unpublished da on individual 01 ce buildings in ti Toronto CMA.
Office building characteristics Vary strongly from district to district as has been shown. There are other differences. The interna1 street and circulation systern in the Financial District includes fragmented parcels that had to be assembled for the development of large office buildings. The Consumers Road or the WoodbineRlighway 7 districts comprise of large parcels of land separated by roads and expressways. lnner city districts, including Downtown North York, have mixed land uses, which include mainly residential, retail, institutional and offce uses; office parks are clusters of office and industrial buildings. Each district has different kinds of boundaries. Expressways and arterial roads enclose some districts (office parks), whereas other are bounded by residential neighborhoods and institutional complexes (Midtown, Downtown North York). Also each district has a particular location in the network's of the public transit and road infrastructure. The Financial District is transit oriented, Midtown is partially transit oriented (located along the Yonge subway line). Office parks are totally automobile oriented and their designation as office parks or their emergence as office parks is attributed to being highly accessible by automobile. Description and understanding of these districts is important, because office districts are the resuit of rounds of earlier development and they provide the conditions for new rounds of office development, stagnation or abandonment. 6.3.1 The Financial District The territory currently designated in Official Plans as the Financial District is the prime office area of the Toronto region in tans of scale, quality of office space, and rental rates. In this district, the fint purpose-buiit office structures in Toronto were buiit in the late 1850s in the area east of Yonge Street around the jundure of Adelaide and Toronto Streets (Gad and Holdsworth, 1984). Until the 1960%this area was the general office district in the City of Toronto. Although banks, trust and insurance companies became the rost prominent establishments in this district, other types of office establishments were also part of the general office district (Gad and Holdsworth, 1984; Gad, 1999). The commencement of the Toronto-Dominion Centre in the mid-1960s ushered in a new phase of office development in the general office district. A pro-growüi urban regime, using permissive planning regulation, encouraged large-sale urban redevelopment in the City of Toronto. City officiais welcomed the participation of corporations in redeveloping the downtown area. In the case of the Toronto-Dominion Centre, the director of the City of Toronto Planning Board urged the president of the Toronto-Dominion Bank to consider a downtown cornplex instead of just a head office building (Collier, 1974). In the 1970s some of the largest office buildings in the Financial District were built (Commerce Court, First Canadian Place and Royal Bank Plata). In the 1976 Central Area Plan the area was officially designated as the 'Financial District'. Following the Central Area Plan, development restrictions were imposed, and densities in the Financial District were lowered from an FSI of 12 to an FSI of 8 (Caulfield, 1974; Gad, 1999). However, by that tirne, many of the largest office complexes were already built, under construction, or approved. The oversupply of office space in the mid-1970s coupled with municipal 'resistance' to office development had resulted in a relatively modest delivery of new space in the late 1970s and early 1980s. Notwithstanding this, downzoning did not prevent the construction of large-scale developments, and by the mid-1980s when the real estate market was 'hot', two of the largest office complexes in the current Financial District were built. They had much higher densities than allowed in the 1976 Official Plan and zoning bylaw. The Scotia PIaza (FSI of 16) and the BCE Place (FSI of 12) were approved in the mid- 1980s (Toronto Star, June 29, 1984; Globe & Mail, December 15, 1987). The average density of the medium and large office buildings completed before the 1976 Official Plan and after the plan are about the same average with an FSI of 13.5. Much of the post-1976 plan densities are due to pemitted and bargained bonuses granted to office projects as a iesult of historical preservation and the provision of public benefiis such as assisted public housing and daycare facilities. In the 1990s, the Financial District was considered Canada's most densely developed urban area (Gad, 1991b). This district has the largest office buildings in Toronto in tenns of floor-space and height and office buildings are the major land use in the Financial District. In a thiiiy-year period (1961 - 9 1) office space in the Financial District had increased fiiefold, while its proportion in the metropolitan office stock declined from 35 to 22 percent (Table 6.7). In addition, intemal dynamics have changed the composition of the district's buildings.
Table 6.7 The lnventory Office Space in Toronto's Financial District, selected yean, 1961-99
1961 1971 1981 1991 1999 Office space inventory 6,200 12,400 21,000 31,300 32,000 ('000siuare feet) -
% Toronto's CMA inventory
No. of buildings added 33 20 26 1
No. of buildings added with less than 300,000 square feet
Note: Based on the financial Diboundaries of the Central Area Plan (1 976). Source: Same as Tabfe 6.3.
Repeated conflicts anse because there are still, and always will be 'historic' buildings that are threatened by intenslication through redevebpment. Also, intensification has implications in tenns of increasing demand for the provision of public transit, and because of the over-spill effects of automobile traffic touching a wide range of inner-city areas. Thus, office development in the Financial District casts a huge shadow of extemalities over the city. Together with the large towen associated with large finance as symbols of domination, these extemalities give rise to repeated episodes of resistance by fractions of the inner-city population. However, the Financial District is not comprised of just large office complexes; srnall and medium office buildings are cornmonplace. Out of 80 office buiidings added in the Financial District in 1954-99 period, 49 buildings had less than 300.000 square feet each (Table 6.7). and until the eariy 1970s these buildings were the dominant feature in the landscape of the Financial District. Only in the 1970s and 1980s with the construction of many large-sale projects, small and medium office buildings have become less signifkant, and their share of the districYs office space has plunged from 66 percent in 1971 to 30 percent in 1991.
6.3.2 Downtown and Midtown Downtown is used here to describe an area that includes second largest concentration of office floor- space in the CMA. The Downtown district encircles the Financial District, with the largest part located north of the Financial District. This district includes retail, institutional and residential uses as well as office buildings. Royal Le Page dides Downtown into fie concentrations: North, South, East. West and King West. The eastem sector of Downtown as well as King West includes some of the oldest office stock, and is also the smallest in ternis of office space. The areas of Downtown North and Downtown West have the largest office inventories in Downtown. In the Downtown area, office development expanded substantially from the 1950s to the 1980s. As land for redevelopment in the Financial District became scarce and municipal regulation tighter, office development moved to the areas sunounding the Financial District. In the 1970s and the 1980, the area north of the Financial District and south of Bloor Street (Downtown North according to Royal LePage definitions) experienced massive growth, and in the 1980s the area immediately west and south of the Financial District added considerable volume of office space. Midtown is a combination of three distinct clusters, Bloor Street, St. Clair Avenue, and Eglinton Avenue at the intersections of Yonge Street. These areas are located around major subway stations along the Yonge subway line, and their genesis as office districts is a consequence of the opening of the Yonge line in the mid-1950s. Prior to the opening of the Yonge subway line in 1954, no significant office clusters were to be found in the Midtown District. The subway and municipal encouragement through zoning induced office construction around the major subway stations in the Midtown area (Lemon, 1985). Throughout the decade following the opening of the Yooge subway line (1954-65), 45 percent of new office construction in Metropolitan Toronto was in the Midtown district. Midtown Toronto continued to experience considerable growth from the mid-1960s to the mid- 1970s. In the 1969 ûfficial Plan, two of the three clusten in the Midtown area were designated to function as 'commercial districts', thus removing them from the liberal growth framework prevailing in the Central Area. Since the mid-1970s, office development in these areas has slowed down as a result of neighborhood pmtest, followed by restrictions on parking space permitted in and around new office buildings. As a result, Midtown was the only district in the Toronto CMA that gained les office space in the 1981-91 decade than in each of the preceding decades (Table 6.3). Both Downtown and Midtown districts are areas with offices, institutional, and older residential uses that have been subject to gentrification. Consequently, any office development that is associated with disturbing the existing building fabric and its reuse has been problematic and very few large offi buildings wewe added in these districts after the mid-1970s.
6.3.3 Suburban Downtowns By the end of the 1990s. there were three distinct office districts which deserve the label 'suburban downtown'. These suburban downtowns are in the former Metropolitan municipalities of North York and Scarborough, and a third one is in the City of Mississauga. These downtowns or subcentres were created through both public planning measures and the initiatives of private developen. They are defined and delineated in Official Plans and roning bylaws, and they are promoted by local municipalities, and in the case of Nom York and Scarborough also by Metropolitaii Toro~to.In these subcentres, office buildings are confined to reasonably small areas (at least at suburban sales of cornpactness), and in the 1990s each of these centres accommodated more than 3 million square feet of office space. The development of suburban downtowns in the Toronto area is a relatively new phenomenon (Hartshom and Muller, 1989; Relph, 1991). Until the early 1970s, no such downtowns existed. However, since the mid-1970s, and especially in the 1980s, the suburban municipalities surrounding the City of Toronto expanded rapidly, and their downtowns grew conespondingly (Table 6.8). This transformation resulted from several factors, most notably suburban population and employment growth, centrifuga1 forces pushing office development away from the City of Toronto. the deconcentration of office employrnent encouraged by the Metropolitan Toronto govemment, and the desire of suburbsn municipalities to attract developrnent in order to expand their tax base and in order to gain visibility and recognition. The importance of suburban downtowns for their respective local governments is reflected in the off icial designation: Mississauga City Centre, Downtown North York and later North York City Centre, and Scarbomugh Town Centre. The 1980s were the 'golden decade' of office development in the suburban downtowns. In 1976, total office floor-space in the three downtowns was 1.35 million square feet; it increased to 4 million in 1981, and more than tripled by 1991 to 12.7 million square feet (Table 6.8). Conespondingly, their share of Toronto's office stock increased from 2.5 percent in 1976 to 9 percent in 1991. In the 1990s, growth in suburban downtowns literally came to a hait. There were no new office buildings completed. (Although several office buildings were completed in the early 1990s in North York City Centre and Mississauga City Centre, they were part of the 1980s boom). Table 6.8 The inventory of office space in tha Suburban Downtowns, selected years 1976-99 ('000 square feet)
Suburban Downtown 1976 1981 1991 1999 North York Crty Centre (NY) 650 2,300 5,600 6,700
Scarborough Town Centre (SC) 450 850 3,600 3,600
Mississauga City Centre (MS) 250 900 3,500 3,500
NY+SC+MS as % of CMA 2.5 5.5 9.0 9.3
No. of office buildings with 1 2 12 15 more than 300,000 square feet Note: The discrepancv between th& table and table 6.3 is a resuft of a fine-tuned delineation of ttie suburban downtowns. Source: Same as s able 6.3.
Aithough al1 were created in the 1970s and expanded in the 1980~~some major differences prevail. In the suburban municipalities the role of private developea is more pronounced than in the City of Toronto. In Scarborough, the T. Eaton department store Company initiated the Town Centre in the late 1960s. Eaton owned the land and together with Trizec, built a shopping centre as an anchor of this csntre. Eaton even donated some land to the municipality of Scarborough for the construction of new municipal offices; the availability of land was one of the major considerations for choosing the site as the future tom centre (Globe & Mail, Mach, 9, 1973; December 12,1975; September 24, 1981). A very sirnilar chain of events happened in Mississauga. A local real estate developer, S.B. McLaughlin, bought land that he thought might become the city centre. In 1970 he built a shopping centre and the first office building in the future crty centre. He persuaded the municipal council to move into this centre (see Chapter Seven). In North York the idea of 'creating' a downtown was bom in the 1970s. North York's population growth, the extension of the Yonge Street subway Ine northward to Finch Avenue and the encouragement by Metropolitan Toronto to deconcentrate office growth to suburban centres, al1 contributed to the adoption of the 'downtown plan' by the municipality of North York in 1979 (Matthew, 1989). The group of suburban downtowns is not as homogenous as it seems. Among the downtowns, North York City Centre is the most 'urban' as a resuit of being on the Yonge subway line and in an area with relatively dense pre-existing urban development. The Nomi York municipality encouraged the reliance on transit by restricting the ratio of permitted parking space in office buildings. Also, the developrnent of this subcentre encountered a fierce resistance arnong residents in the neighborhoods adjacent to the City Centre. The subcentres in Scarborough and Mississauga were developed on greenfield sites, thus local conflicîs were hardly a major issue. In addition, the size. height and densw of office buildings Vary between these subcentres. North York City Centre has the largest office buildings (10 buildings with over 300,000 square feet each, Scarborough has fie, and Mississauga has only one). The North York City Centre stands out with seven buildings of 20-24 floon. In the Mississauga City Centre and the Scarborough Town Centre, the maximum building height is 18 floon.
6.3.4 Office Parks The nine recognizable office parks in the Toronto CMA contained more than 2 million square feet of office space in 1999. The major attractions of office parks are related to space and accessibility (Daniels, 1974). The availability and relatively low cost of greenfield sites enables on-site parking and customized-design buildings. In the Toronto area, office parks are a feature of the post-WWII era. and therefore strict regulations and preferences regarding land use separation are applied. The office parks exclude any residential uses (apart from hotels) and usually have veiy distinct boundaries such as expressways, railway tracks, or ravines. which act as barrien between various types of offices and residential neighborhoods. Hence, conflicts with residents as interest groups are viltually unknown. Most Toronto office parks were developed in areas initially designated as industrial areas (Pivo, 1993). Two major comdors of office park development dominate the Toronto area: the Don Valley comdor and the Highway 401 comdor in the vicinity of the Airport (Figure 6.1). In the case of the Don Valley corridor, the north-south Don Valley Parkway (DVP) and its extension northward (Highway 404), and the major east-west comdor, Highway 401. have provided high accessibility to Toronto's central area and to the metropolitan region as a whole. In the airport area, Toronto's International Airport and sunounding web of highways (401. 403. 427, and recently 407) have enhanced the attractiveness of the Airport district for office development. The Don Valley Parkway is the backbone of the strongest concentration of office parks in Toronto. Beginning in the mid-1960s. the development of the Eglinton-Don Mills area (Flemingdon Park) created Canada's first suburban office park that ran along the proposed north-south expressway. ln the late 1960s. after the completion of the Don Valley Parkway another mixed-use park further north of Flemingdon Park was developed (Matthew, 1989). The Consumes Road district, situated around the intersection of Highway 401 and the DVP, signaled the future trend of office development. In the 1980s and 1990s, office clusten at Woodbine and Steeles and Woodbine and Highway 7 were developed. By the early 1990s, these nodes became the largest office parks in the Don Valley comdor (Table 6.9). The leapfrog extension northward along the Don Valley axis has created the most distinct concentration of office parks in the Toronto area, ovenhadowing other office clusten by the earîy
Table 6.9 The inventory of office space in Office Parks in the Toronto CMA, selected yean, 1971-99 ('000 square feet)
Concentration ûffice Park 1971 1981 1991 1999 Average building size Don Valley Parkway Don Mills 2,600 3,650 5,100 4,700 1OS
Duncan Mill 500 1250 2,350 2,400 8 1
Consumers Road 1,000 2,850 4,100 4,800 118
WoodbineISteeles O 1,300 5,900 5,700 130
Woodbine/Highway 7 O O 5,000 5,550 74
Airport Highway 427 300 1,250 2,500 2,600 73
Airport 150 700 5,800 8,000 75
Hurontario
Meadowvale
Total 4.700 12250 35.250- -,--- 39.1ûû. -- 89 % of Toronto 13.2 168 24.8 26.3 Source: Same as Table 6.3.
