7 minute read time
January 18, 2022

For tenants, workers and market watchers attempting to decipher the future of the office and the role it will play within their organizations and lives, there are increasingly clearer indications of what the future may hold.

Subleasing another group’s already built-out office space has proven to be an attractive short-term solution as companies cautiously return to the office and make plans for the future. Landlords are taking note and are beginning to retool their vacant spaces to better align with tenant needs and the predominant risk-averse mindset.

The rush to snap up quality sublease spaces, particularly those properties offering shorter lease terms, has helped to stem a bigger spike in vacancy and has driven a rebound in Canada’s largest office market, Toronto, which still boasts among the lowest downtown office vacancy in North America—9.6% as of the third quarter of 2021. In fact, 85.2% of third quarter office lease transactions were for built out spaces.

“People want shorter and more flexible lease terms right now,” explains CBRE’s Downtown Toronto Research Manager Shekhar Bhardwaj. “If you’re signing a three-year lease, do you want to spend your money building out a raw base space and having a lot of capital expenditure up front? No, you want turnkey built-out space in case you decide not to renew in three years. This is the best way to get into the office market with the least risk. It’s a cautious way of returning to the office but is also an opportunistic approach to getting a good deal for quality office space.”

Sublease space as a ration of overall vacancy 

Major sublease deals in Toronto in recent months include Tokyo Smoke leasing 17,768 sq. ft. of built-out space in two locations from Coinsquare; Scotiabank taking 53,358 sq. ft. at 70 University Ave.; and Wayfair leased 27,518 sq. ft. at 88 Queens Quay W from Cisco Systems.

Some companies dipped a toe into the subleasing waters but decided to retain their spaces in the end. Wildbrain did just this at 25 York St., holding on to its 18,263 sq. ft.; Intelex did the same, retaining its 20,445 sq. ft. at 70 University Ave.

“A lot of occupiers tested out the sublease market as they flirted with virtual only models. They saw what rents and money they could recoup for their office space,” says Bhardwaj. “Then when optimism returned post-vaccine and hybrid pulled ahead of full virtual solutions, many office tenants pulled their space off the sublease market.”

Furnished suites

For those looking for once-in-a-lifetime discounts, the moment has likely passed. Whether sublets have been pulled off the market or leased up by opportunistic groups earlier in the recovery, much of the quality, larger blocks of sublease space in Toronto have been spoken for at this point. This was reflected in the most recent quarterly numbers, with sublease vacancy in the city declining from 3.3% in December 2020 to 2.6% as of Jan. 10, 2022 (versus 0.4% in March 2020).

In the face of dwindling supplies of built-out sublease spaces, some landlords are testing out different approaches to capture tenants.



Ready Set Go has allowed us to welcome tenants looking to minimize upfront investment and maximize lease flexibility - Jamie Petch, Kingsett Capital

Such as what KingSett Capital has been doing with its Ready Set Go program, building out fully furnished model suites in its office buildings that are Wi-Fi-enabled and, most crucially at this moment of great uncertainty in the office market, have flexible lease terms of one to five-plus years.

The market has responded well, proof that KingSett is meeting a growing market need. Since February 2020 KingSett has leased 58,000 sq. ft. of space under its Ready Set Go program, 14,000 sq. ft. of that at Scotia Plaza, where the program was first introduced in 2019.

The purpose of the program is to maximize the value of the smaller vacant spaces in KingSett’s portfolio as smaller users opted for co-working spaces instead “While we aren’t trying to replicate the community aspect provided by co-working, Ready Set Go allowed us to welcome tenants who were looking to minimize their upfront investment and maximize lease flexibility, which is exactly what our furnished spaces offered,” says Jamie Petch, KingSett’s Senior Vice President, Office.

KingSett built five suites at Scotia Plaza prior to March 2020 and all were leased in relatively short order for five-year terms at premium rents. Then COVID hit and the office-leasing market came to a grinding halt. But when workers began returning to the office in the summer of 2020, the KingSett team decided to expand the Ready Set Go program. “We thought people who wanted office spaces now would probably be concerned about committing long-term but would still need to be in an office.”

So KingSett built out an inventory of Ready Set Go spaces across its Toronto portfolio and began leasing them up, but some things had shifted. “Now the term lengths were shorter than five years,” Petch says. “These were smaller groups who wanted to come back to the office but didn’t want to commit to a long-term scenario because nobody knew—and many firms still don’t know—what their long-term strategy will be.”

KingSett saw their occupancy rates increase and start generating cash flow for these smaller suites, “which gave us the ability to secure tenants who may not have been looking at our buildings had the spaces not been finished,” says Petch. While the program is primarily for KingSett’s smaller spaces, the landlord has built a 12,000 sq. ft. furnished suite at Atrium, part of an experiment to see what the ideal size for Ready Set Go suites should be.

Furnished suites will remain a long-term tool for KingSett, and Petch says they have expanded the program to Vancouver. And while it won’t work in every market or class of building, he sees Ready Set Go as representing the evolution of the model suite. “We’re offering a simple solution for capital avoidance and term flexibility, and hopefully that’s what helps people return to the office, knowing that there are solutions.”

Adds CBRE’s Michael Spence, who works with KingSett on its Ready Set Go program, “There is so much more choice out there at the moment, including the sublease spaces, so landlords have to be more flexible. And those that are adapting are the ones getting deals done.”


Landlords look to implement flexible office leasing options in a bid to compete with co-working

Co-working

As landlords look to implement flexible office leasing options in a bid to compete with co-working providers, co-working itself — which was shaking up the office market prior to the pandemic — has been reemerging to fill the gap and cater to tenants unsure of where their businesses will land with regards to remote work.

Coworking spaces offer companies a viable option as they figure out the future, with an agile touchdown space for its people to work - typically in an attractive and central location.

One CBRE client completed a deal with a co-working provider for 150 desks with the potential to grow to 350. “It’s basically to test out the employees’ usage, and it’s for six months with the potential for another six. It’s really to get through this next little bit and figure out what the case will be after that,” says Bhardwaj.

Co-working is also providing a viable option for larger U.S. companies gearing up to make moves north of the border but who haven’t yet secured a permanent space; they’re turning to co-working locations in order to transition into acquiring a proper physical office in the future. “They’re using co-working as a pilot project, to test things out,” says Spence. “They need a place to hang their hat and hold interviews and they can build out their office and scale their business in Canada from there. So co-working is a great in-between option for them.”

As any stock market investor will know, it’s hard to pick the top and bottom of the market. For those office tenants looking to return to work, the bottom has passed. But with landlords pivoting to build out space, create model suites and provide co-working options, there are a lot of flexible, low risk and low-cost options to facilitate a return to the office as the pandemic eases and economy ramps up.

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