Commercial real estate: Scotia Plaza goes on sale

The sale of Scotiabank's Toronto headquarters will likely be the biggest real estate deal in Canadian history. But just how do you sell a skyscraper?

The gleaming Scotia Plaza lobby (Photo: Eugen Sakhnenko)

For sale: Renovated 25-year-old income property in a prime downtown location. Two million square feet of luxurious space. Six basement levels (including a bullion vault). Polished red granite exterior. Great tenants eager to stay. This one won’t last!

It was the most titillating news to hit the commercial real estate business in more than a decade. In mid-January, Scotiabank revealed it was putting its downtown Toronto headquarters on the block. The 68-storey Scotia Plaza, the second-tallest skyscraper in Canada, is one of the country’s most prestigious addresses, and the last of the city’s soaring bank towers still owned by its anchor occupant. Located at the crossroads of King an Bay streets, “this is the jewel of the Canadian real estate industry,” says Nick Yanovski, vice-president of the capital markets group at commercial real estate brokerage DTZ Barnicke. “All deals for the next while will be benchmarked off this one.” The final sale price is expected to be well north of a billion dollars, which would make it the largest real estate transaction in Canadian history—possibly double the previous record of $618 million that CIBC fetched in 2000 for its Commerce Court complex in Toronto.

It’s not just the deal’s size that’s significant. Real estate brokers have long tried to woo the bank into listing the building, but Scotia has held on to it as a kind of rainy-day fund. Now, it needs to tap that reserve to fund an aggressive international expansion, including the recent acquisition of a majority stake in a Colombian bank. As well, the bank must beef up its capital levels to meet new banking regulations. Combined with a downtown property market at a record high, in part fed (like its residential counterpart) by extremely low interest rates, “this could be an opportune time to maximize the value from our holdings,” says Scotia spokeswoman Ann DeRabbie.

The sale is being handled jointly by CBRE, the commercial brokerage giant, and Scotia’s real estate division. Selling a skyscraper isn’t the same as selling a retail storefront, explains George Carras, who runs research company RealNet Canada (though there is one comparison to selling a family home; the tower will likely be “fluffed” for visits by bidders, which could involve anything from new lobby furniture to removing condensation from windows). There are dozens of people involved on both sides of the transaction, from leasing experts who project future demand to engineers who review building conditions. After commissioning financial, environmental and structural reports, the broker prepares a confidential marketing document—in this case, it likely runs to more than 50 pages, not including leases, which are thousands of pages more—that goes out to qualified bidders. As in other large corporate transactions, the sellers often set up war rooms (real or electronic) to house all the relevant documentation.

Scotia Plaza bid books went out the middle of last month. Big Canadian pension funds are considered the strongest contenders. Over the past decade and a half, they and the major insurers have snapped up most of the biggest properties—OMERS bought Brookfield Place in Toronto four years ago, for example, while London Life and Great-West Life jointly spent $382 million on Calgary’s Gulf Canada Square in 2007—and today are believed to own almost 90% of downtown Toronto’s commercial space. Both CPP and OMERS have expressed interest, and Alberta Investment Management Corp. and Brookfield (which covets marquee properties in business districts) are expected to take close looks. REITs, such as Dundee or H&R (which recently bought Corus’s Toronto head office), might also put in bids, as may pension fund advisers representing smaller funds, speculates Yanovski. “The universe of buyers isn’t massive—how many organizations have that kind of money?—but the bidding will be very strong,” he predicts. An asset of the quality and size of Scotia Plaza, after all, rarely becomes available.

There may also be interest from foreign buyers, says O’Bryan, vice-chairman at commercial brokerage giant CBRE Canada. “If you go back five years, you would not have contemplated London and Toronto in the same category. Now, Toronto and Vancouver are first-tier cities.” But with intense demand from domestic players, foreign investors may stay out of the bidding.

Ultimately, the buyer will be making a bet on the country’s continued economic health. “This is one of the biggest assets in Canada, in the financial capital of Canada,” says Yanovski. “And find me a stronger financial market than Canada in this world.” By that logic, this aging skyscraper may prove to be the site of our fiercest-ever bidding war.

The listing: Features of Scotia Plaza

1. The tenants: The tower is home to top law firms (Miller Thomson, Cassels Brock) and financial firms (Genuity Capital, Raymond James). At the estimated average of $35 per square foot, they’re paying a significant premium to the current average for prime space of $23.30. Rents for so-called Class A office spaced soared 17% last year, but are still half or less of those in London and New York. The tower is currently 99.5% occupied—a big difference from the 12% vacancy rates it experienced when it opened.

2. Cleaning: Like all the major skyscrapers, the tower has built-in window-cleaning features. Vertical channels in the walls allow cleaners to “plug in” their platforms, protecting them from updrafts. It takes six to 10 weeks to clean the building, with the windows and the granite cladding washed in separate passes.

3. Canada’s deepest basement: The building goes six storeys below ground, the deepest excavation ever in the country, and two more than the taller First Canadian Place across the street. Workers extracted 170,000 cubic metres of dirt, and had to underpin two neighbouring buildings to prevent them from toppling into the giant crater. “There were as many lawyers involved in that as there were construction people,” Bruce Pickersgill, the builder’s project manager, told the Toronto Star at the time. In the depths of the building’s footing resides ScotiaMocatta’s bullion vault, the only bullion bank in Canada.

4. A historic footing: When the tower complex was built, Scotiabank incorporated its original 27-storey head office at 44 King Street West into the building—and continued to operate the branch housed within it—even though that extended the project’s time frame from three years to eight.

5. The atrium: A 14-storey glass atrium connects the original Scotiabank building to its younger, taller sibling. The ground floor features a 131-foot metal structure dubbed the “Circle of the Provinces.”

6. Retail: In the base are 45 stores and a 455-seat food court linked to the PATH system, a six-kilometre underground walkway that connects to other office towers as well as the subway. “Any time you have access to the subway, it speaks to income and leasing potential,” says RealNet president George Carras. “There’s a greater chance the building will continue to attract better tenants.”

7. The red skin: The exterior and some of the interior surfaces are made from 28,000 pieces of red Napoleon granite, quarried in northern Sweden, and cut and polished by craftsmen near Pisa, Italy, then imported to Canada in slabs. Project managers frequently travelled to Italy to inspect pieces that a representative on-site deemed of questionable colour or match.

8. Maintenance: A 25-year-old building will inevitably lack the state-of-art air-handling systems, elevator cabs and other construction technology found in newer buildings, such as the nearby RBC Centre, completed in 2009. But marquee towers like Scotia Plaza are carefully maintained and regularly renovated. In June, the tower became the largest LEED gold-certified building in the country, an indication of its energy efficiency.

9. The mural: The south wall of the tower’s lobby features a massive mural of a waterfall. Stretching up 11 floors, it is the work of Alberta artist Derek Besant, and is the largest indoor mural in Canada.

10. The design: There’s a practical reason for the sawtooth pattern of the building’s exterior walls: it creates as many as 22 corner offices per floor instead of the typical four—an obvious draw for corporate tenants.