The Case for Allowing Residential Use in Toronto’s
Financial District South
David M. Nowlan
Professor of Economics Emeritus, University of Toronto
Partner, August Trust Research Partnership
Toronto, November, 2004
Contents
Summary ..................................................................................................... i
Introduction ................................................................................................1
Mixed Use, Downtown Population Growth and Economic Success ......6
Offices in Mixed Use Areas .....................................................................14
Effect of the Lanterra Development on the Value
of Adjacent Land and the Timing of Development...............................18
Supply of Alternative Sites for Office Development .............................24
Conclusions ...............................................................................................32
Summary
Lanterra Yonge Lakeshore Inc is proposing a mixed-use residential/retail/entertainment
project at 15 York Street, next to the Air Canada Centre and within a precinct called, in
Part II of Toronto’s Official Plan, the “Financial District South.” This District, which lies
on either side of York Street below Front Street, most of which is south of Union Station
below the railway tracks, is restricted in the Plan to “non-residential” uses. Lanterra is
thus proposing an amendment to the Plan.
This report analyzes, from an economics and planning perspective, the desirability of
only permitting non-residential uses in the Financial District South, rather than mixed
uses including residential, and it looks in particular at the merit of permitting residential
units at 15 York Street.
The evidence presented in this report shows that the market will readily be able to
provide future downtown office space when the demand for it arrives, whether or not 15
York Street and the rest of the Financial District South are available for office uses.
There is no benefit in preserving the Financial District South for office use only when
there exists a viable mixed-use residential proposal such as 15 York Street, particularly
given the positive benefits that would accrue from the development. These benefits
include: stimulating potential office developments by making the area more attractive for
future offices, addressing the commuting imbalance, reconnecting the Downtown with
the Waterfront, and creating a vibrant area of the City.
The Financial District South is within the Railway Lands East which is among the
downtown areas designated as a “Mixed Use Area” in Toronto’s proposed new Official
Plan. Both the new Plan and the older Part II Plan envisage that this area will be
developed so that the central city may be “reunited with the Central Waterfront.” The
Part II Plan calls for new development in the area to “have a mix of uses, and a form,
i
Summary
character and environmental quality which will ensure that the area is used by people for
a variety of purposes throughout each day”(para. 2.1). The new Plan regards precincts
such as York Street as “important to the vitality of Downtown as a great place to live and
as an attractive and competitive business location”(p. 16).
The idea of encouraging mixed use developments in downtowns as a way of stimulating
and revitalizing areas that in the past have often been regarded as business-only precincts
has taken hold in cities around the world. In recent years, with soft office markets, these
mixed-use environments have often been driven by residential and retail developments,
with office uses coming in once the renewed vitality and interest of an area is seen.
Toronto has been among the world leaders in encouraging such mixed use environments
downtown, going back at least to the 1970s when the 1976 Official Plan paved the way
for a turnaround in the residential population of the central area. Since 1976, the
population of the central area has risen by 50 per cent, with the effect not only of
enlivening the downtown but also of reducing commuting needs in and out of Canada’s
major employment centre. As the Official Plan says, “The large increase in Downtown
activity and development over the past three decades has not been accompanied by any
significant increase in road capacity. Instead, the growth in trips has been successfully
handled by improvements to transit services and by an increase in Downtown housing
that has put more people within walking and cycling distance of their place of work and
other activities … Policies favouring the expansion of transit over increases in road
capacity and encouraging more mixed use development in the Downtown are key
components of this Plan”(p. 18). At another point it notes that “Every home built within
the Downtown area offsets the need for in-bound commuting each day”(p. 15).
In spite of the enormous success Toronto has had in encouraging people to live in the
central area, there still are more than four times the number of people working in the area
than workers who live there—a difference of over 300,000 people—and of course not all
workers who live in the area work there. Thus the issue of commuting demand is a major
one for Toronto and not one that can be thought of as solved. When the demand for
ii
Summary
downtown office space returns, an increase of only 10 per cent in office workers alone
will require approximately three additional inbound and three outbound lanes of arterial
road capacity plus room for an additional 8,000 peak-hour transit trips in each direction,
unless this demand too can be offset at least to some extent by an increase in the
residential population (see pages 3 and 4 of the report). So it would seem to be prudent
to take every advantage of what is at the moment a strong housing market in downtown
Toronto to add capacity to our housing stock not just to reduce current commuting needs
but to “bank” residential space against the return of office-employment growth.
The purpose of encouraging downtown housing is not just to offset commuting needs but
to help build an attractive environment for both residents and businesses. Increasingly,
people like living downtown. U.S. authors point to an “emerging national trend in
demand for downtown living.”
In a definitive recent study of mixed-use developments around the world, the Urban Land
Institute writes that “Residential uses often were not included in mixed-use projects of
the 1970s and the 1980s, but in recent years they have come to play a prominent role,
accounting for a high percentage of mixed-use projects developed over the past decade.”
… “Housing is the use that will drive mixed-use development over the next five years,
partly because of the strong housing market and weak demand in most other sectors.
Housing in mixed-use developments will be fuelled by the growing diversity of housing
markets and available housing products, and by growing demand for intown and urban
housing products.”1 This downtown housing dynamic is illustrated in the body of the
report with examples from New York, Vancouver, Melbourne, Copenhagen, Portsmouth
and a dozen cities in the U.S. including the large Yerba Buena Centre next to the CBD in
San Francisco where a convention centre, museums and galleries and 2,500 housing units
have preceded the current and on-going development of office space.
As a result of this “return to the city,” the downtown populations of many U.S. cities
have been rapidly rising, like Toronto’s. Seattle and Pittsburgh increased their downtown
1
Mixed Use Development Handbook, 2nd edition, Urban Land Institute, 2003, p. 50 and p. 396.
iii
Summary
residential populations by over 50 per cent in the ten years from 1990 to 2000. San
Francisco, Portland (OR), Miami and Chicago all saw growth above 30 per cent. New
York’s downtown grew by 16 per cent, Dallas’s by 28 per cent.
Richard Florida in his path-breaking work on The Rise of the Creative Class attaches
considerable importance to the rise of the downtown as an indicator of economic growth
and innovation. He finds that the ranking of cities by their high-tech index “is positively
correlated with the share of a region’s population living downtown.”
“Seattle illustrates the trend,” Florida writes. “Nearly half of all high-tech jobs in Seattle
are located in the city versus 35 per cent in the suburbs … Almost a third of all high-tech
companies and jobs are in the central business district, Pioneer Square and Belltown,
even though Microsoft and its tens of thousands of employees are located outside the
city. … Sommers and Carlson found that many high-tech companies prefer the urban
environment for its “vertical character, specialty shops, street life, entertainment and
proximity to a great mixture of businesses and cultural activities … People thrive on the
thick labour markets, job opportunities and amenities there.”2
The Urban Land Institute believes that “once office and hotel development markets
begin to pick up in four or five years, however, new office development will likely
gravitate toward new and existing mixed-use districts that offer a better office
environment than free-standing sites.”3 Major recent projects illustrate this attraction
office users have to mixed-use environments. A significant example is the Time Warner
Centre in the heart of Manhattan at the southwest corner of Central Park which opened in
February this year with 198 residential units, 200,000 square feet of office space, a
Mandarin Oriental Hotel plus entertainment and retail facilities. Another example is the
Sony Centre am Potsdamer Platz in the centre of Berlin which opened in the middle of
2000 with 730,000 square feet of office space, 285,000 square feet of residential space
(201 units, both rental and condominium), and 452,000 square feet of retail and
2
3
Richard Florida, The Rise of the Creative Class, Pluto Press Australia, 2003, p. 288-9.
Mixed Use Development Handbook, p. 16.
iv
Summary
entertainment space. The Sony Centre was fully leased by opening day in spite of a very
soft office market in Berlin, as elsewhere, in that year.
Office tenants like to locate in and near mixed use environments. The attraction of lively
surroundings that mixed uses entail is clear enough, but there is a further relevant point
especially for office employers in a downtown with a large and growing residential
population. This population supplies the type of worker that offices need. In Toronto,
the characteristics of the growing downtown residential population match extremely well
the employee needs of the downtown employers.
It is not just the match of skills to jobs that helps the competitiveness of downtown but
also the size of the local labour force relative to demand. Empirical studies strongly
support the prediction of urban theory that wages for similar jobs will vary by location,
and that the highest wages will be at the employment centre, the CBD. The reason for
this is that if employees from the suburbs are to be induced to work centrally and not at a
job closer to home, they have to be compensated for their commuting costs, not just outof-pocket costs but also time costs. For equivalent jobs, average wages in any location
will therefore reflect the average commuting length of the employees at that location. A
recent study of Minneapolis-St Paul and Boston found that wages for equivalent jobs
varied by up to 15 per cent within the metropolitan areas of these cities and that “this
variation is significantly related to the average travel times for workers in the various
zones.”
