Abstract 

Trends in remote and hybrid work are opening the door to new ways of thinking about the Toronto Region’s approach to building conversions. With the downtown Toronto office vacancy rate peaking at its highest levels since the mid-1990s, and foot traffic significantly reduced compared to pre-pandemic levels, the region is faced with new challenges and opportunities. This article takes a deep dive into the reevaluation of the use of downtown space and how the region can leverage building conversions to address critical industry gaps in growing sectors, such as the region’s thriving life sciences ecosystem – ultimately contributing to the growth of the local and national economy.  

Introduction 

The global market landscape and how we do business is profoundly changing. The acceleration of the digital economy during and after COVID-19 has put enormous stress on traditional methods of work. As the Toronto Region’s investment promotion agency, Toronto Global is seeing this every day in our discussions with international companies considering expansion into the Toronto Region. It is a reality of the new environment we find ourselves in. In particular, the adoption of the enduring remote and hybrid work trend across the North American economy creates both challenges and opportunities from an economic development perspective. This shifting paradigm has framed the need to reassess the use of space in Toronto’s downtown core, opening up dialogue about making public transit more efficient, improving parks and green spaces, and public-private multi-sectoral collaboration on how to repurpose vacant buildings or underutilized space. To understand the context for this conversation, we first start with the City of Toronto’s post-pandemic outlook and its downtown footprint. 
 
The Future of Downtown 

Hybrid work is here to stay, particularly in cities like Toronto. With a significant concentration of employment in the technology, financial and business services sectors, most employers have transitioned to hybrid work arrangements for their employees. The effects cascading from this phenomenon are considerable. A new study by commercial real estate firm CBRE found that the vacancy rate for downtown Toronto office space hit 15.1 percent in the second quarter of 2023, the highest it’s been since 1996. That’s up from just two percent in March 2020, when the pandemic was declared. Consequently, foot traffic has been reduced in the City of Toronto, rebounding to only 65 percent of pre-pandemic levels.  

Toronto is not unique in experiencing these problems, but what is unique about the city is the size and scale of office space downtown and the hyper concentration of these jobs – technology, financial and professional services, and R&D – in the core. The interest in establishing offices to access the rich tech, financial and business ecosystem remains desirable. However, businesses are now considering smaller physical footprints and hybrid structures designed for a remote workforce, many opting for coworking spaces or shared workspace environments rather than their own physical address. For many companies, the downsizing of space is accompanied by a change of use – adding collaborative areas designed for in-person meetings rather than ‘heads down’ desk work and looking at regional options outside the downtown core. 

Figure 1 shows an overview of the downtown Toronto office supply and demand in Q2 2023, according to the CBRE.ⁱ 

When considering how to approach these challenges, one can look to other Canadian cities, like Calgary, that were faced with a sharp decline in office space demand in the mid-2010s and discovered ways to repurpose their downtown office stock. With the City of Calgary’s Greater Downtown Plan released in 2021, the goal to transform downtown into an economic and cultural hub involved tower conversions, bike lanes, art centres, community hubs, and more, with a focus on mixed-use buildings. The city’s investment of a quarter billion dollars is dedicated to revitalizing the core by shifting over 6 million square feet of office space to other uses. Calgary turned to converting offices to residential dwellings, discovering that 35 percent of the city’s buildings were top candidates for financially viable conversions. With a cash incentive of CAD $75 per square foot, Calgary was able to set the stage for developers’ success, with new projects expected to increase Calgary’s downtown population by 24 percent.ⁱⁱ 

Figure 2.ⁱⁱⁱ 

Office vacancy rates in downtown hubs like Toronto (15 percent) and Vancouver (9 percent) are at an all-time high compared to pre-pandemic rates – signaling the changing interest of employers to keep or add office space as remote and hybrid work become foundational strategies. The very nature of remote and hybrid work necessitates taking a broader and regional lens to attracting investment. By analyzing other case studies such as Calgary, the Toronto Region is similarly positioned to leverage building conversions to catalyze the economic revival of the downtown core. A regionally coordinated approach is best suited to understanding, tracking, and designing adaptive responses that governments and economic development organizations should take in order to secure the prosperity and competitiveness of the Toronto Region. These challenges demand a reevaluation of our use of downtown space and how to best utilize vacant space (see Figure 2). 

