High Tech New Office Tower

When Peter Menkes purchased a plot of land five years ago on former railroad lands in downtown Toronto, it was a gamble. He envisioned an office development beside Union Station. But the centre of the financial universe remained on Bay Street, in the city’s core. Attracting tenants to the waterfront was a risky move.

It was, he said in an interview, “a leap of faith.” The gamble paid off.

Menkes unveiled the city’s newest office tower, the $250-million Telus House on Wednesday. The 30-storey, 780,000 square foot tower at 25 York St. is the first major office development south of the railway tracks in more than a decade. The building is co-owned by the Healthcare of Ontario Pension Plan and Menkes Development.

“They thought it was a little crazy, because no one was building anything back then,” Menkes said in the futuristic open concept lobby of his largest tenant, telecommunications company Telus. The company has leased 460,000 square feet, more than half the building.

The new building is a “spaceship” compared with the staid bricks and mortar of traditional office buildings in Toronto, said Menkes. As befitting a building housing a telecom company, the building is as sleek as an iPad and bursting with technology.

Inside the teleconferencing room, high-definition monitors display life-size images of Telus executives from across the country.

“You forget that these guys aren’t in the same room,” says Joe Natale, Telus’ chief commercial officer. “I’ve asked people to meet me privately at the lunch break forgetting that they’re not here.”

The developer is targeting LEED (leadership in energy and environmental design) Gold certification and the building uses more than 60 per cent less in energy than a comparable-sized property.

A gourmet kitchen where staff can prepare meals, rooftop garden patios and a fitness and wellness centre, a prayer room and massage and physiotherapy rooms are some of the attractions that make the offices seem more like boutique hotel than traditional office space. All furniture is formaldehyde free, including carpeting to reduce volatile organic compounds.

Those are some of the reasons that new buildings such as the Telus House have been attracting tenants at the expense of some of the older Class A or top quality properties in the city.

More than 3 million square feet of office space has been completed in the last 12 months, including the 1.2-million-square-foot Bay-Adelaide Centre in the financial core and the 1.2-million-square-foot RBC Centre on Wellington St. in the entertainment district.

The plethora of new office space (the last major skyscraper completed was Brookfield Place in 1991) means that tenants have been vacating older properties. Telus consolidated its operations from 15 other sites, to house their more than 2,000 employees, for example.

More space on the market means higher vacancy rates, which has tipped the balance to tenants who have newfound negotiating power.

The downturn has also meant asking rents have come down to $15.20 per square foot at the end of 2009 from $17.83 per square foot in 2008, according to Colliers International.

Office vacancies downtown hit 6.1 per cent, representing a 20 per cent increase or 11.3 million square feet of space.

Menkes said there is still 100,000 square feet of space available in his building, although he already has an offer for several floors.

“Some of the larger tenants are looking for big blocks of space that weren’t available in the other buildings,” said John O’Bryan, vice-chair of CB Richard Ellis.

Some of the older buildings, such as the TD Centre, are now undergoing their own makeovers during the downturn. Cadillac Fairview, owners of the complex, said last week they are spending $110 million to give their property a facelift, including replacing all the glass in one building.

“It could be a blessing in disguise. By the time some of the big landlords have finished renovating their buildings they’ll be ready for the next upturn,” said O’Bryan. CB Richard Ellis sees the market picking up next year.

“We are already starting to see more interest especially from financial institutions for space,” said O’Bryan.

A separate report released by Colliers Wednesday said the Canadian real estate investment market also picked up strongly in the first quarter of this year with strong sales and renewed interest in commercial properties.

That bodes well for newer properties such as the Telus House project.

O’Bryan said Menkes’ risk has helped to open up the harbourfront area that has been closed off by an expressway and rail lands.

“The area was seen mainly as residential, not a place for offices. But it works well because it has a funkier feel, and people are really starting to warm up to mixed-use properties that offer a greater variety of experiences.”

Story by By Tony WongBusiness Reporter: The Toronto Star