Since wage costs make up most of the costs in the office-based services sector, the wage
differences that have been observed create a substantial penalty for businesses locating in
a central location with a relatively small local supply of workers. This is one of the
factors that drive firms out of the CBD and to outer metropolitan locations with better
access to workers. For many firms, of course, benefits of a central location such as
locational or cluster economies no doubt offset this high cost, but the point remains that if
commuting costs could be reduced through a substantial increase in the size of the local
labour supply, wage costs in the centre would fall and centrally located firms would
v
Summary
become even more competitive and less likely to leave the area, and others would be
more likely to want to locate centrally. Thus the economic benefit to the City of greatly
increasing the residential population of the central area is enormous.
Aside from the broadly beneficial effects of increasing the downtown residential
population, a mixed-use residential/retail/entertainment project of the type being
proposed by Lanterra will make adjacent sites more attractive to office developers. This
increased attractiveness will bring forward the optimal time for office building in the area
and, correspondingly, will raise the present value of the sites for contemplated office
uses. The mechanism by which this higher land value and advanced development timing
will occur are the higher rents that can be charged for office space in mixed-use
environments.
Based on the evidence we have, a conservative estimate of the effect of a mixed-use
environment on office rents is that they would be raised by at least 10 per cent. This
creates a substantial incentive to initiate an office project earlier than otherwise and it
correspondingly raises the value of the site for office uses. The body of the report uses a
simple example to show that an anticipated 10 per cent increase in net rent would bring
forward the optimal time of an office development from 15 years hence to 5 years hence
and that it would almost double the present value of the site for office uses.
Thus, even small changes in net rents will result in large increases in the value of land for
office purposes and this in turn will shift development activity towards office projects
and away from residential, where the two uses compete for sites. Thus, the market
provides negative and self-adjusting feedback to the development industry. As
residential and mixed use projects such as the Lanterra proposal gradually increase the
attractiveness of downtown, office demand responds and a relative shift in land values
begins to favour office projects.
A growing demand for downtown office space, when it occurs, will of course be related
to factors other than simply the growth in the residential population. Toronto is the
vi
Summary
financial and business-service heart of Canada, and downtown is the office centre for
these activities. The Financial District, for example, while having only about 19 per cent
of the City of Toronto’s total office employment has 65 per cent of financial and business
service employment. As the Canadian economy grows, so too will the need for
employment in these important service sectors.
By linking the potential growth in downtown office employment to the predicted growth
in overall Canadian employment, some estimate of the possible increase in demand for
downtown office space may be calculated. This is done in the body of the report. It
points to a possible increased need for office space in the Financial District of
approximately 7,300,000 square feet after 50 years, i.e., by 2054. The comparable
number for the whole of the Central Area is 17,230,125 square feet. By comparison, the
existing supply of developable office space on vacant sites in the downtown is estimated
at about 20,000,000 square feet, of which over 12,000,000 square feet “have or are being
marketed,” according to Colliers International. (These 12,000,000 square feet include
projects south of College and west to Spadina.)`
In addition to space on these vacant sites, there is the strong potential over the coming
decades for redevelopment of many low-density sites in the Financial District. For
example, properties in this district with densities below 6 cover an area of about 22 acres
and have a current average density of 2.29. If these properties were to be redeveloped at
an average coverage ratio of only 15 above the current 2.29, an additional 14,228,000
square feet of office space would become available, about double the forecast increase in
demand through to 2054.
As noted earlier, based on the evidence, it is reasonable to conclude that the market will
be able to provide future downtown office space when the demand for it arrives, whether
or not 15 York Street and the rest of the Financial District South are available for office
uses. There is no benefit in preserving the Financial District South for office use only
when there exits a viable mixed-use residential proposal such as 15 York Street,
particularly given the positive benefits that would accrue from the development. These
vii
Summary
benefits include: stimulating potential office developments by making the area more
attractive for future offices, addressing the commuting imbalance, reconnecting the
Downtown with the Waterfront, and creating a vibrant area of the City.
viii
Summary
Introduction
Lanterra Yonge Lakeshore Inc is proposing a mixed-use residential/retail/entertainment
project at 15 York Street, known as Block 5, a 2.14 acre site in the Railway Lands East,
at the northeast corner of York Street and Lakeshore Boulevard West. This site, labelled
site “D” in Map C of the Railway Lands East Part II Plan, is in a part of the Railway
Lands East called the “Financial District South.”
The Financial District South straddles York Street south of the railway tracks and is
designated, in the Part II Plan, for “non-residential” use. Lanterra is thus seeking an
amendment to the Plan to permit residential uses. Although the intention of this
designation when the Part II Plan was approved 10 years ago may have been to direct the
land to office uses, in fact the first development in the Financial District South was the
Air Canada Centre.
This report analyzes, from an economics and planning perspective, the desirability of
only permitting non-residential uses in the Financial District South, rather than mixed
uses including residential, and it looks in particular at the merit of permitting residential
units at 15 York Street.
In Toronto’s proposed new Official Plan, which was approved by City Council in
November 2002, the Central Waterfront, which includes the Railway Lands, is described
as part of the Downtown. Much of the Downtown and in particular all of the Railway
Lands East is designated as a Mixed Use Area (OP, Map 12) with unique opportunities
for “substantial employment and residential growth” (OP, p. 14).1 This is consistent with
the Part II Plan which calls for the Railway Lands East “to be developed as an integral
part of the Central Area so that the barrier effects of the road and rail corridors will be
minimized and the central city reunited with the Central Waterfront. New development
Policy 1 in Chapter 4 of the Official Plan defines mixed-use areas as those “made up of a broad range of
commercial, residential and institutional uses, in single use or mixed use buildings, as well as parks and
open spaces and utilities.”
1
1
Introduction
in the Railway Lands East would have a mix of uses, and a form, character and
environmental quality which will ensure that the area is used by people for a wide variety
of purposes throughout each day” (Part II, para. 2.1). The new Official Plan further states
that “Well designed connections between the core of the City and the Central Waterfront
are important to the vitality of Downtown as a great place to live and as an attractive and
competitive business location” (OP, p.16).
The logic of mixed use residential development downtown in Toronto is set out in the
new Official Plan. “Mixed use is a key ingredient,” it says, “to the successful functioning
of Downtown and by creating ‘accessibility through proximity,’ shows that moving less
is clearly achievable” (OP, p.15). The Plan elaborates, “Every home built within the
Downtown area offsets the need for in-bound commuting each day” (OP, p. 15).
This beneficial effect of downtown residential development is later explained by noting
that “The large increase in Downtown activity and development over the past three
decades has not been accompanied by any significant increase in road capacity. Instead,
the growth in trips has been successfully handled by improvements to transit services and
by an increase in Downtown housing that has put more people within walking and
cycling distance of their place of work and other activities. … Polices favouring the
expansion of transit over increases in road capacity and encouraging more mixed use
development in the Downtown are key components of this Plan” (OP, p.18).
Toronto was one of the earliest cities in North America to embrace mixed use in the
central area. The Colonnade on Bloor Street was one of the first, if not the first, high rise
mixed-use developments in North America and was part of the stimulation behind the
1976 Official Plan of the City which sought to encourage residential development not
only south of Bloor Street but right in the heart of the financial district. The 1991
Official Plan provided even stronger language and policies for increasing the downtown
residential population.
2
Introduction
For the central area as a whole, this encouragement has paid huge dividends. Beginning
in the late 1970s, the central area population began to reverse a decades-old downward
slide. A census population of 108,087 in 1976 rose to 112,374 by 1981, 143,397 by 1991
and 167,259 by 2001. This increase in turn has reduced the need for commuting to and
from the central area by an estimated 38,000 commuters a day over the 1976-2001 period
and by 16,600 during the decade from 1991 to 2001.2 This growth in residential
population has resulted in a reduced commuting demand on road and transit systems.
The growth in retail, restaurant and recreational facilities accompanying this population
increase has not only helped create a more vibrant and enjoyable downtown for its
residents but also for businesses located in the centre.
In spite of this population increase, the imbalance between the central area residential
labour force and the number of people working in the area is still significant. Of the
166,054 people living in the central area in 2001, 98,195 were in the labour force, and not
all of these work in the central area. Contrasting this with the approximately 415,000
people who work in the area, including about 280,000 in offices, shows the extent to
which further commuting savings are possible through the continued expansion of the
downtown residential population.