At the Tipping Point 

While the rise in office vacancies isn’t new to large cities like Toronto, New York City and San Francisco, policymakers are focused on a variety of broad measures to address these challenges. 

Where some see a challenge, Toronto Global sees an opportunity. Toronto Global has identified niche opportunities for regional solutions, particularly in the life sciences sector, which is witnessing an era of unprecedented innovation and growth. Key drivers for the sector include technological leaps in areas such as personalized healthcare, regenerative medicine, genomics and synthetic biology, ^iv along with the growing convergence of artificial intelligence and big data analytics in healthcare.^v Consequently, governments around the world have been supporting historic investments in life sciences; for example, the Canadian Federal government recently committed CAD 2.2 billion in funding toward domestic life sciences and bio-manufacturing through to 2027.^vi In April 2023, the Province of Ontario announced the creation of the Life Sciences Council following the release of its life sciences strategy, Taking Life Sciences to the Next Level. The growth in this sector is spurring a boom in the global demand for all types of lab space, specifically wet lab space, and the Toronto Region is no exception. 

A wet lab is a specialized laboratory space designed with unique features (equipment, ventilation, storage, etc.) to support cutting-edge life sciences research. The Toronto Region does not have enough capacity to keep up with demand for wet lab space and planned construction is insufficient, constraining the growth of the life sciences industry. Companies looking to “graduate” and scale up their operations in the Toronto Region are being forced to make difficult decisions, including potentially relocating to other cities to find affordable and adequate wet lab space. More wet lab development in the Toronto Region will mean more growing companies – both domestic and international – will come, stay and scale here, further strengthening the region’s life sciences industry. Government has a crucial role to play in financing and providing long term support to grow this critical component of the sector. 

Demand Outgrowing Supply 

Despite the evolving monetary environment and economic uncertainties impacting venture capital and private equity investment in the sector, demand for wet lab space in the Toronto Region is still far outpacing supply. As Canada’s epicentre in the heart of the Ontario Life Sciences Corridor, there is near-zero capacity for the intensifying demand. With almost half of the life sciences real estate assets owned by users and no vacancy in third-party assets, options for graduation stage companies to grow or scale up remain limited.^vii 

Figures 3a) and b) show examples of the life sciences companies who have expanded to the Toronto Region, and recent lease transactions occurring over Q4 2022. 

The situation in the Toronto Region contrasts with other leading life sciences hubs in North America like Boston, one of the top life sciences clusters in the world, which has ten times the capacity for life sciences companies to grow. The development of wet lab space in cities like Boston, New York and San Francisco includes a significant private sector contingent, driven by real estate companies like Alexandria, BioMed Realty (Blackstone) and Healthpeak Properties, and catalyzed by significant government participation. These companies have collectively invested over USD 3.5 billion in life sciences real estate over the past two years alone.^viii 

When it comes to wet lab space, Toronto has grown in comparison to other major life sciencesl clusters in North America, most recently ranking as the ninth largest life sciences real estate market overall with 9.5 million square feet of existing building inventory, ahead of cities like Seattle and Los Angeles.^ix 

Figure 4 shows the life sciences market comparison across North America, with the Toronto-Golden Horseshoe ranking fourth by overall market inventory. Figure 5 shows the life sciences market inventory in existing and future supply, and Figure 6 shows the life sciences development pipeline in Canada, projected from 2022 to 2027. 

