Appearance vs Reality: Office Space in Canada

December 5, 2022 5 Minute Read

Appearance vs Reality: Office Space in Canada

There’s plenty of gloom swirling around the office market at the moment.

So CBRE’s newly minted Chairman Paul Morassutti kicked off his panel discussion at the Toronto Real Estate Forum by asking an esteemed group of commercial landlords and workplace strategists to address what he dubbed the elephant in the room.

“What are you actually seeing in your portfolio? What are you seeing from your tenants?” Here are six takeaways from the ensuing conversation.

Real Estate Forum Panel

1. Deals are getting done

Tom Burns from Allied Properties REIT told the panel his group completed 384 office leasing deals so far in 2022, with 100 more slated to close by year’s end. About 60% of those deals have been renewals. “Activity is good,” Burns said, with tenants seeking built-out spaces in particular. “They want to spend our capital not theirs.”

Ivanhoé Cambridge’s Jonathan Pierce said the situation varies depending on the tenant’s industry. Some are increasing their space on renewal; some are downsizing; some are adjusting fixed leasing commitments and rolling some of their space into flex arrangements. “It’s a nuanced market,” he said. “Not black and white.”

The workplace is a big question mark now, added Pierce, so the onus is on landlords to create experience-driven environments “that employees will actually want to come to.”

2. Real estate is a strategic asset

So said Veni Iozzo with CIBC’s enterprise real estate and workplace transformation group. “It’s no longer about cost and only cost. Real estate is used to enable business objectives and culture. It’s not just a space to put people in.”

Her company’s new Toronto HQ, CIBC Square, is a case in point – very much an office of the future. Located atop a transit hub, it connects people via a high-tech, high-touch environment with flexible, open spaces for collaboration and activity.

Inclusive design is a top priority at CIBC Square, with features such as wider hallways to accommodate wheelchairs, and lactation suites. “It was about transforming the workplace to reflect how work gets done today.”

3. It’s about change, not a return

Mallory O’Connor of Habanero Consulting said employers must keep their finger on the pulse of what their people want and need, and appreciate that flexibility continues to have a place and “not trying to return to something that was. Lean into something that’s new with a new way of thinking. Because more instability, change and agility will be required.”

Landlords taking a head-in-the-sand approach to designing better buildings, added Morassutti “run the risk of never having another rental increase again.”

“To elevate organization performance, you need to tap into the employee experience,” O’Connor said. “You need to listen and to have a bottom-up approach. Understanding what is it like to work in their environment.

“Bringing that voice of experienced design and elevating it will help landlords stand out in a crowded market.”

4. Class B and C buildings at an inflection point

As tenants flock to newer, shinier towers, what should office landlords do with the B- and C-class buildings being left behind? 

“Temper expectations on return and value,” suggested Dream Office REIT’s COO Gordon Wadley. “If you look at B and C inventory, not just in Toronto, but in markets across Canada, it’s functionally obsolete.”

The cost of capital for funding improvements is getting higher, and so is the vacancy rate, and people don’t want to pay as much rent for these buildings.

“So there’s going to be a real inflection point over the next 24 months for these B and C class buildings in terms of occupancy and value.”   

5. ESG is Everything

While ESG (Environment, Social and Governance) has become a key focus for many firms, Allied especially, Burns told the panel that the bulk of tenants looking at his company’s buildings “hardly ask about it. They’re more interested in the amenities and the experience for their employees.”

Pierce said ESG has become a central plank of Ivanhoé’s operations. “You’re not in the game if you don’t have a strong policy and commitment to ESG. You wouldn’t get into the RFP stage.” 

Wadley pointed to Zibi, Canada’s largest net-zero carbon community, which Dream is building in Ottawa in partnership with the federal government. “We were 14 dollars net higher than the next closest proponent in the bidding process but we won the deal because they said we checked every box when it came to ESG.”

“We saw where the puck was going.”

6. Back to office mandates won’t work

Employers forcing employees back to the office a la Jamie Dimon of JPMorgan Chase will fail, the panelists agreed.

“You can’t police mandates and expect great outcomes for your business,” said O’Connor. “Flexibility has to come from clarity from leadership about what you’re trying to accomplish and where you need to go and having a conversation with your employees about how you’re going to get there.

“Listening, talking and co-creating is the way to go. Don’t mandate it. That’s bad news.”

There is a future for office space and offices users. It’s just more complicated than in the past, but possibly more rewarding for all involved when done right.

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