More importantly, this imbalance of jobs and homes underlines the sensitivity of
commuting demand to the future growth of employment in the central area. With no
increase in residential population, each additional 100 office workers will add between 80
and 90 commuters daily into and out of the central area. Thus an increase in office
employment of as little as 10 per cent would increase the demand for commuting
2
This is based on an estimated saving of 70 commuter trips into and out of the central area for each 100person increase in residential population. This “nexus” estimate goes back to a 1989 paper by David
Nowlan and a subsequent publication by Nowlan and Greg Stewart in the Journal of the American
Planning Association. The relationship among population, employment and commuting has been brought
up-to-date most recently in a 2000 report by Nowlan for the City of Toronto. See David M. Nowlan,
“Commercial Growth and the New Toronto Plan,” in Proceedings of the CityPlan ‘91 Forum on the Future
of the City of Toronto, 1989, David M. Nowlan and Greg Stewart, “Downtown Population Growth and
Commuting Trips: Recent Toronto Experience,” Journal of the American Planning Association, Vol. 57,
No. 2, Spring 1991, and David M. Nowlan "An Update of the Nexus Relationship and a Comment on the
Central Area Residential Labour Force," City of Toronto Planning Division, The Future of Downtown
Toronto: Background Studies, June 2000.
3
Introduction
facilities by 23,000 or 24,000 people daily. Using the model-split and peak-hour ratios
that Greg Stewart and I have calculated,3 this would require slightly more than an
additional three inbound and another three outbound lanes of arterial road capacity plus
the capacity for almost 8,000 additional peak-hour transit trips in each direction.
Although “office and retail uses will continue to be paramount in the Financial District”
(OP, p. 77), residential projects such as 33 University Avenue, 1 King Street West and
the Trump International hotel/apartment building at the corner of Bay and Adelaide have
been welcomed into the financial core, in keeping with the Official Plan policy of
encouraging downtown residential development. It does seem incongruous, therefore,
that the York Street corridor in the Railway Lands East retains its 1994 designation as
“non-residential.” Both the new Official Plan and the older Part II envisage that these
lands will help provide a much needed connection between the Downtown north of Front
Street and the waterfront, and both acknowledge the importance of ensuring that the area
is used throughout the day for a wide variety of purposes. Equally as important, the
demand for additional office space in downtown Toronto is weak at present while the
demand for residential units is strong. This presents an ideal opportunity to “bank”
additional residential population against the time when downtown employment is again
rising, so that this additional population can continue to offset the need for new
commuting facilities.
These introductory observations suggest that a mixed-use designation that included
residential would make sense on 15 York Street and the rest of the Financial District
South, as part of the Railway Lands East precinct. The economic benefits and
consequences of such a designation are elaborated in the following sections, first through
a look at the recent experience in North America and elsewhere with mixed-use
downtown development. Richard Florida’s view that downtown population size and
growth are correlated with urban economic success is illustrated. The beneficial effects
of residential and retail uses on office demand is then analyzed, with the conclusion that
the proposed Lanterra development would raise the value of adjacent land for office uses
3
See “Downtown Population Growth and Commuting Trips,” op.cit., p. 175.
4
Introduction
and hasten the time when office projects would be launched. The sites currently
available for office development in the downtown are then noted and the likely demand
for office space over the coming several decades is analyzed in order to help evaluate the
argument that space in the Financial District South must be preserved for office uses. A
concluding comment ends the report.
5
Introduction
Mixed Use, Downtown Population Growth and Economic Success
A strong demand for downtown residential space exists in city after city, with downtown
mixed-use developments proving popular not just in North America but in Europe and
Asia as well. In the U.S., Fitzgerald and Leigh point to an “emerging national trend in
demand for downtown living.”1 Increasingly, the mixed use developments that are
helping revitalize downtown areas in many U.S. cities are led by residential and retail
developments, with office uses following.
The Urban Land Institute summarizes the situation this way in its definitive recent study
of mixed-use developments around the world: “Residential uses often were not included
in mixed-use projects of the 1970s and the 1980s, but in recent years they have come to
play a prominent role, accounting for a high percentage of mixed-use projects developed
over the past decade.”2 … “Housing is the use that will drive mixed-use development
over the next five years, partly because of the strong housing market and weak demand in
most other sectors. Housing in mixed-use developments will be fuelled by the growing
diversity of housing markets and available housing products, and by growing demand for
intown and urban housing products.”3
A notable example of this leading role that housing has been playing is the development
of The Solaire, a 293-unit apartment high-rise in lower Manhattan, the first new
development to be completed in zone 1, the immediate area of the World Trade Centre
disaster. It is located downtown in the middle of the Battery Park Redevelopment
project. Opened in 2003, it is now almost completely rented. Other buildings in the area
have been successfully converted to apartments, while office projects are underway in the
area, including of course the five-building development on the site of the World Trade
1
Joan Fitzgerald and Nancey Green Leigh, Economic Revitalization: Cases and Strategies for City and
Suburb, Sage Publications, 2002, p. 170.
2
Mixed Use Development Handbook, 2nd edition, Urban Land Institute, 2003, p. 50
3
ibid., p. 396.
6
Mixed Use, Downtown Population Growth
and Economic Success
Centre, to be anchored by the Freedom Tower with 2.6 million square feet of office
space.
The Concord Pacific Place development on the False Creek site of Expo 86 in downtown
Vancouver is another example of a major mixed-use project led by residential
development. It was specifically designed as a residential development in its initial
phases in order “to improve the balance of residents to jobs and to avoid dispersing or
slowing down the development of existing office areas,” with a view to choosing
“residential development over office whenever reasonable.”4 Plans call for 2.5 million to
3 million square feet of commercial to follow.
In Melbourne, the reclamation of the downtown Docklands area, immediately adjacent to
the CBD, is in response to the city’s desire to increase the downtown residential
population in order to reduce commuting travel by achieving a better balance of jobs and
homes and in order to retain the CBD as a desirable work location. The Docklands is
now home to a number of large apartment buildings, retailers, restaurants and
entertainment facilities with more to come.5
Copenhagen’s waterfront Havnestad Syd project provides another example of a 721,000
square foot mixed office residential development in which the residential component has
been the first phase to be developed. The office component is expected to be built out
over the next several years.
In Portsmouth, England, a mixed-use project is underway on a 20-acre site in the centre
of the city. It is planned to have more than 200 residential units, a hotel and 750,000
square feet of leisure and retail space. Its designer, David Moreno, says that “our goal is
to reconnect the important existing components of the urban core into a seamless
4
City of Vancouver, Planning Department, False Creek Policy Broadsheet, 1988
My experience of Melbourne is first-hand, having lived there for many months during the last three years
during which I gave several invited lectures to state, city and academic planners. They have a lively
interest in Toronto and say that their new polices to stimulate downtown residential growth were very much
influenced by Toronto’s experience and by the nexus relationship in particular, the reduction in commuting
as a result of Toronto’s central area residential growth.
5
7
Mixed Use, Downtown Population Growth
and Economic Success
pedestrian network of compelling shopping streets, plazas and gardens,” yet another
example of residential and retail uses leading the revitalization of a downtown area.
The advantages of having a larger downtown resident population as an attraction for
office jobs is reflected in project after project in U.S. cities in recent years, many of them
on downtown waterfronts or previously industrial lands. These include:

West Palm Beach, Florida, where a mixed-use town centre, CityPlace, has been
created on a 72 acre site in the heart of the city. Housing, cultural facilities,
restaurants and retailers have been the first uses to be developed; offices, hotel and
conference space are next planned. According to the development team, “the
provision of various housing options was important to achieving 24-hour street life
integral to the project’s success.”

The Old Bank district in Los Angeles where apartment developments are leading a
downtown revival and are seen as crucial to attracting businesses.

16 Market Square in downtown Denver where 3 new office buildings have been
introduced with 183,860 square feet of space following the successful redevelopment
of LoDo into a mixed-use neighbourhood including 1500 housing units between 1988
and 1998.

The Peabody Place in the heart of downtown Memphis, one of the largest mixed-use
developments in the U.S., which started with the Peabody Hotel and the Gayoso
House Apartments.

New York is attempting to create a new CBD district in Queens with “commercial,
residential and community facilities allowed as-of-right.”

In downtown Atlanta, three new mixed-use projects are adding momentum to a
downtown revival, one of which, Sweet Auburn Village, is slated to have 40,000
square feet of office space, 180 residential units and 42,800 square feet of retail
space.

The redevelopment of Pennsylvania Avenue in Washington, D.C., has involved a
mixture of office, retail, apartments and condominiums.

