NAIOP gathered some of Toronto’s experts in Commercial Real Estate on a panel to share views on what has continued to be a hot topic throughout the pandemic, the state of the downtown office market. Moderator, Jon Ramscar from CBRE was joined by Alan Mackenzie, JLL Canada; Gordon Wadley, Dream Office REIT; and Nick Macrae, HOOPP; to reflect on 2020 and look ahead to what 2021 has in store.
It’s no surprise that the commercial office sector was one of the hardest hit this past year, with well over five million square feet of available space coming to the market. Last year at the same time, the office availability rate was at a mere 1.8%. The pandemic has certainly rocked the market. Over the course of 2020, downtown office availability rose to 7.2%.
While this may sound like doom and gloom, one thing the group agreed on is that these numbers in no way signal the demise of the office market, or of the businesses that reside in these downtown towers. Toronto is the fast-growing city in North America, so an increase in availability doesn’t necessarily result in a “tenant market.” This past year, companies put their business continuity plans into high gear and experts agree most were successful. The year signified a true marriage between landlords and their tenants – a partnership where they relied on each other, supported one another, and planned for their future together. Landlords had to be strategic when it came to mitigating risks for their tenants and empathetic to new payment arrangements, while tenants had to adjust KPIs, reallocate staff, and most of all really put their faith in their landlords and take a long-term view of their businesses.
It’s important to note that while many businesses packed up and went home for the year, it didn’t necessarily result in a vacant space. This was the year to sublet. Many coveted office spaces were scooped up by alternate companies (most notably in the tech industry), and both tenants and landlords were able to recoup a portion of their losses. Now, as more and more areas open up across the City, and people appear to be more optimistic in their decision making, it looks as though many tenants plan to reclaim their sublet space for themselves. While it may not be a year of long-term renewals or expansions, it will be a year of renewals no less, although shorter-term (1-3 years).
Perhaps what has changed most over the course of the year, and will for years to come, is an even greater commitment to health and wellness in the office sector. Sophisticated tenants will want (and be very willing) to pay top dollar to invest in healthy buildings to ensure a healthy, productive workforce. While health and wellness were certainly key priorities to landlords and tenants alike prior to 2020, 2021 has created a new definition for “A Class” building, with healthy buildings and amenities at the forefront of all decision making.
Panel participant Alan Mackenzie shared a research study conducted with 362 corporations across the globe. The study revealed which sectors were hardest hit by the WFH trend. For instance, the tech sector has 97% of its workforce working from home (only 3% in office), whereas the automotive sector has 76% (24% in office). Regardless of the industry, the study concluded that experts anticipate companies reaching 90% capacity in office by the end of 2021.
As Toronto’s vaccine plan rolls out, both landlords and tenants are hopeful for an economic bounce-back even as early as this summer, resulting from a very long year of pent-up demand. At the same time, they note we continue to face unprecedented times, and at the end of the day nobody has a crystal ball.
The office market is not dead; it will return. It’s just a matter of when.