Professional Documents
Culture Documents
NQ 53742
NQ 53742
NQ 53742
lgal Chamey
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lgal Chamey
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 i
s 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 f i i yean provides the
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
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. W i i respect to spatial fields of operations, a distinction between
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
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
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
INTRODUCTION
Principal Approaches
1.l. 1 Neo-classical approaches
1 .1.2 Political economy approaches
1 .1.3 Institutional approaches
A Provisional Framework
2 RESEARCHING OFFICE DEVELOPMENT IN TORONTO:
CONTEXT, APPROACH, METHODS, AND DATA
CONCLUSIONS:
SPATIAL F1X AND SPATIAL SWlfCHlNG OF
REAL ESTATE CAPITAL
List of References
List of Interviews
Table Paae
List of interviews 66
Paae
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. F i e components 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 l e u 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.
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
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.
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).
S h o n n ~UP c a ~ i t aaccumulation
l
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. 202-11) 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 k e n considered 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 responsibilitiesto 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 i m ~ e r a t i v e s
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 1 9 2 0 ~ ~ the Chicago office
when
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 o m ends; consequently they are more likely to play
influential roles in the policyrnaking process Weiss, 1991).
'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-inducedbase] means that city building is
l e s and l e s 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
(1987, 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 p m f i . 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 I l e 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.
D e v e t o ~ m e nand
t acquisition: Complementarv ~ a t h s
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.
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.
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.
2.1.4 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 1 9 7 0 ~
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 office-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 t o m 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.
Table 2.1
Type of data available on office building permits and office floor-space
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
Notes:
(1) In some municipaiiies, offibuilding pemits at the municipal level are embedded in commercial building pemits. In the
1990s, these municipalities have disaggregatedthe commercial cornponent into office, retail and industrial.
(2) In the late 1990s,Royal LePage 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.
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
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
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 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). h i l e 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.
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-residentialstructures.
(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 1971to 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) Canadianbasedownen of real estate assets, selected yean.
1971-99, $ million (1)
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.
; 2000 as a result of the purchase of Cadillac FaiMew by the Ontario Tea&ers Pension, and the
(2) Cadillac F a i ~ e w in
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 b a r d 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.
Table 3.3
A profile of the large Canadian real estate companies in their initial phases
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 a m 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
~ companies became developers of office buildings. Financial institutions, such as banks,
1 9 8 0 ~these
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 o m n e d 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
cornpletely 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 o f f i 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 (NationalPost, 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 f i e 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 o f f i 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 h i l e 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
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 'alternativepo f f i 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.
Trizec 10,255 4,072 14,327 14,105 14,070 28,175 14,118 50,162 64,280
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 F a i ~ e w .
(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.
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
d o m 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 a l 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);
Newspapen (Globe & Mail, Financial Post, Financial Times);
Local newspapen and magazines including both articles and advertisements (Toronto Star,
Mississauga Business m e s , 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 o f f i i cornplex, the Toronto-Dominion Centre, the largest was
Fairview. The most experienced developer of office space in Toronto (active since in the 1 9 2 0 ~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 L i e (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 o f f i i 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)
Bramalea Lirnited
Manulife Financial
Royal Bank
Marattion Reaity
Menkes Developments
Shipp Corporation
Orlando Corporation
TrizecHahn Corporation
Harnrnerson Canada
Y&R Properties
"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.
1 OTHER
EXïERNAL MARKETS
Repayment Debt
DEVELOPER
FINANCIAL
INSTlTUlION
Equity
1
1
FINANCIAL
INSTITUTION AS A
DEVELOPER 1
Figure 4.1 : Connections between financial capital and real estate developers
There are f i e 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.
Sources: Statistics Canada, Corporation Financial Statistics, Catalogue No. 61-207; Financial Statistics for Enterprises,
Catalogue No. 61-219.
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, 0 8 Y
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. 0 8 Y 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, 0 8 Y Properties, with over $ 2 0 million to reclah the ownenhip of the
First Bank Tower in the First Canadian Place office complex (Globe 8 Mail, August 6, 1999).
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 o f f i building (Collier, 1974). As a result, Me bank teamed
up with Fairview to develop the largest office complex in Canada, the Toronto-Dominion Centre ( f i e
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, h i l e 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 a m 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 11, 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)
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 M e r
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 a m of Great West Cie, had no prior experience in development, the company commenced its
first office project in 1998 (FinsncialPost, 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).
