demand for downtown office space in Canada—Altus Group estimates a 10-20% decline—could result in extensive redevelopment of existing buildings for decidedly different purposes.
“What you’ll see is potential for the repurposing of these buildings, where owners go for rezoning and some redevelopment into purpose-built multi-residential or some condos,” Colin Johnston, president of research, valuation and advisory at Altus Group, told CREW. “[In Toronto] there’s some weakness in the condo market right now, but it’s more likely landlords of B- and C-class office buildings look to conversion for purpose-built apartment buildings.”
Altus Group’s latest report on the Canadian office sector determined that it’s too early to say whether downtown or suburban office space will be preferable when the COVID-19 pandemic subsides. Additionally, the report stated that, because demand for office space is projected to decline, lower quality office buildings in the country’s downtown cores will struggle to fill vacancies more than A-class buildings. Consequently, rental rates could concurrently decrease with demand.
“We definitely think lower quality buildings are going to fare worse, the B- and C-assets, because there will be a flight towards quality,” said Johnson, adding that inducements like free months’ rent could become commonplace. “People who could not afford A space before will try to upgrade from the building they’re currently in into better buildings.”
Altus Group’s report estimates there could be a 10-20% decrease in office space this year, a number that could grow in 2022, thanks to hybrid arrangements that would see employees work remotely some days and in their office other days.
“There are employees with backroom functions that don’t need to come back,” said Johnson. “Most big employers are talking about not going back into the office in any meaningful way until June or September, and we won’t have a clear picture until the latter part of this year or until next year.”
Pessimistic forecast for retail sector
Altus Group also released a report on Canada’s retail sector and its conclusions weren’t promising. Although retail properties anchored by grocery stores and pharmacies have relatively propitious outlooks, the same cannot be said for the lion’s share of brick and mortar retail outlets in Canada.
Johnson says big-box retailers and cinemas could also see structural changes in the immediate aftermath of the pandemic, but a nascent form of shopping—sidewalk pick-up, which he calls “click and collect”—could become adopted en masse, as it’s proven convenient.
“Brick and mortar locations, will they gear towards more click and collect—and that goes for grocery stores and restaurants?” said Johnson. “In the U.S. since 2016, there have been 24 enclosed malls, or almost 8 million sq ft converted from retail into distribution centres. Click and collect will remain strong in magnitude, just as we’ve seen with e-commerce, but will retailers need as much space for click and collect?”
Written by Canadian Real Estate Wealth.
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Canadian Real Estate Wealth