Why another challenging year could be ahead for Canada's office market

  1/24/2024 |   SHARE
Posted in Commercial Real Estate by Vanguard Realty | Back to Main Blog Page

Nearly four years have passed since the COVID-19 pandemic heralded a revolution in the way Canadians work, with offices shuttering amid a wave of public health measures – but even with the pandemic fading in the rearview mirror, the future of the office space remains shrouded in uncertainty.

New figures from Statistics Canada show that the percentage of Canadians working mainly from home has fallen since the height of the pandemic, from around 40% in April 2020 to about 20% in November of last year.

Nonetheless, that’s still a sizeable jump over the 7% who worked mostly from home prior to the pandemic – and the commercial market is feeling the bite, with downtown office vacancy rates in Toronto jumping to a new record high at the end of 2023.

Fully 17.4% of downtown offices were vacant in the city as last year drew to a close, according to CBRE Group, with the vacancy rate across Canadian cities spiking to 19.4% in Q4.

Amid some optimism for the commercial mortgage market in 2024, the office space will remain an asset class that’s set to see “major pain” in the 12 months ahead, according to a leading commercial broker.

Michel Durand, president and chief executive officer at MCommercial, told Canadian Mortgage Professional that a significant adjustment taking place in the type of office expected by workers meant the professional environments of old no longer sufficed.

“The vacancies are growing and it’s throughout all markets in Canada,” he said. “Those people that want to remain in offices and the companies that want to keep an office environment, the type of environment that they want is different now.

“We need a different office environment to keep our employees wanting to come back – but that needs to be built out. So you have all this space that’s going to continue to suffer, and the lenders are going to take time to get comfortable.”

How expectations for modern office spaces are changing

Bygone days may have seen a worker spend five days a week working from a cramped, generic office space – but that’s no longer adequate, Durand said, with new office builds set to come to market bearing a design that’s radically different from those older models.

“It’s going to take a while for that to happen, for those spaces to be built out, and it’s going to be difficult to finance them,” he said. “But office is going to see a necessary evolution and transition to the type of office spaces that aren’t cubicles with just one window. That’s going to change.”

The adjustment towards those new build types might bring some further pain for the office space, according to MCommercial’s head underwriter and commercial mortgage agent Alexander Durand, who also noted that plenty of discussion in 2023 had centred around converting offices to residential space in a bid to address the housing inventory crisis in Canada.

“However, borrowers and lenders are seeing that it’s still going to be very difficult given the differences in the floorplates,” he said. “It’s going to be very expensive to change and not as practical, so it’s more challenging.

“We’re really going to be leaning on those new builds to come in to bring back the office sector to a more comfortable offering for lenders.”

Municipalities continue to face delivery challenges

Municipalities are also dragging their feet in many cases to allow zoning to be changed from office to residential, Michel Durand added, even when office owners want to convert and lenders are amenable.

That’s partly a result of bureaucracies being gummed up during the pandemic and “getting bombarded” with rezoning commercial properties as well as permitting for new builds, apartments and housing, he said.

Excessive red tape and slow processing times by municipalities have been common concerns for housing and commercial market observers seeking a solution to Canada’s chronic supply shortage.

“I think that municipalities have a willingness to [rezone], but that process of getting that done for most municipalities might [take] another year before they say, ‘OK, when requests come in, here’s how we process that. Here’s how we fast-track it,’” he said.

Source: Canadian Mortgage Professional

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