Many businesses that have been closed for 12+ months are now beginning to consider returning to the office. The rush away from office real estate may turn into a rush back to the office as the country gradually opens again.

Vacancies in office real estate rose to 14.6% in Q1 of 2021. Specifically in Toronto, vacancies reached their highest level since 2008. Although the office did better than some other sectors of real estate, these represent some of the highest vacancy rates in 25 years. The lack of demand from the office sector in downtown Toronto has an inadvertently direct impact on the retail sector.

High vacancy rates mean it’s likely to be a renter’s market until demand evens out.

As demand for offices increases initially, landlords are adapting to significant shifts in office design preference and work culture. These shifts are showing up in the amount of space tenants are leasing and how they’re optimizing that space.

Mixing Local and Remote Work

Although some companies are returning to onsite work full-time, others are switching to flexible work. Hybrid workplaces have different requirements, including more collaborative spaces for remote workers to get together and be productive. Major banks and corporations are supporting a hybrid model where their employees can elect to work 2-3 days from either home or office. On alternate days, the office would be occupied by another hybrid employee.

Mixed spaces with high-tech setups are ideal for a fragmented workforce. Dedicated high-speed Internet connections, smart screens, and built-in audio/visual setups can help local and remote teams communicate more efficiently.

The other benefit of mixed spaces is psychological. Employees who have been working from home for more than a year may not do well transitioning back to a traditional office setting. Comfortable, collaborative spaces help to ease the transition without sacrificing productivity.

Slimming Office Spaces

Increases in remote work combined with downsizing have left companies with fewer people to occupy their rented offices. While layoffs were less common in office jobs that had the option for remote work, there were a considerable number of layoffs even in these roles, especially in companies of more than 5 employees.

Smaller office spaces may also come as the result of decentralization. Rather than having one large office where everyone works together, some companies in large metro areas are moving to satellite campuses. These are smaller office spaces in urban or suburban areas that provide teams with a place to meet and work together with lower risk and a more personal atmosphere.

As of April 28, 2021, Service Canada had received applications from 7.3 million Canadians for federal aid through the Canada Emergency Response Benefit. A report released by Statistics Canada found one in five Canadian businesses had laid off more than 80 percent of their staff.

Lease Timelines

The question of lease terms for office real estate post-Covid is still up in the air. There are two potential scenarios that seem likely:

Long lease terms with flexibility clauses

Long leases can be intimidating for businesses that are returning to the office market post-Covid. The unpredictable nature of the market might make a typical 10 – 15 year office lease unappealing.

Flexibility clauses give tenants the ability to expand or reduce their rental space at set intervals throughout the lease term without any financial penalty. This allows a business to rent a smaller space at first and expand up as needed or rent a large space and reduce if it’s found to be unnecessary.

Short leases initially, followed by longer future leases

Smaller companies may opt for shorter office leases upon reentry into the market. These are likely to be followed by longer leases once the company understands their needs and establishes stability.

Built-in Health Measures

Vaccination rates nationwide were recorded at 48.45% as of July 16th. Around 80% of the population had received at least one dose of the vaTccine by that time. Even with a high vaccination rate, certain public safety measures will likely remain part of our daily lives, even in our workplaces.

Office spaces built with health and safety in mind are better equipped to handle tenant needs. These can include temporary measures like mobile barriers and sanitation stations or more permanent fixtures like hands-free doors.

The remainder of the year will be a healing process for the office and retail sector, while the multifamily and industrial sectors continue to thrive. Restructuring of rents and redesign of the office buildings will help the market eventually return to a normal balance.

Please call us at 1 800 980 6668 or check out www.creiland.com to learn more about our services and how we can help you mitigate your risks with your leased premises.