Downtown San Diego has staged a “remarkable renaissance” through several mixed
use projects in the core including the “Vantage Pointe” condominium/retail project
and the “Smart Corner” office/residential/retail complex.
8
Mixed Use, Downtown Population Growth
and Economic Success

Austin is undergoing an “exciting revitalization” in the downtown area with many
new residential and office developments.

And even downtown Dallas is becoming a lively mixed-use area, which led Omnicom
Group in 1999 to decide to move there “due to the attractiveness of downtown.”
Perhaps one that is closest to the Railway Lands situation in Toronto is the Yerba Buena
Centre in the SOMA (South of Market) district of San Francisco, an 87-acre site adjacent
to the CBD. As is happening and apparently will continue to happen in the Railway
Lands East, development in Yerba Buena has taken place over time on a site-by-site basis
by different developers. Although plans for redevelopment of the area began to be made
in the 1950s, in fact much of the development activity has occurred only over the last five
or ten years, with residential buildings preceding offices.
The Yerba Buena site is anchored by a convention centre and now includes 20 museums
and galleries, 2600 hotel rooms, a 350,000 square foot entertainment centre, 2,500
renovated or new housing units, 1,500,000 square feet of office space and more than 10
acres of public gardens. Construction is continuing with three new museums, three
additional hotels, about 1,000 more dwelling units, and other major retail and mixed-use
buildings under way. According to the ULI Handbook, the underlying philosophy of
Yerba Buena is the notion “that public amenities—gardens, museums and cultural
facilities—can act as a catalyst for reinvestment in a distressed urban district and serve as
the nucleus for a new mixed-use neighbourhood.”6
In consequence of these and other projects, the downtown population in U.S. cities has
begun to increase, following the pattern of Toronto. The following table shows these
downtown population increases between 1990 and 2000 for a selection of U.S. cities with
downtown populations in excess of 20,000 or with a growth of over 20 per cent during
the decade.7
6
ULI, Mixed Use Development Handbook, op.cit., p. 378.
The U.S. downtown population data are from Economic Revitalization, op.cit., Table 6.1, p. 172. They
are originally from unpublished work by E.L. Birch. There is a difficulty in determining the population of
downtowns in that there is no standard definition of what constitutes the “downtown” of a city. According
to Rebecca Sohmer and Robert Lang in their paper “Downtown Rebound,” in Bruce Katz and Robert E.
7
9
Mixed Use, Downtown Population Growth
and Economic Success
Table 1
Downtown Residential Population Growth Rates, 1990 to 2000
Downtown
Area in
1990 Downtown
2000 Downtown
% Growth
Square Miles
Population
Population
1990-2000
Atlanta
3.5
19,763
24,931
26.2
Baltimore
2.5
28,597
30,067
5.1
Boston
4.4
77,253
80,903
4.7
Chicago
3.7
56,048
72,843
30.0
Dallas
?
11,858
15,198
28.2
Detroit
1.4
34,872
35,618
2.1
Los Angeles
4.6
34,655
36,630
5.7
Miami
?
15,143
19,927
31.6
Minneapolis
?
36,334
30,299
-16.6
New York Downtown
?
87,743
101,493
15.7
New York Midtown
?
66,184
69,215
4.6
4.3
74,686
78,349
4.9
?
6,517
10,216
56.8
Portland (OR)
1.8
9,528
12,902
35.4
San Francisco
?
32,906
43,531
32.3
1.2
12,292
18,983
54.4
?
26,597
27,667
4.0
1991 Downtown
2001 Downtown
Population
Population
3.67
91,158
107,503
17.9
1.97
25,234
34,863
38.2
City
Philadelphia
Pittsburgh
Seattle
Washington, D.C.
Toronto, south of Bloor
Street from Bathurst to
Parliament
Toronto, south of
College Street from
Spadina to Jarvis
Source: Economic Revitalization, for U.S. population; Redefining Urban and Suburban America; for U.S.
downtown areas. Toronto downtown south of Bloor Street consists of census tracts 11-17, 32-39 and 5966; downtown south of College consists of tracts 11-15 and 34-37.
Lang (eds.), Redefining Urban and Suburban America, Brookings Institute, 2003, some work on establishing a
consistent definition across U.S cities of their downtowns is being done at the University of Pennsylvania. The U.S.
downtown areas are taken from this work. I have shown two plausible definitions of Toronto’s downtown population.
10
Mixed Use, Downtown Population Growth
and Economic Success
In the cases of Baltimore, Philadelphia and Detroit, the increases in downtown population
occurred in spite of declining populations over the whole of each city. In the other cases,
save for Minneapolis, both the downtown and the city populations were up over the
decade.
What’s particularly interesting is the extent to which the downtown population increases
in the U.S. cities are related to the “creativity” indexes created by Richard Florida, which
in turn are highly correlated with the Miliken “High-Tech” Index, an index of the
significance of high-tech industries in the city.8
Table 2 lists the top ten U.S. cities ranked by the High-Tech Index, with Florida’s
combined “Creativity Index,” his “Composite Diversity Index,”9 the size of the
downtown in 2000, and its rate of growth between 1990 and 2000 also shown.
It’s immediately obvious that the cities with the highest High-Tech Index are also those
with either the fastest growing downtown residential populations or the largest downtown
populations, or both. Phoenix, with its sprawling development pattern is an exception.
These are also cities that score high on the Creativity Index and the Composite Diversity
Index (even Phoenix is in the top half of these rankings).
Florida attaches considerable significance to the rise of the downtown as an indicator of
economic growth and innovation. “We found that downtown revitalization is associated
with the same lifestyle factors that appeal to the Creative Class. The Gay Index, for
instance, is strongly associated with percentage change in downtown population; and
both the Gay Index and the Bohemian Index correlate with the share of a region’s
population living downtown. The Composite Diversity Index is the best predictor of both
the percent change in downtown population and the percent of the region’s population
living downtown. We also found that thriving downtowns are associated with vibrant
high-tech industries. The Milken High-Tech Index, for instance, is positively correlated
8
9
Richard Florida, The Rise of the Creative Class, Pluto Press Australia, 2003.
For definitions of these indexes, see ibid., pp. 333-4.
11
Mixed Use, Downtown Population Growth
and Economic Success
Table 2
High-Tech Index Rank Compared with Creativity and Diversity Index Rankings
and with Downtown Residential Population Size and Growth Rate
Florida’s
High-Tech
Index Rank
City
Florida’s
Composite
Downtown
Percentage
Creativity
Diversity
Residential
Growth of
Index Rank
Index Rank
Population
Downtown,
(out of 49 cities)
(out of 49 cities)
in 2000
1990-2000
1
San Francisco
1
1
43,531
32.3
2
Boston
3
4
80,903
4.7
3
Seattle
5
8
18,983
54.4
4
Los Angeles
13
2
36,630
5.7
5
Washington, D.C.
9
7
27,667
4.0
6
Dallas
11
14
15,198
28.2
7
Atlanta
14
13
24,931
26.2
8
Phoenix
22
18
5,925
-9.1
9
Chicago
16
15
72,843
30.0
10
Portland, OR
18
16
12,902
35.4
Source: The Rise of the Creative Class; Economic Revitalization
with the share of a region’s population living downtown … My research documents the
striking statistical correlation between ethnic diversity and high-tech industry.
Immigrants … turn out to be one of the keys to economic growth.”10
He goes on to describe Seattle, which as we’ve seen had a staggering 54.4 per cent
increase in its downtown population between 1990 and 2000. “Seattle illustrates the
trend,” he writes. “Nearly half of all high-tech jobs in Seattle are located in the city
versus 35 per cent in the suburbs … Almost a third of all high-tech companies and jobs
are in the central business district, Pioneer Square and Belltown, even though Microsoft
10
ibid., p. 288
12
Mixed Use, Downtown Population Growth
and Economic Success
and its tens of thousands of employees are located outside the city. Amazon.com put its
new headquarters in an abandoned hospital on the outskirts of downtown … One of the
city’s leading real estate firms, Martin Smith Real Estate, has created an ‘urban
technology campus’ of buildings in and around the downtown. In their study of these
shifts, Sommers and Carlson found that many high-tech companies prefer the urban
environment for its “vertical character, specialty shops, street life, entertainment and
proximity to a great mixture of businesses and cultural activities … People thrive on the
thick labour markets, job opportunities and amenities there. Microsoft even runs a roundthe-clock bus to take its employees who live in and around downtown Seattle to its
suburban headquarters.”11
The evidence is obviously strong that a large and growing downtown population is a sign
of a vital and innovative urban economy, and that polices to encourage the growth of
population downtown, including especially support for mixed-use residential
developments, are likely conducive to overall economic (and social) success.
