A Robust Canadian Economy
Fuels Toronto's Commercial Space

The Toronto area's office market is best known for a glittering downtown skyline with financial institutions and cosmopolitan restaurants, but the less-glamorous warehouse market attracted almost as much investment last year.

Looking ahead, though, the office sector may offer greater potential for rising rents.

Canada's largest city by population, with about 2.5 million residents as of 2003, Toronto anchors a metropolitan region that sprawls along Lake Ontario, just north of the hungry U.S. consumer market. The warehouse and office sectors in the Toronto area -- the country's banking and manufacturing center -- both have benefited from the robust Canadian economy. The nation's unemployment edged up in April to 6.4%, though it still stands near a 30-year low, according to Statistics Canada, a government agency.

Construction is to start this summer on the RBC Centre, downtown's first major new office tower in more than 10 years.

"Toronto is similar to the Los Angeles market," says Steven Dunn, chief economist with CB Richard Ellis, a real-estate brokerage firm. "Both markets have very strong and large industrial markets and recovering office markets."

Toronto is due to get its first major new downtown office tower in more than a decade. Cadillac Fairview Corp., wholly owned by the Ontario Teachers' Pension Plan, appears to be the front-running developer. In March, Cadillac netted Royal Bank of Canada and its joint venture with Dexia, RBC Dexia Investor Services, to anchor the project with leases for about 410,000 square feet in the company's 43-story office building. Cadillac Fairview expects to begin construction in July on the 1.2 million-square-foot office building designed by a team that includes architects Kohn Pedersen Fox Associates PC.

New York-based Brookfield Properties Corp. is also hoping to secure a tenant and begin construction this summer on a 50-story office tower that will be the first phase of its Bay Adelaide Centre. Brookfield acquired the site in the heart of Toronto's financial district in 2001. A previous developer stopped construction on a project planned for the site in 1991 after completing an underground parking garage, says Brookfield spokeswoman Melissa Coley.

The office and industrial markets aren't in sync, partly because the office market hadn't fully recovered from the oversupply of the late '80s and early '90s when the tech bust hit in the early part of this decade, says Chris Tambakis, vice president of investment with real-estate brokerage and services company Colliers International in Toronto. By contrast, the industrial market didn't suffer from the tech collapse, instead emerging over the period as a growing distribution hub.

CB Richard Ellis ranks the Toronto region's 703 million-square-foot industrial sector as the third largest in the U.S. and Canada, after Chicago, with 988 million square feet, and Los Angeles, with 893 million square feet. Toronto's industrial leasing market has been "on fire" as goods manufacturers and distributors' appetite for space has held vacancy rates in the 5% range, even as construction has ramped up, Mr. Tambakis says.

The dollar volume of industrial investment sales valued at more than one million Canadian dollars (US$898,000) also set a record last year, rising to a high of about C$2.1 billion, or US$1.89 billion, from C$1.8 billion in 2004, while the average price paid per square foot rose to about C$72.89, or US$65.45, last year, up from C$58.49 in 2004, according to Colliers. Last year's average warehouse prices were in line with the Canadian average of C$76.11, and about midway between the US$85 average fetched in Los Angeles and US$57 in Chicago. The higher transaction level came as some larger portfolios traded hands.

The run on industrial properties came even as some analysts say the strengthening Canadian dollar could pose a risk for the manufacturing sector and its demand for warehouses in the Toronto area. Pedro Antunes, an economist with the Conference Board of Canada, says a weaker Canadian dollar fueled the Canadian economy's export-led recovery over the '90s, benefiting the Canadian auto industry and other manufacturers, which were able to sell cheaper exports.

More recently, the Canadian dollar has appreciated to about 90 U.S. cents from a low of about 64 U.S. cents in 2002, and that's increasing the cost of the country's goods abroad, he says. "So far Canadian manufacturing has done quite well," Mr. Antunes says. "The question going forward is how long can we keep it up?"

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