Doubling down on the downtown
Developer planning two-tower skyscraper that will combine offices, residences and retail
Urbanites are fleeing locked-down cities. Office towers are deserted, with the highest vacancy rates since the financial crisis. Downtown-condo investors face plunging rents and property values. None of this worries Michael Cooper, CEO of Dream Office REIT, the developer behind the Distillery District and numerous downtown office towers.
In December, Dream announced the largest project since the pandemic hit: a two-tower skyscraper at King and University that will combine offices, residences and retail, and exceed First Canadian Place in height. A decline of downtown Toronto? “Inconceivable,” says Cooper.
You must have been planning this project before COVID-19, but have you had second thoughts? Office vacancies in downtown Toronto are up more than 50 per cent in the last quarter alone.
No. It’s an amazing location, right at the edge of the financial district where all the theatres and restaurants start. There are three beautiful historic buildings that we want to use as part of the atrium. People want to have exceptional spaces and the future of offices is going to be special buildings, not commodity office towers. It’s about motivating employees to be in the office, so buildings that compete only on price have an uncertain future. We used to own 176 office buildings and we sold 144 between 2015 and 2019 because we already saw this trend. The demand for office space could grow slower in the future but it will still grow.
How will the pandemic change the design of office towers? Could we finally see the end of open floor plans?
The big thing is air quality and that’s easy to improve. The idea of having a 25,000-square-foot open floor plan is probably not the way of the future, but rather more collaborative spaces — the office may become more of a community centre. There are also more technologies like voice-activated elevators and machines that improve air quality inside elevators.
Do you anticipate we will all be back in offices like 2020 never happened?
That’s still uncertain. If you’re in the customer service business, you want to be available to people. I heard a lawyer say he’s moving to Prince Edward County and I thought, “I want a lawyer who can meet me in the food court in five minutes.” Over the past three or four months, more large companies have been saying they expect people back at the office, and people are sick of working at home, they want to go to work like adults and be around other adults. We brought people back into the office in August and I literally heard shrieking, people were so happy to see each other.
Are lease prices dropping as more office space becomes available? Companies like Shopify and Amazon have secured additional office
space even as they say some remote work will continue.
I haven’t seen one company getting a bargain so far. Landlords have very little space to rent right now. The vacancies are due to tenants subletting their spaces and some of those leases are two years in duration, whereas the tenants you’re talking about may want to secure space for 10 or 15 years. For Shopify and Amazon, officespace cost is not key to their profitability. What they need is to attract people and give them comfortable premises.
What about asset prices — are there lots of bargains, like we saw during earlier downturns?
So far we haven’t seen that, in part because interest rates are so low. Office real estate is selling at pretty close to what it was a year ago. People have told me that if we find a bargain, they would like to buy it with us, and we haven’t found one yet.
Your company builds residential projects as well, including the new Canary development on the waterfront. Are you concerned about the trend of people moving out of cities?
I’m not fussed by the idea that somebody wants to live on a farm and Toronto will die as a result. That’s inconceivable. If I was in a different city, that might be a concern, but Toronto was absolutely thriving before the pandemic and it will thrive after. It’s one of the greatest cities in North America in terms of population growth, multiculturalism, culture. What I am concerned about is fiscal and monetary policy. Will we be able to recover from the financial position our country is getting into? There is lots of money available now at very low interest rates and I hope that liquidity doesn’t dry up.
When remote working first started, some pundits were saying that office real estate will be permanently depressed, but it sounds like your industry hasn’t felt much disruption so far.
We’re seeing it for sure in apartment rentals. Everything people like about the city is closed now, but when it opens up, people will back downtown.
What about the condo market? Numerous condominium projects have stalled recently.
All the ones I know of were troubled before the pandemic but yes, there are fewer condominiums being launched right now. Still, we always underestimate how much housing is needed. In the last 20 years, everyone said we’re building too many condos, yet we still don’t have enough housing units. And while rents have come down, I would suspect that interest rates have come down more than rents.
If 212 King St. W. gets approved, it will be among the tallest buildings in Toronto. How high can skyscrapers go?
The technology keeps getting better and the higher you are, the more expensive the space is. I think every building charges more for apartments or office space the higher they are. In condos, it could be $10,000 more for each floor.
With the demise of Sidewalk Labs’ Quayside project, that land will presumably be back in play. Dream owns a large parcel adjacent to it. Will you be interested?
Yes. It’s well known that Waterfront Toronto will be looking for a developer there. We own 5.3 acres next door and we had been creating a master plan for the area with Sidewalk Labs.
Last fall, you launched an impact-investing REIT. Are concerns around societal impact rising in your industry?
Real estate plays a big part in many of the most challenging issues we have. We’re focusing on affordable and attainable housing, resource management that reduces water and carbon footprint, and inclusivity. Real estate produces 36 per cent of global carbon emissions, from heating and cooling and all the carbon used in construction.
You have to deal with that.
What’s your take on the Toronto region’s approach development and urban planning?
That’s not what I do for a living. We live with what the rules are.