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In recent years, North American cities, particularly Toronto, have witnessed a significant shift in the commercial real estate landscape, marked by increasing vacancy rates in office buildings. This trend, initially spurred by technological advancements and later accelerated by the pandemic, reflects a fundamental change in the way we work and the declining need for traditional office space.
Disappearing Office Space: By the Numbers
The Decline of Traditional Office Space
Pandemic: The Catalyst for Change
The Cost of Commuting: Time and Money
Increased Worker Productivity in Remote Settings
The Impact on Commercial Real Estate
The Future of Work: A Hybrid Model
Disappearing Office Space: By the Numbers
- Office Vacancy rate in Toronto’s core rose to 17.4%
- 625,000 square feet of new space is being added from newly completed projects (CBRE Group)
- Toronto’s downtown office vacancy rate is 19.4%
- Toronto represents half of Canada’s new offices
- Developers have stopped new projects; pipeline at 6-year low
- 2.5 million square feet is being repurposed across Canada, or 0.5% of inventory
- 30 million square feet of vacant office space is available to rent in the GTA
The Decline of Traditional Office Space
The evolution of office space usage can be traced back to changes within specific industries. For instance, law firms, traditionally known for their extensive law libraries, began to digitize their resources, reducing the need for physical space. This shift towards digital resources was an early indicator of how technology could alter the physical footprint of professional workspaces.
As technology continued to advance, the reliance on physical office space diminished across various sectors. The advent of cloud computing, high-speed internet, and collaborative software tools enabled professionals to work effectively from anywhere. This technological revolution laid the groundwork for a more flexible work environment, challenging the traditional 9-to-5 office model.
Further, the office space itself has changed. Gone are the days when workers enjoyed private, high-walled cubicles that made each person feel like they had their own office. Today, office space is designed differently. Office staff are sitting at tables or small ‘hotelling’ stations meant for mobile working and go into the office to attend meetings. The open office concept is not designed to facilitate a person being in the office 40 hours a week.
Pandemic: The Catalyst for Change
The COVID-19 pandemic served as a catalyst, accelerating the transition to remote work. With lockdowns and social distancing measures in place, businesses were compelled to adopt remote working arrangements. This sudden shift revealed an unexpected truth: many jobs could be done effectively outside the conventional office setting.
The Cost of Commuting: Time and Money
An important factor in this shift is the cost of commuting, both in terms of time and money. In cities like Toronto, where many employees commute from suburbs, the daily journey to and from work can be lengthy and expensive. The time spent commuting is a significant loss of productivity, and the financial burden of transportation adds up. The pandemic-induced shift to remote work eliminated these costs, leading many to reconsider the necessity of a daily commute.
Increased Worker Productivity in Remote Settings
Contrary to the traditional belief that office environments are essential for productivity, numerous studies have shown that workers can be more productive when working remotely. A study by Prodoscore, a productivity intelligence software company, found that employee productivity increased by 47% in 2020, coinciding with the shift to remote work. Similarly, a report by Great Place to Work indicated that 87% of employees reported being equally or more productive working from home than in the office.
These findings challenge the long-held assumption that physical office presence is crucial for effective work. The flexibility afforded by remote work allows employees to create a work environment tailored to their personal productivity, free from the distractions and stress of a traditional office.
The Impact on Commercial Real Estate
The decrease in the need for physical office space has profound implications for commercial real estate. In North America, and particularly in Toronto, vacancy rates in office buildings have been steadily increasing. According to a report by CBRE Group, Toronto’s downtown office vacancy rate rose to 19.4% in the fourth quarter of 2021, a significant increase from pre-pandemic levels.
WeWork, a company that promotes shared workspace, filed for creditor protection WeWork filed for Chapter 11 bankruptcy protection from creditors, owing $18.7 billion (U.S.) in debt, with $15.1 billion in assets. WeWork has 10 office locations in Toronto. The company it plans to seek protection from Canadian creditors, via the Companies’ Creditors Arrangement Act.
Keep in mind that figures frequently understate the severity of the commercial office real estate crisis because they only cover spaces that are no longer leased. Most office leases were signed before the pandemic and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in the 10 largest business districts in the United States is still below 50 percent of its pre-COVID level, as white-collar employees spend an estimated 28 percent of their workdays at home.
With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both. And while we wrestle with the effects of distributed work, artificial intelligence could drive office demand even lower. Some pundits point out that the most expensive offices are still doing okay and that others could be saved by introducing new amenities and services. But landlords can’t very well lease all empty retail stores to Louis Vuitton and Apple. There’s simply not enough demand for such space, and new features make buildings even more expensive to build and operate.
This rise in vacancy rates poses a challenge for real estate developers and landlords, who must adapt to a market with reduced demand for traditional office spaces. Some are reimagining these spaces for alternative uses, such as residential units or mixed-use developments, while others are exploring ways to make office spaces more conducive to the needs of a post-pandemic workforce.
Impact on Office REITS
One REIT that has suffered is Slate Office REIT (SOT.UN). Slate Office REIT engages in investment in a diversified portfolio of income-producing real property investments used for office purposes. It office properties include buildings and complexes providing office space for federal and provincial governments and various service companies. The company was founded on August 27, 2012 and is headquartered in Toronto, Canada. In December 2011, Slate Office REIT traded at 18.75 a share, today in trades for just 77 cents:
Unlike other REITs, such as those focused on retirement residences like Chartwell (CSH.UN) or apartments like Minto (MI.UN) who are enjoying big increases in share price and substantial dividends (Chartwell presently pays a 5.16% dividend), those REITS in the office space sector, like Slate, are having a difficult time.
The Future of Work: A Hybrid Model
As businesses and employees adapt to the post-pandemic world, a hybrid work model is emerging as a popular solution. This model combines remote work with occasional office attendance, offering a balance between the flexibility of working from home and the collaborative benefits of in-person interactions.
The hybrid model also addresses one of the key criticisms of remote work: the potential for reduced collaboration and company culture. By allowing for periodic office attendance, businesses can maintain a sense of community and teamwork while still offering the benefits of remote work.
Conclusion
The increasing vacancy rates in office buildings across North America, particularly in Toronto, signify a fundamental shift in the way we work. Driven by technological advancements and catalyzed by the pandemic, the move towards remote work has challenged the traditional need for office space. This shift, while presenting challenges for the commercial real estate sector, offers numerous benefits, including reduced commuting costs and increased worker productivity.
As we move forward, it is clear that the future of work will be more flexible, with a hybrid model likely to become the norm. This evolution reflects a broader societal shift towards work-life balance and a reevaluation of what it means to be productive in the modern world. The office, as we knew it, is changing, and with it, our approach to work and productivity.
