It's official; we have epic fail.
Toronto's MaRS project a step too far
By Garry Marr, Financial Post
Published: Tuesday, November 18, 2008
It's one trip to Mars that's going to take longer thanks to a slowing economy, says the vice-president of the $300-million Medical and Related Sciences complex in Toronto's hospital district.
The second phase of the two-square kilometre project, dubbed MaRS, has been put on hold because the developers can't find enough tenants ready to move into the 750,000 square foot complex by the completion date set for 2010. Phase I of the project was finished in 2005 and its 700,000 square feet are filled.
"The construction has been suspended. It's a reflection of the market conditions right now," says Randal Froebelius, vice-president of real estate for MaRS, a not-for-profit corporation. "We don't want to build an empty building."
While rumours have floated for weeks that many condominium and office projects could end up being halted mid-construction, MaRS is the first company in Toronto to admit it does not make sense to go ahead. A two-floor parking garage has already been built, along with a concourse extension connected to the subway line, but both will all be mothballed until the economy turns around.
The decision was made by MaRS' development partner, Pasadena, California-based Alexandria Real Estate Equities Inc. Alexandria itself has been a victim of the slumping stock market, with the value of the company dropping by about US$2-billion in just under two months.
MaRS developed Phase I on its own but for the second phase it leased the land to Alexandria which is responsible for building and renting the space. Many of the potential tenants for the building are dependent on venture capital funding, a market that has all but dried up as wealthy investors refuse to part with cash on risky investments.
A spokesman for Alexandria was not available for comment yesterday.
"If leasing catches up we could end up back on track and be finished by 2010. The project was ahead of pace," said Mr. Froebelius, adding MaRS fully supported the decision by Alexandria.
The MaRS complex is billed as an innovative centre for companies in the science and technology sector in the embryo stage of their development. The idea was to hook those small startup companies up with business leaders. Firms like RBC Venture, a division of the Royal Bank of Canada, are on site.
MaRS received $70-million in funding from the Ontario government and another $20-million from the federal government but it has been largely funded by the private sector. The company's board of directors reads like a who's who of Toronto's elite, including Royal Bank chief executive Gord Nixon, First Marathon Inc. founder Lawrence Bloomberg and Roy-L Capital chief executive Joseph Rotman.
"This a lot like what happened with the Bay-Adelaide Centre," said Bryan Kerdman, partner at Toronto-based Edgestone Capital Partners which deals with venture capital.
The Bay-Adelaide Centre, now being completed by Brookfield Properties Corp., had its foundation constructed when the market crashed in the early 1990s. The developer closed it off and left just a parking garage and the site became known at "The Stump" for a decade -- a symbol of overbuilding during the last real estate cycle.
"I think it's a wise move. How much can space can be absorbed in this type of economic environment? That type of space is very specialized space too," said Mr. Kerdman. "These are very different times now."
In the case of MaRS, he says, so many investors are afraid to part with their money that small start up firms simply are unable to get off the ground. "These high-net worth individuals had some portion of their assets in the market and now they are less high-net worth than they used to be," said Mr. Kerdman.
Colliers International head of research Ross Moore says this could just the beginning of projects that end up getting mothballed in the coming months.
He points to the proposed new Calgary headquarter of oil and gas giant EnCana Corp. and notes how much trouble the developer of the site seems to be having getting financing for the project. Analysts have speculated H&R Real Estate Investment Trust, one of the largest publicly-traded players in real estate, will have to make some drastic decisions, like cutting its dividend, to finish the project.
"If H&R cannot get a project done today, how are mere mortals going to do it?" said Mr. Moore.