Figure 4: Life Sciences Market Comparison, North America 

Figure 5: Life Sciences Market Inventory, Existing And Future Supply 

Figure 6: Life Sciences Development Pipeline, Canada 

The Greater Toronto and Hamilton region has several millions of square feet of unmet lab space demand for specialized infrastructure. Furthermore, the Toronto Region’s rise as a global artificial intelligence hub, a destination for tech talent, and an ecosystem conducive to fostering innovation and research has uniquely positioned the region to spearhead the future of life sciences innovation as AI becomes more integrated with the drug development process. Companies like Recursion, a leading clinical stage TechBio company decoding biology to industrialize drug discovery, have recently set up their Canadian headquarters in Toronto as a reflection of the region as an emerging tech and life sciences global powerhouse.  

With several major investment announcements from the biopharma industry and home to 35 percent of the national life sciences labour force, the demand for wet lab space in Toronto is strong. Thus, there is an opportunity to convert lesser-used or vacant office space to wet lab space as part of a larger strategy to re-think Toronto’s downtown, enable industry growth, and attract workers back to the downtown core. 

Building Conversion for Wet Labs 

While it may make for good policy, converting office space to wet labs is far from easy. Not every office building is suitable for a lab conversion and for buildings that are suitable for conversion, it can be expensive and challenging, from specific floor plate sizing, the heating, ventilation, and air conditioning (HVAC) system, plumbing, specialized filtration, and more. Aspects such as load requirements are top of mind for developers, since lab equipment is significantly heavier than traditional office desks and laptops, which are inherently load-bearing in and of themselves.  

Wet labs contain high-end equipment with humidity/temperature control and energy consumption requirements, as well as specific lab design often outfitted with freezers, specialized refrigerators, biosafety cabinets, etc. Moreover, there are any number of municipal, provincial and federal development, zoning, or permitting requirements that may be problematic for the developer. From infrastructure development to equipment requirements to lab space operators and service providers, there is a complex map of pieces required to bring high functioning, multi-tenant lab space on-stream. 

Barriers for Development 

Multi-tenant developments create stability for commercial developers by spreading risk across numerous companies while providing space and infrastructure flexibility. These developments also decouple the commercial fate of the lab space from that of a specific company since they service an entire pipeline of prospects, each with evolving real estate needs. Multi-tenant spaces are much more likely to succeed if they are managed by a third-party intermediary that helps manage supply, aggregate demand and provide financial reassurance to public and private sector partners. They also provide emerging companies with flexible and expandable space. Multi-tenant spaces are ecosystem assets that can help incentivize start-ups to remain on-site and in the Toronto Region. 

However, developers remain wary of the underlying challenges in new lab space development. While cost estimates can vary, office construction costs can fall into the range of CAD 175 – 390 per square foot, while wet lab construction costs are between CAD 500 – 800 per square foot in Toronto. These expensive, specialized facilities may ultimately attract significantly higher rents, but developers and investors considering new projects need to be confident that they can secure long-term tenants. The substantial costs to build out lab space are difficult for developers to justify when prospective tenants carry unconventional financial covenants in an unproven real estate sector. Financial assistance from government would help de-risk the dual challenge caused by high development costs and pre-revenue life sciences tenants. Consequently, more private sector wet lab investment may be within reach. This would be a win for the Toronto Region. 

Foreign Direct Investment and Government Incentive 

This is where the government incentives and foreign direct investment become a crucial key to the overall solution, by matching the industry demand with real estate, especially when the cost of capital is increasing. The government can consider how Boston, New York and other emerging life science centres in the US and Canada, like Philadelphia, Pittsburgh and Vancouver have helped incentivize wet lab development – by focusing on risk mitigation, financing programs, zoning law incentives, and partnerships between public-private entities – to determine the best approach for catalyzing wet lab development in Ontario. For example, New York launched a USD 500 million initiative called LifeSci NYC in 2016, which included USD 300 million in tax incentives for commercial lab space. 