4.4.1 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
Edmonton Eariy-to-mid 1980s Scotia Place 550,000 National Trust, pension funds
St. John Mid-1970s-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 f i e 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
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 o f f a 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 f i e 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.
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
Bentall Centre
Table 4.7
Office buildings developed by Manulife Financial h r income-producingpurposes,
1960s to 1980s
Vancouver 12.9 One building çold in 1995 (350,000 square feet); another
building (200,000 square feet) purchased in 1999
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)
Sources: 1960 to 1980: adapted from Des Rosiers (1987); 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.
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
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 (1961-1999) 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.
Table 5.1
Major switching practices of selected large real estate companies (by property type)
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 1 9 9 0 ~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. f h e 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 o f f i 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)
. .-- - ..
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 F a i ~ e w
Corporation. 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 PropertiesGroup, 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.
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)
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 office-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 1981 .
Figure 5.3
Value of Office Building Permits in
Ontario and Quebec (constant dollars)
O N T A R I O
- - *- - 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)
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 (1969-1978) and for the city (1979-1999).
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)
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.
Table 5.4
The Canadian office portfolio of Trizec, selected yean, 1968-99, percentages (1)
Table 5.5
The Canadian office portfolio of Cadillac Fairview, selected years, 1968-99, percentages (1)
Other O O O O 2.0
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-developmentatmosphere 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 t e n ) 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 s a l e 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).
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 municipalitiesthat 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 excludedfrom 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.
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 o f f i 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
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 o f f i
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 ('000square feet)
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 LePage, 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 1 9 8 0 ~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)
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 municipalitieswithin 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
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.
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 Dsitrcit is the prime office area of the
Toronto region in t a n s 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 r o s t 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
91) 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
Note: Based on the financialD i boundariesof 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.
6.3.3Suburban 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)
Aithough al1 were created in the 1970s and expanded in the 1 9 8 0 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 t o m 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 MississaugaCity Centre and the Scarborough Town Centre,
the maximum building height is 18 floon.
Table 6.9
The inventory of office space in Office Parks in the Toronto CMA, selected yean, 1971-99
('000 square feet)
Hurontario
Meadowvale
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 o f f i 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 o f f i i districts is a newly emerging phenomenon in the
Toronto CMA. Some districts gain substantial amounts of o f f i space, h i l e 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 convertedto 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 1 9 7 0 ~
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)
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 o f f i i 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 M i l e 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 o f f i i 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).
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 differentiatedthan 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 t e n s 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 h g 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
spaces.
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.
-
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 'justJdowntown 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 t e n s 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 f i e 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; February, 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.
Location -
1975
ûffïce space %
-
1987
Office space %
-
1999
ûffice space %
('000square feet) ('000 square feet) ('000square feet)
Financial District (1) 2,827 67.0 4,171 70.7 5,050 54.1
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 1 9 8 0 ~tenants
~ did not consider suburban
locations as alternative locations to downtown. Tax incentives were another reason for holding real
estate assets for the long t e n . 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.
Table 7.3
Inducon's office portfolio in Office Parks in the Toronto CMA, 1982 and 1991 ('000 square feet)
Location
Office space
-
1982
% Office space
-
1991
%
Consumers Road 700 93.3 700 21.2
Mississauga (1)
Oahïlle
Other
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 f o n 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.
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.
Table 7.4
Top developen and ownen of office space built in the Financial District after 1960
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 &ilSeptember
l
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-millionsquare 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.
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 cornpanies. 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.
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
Hammerson 1 190
The City Centre is chaiacterized by a significant number of mid-rise office buildings (11-16 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.
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 %oreassets'. 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 m u t of 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 f i years, 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 d e , 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 intermediariesthat 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 p o l i , 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 f i years, 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 multisccupancyoffice buildings are not being built.
First, older buildings are being re-used and converted from commerciaCindustrialloft buildings to office
buildings and older office buildings are being renovated and upgraded. These buildings are located on
the periphery of h e downtown 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 office '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 f o n s 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.
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lnsurance c o m ~ a n i e s
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)
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-- 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 'SunLife 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 997was 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.
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---- 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 '1960s 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 11.
--- 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.
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 1 981 'Office space creation tops in North America', August, 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