11
ibid., pp. 288-9
13
Mixed Use, Downtown Population Growth
and Economic Success
Offices in Mixed Use Areas
Mixed use environments, whether the uses are mixed within a single building or mixed
among adjacent buildings is proving to be attractive to office tenants. ULI’s Mixed Use
Development Handbook concludes that “Office and hotel uses will increasingly favor
mixed-use environments, but in some cases they will prefer to be in adjacent rather than
central locations in a mixed-use development. Because of high vacancy rates in most
areas of the United States, Europe and even Asia, office uses will not be the major drivers
of mixed use projects over the next five years. In fact, the trend in mixed-use projects in
recent years has been away from office and hotel uses and towards residential and retail
uses. This trend will continue over the next three to four years. Once office and hotel
development markets begin to pick up in four or five years, however, new office
development will likely gravitate toward new and existing mixed-use districts that offer a
better office environment than free-standing sites.”1
In fact, in some notable major recent projects, the principle office tenant has been the
driving force behind the creation of a mixed-use project, in order to create a vital, 24hour-a-day mixed-use environment using residential units as an important component.
A significant example of this is the Time Warner Centre in the heart of Manhattan at the
southwest corner of Central Park which opened in February this year with 198 residential
units, 200,000 square feet of office space, a Mandarin Oriental Hotel plus entertainment
and retail facilities. Another example is the Sony Centre am Potsdamer Platz in the
centre of Berlin which opened in the middle of 2000 with 730,000 square feet of office
space, 285,000 square feet of residential space (201 units, both rental and condominium),
and 452,000 square feet of retail and entertainment space. The Sony Centre was fully
leased by opening day in spite of a very soft office market in Berlin, as elsewhere, in that
year.
1
Mixed Use Development Handbook, op.cit., p. 397.
14
Offices in Mixed Use Areas
Two other major projects of this sort are worth mentioning. One is the Roppongi Hills
project in the centre of Tokyo that opened in 2003, the largest private-sector project ever
completed in Japan. On a large 28.7 acre site, it contains luxury housing and designer
shops along with a 53-storey office tower and is hoped to improve the competitiveness of
Tokyo as a destination for further investment. The second is the Kuala Lumpur City
Centre project opened in 1999 and the location of the Petronas Twin Towers which house
the head office of the Malaysian state oil company. This is said to be the largest real
estate development in the world with a total of 17,970,000 square feet of office,
residential, retail, hotel and entertainment space on 22 lots surrounding a 5-acre park.
Other residential facilities are planned in the vicinity.
Office tenants seem to like to locate in and near mixed use environments. The attraction
of lively surroundings that mixed uses entail is clear enough, but there is a further
relevant point especially for office employers in a downtown with a large and growing
residential population. Richard Florida, in one of his quotes above, refers to a “thick”
labour market. A thick market is one in which an employer has a relatively easy task of
hiring the number and type of employees that are needed. In Toronto, the characteristics
of the growing downtown residential population match extremely well the employee
needs of the downtown employers.
Jobs in the central area are highly concentrated in the service sectors, particularly the
high-end, high-technology and high-information service sectors. These jobs require
superior educational achievements, and that is what the central area residents are
delivering. According to the 2001 census, almost 35 per cent of the total central area
population in Toronto had a bachelor’s degree or higher. This is in sharp contrast with
the less than 20 per cent of the overall Toronto CMA population with bachelor’s degrees
or higher. The dynamics of both business and residential locational patterns are bringing
labour-market supply and demand characteristics together in ways that are beneficial to
both sides.
15
Offices in Mixed Use Areas
It is not just the match of skills to jobs that defines a thick labour market, but the size of
the local labour force relative to demand. Urban theory predicts that wages for similar
jobs will vary by location, and that the highest wages will be at the employment centre,
the CBD. The reason for this is that if employees from the suburbs are going to be
willing to work centrally and not at a job closer to home, they have to be compensated for
their commuting costs, not just out-of-pocket costs but also time costs. Average wages
for comparable jobs in any location will therefore reflect the average commuting length
of the employees at that location.2
Empirical studies strongly support this theoretical prediction. One of the earliest studies,
published in 1981, used Chicago data. Wages for the different occupational groups were
found to decline by between 1.0 and 1.6 per cent for each mile distant from the centre at
the Chicago Loop. Other studies have found similar patterns. A recent one using data
from Minneapolis-St Paul and Boston found that wages varied by up to 15 per cent
within the metropolitan areas of these cities and that “this variation is significantly related
to the average travel times for workers in the various zones.”3
Since wage costs make up most of the costs in the office-based services sector, the wage
differences that have been observed create a substantial penalty for businesses locating in
a central location with a thin local labour pool of qualified people. This is one of the
factors that drive firms out of the CBD and to outer metropolitan locations with better
access to workers. For many firms, of course, benefits of a central location such as
locational or cluster economies no doubt offset this high cost, but the point remains that if
commuting costs could be reduced4 through a substantial increase in the size of the local
labour supply, wage costs in the centre would fall. Centrally located firms would become
For a discussion of the theory underlying this prediction of wage variations, see my paper “The Efficiency
of the Urban Land Market” at http://www.chass.utoronto.ca/~nowlan/teaching/note5.doc.
3
The 1981 study is R.W. Eberts, “An Empirical Investigation of Urban Wage Gradients,” Journal of
Urban Economics, vol 10, 1981. The quote is from Darren Timothy and William C. Wheaton, “IntraUrban Wage Variation, Employment Location and Commuting Times,” MIT Centre for Real Estate,
unpublished, January 2001. Other well known studies include William C. Wheaton, “Office Growth in the
1990s: Downtown versus Edge Cities,” Urban Land, April 1996 and D.P. McMillen and J. McDonald,
“Suburban Subcentres and Employment Density,” Journal of Urban Economics, vol. 43, 1998.
4
As recent City studies have shown, of those who live and work in the central area, 45 per cent walk to
work. Toronto Star, October 12th, 2004.
2
16
Offices in Mixed Use Areas
even more competitive and less likely to leave the area, and others would be more likely
to want to locate centrally.
Thus the economic benefit of greatly increasing the residential population of the central
area is enormous. As well, these benefits are widely distributed. The City and its
taxpayers will benefit from the reduced expenditures needed for commuting
infrastructure; residents will benefit from reduced commuting costs, both time costs and
out-of-pocket costs; and businesses will benefit from lower wage costs. The lower wage
costs and a more vibrant mixed-use downtown will in turn induce more businesses to
locate centrally from which the City will gain a second round of financial benefit.5
5
If new business taxes exceed the cost of servicing new offices, as is generally assumed to be the case.
17
Offices in Mixed Use Areas
Effect of the Lanterra Development on the Value of Adjacent Land and the Timing
of Development
More local residents create economic benefit by reducing the commuting costs of the
daily work trip to the CBD, but the benefits to businesses in the central area go beyond
this. Increasingly, as I have shown, office employers like to locate where there is a good
supply of entertainment facilities, cafes and restaurants and a lively street scene during
the day and after hours. A recent “Business Retention Survey” asked 65 companies in
downtown Denver a number of questions about the problems and attractions of locating
there. One of the questions asked each respondent to state what they regarded as the
“single most important thing that needs to be improved or enhanced if Downtown Denver
is to grow and prosper.” The largest response, by 26 per cent of the companies, was
“transportation.” But the second and third most common responses were “retail
opportunities” (14%) and local “housing” (11%). Also in the top group of responses was
“establish critical mass of businesses and residents,” which at 7 percent was cited almost
as often as “cleanliness,” “safety” and “parking.”1
A mixed-use residential/retail/entertainment project of the sort being proposed by
Lanterra will undoubtedly make adjacent sites more attractive to office developers. This
increased attractiveness will bring forward the optimal time for office building in the area
and, correspondingly, will raise the present value of the sites for contemplated office
uses. The mechanism by which this higher land value and advanced development timing
will occur are the higher rents that can be charged for office space in mixed-use
environments.
Not a lot of empirical work has been done yet on the rent differential between mixed-use
and homogeneous environments, but the evidence we do have strongly supports the view
that mixed-use is preferred, other things being equal. One of the most comprehensive
“Downtown Denver Business Retention Survey,” prepared for the Downtown Denver Partnership by
Development Research Partners, July 2004.