One example being championed by stakeholders is for the government to provide financial assistance in the form of rental subsidies or guarantees. This type of financial underwriting program would provide multiple benefits, including alleviating affordability issues facing these companies, improving finance-ability, and mitigating the default risk for developers.  

Programs, such as Toronto’s IMIT program, currently incentivize the construction of new buildings or renovations in targeted sectors, including biomedical operations through grants aimed at offsetting a portion of the property’s municipal taxes. In the Toronto Region, permitting and zoning laws are yet another hurdle that must be addressed. Other jurisdictions provide examples that showcase how zoning and other changes could facilitate the construction of new wet lab buildings here as well. 

In recent years, public-private partnership models have proven to be highly successful here in Toronto. For example, the Ontario government and the University of Toronto collaborated with Johnson and Johnson to launch the JLABS incubator in 2016, which is situated in downtown Toronto within the MaRS Discovery District. This was the first JLABS incubator to be located outside the U.S. and is a testament to the Toronto Region’s established strengths in the life sciences arena^x. Another example that could serve as inspiration is Biospace 1 in Calgary – a facility that will house companies working on advances in health, wellness and biomedical innovation. This facility is the product of a partnership between DynaLife Medical Laboratories, Biohubx (an NGO that supports life sciences companies) and the Western Economic Diversification Canada fund.^xi The British Columbian government also recently announced a $10 million dollar investment in a new wet lab facility with adMare Bioinnovations, to help grow early-stage, local biotech companies by providing access to turnkey-ready wet labs with cutting-edge equipment, as well as meeting and office space.^xii 

Fortunately, the majority of life sciences roles require wet lab space and equipment to be carried out, attracting talent back to in-office work in the downtown core. This trend leads to benefits like rebuilding of the tax base and high-impact economic projects, such as multi-tenant wet lab spaces or mixed-use buildings. By exploring a variety of incentives and partnership models to attract both high-profile anchor tenants and wet lab developers, these projects can bring about novel partnerships, high-quality jobs, and immense spin-off opportunity. 

To learn more about the shortage of wet lab space in the Toronto Region and the importance of the biotechnology industry, check out Toronto Global’s commissioned research on our page, At The Tipping Point. 

Conclusion 

As a result of the boom of massive unfulfilled demand, the region is at risk of stifling the growth potential of early-stage and mid-stage life sciences companies – both domestically and internationally, for those interested in expanding into Ontario. In turn, the lack of wet lab space has caused companies to look at other North American clusters, slowing our pace of development for novel IP and hampering their ability to recruit top talent.  

Solving the wet lab space challenge is a critical driver of high-value economic activity, and the opportunity to convert existing office space into specialized life sciences facilities presents Toronto with a niche opportunity. By mitigating the challenges facing early- and mid-stage companies and de-risking through targeted incentives and programs, the Toronto Region could bolster the investment in wet lab space to retain home-grown companies looking to scale, attracting more foreign-owned companies and simultaneously address office vacancy.   

The Toronto Region’s increase in office vacancies, declining foot traffic, and overwhelming demand for real estate in key sectors present an opportunity to reexamine the use of underutilized spaces and the need for a regionally coordinated approach. By incentivizing and investing in building conversions to address critical industry gaps in key sectors, such as life sciences, government bodies and economic development organizations can collectively adapt to the changing environment of the city’s infrastructure, to ensure the prosperity and economic resiliency of the Toronto Region. 

Takeaways 

• There is a crucial need to reassess the use of space in Toronto’s downtown core, by opening up dialogue about making public transit more efficient, improving parks and green spaces, and using public-private multi-sectoral collaboration on how to repurpose vacant buildings or underutilized space. 
• Due to the city’s size and scale of office space downtown and the hyper concentration of jobs in technology, financial and professional services, and R&D, Toronto can look to neighbouring transformations-in-progress like Calgary, to model a regionally coordinated approach toward revitalizing the core by repurposing office space use. 
• In a Toronto Global case study, we look at the Toronto Region’s strained capacity for the overwhelming demand for wet lab space, halting the growth potential for the region’s booming life sciences industry. 
• Solving the wet lab space challenge is a critical driver of high-value economic activity, and the opportunity to convert existing office space into specialized life sciences facilities presents a niche opportunity to the region. 
• Government support and incentives and foreign direct investment become a crucial key to the overall solution, by matching the industry demand with real estate, especially when the cost of capital is increasing. 

