Toronto's Real Estate Held by `Oligopoly,' Study Says

TRYING to buy downtown Toronto real estate is a tough job. The people who already own it aren't letting go. Toronto real estate is tightly held by a near-oligopoly of private and institutional investors, according to recent report on the city's property market by Salomon Brothers Inc., the New York-based investment bankers. The report says the Toronto downtown office market is the only one in North America that is dominated by such a cartel. ``Buildings in the financial core are owned for the most part by a closely knit group of well-capitalized developers and banks,'' the report states. ``Essentially the market can be described as an oligopoly reinforced by strict planning regulation. This limits entry to the market, as well as boosting rents and increasing the cost of doing business in the city.''

First in the list of the big players is Olympia & York, which owns the two buildings that make up First Canadian Place, headquarters of the Bank of Montreal and the Toronto Stock Exchange. The company also has a half interest in the newly opened 1.5 million-square-foot Scotia Plaza Building.

``Together [those buildings] represent 8 percent of the total downtown inventory,'' the analysts commented.

Frank Clayton, a Toronto-based real estate analyst with Clayton Research Associates Ltd., said the concentration of ownership does not mean it is an oligopoly. ``It's still a competitive market. Because there are only a few people in control doesn't necessarily mean they're acting in an unpublic-spirited way.''

Salomon Brothers noted that the five big banks in Canada all have their headquarters within a couple of blocks of one another in downtown Toronto, completing the private-institutional property oligopoly. The Canadian Imperial Bank of Commerce, the Royal Bank of Canada, and the Toronto-Dominion each own their buildings, although the Toronto-Dominion bank co-owns the T-D Centre with Cadillac Fairview, another large developer and property-management firm. Once owned by the Bronfman family of Seagrams Company, Cadillac Fairview was acquired by JMB Institutional Realty in 1987 at a cost of more than US$5 billion.

The study was prepared for institutional investors and is Salomon Brothers' first look at the Canadian property market. Salomon has prepared similar analyses of London, Sydney, and a number of American markets.

The report notes that ``the United States has no single city that approaches the dominant market position that Toronto occupies within Canada. One of every seven jobs in the country is within the Metropolitan area.''

It says that Toronto has more than 111 million square feet of office space and is the seventh-largest office market in North America. It adds that Toronto is different from most American cities, in that its office development is highly concentrated in the core. ``More than half of the total space is located in downtown and midtown, a trait found in only four of the large US markets.''

ONE concern the report has is the strict planning and zoning regulations put in force by local politicians. It has its good and bad sides. ``A long review process means that there is a substantial lead time between a project's initial proposal and its final completion, often as much as four years. The major result of such a policy is that the excesses of the US building cycles (high vacancy rates and declining real rents) are typically avoided in Toronto.

Metro Toronto has a policy of decentralizing office growth to its suburban downtowns, partly in an effort to ensure that no area is developed beyond the means of its road and public transit capacity. The strategy seems to be working. Each of the six municipalities in Metro Toronto has its own downtown.

But the increased planning and restrictions on building will further slow growth in the downtown core and push up prices even further. ``Downtown zoning policies have recently become very restrictive,'' and the analysts fear it could get worse. ``The problems that accompany growth and density (for example, traffic, pollution, and the overcrowding of the transportation infrastructure) are perceived to be worsening, generating increasing public and government opposition.''

Restriction could lead to even scarcer supply, which could in turn produce an effect of ``hollowing out'' of the downtown core, with businesses moving to the suburbs as rents become exorbitant downtown.

This has already started to happen.

``We're looking for space in the suburbs for our computer and other clerical departments,'' says John Stacey, a partner with the accounting firm of Deloitte, Haskins & Sells, whose firm is in the heart of Toronto business core. ``It's too much to pay $45 [Canadian] a square foot for support staff when we can $10 or $12 in the suburbs.''

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