In the west, the Airport area includes four distinct office districts: Highway 427, the area surrounding the Airport, Heartland Business Park (Highway 403 and Hurontario), and Meadowvale, west of the airport on Highway 401. The raison d'être for office development is the Airport and the surrounding major highways. In the eariy 1970s, only a few office buildings existed in this area. Dunng the 1980s. the area had undergone intensive development, and by the mid-1990s. the Aiport office district was the single largest 'office park' in the Toronto region with 8 million square feet of office space (Royal LePage, Toronto Office Space Market, Statistical Summary, Year-End 1999). In the second half of the 1990s. office parks were almost the only areas of office development in the Toronto metropolitan region. In 1998-99 almost 2.5 million square feet were completed in the Toronto CMA, and in 1999 almost 4 million square feet were under construction. The vast majonty of the construction has been in the office parks situated outside Metropolitan Toronto. These include office parks in Markham (the Don Valley ParkwayNighway 7 concentration), and in Mississauga, primarily in the Airport, Heaitland, and Meadowvale districts (Royal LePage, Toronto Office Space Market, Statistical Summary, Year-End 1999). Tbere are some variations in the character of office parks. For instance, the average building size in most office paiks is between 70,000 and 85,000 square feet; however, in the Consumen Road and Woodbine/Steeles districts, the average building has between 120.000 and 130,000 square feet of office space (Tab!e 6.9). Office parks, although having on average the smallest building size among office districts in Toronto, contain also some large-scale offi buildings. Although the presence of large-scale buildings in office parks is not new, there has been a trend toward larger office buildings in the last decade. In the late 1960s, three buildings, each over 300,000square feet (the IBM building. the 23-storey Foresten House and the Bell Canada Data Centre), were buiit in the Don Mills district. In the late 1980s, two buildings of more than 300,000 square feet were developed in the Consumen Road office park, each 17-storeys high. In the WoodbineISteeles office park, three low-rise buildings (two buildings in an IBM cornplex of 900,000 and 700,000 square feet, and the Bank of Montreal Data Centre 400,000 square feet) were added between the mid-1980s and the early 1990s. Beginning in the late 1990s, major office buildings have been erected in the western office districts: a 500,000 square feet (12-storey) building in the Heartland district (completed in 1999). and a twin-tower Roysl Bank edifice (800,000 square feet) in the Meadowvale district is under construction. In the Woodbine/Steeles distict, a building for Call-Net (650,000 square feet) is under construction in 2000 (Royal LePage, Toronto Office Space Market, Statistical Summary, Year-End 1999). Office parks are well separated from residential areas, and negative over-spills from office parks have not surfaced. However, conflicts do arise between office park proponents and others. Since office parks contain industrial and warehousing uses, intemal conflicts adse over roads and parking facilities. The interests of truck users (industrial and warehouses owners) and passenger car users (office tenants) freguently clash. Also, office buildings seem to accrue in mixed industriaVoffice parks over time and at a certain stage higher capacity passenger transpoitation facilities (more roads or public transit) may be required. This becomes a problern for municipal govemments, who want to promote suburban downtowns, which are easier to serve with public transit facilities than are office parks. To a large extent, office parks were developed in spite of the attempts of Metropolitan Toronto to restrict this type of development. The 1981 Metropolitan Officia1 Plan stated that no new office centres should be buiit; however. the 1991 Official Plan designated a number of suburban clusters for office development in order to reduce the flight of development to the outer suburbs of the CMA. 6.4 Sequential Cycles of Investment within the Metropditan Realm Switching of investment between different offii districts is a newly emerging phenomenon in the Toronto CMA. Some districts gain substantial amounts of offispace, hile other districts experience relative decline, stagnation, or even abandonment. This is part of the cyclical process of investment within the urban realm. Some places becorne attractive for investment, while othen experience disinvestment. Neoclassical interpretations consider uneven spatial development as a ternporary phenomenon. Over time as geographical expansion reaches its limits, the system should move into equilibrium and the performance of different locations should converge (Richardson, 1969; Watkins, 1980). Hence, capital moves fmm high cost areas (in tenns of land and building cost) to low cost locations. On the other hand, another perspective views dis-equilibrium a typical phenomenon as locations that gain initial advantage continue to build on their edge while these disadvantaged fall behind (Myrdal, 1957; Clark et at., 1986). Capital flows, according to the Manist theory. move from locations with low profit potential to high profi potential (Clark, 1980; Harvey, 1982,1985; Smith, 1984); however, this uneven spatial configuration is a long-term phenomenon. Further, spatially uneven development is an essential ekment of growth in capitalist economies (Broweît, 1984). When new areas of growth are exploited to the point where profi rates fall, capital flows to previously undeveloped areas (Beauregard, 1993). Office development in the 1990s in Toronto illustrates sequentia! and simultaneous nature of spatial investment and disinvestment in office buildings. In the fint haf of the 1990s, when almost no office developmen! was punued in the City of Toronto, its total office flwr-space declined in absolute terrns. This decline can be attributed to the absence of new constriction and the deletion of office space through convenions and demolitions. As a result of historically high vacancy rates, negative net rents and the demand for residential space, office buildings were converted to residential buildings. The trend to convert vacant or almost vacant office buildings to residential space began in 1993 when the City of Toronto eased rules restricting such convenions (Real Estate News, Febniary 17, 1995). In early 1995, sixteen conversion projects were underway or in the approval process, representing 1.4 million square feet of office space (Royal LePage, 1995). Most of the conversions were restricted to older buildings either in Downtown or Midtown. One of the areas that suffered the most from convenions was the Yonge-Eglinton area, one of the three nodes constituting the Midtown district. According to the report by Royal LePage, 6.5 percent of the area's office inventory was either converted or proposed to be converted (Royal LePage, 1995). The City and local ratepayen discouraged office development in this area (see section 6.3.2). Parallel to convenions of office buildings in certain parts of the City of Toronto, reinvestrnent in the conversion of manufacturing and wholesale buildings into office space occurred in other areas. Under the Centra! Area Plan, the area West of Toronto's Financial District was zoned for industrial use. Pressures from the development industty resulted in bylaws that permit commercial development and extensive office development in a sub-area of the industrial district just west of the Financial DistrÏct. In the 1980sl both new space (2 million square feet) and renovated space was put on the market in this area. The City was detennined to keep offie development out of the garment district (further west of the Financial District) in order to maintain industrial jobs downtown (Metropolitan Toronto Business Journal, July-August 1985). In the mid 1990s. however, the gannent district, also known as the King- Spadina district, was opened by the City for further office redevelopment (together with the area east of the Financial District, King Parliament) and was designated as a reinvestment area. These areas were 'de-zoned' allowing any use consistent with density and simple compatibility guidelines (Globe & Mail, April 29, 2000). The re-use of older warehouses and manufacturing facilities located in the urban core for office uses is evident in other cities, such as Vancouver (Hutton, 1998) and Chicago (Rast, 1999). Until then the buiit fabric of this district consisted of mainly buildings that were buitt in the 1900-1930 period, usually 5-6 stories (but also a few of 10 stories), which were multi-purpose 'loft' buildings used for Iight rnanufacturing and wholesale. As the barriers to the reuse of these spaces opened, buildings in this district were converted to fit the needs of the 'new economy' such as architects, publishers, fashion designers, software developers, new media companies, or digital content developers. These types of companies, which employ professionak of various kinds, opt for new types of spaces which have 'character' and histocy, and they are dissatisfied with the traditional office buildings. The prefened buildings have architectural attributes such as interior post and beam construction, exposed intenor brick, windows on al1 sides, and hardwood floors (Daily Commercial News, October 20, 1998). As a result of this process, a considerable number of buildings in this district were retrofiied by upgrading mechanical systems and information systems. How far this process has gone is not quantifiable at the moment. There seems to be some resistance to acknowledge these buildings as office buildings. The case of office development along the Don Valley comdor provides illustrative evidence of sequential and simultaneous investment and disinvestment practices. Office development in the area staited midway between the Gardiner Expressway (the expressway that mns along Toronto's waterfront) and Highway 401 along the Don Valley corridor. As the noithem sections of rnetropolitan Toronto were experiencing rapid population growth and as eadier office parks 'aged', office parks along the Don Valley Parkway leaped northward. Older office districts in the south lost their attractions. In the mid-1960s, when the fint office paik in the Don Valley comdor was developed, it constituted a pioneering experiment in office devekpment. The commencement of flemingdon Park (Don Mills), Metropolitan Toronto's first office park, constituted an opportunity to switch offce-building investment from its traditional location in the downtown core to a sububan site. In the mid-1960s, Olympia & York Developments bought the bulk of the 600-acre site that would eventually constitute Flemingdon Park (Foster, 1993). Located on a major north-south expressway in metropolitan Toronto, a short drive from the major east-west highway. Highway 401, and the fact that it was an island of undeveloped land consthted Ïts main advantages. Once flemingdon Park was partially developed (and land surrounding it covered by rapidly growing residential areas), a new round of investment was undenvay in the Consumers Road office district further north. Until the eady 1960s, the parcel of land at the Don Valley Parkway and Highway 401 intersection was rnainly familand. By the earfy 1970~~two intemal roads were built and the Don Valley Parkway was being extended northward alongside the western boundary of this parcel of land (Matlhew, 1989). Accessibility and available land for development attracted office development from the late 1960s. and especially during the 1970s. when Consumers Road became the prime area of office development in the Don Valley corridor (Table 6.10).
Table 6.10 Additions of new office space along the Don Valley comdor, selected yean, 1961-99 (percentages)
Office Park 1961-70 197141 1982-92 1993-99 Don Mills 72.3 22.8 8.6 O
Duncan Mill 11.4 15.7 8.6 O
Consumers Road 16.3 37.9 9.4 O
Don Valley corridor (percentage) 100.0 100.0 100.0 100.0 Total additions ('000 square feet) 3,224 6,185 13,567 917 Source: Same as Table 6.3.
Rapid population growth at the northeastem fnnge of the Toronto CMA beyond the Metropolitan boundaries, prirnarily in Markham and Richmond Hill, coupled with cheaper land and lower taxes have attracted more office development further north along the Don Valley Parkway corridor. Devefopment leaped to the intersection of Highway 404 and Steeles Avenue in the eariy 1980s. and further north to the intersection with Highway 7 in the late 1980s. The construction of a new highway, Highway 407, in the mid-1990s has contributed to the further attraction of the WoodbineMighway 7 offii cluster, which became by the late 1990s a major office development cluster in the Don Valley comdor (Table 6.1 0). In the 1980s (1982-92), the role of the older office parks as attractive investment arenas for new office developrnent has diminished Mile othen have been experiencing continuous growth. In the 1980s173 percent of new office development was in the newest office parks, Woodbine/Steeles and WoodbineMighway 7. In the 1990s (1993-99) al1 new office development along the Don Valley corridor was in these two office parks. In the 1990s, older office clusters such as Don Mills. Duncan Mill and Consumers Road have been experiencing relative stagnation and several office buildings in these districts were rernoved from the inventory as they were converted into residential and other uses, or office buildings were demolished and the parcels of land they stood on rernain vacant. On the other hand. office development was funneled into the newest office parks, as these clusten have become the favourite locations of office development In 1998-99, as the office market moves from depression to moderate growth, the major areas experiencing office development have been selected offii parks. The most recently developed office park in the Don Valley corridor, WoodbineMighway 7 together with the offce districts in the Airport Complex (Airpoit, Heartland, and Meadowvals) have accounted for 88 percent of new office construction in the Toronto CMA in 1998-99 (more than 2 million square feet). Office buildings under construction in 1999 in these areas accounted for 93 percent of the floor-space of the office buildings under construction in the Toronto region (Royal LePage, Toronto Office Space Market, Statistical Summary, Year-End 1999).
6.5 The Changing Character of Toronto's Office Stock The stock of office buildings and the office districts they are part of shows a great degree of variability across rnetropolitan space and across time. Between the 1950s and the 1990s, the landscape of offices has changed from being concentrated in a small downtown area with relatively small buildings to a multi-nodal pattern with buildings of rnany sizes. Office buildings have increased greatly in size over time in the Financial District. the Downtown district and in the suburban downtowns. Even office parks have witnessed the construction of buildings with larger amounts of space. However, paralfel to the construction of large buildings, small office structures have prevailed in office paiks. The 1990s saw a turn in ternis of office buildings constructed or re-modeled: large towen with multiple occupancy ('speculative space') have given way to smaller customized buildings for single occupancy. Al1 of the 1990s large-scale buildings in office parks are custom-built for single occupancy. Along with convenions of office buildings to other uses, a phenomenon discemible prirnarily in the 1990s, built structures were recycled as offce buildings. These 'new spaces' located in old industrial districts, such as the King-Spadina district, may be mula- tenant buildings, but these multi-tenant buildings are reused spaces of srnall-to-medium size industrial and multi-purpose buildings. The character of off= districts is also subject to change. Since the 196Cs, office clusten with large buildings in tight spaces have competed with the low-density spaces of office parks. In the 1990s' however, high-density clusten stopped growing, while office space was added in office parks and in old industrial areas. However, not al1 office parks continued to add new office space; some experienced stagnation and even absolute decline in office floor-space. Older office parks were 'abandoned' in favour of newer office paiks. As a resuît, the oldest office park in the Toronto area, the Don Mills district (earlier known as Flemingdon paik) has seen an absolute decrease in the office building inventory in the 1990s through demolitions and through conversion to residential and non-office uses. At the same time, the districts of WoodbineMighway 7 and the Airpoit sustained a strong growth of office deveIopment. The uneven distribution of real estate investrnent in office buildings is a necessary condition in the production of real estate in capitalist economies based on the intemal characteristics of the growing economic sectors. Wihin the suburban sphere, investment migrates between locations according to availability of greenfield sites (in conjunction with accessibility). lnvestment in suburban locations in which development becomes complicated experience declining profiiability and their share in development diminishes in favour of inexpensive undeveloped land. This allows the continuation of low densities, although larger office buildings may be erected. In the 1990s. strong demand, driven mainly by the fast-growing high-tech sector (with a preference for office park development), the proximity to large suburban labour pools, and further advances in telecommunications have reinforced office development in the suburban locations that were able to deliver high accessibility and availability of land. However, these 'preferences' are also accompanied by structural conditions in the older office districts, where an intriate land use network and residents' opposition gives rise to barriers. Capital that seeks to minimize resistance is encouraged to look for more favourable locations. The variety of office districts in the Toronto area, each with specific characteristjcs, provides real estate companies diverse areas of operation in which each Company cari possibly fit. The compatibility or the division of labour between real estate companies wiaiin the Toronto area in the subject of the next chapter. CHAPTER SEVEN
THE SPATiAL PRACTICES OF OFFICE DEVELOPMENT COMPANIES AND OFFICE DEVELOPMENT DISTRICTS IN TORONTO
In the previous chapter I have shown the physical characteristics of different office districts in Toronto. In the introduction and in a preliminary way in Chapter Three, I have argued that developen (and investors/owners) operate within specific territories within the urban region. In this chapter further evidence conceming the spatial selectivity of developers and owners of office buildings will be fumished. The major concem of this chapter, however, will be bringing together the physical characteristics of office districts, the municipal actions that shape these districts, and the actions of developers which also create and reproduce these districts. The combination of physical characteristics and the actions of key agents creates the basis for the concept 'office development district'. Although the literature on urban development recognizes the importance of specific sub-areas or 'sub-markets' within large urban areas, the concept of office development district has not been articulated in this literature. The notion that real estate development is highiy dependent on specific conditions has been suggested throughout this dissertation and in nurnerous studies (for exarnple, Leitner, 1994; Pryke, 1994a; Bryson, 1997). Other researchers (Knox, 1993; Logan, 1993; Beauregard and Haila, 1997) stress the tension between local and global real estate markets, but even these studies acknowledge the significant role of local conditions in shaping real estate developrnent. Studies on office markets indicate that within a particular metropolitan area office markets are subject to further spatial segmentation (Clapp et al., 1992; Hanink, 1997; Rabianski and Cheng, 1997; Wolverton et al.. 1998). This segmentation is not Iimited to the traditional notion of downtown versus the suburbs. lt has been increasingly acknowledged that there are a variety of commercial property sub-markets as is shown by Healey's (1998a) recent statement that 'it is now clear that land and property development markets are now much more segmented and differentiated than had been assumed in earlier penods" (p. 221). This segmentation is a resut of several factors. First, it is a consequence of a segmented demand; different types of usen generate differences in demand in tens of building size and location (Gad, 1985,1991a; Matthew, 1993b; Pivo. 1993). However, the suggestion that demand of office usen dictates the supply of space has been challenged, since the development process is relatively lengthy and there is a time hg between the indication of specifii demand and actual product delivery to the market (D'Arcy and Keogh, 1997). At particular times, especially in expansion pariods, a considerable part of office developrnent is speculative (iniliated with no commitment from future tenants). Therefore, the perceptions and preferences of the producers of offne space are pivotal in determining the characteristics of office development. Second, space, both institutional and physical, is highly fragmented and specialized. Municipal zoning regulations define the type and location of certain types of development. Physical characteristics, like accessibility and availability of land, which are often intertwined, propel different kinds of office development. Govemments and real estate companies do not operate in isolation but rather tend to cooperate. As suggested by Logan and Molotch (1987) and Haila (1991), some real estate companies attempt to manipulate development and for this purpose govemments are needed. This in turn results in diverse and cornpetitive office development 'markets' in which a substantial number of developers operate. In the segmented urban structure of rnetropolitan areas, there are spatial opportunities that allow different real estate companies to find their niches or operational s paces. Although the literature on urban development in general and on office development in particular is replete with references to the influence of developers, I have argued before that there are structural necessities that bring developers and municipal govemments together. This calls for an empirical investigation to establish in which particular circumstances and in which patticular events or episodes real estate developers gel away with good or inappropriate 'deals'. What follows is detailed information on the spatial selectivity arnong office deveiopers in Toronto. Employing systematic data that is largely based on the largest office deveiopen in the Toronto area and a patchwork of data on some of the smaller developers, the spatial configuration of their operations is descnbed. TWOcornpanies with distinct spatial practices are examined in detail. In the second section, I pmvide propositions about the concept 'office developrnent district'. These districts embody the notion of a localized and segmented office development process and its particular physical manifestations. The third and major section is about case studies of important types of office development districts in the City of Toronto. and the suburban cities of North York and Mississauga.