Effect of the Lanterra Development
18
on the Value of Adjacent Land
and the Timing of Development
1
recent studies of the determinants of office rents was undertaken by Edwin Mills, a
Northwestern University urban economist, for 543 office buildings in the Chicago
metropolitan area. These represented about 80 per cent of the total metro area office
space. He demonstrated that rents depended on about 15 characteristics of the building
and its location. His relevant findings were that “the availability of shops [in the
building] is estimated to add 2.68% to office rents … availability of restaurants increases
office rents by 9.64% … The estimated coefficients imply that the availability of a bank
or daycare centre causes large additions to rents, although only the bank coefficients are
[statistically] significant … The health club coefficients are smaller, but not significant.”2
Mills did not include residential uses in his study, but his results are nonetheless relevant
to the Lanterra proposal because that project will help, through its non-residential
components, create the type of mixed-use environment that Mills found to raise office
rents. Higher potential office rents, as I show below, increase the likelihood of early
developments on adjacent land. Without the Lanterra project, the York Street corridor
within the Financial District South remains empty land.
In its comprehensive overview of mixed-use developments, the Urban Land Institute has
found that “mixed-use development can achieve greater long-term appreciation in land
and property values. By creating a special place through the innovative mixing of land
uses and creative urban design, owners can benefit greatly in the long term from the
appreciation in value of both the project itself and the surrounding undeveloped land.”3
Later in the book, the authors write: “Evidence suggests that quality mixed-use
environments can achieve superior office rents and performance. According to Eric
Smart of Bolan Smart Associates of Washington D.C., ‘In general, it is reasonable to
expect a rent premium of 5 to 25 percent for an office product in a well conceived and
executed mixed-use development.’ Office space in Reston Town Centre in Reston
Virginia, for example, as of 2002 had achieved the highest rents in northern Virginia …
Edwin S. Mills, “Office Rent Determinants in the Chicago Area,” Journal of the American Real Estate
and Urban Economics Association, vol 20, 1992.
3
Mixed Use Development Handbook, op.cit., p. 29.
Effect of the Lanterra Development
19
on the Value of Adjacent Land
and the Timing of Development
2
at Legacy Town Centre in Plano Texas, the developers were able to lease space in a soft
office market to several major users, including Compaq Computers and Marriott, because
they preferred the mixed-use environment over many more conventional competing sites.
Ken Hughes of Kenneth H. Hughes Interests in Dallas says ‘Office buildings close to
restaurants and other shopping are more popular with many tenants, and I suspect that on
average individual tenants stay in the same building longer.’ ”4
If we accept the evidence that increasingly office tenants prefer mixed-use environments
and are willing to pay rent premiums for such settings, a conservative estimate of the
effect of a mixed-use environment on office rents might be a 10 per cent increase. What
effect would this have on the timing of office development on, say, the 25 York Street
site immediately to the north of the Lanterra site? To understand the answer to this,
reference must be made to the underlying theory of optimal development timing.
Essentially, the theory of optimal timing uses the assumption that the actions taken or
contemplated by developers are such that the present value of the site is maximized. The
competitive land market serves to ensure that the developer who places the highest value
on the site will get the land. A developer contemplating an office building of some
specific size at 25 York Street will consider the expected current net rent per unit of
office space (where the net rent appropriately accounts for any expected vacancy rate) in
this and future years, and these numbers will be compared with the cost of a building.
What is important for judging the best timing is a comparison of the expected future net
rents from the building with the annualized equivalent of the expected total building
cost.5 If the net annual rent is currently below the annualized building cost, then the
4
ibid., p. 50. The Handbook also reports that Patrick Phillips of Economics Research Associates in
Washington thinks that “large tenants may perceive a conflict—any use other than office may be seen as
compromising their identity.” But this view would seem to be contradicted by the many major tenants who
actively set out to create for their head offices a mixed-use environment—see the previous section of this
report.
5
For example, if the building cost—including all costs such as finance, legal and developer profit as well
as the construction cost— is expected to be $300,000,000 five years from now, and if the rate of interest or
return on an alternative investment of the same risk category is 10% a year, then the annualized equivalent
building cost is $30,000,000.
Effect of the Lanterra Development
20
on the Value of Adjacent Land
and the Timing of Development
developer will delay building. If the net rent is expected to stay below the building cost,
then the developer will have no plans for development, but may sell the site to someone
who has a different expectation of future rents and costs. If, in the future, the net rent in
fact stays below annualized costs, then the building will never be built.
But, if net annual rents are expected to rise at a rate higher than the expected increase in
building costs, then at some point the net rent will be expected to reach and go above the
annualized building cost. The optimal time to build will be just where the net rent
reaches the annualized construction cost, and this will be the planned construction time if
the plans are based on expectations of rents and costs.6
The effect of an adjacent mixed-use project on the timing of some development, and on
the value of the site, may now be seen through an example. Consider the allowed
800,000 square feet of office space on the vacant 25 York Street site in the Financial
District South. Suppose that with expected net rents of $22 per square foot (an average
that includes the effect of expected vacant space) and construction costs of $250 per
square foot, it makes no sense to proceed immediately with the project (if the
construction cost is annualized at 10 per cent, it comes to $25 per square foot or
$20,000,000 for the building while the net rental stream would only be $17,600,000).
However, suppose, as an example, that net rent is expected rise by 3 per cent a year while
construction costs are expected to rise by only 2 per cent per year. Then, at some point,
expected net rent will rise to meet and then surpass the expected annualized building cost.
6
The reason this is the optimal time for development is that the current value of the land is highest when it
is planned to develop just when net rent has risen to equal the annualized cost of construction. The land
value will be less if construction takes place either before this point or after. For a full discussion of the
theory of optimal land development, see my paper “A Model of Development Timing” at
http://www.chass.utoronto.ca/~nowlan/papers/development_timing.doc. If an optimal decision is to be
made with respect to both the timing of the development and the size of the building, the optimality
conditions become a little more complicated. Even with the size given, the condition that optimal timing
occurs where a net annual rent curve crosses the annualized building cost from below is not precisely
correct since account must be taken at the margin of the rate at which construction costs are rising, but this
introduces only a very slight change to the optimal time. The precise condition can be worked out from
equation 3 in my paper.
Effect of the Lanterra Development
21
on the Value of Adjacent Land
and the Timing of Development
This hypothetical situation is illustrated below in Figure 1, using the assumptions that
have just been mentioned. The annualized construction cost over future years is shown
by one curve; annual net rents with and without an adjacent mixed-use environment are
shown in two other curves. The adjacent mixed-use development is assumed to be
completed in year 3. At that time, the net rental curve with mixed use rises 10 per cent
above the curve without mixed use.
Without adjacent mixed use, the optimal time for office development on this site is 15
years from now. With an adjacent mixed-use development in year three, the optimal time
is advanced by 10 years, to a time only 5 years hence. Thus, a modest increase in the
magnitude of the net rent revenue stream has had, in this example, quite a dramatic effect
on timing.7
To the extent that an office development of this type produces public benefits, such as tax
revenue that exceeds the cost of providing project-related city services, the effect of the
earlier development is to bring these benefits forward in time. This has a significant
effect on the present value of the public benefits. Every year these benefits are delayed,
their present value is reduced by the rate of discount, currently about 4 or 5 per cent after
adjusting for inflation. If development of some given project is delayed by 10 years, the
anticipated public benefit is only about two-thirds of what it otherwise would be.
Equally dramatic, although not shown in the diagram, is the enhanced site value of 25
York Street as a result of the adjacent mixed-use development. The earlier optimal
development time combined with a 10 per cent higher stream of net rents comes close to
doubling the site value of 25 York Street.8
7
The precise effect is of course dependent on actual expectations about the paths of future net rents and
future construction costs. While the assumptions used in this example are quite realistic in today’s
environment, other assumptions will change both the best time for development without adjacent mixed
uses and the best time with such mixed uses. If for example net rents were expected to increase by only 2.5
per cent a year then the optimal development time without and with adjacent mixed uses would be more
than 15 and 5 years respectively. The conclusion however remains unchanged: the adjacent mixed use will
bring significantly forward the optimal time to develop this office property, and the 10 per cent higher net
rent stream will continue to have the effect of almost doubling the value of the vacant site for office uses.
8
Formally, the site value is the integral of the rising future net rents less the constant annualized
construction cost discounted back to the present. This is sometimes called the “residual” land value.
