Canada’s office market has been impacted significantly by COVID-19 – though not as much as retail – and the pace of change has even led to debate as to whether the “new normal” is cyclical or structural in nature. Office employees went to work from home in droves in spring, revealing that flexible work is feasible, practical and increasingly desirable. Advancements in technology and digitization have broadened how, when and where work happens. Employees who did not previously have flexible options are now voicing their expectations for flexible work, health and safety and improved work-life integration.
Despite admirable efforts by landlords and employers to provide safe working environments, the return to office (RTO) has been slower than expected. Anecdotally, a relatively small percentage of space is being re-occupied – given each city’s COVID-19 case counts and restrictions – influenced by the health and wellness concerns of employees, mainly involving transit. Even when the pandemic ends, traditional workplace models may not return. Portfolio strategies may start to shift from a headquarters to a hub-and-spoke mindset with footprint optimization and the human experience key considerations. The “hub” would be a central location where some employees work full-time, also facilitating branding, culture creation, internal collaboration and engagement. The “spoke” would include flexible workspaces and partial or full-time WFH. The big question that will impact demand is whether tenants will require more, less, or the same amount of office space.
Co-working providers and tech firms have driven demand for office space across Canada. The pandemic has challenged the co-working model and brought lofty expectations for this sector down to earth. Meanwhile, reactions from some large tech users have been mixed – making big space commitments in major hubs (Vancouver, Toronto, Ottawa and Montreal), while also placing large blocks of space up for sublease and issuing statements regarding the implementation of indefinite WFH plans.
Most markets began the pandemic with relatively sound fundamentals and low vacancy rates. COVID-19 may have provided an unexpected “release valve”, especially in tight downtowns like Vancouver and Toronto. However, lower leasing volumes reflect the mood of the market as tenants stand on the sidelines, meaning demand is low even though more space is available. Concurrently, sublease space is up significantly, with more than 12.1 million square feet (msf) available at the end of the third quarter – up 2.9 msf from year-end 2019 and the highest level in four years. To date, most sublets are small but larger blocks are on the horizon, which could tilt the scales in tenants’ favour and force landlords to adjust pricing – particularly in major downtown centres. Apart from challenged markets such as Calgary and Edmonton, rent growth may have plateaued in 2020 after rising for several years and may begin to soften.
As of third-quarter 2020, national office vacancy was 10.9% (up 100 basis points (bps) year-over-year). This is likely to rise further during 2021 – to 12% by year-end – with modest increases in most markets. Despite significant construction deliveries in 2020 and 2021 (nearly 12.8 msf in all), high preleasing levels underscore the market’s strength, keeping vacancy stable. The unknown is whether tenants will reassess their preleasing commitments in light of WFH strategies. Developments underway amounted to 19.5 msf in the third quarter, down from 22.1 msf one year earlier. This could slow to 12.9 msf by year-end 2021 if uncertainty inhibits the start of new projects, especially speculative ones.
Property managers and building staff are among the pandemic’s unsung heroes. The importance of keeping buildings and spaces clean and safe has called upon property management to play an even bigger role, establishing cleaning and social-distancing protocols. The lower utilization of office space and WFH have increasingly made cleaning a daytime task, allowing a quick response to any COVID-19 cases on the premises and reassuring tenants that workplaces are disinfected. Technology, already part of property management in the realms of sustainability and connected buildings, will play an even greater role going forward given the importance of occupancy monitoring and contact tracing in co-operation with tenants as more employees return to the workplace.
The WFH/RTO tug-of-war will not be resolved in 2020 and will likely persist throughout 2021. As major employers revisit their workplace strategies, it will take time for decisions to be made and impacts to be felt.
Property managers and building staff are among the pandemic’s unsung heroes. The importance of keeping buildings and spaces clean and safe has called upon property management to play an even bigger role, establishing cleaning and social-distancing protocols. The lower utilization of office space and WFH have increasingly made cleaning a daytime task, allowing a quick response to any COVID-19 cases on the premises and reassuring tenants that workplaces are disinfected. Technology, already part of property management in the realms of sustainability and connected buildings, will play an even greater role going forward given the importance of occupancy monitoring and contact tracing in co-operation with tenants as more employees return to the workplace.
The WFH/RTO tug-of-war will not be resolved in 2020 and will likely persist throughout 2021. As major employers revisit their workplace strategies, it will take time for decisions to be made and impacts to be felt.
Even when the pandemic ends, traditional workplace models may not return. Portfolio strategies may start to shift from a headquarters to a hub-and-spoke mindset with footprint optimization and the human experience key considerations. The big question that will impact demand is whether tenants will require more, less, or the same amount of office space.