7.1 Spatial Selectivity among Real Estate Companies in Toronto The real estate companies engaged in office development in Toronto exhibit spatially distinct practices. Each type of real estate Company specializes in paficular settings. Figure 1 and 2 (Introduction, p. 4) show the most dramatic differences in the spatial selectivity of office developeis in the Toronto region. The operational spaces of the large developer were identified thmugh the examination of annual reports (for publicly held companies), and various other sources, such as newspaper articles, publication in the industry joumals, and oie web sites of several companies. These real estate companies were chosen because they are the most prominent companies that were engaged or are still engaged in office development or ownenhip of office buildings in the Toronto area. At a first cut, the spatial division employed here is faiily cnide. Developen are classified as either core or suburban oriented; oniy a few have both substantial core and suburban office porîfolios (Table 7.1). The definition of the core includes the Financial, Downtown and Midtown office districts. The areas outside of the core are considered suburban. Later in this chapter a more finely tuned differentiation between the spatial practices of developen will be provided. A number of thresholds were used to differentiate between spatial categories in Table 7.1. A company is considered as operating mainly in the core if at least two-thirds of its Toronto office floor- space is in the core. A subuhan company has at least two-thirds of b office floor-space in the suburbs. Companies that are not pari of one of the above categories are considered as operating both in the core and in the suburbs. Table 7.1 shows a set of the large developers and ownen of office space in the Toronto area for four cross-section dates between 1971 and 1999. Throughout the three decades, the focus of the largest developers and ownen was in the core area. The most substantial office developments of the two largest development companies, Cadilbc Fairview and Olympia 8 York (OBY) were in the core, although 08Y was an exception in 1971, when it was still a suburban developer. The focus of mid- sized developers was in the Oowntown and Midtown districts. Bramalea Limited and Manulife Financial Real Estate (a division of the Manufacturers Life lnsurance Company) are examples of this tendency; Manulife developed office buildings mainiy in the YongeJBloor area (including its head office), and Bramalea developed buildings that are adjacent to the major subway stations along the Yonge Street line. Other companies had a more balanced distribution between downtown and suburbs. Y&R Properties was essentially an office developer in the Financial District, but beginning in the early 1970s, the company undertook office development in an office park (Consumen Road). H&R Developments, a developer in the suburban realm until the late 1970s, began developing office buildings in downtown Toronto in the eariy 1980s, and continued to engage in development in suburban locations in North York and Mississauga. Table 7.1 The operational spaces of selected real estate companies in the Toronto CMA, selected years, 1971 -99 (office portfolio)
Developer 1971 1981 1991 1999 Cadillac Fai~ew CORE CORE CORE COR€
Olympia 8 York SUBURBS CORE CORE CORE
Bramalea WA CORE CORE N/A
Brookfield WA NA COR€ COR€
YbR CORE NIA NIA NA
Manulife COR€ CORE COR€ COR€
Royal Bank N/A COR€ COR€ COR€
Oxford NIA CORE CORE CORE+SUBURBS
Trizec CORE CORE CORE CORE+SUBURBS
ClBC Development NIA NIA CORE CORE+SUBURBS
Hammerson CORE CORE SUBURBS NIA
H&R NIA CORE+SUBURBS CORE+SUBURBS CORE+SUBURBS
Marathon N/A SUBURBS SUBURBS N/A
lnducon N/A SUBURBS SUBURBS NIA
Menkes NA SUBURBS SUBURBS SUBURBS
Shipp NIA SUBURBS SUBURBS SUBURBS
Orlando N/A SUBURBS SUBURBS SUBURBS
Note: N/A - non applicable when the company has insignificant oKce portfoiio (les than 100,000 square feet), ceased to exist, or data is not available. Source: Va rious, as specified in section 2.3.
Some of the suburban developers had and still have extensive areas of operations white other developers specialize in limited settings. The suburban developers in general have smaller-sire office portfolios than their counterparts in the core; however, the rapid growth of office space in the suburbs, particularly in the 1980s. transformed some of them into sizeable office developen. The spatial practices are not only differentiated between core and suburban locations, but also between 'office districts' and between municipalities. Within the City of Toronto a high degree of specialization is evident. Cadillac Faiwiew and Olympia & York were not 'justJ downtown developers. More specifically, both focused on Toronto's Financial District: Cadillac Fairview from the late 1960s onward and Olympia & York beginning in the eaily 1970s. Most of the office buildings owned by the Royal Bank and ClBC (bank) were in the Financial District Other companies developed office buildings in the areas surrounding the downtown. Allied Canadian Corporation, for example, a Company founded in 1988, began to recyde older industrial buildings on the western and eastem fringes of downtown in the mid-1990s. Spatial selectivity according to municipalities and physical charaderistics is especially evident in the case of suburban developen. The large suburban developen have operations across the mole suburban realm, whereas smaller developen focus on one or two municipalities. One of the largest suburban office developen in the Toronto region until % bankniptcy in 1992. lnducon Development Corporation, was the most divenified developer in tens of municipalities, lnducon had office buildings in five different municipalities: North York, Etobicoke, Mississauga, Oakville. and in Markham. Another large suburban office developer, Menkes Developments, has been invohred in development in North York, Mississauga and Richmond Hill. On the other hand, the office buildings developed by the Orlando Corporation are exclusively in Mississauga. The second-tier suburban developen are even more focused on specific municipalities: the smaller the developer, the more likely that the focus of office development is on a particular municipality. In the case of highly articulated territones, office development is usually an ancillary operation for real estate companies, whose major activity is residential development (entire subdivisions or apartment buildings). For exarnple. S.B. Mclaughlin developed office buildings only in Mississauga since the majority of his land and residential development was in Mississauga (see section 7.3.3). In a similar fashion, Shipp Corporation developed office buildings in two adjacent municipalities (Etobicoke and Mississauga), following its single-family housing and high-rise residential developments in these municipalities. This limited scope of office development (usually less than half-amillion square feet) replicates the spatial patterns of other ventures perfoned by these types of developers. For example, the Magnolia Group built office buildings only in Scarborough and the Matthews Group and Kaneff Properties, both developed office buildings only in Mississauga. In addition to specific municipalities, suburban developers specialize in different types of developments: some developers tend to focus on suburban downtowns while others focus on office parks. Inducon, which developed office buildings in fie municipalities, was primarily an office/business park developer; Orlando develops office buildings only in business parks. On the other hand, McLaughlin and Shipp developed office buildings only in subuhan downtowns. At the metropolitan scale, the spatial practices of developen are generally invariable. Developers usually remain in their familiar settings, and only occasionally venture into new areas. In case of changing their operational space, the more prominent move is 10 divenify operations within the suburban realm or to switch from suburban developments to downtown locations. This type of developer is similar to the type that Logan and Molotch (1987) and Haila (1991) refer to as serendipitous developers. Shipp Corporation developed an office complex in Etobicoke in the 1970s, and in the 1980s it carried a limited diversification by moving to the neighboring municipalrty in the west, Mississauga, constructing the hrgest office complex in the Mississauga City Centre (Canadian Building, January 1972; Fe bruary, 1978). Spatial practices are matched by financial strength of real estate companies. Smaller real estate cornpanies begin their operations usually in suburban locations where development requires less capital and limited expertise. Suburban developments are smaller in ternis of office buildings constructed and therefore enables smaller real estate companies to act as developers. As a real estate Company acquires more capital, expertise and reputation, it is able to engage in the development of larger buildings. This rather rare occurrence was the case of Olympia 8 York. Olympia & York started its office development business in subutban Toronto (North York) in the 1960s; this was its prime arena until the early 1970s. In the late 1960s, Olympia & York launched its first development in the core, and by the early 1970s it penetrated into the Financial District by building one large-scale building, and eventually developing the largest office building in Canada, the First Canadian Place. However, suburban real estate companies that remain in the suburbs continue with small to medium-size office development. In the following paragraphs the spatial practices of Cadillac Fairview and lnducon are exarnined. These two cornpanies present extremes in ternis of spatial practices. Cadillac Fairview is one of the largest Canadian developers; in Toronto its continuous focus was on the Financial District and Downtown district. lnducon was probably one of Canada's largest suburban office developers, with development taking place primarily in suburban Toronto. For both companies rich documentation is available, and several key persons of these cornpanies were interviewed.
7.1 .1 Cadillac Fairview Corporation From its beginning as an office developer, Cadillac Fairview (initially Faiwiew) was a core area developer. The company's first two office buildings were in the Downtown district, and then it moved into the Financial District with the development of the Toronto-Dominion Centre. Until the mid-1970s. Fainriew and Cadillac, still separate entities. focused on three office clusten: the Financial District, Midtown (Bloor Street West), and North York (Sheppard and Leslie. developed by Cadillac). In the mid- 1970s, Cadillac Fairview launched its second large-scafe project, the Eaton Centre in downtom Toronto, a shopping centre with a substantial office component Later in that decade, Cadillac Fainriew commenced another development by joining forces with another real estate company, Farnous Players, tu develop a business park (5 office buildings) in Etobicoke near Pearson International Airport. In the 1980s. Cadillac Fairview continued to develop office buildings in the Financial District and in the Downtown district, namely fumer parts of the two multi-phase Toronto-Dominion Centre and Eaton Centre complexes. In addition, its interest in suburban development expanded as it started a new development in North York (YongeNork Mills area). In the mid 19805, Cadillac Fairview made an atternpt to penetrate into an unfamiliar office development territory, the City Centre in Mississauga, but lost to another developer, Daon Development Corporation. In the eaily 1990s, Cadillac Fairview completed the development of the Toronto-Dominion Centre and the Eaton Centre, and its operations shifted to trading (acquisition and disposition of properties), and project management. In spite of some suburban projects, throughout the last twenty-five years Cadillac Faiwiew has maintained its focus on the Financial District and Downtown (Table 7.2, see also Figure 1 in the Introduction). The complexes located in these districts, the Toronto-Dominion and Eaton Centres have been the core of Cadillac Fairview's portfolio in Toronto, constituting in terrns of floor-space, between two-thirds to three-quartes of its Canadian office portfolio. This fact reflects the substantial arnount of capital invested in these projects, which in itself reflects a long-terni strategy. At the same time, the share of its BIoor Street holdings, which were considered less successful, declined from 25 percent in 1975 to 8 percent in 1999. The share of its suburban office portfolio increased substantially between 1987 and 1999. particularly due to the acquisition of a number of office buildings. According to a former president of Cadillac Faiwiew, the company prefened downtown Toronto because there was potential for stability and for improving values, and because of the 'scarcity factor'. According to the same source, in the subuibs, one location is not that different from other; there is an infinite number of sites. and it is very hard to take a position in the market with any degree of confidence that the market is going to be ovenupplied. Downtown Toronto, on the other hand, is a focal point. Transportation, especially rapid transit, is oriented to bnnging suburban residents downtown. The confluence of firnis that do business together, and the limited availability of space within a walking distance, made the company believe that they would get premium rents for space that is in a core location (interview with a former president of Cadillac Faiwiew). Table 7.2 The office portfolio of Cadillac Fairview in the Toronto CMA, selected years, 1975-99
Location -1975 -1987 -1999 ûffïce space % Office space % ûffice space % ('000 square feet) ('000 square feet) ('000 square feet) Financial District (1) 2,827 67.0 4,171 70.7 5,050 54.1
Downtom (2) O O 506 8.6 1,986 21 -3
Midtown (3) 1,087 25.8 707 12.0 779 8.4
Suburban (4) 305 7.2 51 5 8.7 1,514 16.2
Total 4,219 100.0 5,899 100.0 9,329 100.0 Notes: (1) Toronto-Dominion Centre and 20 Queen Street West. (2) Toronto Eaton Centre and Sirncoe Place. (3) Bloor holdings include buildings btedon BbrStreet West in the section between Bay and Avenue Road. (4) Suburban locations include mainly buildings at the SheppardReslie intersection (1975), at Sheppardt'eslie and YongeNork Mills (1 98ï), and at YongeNork Mills, and in the Don Valleyflglinton area (1999). Source: Cadillac Fai~ewCorporation, 1975,1987 and 1999 Annual Reports.
According to another former presiden! of Cadillac FaiMew, it regarded downtown assets as long-teim holdings. The same was not the case with the suburban buildings, which it considered as opportunities to develop and perhaps to sel1 for profi. Until the early 1980~~tenants did not consider suburban locations as alternative locations to downtown. Tax incentives were another reason for holding real estate assets for the long ten. It was better to hold on to a property, because when the depreciation runs down, the capital can be used to build another property. Selling a building makes it subject to capital gains tax; therefore, it was not profitable to engage in selling buildings as a strategy (interview with a former president of Cadillac Fairview). The office development practices of Cadillac Fairview indicate the spatial precision of real estate investment. Capital investment is not arbitrarily distnbuted over space; there are preferred nodes into which investments are funneled. This is especially the case with long-terni investment. Short-terni investments are more spatially dispersed as they tend to follow opportunities. However, even here Cadillac Fainriew showed a very narrow range of operatiom: basically two axes in the municipality of North York (with the exception of a partnership in Etobicoke). Large complexes that reach a certain threshold, such as Toronto-Dominion Centre and Eaton Centre, become almost independent entities in the sense that they generate and sustain their own environment (see section 5.4.2). This type of investment provides a regular incarne, and the value of these assets also appreciates over tirne; however, the major complexes need constant investment to keep them 'updated'. Smaller complexes or freestanding office buildings are likely to be noncore assets of large real estate companies and more dependent on their surroundings. Hence, Meir income Stream is more volatile; in this case disposing of these assets may offset this volatility and create significant one-time gains.
7.1.2 lnducon Development Corporation lnducon Development Corporation was the largest suburban office developer in the Toronto region in the late 1980s. In the mid-1960s. lnducon buitt its first office building which was the company's head office; it was a small building (les than 20,000 square feet) located in an industrial area in North York (Don Valley Parkway and Lawrence Avenue). The decision to build this office building at that location was based on the fact that "the land was cheap and centrally located" (interview with the founder of Inducon). Inducon's fint large-scale office development was in the Consumen Road district (Don Valley Parkway and Highway 401). In the mid-1960~~lnducon bought 70 acres of what then was a greenfield site, and the Company became one of the first developen in this area. In the 1980s. lnducon experienced exponential growth. During this decade, lnducon moved from one office development to another. In the northeastern section of the metropolitan area, lnducon moved north along the Don Valley Parkway into the area of Victoria Park and Steeles (the municipality of North York), and to the intersection of the Parkway with Highway 7 (Markham). lnducon also developed office space in the west-end of the Toronto area, moving to the Airport area (Etobicoke and Mississauga), Mississauga City Centre, and Oakville. By the late 1980s, lnducon was the largest suburban office developer in the Toronto area with over 3 million square feet of floor-space developed (Table 7.3). The company's strategy showed similar features in each development. lnducon looked for opportunities to buy cheap land with high accessibility and get it rezoned from industrial to commercial, largely office development. By buying cheap land, it was able to build surface parking, thereby tapping into a specific suburban market for car-oriented tenants. Profas were made principally thmugh the rezoning of land. This strategy could, of course, not be used in downtown Toronto, where land was expensive, below grade parking was often a precondition for development, and the capital needed to commence development is far greater than in the suburbs (interview with Inducon's founder). Also, rezoning would have been a very major problem in the downtown area, unleashing resistance from a varieîy of opponents. In its early phase, lnducon took advantage of loopholes in North York's zoning bylaws. Until the late 1960s North York did not allocate land for office buildings. As a result, office buildings were permitted as secondary uses in industrial areas, since they wen considered as being associated with manufacturing rather than accommodating businesses that senred or perfomed other functions (Matthew, 1989). In the eady 1980s, North York introduced an office development policy, which encouraged office development in selected business parks and prohibited office development in industrial areas (North York Official Plan, Amendment No. 261). Inducon, as a stakeholder in these industrial areas, objected to this move since it had a direct effect on Company's profits. Until this policy was introduced, most industrial areas were in fact business parks, and lnducon was able to constnict inexpensive office buildings in these districts. The proposed policy would have denied lnducon the abildy to profit from erecting offibuildings on industrial zoned land (see section 7.3.2).
Table 7.3 Inducon's office portfolio in Office Parks in the Toronto CMA, 1982 and 1991 ('000 square feet)
Location -1982 -1991 Office space % Office space % Consumers Road 700 93.3 700 21.2
Highway 404n O O 300 9.1
Highway 4WSteefes O O 300 9.1
Mississauga (1)
Oahïlle
Other
Total 750 100.0 3,300 100.0 Note: (1) This development is in the Missiiuga City Centre. Sources: Newspapers, advertisements, and an inte~ewwith the founder of Inducon.
Inducon's office buildings are easily discernible in style and sire, even when driving along an expressway. Office buildings developed by lnducon are utilitarian; behind each building there was a strict economic rationale, which meant building the most economical buildings that would enable lnducon to invest less and charge less rent than other developers. To cut on cost lnducon almost duplicated its office buildings over the areas it was active in. In addition, until the late 1980s, lnducon built above grade parking to make it buildings less expensive. This, in tum, resulted in specialized niches in which these conditions could be achieved. These well-defined spatial interests made lnducon highly dependent on the witlingness of selected suburban municipalities to engage in providing the means for low-priced office development. 7.2 Office Development Districts Cadillac Faiwiew has developed some of Canada's largest and most distinct office buildings, mostly in extremely difficult settings in the City of Toronto. It has also developed somewhat less noticeable structures on main streets in suburban North York. Inducon, on the other hand, erected standard boxes largely on greenfield sites in selected suburban municipalities. These two examples show a confluence of developen, municipalities, physicai settings, and office development These connections lead to the notion of an 'office development district'. ln an office development district certain preconfigurations, processes of making and changing development niles, various agents, and distinct development results corne together. New rounds of development, often consisting of redevelopment, reproduce the office development district until some fundarnentally new conditions arise. In the preceding discussions, individual real estate companies and their operations were emphasized. However, in office development districts monopoly situations are only rarely achieved. Therefore, the discussion of office development districts must recognke relationships between office developen (and owners) operating in the same territory In the fon of a series of propositions, the basic features of office development districts are highlighted. 1. Oevelopers work in one or a series of distinct sub-areas of the city. While monopolistic control may be advantageous, it is rarely achievable. Hence, oligopolistic conditions very often prevail in office development districts.
2. When office developers cannot enjoy monopoly, they compete for tenants in an office development district, but they also cooperate to create and maintain advantageous if not necessary conditions for the development of new office space and the maintenance of existing space.
3. Spatially well-defined territories are favourable for a numbar of reasons. Generally, homogeneity is beneficial because it allows developers/owners ta:
0 achieve efficiencies by constnicting the similar buildings rneasured by size, height, and density;
0 hook the building into the appropriate infrastructure (e.g. roads, types of parking facilities); require and defend appropriate transpottation facilities: communicate efficiently with prospective and existing tenants. 4. Developers beneft from the association with similar kinds of real estate companies in the same territory In office development districts, developen and offne orniers with similar interests can use their joined force to negotiate with municipal govemments for adequate support.
5. The homogeneity associated with office development districts needs to be established and has to be maintained; hence offne developen and ownen join to defend the territory from changes and intrusions by outsiders.
