Wall Street Journal : Canadian Investor Bets on a Montreal Revival

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Canadian Investor Bets on a Montreal Revival

Cadillac Fairview Wants to Expand City's Business Center to the South

 

By DAVID GEORGE-COSH

Nov. 5, 2013 6:11 p.m. ET

 

 

For more than two decades, Montreal was one of the sleepiest office markets in Canada, seeing no new private development as cities such as Toronto and energy-rich Calgary added millions of square feet of new space.

 

 

Now, as Canadian investors step up real-estate investment throughout the world, a company owned by one of Canada's largest pension funds is looking to shake things up.

 

Cadillac Fairview Corp., a unit of Ontario Teachers' Pension Plan, wants to expand the city's business center to the south with a planned 1.9 billion Canadian dollars ($1.82 billion) development next to the Bell Centre, where the National Hockey League's Montreal Canadiens play. The company earlier this year broke ground on the first building on the 9.2 acre site, named the Deloitte Tower after the professional-services firm that it lured from Montreal's traditional downtown.

 

 

Owners of office buildings in Montreal's core dismiss the competitive threat, citing the lack of retail and transportation in the Deloitte Tower area. "I don't think that people who went to that location will be happy," says Bill Tresham, president of global investments at Ivanhoé Cambridge Inc., which owns the Place Ville Marie office complex that Deloitte is vacating.

 

 

But Cadillac Fairview executives say businesses will be attracted to the tower's modern workspaces, energy efficiency and the civic square and skating rink in the complex modeled on New York's Rockefeller Center. "That's where we feel the growth is," says Sal Iacono, Cadillac's senior vice president for development in Eastern Canada.

 

Developers in other cities have had mixed results when they have tried to build new business districts to compete with traditional downtowns. London's Canary Wharf development was forced to seek bankruptcy protection in its early years, although it eventually turned into a success. The Fan Pier project in Boston finally has gained traction after years of delay.

 

 

The Cadillac Fairview development is partly a sign that Montreal has absorbed a glut of space that has hung over its office market for years. Its third-quarter vacancy rate for top-quality space downtown was 5.4%, compared with 9.4% in the third quarter of 2010, according to Cushman & Wakefield Inc.

 

 

But the project also is a sign of the increasing appetite that Canadian investors have for real-estate risk as the world slowly recovers from the downturn. Canadian investors are on track to purchase at least US$15.6 billion of commercial real estate world-wide in 2013, up from US$14.5 billion in 2012, and a postcrash record, according to Real Capital Analytics

 

Much of the interest is coming from Canadian pension funds, which have more of an appetite for risk than U.S. and European institutions because Canadian property wasn't hurt as badly by the downturn, experts say. The Canada Pension Plan Investment Board, the country's largest pension fund, allocated 11.1% of its assets to real estate, for a total of C$20.9 billion, in the first quarter of fiscal 2014. That is up from 10.7% in the first quarter of fiscal 2013, for a total of C$17.7 billion.

 

 

Ontario Teachers' Pension Plan has been aggressive in several other sectors as it tries to shore up its funding deficit amid stubbornly low interest rates. The fund last month acquired Busy Bees Nursery Group, the largest child-care provider in the United Kingdom, for an undisclosed sum, while contributing US$500 million to Hudson's Bay Co.'s purchase of Saks Fifth Avenue for US$2.9 billion in July. Over the past year, Teachers' also has made investments in Australian telecom companies, oil assets in Saskatchewan and a supplier of outdoor sports-storage systems.

 

 

Cadillac Fairview's real-estate portfolio increased to C$16.9 billion at the end of 2012, the last period for which data is available, up from C$15 billion in 2011.

 

 

Montreal has a population of 1.65 million and its business sector, which relies heavily on aerospace, information technology, pharmaceuticals and tourism, remained relatively healthy during the downturn. The last commercial office buildings in its modern office district were completed by private developers in 1992. Nearly 20% of the city's office inventory was built before 1960, more than in other large Canadian cities, according to Cushman & Wakefield.

 

 

Other pension funds also are making new investments in Montreal's office market, though they are focusing on core properties. Ivanhoé Cambridge, an arm of Quebec-based pension fund Caisse de dépot et placement du Québec, spent more than C$400 million in August to acquire full control of the Place Ville Marie office complex, and is planning a C$100 million upgrade.

 

 

Cadillac Fairview began assembling land for its project in 2009 when it acquired Windsor Station, a historic hub that dates to the 19th century. The area is southwest of Old Montreal, the historic section of the city near the St. Lawrence River.

 

 

But the area has been unappealing to most office-building developers because it lacks many stores, restaurants or other amenities. "No one was interested in developing," Mr. Iacono says.

 

The company has been planning a development including retail, office and residential space since then, but many were skeptical that businesses could be convinced to move outside of the city's traditional business center.

 

 

That skepticism was damped when Deloitte announced plans to move. Then this year, the Alcan unit of mining giant Rio Tinto said it would move its headquarters to the top eight floors of the 500,000 square-foot tower, increasing its occupancy to 70%.

 

 

Cadillac Fairview also has started building a 555-unit condo on the site. Eventually, the entire complex will include an additional 4 million square feet of office, retail and residential space as well as public areas.

 

 

Deloitte executives say the new building—slated to open in 2015—was appealing because of its energy efficiency and green features such as stalls for charging electric cars.

 

 

"This building is a catalyst for a whole energy for that part of the city," says Sheila Botting, national leader of real estate for Deloitte in Canada.

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