This article was published in the Fall 2023 edition of the Economic Development Journal, a publication available to members of the International Economic Development Council and is being republished with its permission. To have access to IEDC’s Journal articles and its many services, you can become a member by visiting https://www.iedconline.org.

Daniel Hengeveld is Vice President, Investment Attraction at Toronto Global (dhengeveld@torontoglobal.ca). 

Today’s announcement of Unilever’s Horizon3 AI lab is an incredible vote of confidence in Toronto’s AI Ecosystem. Unilever’s Horizon3 Labs is the first and only of its kind globally and represents an investment that grew out of the company’s strategy to become a data-driven company.

Unilever has implemented more than 400 applications of AI across various disciplines including marketing, innovation, supply chain, and research & development. This includes employing generative AI in its customer service and marketing, and advanced analytics and machine learning in supply chain and logistics.

The company also developed a bespoke AI solution that auto-updates product titles and descriptions on retail websites to respond to search trends to put relevant products in front of consumers.

Andy Hill, Unilever’s Chief Data Officer, went so far as to say, “We are working to solve real-life problems through innovation, and setting up this lab in Toronto allows us to access vibrant tech talent and some of the best partners in the business to bring solutions to life.”

Why did Unilever, a Fortune 500 company with products in over 190 countries and 3.4 billion daily users, choose Toronto for it’s first and only global AI Lab?

 “In selecting Toronto, we will be able to tap into one of the fastest growing AI superclusters in the world with access to best-in-class research facilities and world-class talent while also building off the collaborative power of academia, businesses and government,” said President of Unilever Canada, Gary Wade.

The numbers back up Wade’s assessment. Toronto Region’s AI ecosystem is a thriving center of innovation, where top-tier research meets cutting-edge startups and tech giants, making it a prime destination for AI projects. Many multinational enterprises, such as HSBC, Sanofi, Samsung, and NVIDIA, have chosen the Toronto Region as their AI R&D centres, a testament to the region’s dynamic AI ecosystem.  

Over 285,000 tech workers reside in the Toronto Region. We have the third largest tech talent pool in North America after San Francisco Bay Area and New York Metro, and the second fastest growing tech talent workforce. In Ontario, over 1,000 students graduated from AI Masters’ programs, while more than 1,500 enrolled. Our world-renowned University of Toronto is one of the largest producers of high-quality AI and tech talent for the Toronto Region. Alumni from the university work for some of the world’s most well-known firms such as OpenAI, Google, Apple, and Microsoft.

There are over 660 AI firms across Canada, with 273 AI firms in the Toronto Region alone, underscoring the region as a hub for AI activity. In the fiscal year 2022-23, Canada’s venture capital investments in AI accounted for 28 percent of the global total, surpassing the investments of countries like Germany, the UK, and Italy.

Radical Ventures, Canada’s AI-focused Venture Capital (VC) fund based in the Toronto Region, is dedicated to investing in companies that harness AI and disruptive technologies for innovative solutions. With the AI activities occurring in our ecosystem, Ontario experienced a record high in AI VC investments, reaching $1.16 billion in 2022.

Toronto is also home to the Creative Destruction Lab (CDL), global startup program for seed-stage, science-based companies. The Artificial Intelligence Stream, at CDL,  brings together experienced entrepreneurs, leading scientists, and active investors to help scale ventures focused on artificial intelligence. Alumni of the CDL program include Xanadu, Deep Genomics and Ada. In fact, the CDL model is so successful that it has scaled to 13 locations globally.

