Last Updated on October 24, 2023 by Neil Sharma
The office sector might be Canada’s most unpredictable real estate asset class because, on the one hand, tenant demand is plummeting but, on the other, there’s fervent belief that square footage per employee will increase to abet social distancing.
“Although some companies will increase space for social distancing and growth, overall vacancies are expected to rise in most markets due to increasing sublet space and tenants downsizing or offloading space altogether,” said an article from Erika Siegert, senior data analyst of national research insights at Altus Group. “In turn, there will be more landlord-tenant conversations around modifying lease terms and adjusting rental rates, with an overall focus on finding flexible solutions. As safety remains top of mind, remote work is here to stay, but there will still be a need for in-office interaction and collaboration moving forward.”
It’s more likely that working from home, according to Siegert, becomes entrenched in secondary and tertiary markets than it does in juggernauts like Toronto. In fact, Urbanation that there’s 8.7 million sq ft of office space under construction in downtown Toronto, much of which is pre-leased, and that an additional 27.5 million sq ft is in the development pipeline.
However, Siegert sees co-working spaces being optimal for Montreal, Kelowna, Calgary, Ottawa, Hamilton, and Halifax.
“Expect more demand for co-working space as an amenity in office buildings, or options to pay for space as you need it,” said her article. “Look for companies using more hub and spoke models to provide employees with better flexibility, maintain connectivity, and reinforce company culture.”
Even before the COVID-19 pandemic upended the office sector, a reevaluation of space was already underway, although it’s unclear if a move towards more square footage per employee was being seriously considered the way it is now.
“Before COVID, the move to less space was ending, because we were looking at 100 sq ft per person and the whole shift to cramming as many people per sq ft,” Dilpreet Mathauda, senior advisor of sales and leasing with Capital Commercial Real Estate in Winnipeg, told CREW. “You’ll see a reversal of that, not only because of social distancing but because that flight to a smaller footprint wasn’t working well. We’re seeing a shift to more traditional offices. We went from a traditional setup to full open concept, and now we’re shifting to a hybrid scenario. This was already happening pre-COVID.”
Mathauda’s medium- and long-term outlooks for the office sector are positive. Acknowledging that employers will likely push for workers to return to their offices, he says ambitious employees would be just as likely to desire a return.
“We’re all social creatures, and if you onboard a new hire, how do you do it if you’re all working completely from home? Young professionals want to rub shoulder with suite executives and show how hard they work and how late they work, so how do you replicate that by working from home?”
Ultimately, most observers are having difficulty ascertaining what the next few years in Canada’s office market will look like, precisely because this is uncharted territory and because different companies have different needs. Moreover, landlord inducements have become so aggressive that they’re difficult to pass up.
Mathauda added that immediately following the Twin Tower terrorist attacks on Sept. 11, 2001, a plethora of news articles appeared in which employees expressed reservations about working in tall office buildings. However, in seemingly no time, such consternation disappeared, and he believes that social distancing concerns will be similarly forgotten in two or three years.
“It depends on your job profile and industry—working from home works well in some industries, and not in others,” said Mathauda. “I advise organizations that if they’re looking to add more space for social distancing and no other reason, they should ask themselves how they’re going to use that space next year, or in the next two to five years. If they only want more space for social distancing, they might want a more staggered model for returning to the office: one team comes in one week, another team the next week, and they won’t have to take on more space. They keep their footprint low and reevaluate in a couple of years when the pandemic is behind us.”
Neil Sharma is the Editor-In-Chief of Canadian Real Estate Wealth and Real Estate Professional. As a journalist, he has covered Canada’s housing market for the Toronto Star, Toronto Sun, National Post, and other publications, specializing in everything from market trends to mortgage and investment advice. He can be reached at neil@crewmedia.ca.
