Will COVID-19 lead to an exodus from crowded offices in downtown towers? Don't count on it, experts say

News.Yahoo.com
May 22, 2020

Companies with offices in tall downtown towers across Canada face big challenges related to COVID-19.

In addition to ensuring the cleanliness and safety of the workplace before employees return, there's the issue of elevator service in skyscrapers.

"At our office building, you can only have two people in an elevator and there's 550,000 square feet of people," said Glenn Gardner, a broker on the downtown Vancouver leasing team of commercial real estate firm Avison Young.

"You can wait a really long time for that elevator."

Could part of the solution to that and other pandemic-related issues include a move from downtown to the suburbs?

The pandemic is forcing many commercial tenants to reconsider their physical environment, from the amount of office space required if employees will work from home more often to issues presented by public transit and where they're located in a metropolitan area.

Ray Wong, vice-president of data operations at Altus Group, a company that provides statistics and analysis to the commercial real estate industry, said suburban offices have appeal for a number of reasons.

"The suburbs make a really interesting case because they're about half the cost of downtown office space," said Wong. "And it gets you closer to some of your workers. In the suburbs, you get a bigger bang for your buck for residential also, which could appeal to workers who have been isolating in tiny downtown condos."

Companies typically want to locate close to clients, but they also consider the needs of their workforce.

Mark Fieder, president of Avison Young Canada, said he expects some business owners will want to leave downtown cores so that employees who are concerned about COVID-19 don't have to worry about travelling to work via crowded public transit.

Looking for space

"Companies may think the best way is to take some space in the suburbs where staff can drive to work."

Fieder doesn't see a massive shift ahead, however.

"Is every tenant talking about that or planning for it?" he said. "No, I don't believe that."

Many business leaders believe a central downtown location is best, given that many employees who work in major Canadian cities live in suburbs, which could be on the far opposite side of town from other suburbs. Transit systems and highways typically connect to the centre.

Working from home over-hyped?

"The debate about suburbs versus downtown can make it sound like the Montreal Canadiens versus the Toronto Maple Leafs," said Jon Love, CEO of Kingsett Capital, a firm with investments in many major office buildings across the country, including the 68-floor Scotia Plaza in downtown Toronto.

"Just look at who's moved downtown," said Love, listing off Microsoft, Google, Telus and Deloitte in Toronto.

He also notes the two 50-storey towers CIBC is building for its new headquarters on Bay Street.

"It's not because downtown is cheaper. It's because those tenants are in the pursuit of an ecosystem that allows for enhanced collaboration, productivity and creativity."

Love sees the disruption caused by COVID as a temporary situation, and one that may not be as bad as expected.

"We're going to start off with reduced populations in all of the tall towers," he said. "And people will find the best elevator service they've ever seen."

Love also believes the working-from-home trend won't live up to the current hype.

"To me, working from home is like holding your breath--you can still survive but you can only do it for so long," he said. "It turns out that all these things, Zoom and so on, work best when everybody is doing it. But when we start to go back to the office, the appeal will start to break down."

Big companies choose the suburbs

Whether or not the shift to work from home is as strong as many are predicting remains to be seen. Canadian tech giant Shopify announced this week its workforce will "permanently work remotely." Many other firms are considering flexible arrangements where more employees work from home part-time.

But there's no question the cost of downtown space in many Canadian cities and lifestyle issues continue to boost the appeal of suburban offices.

Just north of Toronto, the city of Vaughan is booming.

During the first quarter of 2020, 656 residential and commercial building permits were issued, with a value of more than $128 million, according to Mayor Maurizio Bevilacqua's office.

Companies such as KPMG and Harley Davidson Canada have opened offices there, lured by an educated population, proximity to the international airport and a subway connection to downtown.

Relocating from downtown

PwC Canada opened an office in Vaughan in November 2019. The company's national real estate leader, Frank Magliocco, said 300 employees work there, 100 of whom relocated from the downtown Toronto office.

"I think in the past these bedroom communities didn't have any vibrancy, but what we've seen is that some of these communities have nightlife, restaurant scenes, entertainment scenes and I think people are enjoying that aspect of it."

PwC also publishes a regular report about real estate trends and has identified a shift away from urbanization.

Magliocco said although it's more pronounced in the U.S., it's growing in Canada as well.

"It's almost a reverse migration of sorts. I think people have said, 'I don't' necessarily need to be in that hustle and bustle, I'd rather be in an area where I can have some space, have a lifestyle where I can drive to work and create a vibrant community.' "

Where the action is

Fieder, of Avison Young, believes demand for downtown real estate will stay strong despite the fact that some of his clients do expect a larger segment of their workforce to spend more time working at home. Those companies are considering they may be able to reduce their downtown office space and costs.

But at the same time, there are others looking at leasing additional space.

"We had a client meeting the other day where in the longer term, because of social distancing and attention to how densely we've been packing our people in, they suggested they may need more space than they have now," said Fieder.

And because of the pandemic, there will be plenty of space available, even in downtown Vancouver and Toronto, where vacancy rates have been at record lows for some time.

The commercial real estate industry expects a significant amount of office space to come back into the market soon, but commercial real estate brokers say that won't be because of hordes of workers opting to work at home.

Instead, it's anticipated that a number of small- and medium-sized businesses simply won't survive the brutal economic conditions created by the crisis. Many will go under and have to walk away from leases.

Avison's Glenn Gardner in Vancouver compares the post-COVID era to what happened following the 9/11 attacks.

"It's a completely different event, but when 9/11 happened, people were saying nobody is going to fly again. Nobody is going to lease office space at the top of a building. Inevitably though, humans forget," he said, noting top floors remain in demand.

"I think at the end of the day, people wanted to be downtown because that's where the action was, and at some point in time, provided there's a vaccine, that's where the action is going to be again."