It's a renters' market for businesses that believe the office will make a comeback post-pandemic

  2/23/2021 |   SHARE
Posted in Commercial Real Estate by Ron Hyde| Back to Main Blog Page

Office Space

Empty offices left behind by newly minted remote workers and other upheaval caused by the pandemic have begun to show up on the rental market, and it's presenting some prospective tenants with opportunities they couldn't have imagined prior to COVID-19.

"They're getting the red carpet rolled out," said Darren Fleming, an Ottawa-based commercial real estate broker.

It's almost a year into the pandemic, and Fleming and his team at Real Strategy Advisors are seeing companies that were on the fence about what to do with office space that's been sitting empty now starting to downsize.

"It's to either get rid of about half their space or go [fully] virtual," said Fleming, the firm's CEO.

That's an even bigger shift than he expected just six months ago, when he estimated clients would shed about 25 per cent of their space.

But for those clients who are looking for new space, Fleming says they have an "unparalleled amount of choice" and the potential to land incentives such as free rent for one year.

"If you're a tenant looking for space right now, there's a whole lot of people who don't have a lot of alternatives to rent to," he said.

Michael McNaught and his growing team at RVezy, an RV rental marketplace company, are prospective tenants seeing the market change first-hand.

In March 2020, McNaught was about to sign a lease for new office space in Ottawa, but then the pandemic hit. RVezy sent all of its staff home to work remotely and put the lease-signing on hold.

Since then, RVezy's business has doubled and its workforce has nearly tripled from about 20 employees at the start of 2020 to 55 now, with plans to keep hiring.

"We just happened to be one of the fortunate businesses that was well suited during this pandemic," McNaught, the company's co-founder, said.

Now, RVezy is on the search for office space again — and it's not just the company's needs that have changed.

"Pre-pandemic, it was a much more difficult [rental] market. We had probably four to five options that we were looking at. At this time, it's really endless," McNaught said. "There's so much available in all areas of the city and even different types of spaces. We've seen anything from office buildings to old firehouses to even a yoga studio."

Office availability on the rise across Canada
According to Altus Group, which collects data on commercial real estate transactions across the country, office availability in Ottawa increased from 8.8 per cent in the last quarter of 2019 to 10 per cent in the fourth quarter of 2020.

Other cities have seen even bigger jumps over the same period. In Toronto, office availability rose from 8.7 per cent to 12.4 per cent, while in Vancouver, it increased from 5.9 per cent to 9.1 per cent.

Raymond Wong, vice-president of data operations and data solutions at Altus Group, characterizes the difference in availability in Toronto from pre-pandemic to now as "night and day."

"That's why [the city has] close to nine million square feet under construction right now in the downtown to facilitate that [pre-pandemic] pent-up demand," Wong said.

For more than five years, Toronto has had the most construction cranes in operation in North America, according to international construction cost surveyors and consultants Rider Levett Bucknall (RLB). The firm is set to release its latest crane index ranking later this month that it says will show Toronto is still at the very top.

In the first quarter of this year, RLB says, 208 cranes have been in use in Toronto, with 19 involved in commercial construction. But the firm suggests that could be impacted by the working-from-home trend.

"With companies reconsidering the traditional model of the office — some have already committed to permanent remote working — going forward, we may see a decreased demand for commercial space in the city," Terry Harron, principal and resident manager of RLB's Toronto office, said in an email to CBC News.

As some tenants in commercial office space already try to shed square footage, listings website is seeing an increase in the total space available for sublease.

Spacelist Commercial Listings, founded in 2012, aggregates commercial real estate listings from brokerages, property management groups, owners and third-party property marketing platforms. It tracks real-time data from active listings and demand from those searching for space.

According to its data, Spacelist says total office square footage listed for sublease in 2020 compared with 2019 increased by 230 per cent in Edmonton, 400 per cent in Vancouver and 524 per cent in Toronto.

More than half of tenants expected to downsize: survey
For a prospective tenant, a suitable sublease can be valuable, as it can take over a space that has already been renovated for similar needs or even furnished.

Steven Jaffe, CEO of Spacelist, says despite the pandemic and the growth in working remotely, there is still demand for office space.

"In fact, there may even be increased demand. [But] the differentiation from pre-pandemic is the type of demand," he said.

"Instead of one 10,000- or 5,000-square-foot office in downtown Toronto, they may be looking for 1,500 square feet downtown and then a smaller one out in the suburbs — or maybe two, closer to employees."

What the future of work looks like is still in flux for many, and according to Altus Group, it may be less drastic than some had suspected last spring.

"The expectation back then was that, 'why do we need office?'" Wong said.

In November, Altus Group conducted a survey of 85 clients from across Canada to get a sense of whether they still expect tenants to downsize and by how much.

The survey found that 57 per cent of the respondents expected their tenants to downsize, but 62 per cent anticipated space needs would decrease by just 20 per cent or less.

It's a small snapshot of landlord expectations, not tenant intentions, but Wong still finds the results interesting.

"That's a big shift," he said.

Wong suspects it's a result of waning productivity, Zoom fatigue and the expectation that people will want to come together again to work collaboratively.

"I still believe that ... when people feel safe again with the immunization and the vaccine, the office will return," he said.

Landlords offering incentives
But it will likely look very different, according to Fleming of Real Strategy Advisors.

"There's going to be a huge amount of capital required to transition these spaces into these hybrid hub models," he said.

"We're going to need to lean on technology more than we did before: screens, better cameras, better audio, better bandwidth to make sure that those people [working from home] are included and don't feel isolated."

Fleming said he's seeing landlords offer incentives such as cash to cover renovations to create custom spaces, in order to lock in new tenants.

Wong said rental prices haven't changed substantially, but that could start to change depending on how long the office availability rate stays high. 

Michael McNaught of RVezy said that during his renewed search, landlords have been far more flexible now than prior to the pandemic on lease terms such as rental price and including extras such as more parking spots.

"Everything's on the table in these negotiations right now," he said.

nd while the allure of downtown may be fading for some, McNaught said RVezy is still interested, and he's confident his employees will still want to be in downtown Ottawa with access to restaurants, coffee shops and culture.

"No one's going to forget what pre-pandemic life was like," he said.

Source: CBC

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