6. Developen require municipal govemments not only to provide specific infrastructure for the office development district, but also to engage in negotiations which define and protect the office development district.
7. Municipalities have an interest in attracting office development to specific places within a municipaliky; and they need office developen who erect and maintain offke buildings in these districts.
8. Office development districts are differentiated and preconfigured by location, transportation facilities, the presence or absence of previous development, and the character of sunounding land uses and interests.
9. Given varying degtees of expertise and financial strength, developen have to find appropriate office development districts for their operations. Negotiation costs Vary spatially (high in inner city settings, lower in suburban settings) and may disable or enable developers to operate in certain office development districts.
10. Developerdowners of office buildings, users and municipal govemments have an interest in maintaining development districts. However, under new conditions, abandonment or redevelopment for uses other than offices may occur.
These propositions are based on secondary literature discussed in various chapten, and on observations made during research on office development in Toronto. In the next section, specific examples of and evidence for the operations of office development districts will be presented. 7.3 Area-Specific Case Studies of Onice Development Districts The Toronto area provides an excellent arena for observing the emergence and functioning of office development districts. The large and varied area contains older districts with 200-year development history and districts where office buildings are presentiy const~ctedon greenfield sites. As argued before, real estate companies of different sire and capability have been active in this region. Above all, the Toronto region consists of a differentiated municipal landsape. There are 27 local municipalities (after the 1998 amalgamation 21), 'area rnunicipalities' according to legal definitions, in the Census Metropolitan Area. The municipalities in which noticeable office development has taken place in the post-WWII era generally have had populations of over 100,000 each at the time when developers started to construct office buildings of reasonable size (over 20,000 square feet of floor-space). Most office developrnent has taken place when these municipalities had 200,000 to 700,000-population range. The size of these municipalities is of considerable importance when discussing office development, because this type of development rarefy occupied a monopoly in discussions of urban growth and management. Municipalities, especially the lowest level ones, are absoluteiy cmcial for any kind of development or redevelopment to happen. While the upper level rnunicipalities (regional rnunicipalities) and the provincial govemment provide region-wide macroçonditions through investment in major transportation facilities and trunk sewers, the 'area municipalities' control land use through 'official plans' and zoning bylaws. These detailed, legally sanctioned, land use control authorities and control practices make it imperative for developen of office properties to interact with the municipalities. In this interaction, bargaining is inevitable and can give rise to the notion that municipal govemments are subject to inappropriate pressures by developen. It is my position here that the bargaining process is subject to specific empirical investigation. The questions whether there is undue pressure by developers and when a municipality 'sells out' have to be detennined based on empirical findings. The major concem in the following pages is to detemine how office developen and municipal govemments interact rather than to criticize the interaction between govemments and developers in general. In order to demonstrate the ernergence and functioning of office development districts, three municipalities have been selected: the City of Toronto. the City of North York and the City of Mississauga. These three are important and interesting, because they are the municipalities with the greatest arnount of office floor-space in the 1990s. They also have provided office developen with quite different conditions and oppominities in the 1950-2000 period. In the City of Toronto office developrnent has occuned exclusively as redevelopment; in North York greenfield development was later challenged by the promotion of a large subcsntre on already developed sites, and in Mississauga office development has occuned almost exclusively on greenfield sites. Each of the three municipal govemments has had different interests and quite different approaches to offce development. This was discussed in section 2.1.5 and will be elaborated upon below.
7.3.1 The City of Toronto The City of Toronto has a 200-year history of urban development. At its very core there are parcels of land, which saw up to fwe cycles of development and redevelopment. Its whole territory was fully developed by the 1930s. ûffice development has always been redevelopment on already built spaces, and has had to contend with complex conditions, since a socially mixed population and a variety of business interests have displayed conflicting interests and visions. Since the mid-1970s. the general objective of the rnunicipality has been to restrict office development, and the so-called Central Area Plan spelled out the rules. In this plan, the Financial District was subjected to restrictive measures, but in practice high-density office development continued to be the hallmark of this district, especially in the 1980s. However, high-density office development did not proceed smoothly; it was forged in a process of very intensive negotiation. The detailed case of the Scotia Plata development in the mid-1980s illustrates the complex environment that typifies office development in the Financial District. Areas sunounding downtown were zoned for light rnanufacturing and other industrial uses. In the mid-1990s. when zoning restrictions in areas west (King-Spadina) and east (King-Parliament) of downtown were rernoved, many old factories and warehouses were retrofitted and converted to office space.
Toronto's Central Area Plan The Central Area Plan, 'adopted' by the City council in 1976, was an ambitious attempt to shape the downtown area by restricting, among other rneasures, the scale and density of office development. Down-zoning was adopted; in the newly designated Financial District (the most intensively developed office district) densities were lowered from a floor space index (FSI) of 12 to 8, while elsewhere in the Central Area densities were lowered to an FSI of 4. According to this plan, future office employment growth was to be managed by deconcentration and especially through the establishment of suburban office centres (Frisken, 1988; Gad, 1999). The strategy of creating suburban city centres and other secondary centres was also reflected in the Metropolitan Plan and welcomed by the suburban municipal govemments. The Central Area Plan was in stark contrast to the previous plan, the 1969 Officia1 Plan, which recommended the future redevelopment of large parts of the downtown area and encouraged the concentration of office buildings in central Toronto (Gad, 1979; Frisken, 1988). Until the eaily 1970s. there were few explicit policy statements conceming offices as a specific land use, but many actions taken by the various levels of govemments helped to facilitate the concentration of office employment in central Tomnto. Before the approval of the 1969 Offcial Plan, the ctty had already stimulated central area redevelopment through invesbnent in a new city hall, and through encouraging the enlargernent of the proposed Toronto-Dominion Centre from merely a head office building to an entire downtown complex (Collier. 1974; Gad, 1979; Lemon, 1985). Also, an important coalition of downtown land owners, developers and employers. prirnarily banks, insurance companies and depariment stores, exerted pressure through the so-called Redevelopment Advisory Council. The uprîsing of citizens' groups against intensive redevelopment in the late 1960s and eariy 1970s, and the election of a 'reforrn' council in 1972, began to reverse the City's downtown development policy. The emerging planning philosophy held that the development of new office space in the Central Area should be limited to the capacity of transportation facilities that already existed or had been committed prior to the plan. The construction of transportation facilities, according to the plan, enhances the attractbeness and accessibility of the downtown area. and hence encourages new rounds of office development (Frisken, 1988). While city planners considered developrnent in the city of Tomnto as a 'privilege' (Globe & Mail, November 1, 1974). developen considered it as a right. The idea of restricting development came under attack from the real estate sector. Property owners suggested that it would diminish profits and escalate rental rates. In addition, an organization representing real estate developen appealed to the Ontario Cabinet seeking the elimination of a ceiling for the construction of new office space (Globe & Mail, October 4, 1978). This group of developers even suggested that the downtown core should be removed from the city's jurisdiction and placed under the authority of a separate entity, claiming that the downtown core belongs not only to tho Ctty, but to the Metro region and the province (Globe & Mail, October 29, 1975). After a long hearing process at the Ontario Municipal Board, the Ontario Cabinet approved the Plan in 1979. Although giving its general approval, the Cabinet directed the City Council to relax zoning restrictions if the dernand for office space grew rapidly. Even the 'reforrn' mayor of Toronto at that time, John Sewell, recognized that The growth of office space depends more on the economic climate than on a growth line suggested in the Central Area Plan" (Globe & Mail, February 3. 1979). Although development restrictions were imposed, exemptions were prevalent. In the 1981 -91 period, fiieen office buildings were built in the Financial District at a densw of more than 12 times (Metropolitan Toronto Office Bank Data, 1993), instead of 8 as indicated in the Central Area Plan. Several of the most visible office buildings in the Financial District were endorsed by the City Council after the Central Area Plan was approved. Toronto's City Council ovemhelmingly approved BCE Place, located at Bay and Front Streets, although the denstty of this project was 12 times of the lot coverage (Toronto Star, December 15, 1987). The Ci Council also approved the Bay-Adelaide Centre in 1989 (it was mothballed indefinitely in 1993). This 57-storey building is on a site zoned for a 25-storey building (Toronto Star, May 25, 1989). In these cases, the prevailing condition for the approval of extra density was the provision of public benefds, such as assisted housing and the preservation of historical buildings. In one of the most publicized office developments in the 1980s. Scotia Plaza, a density of 16 times the lot coverage was approved due to historical preservation agreements and the transfer of density rights. Although bonusing was clearîy a possibility outlined in the Central Area Plan, it involved intensive negotiation in each building project. ln the whole downtown area office development always seems to have involved negotiations between developers and the City, regardless of 'official plans1or development rights as per zoning bylaws. The 'reforml and the Central Area Plan era were no exception and developers and politicians kept on 'making dealsl, and downtown developers and their lawyers kept up the practice of close relations with the members of City Council. These close connections and the notion of 'giveaway to developers' were documented and criticized in the local and national newspapers (for example, Toronto Star, November 5, 1988). As noted by an investigation of the Globe & Mail in the mid-1980s. the rnajority of Toronto counciIlors received most of their campaign contributions from the real estate industry. An analysis of the voting records of the councillors most reliant on the development industry for their campaign funds, showed that these pofiticians have supported most of the development proposals that sought increase in density in the downtown core (Globe & Mail, December 11, 1987).
The Financial District The largest and densest concentration of office space within the Toronto CMA is in the Financial District. Within this area of about 800 by 800 meters, a small number of large and powerful owners of office properties control office development, specifcally the large publicly listed real estate companies and financial institutions. In this district, the total office space built after 1960 was 27.4million square feet; more than 60 percent was developed/owned by eight corporations, including joint ventures (Table 7.4). In addition, the Financial District has a very distinct pattern of tenants. The majonty (56 percent) of jobs in 1989 were in finance, insurance and real estate (Gad, 1991b). The designation of this area as the 'Financial District' in the 1976 Central Area Plan with distinct boundaries and specific zoning, have solidified the position of this area as primarily an office development district through an act of municipal govemment.
Table 7.4 Top developen and ownen of office space built in the Financial District after 1960
Real estate company Number of buildings Office space ('000 square feet) Cadillac Fai~ewCorporation (1) 6 4,600
Olympia 8 York Developrnents 3 3,700
BCE Oevelopment Corporation 2 2,300
Campeau Corporation (2) 1 1,500
Y&R Properties (3) 3 1,450
ClBC (bank) 3 1,400
Royal Bank 3 1,400
Sun Life 2 1,000
Total eight companks 23 17,350 (34%) (63%) Total Financial District 68 27,400 (1003C) (100%) Notes: (1) Toronto-Dominion bank was the joint venture partner in the TD Centre. (2) The Bank of Nova Scotia was a joint venture partner in the Scotia Plata. (3) The portfolio of Y&R indudes buildings it deveroped since the 1920s. Source: A compilation of sources presented in section 2.3.
A number of authors have suggested that the prevailing situation in the Financial District is that of a spatial oligopoly, Le., a lirnited number of developers control the real estate market, namely the office market: o One of the advocates of the conspiracy theory, James Lorimer, insisted on 'the domination of office space in downtown by a few corporate developers" and that the prevailing conditions eliminate She smaller, less well-financed office developers" (Lonmer, 1978, pp. 183-84). O In the Ide 1980s, a report by a financial services company, Salomon Brothers, suggested that "Buildings in the financial core are owned for the most part by a closely knit group of well- capitalized developers and banks" (Kostin et al., 1989, p. 16). A report of the Royal Commission on Corporate Concentration that examined Cadillac Fairview Corporation in the mid-1970s concluded that there is no evidence of concentration; however, the "surprisingly high 25 percent" of the class 'A' office space in the Financial District was cited (Gluskin, 1976, p. 82). This semioligopoly prevailing in the Financial District was illustrated in the case of Olympia 8 York. In 1991, before buying 50 percent of the Scotia Plaza project. OBY sought clearance from the Bureau of Competition Policy. Olympia 8 York appiied for an advanced ruling 'io lay to rest fean that it is tightening a stranglehold on the Toronto real estate market" (Globe 8 &illSeptember 18, 1991), and more specificaliy on the office market in the Financial District. According to the Globe & Mail. OBY owned directly about 18 percent of the Financial District office inventory; however, OBY also had 36 percent stake in Trizec, which in tum owned about 68 percent of Bramalea (Globe & Mail, September 18, 1991). 00th Trizec and Bramalea had existing and planned office projects in the Financial District. The Financial District contains a considerable share of the largest office buildings in the Toronto area (al1 buildings over 1-million square feet, except one, and almost al1 buildings with over 30 floors are in the Financial District). The prime prerequisite for constructing or buying a building of this size cals for a sizeable amount of capital. Hence, only large real estate corporations, which are financially sound, are able to secure finance for their ventures. Moreover, a large amount of floor-space on smali sites results in high-rise buildings with deep underground garages. Development of these buildings necessitates high level of expertise. In case that expertise is not available intemally, real estate companies use highprofile architects and specialized engineering consultants. Older buildings are invariably in the way and cause lengthy negotiation about their demolition or some way of incorporation, including cornplicated development right transfers. Large-scale office buildings in the Financial District create spillover effects over large areas. The large number of owners and interests involved results in lengthy negotiation processes. including hearing at the Ontario Municipal Board. As a result, only the large real estate companies can engage in this type of office development. Since the top-twenty buildings in the Financial District consist of the majonty of office space (55 percent of the total office stock), it is reasonable to suggest that big corporations control the office leasing market. The developers and owners of office space in the Financial District are also the largest developers and owners of real estate assets in Canada (see Table 3.2) and the largest developers and ownen of office space in Toronto (see Table 3.6). Cadillac Fainriew and Olympia 8 York, Toronto's two largest developen, are also the largest developen in the Financial District. Large-scale developments necessitate joint ventures between developers and major financial institutions. The Toronto-Dominion Centre is a joint venture between Cadillac Fainriew and the Toronto-Dominion Bank, First Canadian Place was a joint venture of Olympia & York, the Bank of Montreal. and the North American Life Assurance Company, and Scotia Plaza was developed jointly by Campeau Corporation and the Bank of Nova Scotia. Often financial institutions developed their flagship projects using experienced developers as project managers. For the development of Royal Bank Plaza, the Royal Bank hired Y&R Properties as a developer for fee, and Sun Life hired Rostland Corporation (headed by the former president of YBR) to develop its Financial District head office complex. The exception in this list of large developen is YBR Properties, which was a Toronto-based office developer active in the fringes of the old office district, which became the Financial District, since the 1920s. The ownership of land enabled Y&R to develop sizable office structures in mis area. This quite compact area, its designation as the Financial District in municipal plans, the similar characteristics of office occupants, the distinctiveness of its buildings, and the specific set of devekpen active in this district makes it a coherent and distinct office development district.
