Office vacancies in Canada’s major centres still historically low

Amid major institutional employers’ announcements that they’re relinquishing office space in favour of remote work configurations, the trend of rising office vacancies appears persistent.

In its Q4-2020 earnings conference call earlier this month, TD Bank Group revealed that its adjusted net loss for the quarter was $213 million, significantly higher than its $178 million adjusted net loss in Q4-2019. Moreover, the bank noted that its net outlays were driven by corporate real estate optimizing costs reaching $163 million.

“This quarter, we made the decision to vacate approximately 1.2 million sq ft, or 11%, of our non-retail space related to real estate optimization plans that predate COVID,” Riaz Ahmed, TD’s chief financial officer, said during the call.

While he says the plans were in motion prior to the pandemic, the bank might have still decided to rid itself of superfluous office space after the global health crisis hit in March.

In CIBC’s Q4-2020 earnings conference call, Victor Dodig, the bank’s president, CEO and director, stated that the pandemic accelerated a real estate consolidation plan the bank previously hatched for many of its employees to work from home permanently.

“Some of the spaces are sitting vacant at this point in time with teams working from home,” added Hratch Panossian, CIBC’s senior executive vice president and chief financial officer. “There’s cleaning expenses, utilities and so forth. So there really was a positive payback for our shareholders when we looked at exiting some of the space earlier.”

Remote working is a trend that the pandemic accelerated, but according to Ray Wong, Altus Group’s vice president of data operations and data solutions, there isn’t a mass exodus from downtown office buildings. Wong noted to CREW that Richardson GMP will occupy three floors and 85,000 sq ft of office space in a 25-storey Menkes’ tower on Toronto’s waterfront, which is 65% leased.

In fact, office square footage per employee has been shrinking for decades, and Wong says that contraction is on the cusp of reversing.

“Amazon has taken up more space in Vancouver at The Post building and in downtown Toronto, so there will be a continuing shift from companies to see what the balance is and how many employees will have to come into work, as well as understanding the actual space requirements for social distancing,” said Wong.

“I don’t think social distancing will go away with the pandemic. We’ll have increased space per employee, because even the number before the pandemic was getting too densified in some of the office space, and that trend was going to happen anyway. It will be interesting to see what will happen in next 18-24 months.”

But office towers in Canada’s major downtown cores definitely have had pandemic-induced vacancies. Downtown Toronto’s office vacancy rate in Q3-2020 was 5.1%, up from 3.4% in Q3-2019; downtown Vancouver’s office vacancy rate rose to 5.3% last quarter from 2.2% in the third quarter of last year; and Montreal’s hardly changed, rising to 7.7% during the third quarter of this year from 7.6% in Q3-2019.

In fact, in a way, the pandemic has created opportunity in a tight office sector through sublets, and it pushed the net asking rate in the GTA up by 5% in Q3-2020 from a quarter earlier, according to Colliers Canada.

In some cases, it’s given tenants more negotiating power with their landlords, says Wong. For example, some landlords have agreed to lower rent in exchange for extended lease terms.

“Posted rents in the marketplace haven’t changed much, but there are more tenant incentives with one or two months’ free rent,” he said. “Office availability rates in downtown Vancouver and Toronto are still relatively low on a historical basis, so some of those adjustments are for existing tenants renegotiating some term on space they have leased. If availability rates move up in 2021, we may see price come down.”

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