The fifth floor of Manulife Financial Corp.’s stately headquarters on Toronto’s Bloor Street East sat empty during a recent tour, the workers having vacated about a week earlier.
The traditional offices on the periphery of the floor, in many different sizes and configurations, are destined to become a relic of the past.
That space will soon be open, well-lit and dotted with smaller workstations like the ones two floors below, where there is also a lounge area reminiscent of a modern coffee shop.
Manulife, one of the country’s largest life insurers, is embarking on a massive overhaul of its offices, one that will make more efficient use of its real estate by changing the way its employees work.
The company plans to increase the proportion of its work force that is mobile – that is, working remotely or dividing time between multiple locations – to 30 per cent.
Currently, that number stands at less than 5 per cent. It also intends to standardize the look: There will be one type of workstation and just two different office sizes. Those offices will be on the interior of each floor, bounded in by glass fronts. More space will be dedicated to meeting rooms, phone rooms, and other shared areas.
The objectives are to improve collaboration and cut costs.
“Real estate is an expense and it needs to be managed,” says Brad Searchfield, global head of corporate real estate at Manulife. “All things being equal, we will use less real estate. Then as we grow, it creates opportunities for us to manage that growth very cost effectively.”
The plan is to start in Ontario, then roll it out across its North American offices and, finally, to Asia.
The process of change that Manulife is undergoing, which it has already tested in its office space in Waterloo, Ont., is increasingly common among major corporations.
Royal Bank of Canada, for instance, is cutting office space by reducing the number of employees who get their own dedicated desk or office, encouraging work in collaborative environments, and making it easier for employees to work from different locations. Telus Corp. has slashed its real estate costs by getting thousands of workers to do their jobs from home at least part of the time.
The trend is picking up steam quickly, and its impact on the country’s commercial real estate market could be profound. It is raising questions about whether too much office space is being built in cities such as Toronto, and whether the bank towers in the financial district will continue to command premium rents.
Real estate brokerage Cushman & Wakefield predicts that Toronto’s office market is in for a bumpy ride next year. Office development is taking off. Of the 5.1-million square feet currently under development in the city’s downtown, 1.6-million square feet will hit the market in late 2014. The brokerage predicts that will push the vacancy rate up from 4.7 per cent to 7 per cent by the end of next year, and to 8.8 per cent by the end of 2015.
The problem is that this development is occurring at a time when demand for office space is actually weakening. And one of the top trends reshaping the office market is “new workplace strategies” that reduce the amount of space required per employee, Cushman says.
Manulife’s Mr. Searchfield expects that reconfiguring its offices will allow it to fit a number of workers who currently work in a building next door into the head office, freeing up space it could sublease to other companies or use to bring employees from elsewhere closer to head office. That could have a domino effect. The company has 17 buildings in its corporate real estate portfolio in North America, and about 18,000 employees on the continent.
When you take into account the new office space coming on stream, “we’ve got more space than we need, in a market where every firm is moving to find efficiency,” says Craig Smith, president of Ashlar Urban Realty Inc. in Toronto.
“Ten or 15 years ago the bank towers and their neighbours in the downtown financial district would have been at about 260 square feet of space per person,” says Sandy McNair, president of Altus InSite. “Today that would be closer to 160 square feet per person. Then you’ve got firms like Telus at 100 square feet per person, and Royal Bank and TD that are moving to 120 square feet per person on their newer premises.”
“We’re going to end up with more people in less space,” he adds. That poses problems for the owners of bank towers and other older office buildings, many of which cannot be occupied at a level below about 150 square feet per person, he says. Even if a company can change washrooms, elevators and electrical systems to accommodate more people, “the killer, the one that there’s no negotiating with, no matter how much they’re willing to spend, is the width of stairwells, fire stairs.”
“The textbook has said that the bank towers are going to have the safest rents and the lowest vacancy, they’re the safest investment. And yet here we are in an environment where they’re perhaps not.”
This concern about a surplus of office space isn’t limited to Toronto. There is more than 15-million square feet of new office space in the pipeline nationally for the next four years. The country is in the midst of the most active downtown development cycle in 20 years, according to Cushman.
Downtown New York is the North American market that had the most office space under construction during the third quarter of this year. Next on the list? Calgary, Toronto, then Vancouver, each of which topped cities such as Boston, Washington and San Francisco.
Calgary is expecting 5.2-million square feet of construction, and downtown Vancouver’s office development market is more active than it has been in more than two decades. St. John’s is seeing its strongest office construction cycle since 1986, with the creation of 310,000 square feet downtown.
Towers are going up while work spaces are shrinking.
“We’ve just finished a project for HSBC in the lower mainland in Vancouver, a brand-new, transit-oriented building for them where they consolidated six locations … for exactly that reason – they wanted to achieve greater efficiencies, provide for telecommuting and things like that,” says Gary Whitelaw, chief executive of Bentall Kennedy.
“We see those kinds of trends – mobile technology, video conferencing – changing the nature of office space utilization. I absolutely think that corporations are going to drive to control space usage, and with that head count, to drive productivity.”
As new office towers rise, he’s concerned about Calgary. “There’s a lot of new construction coming into that market,” he says. “Whether that head count and the need for space will keep up with that new supply is a good question.”
Calgary is lagging other major markets when it comes to efficient use of space, and it’s not clear when – or if – the trend toward fewer square feet per employee will hit the oil patch in a big way.
“Calgary’s just a lot more generous with space,” says Mr. McNair. “In downtown Calgary, the norm for energy firms would be close to 300 square feet per person. Some of the firms are at 400.”
But the trend is spreading.
“Most organizations can reduce their real estate by 30 per cent if they go to a [desk] reservation system or a slightly different workplace model, with very little change, because 30 per cent of those people are either on holiday, travelling on business, ill or out visiting clients,” says Lisa Fulford-Roy, a senior vice-president at design firm HOK, which is working with Manulife.