The Uncertain Future of the Canadian Office Market

When COVID-19 emerged and the World Health Organization declared the outbreak a “Pandemic” on March 11, 2020, the world instantly changed. The global economy came to a screeching halt via government-mandated lockdowns and, out of necessity, the world’s service workers pivoted immediately to a work-from-home model.

This ability to digitally work on a home computer and avoid the analog “pre-COVID” world hassles of commuting to work on crowded routes led many employees and employers to ask themselves the question, “Is this a better way?” Nearly three years since the Pandemic began, the global services sector is still trying to determine a suitable response to this question, which, no doubt, will ascribe a large question mark to the fate of the office market.

Looking at the existing trends since the beginning of the Pandemic, it is clear that higher quality buildings that are more functional, desirable, and adaptable are outperforming, reflecting more resilient vacancy rates than the total Canadian office market. Perhaps a more shocking trend is that for the first time, the national vacancy rate for downtown offices has risen above the suburban equivalent.

Looking ahead, the question remains whether the Pandemic has changed work habits and business models temporarily, or is this permanent and a structural shift?

According to Google’s mobility trends, it appears the ratios of people traffic to “Workplaces” and “Transit Stations” have been recently improving relative to the depths of the Pandemic, but both categories are still 23-26% below their pre-Pandemic levels. Reinforcing this finding, Kastle Systems’ daily access data from 41,000 businesses nationwide shows 55% fewer service sector employees signing into and out of offices compared to pre-Pandemic levels. Assuming an average of the Google Mobility trends and the Kastle Barometer for workplace activity, employee utilization will be 35% lower at workplaces going forward.

If office traffic has still not fully recovered to levels seen nearly three years ago before the Pandemic began, it is fair to assume that this trend of reduced employee activity in the office is structural, or at least has further staying power.

What are the implications of potentially having significantly less people in an office on any given day? Anchoring off this 35% Work-from-Home Impairment and some key assumptions detailed in our whitepaper, the projected demand and new supply of office space over the next 5 years will likely result in Canada’s national office vacancy of 16.4%, being reduced to a more balanced 10.6% in 5 years. There are many generous assumptions that are applied here, therefore, this may be a best-case scenario for the office market. Even if it occurs, it is unlikely to result in any meaningful rental rate growth due to excess space options for tenants. The potential path to getting back to a balanced market is bracketed by a wide dispersion of outcomes – the office market is likely poised for downward repricing, but not all segments or properties will be impacted in the same way.

One thing is for certain, the next five years for the Canadian office market will look strikingly different than the previous five years.  Canada’s office market will undoubtedly evolve to meet the future needs of Canadian corporations, as the retail sector has done over many years and cycles.

Owners able to best determine which behavioural trends are structural rather than temporary and can execute adaptive strategies to capitalize on these trends will be best positioned for future outperformance in the office sector.

We invite you to learn more about this subject by reading our latest white paper.