The battle over the amroval of the Scotia Plaza develo~ment The Scotia Plaza project illustrates difFicuRies of office development in the Financial District. At first sight, an unanticipated conflict arose between two real estate interests and a municipal govemment united in its support for a project that breaks the rules of the Central Area Plan. Another look at the conflict, however, points to a deep-seated structure of the Financial District as an office development district. The Bank of Nova Scotia was the last bank among the five large Canadian banks to build a post-1960 head office building in Toronto's Financial District. The bank insisted on building its new head office on a site next to the old head office, refusing to move to potential sites that were already assembled or in the process of being assembled two blocks further south. Fragmented land ownership of the Scotia Plaza site resulted in a long process of land assembly, which lasted three years, and involved several direct purchases of buildings and several lease purchases (interview with a former president of Campeau Corporation). In 1981 , a joint venture of the Bank of Nova Scotia and Campeau Corporation to develop a new head office for the Bank on the northeast corner of Bay and King Streets was announced (Globe & Mail, March 13, 1981). Carnpeau, an Ottawa-based developer, argued that using the density allowed by the Central Area Plan combined with the density bonuses available through preserving historic buildings would not result in an economically feasible project. To achieve an increased density on this site, Carnpeau proposed exchanging residential density from another site. In 1969, Campeau received permission to construct a large commercial project on Toronto's waterfront. However, Campeau did not show any interest in proceeding on this proposal, and as time went by the City became less pleased with the massive buildings it had agreed to in 1969. Campeau, therefore, approached the City with the proposal to exchange 500,000 square feet of residentiaf space from King and Bay for 500,000 square feet of commercial space from its waterfront site (Cdy Planning, December, 1983). Combining the Scotia Plaza site's perrnitted density with the bonuses accruing from hentage presewation and the density transfer increased the projecî's density to 15 times the lot coverage (fiancial Post. June 9, 1984). For this purpose, an amendment of the Official Plan and the zoning bylaw were needed. The situation became more complicated when one of the close-knit members of the Financial District 'business community', the Toronto-Dominion Bank (TD) announced its opposition to the proposed plan and zoning amendments. Before the approval of the plan by the land use committee and the City Council in May 1984, the TD Bank publicized its objection, which was based on the concem for the Cws planning policy and possible increase in traffic congestion in the downtown area (Globe & Mail, May 17, 1984). However, it was suggested that the TD Bank opposed the Scotia Plaza project because of its major stake in the Financial District's office market. The Toronto-Dominion Bank, jointly with Cadillac Fairview, has developed and owns the Toronto-Dominion-Centre, the largest office complex in Toronto, which was located on the opposite corner of King and Bay, the site of Scotia Plaza. In 1984, the fourth tower of the Toronto-Dominion Centre was under construction, and it was indicated that thc chairman of the Toronto-Dominion Bank was womed that the Scotia Plaza 'Would represent significant cornpetition for the TD fourth towef (Globe 6 Mail, May 29, 1984). Even the Toronto Downtown Redevelopment Advisory Council, whose memben represent top employers and land ownen in the downtown area, decided to support the TD argument to reduce the size of Scotia Plaza (Globe & Mail, June 22, 1984). It was suggested that the split in the business communtty occurred because Campeau was an outsider in the City's traditional corporate circles. The 'old guard' of the Toronto business elite was already jealous of the newcomer because of the 1969 deal that ailowed Campeau to build a massive development on the waterfront (Globe & Mail. June 28, 1984). On the other hand, Toronto's mayor at that time was a keen supporter of this project. The rnayor argued that Toronto's reputation as an international banking centre would get a strong boost with the commencement of the Scotia Plaza development, and the project would create construction jobs and tax revenues (Globe & Mail, October 5, 1982; June 27, 1984). The creation of construction jobs was a pressing problem in 1982. since Toronto. and the whole of Canada. were in the middle of a relatively strong recession. The mayor also claimed that the development did not violate the City's Official Plan, but 'ineets its spirit and helps meet its provisions" (Toronto Star, June 29, 1984). Finally, in June 1984 Toronto City Council approved the Scotia Plaza project (Toronto Star, June 29, 1984). As a result, Campeau had transferred rights from its waterfront site allowing the density of the Scotia Plaza to increase from 12 times the lot coverage to 16 times. In retum. Campeau and the Bank agreed to preserve to old Bank of Nova Scotia Building (completed in 1951), to give the City land for 200 non- profit housing units, and to provide daycare facilities in Scotia Plaza (Globe & Mail, November 19, 1984). To avoid further delays, Campeau and the Bank agreed to give $2 million to build non-profit housing in exchange for a Toronto citizen$ group withdrawing its objection at the Ontario Municipal Board (OMB). It was indicated that Campeau was willing ta put up the rnoney, because a long delay would have cost much more, and an adverse decision by the OMB could have reduced the size of the building (Globe 8 Mail, November 19, 1984). In addlion, Carnpeau and the Bank paid $36 million to buy out the lease the Toronto-Dominion Bank had in an existing building on the Scotia Plaza site. The Scotia Plaza case illustrates the difficuities of developing in a district crowded with buildings and a number of interests. It shows that whatever the plans of the municipal govemment, it cannot afford a constant path. Different circumstances force the municipality to change its 'planned' route. Pressures not only from developers, but also, at times of business cycle troughs, from labour and construction interests, force the municipality to re-asses its development policy and often to 'give- in' to pressures. Scotia Plaza shows the paradox of oligopoly and competition in the real estate sector. Real estate companies, together with major tenants and employees typically stand together in order to promote the office development district, but crucial competition for tenants splits the ranks. However, the case became more cornplicated because a new player tried to enter the tenitory, and considerable attempts were made to keep this developer out. Another aspect of redevelopment in a densely developed area is quite clear: the enorrnous negotiation costs. During the time between the announcement of the project (March 1981), the approval (June 1984), and occupancy (Spring 1988) the real estate company had to incur costs that only a major company can sustain.
7.3.2 North York Similarly to the City of Toronto, the neighboring municipaltty to the north of Toronto, North York, shows a mix of restrictive and more permissive policies with regards to office development, and the existence of two very different types of office development districts. In an attempt to develop its City Centre, an initiative that was supported by Metropolitan Toronto, the municipality promoted office development in the area identified as Downtown North York and later as North York City Centre. However, North York also adopted a policy that attempted to restrict office development in industrial areas in order to direct future office development to designated office development areas like the Ci Centre. North York's Downtown The development of Downtown North York exemplifies the role of a municipality as a promoter of office development. Until the late 1970s, the Metropolitan Borough of Nom York (City of North York between 1979 and 1998) had no visible centre. During the 1970s, the municipality was confronting massive redevelopment in the Yonge-Sheppard area as a resuit of the extension of the Yonge Subway fmm Eglinton Avenue in the City of Toronto to Sheppard Avenue in North York (Figure 6.1). The municipality adopted a policy of encouraging redevelopment along Yonge Street north of the Sheppard subway station. However, the rate of development had not come up to the City's expectations. In 1976, the Council directed the Planning Board (later the Planning Department) to review the Yonge Street comdor and recommend new policies for ths area. The Downtown Plan, which was adopted in 1979, provided higher development densities in a comdor along Yonge Street north of Highway 401. A strong majorii of North York City Council supported the policy that development proposals should be approved promptly and a development depactment was established to publicize and attract investment (North York, Department of Planning and Development, 1983; Matthew, 1989). A signifiant promoter of the development of Downtown North York was the municipality's highprofile mayor. Mel Lastrnan, the North York mayor from the eariy 1970s to the late 1990s (from 1998, he haî been the mayor of the new City of Toronto), promoted the plan, mastering a strong opposition from ratepayers. The development of Downtown North York coincided with the deconcentration policy adopted by the City of Toronto in the mid-1970s and the efforts by the Metropolitan govemment to encourage a multi-nodal urban structure. Curbing office development in the City of Toronto probably contributed to the spillover of office construction in North York's Downtown and in other suburban downtowns. In the Metropolitan Plan, North York City Centre was identified as one of the two 'Major Centres' in Metro (the other was Scarborough Town Centre) and the plan recommended the continuous growth of this centre to an employment level of 40,000 perçons making it the largest office node outside downtown Toronto (Municipality of Metropolitan Toronto, 1989). The permissive environment in Downtown North York was designed to attract office development to the emerging centre. The highest densities in North York were allowed in this area; much lower densities were allowed in the business parks, and the Office Policy introduced in the eady 1980s attempted to discourage office development in industrial areas (North York Official Plan, 1983). This policy was designed to strengthen the attractiveness of the emerging downtown. This is the place to mention that the designated district of Downtown North York is adjacent to low-density residential neighborhoods. Hence, the plan ignited fierce resistance of ratepayers groups who complained that massive development would change the neighborhoods' character. This resulted in a long battle between various citiiens' groups and the City of North York over the review of the Downtown plan in the 1980s, when further intensification was suggested. The higher densities proposed in the review of the Downtown plan in the 1980s were designed to attract 'big cRy' development (Toronto Star, January 13,1988). The proactive role of Me City of North York in developing its Downtown was cemented by accommodating the basic requirements expected by the development industry. The testimony of the director of North York's long-range planning department at the OMB hearing illustrates the role played by the City. In his review of the downtown history, he noted that after building activity practically stalled from 1969 to 1977, increased densities were introduced by the new Official Plan in 1979. However, these densities were still not enough to attract substantial development. As a result, the Council approved amendments allowing higher densities in the 1980s, which eventually spuned the boom in the Yonge Street conidor in the second part of the 1980s (Toronto Star, January 13,1988). North York's Downtown is a case of a municipal-led promotion to develop a city centre as a result of lacking a visible u&an core. By creating a preferential policy. the municipality attempted to attract development. The real estate companies engaged in office development in North York City Centre were not the same developers as in farontok Financial District. The involvement of the govemment was evident in several of the initial office development projects in North York's Downtown. Different levels of govemment (federal, provincial and local) erected office buildings in the 1970s; these projects were the core of the upcoming domtown. North Yoik's developen were locally-based, like Menkes and Penta Stolp (akhough one of the first dice buildings was developed by a foreign developer). having had previous expenence in residential or industrial development. When office development was in demand followed by incentives offered by the municipaliity, these real estate companies began producing office projects. Only in the later phase of development. after the second half of the 1980s, several large real estate companies showed interest in North Yoik's Downtown. Olympia & York was involved in an office development in the City Centre, ClBC Development Corporation and Ontario Hydro, and a Montreal-based developer, Canderel, and a foreign-based life insurance Company. Prudential, were in the midst of planning two large-scale complexes. In the early 1990s. ten major office buildings were planned for North York City Centre; these included several high- rise office buildings of more than 25-storeies. The approval by the Ontario Municipal Board in 1992 of the Downtown or City Centre Plan. which envisioned massive development, came too late for North York, because by that time the real estate cycle was already beyond its peak, and many of the proposed developments were put on hold (Toronto Star, November 26, l991, January 14, 1992). North York's Office Policv Office development in North YoKs Domtown/City Centre was long preceded by greenfield site office developments in so-called industrial areas (briefly discussed in section 6.3.4). An eady exarnple of these practices is illustrated by Olympia 8 York (OBY). In the mid-1960s, Olympia 8 York Developments, until then a modest-sire Company, was able to acquire a 600-acre site in the EglintonIDon Mills area in North York (at that time, in the periphery of Toronto). In a period of ten yean, O&Y built 3 million square feet of off~espace and a sizeable amount of industrial space (Foster, 1993; Stewart, 1993; Banco, 1997). Olympia & York was able to create the first large-scale business park by a single developer. But, office development in industrial areas, some of which were reluctantly classified as 'office parks' in the 1989 Metro Plan, began to conflict with the attempts to promote office development in North YoKs DowntownfCity Centre. Beginning in the early 1970s, the Borough of North York was struggling to formulate an office development policy. A study sponsored by the Borough in 1973 recommended that most future office development to be restdcted to defined office development areas. In the early 1980% as part of the North York comprehensive official plan, the office policy was reviewed. Responding to the emerging new office policy, lnducon Development Corporation raised several concems regarding the proposed policy. Inducon, a developer of industrial and office space, was a veteran development Company in North York. Started in the eariy 1960s as builder of small industrial buildings in North York, it branched out to own and develop large units of land in North York's business parks and industrial areas. The ability to make a quick profi by rezoning industrial land to commercial use was one of the most profitable techniques used by lnducon (see section 7.1.2). During the review process of the North York Office Policy in the eariy 1980s, lnducon presented the North York council with a number of wntten submissions raising concems regarding the proposed policy. The controversial section of the policy that concemed lnducon was the section that deals with discouraging office development in industrial areas. lnducon suggested that the prohibition of future office development in industrial areas would have a number of negative effects (North York, Su bmissions to Council, Amendment No. 261, February 21, 1983): + discriminate against office ernployees because they would be forced to drive to downtown Toronto offices; downgrade property values, because previously most industrial areas were in reality 'business force office usen who cm only afford lower rents to locate outside the City Centre and North York altogether; hurt North York financially by not getang higher assesment; downgrade industrial areas and perpetuate rundown districts. It seems that Inducon's main concem was related to the impact of this policy on its ability to generate profb from the so-called industrial areas. Until the policy was introduced, most industrial areas were in fact business parks, gMng equal status to office and industrial uses. The proposed policy, from the Company's point of view, downgraded these properties to a lesser value by denying the option of office uses. In fact, it also denied the ability of Inducon to profit from building commercial uses on industrial lands. For Inducon, the best scenario would have been designating the majority of industrial land as business parks, especially those where lnducon had stakes. Inducon's case illustrates the attempt to shape an office development district by a real estate company. The development company is not nterested in getting approval for a particular project or some spot rezoning. In this case, the devekper is askng the municipality to create, or at least sanction and maintain one or a series of office development districts. The guarantee of such a district allows frictionless operations of the real estate company. As lnducon sensed that there was trouble in North York, it shifted its interest to other rnunicipalities in the Toronto CMA that were more tolerant of Inducon's development pracücas. North York was left behind as arena for office development for outer rnunicipalities, especially Markham and Mississauga.
7.3.3 Mississauga The City of Mississauga, which is situated outside of the Metropolitan Toronto boundaries, provides another distinct picture of office development. The role of private developers was more pronounced in Mississauga than in the case of Toronto and North York. Its City Centre, one of the Toronto CMA's major suburban downtowns, was initiated by a private land developer and then prornoted by the municipality. In a second phase of the Crty Centre's history, control of office development and ownership passed from the monopoly of one company to an oligopoly of another group of companies. Private developers created almost monopoly positions in some of the largest office parks in Mississauga. Markborough Properties owned 3000 acres in the Meadowvale Business Park, and Orlando Corporation owns 600 acres in the Airport area, and it is in the process of developing 1200 acres in the Heartland Business Park (Figure 6.1). In Mississauga, one of the fastest growing municipalities in the Toronto area, growth was promoted strongly, especialfy since it becarne a city in 1974. Its prodevelopment mayor since the late 1970s, Hazel McCallion, has advocated development and facilitated a favourable business climate through cutting bureaucracy and promoting the image of Mississauga as the perfect environment for businesses (dubbed a 'builder-friendly city', Mississauga News, November 1995). This corporate- cooperative culture is evident in Mississauga as the municipality makes efforts to accommodate the requirements of developen, especially through shortening the development process and providing infrastructure and bus seMces to specific locations. Developen are aware of the positive attitude toward development at the civic level, and praise this approach. As suggested by one of the prominent developers in Mississauga, the business rninded council and Me mayor run the city as if they own it (Mississauga News, August 11,1995). Records for the 1994 and 1997 contributions for municipal elections in Mississauga were attained (previous records were destroyed since the law requires to keep records only for the two most recent election campaigns). The Mississauga City Council is made of nine councillors, al1 of whom received contributions. In total, local (operating primarily in Mississauga) real estate-related companies accounted for a substantial share of the contributions; each councillor received between 28 and 55 percent of herhis contributions from these corn panies. For example, Hammenon Canada, the largest land owner in Mississauga, contributed to al1 nine Mississauga City councillon; Kanneff, a prominent residential developer in Mississauga, to eight councillors, and Orlando, a leading Mississauga-based industrial and office developer, contributed to seven councillors.
Private develo~mentof a City Centre: The case of Mississauqa The idea of developing a city centre in Mississauga was initiated by the largest land owner in Mississauga in the 1960s and 1WOs, Bruce McLaughlin (his Company was known as S.B. McLaughlin). McLaughlin refened to this project as 7he first by a private developer to create an entirely new city centre". However, he acknowledged the importance of the public realm as "govemment and planning support is necessary because without such cooperation, adequate space cannot be reserved for such a new city development" (The Telegram, April17,1968). McLaughlin started assembling land in the 1950s. and by the late 1960s he had 4000 acres in Mississauga (S.B. McLaughlin Associates Limited, 1969 Annual Repoit: Lorimer, 1978). Except for pursuing extensive residential development, his ambition was to build the centre of the new Town of Mississauga. (A number of municipalities were combined in 1967 to fom the Town of Mississauga.) In the 1960s, McLaughlin envisioned the development of a major urban area west of Toronto, and he wanted to build the 'City Centre' on a greenfield site where he owned a 200-acre site (Mississauga News, March 26, 1968). The pivot of this centre was Square One (previously known as 'Greenfields'), an enormous regional shopping centre, completed in 1973. In 1970, he also put up his first office building where he thought the city centre should be. To cernent his site as the new city centre, he persuaded the town council to trade its old tom hall (which was about two kilometen south of Mclaughlin's proposed city centre) for a new building in the pmposed city centre (Mississauga News, July 2, 1969). When McLaughlin appeared before the Mississauga town council to present his plans for the City Centre in 1969, the town council was extremely supportive. One cf the councillon praised McLaughlin saying "We are indeed fortunate in having a developer such as Mr. McLaughlin in the municipality" (Mississauga News, February 12, 1969). This notion was repeated thirty years later as the director of Economic Development for Me City of Mississauga referred to the developen as "key playen in our [Mississauga's] future" (Mississauga Business Times, March 2000). In 1973, the pro-development Mississauga town council was defeated, and a shift in attitudes towards growth occurred at Town Hall. Questions were raised about whether Mississauga should favour intensive commercial development on McLaughlin's land or on the location of the old town hall. However, after the 1976 municipal elections, a newly-elected prodevelopment council approved the plan designating McLaughlin's land as the Mississauga City Centre, despite the near-monopoly land ownenhip situation (Mississauga News, March 24, 1976; Lorimer, 1978). The ability of one major developer to determine the location and type of a city centre points to the essential role of some private developers in the ctty building process. Landownership and a 'vision' of an entrepreneurial developer were key elements in this process. However, in spite of his monopoly, McLaughlin needed municipal cooperation to make his scheme a reality. In this case, the local govemment, and to some extent the provincial govemment, were drawn in by a private developer. The main role of local and provincial governments was to facilitate the idea that was conceived earlier by providing the necessary support in terms of land use designation, limiting competition by supporting the specific location for the City Centre, and acting as an anchor tenants for the future City Centre.
Mississauaa City Centre: The second hase McLaughlin, as the owner of the site that constitutes the City Centre, enjoyed a monopoly position regarding development and under these conditions he erected four office buildings between 1970 and 1979. In the late 1970s, another Mississauga-based developer, Shipp Corporation, branched out from residential development into office development in the City Centre by developing its first building of a four-building cornplex. The association of developers and life insurance companies as joint venture partners is evident in a number of developments in the Mississauga City Centre. The partner of Shipp was Mutuai Lie of Canada; the partner of the Matthews Group was Great West Lie, and lnducon was a partner of Prudential Assurance (of the U.K.). After Mclaughlin experienced heavy losses and his debt swelled in the eariy 1980s, a British-based property company, Hammerson, acquired his assets, and became the largest land owner in the City Centre. In the Mississauga City Centre, six private developen (excluding the City of Mississauga) are responsible for the developrnent of almost 90 percent of the office floor-space (Table 7.5). The size of office space in the Mississauga City Centre is only one-tenth of the Financial District; therefore, the potential degree of concentration is much higher. The real estate companies that developed office buildings in the City Centre were either based in the western fringe of the Toronto area (McLaughlin, Shipp, and Matthews) or were real estate companies that saw an opportunty in office development in Mississauga (Prudential, Northsted, and Hammerson).
