What will be the new normal for the office market?

“We are cautiously optimistic for 2022,” says Adam Kot, vice president, commercial mortgages and head of origination at Addenda Capital, a multi-asset investment firm focused on sustainable investing. To enhance the long-term stability of financial returns for its clients – which include pension plans, high net worth individuals, insurance companies, corporations and foundations – Addenda manages a portfolio of high quality commercial mortgages. through its team of in-house experts. This offers a front row seat in the real estate landscape.

“We believe that landlords will find new solutions to generate demand for office space if we see an increase in vacancy rates,” adds Adam Kot, noting the general “creativity and strength” of landlords in the real estate market. Canadian. Owners and employers will look to find ways to attract workers to the office, he says. “Employers and employees see the value in the efficiency and team spirit that the office environment brings. It is essential to build a corporate culture.

With many fingers crossed hoping for an end to COVID and a return to greater normality, the office space market is showing signs of recovery, according to recent data.

The last three months of 2021 saw the first quarter of rebound since the start of the pandemic, CBRE (source 1) wrote in January 2022. “In stark contrast to the fourth quarter of 2020, net absorption totaled 1, 7 million plus square feet. .. in the fourth quarter of 2021. These gains even exceed the 2019 quarterly average of 1.5 million square feet when global tech occupants flocked to Canadian hub cities,” CBRE noted. (Net absorption refers to the difference between the space that became occupied minus the space that became vacant.)

Additionally, the overall vacancy rate for the office sector rose just 10 basis points in the fourth quarter to end 2021 at 15.8%, CBRE added. “This is the lowest quarterly increase on record since the start of the pandemic, signaling a likely market reversal, with three markets reporting lower vacancy at year-end: Toronto, Vancouver and Ottawa. .”

“We will keep an eye on how occupancy rates will be affected once the restrictions are fully lifted,” says Adam Kot of Addenda Capital. However, one must “take a long-term view of all this and avoid knee-jerk reactions to increases in short-term vacancies”, he warns. In other words, observing trends over a three to five year period as leases come to an end provides a better window to assess truly significant changes in the market.

Faced with the immediate needs of tenants, what will landlords do to adapt? A partial return to the office could result in reduced space requirements for tenants, while others might want more floor space for open concepts that allow for social distancing or other reconfigurations. For example, tenants will look for spaces designed to encourage more socializing and collaboration, including amenities such as breakout rooms and recreation rooms. Health and wellness features are also important, such as increased ventilation for air quality, improved lighting, additional greenery, or quiet rooms.

It is “clear that a changing workplace will have a significant impact on offices and their use,” writes the consultancy PwC in a report on new real estate trends in 2022 (source 2). And for property owners coping with new trends, “a changing world of work will accelerate the real estate industry’s continued transition to a more service-oriented business, with greater focus on the user.” In this respect, property owners will be faced with the challenge of better understanding “what are the specific requirements of their tenants”. This will most likely include technological solutions resulting in buildings where tenant presence can be improved through sensor-controlled airflow, lighting, heating, security and accessibility.

Mixed use and durability

As landlords attempt to meet tenant demands for office space, “we could see opportunities to reconfigure existing office supply into mixed-use projects,” says Adam Kot, adding that this could include partial repurposing to include residential or commercial components. Converting office space into residential space could help solve the current housing shortage issues in many major centers. Such a conversion could make the downtown space more attractive for people wishing to reduce their commuting times. Many owners will also reinvest in buildings with a focus on sustainability improvements. Such investments will respond to changing tenant demands and create more sustainability-oriented real estate investments for the market, which “would obviously be a very positive outcome.”

For now, worker preferences seem to point to a hybrid model. “Once the COVID-19 pandemic is over, the hours that Canadian employees would prefer to work from home could represent, in total, 24% of their total work hours,” wrote a Statistics Canada researcher in October 2021 (source 3) . “This estimate, which only considers worker preferences and does not incorporate employer preferences, is nearly five times the overall share of total hours worked from home observed in 2016 or 2018.” Among the “new teleworkers”, “80% of them would like to work at least half of their hours from home once the COVID-19 pandemic is over”. The next few months may well bring long-awaited answers on the success of the return to power, but it will be the next few years that will determine the evolution of this asset class.

Adam Kot
Vice President, Commercial Mortgages and Head of Origination at Addenda Capital

Source 1: https://www.cbre.ca/en/research-and-reports/Canada-Office-Figures-Q4-2021
Origin 2: https://www.pwc.com/ca/en/industries/real-estate/emerging-trends-in-real-estate/report.html
Source 3: https://www150.statcan.gc.ca/n1/pub/36-28-0001/2021010/article/00001-eng.htm

Jose C. Birney