Effect of the Lanterra Development
22
on the Value of Adjacent Land
and the Timing of Development
Figure 1
Timing of an Office Development With and Without Adjacent Mixed Use
800,000 square-foot building; cost today $250 per square foot, rising at 2% per year, annualized at 10%; net annual rent today $22 per square
foot and rising at 3% per year
Net Annual Rent and Annual Equivalent Building Cost
$50,000,000
$45,000,000
$40,000,000
$35,000,000
annual equivalent building cost
$30,000,000
optimal development in 5
years with adjacent mixed
use
net annual rent without adjacent mixed use
10 % increase in net annual rent with
adjacent mixed use in year 3
$25,000,000
optimal development in 15
years with no adjacent mixed
use
$20,000,000
$15,000,000
$10,000,000
1
3
5
7
9
11
13
15
17
19
Years from Today
23
21
23
25
27
29
Effect of the Lanterra Development
on the Value of Adjacent Land
and the Timing of Development
Supply of Alternative Sites for Future Office Development
Demand for downtown office space is currently weak, but this may be a cyclical
phenomenon and demand may well begin to grow, perhaps sooner rather than later. If
the arguments given above are correct, then the continued growth of the downtown
residential population and mixed use buildings will create a more attractive environment
for offices and may well speed the time when office demand recovers.
The demand recovery, when it occurs, will be signaled by a rise or an expected rise in
office rents. Even small changes in net rents will result in large increases in the value of
land for office purposes, as I have shown in the previous section, and this in turn will
shift development activity towards office projects and away from residential, where the
two uses compete for sites. Thus, the market provides negative and self-adjusting
feedback to the development industry. As residential and mixed use projects gradually
increase the attractiveness of downtown, office demand responds and a relative shift in
land values begins to favour office projects.
A growing demand for downtown office space, when it occurs, will of course be related
to factors other than simply the growth in the residential population. Toronto is the
financial and business-service heart of Canada, and downtown is the office centre for
these activities. The Financial District, for example, while having only about 19 per cent
of the City of Toronto’s total office employment has 65 per cent of financial and business
service employment. As the Canadian economy grows, so too will the need for
employment in these important service sectors.
24
Supply of Alternative Sites for
Future Office Development
Figure 2
Office Employment in the Financial District and Central Area of Toronto as a
Percentage of Total Canadian Employment
ratio of Central Area Office Employment to Employed Canadian Labour Force
ratio of Financial District Office Employment to Employed Canadian Labour Force
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
Central Area ratio
1.00%
Financial District ratio
0.00%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
The relationship between the Canadian economy and employment in the Central Area
may be shown by plotting the ratio of Central Area and Financial District employment
over recent years to the total employed Canadian labour force.1 This is done in Figure 2,
with Central Area data going back to 1983 and Financial District data back to 1993.
With respect to the Central Area as a whole, the relationship peaked in 1989 and again in
1999. The ratio was stable in 2000 and 2001 but has fallen in each of the past two years,
2002 and 2003. In the Financial District, the relationship has been more stable, although
again the ratio in the last few years has been fallen below the 1999 peak.
If there is the suggested link between the office sector in downtown Toronto and the
overall Canadian economy, perhaps these employment ratios combined with independent
1
The basic relationship is to the Canadian economy, but if employment is linked to GDP, for example,
changing labour productivity must be taken into account which essentially brings the basic relationship
back to the Canadian employment level.
25
Supply of Alternative Sites for
Future Office Development
projections of Canadian employment can be used to give some sense of what the office
demand might be in future years. Given the recent declines in the employment ratios
shown in Figure 2, such an exercise should give us a very aggressive look at what might
become of downtown employment and it should be regarded as an upper limit.
The current (2003) ratio of Central Area office employment to Canadian employment is
1.65 per cent, a ratio below its high of 1.88 per cent in 1999. Suppose that this ratio will
now stabilize rather than continue to fall. It can then be applied to projections of
Canadian employment to yield a projected office employment number for the Central
Area. For the Financial District, which is part of the Central Area, the comparable ratio
is 0.70 per cent. This is higher than it was in the early 1990s, but it too has fallen in
recent years from 0.81 per cent in 1999. Again, supposing that this ratio will now
stabilize rather than continue to fall, the 0.70 per cent can be used for upper-limit
projections.
For Canadian employment projections, I use the recent “Outlook” from the Policy and
Economic Analysis Program of the University of Toronto.2 The results are shown in
Table 3. Starting from today’s Canadian employment level, the projected annual
increases in the Outlook document are applied through until 2025, the final year of the
projection. To continue the projection for another 30 years to 2054, I simply applied the
same annual rate of growth of the employed labour force that the Outlook study applied
for the years 2019 to 2025, 0.3 per cent. The annual change had become quite stable by
this point in their projection.
From these projected numbers I take the increases over current employment for the years
2024, 2044 and 2054, as shown in column 3 of Table 3. The Central Area and Financial
District office employment ratios of 1.65 per cent and 0.70 per cent are applied to these
projected Canadian changes to yield the employment increases shown in the 4th and 5th
Peter Dungan and Steve Murphy, “Long Term Outlook for the Canadian Economy: National Projection
through to 2025,” Policy Study 2004-2, Policy and Economic Analysis Program, University of Toronto,
July, 2004.
2
26
Supply of Alternative Sites for
Future Office Development
Table 3
Upper-limit Projections of Central Area and Financial District Office Employment
and Floor-space Increases over 2004
Canadian
Year
Projected
Projected
Central
Financial
Employment
Projected
Projected
Area
District
Increase
Central
Financial
Additional
Additional
from
Area Office
District
Office
Office
Current
Employment
Office
Space
Space
Canadian
(2004)
Increase
Employment
Needs over
Needs over
Employment
Levels
over 2004
over 2004
2004
2004
2004
15,988,000
2024
18,450,000
2,462,000
40,623
17,234
10,155,750
4,308,500
2044
19,570,000
3,582,000
59,103
25,074
14,775,750
6,268,500
2054
20,165,000
4,177,000
68,921
29,239
17,230,125
7,309,750
columns. These are then converted to office floor space projections at 250 square feet per
employee.3
The final result is a projected upper-limit increase of 68,921 Central Area office
employees over the next 50 years, having an office space need of 17,230,125 square feet.
In the Financial District, the comparable numbers (which are of course part of the Central
Area projections) are 29,239 employees requiring 7,309,750 square feet.4
3
This has been a long-term average space use per office employee, although it went up during the 1990s
when employment fell and tenants had more space than they needed. A similar increase in the office space
use per employee was noticed in the U.S. in the early 1990s. In their recent study, Joan Fitzgerald and
Nancy Green Leigh argue that “Today, with team approaches in personnel organization, ratios are closer to
one person per 150 square feet.” (Economic Revitalization, op.cit., p. 173) An earlier study in the U.S.
using data from the 1980s came up with a figure between 258 and 267 square feet per office employee. See
John M. Clapp, Dynamics of Office Markets: Empirical Findings and Research Issues, The Urban Institute
Press, 1993, pp. 165-7. For today’s offices, the figure of 250 square feet per employee used in the text is
probably on the high side even for downtown offices.
4
This projection is an upper limit for another reason: it does not take into account the growing number of
employees who will work at least partly from home offices and thus not need as much space in downtown
buildings.
27
Supply of Alternative Sites for
Future Office Development
Table 4
Potential Sites for Downtown Office Buildings
Address
Building Name
Rentable Area
Market Region
Buildings that have or are being marketed as potential sites for offices in the downtown, from Colliers
International
Bay-Adelaide Centre 40 Adelaide Street W
North Tower
400,000 Financial Core
Richmond Adelaide Centre
100 Adelaide Street W
(Phase 3)
712,000 Financial Core
Bay / Dundas Development
555 Bay Street
South Tower
596,140 Downtown North
560 Bay Street
50,000 Downtown North
CF Bay / Dundas
575 Bay Street
Development North Tower
900,000 Downtown North
747 Bay Street
College Park Phase 4
465,000 Downtown North
767 Bay Street
College Park Phase 3
558,200 Downtown North
30 Church Street
40,081 Downtown South
TrizecHahn Technology
151 Front Street W
Centre Phase 2
380,000 Financial Core
304 Front Street W
215,272 Downtown West
City Place Royal Trust
365 Front Street W
Data Cente
960,000 Downtown West
400 Front Street W
Front Wellington Plaza
121,347 Downtown West
400 Front Street W
Front Wellington Plaza
339,228 Downtown West
Brooke Murchison Block
150 King Street E
Redevelopment
250,000 Downtown East
30 Mercer Street
55,731 Downtown West
18 Mowat Avenue
14,000 Downtown West
40 The Esplanade
Prudential Development
220,000 Downtown South
80 The Esplanade
Southtown Phase 2
1,038,887 Downtown East
100 The Esplanade
Southtown
1,274,135 Downtown East
180 University Avenue
Sun Life North
566,000 Financial Core
299 Wellington Street W
Front Wellington Plaza
375,000 Downtown West
20 Yonge Street
World Trade Centre
550,000 Downtown South
185 Yonge Street
Campeau Development
300,000 Downtown North
20 York Street
Southtown
575,825 Downtown South
25 York Street
796,155 Downtown South
30 York Street
Southtown
581,825 Downtown South
Subtotal
Additional properties identified by Fairmont Developments
20 Bay St
Water Park Place, Oxford
45 Bay Street
Canada Post
Bay/Adelaide, remainder
Brookfield/Canapen
BCE Place
Brookfield
280 Front West
H&R
2 Queen St W.
Cadillac
Simcoe/Wellington
Cadillac
16 York St
Fairmont
18 York St
Fairmont
20 Bay St
Water Park Place, Oxford
12,334,826
350,000
1,200,000
877,300
750,000
900,000
895,000
518,000
1,240,120
625,000
350,000
Subtotal
7,355,420
All Properties
19,690,246
28
Supply of Alternative Sites for
Future Office Development
I turn now to look at the availability of potential sites for office development to meet the
50-year space needs projected in Table 3. Since development and redevelopment is a
dynamic process, with buildings being torn down and the sites rebuilt, this comparison of
potential supply to possible demand is not a precise exercise, but it is worth having a look
at some data.