Table 7.5 Top developen of office space in the Mississauga CQ Centre, 1970-92
Real estate company Number of buildings Office space ('000 square feet) Shipp Corporation (1) 4 1,100
S.B. McLaughlin 4 700
Matthews Group (2) 2 550
City of Mississauga 1 450
Prudential8 lnducon 1 280
The Northsted Group 1 190
Hammerson 1 190
Total seven companies 14 3,460 (70%) (9296) Total Mississau~a- City Centre 20 3,750 (loosc) (1 00%) Notes: (1) Joint venture partner: Mutual Life. (2) Joint venture partner: Great-West Life. Source: A compilation of sources presented in section 2.3.
The City Centre is chaiacterized by a significant number of mid-rise office buildings (1 1-16 stories). It is designated as the primary office centre in the Mississauga Official Plan, and it is planned to contain the highest density and the greatest concentration of office development in the City of Mississauga. In terms of employment, two thirds of office employrnent in the City Centre is in finance, insurance, real estate and business seMces (Ciof Mississauga, 1998). The cohesiveness of the Mississauga City Centre is manifested by the 'united' front of real estate companies against cornpetition from outside developen. In 1988, the president of Hammerson called the ctty council to reaffirm its mmitment to the City Centre as Mississauga's 'downtown'. He complained that outside forces are trying to shih the core away from the City Centre (Mississauga News, February 24, 1988). He was referring to the pmposal of the developen of the West Edmonton Mall (the Ghenezian brothen) to build a huge retail compiex near the airport (Globe & Mail, September 9, 1986). This shopping maIl would have competed with the Square One shopping centre located in the Mississauga City Centre. The objection by the Mississauga City Centre interests resulted in the rejection of this project (interview with a former president of Hammerson Canada). The plea to reaffirm the municipal commitment to the Ctty Centre was followed by a promotion campaign conducted by the City Centre Marketing Group. This initiative was proposed initially to a core group of developen, which were the most active in Mississauga. These developen were Shipp, Hammerson Canada, Inducon, and the Matthews Group, al1 with shopping centre and office building interests in the City Centre. Fclkwing their positive reaction, invitations were extended to other developers (Mississauga Business Report Magazine, June 1989). This campaign brought together the City and most of the brgest real estate development companies in Mississauga. The aim of this initiative was to attract corporate office tenants and to give a strong boost to the development of the City Centre (Real Estate News, November 25, 1988). One result of this campaign was the launching of a shuttle bus service within the Cv Centre. In this endeavor, the developers own the buses but the provincial and the municipal govemments cover the operating costs (Mississauga News, February 18, 1990). Following the 1990s real estate recession, this marketing alliance became more onented toward attracting tenants and leasing office and retail space in the City Centre area rather than promoting new commercial real estate development (Mississauga Econornic Development Office, 1999). In addition, office and retail development in Mississauga business parks has enjoyed unprecedented growth during the 1980s and to a lesser extent in the late 1990s, and a shift of office development away from the City Centre was evident. In this light, Hammerson, as the major land and property owner in this district, needed to enhance the attract~enessof the City Centre, and, as a result, confronted and opposed to rezoning of land in business parks for retail development. In the 1990s, the City Centre stagnated as no office development was commenced; at the same time, especially after the mid-1990sl a large number of office buildings were constructed in office paiks in Mississauga. One such office park is the Heartland Business Park, which is discussed in the following paragraphs.
Heartland Business Park: Orlando's territow Orlando Corporation is a real estate Company engaged in industrial, retail and office development. Orlando is a rnodei of a suburban real estate company, developing commercial properties mainly in Mississauga. One of the Company's comparative advantages is its vast land bank. Its first large-scale real estate development was launched with the purchase of a large piece of land (600 acres) near the Toronto International Airport in the 1960s. Later developments in the Airport area in the 1980s and 1990s were based on the ownership of large pieces of land. In the mid-to-late 1980s, Oilando assembled another 1200 acres in the heart of Mississauga to create Canada's biggest business park. the 'Heartland Business Community'. The most recent stage in Orlando's strategy of purchasing large land banks and developing entire business parks was announced in mid-2000. Ohdoassembled a 500-acre site in the City of Brampton, notth of Mississauga, adjacent to the newest expressway in the Toronto area, Highway 407. The company plans groundbreaking within the next three to five years (Mississauga Business mes, June 2000). One of the reasons for retaining its presence in Mississauga (except for functional reasons, such as location, accessibility and growth) is the good relationship the Company has with the pro- development mayor and the City Council. This relationship is based on a long history of cooperation. The municipal bureaucracy is considered very efficient, a crucial factor in real estate development. where the tirne element is very important. Also, since Orlando's land assets include mainly greenfield sites, its development schemes usuaily do not involve lengthy processes of approval and the Company tries to avoid any encounter with the Ontario Municipal Board (interview with an Orlando executive). Orlando's Heartland Business Park in Mississauga is located West of the airport adjacent to a well-developed network of expressways (Figure 6.1). In 1986, Orlando purchased 800 acres of land followed by two more deals for an adjoining 400 acres in 1987 to create Heartland (Canadian Building, March 1989). By 1999, approximately 11 million square feet of industrial, office and retail space were constructed in the Heartland Business Park. When fully developed, Heartland would have 30 million square feet of space and 30,000 employees (Orlando Report, 1999). Heartland fis perfectly into Orlando's philosophy. lt is a 'total environment' business park built by a 'total package' real estate company. Odando is a fully integrated company which provides a total product tailored for the clients' specifications. Orlando picks a site. builds the roads, designs and constructs the building, and leases, and manages the building. It is able to provide a building in an environment which is controlled totally by the Company. The abilii to conrtnict an entire environment is illustrated by Street naming in Heartland. As pointed out by John Bentley Mays in an article in the Globe & Mail, streets in Heartland with names such as Avebury, Venice, and Rodeo Drive have nothing to do with any local fact or history and "the street-names appeared to be picked for general effect. as contributors to the scenography of this vast place" (Globe & Mail, August 5, 1992). Once Orlando has the zoning (in ternis of type of development and density) in place, the developer is able to build the type of building helshe prefers and thus often disenfranchises, to some extent, the power of the municipality to influence development. The construction of retail 'powef centres' ('big box' warehouse retailers) in HeaRland illuminates this argument. In 1994, Mississauga's mayor complained: When I supported retailcommercial there [Hearthnq it was because we thought we are getting a maIl for the industrial area, 1 never dreamed 1would be a power centre". However, she stressed that the fim [Orlando] %as done nothing wrongn (Mississauga News, October 19, 1994). A report prepared by the City reaffinns this argument. It indicated that the uses confonn to the Officiai Plan and the zoning bylaw, which did not specify that the retail units had to be in an enclosed structure (Mississauga News, February 12, 1995). It is doubtful if this flexibility would be allowed in an environment which is immediately sunounded by residential or mixed-use properties. However, even in the case of a large-scale greenfield development such as Heaiaand, conflict might be building at its fringes. Since this retail complex borders residential areas. ratepayen in the adjacent areas complained about the loading activities at these warehouses and are wom'ed about traffic created by this type of development (Mississauga News, October 19, 1994). Orlando's strategy conflicts with the interests of the oligopolistic ownen of the City Centre. There are many indications of conflicts coming out into the open. But the conflict is not just between owners of properties, the conflict is also between two very different office development districts. Orlando builds smai to medium-size customized office buildings in settings it has full control over. The relatively sudden uptum in demand by 'high-tech' companies for office space could be met almost instantaneously by Orlando. On the other hand, the City Centre group of developen specializes in large buildings in more complex settings. The City Centre has developed from a greenfield site into a very different and complicated office development district over the last thirty years. The users' characteristics and land costs play a major role in the success of Heartland and the relative decline of the City Centre. The ability to merge office uses with spaces for storage and distribution is possible in Heartland where large tracts of land are available at far less cost than in the City Centre. Alsol these kinds of storage facilities cannot be accommodated in the City Centre, and it is difficult to promise easy access by car and ground level parking. Despite its total conbol over the devekpment of Heartland, Orlando has to depend on govemment cooperation to make this business park an unintempted success story. When it comes to rezoning, the role of the municipality is essential. In 1996, Oilando submitted an application to rezone 180 acres of land in Hearthnd from industrial to residential use. At this point the City had the upper hand since it has the authonty to approve rezoning. As a nsuit of the City's opposition, the Company rnodified its proposal. Additional opposition arose when Orlando applied for additional rezoning. This time the ownen of major shopping centres in Mississauga who already incurred loses from its big box success were detemined to prevent further expansion of retail activities in Heartland (Mississauga Business Times, June, 1996; October. 1996; March 1997). The role of various levels of govemment is particularly important when it cornes to investrnent in transportation facilities. The prime advantage of Heartland is its accessibility. It is located on the major east-west highway of Southem Ontario, Highway 401, on Mississauga's main Street, Hurontario (Highway 10) adjacent to Toronto's international airport. To keep Heartland's edge, a continuous flow of investments in transportation infrastructure has to be made. This is where the role of govemments becomes extremely significant. One recent example in the case of Heartiand was a partnership between three Ievels of govemment in building a new interchange connecting Heartland and Highway 401 (opened in late 1999). The Ontario Ministry of Transportation, the Region of Peel (the regional govemment) and the Crty of Mississauga joined forces in this project. Orlando, the owner of the Heartland Business Cornmuntty 'donated' $3 million worth of land, while the total cost of the project was more than $16 million (City Business, Winter 2000). Prior to the completion of this project, the local public transit department, Mississauga Transit, has maintained regular bus routes through the area, and an express service directly to the Toronto subway system (Mississauga Business kes, November 1998). These transportation irnprovements and facilities are backed by public finance to rnaintain or even increase the accessibility of the Heartland Business Park. Orlando, as a major real estate developer in Mississauga, fis well into the businessoriented municipality. On the one hand, it is able to create its controlled environments. This way it minimkes conflicts over land use issues. On the other hand, Oriando engages in a continual dialogue wïth the municipality to create the necessary conditions that its pmperties will continue to be profitable in the long tem. However, there is conflict with other real estate companies which compete for customers and tenants. 7.4 Uneven Surfaces of Office Development The segmentation and differentiation of real estate markets encourage a more refined approach to analyze real estate development than focusing on the downtown-suburban dichotomy. The uneven development of offices at the metropolitan level is expressed in a series of relatively small and distinct districts. In these office development districts municipal interests merge with those of selected groups of developers and also with emerging physical characteristics The physical characteristics such as size, height and density of buildings combined with specific transportation modes solidify the cohesiveness of these districts. Interactions and arrangements between developers and govemments Vary betwaen municipalities and districts, and consequentty produce specific types of districts. Research on Toronto indicates a range of offidevelopment districts situated in different physical and municipal settings. These districts include two principal types: centres with a relatively high building density and low-density office parks. In centers, an oligopolistic pattern of building ownenhip tends to prevail as groups of specific real estate companies and other ownen hold a substantial part of office floor-space. These oligopolies result in competition and cooperation between different developen and ownen. These groups compete in attracting tenants to their specific buildings but also come together in order to maintain the viability and the competitiveness of these districts, and they cooperate in order to keep outsiders away. Development involves intricate negotiations with different interest groups. In these districts bargaining with local govemments is especially important, since land is expensive and changes in existing zoning and densities may result in substantial financial gains. However, there are some differences between these centers. Office development in downtown or the Financial Distrid is redevelopment of an existing fabric; in suburban downtowns it has been prirnarily greenfield development. Generally, redevelopment sites require sizeable financial resources. Consequentiy, the largest reaf estate companies and banks control office development and ownership in the Financial District. In the City of Toronto, since growth was extensive throughout most of the penod under investigation, the municipality was able to set restrictive development policies and extract some benefits from allowing real estate companies to develop at higher densities. In other centres (suburban downtowns) a different set of real estate companies has been at work. Life insurance companies joined an oligopoly of smaller and local real estate companies in some cases. In the suburban centres, local govemments have attempted to attract real estate companies to engage in development by offenng various incentives. It could be argued that in the case of the North York City Centre the municipality was in search for a team of developen. The other type of district, 'office paik' includes a wide range of districts; their emergence and development is waiting to be more clearly understood. Nevertheless, findings indicate a number of characteristics. Unlike centres, either downtown or suburban downtowns, office development in office parks was initially lest controlled by municipalities. These districts developed from areas that were usually designated as industrial districts, and only in later stages was the importance of office uses acknowledged, and some were oficially designated as 'office' or business parks, or 'employrnent areas'. Specialized real estate companies, primarily local, who were familiar with specific suburban settings, have used this ambigu@ to exploit opportunities and develop office buildings in industrial areas. As a result of development on greenfield sites and the relatively inexpensive land values, sorne real estate companies were able to assemble large units of undeveloped land and to establish prominent positions in particular districts. Developen have been able to determine development in districts in which they exercise a near monopoly. In these areas, once zoning byhws are in place, the role of the municipaiii diminishes (its role is important in servicing the land or in case of rezoning), and the flexibility of the developer is enormous. Unlike the case with downtown sites, where development densities are open for negotiation and revision, development on suburban sites is normally less about higher densities since the typical suburban-type development is low-to-medium density. The major obstacle for development, land use conflicts resulting from proximity to other properties, is reduced, and the development of these areas becomes relatiely quick and easy. In the case of office development districts, political connections are important. These connections take different foms in different districts (more direct relations in suburban downtowns and office parks and connections mediated by lawyers in downtown), but still, negotiations are based on some understanding of what makes development possible. Office developrnent districts show that there are limits to spatial flexibility within the Toronto region. Each district encompasses specific characteristics based on its physical and political features; these particular circumstances 'anchor' real estate companies to districts that best fit their capabilities and their requirements. CONCLUSIONS
SPATlAL FIX AND SPATiAL SWlTCHlNG OF REAL ESTATE CAPITAL
In capitalist economies buil structures embody two contradictory features. Buildings are fixed in space and their physical shift is close to impossible; these buildings represent considerable amounts of sunk capital. However, the value embodied in buildings is transferable, and the owners of these structures may consider them as tradable commodles. Scnitinizing this apparent paradox is the core of this study. One way to conceptualize and analyze the functioning of the activtty responsible for the production and trading of these structures, in this case office buildings, is through fiie major propositions. These propositions were examined and substantiated in the chapters reviewing the literature on real estate and office development. and by the findings and evidence assembled on office development in Toronto and also on the scale of the Canadian urban system.
The first proposition indicated that beyond Haivey's conceptualization of capital switching between circuits of capital accumulation, there is an intemal logic to investment in the real estate sector. Building upon Haila's (1991) notion of the 'intrinsic dynamic of the real estate sector', Iconstructed a framework that combines structural elements with insights into the practices of the real estate companies. This framework was introduced to study the practices of real estate capital. This in tum resulted in the conceptualization of the 'three dimensions of capital switching'. Although the idea of capital switching was used to scrutinize switching between the pnrnary and the secondary circuits at the macro- economic scale, I used this framework to analyze the practices of real estate companies at the level of the individual Company. Capital is neither faceless nor hornogenous; it has identity that is fumished through the fractions it consists of. The actions of agents representing these fractions are shaped by macro-economic conditions; however, their own goals, insights, expectations and practices are an essential part of the notion of switching. The framework of the three dimensions of capital switching offers a way to conceptualize and analyze office development. It incorporates several sets of variables that have a major role in shaping the operation of the real estate sector. The dynamism of real estate capital, which results in a constant search for more profitable outlets, necessitates an analytical framework that is able to accommodate these sets of variables. The focus of the empirical work in this study was on the practices of large Canadian real estate companies in the period stretching over several decades (1950s to 1990s). According to this canceptualization, real estate capital considers three core components when it comes to switching practices; these include operational modes, products and locations. First, real estate companies can either engage in the development of new office buildings (or altemativeiy undertake major renovations and re-use existing buildings) or merely engage in trading of existing properties. There are some properties that are more valuable than others for real estate companies, these are considered by the companies as %ore assets'. These properties usualiy consist of the largest office complexes located in downtown areas of the major cities within the urban system. Core assets provide a stable incame stream of rents and as a resutt of their size are able to create their own microenvironment. Other assets, which are older, smaller, and not as centraliy located, are held as 'bargaining chips' that can be bought and sold depending on the position of the market for office properties. Typically, real estate companies start as entrepreneurial firms which are engaged in development and the subsequent sale of properties. This type of companies lack sufficient capital, and hence tend to obtain the development gain and seIl the completed propeilies. In later stages of the corporate Me cycle, real estate companies are able to retain some of their projects. In these phases real estate companies become traders while striving to keep their core assets intact. Second, real estate companies switch investment between different pmperty types by re- deploying capital between residential and commercial properties or between distinct products within the commercial component (between retail properties and office buildings, for instance). Unfavourable conditions in the residential component (as a mutof govemment legislation and econornic recession) and favourabie conditions in the commercial component, especially in the 1970s in Canada, contnbuted to the shifting of investment from residential to commercial properties. Within the commercial cornponent, switching is possible as some elements are considered by the real estate companies as having favourable growth prospects than othen, as evidenced by the switching between office and retail properties. Finally, real estate companies shift capital between different spatial scales and between different locations (this aspect will discussed in detail in the following paragraphs). In investigating capital switching, the time frame is crucial. Evidence of the existence of the three dimensions of capital switching is visible at the scale of several decades, and it is also observable in the everyday practices of real estate companies. Companies employ different investment strategies in the long-terni, but they are also faced with various possibilities as embodied in the three dimensions of capital switching at any particular point in tirne. However, processes that encompass longer time frames, that is over fiyears, were not studied here. In addition, I have suggested that investment in office development or real estate properties is not the final destination of capital (not the 'last-ditch' as maintained by Harvey). The notion of a one- way Stream from the primary to the secondary circuit, as advocated by Harvey, has to be expanded to reciprocal relations between the real estate sector and the wider economy. Some indications based on the study of the Canadian case suggest that capital is not frozen as real estate capital once it enten the secondary circuit. Rather, it might seek alternative investrnent channels as conditions in the real estate sector change. Neither Harvey nor Haila are right or wrong. Diierent time scales, different questions and different methods determine different outcomes. Naturalty, Harvey's overreaching theory of caplalism over the last century and a half does not focus solely on real estate. On the other hand, Haila's notion of the intrinsic dynarnic is an attempt to build a frarnework around real estate intemal behaviour. Both framewoiks contribute to the understanding of the woikings of real estate investment.
