The giants of Bay Street may be going south

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Mike Mallinos marvels at the changes going on outside his office.

The 38-year-old principal at Stonegate Private Counsel, which sits near York and Bremner streets just blocks north of Toronto's waterfront, used to work in the Financial District before his firm moved south of the tracks in 2010. The switch from "Bay Street" to an area of the city that had long been forgotten caused a little culture shock at first.

"We were still one of the few towers down here," he says of his company's offices in Maple Leaf Square. "But it's been an amazing change in the last five years, there are more towers than I thought possible."

Not only towers. If he looks out his office window, past the other new buildings, he can also spot the new aquarium. He can practically reach out and touch the Air Canada Centre.

While throngs of workers power walk, elbows out, from Union Station north to their Bay Street offices five mornings a week, workers in the South Core are more likely to find their morning walk impeded by a tourist asking for directions. But there's a theory percolating in the real estate community that this brand new neighbourhood will give Bay Street a real run for its money when it comes to attracting large corporate tenants.

It's already lured a large pension plan (Healthcare of Ontario Pension Plan), a wealth management giant (CI Financial Corp.) and one of the major insurers (Sun Life Financial), each of which is making the South Core home to their head offices.

Royal Bank of Canada, the country's biggest, will be moving more than 4,000 of its employees to the neighbourhood starting later this year. Cisco Systems Inc. recently announced that the area will be home to its new Canadian headquarters and one of its four global innovation hubs.

Toronto is an evolving city, and new neighbourhoods crop up. But the South Core is unique – the Financial District has been spreading, and some people view this as its southern expansion. The shiny new towers are offering companies cost savings, in part because their modern design makes it easier to cram more workers into less office space.

It will have its challenges – an expected influx of upward of 20,000 new office employees and close to 10,000 residents will put heavy demand on infrastructure in the area. But if the South Core continues to attract tenants that Bay Street landlords want, there could be an impact on Toronto's storied Financial District.

"The big question is: What does this mean for Bay Street?" asks Michael Caplice, senior managing director at commercial real estate firm Cushman & Wakefield. He thinks that, 15 or 18 months from now, the premium office space inventory in downtown Toronto will hit a 10-per-cent vacancy rate, a height it hasn't seen since the end of 2003.

The owners of the older bank towers, which have long been the pinnacle of office space, will likely find themselves having to spend significant dollars to spruce them up, and will likely still have to lower their rents, real estate analysts say.

At the moment, 13 buildings make up the 4.1 million square feet of existing office space in the South Core. Three buildings – RBC Waterpark Place at 88 Queens Quay W, Bremner Tower at 120 Bremner Blvd., and One York Street – are under construction and will add 2.4 million square feet of office space.

The newer towers offer firms a number of perks. Because they are more energy efficient and don't require the same maintenance, companies can generally save money compared with space in the heart of the Financial District. A key consideration is the ability to accommodate more workers. That's hard to do in the old bank towers because there are some barriers to retrofitting them: for instance, minimum stairwell requirements based on the number of occupants in case of fire.

Adam Vaughan, one of two city councillors whose wards cover the area, says that places such as this were able to develop because Toronto retained strong residential neighbourhoods downtown. And when the economic tide turned, the once-industrial area had the "bones" that allowed it to grow.

"Because it has industrial capacity, it can handle densification in a way that other residential neighbourhoods can't," said Mr. Vaughan, who is hoping to take his urban agenda to Ottawa as an MP. "So there's the hydro, there's the water, the sewer, the road infrastructure is industrial strength for a residential neighbourhood, and so you can intensify on it without overtaxing it."

He warned, though, that stresses on infrastructure can be pushed quietly toward a tipping point that may not be obvious when developments are first approved.

But work is being done, including a $195-million hydro transformer under the roundhouse across the street from the Rogers Centre. And the revitalization of Queen's Quay, scheduled to finish next spring, is a very visible sign of the lakefront's changing face.

The South Core is also well positioned to take advantage of the revitalization of Union Station that is now underway. Union is the busiest transportation hub in the country and, situated at the top of the South Core, it is the neighbourhood's access point to the TTC. The subway station is currently being expanded with a second platform to deal with increasing passenger loads – both commuter and locally generated.

Other parts of Union are being revitalized as well, with city plans explicitly linking the project to development in the South Core. And plans for a greater mix of stores and restaurants at the train station promise to turn it into a retail destination for the neighbourhood.

John Campbell, the CEO of the government agency Waterfront Toronto, says that it is keen to create a community that will convince people that they won't be coming to "some wasteland" if they lease.

"We're giving people a comfort level, 'Yeah, there's a there that's going to be there,'" he said, referencing Gertrude Stein's famous putdown of her hometown of Oakland.

"The big picture is, what we're doing is giving people a sense of comfort that South Core and areas like that are good because in fact we're building their backyard, we're building the place around them that gives them a sense of place."

Workers have started to lay streetcar tracks recently on Queen's Quay, a tangible sign of progress in the $150-million project to turn the street into a "showpiece for the city." The work is being led by Waterfront Toronto, which is footing three-quarters of the bill, and stretches from Bay Street to just beyond Lower Spadina. Incorporating bike lanes, transit and a pedestrian promenade, the project is due to finish next summer, in time for the Pan-Am Games.

South Core developers also had to adapt to accommodate and attract big-name residents such as RBC. Its arrival is connected to another milestone in the neighbourhood's development – its connection to the PATH system, the underground network of tunnels that extend across the core.

The bank said they wouldn't take the space without a link to PATH. Figuring out how to push this beyond the Gardiner required some tricky engineering, but the experience around King and Bay shows the tunnels have value beyond just convenience in the colder months. Pedestrian volumes north of Union are so heavy that the often-narrow sidewalks would struggle to move people without the PATH acting as a second option. And the tunnels have an extensive range of retailers offering services to passersby, a convenient amenity nearby if the South Core continues to fill in.

"Transit is very important in our business, but this is one area where the occupants of these residential buildings rely on their shoes rather than transit. It's even more convenient," says Jim Ritchie, a senior vice-president at Tridel.

In the end, the key to the South Core's success may be its combination of residential, office and retail.

"Six or seven years ago, the policy people at the City of Toronto did not want to have any residential," says Barry Fenton, the CEO of Lanterra Developments, which has been involved in a number of projects in the area, including Maple Leaf Square. "So we actually went to David Miller's office and ended up convincing him that the only way you're going to have a successful site and synergy down there is you have to have a mixed-use project."

That, he says, is how to "create the buzz."

"I really believe the only reason the office component works so well is because of the residential," Mr. Fenton says. "And I think one of the main reasons residential does so well down there is because there is a lot of gridlock and traffic getting into the city, and people want to be right there."