Scotiabank says it is exploring selling its Toronto headquarters. (Courtesy Scotiabank)

Scotiabank's landmark red skyscraper in the heart of Toronto's financial district could fetch $1 billion or more if real estate trusts, pension funds and others get the chance to bid for Canada's second-tallest building, a commercial real estate expert said Thursday after the bank revealed the granite tower may be for sale.

"I think what you will get is a bidding war," said Bill Argeropoulos, director of research at real estate firm Avison Young.

"It is really a unique opportunity to own one of the country's triple-A towers."

Argeropoulos said fund managers such as the Ontario Teachers' Pension Plan, the Canada Pension Plan Investment Board and the Caisse de depot et placement du Quebec, as well as the major real estate trusts would all likely be interested in acquiring all or some of the building.

"I wouldn't be surprised if you saw two pension funds come together to perhaps spread the risk in an investment this large," Argeropoulos said.

Scotiabank (TSX:BNS) confirmed Thursday that it was in the very early stages of exploring the possible sale of the building as part of a regular review of its operations.

"In the current low-interest rate environment, it's potentially a good time to sell and we have chosen to explore the sale of Scotia Plaza," bank spokeswoman Ann DeRabbie said in an email.

Scotiabank is the only one of Canada's big banks that owns its head office in downtown Toronto.

"I think a lot of people have asked the question, when is the bank going to sell," Argeropoulos said.

He noted that the downtown Toronto real estate market has been hot with several big deals as low interest rates give investors easy access to cash to buy properties.

Last year, Hines REIT sold the Atrium on Bay office and retail building to H&R REIT for $345 million, while Dundee REIT acquired a $690-million portfolio of office buildings from Blackstone and Slate Properties that included $373 million in Toronto properties.

"From a timing perspective, I don't think there is a better time than today if you needed to free up some capital," Argeropoulos said.

Barclays Capital analyst John Aiken suggested the sale of the building could help boost Scotiabank's financial position ahead of new capital requirements.

"We view the sale of Scotia Plaza as a creative and brilliant move to help boost Scotia's capital ratios without having to alter its core strategic assets or issuing common equity," Aiken wrote in a note to clients.

"Consummating the sale could go a long way in putting this issue behind it."

Under the incoming Basel III rules, a bank's required Tier 1 capital ratio must be at least seven per cent. The ratio of how much of the bank's assets include shareholder equity and other core capital, is a key a measure of a bank's health and ability to endure downturns.

Canada's banks, which had relatively high levels of Tier 1 capital going into the 2008-2009 financial crisis, were widely regarded as among the world's most solidly financed during the global recession that was sparked by the U.S. banking scare. Some also moved to further increase their Tier 1 capital, but on occasion with types of security that won't be allowed under the new rules.

According to Avison Young, the office vacancy rate in Toronto fell 70 basis points to 7.9 per cent in 2011 and was expected to decline further this year.

The result compared with a national average of 7.6 per cent in 2011, down from 8.3 per cent in 2010.

In its outlook for 2012, the firm noted that 2010 saw a number of big real estate deals as lenders were ready with cash and interest rates sat near record lows.

Avison Young said the trends was expected to continue, "tempered only by a scarcity of high-quality assets and the spectre of international economic difficulties."

The 68-storey tower near the corner of King and Bay streets has been the home of Scotiabank's Canadian operations since it opened in 1988.

The building, at 275 metres, is currently second only in height to the nearby First Canadian Place, which has 72 stories and stands 298 metres tall. However, plans call for the Trump International Hotel and Tower currently under construction in the same vicinity to take over second place at almost 277 metres.

All three are considerably shorter than the CN Tower, which soars 553 metres.

Scotiabank shares closed up $1.42 at $53.98 on the Toronto Stock Exchange on Thursday.