The head of the Canadian arm of Houston-based Hines said the developer might have the newest office buildings in Toronto for some time.
With the first tower of the 3 million-square-foot CIBC Square office complex 100% leased and the under-construction second tower well on its way to the same status with only a few floors left to rent, Avi Tesciuba concludes there could be an argument that the market for what he called AAA towers, or the highest-end properties, is undersupplied.
Speaking at the Real Estate Forum in Canada's largest city, the longtime Hines executive said statistics show the Toronto office vacancy rate is 18% overall, but that drops to 5.8% for buildings like CIBC Square, properties that Hines and Montreal-based Ivanhoé Cambridge each have a 50% stake in.
"There is essentially no new supply coming behind us," he said at a panel discussion. "We developed three new buildings during COVID, and there were others, but that is kind of the end of that wave."
Stefan Teague, a partner at Crown Realty Partners who was moderating the panel, quipped, "You got the newest building for the next five years, at least, and probably longer."
Tesciuba said new supply had been affected by rising costs, and few developers are willing to build speculatively without tenants locked into a long-term lease.
Part of the attraction to newer buildings is amenities, and the Hines executive said it is not just about "checking boxes" but creating a different experience right down to having concierges greeting people.
"The intent is to feel like a luxury hotel or private club," he said, adding that those concierges that are being hired tend to come from the hotel industry. "We dress them like hotel concierges, not like security guards."
Even entering CIBC Square is made as easy as possible as you pass through a turnstile so you can tap through with your watch or phone, or you can easily send a QR code to guests visiting who will have an elevator called down for them.
"We want our tenants or customers to want to come to the office and create a sense that if you are not coming, you are missing out," said Tesciuba, adding that the drive to be in a higher-quality building is not just a Toronto story.
In Calgary, where the city still has the highest vacancy rates in the country, Hines said the office complex that it developed and now manages, called Eighth Avenue Place, is almost 100% full.
In Houston, where Hines built Texas Tower at 845 Texas Ave., the building is 94% leased today. He noted vacancy rates were almost 30% when they decided to build the site that now houses the company's global headquarters.
The decision to build was not a market thesis where the company thought this was a tight market and it could support another tower. "It was entirely driven by a flight to quality," said Tesciuba.
The Hines executive predicted so-called zombie buildings where the property is worth less than the debt could make their way to Canada.
"It means the owners have no equity, and if you want (tenant improvements), the landlord is not in a position to give TIs," said Tesciuba. "[Previously], a landlord was checking the financials of a tenant, but we are now seeing the reverse sometimes where the tenants are checking the financials of the landlord."
In the United States, tenants are now asking landlords to put TIs and commissions in escrow,
"We are seeing that," said Teague. "We used to get those questions and laugh at the brokers who do that and tell them to go away. Now we are hearing that a lot."
Asked in an interview with CoStar News how much landlord reputation matters, Tesciuba said credibility is the word he would use.
"It's everything. It is doing what you said you would do, and amenities matter a lot," he said. "It's a package. The amount of amenities has grown. To give you a sense, in the last three buildings we developed in Toronto, the amenities were 1% or 2% of the total square feet of the building. The ones we are marketing today, we are targeting 5%."
He told the panel that south of the border, there is "almost a manic focus" on getting people back in the office, and some of that attitude is coming to Canada.
"I think the trend of coming back to the office is getting stronger, not weaker. And what I like about AAA, the higher class, is there is very little of it left," said Tesciuba in an interview. "With no new supply of it for a while, I think, you would expect more demand for whatever is left."
Statistics from the Strategic Regional Research Alliance seem to back up the trend with the group's latest stats as of Nov. 1, showing average weekly office occupancy in downtown Toronto is now 72% of what it was before the pandemic. It is the highest percentage since the group started monitoring occupancy in May 2020.
Even with the improvement in office occupancy, the Hines executive had a strong message for government leaders.
"Ideally, government should do everything in their power to encourage a vibrant downtown," he said during the panel session. "Without everyone in the office, downtowns are going to shrivel and die. Retail is going to die. Anything in their power is their own workforce and encouraging them to come to the office."