Table 4 contains a list of downtown properties from Colliers International and Fairmont
Developers, properties that they consider potential development sites. Colliers regards
the properties they list as ones that “have or are being marketed as potential sites for
offices in the downtown.” The Fairmont list adds to these properties that are not yet at
the marketing stage. The Fairmont properties are strictly in the financial core while the
Colliers list goes up to College Street and west to Spadina.5 The complete list thus
embraces an area a little larger than the Financial District but considerably smaller than
the Central Area.
Taking the total rentable area at face value, one sees in Table 4 that at 19,690,246 square
feet the potential supply of space is not only above the projected increase in Financial
District demand for the next 50 years but also that of the whole Central Area. Recall that
these projections envisaged an increase in demand of 7,309,750 square feet and
17,230,125 square feet respectively.
A couple of further comments are worth making. One is that the Fairmont portion of the
list contains properties in the Financial District South, notably 16 and 18 York Street, that
could be developed for mainly for mixed-use residential if such a use comes to be
allowed in this district. That would remove 1,865,120 square feet from the total, which
still would leave almost 17 million square feet for development. Another observation is
that the rentable area shown in the table are areas that in some cases at least would be
subject to negotiations over density allowances, the result of which would be to raise the
available supply.
5
This reflects the continuing expansion of core-area offices outside the traditional Queen-York-Jarvis
boundaries of the formal Financial District.
29
Supply of Alternative Sites for
Future Office Development
Finally, these properties consist principally of new building sites and not sites with
buildings that would be likely candidates for redevelopment to higher densities over the
next 5 decades. We can get some sense of this redevelopment potential by noting that 82
of the 188 properties in the Financial District north of Front Street have coverage ratios
below 6. These 82 properties cover an area of about 22 acres, 23 per cent of the Financial
District total, and have a current average density of 2.29.6 If these properties were to be
redeveloped at an average coverage ratio of only 15 above the current 2.29, an additional
14,228,000 square feet of office space would become available.7
Some of the sites with less than 6-times coverage are clearly small and difficult to
develop except in conjunction with adjacent developments, but among this set are 7
properties in excess of 32,280 square feet (3,000 square metres) with an aggregate site
area of 9.9 acres.8 At an incremental 15-times coverage, these properties alone could
conservatively provide 6,460,000 additional square feet of office space, just about the
total projected increase in demand through to 2054 for the Financial District.
Still in the Financial District north of Front Street, there are a total of 13.9 acres of
private sites with less than 2 times floor-space coverage and having an average existing
density of 0.6. Of this amount of land, 6.2 acres involves sites of over 32,280 square feet
with a development potential at 20 times coverage of 5,400,000 square feet of office
space.
6
These numbers are based on 2001 data from the City of Toronto Planning Division, but they will not have
changed much since then. A further analysis of these Financial District properties is contained in my report
“Economic and Planning Implications of Easing Density Restrictions in the Financial District of Toronto,”
a report that examined the implications of the Trump International hotel/residential project on Bay Street.
7
This amount overlaps with some of the potential amount of office space shown in Table 4, since some of
the under-six-times-coverage sites are vacant sites included in Table 4. The point is to look in a slightly
different way at the office development potential in the Financial District.
8
During the office boom of the mid and late 1980s, 18 buildings were built in the Financial District of
which only half were on lots in excess of 21,520 square feet (2000 square metres). The rest were on sites
that ranged in size down to 7,700 square feet (720 square metres). The average density of buildings built
after 1980 is 16.2 times coverage.
30
Supply of Alternative Sites for
Future Office Development
Yet another perspective on office-development potential may be taken. Buildings built
before 1939 sit on 26.6 acres of land and have an average density of 7 times coverage. If,
over the next 50 years, these sites were rebuilt at an average incremental density of 10, an
additional 11,600,000 square feet of office space would be provided.
On the basis of this evidence is reasonable to conclude that the market will not have
difficulty providing future downtown office space when the demand for it arrives,
whether or not 15 York Street or, for that matter, the whole of the Financial District
South is held for office use only or developed with mixed uses including residential.
31
Supply of Alternative Sites for
Future Office Development
Conclusion
The City of Toronto has been in the forefront of supporting mixed-use developments,
including residential projects in the downtown, with great success. This strategy has
become even more important in recent years. The evidence from downtowns around the
world strongly indicates that mixed environments “attract and engage people in a way
that single-use projects can never achieve.”1 In today’s investment climate, mixed-use
residential projects are at the leading edge of mixed-use projects and frequently create the
surroundings that lead to increased business interest.
After its survey of office developments in the U.S in the late 1990s, the Urban Land
Institute concluded that “Certain characteristics will make some downtowns more
attractive than others for office development, among them a mix of land uses (residential,
retail, commercial, tourist, cultural, entertainment, educational and governmental), a
sense that the streets and sidewalks are safe, the availability of convenient mass transit
and a pedestrian-friendly and lively ambiance.”2 In the six years since that was written,
these have proven to be exactly the characteristics that have led to successful downtown
office growth.
Even though the Financial District to the north permits both office and residential
development, the Part II Plan for the Financial District South currently permits only nonresidential uses, based presumably on the aim of creating an office-building precinct. Yet
York Street, the central artery of the Financial District South, is one of the main
connecting streets between the CBD and the waterfront. Its function in this regard would
be greatly enhanced if it were developed as a mixed use artery, with residential uses
providing a lively, populated environment throughout the week. Offices may well come
to this district, but if they do it is likely that they will come because they are attracted to
1
2
Mixed Use Development Handbook, op.cit., p. 345
Urban Land Institute, Office Development Handbook, second edition, 1998, p. 329.
32
Conclusion
an environment that includes mixed-use residential/retail/entertainment projects such as
that being proposed by Lanterra.
The recovery of office demand, when it occurs, will be signaled by a rise or an expected
rise in office rents. Even small changes in net rents will result in large increases in the
value of land for office purposes, as I have shown, and this in turn will shift development
activity towards office projects and away from residential, where the two uses compete
for sites. Thus, the market provides negative and self-adjusting feedback to the
development industry. As residential and mixed use projects gradually increase the
attractiveness of downtown, office demand responds and a relative shift in land values
begins to favour office projects.
Today, downtown residential demand in Toronto is flourishing while office demand is
weak. This may not always be the case: demand for new downtown office space may
well return. If it does, there is more than an adequate supply of land and redevelopment
sites to satisfy this demand. Optimistic projections of the demand for new office space in
the Financial District and the broader Central Area over the next 50 years can readily be
met, indeed can be substantially exceeded, by the potential that now exists for the
development of new space even without the use of capacity in the Financial District
South.
If residential demand were to lessen while office demand grows, Toronto will again be
forced to look at the commuting cost of downtown employment growth, particularly
given the existing imbalance downtown between downtown office jobs and resident
workers.
By driving up wage rates, rising commuting costs reduce the competitiveness of
downtown businesses, but the alternative of building more commuting facilities into the
downtown has substantial public and environmental costs. Toronto has managed this
conflict very successfully with its policy of encouraging residential population growth in
the central area, even in the core of the Financial District. It would seem prudent to make
33
Conclusion
use of the current market forces favouring residential growth if only to provide against
the day when office demand returns. If demand for downtown office space doesn’t
return, or returns only weakly, then the encouragement of mixed-use residential units will
still have highly beneficial effects for Toronto and its development.
34
Conclusion