The second proposition questioned the spatial character of real estate capital. The starting point in this study was the observation that different real estate companies have different operational spaces within the Toronto metmpolitan area. This observation lad to a focus on Canadian real estate companies as they engage in dual spatial practices of capital investment, geographical fix. and spatial switching. Strategies of spatial fix and spatial switching can be employed simultaneously at different spatial scales and in different locations across the same scale. This study observed limited and specifc spatial switching of capital as shifting investments at the national scale have reinforced the poslion of selected urban centres within the urban hierarchy. However, when taking into consideration that non-local real estate companies control only the lesser part of the urban office stock (in Toronto, the ten largest owners of office space controlled about 32 percent of the total office stock in 1999). the role of local developers is undertined. At the metropolitan de,practices of real estate companies involving spatial fix seem to be the rule. Also, distinct office development districts, which contain specific physical features, municipal modis operandi and different demand, give rise to a spatial division of labour arnong office developers. At the level of the office development district, ownenhip concentration was clearly visible. This study indicates the clear spatial preferences of real estate capital. At the national scale. selected urban centres in Canada, not necessanly al1 the largest cities, are prefened by the large real estate companies. Certain cities within the top tier of the urban systern, mainly Toronto and Calgary, were preferred by these companies as places for investment in office buildings over most of the time period studied. Calgary's outstanding growth in the 1970s and early 1980s established its position as a prime investment arena. Once a critical mass of investment was reached, it has sustained Calgary's position, although its growth was less spectacular in the 1980s and 1990s. The large Canadian real estate companies favour other large cities less, like Montreal or Vancouver. Once a location is chosen, it is not easily abandoned. In this context, assets that are considered by companies as core assets play a major role in perpetuating spatial fix. The uniqueness of these assets makes them practically non- tradable, cementing the nexus between specific real estate companies and specific places.
Related to the previous proposition, the existence and importance of different office building cycles at different spatial scales and in different locations was suggested. The comparison of national, selected provincial and two metropolitan scales indicates the existence of building cycles that both converge and diverge over scales and within different scales. For instance, at the metmpolitan scale, office-building cycles of Toronto and Calgary have converged in the late 1970s and earfy 1980s, and diverged throughout the 1980s, converging again in the 1990s. Real estate companies take advantage of different building cycles by attempting to shift or lock in capital spatially. Their switching practices were not limited only to spatial switching, but also to operational and product shift Development was preferred during boom periods, whereas trading was the prominent feature in real estate downtum times. Preference was given to commercial develcpment, especially office development in the 1980s, as several large real estate companies disposed of their land and residential portfolios and focused on office development.
The fourth proposition argued that local knowledge and the reliance on local conditions and networks limit most real estate companies to specific locations. Real estate companies tend to work within well- defined boundaries at the metropolitan level. A configuration which 1 cal1 'office development districts' rationalizes the spatial differentiation of office development within the metropolitan region. In this context, the structure of relationships between local municipalities and real estate companies within defined environments is important. In these environments real estate companies carve out their own territories. This process is influenced by the prevailing municipal agenda. Real estate capital does not work in a vacuum, but it is positioned in highly specific environments, which have their own features, rules and conditions. In these environments, some spatially bound social relationships create distinct playing fields. In the case of Toronto, different political agendas prornoted by the City of Toronto and by suburban municipalities combined with the interests of metropolitan or regional govemments enhanced he fragmentation of development agendas. This has further fragmented operational spaces for real estate companies and has enabled developen to take advantage of differentiated conditions within the metropolitan region. In the Toronto area, the large real estate cornpanies are generally more interested in downtown areas, and less in the suburbs; suburban areas are the territories of local developers. This dichotomy is based on the structural differences in capital assets and experience with cornplex negotiations. Large companies can marshall the large financial resources that are essential for downtown developmenVredevelopment. In the case of Toronto, a spatial division of labour among developen is strongly supported by the findings of this investigation. There are developers with operational fields focused on downtown and the traditional devekpment axes, whereas suburban developen completely ignore these areas prefemng to concentrate their development operations in different suburban environrnents. It was also proposed that the existence of office development districts, which is reinforced by distinct physical features, municipal regulation and the practices of reaI estate companies, contribute to the spatial specificity of office development. One of the interesting and in my opinion, very contentious issues in research on real estate development is the question of the global and the local. The global literature on real estate development includes many assertions on the role of global expertise and capital. Research on Toronto and Canadian real estate companies engaged in office development (and in the swapping of office buildings) reveals a very strong local constraint both at the scale of the national urban system and at the scale of the metropolitan area. The tension between the global and the local can be related to the inherent dualrty or paradox of real estate, namely the fixity of its physical form and its tradability in its money form. There are global and national forces that shape real estate development: demand (as reflected, for instance, by structural changes in the economy), trade and labour relations, and national fiscal and monetary policies. There are global trends in architecture, building technology and taste. On the other hand, creating an office building requires a specific site surrounded by other specific sites in a specific political junsdiction, which generally has a very nanow spatial reach. This reach may be variable, but small municipalities are still crucial in regulating land use and as a result in the erection of buildings. There may be exceptions, such as London and Pans, in which upper level govemments were involved in the regulation of urban development; there may be pressure to give in to 'global forces'. However, municipalities are legal, political and social entities that have persisted at least over the period of the last haff a century. The locality is a structural imperative, a necessity, but each municipality is different and consists of particular sets of agents and conditions arranged in specific configurations. In this frarnework, local govemments have considerable leeway to maneuver and as a result may produce different office development trajectories. At the local level, municipal jurisddictions are abk to exercise their powen, and to some extent, function as 'miniature empires'. Municipalities, that apparently share similar qualities, compete for investment; however, the ability of some municipalities to attract development, while other municipalities have relatively small-scale investment suggests that beyond structural shifts, some local factors have an impact of the decision of companies and investon to prefer some places over othen. Some municipalities do not compete, not because they lack features that attract capital, but rather because they may reject the notion of growth. Drawing on Cor and Mair's concept of local dependence (1988). municipalities and developen are engaged in reciprocal relations that are spatially immobile; as a result. the maintenance of functioning relationships becomes a prime goal of both municipalities and developen. These relationships, based on values like mutual trust and cooperation, could not be easily reproduced elsewhere. Production is embedded in a social context that is situated, in tum, within a particular geographical setting (Rast, 1999). For municipalities, previous experience with specific developen that often involves social relations extending beyond strictly business-based relations encourages the continuous preference of the developen with whom the municipality had past experience. For developers, building new social and political networks is an expensive and a timeconsuming process. Hence, the idea of spatial fix of real estate development as dependent on particular territories may be defined by political jurisdictions. The paradox between the necessary and the contingent as far as real estate is concemed encompasses issues that were addressed in this study. It can be argued that real estate development is based strictly on necessary conditions. According to real estate professionals, if the Yundamentals' are not in place, no development is likely to occur. Fundarnentals are primarily economic indicators, such as rental rates and the cost to develop a project. For instance, employment growth in the finance and the business sectors creates demand for office space and resuits in the increase of rental rates. If development is profitable, based on a given costheturn ratio, office space would be produced. However. even when these fundamentals are in place, development would not necessarily happen and also it would not happen everywhere. Demand for office space does not necessarily mean office development, since there are spatially mediating factors. On the national scale, or the metropolitan realm, there are spaces that are preferred and others that are overlooked by developers and investors. In this case, the role of the local rnay be vital. Local in this context is not necessarily contingent since differentiated conditions across space are part of the structural conditions. Contingent factors may include the practices of agents that practically implement the real estate development process. The interpretation of the market depends on the indMduals invohred; their perceptions of the future and their capability to cany development out are not less impoitant than necessaiy conditions. In the North Arnerican context of uhan development, both the municipality and the developer are to a large extent regarded as essential components to generate development. One cannot function without the other; however, empirical investigations suggest that variable local conditions are important in this equation. Discussion on real estate development has ample references to the role of the local scale. As suggested by Leitner (1994), location remains an important factor influencing real estate development and Pryke's (1994b) notion on the 'paiticulanty of place' emphasizes the role of space in the process of propeity investment. Hence, an altemative approach is to acknowledge that development is shaped both by both the necessary and the contingent. The property development process consists of a series of strudured networks and relationships between a variety of capitals; within this framework, there is a role for national and local govemments and for locally based specialized developen. The network of relations between the agents invohred produces contingent outcomes which are inevitably shaped by structural conditions.
The fifth and final proposition focused on the crucial role of finance capital in facillating office development. The Canadian study suggests close links and relationships between real estate companies and financial institutions. Specific connections were established between developen and financiers. some of which resulted in long-terni relationships. These long-term relationships facilitate the continuous process of real estate production, as capital can be obtained for different types of developrnents and various locations. As a result of the Canadian financial system being national in scope, these relationships can be maintained across Canada and even beyond. Financial institutions are not just 'silent partnen' of real estate companies, but they are also active in real estate development, primarily as investon and occasionally as devekpeis. The traditional role of financial institutions as financial intermediaries that supply funds for development was challenged in the 1980s, as some, principally life insurance companies, became office developers at least for a limited time period. The hypennobility of capital, traveling at the speed of light, and the idea that contemporary capitalism is dominated by 'spaces of flows' rather than 'spaces of places' (Castells, 1996, 1997) is largely resisted by real estate capital. Arguments claiming that the real estate sector has increasingly acquired global characteristics have failed to provide substantial empirical evidence. Except in a few cases of outstanding real estate companies, and the intemationalization of real estate services and architectural fimis, evidence for intemational flows of real estate capital at a substantial magnitude is absent from ernpirical investigations and from this study. This study argues Ulat there are considerable obstacles to the free movement of capital in the sphere of office development. In the discourse on urban developrnent, some limitations to the free movement of capital are acknowledged, while other conditions are perceived to facilitate the tlexibility of real estate capital. As noted recently by Harvey, capital is highly seledive when it comas to places (Harvey, 2000, p. 33): 70begin with, the gkbe never has been a ievel playing field upon which capital accumulation could play out its destiny. It was and continues to be an intensely variegated surface, ecokgically, poliilly, socially, and culturally differentiated. Flows of capital wouM found some terrains easier to occupy than omets in different phases of developmenr.
Many financial fims that provide financing for real estate development rely heavily on place-specific investments and clients. As a result, finance capital is not spatially flexible; most financial institutions adopt conservative approaches, especially life insurance companies, and hence prefer to invest in the places that generate a substantial pait of their real estate investrnent (their core assets). This in tum reinforces the importance of the more stable markets, which are typically the larger urban areas. In Canada, the investrnent in office buildings by large financial institutions for the purpose of income production has been Iirnited primarily to large cities (particularly Toronto) and to medium to large buildings. Canadian financial institutions, which have national scope, have been strongly engaged in office investment and development in downtown areas, while subuiban locations, aithough not ignored by these companies, have been far less important places of investment. In current research, the sources of real estate financing are left grossiy simplified. In terrns of conceptualizations, further exploration of capital flows within the real estate sector and between the real estate and other sectors is a much-needed avenue of research. The intrinsic dynamic of the real estate sector is acknowledged in this research. However, it raises the question of the spatial lirnits of capital flows within this sector. The detenination of these limits deserves more research. This study was able to identify the existence of these lirnits, but further research should examine the reasons for these limits, and how these limits are shaped over time. Barriers to capital switching across international borders reinforce the role of domestic capital in real estate development. Aithough I had no opportunity to investigate this issue systematically, newspaper articles and interviews with the exec~iivesof financial institutions suggest that the financing of real estate has definite spatial limits. In the case of Me insurance companies, for example, eariy bamers imposed by govemment regulation and more recently the conservative policies of boards of directon (the idea of 'prudent poli, which was also adopted by legislation) have restricted capital flows into real estate properties, and most likely across international and even provincial bordes. Cunency exchange rates associated with capital flows across borden make trans-border real estate investrnent risky. In addition, when examining the total invested assets of Me insurance companies, it becomes evident that they do not need to transfer capital from abroad to finance real estate development. The risk invohred in importing capital, and the fact that real estate constitutes only a fraction of the assets of life insurance companies, supports the argument that in most cases international money is not needed for real estate development. Finally, the interconneMi between capital flows, in which real estate capital foms oniy a fraction, should be addressed in future research. Real estate development is neither stnctly dependent on the prirnary circuit of capital, nor is it an independent activity; it is also related to broad social and economic processes that make office development a desirable or an ill-fated investment. Building cycles provide us with the general patterns of macroeconomic conditions, but they fall short in providing connections between supply, demand, govemment mie, and local conditions. In Canada, in each decade over the last fiyears, a number of factors were responsible for the development of office buildings. Development in the 1950s was unleashed as a resutt of the govemment lifting restrictions on building materials for commerciai development. In the 1960s. aftei the large real estate companies were fomed, demand was strong, and large-scale projects were possible. In the 1970s. the continued growth of the economy resulted in fuither development. The 1980s were characterized by abundant supply of capital seeking outlets and even after it was clear that office development at the extent it was delivered was not needed, available capital was too tempting for both developers and financiers. The 1990s decade was the era of 'prudence' and 'discipline' enforced by tight lending and the careful scrutiny of office development. In the late 1990s and early 2000. this trend has been reinforced by a slow stock market for the shares of real estate companies, and subsequently a flow of capital into 'high- tech' stocks, which has been partially diverted capital from entering or staying in the reai estate sector. Although real estate companies have posted soaring eamings in the last couple of years, the value of their stocks has plunged, and currently the market value of companies is severely undenralued. The lack of interest of the stock market in real estate shares strengthens the notion that the real estate sector is intertwined with the broader economy. As a result, real estate companies have adopted conservative strategies (these were 'imposed' by the financial institutions) with regard to office developrnent. The future of office development Are bricks and mortar obsolete at the dawn of the new millennium? Wiff cyberspace eliminate the need for additional office development? Or will fi change the kinds of office space in the twenty-fint century? Since these questions deal with the future, answenng them might be 'premature'. However, some indicators of future trends are visible. Throughout most of the 1990s, with almost no major office development taking place, the construction of new office buildings seemed to be the furthest away from the mind of real estate developen. Office development seems to be a thing of the past. A widely acknowledged impression was that the Swan Song of sizeable office development was inscribed in the buildings completed in the last great building boom of the 1980s. The mernoiy of the eady 1990s meltdawn of the real estate market with record-high vacancy rates and low rental rates was still fresh, and besides, in the electronic aga, bricks and mortar seem to be rephced by cybenpace (dubbed 'bricks and clicks'). In the late 1990s, however, and more specif'ically at the dawn of the twenty-fint century, office buildings are still in demand. In his address to the shareholden of O&Y Properties Corp. in the 2000 annual meeting, Philip Reichmann, the chief executive officer. contended that contrary to many futurists, demand for office space is rising, not falling: 'People used to think technology wouid mean the end of office space. People would be working from home. This is not the case at all.. .The office building is îhe factory of the information age' (Toronto Star, June 29, 2000).
