Is the future of the office space in crisis?

Prospects for office real estate remain a 'great unknown,' research director suggests

Is the future of the office space in crisis?

Future prospects for Canada’s office market have been the subject of intense scrutiny in recent years – and its long-term health remains a “great unknown,” according to an author of a new report on the national economic outlook in 2023.

The onset of the COVID-19 pandemic saw a remote-working revolution gather pace across the country, with offices shuttered as unprecedented public health measures came into effect.

While those restrictions have long eased, there’s been little sign of a return to the same working arrangements that prevailed before the pandemic, resulting in plenty of uncertainty for leaseholders, investors and office portfolio owners, according to Keith Reading (pictured top), senior director of research at the Morguard real estate firm.

“Some tenants are saying, ‘Look, let’s go to full remote. We don’t need office space,’” Reading told Canadian Mortgage Professional. “Office space next to labour is one of the most expensive items on your balance sheet, so companies that can go full remote are doing that.

“Companies that can go hybrid are doing that. So you’ve got some downsizing that will occur over the next couple of years in the office market. At the same time, we’ve had the threat of recession hanging over us for the last little while and we’ve got high interest rates, and so if you’re a tenant looking to expand, you’re a little bit concerned about the economic outlook and any more money that you borrowed.”

What’s behind the current unrest in Canada’s office market?

The current market turbulence is partly a hangover from the pandemic and partly a result of Canada’s economic slowdown, Reading said, with interest rates having put the brakes on the economy and contributing to a spike in inflation.

Those factors are simply increasing uncertainty within the business community, he added. “And if there’s one thing that the business community wants, it’s stability. If the economy’s stable, they can concentrate on their own business.

“I think right now, there’s just too much uncertainty on two levels: there’s cyclical uncertainty with the economy, but there’s also a sort of structural change that’s going on in the office market.”

Companies are increasingly holding off on making long-term leasing decisions because of the sizeable costs involved, Reading said, with the result that many are choosing to extend for a shorter term with a view to reassessing down the line when they hope economic stability and lower interest rates will have returned.

“With interest rates being where they are, there’s a lot of hesitancy out there in the office market – not to mention companies are uncertain where their business is going longer term in this environment,” he added.

That’s likely to mean “a bit of a struggle” will continue for the office sector in the next couple of years, with medium-term stability only set to unfold by around 2025-26, according to Reading.

“That’s when you’ll see companies start to say, ‘OK, I’m more comfortable with the economic environment. Perhaps I’ll look at expansion or look at opening new lines of business.’ I just think right now, there’s too much uncertainty for a lot of office tenants.”

Coaxing employees back to the office set to present a huge challenge

A survey at the end of last year revealed that nine in 10 employers would be imposing return-to-office measures by the beginning of 2023.

Still, the conundrum of how to get employees back into the office is the main long-term challenge facing the sector, Reading said.

“I think the general theme is around how you make space an attraction to your employees so that they’ll want to come into the office more,” he said, “and that relates to a larger trend, which has been an issue for a number of years: retaining skilled employees and attracting skilled employees. How do you go about doing that?

“I think the consensus seems to be out there that your office space can really help you – and conversely, it can really hurt your efforts to attract and retain employees. So I think that’s a big one going forward as well.”

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