Another complement to our AI ecosystem is the Vector Institute, a research organization devoted to building Canada’s leadership in AI. Affiliated with the University of Toronto, Vector has over 700 members in their research community and works with dozens of corporate partners to drive research excellence and commercialization of AI. AI R&D funding in Ontario hit $1.08 billion in the last year, surpassing any other province’s investment in the sector.

The Vector Institute, led by Geoffrey Hinton, the ‘Godfather of AI’, plays a pivotal role in advancing AI research and commercialization. In fact, many University of Toronto alumni have had the privilege of being mentored by Hinton himself. Toronto Global helps companies partner with industry organizations such as the Vector Institute.

That’s a lot to consider. And, as part of our work with Unilever, Toronto Global prepared a comprehensive analysis of the Toronto Region’s AI ecosystem outlining how the region’s talent, ecosystem, innovation capacity, and global connectivity provide an immense advantage over other global locations. Toronto was chosen over 15 other jurisdictions globally for this investment.

Learn more about AI in the Toronto Region

Diversity is Toronto Region’s Global Advantage

Another component that sets the Toronto Region apart is the diversity of our people and economy. Half of our population is born outside of Canada, making Toronto one of the most diverse cities in the world. Businesses can access a workforce with unique perspectives, cultural awareness, and a worldly view that can help address barriers like data bias – which is critical to building technologies like AI.

By harnessing AI ethically and responsibly, businesses like Unilever are opening doors to new levels of productivity and innovation. In fact, ethical and explainable AI is of increasing interest to academia and industry in the Toronto Region.

Companies can also access talent globally through our open immigration programs. Toronto Region welcomes over 100,000 new immigrants a year, the largest proportion of any Canadian city. The Toronto Region’s workforce has a global perspective, with over 250 ethnicities and 190 languages represented, and more than half the population identifying as a visible minority. Business done in Toronto is better incorporated across the globe.

And the diversity of the Toronto Region’s economy? Accounting for 20 percent of Canada’s Gross Domestic Product (GDP), our region stands at the forefront in Technology, Financial Services, Life Sciences, Manufacturing, and Food Processing. Unmatched in Canada, the Toronto Region’s economy is among the few in North America that can boast such a diverse spectrum of industries.

Unilever owns over 400 brands, including Dove, Hellmann’s, Vaseline, Degree, Axe, TRESemme, Knorr, Breyers and SheaMoisture. For companies like Unilever that manufacture a wide range of products, the Toronto Region’s economic diversity provides an opportunity to tap into vast industry expertise and work collaboratively to understand how industry peers and others are adopting AI.

What’s Next for Unilever?

Unilever’s investment builds on the company’s over 125-year history in Canada that. Establishing in Toronto in the 1890s as Lever Brother’s soap factory, Unilever’s current Canadian presence is still concentrated in the Toronto Region, including their Canadian headquarters, and a manufacturing facility in Rexdale that produces Hellman’s mayonnaise, and now Horizon3 Labs, in addition to a larger national presence.

Unilever is exploring data and analytic tools that unlock AI and machine learning across the value chain. Horizon3 Labs is set to concentrate on three key areas: advanced forecasting, graph database applications, and delivering insights through generative AI.

This strategic focus will integrate work conducted in Toronto into Unilever’s global business operations. Moreover, Horizon3 Labs’ projects will incorporate collaboration with academic researchers and industry experts, fostering a rich environment of innovation and expertise.

The Bottom Line

Unilever’s investment represents another strong signal that Canada, and particularly the Toronto Region, is the right place to invest. With Generative AI being the topic on everyone’s lips – from boardrooms to watercoolers – the time to invest in AI is now! In an increasingly competitive and changing economic landscape, the stability, diversity, and talent that the Toronto Region offers is universally sought after for companies incorporating AI into their business.  

Does your company have an AI strategy? Connect with the Toronto Global team to learn how we advise companies who are considering growth and AI innovation in the Toronto Region.