There is evidence to support this argument. In the United States, recent growth in office supply and demand has been much greater than expected. In 1999, office completions were expected to be more than triple the level recorded two yean earfier (Urban Land, January 2000). In Canada, it is expected that in the year 2000, developen will build more than double the amount of office space they added in 1999 to meet the demand not seen in 13 yean (Globe & Mail, May 3.2000). However, development, ownership and financing of office buildings may not be the same as it was in the 1950 to the 1990 period. The structure of demand has been changing dramatically as new types of spaces are created and new office development arenas or office development districts are emerging. As a result, the type of agents involved in development and ownership. and the form of office buildings might be somewhat different. In the second half of the 1990s, after the severe real estate slump, office development became a more 'disciplined' business. (The term 'discipline' is used in the real estate milieu, both in newspaper articles and in the intenriews I conducted.) Discipline means that financial institutions scrutinize office developments more carefully, demanding substantial pre-leasing before providing financing. Therefore, office developers are more careful in launching development projects. Currently, in the Toronto area there are very few speculative office buildings under development; most of the buildings under construction are largely pre-leased or are design-built for single tenants. This means that no major office towers are being erected in the downtown area or in the suburban downtowns (recently, a few office projects have re-emerged and they have been frequently discussed by the media). Almost all suburban office buildings under construction in the late 1990s and in 2000 are buitt for specific single- tenant occupancy. Other trends might explain why speculative multisccupancy office buildings are not being built. First, older buildings are being re-used and converted from commerciaCindustrial loft buildings to office buildings and older office buildings are being renovated and upgraded. These buildings are located on the periphery of hedowntown area, in the case of Toronto west or east of the Financial District. Unlike the conventional office buildings, these buildings are being redeveloped or refurbished by a new kind of small developer that has emerged in the last decade. The re-use of buildings is even seen in the suburbs, although involving far fewer buildings in comparison to the Clty of Toronto. In the late 1990s. Nortel Networks, one of Canada's leading communications companies, renovated a large factory to create a one million square feet office complex in Brampton and turned it to the Company's headquarters. This complex is a self-contained environment enclosed in a 'groundscarper'. Also, some of Toronto's bank back offices use large converted industrial spaces in the suburbs. Another feature of current office development is the use of 'hybrid' of 'flexible' buildings. The fact that some buildings do not reveal their function from the outside is due to flex spaces as these structures can be used for multiple functions. Related to this process is the scarcity of information on the actual processes that take place in these spaces both in the inner city and in the suburbs. To borrow from the idea of Paul Knox of 'stealth cities', these buildings constitute stealth office space. As a result of fewer office developments in the last decade and the new forms of office development, our notion of off ice 'development' has to be reconfigured. Instead of talking about actual development, large real estate companies are more focused on ownership, and buying and selling of office buildings, including the assembly of large portfolios of prestigious office properties. The early 1990s slump transpired in the reduction of real estate portfolios by many real estate companies and several financial institutions. Pension funds have become extremely important in the real estate sector in the 1990s decade. Recent acquisitions (mainly in 1998 to early 2000) of large office portfolios by all the largest Canadian pension funds may suggest a new phase in the structure of the real estate sector in general and of the office building sector in particular. To conclude, structural changes. which include the composition of playen, and the emergence of alternative fons to the 'standard' offie building, are transfomihg offce development and ownership. New agents have joined or expanded their involvement in office development and ownership, such as pension funds, real estate investrnent trusts and new types of small developen. On the other hand, banks and life insurance companies are out of office development. In between are the traditional real estate companies. These types of companies are undergoing a process of restructuring as some companies continue to be large players but with a closer dependency on their financial patrons. This emerging picture presents a challenge for future research. REFERENCES
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Government Publications
Bo ro ugh of North Y O rû (1973) Study of Future Offïce Development Polky.
City of Calgary (1979) Lo~ationof Oflce Emplopent in Calgacy, Planning Department, Research and Long Range Planning Section, February.
City of Mississauga, New Industrial and Commercial Building Pemits, Economic Development Office, 1990-99. City of Mississauga (1988) Office Space Availabildy Suwey, Economic Development Office, September.
City of Mississauga (1997) otf'ke Building lnventory, Economic Development mi,Juiy.
City of Mississauga (1998) The Outlook for Office Development, August.
City of Mississauga (2000) Cdy Business, A newsletter for Mississauga Businesses, winter.
City of North York, Comprehensive ûffiiial Plan Program, mcialPlan Amendment, No. 26 1 (Oflice Policy), 1981, 1983.
City of North York (1997) North York Office Survey, Economic Development Centre, Spring.
City of North York (1997) Yonge Comdor Development Database, Planning Department, Novernber.
Gl us kin, 1. (1 976) Royal Commission on Corporate Concentration, Study No. 3, Cadillac Fairview Corporation Lhited: A Corporate Background Report, January.
Municipalii of Metropolitan Toronto (1989) Centres and Mice Areas, Metropolitan Toronto Planning Department, Policy Development Division, Report No. 9.
Municipalii of Metropolitan Toronto (1989) OMce Space Characteristics Report, Metropolitan Toronto Planning Department, Research Division.
Mun icipality of Metro politan Toronto (1992), Office space and employment characteistics: Metropolitan Toronto and the Greater Toronto Area, Toronto: The Metropolitan Planning Department Research Division.
Office of the Superintendent of Financial Institutions, Summaiy FinancialData, Life Insurance Companies, Properfy and Casualty lnsurance Campanies (Various years).
Statistics Canada, Building Pemits, Catalogue No. 64-203 (1961 -97). --CANSlM Matrix No. 4073 (Building Pemits, 1998-99). - Corporation and Financial Statistlcs, Catalogue No. 61-207 (Various yean). -- Financial and Taxation for Enteqxises, Catalogue No. 6 1-2 19 (Various years). ---- Canadian Standard Industrial Classikation for Companies and Enterprises, 1980, Catalogue NO. 12-570E. ---National Economic and Financial Accounts, Quarterly Estimates, 1961-1 992 and Third Quarter 1998, Catalogue No. 13-001.
Annual Reports
Canadian Health and Life lnsurance Association, 1998 Canadian Institute of Public Real Estate Companies, 1970-96 Real estate com~anies BCE Development Corporation (previously, Daon Development Corporation) Bentall Corporation Brarnalea Limited Brookfield Properties Corporation Cadillac Fairview Corporation (previously, Cadillac Development Corporation and Fairview Corporation) Cambridge Shopping Centres (previously. Cambridge Leaseholds) Campeau Corporation Dundee Realty Corporation Gentra Inc. Marathon Realty Markborough Properties MEPC Canadian Properties O&Y Properties Oxford Properties Group (previousiy, Oxford Oevelopment Group) S.B. Mctaughlin Associates Limited TrizecHahn Corporation (previously, Trizec Corporation) Y&R Properties
lnsurance com~anies 1. Canada Lie 2. Confederation Life 3. Great-West Life 4. London Life 5. Manulife Financial (previously Manufacturers Lie) 6. Mutual Life of Canada 7. North American Life 8. Sun Life Financial (previously, Sun Lie Assurance of Canada)
Banks 1. Bank of Nova Scotia 2. Canadian lmperial Bank of Commerce (CIBC)
Newspaper and Magazine Articles
Building Developmenf, 1971 'M.E.P.C Canadian Pmperties', December.
Building Management, 1966 'Cemp Investment, Fairview Corporation', February, pp. 26-31.
Calgary Herald 1982 'Office buildings shelved', October 5. ---- 1982 'Economic woes ground Bankers Hall', October 21. ---1998 'Cadillac FaiMew buys The Tower', February 10.
Canadian Building 1972 'Shipp. Harbridge join in $30 million commercial project in Etobicoke'. January. ---- 1974 'Office Building: Trends, problems and frustrations', August. - 1975 September. -- 1976 'British pullout or Canadian take-over?', June. -- 1976 'Office buildings', August. - 1 978 'Shipp Corp. plans commercial centre at Mississauga', February. - 1981 September, p. 15. - 1985 'Pension funds look for better retums', October, pp. 37-41. - 1 989 'Taking Heart', March.
Canadian Business 1976 What's happening in real estate', October. ----- 1996 November, pp. 33-39.
Cify Planning 1983 'The Development Scene: Scotia Plaza-Waterpark Place', December.
Dai& Commercial News 1998 'Ofd Toronto factories to be redeveloped for retail market', October 20. - 1999 'Toronto area office space in short supply', October 1. Financial Post 1981 'New contracts reflect changes in financing', October 24. -- 1984 'Bankers wage a war in Toronto's high-rise jungle', June 9. ---1987 'Despite space glut, Calgary is still buildings', March 2. ----1989 'Ottawa to small now for Minto Developments', July 17. -- 1989 'Calgary buffer against energy ties'. September 20. ----- 1990 'Real estate a haven for foreign funds', September 1 9. --1991 'Hong Kong developer arrives', November 6. ---- 1992 'Sun Life proves itself an insurer with timing', June 29. --1992 'York-Hannover besieged', October 7. ----- 1993 'European investors keen on Toronto core', April21. ----1994 'Carnrost loses flagship towef, March 8. ----- 1996 'Hong Kong spectre looms once more on Canada's skyline', August 7. ----- 1998 '1 997 was the year of the REIT'. Januarj 3. ---- 1998 'GWLRealty entes Toronto market', January 29. ---- 1998 'Fifth tower proposed for Calgary', June 5. ---1998 'REITs move into construction', June 6. Financial Post Magazine 1999 Financial Post 500,35m Edition.
Financial Times 1982 'Calgary's dramatic office market downtum', October 25. ---- 1983 'Insurers: The new real estate developers', October 31.
Globe & Mai/ 1973 'In Scarboro, the centre is in the middle', March 9. ---- 1973 'Fairview Corp. plans fourth tower in Toronto-Dominion Centre', June 7. --- 1974 'Developing in city is 'a privilege', Toronto's chief planner tells OMB'. November 1. ---- 1975 'Take core from City Council control, inquiry on Metro urged in two briefs', October 29. ----- 1975 'Will Scarborough find true happiness... and a downtown?'. December 12. ---1977 'Marathon Realty intends to become substantial force in U.S. real estate', May 2. ---- 1978 'Developers appealing decision on central area plan to cabinet', October 4. -- 1979 'Cabinet approves Toronto downtown plan that restricts office growth', February 3. ----- 1981 'Scotiabank reported planning $400 million tower in Toronto', March 13. ----- 1981 'Mistakes haunt development', September 24. ---1982 'Changing role for developers predicted', September 21. ---- 1982 '$300 million bank building eyed for downtown Toronto', October 5. ----1983 'Prudential', July 28. -1983 'Cadillac, T-D build tower despite oversupply', September 23. -- 1984 7-D opposes Scotia Plaza zoning', May 17. -- 1984 7-0bank seeks $36 million in towering feud', May 29. - 1984 'Downtown businessmen back bid to pare tower', June 22. - 1984 'Scotia tower wins approval despite protest', June 27. - 1984 '1 960s revisited with banker on other side', June 28. - 1984 'Secret $2-million donation ciears way for Scotia Plata', November 19. - 1985 'Daon wins office site in bid with Cadillac', October 3. - 1986 'Daon profi will slow during next few years', February 22. - 1986 'Oxford sells to buildings in BCE unit', March 13. -- 1986 'Mississauga mayor detemined to avoid Edmonton's mistakes', September 9. - 1987 'Developers give generously to city politicians', December 11. - 1987 'Bell office towers get the green light from City Council', December 15. --1988 'Inducon alliances help development projects', October 11. - 1989 'CIBC unveils subsidiary for real estate development', January 1 1. --- 1991 'Developers corne under fire', July 30. -- 1991 'Big banks looking at role as developers', August 26. - 1991 '0&Y seeks advance ruling on Scotia Plaza purchase', September 18. -- 1991 'Real estate market gets powerful investor', October 1. -- 1992 'Tirne more crucial than money for Reichmann restructuring', Maah 26. -1992 'O&Y showing a variety of debt', March 26. - 1992 'lnducon placed in bankniptcy', March 31. - 1992 'Brarnalea seeks court protection', December 23. -- 1993 'Prudential claims O&Y tower', January 1.
---O 1993 'Giant Toronto office complex rnothballed', August 19. -- 1994 'U.S. 'vulhires' are flocking north', April29. - 1994 'Cadillac's huge debts revealed', December 31. -- 1995 'Insurers bail out of real estate', Apnl3. -- 1995 'Spec building back in Toronto', July 11. ---- 1996 'Marathon shifts focus to downtown office towers', March 4. --1996 'HIR Developrnent spins off property', December 5. --1998 'TrizecHahn buys four U.S. office towers', September 4. --- 1998 'Warehouses to become shops, offices', October 15. -- 1998 'Pension funds: The big kids on the block', November 14. ---- 1999 'Sale of Scotiabank's real estate portfolio close to completion', June 17. --- 1999 'Calgary: Western Canada's head-office capital', August 3. ---1999 'CIBC renews tied to Reichmanns with loan', August 6. ----- 1999 'CIBC plan sweeping sale of real estate', August 13. ---1999 'Pension funds taking over public real estate companies', December 3. ---- 1999 'B.C. funds grab CIBC propetties', Decernber 11.
-O--- 2000 'Teachers leaves Cadillac alone to pick its CEO', March 27. ----- 2000 'TrizecHahn unveils plan to reinvent itself, March 28. --- 2000 'Toronto's garment district is spotting g!ad rags', April29. ---- 2000 'Office construction expected to double', May 3. --2000 'Cadillac Fairview CE0 announces new executive team', May 25.
Mays, J.B. 'Places in the Haartland', Globe & Mai/, August 5, 1992.
Metropolitan Toronto Business Jcumal1985 'Ûoing west, young man?', July-August. Mississauga News 1968 'Suburban sprawk Ifs getting wone, but Peel offen something better', March 26. -- 1969 'Canada's largest ready for construction', February 12. --1969 'McLaughlin offer to good to miss', July 2. - 1976 'Mississauga City Centre', March 24. -- 1988 'Keep downtown in city centre, Square One boss tells council', Februaiy 24. -- 1990 'City centre shuttle bus service unique in North America', February 18. -- 1994 'Orlando power centre development not at al1 what city council expected', October 19. -- 1995 'Developer defends power centre', February 12. -- 1995 'Developers partnen in shaping cny's future face', August 11. - 1995 'Mississauga's builder-friendfy reputation growing', November.
Mississauga Business Times 1996 'Controversial rezoning divides City councillon', June. -- 1996 'Controveny dogs plan for rezoning in Heartland', October. -- 1997 'Hammerson fights Orlando's retail moves', March. ----- 1998 'Mississauga's Heartland: A 'power centre', November. --- 2000 'The developen: Key players in our future', March. -2000 'Orlando has big plans for Brampton area', June.
National Post 1999 'Calgary real estate falls out of the saddle: 6.7% vacancy rate', February 10. ---- 1999 'GWL's strategy based on don7 fall in love with your real estate', April 16. ---- 1999 '€-commerce luring banks away from real estate assets', July 31. - 1999 'Cadillac falls to Teachers in $2.38 property deal', December 2. ---1999 'Pension fund nabs seven CIBC pmperties', December 11.
O'Donnell, J. (1989) 'The Entrepreneurial Developer', Uhaan Land, 48,7,34-5.
Real Estate News 1995 'Downtown office conversions in slowing', February 17. ---- 1988 'Mississauga begins corporate courting campaign', November 25.
Toronto Star 1984 '68-storey Scotiabank tower approved', June 29. ----- 1987 'Huge Bell development gets approval from council', December 15. ---- 1988 'Let 'downtown' North York expand, panel told', January 13. ---- 1988 'Giveaway to devekpers revives reform group', November 5. ---1989 'Major bank creates subsidiary to manage real estate holdings', January 11. ---- 1989 'Bay-Adelaide good for city consultants say', May 25. ---- 1990 'CIBC division wins bidding to develop Hydro complex'. March 10. --- 1991 'Residents protest Yonge St. highrises', Novernber 26.
--O-- 1992 'Job boom seen in North York', January 14. ---- 1994 'Investors pour millions into Hong Kong corner', December 29. ----- 1999 'Oxford seals Royal Bank deal', September 23. ---- 2000 'Reichmann plans new tower', June 29.
The Telegram 1968 'Phn 25,000 homes, core for new city'. April27.
Trade and Commerce 1 98 1 'Office space creation tops in North America', Aug ust, 72-84. Interviews
Allison David, Vice President, Investments, Real Estate Dision, Manulife Financial, January 21, 2000 Amell Gordon, Chairman and CEO, Brwkfield Properties (formedy with Oxford Development Corporation and Trizec Corporation), June 11,1999 Beales John, Vice President and General Manager, Real Estate Division, Manulife Financial (fomerly with Marathon Realty), January 18,2000 Bullock James, former President, Cadillac Faiwiew Corporation, July 15, 1999 Campbell John, President, Brookfield Properties Management, July 6, 1999 Cowan Jay, Leasing, GWL Realty Advison, June 9,1999 Cuningham Jeff, Manager, Acquisition and Disposition, Oxford Propeities Group, June 9, 1999 Down Lome, Vice President, Canadian Mortgages, Manulife Financial, April 13,2000 Eagles Stuart, fonner President, Marathon Reaity, June 29,1999 Ghert Bernard, former President, Cadillac hirview Corporation, June 11, 1999 Gillin Philip, Vice President and General Manager of Real Estate, Sun Life of Canada (fomerly with Cadillac Faiwiew Corporation), June 8,1999 Gluskin Ira, Gluskin Sheff & Associates, June 28, 1999 Heyland Bruce, former President, Hammerson Canada, Apnl 13,2000 Jacob Andrew, formerly with Campeau Corporation, May 21,i 999 Kidzium John, Vice President, Development and Corporate Facilities, Real Estate Division, Manulife Financial, January 18, February 10,2000 King David, fonner President, Campeau Corporation, June 21, 1999 Kramer Gary, Orlando Development Corporation (fonneriy with the Planning Department, City of Mississauga), July 29, 1999 Lennox Andrew, Senior Vice President, Real Estate, Bank of Nova Scotia (formeriy with Hammerson Canada and Daon Development Corporation), March 7,2000 Levitt John, Senior Vice President, Business Development, O&V Properties, May 20, 1999 Love Donald, Founder, Chaiman and President, Oxford Development Group, July 6,1999 Marotta John, Director, Leasing, ClBC Development Corporation, May 26,1999 Moore Bill, Senior Vice President, Office Leasing, Royal LePage Commercial Inc., July 8, 1999 Moyes Scot, Manager, Office Leasing, Orlando Development Corporation (fomerly with Royal LePage), June 1,1999 Rotenberg Kenneth, former President, Y4R Properties, July 5, 1999 Soskolne Ron, fomer Vice-President, Olympia & York Developments; fomerly with the Planning Department, City of Toronto, May 19,1999 Thomson Andrew, Director, Development, TrizecHahn Corporation (formerly with Marathon Realty and Bramalea Limited), May 19, May 28,1999 Weinberg David, President, ClBC ûevelopment Corporation (formerly with Cadillac Faiwiew Corporation and the Planning Department, City of Toronto), June 10, 1999 Wood Neil, former Vice-Chairman and President, Cadillac Faiwiew Corporation; former President. Markborough Proparties, June 22,1999 Zsolt Andrew, Founder and President, lnducon Development Corporation, July 22, 1999