The effect of the pandemic on Canadian office markets has become clearer and so far suburban office isn’t a net beneficiary.
It’s not all bad news. Suburban office markets have fared slightly better than downtown centres, with nationwide suburban vacancy increasing by just 3.5% since the first quarter of 2020, compared with downtown centres, where vacancy increased 5.0% in the same period.
But predictions that the pandemic would trigger a fundamental shift away from downtown office towers and into suburban office parks have not come to pass. “I’ve seen absolutely zero evidence of that trend,” says CBRE’s Miles Kettner, a Toronto-based broker who specializes in suburban office leasing. “The only dominant trend that’s playing out is uncertainty among office tenants who still don’t know what the future holds.”
Toronto saw suburban office vacancy rise to 16.2% in the first quarter of 2021, up from 15.0% a quarter earlier. Kettner says his suburban office clients are doing deals only if they must, usually because a lease renewal looms. And those having to make decisions are often downsizing.
“The deals I’m working on, 16,000 sq. ft. is becoming 12,000 sq. ft., 20,000 sq. ft. is becoming 10,000 sq. ft. I just finished a two-year renewal because the tenant is saying they’re not sure where things are going to be in a few years' time. So everything is smaller and shorter-term.” And there has been increasing willingness among both direct landlords and sublandlords to accommodate shorter-term requirements, he notes.
That said, opportunistic users have a great chance to secure premium space in the suburbs via the sublet market. “There is better-quality space available here and it’s better term,” says Kettner. “And people don’t have to come in for just a year or two. There are lots of sublets out there for six, seven, eight years.”
Hub and spoke
In Vancouver, suburban office vacancy in the first quarter of 2021 contracted 10 bps to 6.5%, with the bulk of the action in Burnaby, which saw a 70 bps decline in vacancy. This in contrast to downtown, where there has been a consistent and gradual increase in vacancy throughout the pandemic.
In the depths of the pandemic, there was much discussion about the hub and spoke office model being the way forward for larger organizations. Hub and spoke means companies, in a bid to offer flexibility and support for a distributed workforce, have a central hub headquarters and a network of smaller regional offices, or spokes, closer to where employees live.
The hub and spoke model had been gaining traction prior to the pandemic, and CBRE’s Luke Gibson says it’s been the reality for years in Metro Vancouver, where downtown offices can be difficult to access from the suburbs because of a number of bridges and tunnels and highway congestion throughout the region. “Hub and spoke has always been here. Professional services, financial and engineering firms have been early adopters in this market, with offices downtown and branches in suburban centres like Surrey, Langley, Burnaby and Richmond.”
It’s not hard to see the appeal of suburban offices in the aftermath of the pandemic, Gibson points out. “You have low-rise buildings where you can park your car in front, walk in and up a set of stairs, and you’re at your desk, making accessibility seamless and with fewer touchpoints”
Demand has been especially strong for higher-quality improved office spaces, and Gibson, a senior vice president specializing in suburban office leasing, says his clients are recognizing the value of existing improvements. “The cost to build has jumped significantly, and tenant improvements have never been more expensive, nor the timing on permit approvals for those projects more unpredictable. So quality improved space that is on rapid transit has been leasing at a brisk pace compared to shell space, which has seen a much slower take-up”
South Shore sensation
Montreal’s South Shore office submarket has been a bright spot for suburban office leasing in that city.
It’s not pandemic concerns that are driving tenants to the South Shore. According to CBRE senior vice president David Cervantes, the area’s allure has everything to do with the construction of a light rapid transit line that will connect downtown to the airport via the South Shore, centered around the junction of Highways 30 and 10.
Three major office projects are driving absorption there: Oxford Properties’ mixed-use campus DIX30 (seen above), Solar Uniquartier and Jonxion, with more projects on the way. “The whole story of demand in that part of the South Shore centres around the creation of more robust transit and amenity in that hub,” says Cervantes. “So much so that during the pandemic there were three straight quarters of positive net leasing activity there while the rest of the South Shore had more space returned to the market than was leased.”
Cervantes believes state of the art office space on the South Shore will continue to see strong demand. “New development is a winner because tenants want quality office space, which is being significantly influenced and motivated by health and wellness concerns. People want to step into that upgraded new development envelope and it’s a way for companies to say to their employees, ‘We care about you.’
The suburban office market can’t be painted with one brush. The pandemic hasn’t caused a suburban office renaissance in Toronto, but demand can be strong outside downtown cores where geographic constraints and strong transit links increase desirability and flexibility.