03-06-2025
Vertical integration changes the real estate game
When Pusateri's Fine Foods cancelled its lease at 899 College St., after filing for bankruptcy just days before its grand opening, Loblaw Cos. Ltd. jumped at the chance to occupy prime real estate on the western edge of Toronto's Little Italy.
At 15,000 square feet, the commercial property – owned by Toronto-based Clifton Blake Group – was ideal for a small-format No Frills, a new concept that Loblaw began rolling out last year to deliver discounted groceries in a leaner layout.
But there was a catch. Loblaw wanted to hit the ground running with a refit. That gave Clifton Blake a 24-hour window to study Loblaw's blueprints and begin customizing the space for the new tenant on a compressed deadline.
Most real estate companies don't have the agility to turn on a dime like that – even when a long-term lease with a triple-A tenant is at stake. For Clifton Blake – a developer and private real estate investment trust (REIT) specializing in boutique, purpose-built rental mid-rises anchored by street-level commercial property – adapting to changing circumstances quickly and delivering timely design solutions is a core strength.
'Back at the office, we huddled with our in-house construction team and Navy SEALed the situation within hours,' says Wes Myles, president and chief investment officer at Clifton Blake, whose other commercial tenants include Shoppers Drug Mart, LCBO and WeWork. 'If you're not able to tailor solutions rapidly for prospective tenants with a demanding schedule and significant dollars at play, they will usually vote with their feet and walk.'
The reason Clifton Blake says it was able to 'Navy SEAL' the Loblaw situation so handily is because it has taken the vertical integration of its operations to the next level by combining property development and construction. Unlike many of its competitors, which rely on independent construction companies, Clifton Blake maintains full control over its developments, eliminating the need to co-ordinate with multiple subcontractors that may be juggling several construction jobs at the same time, says Mr. Myles.
Clifton Blake's REIT has nearly $1.6-billion in assets either under management or in the pipeline, with 1,500 rental suites and more than 300,000 square feet of retail and commercial space outside Toronto's downtown core. Vertical integration has allowed it to achieve fast and flexible delivery of real-estate projects. It has also improved quality control and profit margins through reduced labour and financing costs that come with a shorter construction cycle.
For Clifton Blake, the last piece of the puzzle fell into place a year ago, when it partnered with Toronto's Wilkinson Construction to create a new division called CB Wilkinson – a fully integrated real estate company with crews of carpenters, drywallers and framers.
'Having direct control over the entire process ensures a shared vision trickles down from the boardroom all the way to the foreman and trades working on the ground,' says Mr. Myles, who is also CEO of CB Wilkinson.
Many developers claim to be vertically integrated, but few – apart from industry giants such as Great Gulf and Tridel Group of Cos. – have the capability to tweak floor plans and make design changes without costly delays and budget overruns while construction is under way, says Mr. Myles.
'Mobilizing and demobilizing is a big cost that's normally controlled by subcontractors and they will nail you on charges if you need to pivot,' says Mr. Myles, who points to miscommunication as a major reason why projects are either pushed over budget or held up.
Despite the need for last-minute changes, neither of those scenarios happened during the initial refit of Pusateri's at 899 College St. To make the space workable, CB Wilkinson customized a number of elements that have been retained by Loblaw's No Frills, including a loading dock at the side of the building to minimize disruption to residential tenants.
'In recent years, rising material and labour costs have strained relations in the construction industry,' says Jeff Wilkinson, president of CB Wilkinson, whose father started Wilkinson Construction in the 1960s. 'Having the developer and construction manager on the same team is a huge help in keeping those costs from spinning out of control.'
Another advantage of vertical integration is that the developer gets reliable construction budgeting and scheduling information from day one of property acquisition. 'Most developers don't get that kind of feedback until they begin drawing up detailed plans,' Mr. Wilkinson adds.
When completed later this year, Clifton Blake's Pacific Residences – a cubist-inspired, mixed-use mid-rise situated in Toronto's Junction neighbourhood – will have three commercial tenants and 120 purpose-built rental suites, partially framed by a heritage façade that's more than 100 years old.
The fit-out posed a number of challenges, with BMO requiring vault-like security and Starbucks asking for an unexpected boost in electrical power. But a trickier problem was creating seamless access from the street to the second floor for a third commercial tenant in the health and fitness business.
The solution was to alter the building's design midstream by adding small retail frontage at street level with decorative stairs next to an elevator. 'On a typical condo project, you don't even talk about retail until it's almost finished,' says Mr. Wilkinson, noting his company's customization always happens in tandem with the residential build and requires the management of many moving pieces.
'As long-term owners, delivering a complete building that fits into a community is always a priority,' Mr. Myles says. 'The goal is street activation to get people out walking and biking.'
He expects to shave as much as 12 weeks from what would otherwise be a construction schedule of about 128 weeks for Pacific Residences, thanks to the benefits that come from vertical integration. The associated cost savings of 10 per cent to 15 per cent will partly be passed on to commercial tenants.
A potential downside of integration is carrying idle crews in a slower market, but for CB Wilkinson, having total control of an asset under development far outweighs that consideration.
'Most developers have depth not breadth,' Mr. Myles says. 'We have both, which is especially important for mixed-use projects where you're dealing with an eclectic blend of end users.'
