This time last year, experts were predicting that employees who have burned out on remote work will be flocking back to offices in the fall. It hasn’t played out that way.
However, there are bullish signs across all sectors of Canada’s property market as office leases are remaining firm, retail is recovering, and industrial real estate is booming. There’s still plenty of cloud in the crystal ball as COVID-19 continues to ebb and flow, but here’s a look at predictions for the months ahead.
Offices go hybrid
A walk around Toronto’s financial core is a lonely experience these days. The city ranks near the bottom of the Vitality Index, a new database from Avison Young commercial real estate that tracks daily foot traffic to offices in 23 cities across North America. Only about 11 per cent of workers who occupied offices in Toronto and Ottawa before COVID now come to work on an average workday. By comparison, in Vancouver and Montreal about 20 per cent of workers have returned and in Edmonton, which comes out the best among Canadian cities in the index, just 65 per cent of workers have returned as measured against numbers before the pandemic lockdown in early 2020.
Factors that influence the differences include vaccination rates and the industry composition of the city, says Craig Leibowitz, Avison Young’s executive director for innovation and insight advisory.
“Banking, finance and tech employers have most willingly embraced remote work strategies as opposed to other industries like real estate and construction, where the functions of employees’ roles require that they’re present in the office.”
Another big factor is commuting style. Cities where employees commute by car are seeing higher return rates than cities that rely heavily on mass transit, he adds.
The office dynamic has likely shifted for good, suggests Sheila Botting, Avison Young’s president of professional services for the Americas.
“This is a moment in time, and it will pass. Downtowns will continue to be vibrant because they have such a powerful role in the economy. But how we use our offices will transform toward collaborative work environments. People will still want to go to the office to engage with their colleagues, but they don’t have to be there, 9 to 5, every day glued to a desk.”
As a result, some companies are rethinking their office needs, but one size does not fit all.
“Some employers are still retaining a full footprint and hoping for a full return to office work. Another group is saying we can downsize by 10, 20 even 50 per cent. It depends on the nature of the business and work culture, but we are hearing everyone asking the question: what is the purpose of a workplace?” she says.
“Overall, there is a continuing readjustment of retail space, but no one is really pulling the plug,” says Tim Sanderson, executive vice-president for national lead retail for Canada at JLL real estate services.
“We saw renegotiating for better lease rates, particularly in the early lockdowns, but there is less of that going on now that things are open again,” he says.
Weak spots are still in the financial cores, specifically Toronto and Montreal, and in Vancouver and Calgary to a lesser degree, because office workers are not back in large enough numbers.
The suburbs have been stronger in the retail sector; it is increasingly being sought after by investors, which indicates confidence in the future of the market, Mr. Sanderson adds. “And while the major regional malls have suffered by being in lockdown for 200 days or more over the past year, they are also tenanted by very deep-pocketed retailers who are savvy and able to deal with the landlords, and who understand the minutiae of all the government support programs out there. It’s the average guy with one store or coffee shop who has unfortunately been lost in all this,” he notes.
“Retail is going to morph and evolve and there aren’t many brands coming to the market now saying, ‘I’m moving into Canada and want to open 50 stores,’ but there are plenty still saying, ‘let’s try three stores for now, and if they work, we’ll open another three in another city.’ We’re going to continue to see what I call guarded growth,” Mr. Sanderson predicts.
Industrial demand intensifies
Every major market has been seeing historically lower industrial property vacancies every quarter. “We had some strong fundamentals going into the pandemic and the lockdown just amplified the demands in an already tight market. That’s going to continue, especially in the major markets of Vancouver and Toronto, where there are significant land constraints,” predicts Chris MacCauley, Vancouver-based senior vice-president of commercial real estate services company CBRE Ltd.
“This is driven by e-commerce and logistics, but there is demand from all sectors. The lack of supply is going to have an impact on manufacturing, food processing and film production which are all vying for the same spaces,” he says. “Before the pandemic, we were already a very low-vacancy market and, with increasing demand from e-commerce, it has definitely put strain on inventory under construction.”
For the coming 12 to 18 months, the market is going to see demand for all types of industrial space outstripping supply because 75 per cent of new construction under way is pre-committed, Mr. McCauley says. “Pre-leasing industrial property in the past wasn’t as prominent as office, but now we see pre-leasing as a strong trend.”
Another sector competing for warehouse space is self-storage, says Yashar Fatehi, chief executive officer of NYX Capital Corp., which has invested in multiple self- storage facilities across Canada, and in Toronto partners with several Bluebird Self Storage sites.
“At the beginning of the pandemic, as expected, we witnessed a slow growth of occupancy at our facilities by virtue of the fact that people and businesses were locked down,” he says. “However, due to restrictions being lifted, we have been operating at pre-pandemic levels at all our facilities since last fall. I don’t anticipate any further lockdowns to the extent we have already been through and forecast a great year to come.”