From Globe and Mail, Business section:
Property Report: MIXED USE
More bang for buck, and bucking a trend
Intensification of land uses seen as cost effective while sparing neighbourhoods of yet more high-rise condos
TERRENCE BELFORD
Special to The Globe and Mail
July 29, 2008
One Sunday evening last year, Edward Sonshine was driving through north-central Toronto to his son's home for dinner when he noticed something peculiar while passing a small shopping centre his company owns: The parking lot was full despite the fact the stores were closed.
"I thought to myself there has to be a better use for that lot than to provide free parking for the neighbourhood," says the president of RioCan Real Estate Investment Trust.
And with that single insight an idea was born that now promises to revolutionize the way Canada's 30-plus publicly traded real estate companies treat their holdings. RioCan became the first REIT to begin the process of making better use of its large pool of land by intensifying the size and number of structures that sit on it.
For example, in Toronto, RioCan has partnered with home builder Tribute Communities to create two projects that combine retail shopping space - RioCan's forte - and condominium housing; in Calgary, it is teaming with Knightsbridge Homes to expand RioCan's Brentwood Shopping Centre by adding up to 550,000 square feet of residential units.
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Meanwhile, Allied Properties REIT is looking at its 55 office properties to the east and west of downtown Toronto to see how it can intensify the number and size of structures that sit on the roughly 19 acres it owns.
At represent, they take up between 2.8 and three times the area of the land, but zoning bylaws allow for up to six times coverage, Allied president Alan Emory says. "That means we have plenty of room to intensify and create maximum value out of what we already own."
Others are certain to follow, says Rossa O'Reilly, managing director and real estate analyst at CIBC World Markets. "Many of these companies are sitting on very large land holdings, which are underutilized. One of the ways to realize increased value is to intensify what sits on the land," he says.
"It just needed one or two to start the ball rolling and RioCan seems to have done that."
But why was intensification never considered before? What makes it a clever option today? The short answer: the condominium craze.
"It is only recently that the juggernaut of inner city condos has created the financial rationale for redeveloping or adding to existing sites," Mr. O'Reilly says. "Major cities have stopped building out and are starting to build up."
Another positive factor for intensification is that politicians embrace the concept of intensification - if it combines retail and residential and shows sensitivity toward preserving the flavour and nature of existing neighbourhoods.
"I think projects like that reflect the future of this city," says Adam Vaughan, alderman for Toronto's Trinity-Spadina.
One of RioCan's projects occupies the corner of Queen and Portland streets in the heart of Mr. Vaughan's downtown ward. "What we want are vertical neighbourhoods that reflect the existing mix of commercial and residential."
In practical terms, that means forget traditional high-rise towers. Intensification demands imagination and projects that slip seamlessly into surrounding the community.
RioCan and Tribute's two Toronto projects have won support from politicians for taking that route. At Avenue Road and Fairlawn Avenue, they are tearing down a string of low-rise commercial buildings that include a bank, Blockbuster Video, Mr. Sub and a liquor store, and replacing them with a high-end, mid-rise condominium with retail on the street level.
"We have 22,000 square feet of retail on the ground floor and already all but 4,000 square feet is leased," Mr. Sonshine says. "When complete, it will add $250,000 more in cash flow than what is there.
"The only restriction I put on my leasing guys was no food operations. You can't have that in a high-end condo project."
At Queen and Portland, the same team is building a new mid-rise condo on a parking lot. The retail space will take up 2½ floors with a condo on top. One of the things that sets the condos apart is green space on the roof. The units facing Queen Street will have what is in effect their own front yards in the sky and all residents will share a large outdoor terrace - their own private park.
The retail levels will include both the city's first urban Home Depot outlet and a grocery store.
"Many developers looked at the site but almost all of them wanted to build a 22-storey tower," Mr. Sonshine says. "I saw the possibility for retail but the numbers didn't work. But when we combined retail and condos, the numbers were there."
Financially structuring a retail-condo project is little different from structuring a project where several condominium buildings share the same land, says Scott McLellan, senior vice-president sales and marketing at Tribute Communities, which is based in Pickering, Ont.
"There are separate meters for things like energy use, and when it comes to maintenance you just apportion costs according to use," he says. "For example, the ramp to the underground parking lot will probably be used 95 per cent for retail customers so the retail component pays 95 per cent of the upkeep."
Allied likely will follow a different course, Mr. Emory says. Its first priority will be to see whether adding more office space makes sense financially. After that, it will look at alternatives, such as housing.
"We would first look to see if the market can absorb the extra office space. We may find it is better for us to take development profits from partnering with a residential developer," he says.
Another option is for Allied to develop the skills needed for residential development internally and not rely on partnerships, he says.
"I think intensification is definitely the way to go," Mr. Emory says. "But to be successful, it will take vision and new forms of urban housing."
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