TORONTO—A subsidiary of Google parent Alphabet Inc. is nearing a deal to develop part of Toronto’s waterfront, the first major foray of the search-engine giant into the creation of high-tech urban space, according to multiple people familiar with the deal.

Alphabet’s unit, Sidewalk Labs LLC, would spearhead the so-called digital-city project, to be located along a 12-acre section of Toronto’s eastern waterfront. It would create up to 3 million square feet, about the size of the Empire State Building.

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