David Papp Blog

Reworking Office Space in Canada Post-Pandemic

Downtown cores across the country are still dealing with the aftereffects of widespread lockdowns during the pandemic, which prompted many companies to quickly shift their workforce from downtown offices to working
from home.

This has undoubtedly disrupted the traditional office workplace as we once knew it, and it’s safe to say that today’s workforce could never have imagined or predicted the current situation. As many businesses have successfully transitioned to a hybrid work-from-home model – a model that most agree is here to stay – many people, particularly those in the commercial real estate sector, have been left wondering:

What will happen to the office class?

There have been numerous mainstream media reports on the idea of repurposing vacant buildings to address other types of housing issues, ranging from conversions to affordable housing complexes to the abolition of
homelessness. It all sounds very promising, and it could be a silver lining in an otherwise bleak and unprecedented situation.

Due to the highly competitive nature created by the surplus of available inventory, landlords are being forced to provide inducements and incentives such as lower rents or allowing for subletting in order to retain
and attract tenants.

With more vacancy, Canadian cities are seeing class movement, with higher occupancy in the AA asset class and the lower classes being the least desirable of what is currently available. Taking this into account, some operators are using this time to upgrade older assets or work toward building certifications that will make the space more appealing or efficient to operate.

Key Terms:

Class AA

A best-in-class office product with more elaborate common areas, modern construction, and building efficiencies that commands the highest rents and attracts stronger covenant tenants such as banks, governments, insurance companies, and so on. These structures are typically located near the heart of their respective markets and have easy access to major public transportation hubs. Buildings are typically larger than 750,000 square feet, with tenancies ranging from 5 to 10 years, with some inbound tenants signing 15-year leases. Occupancy levels are expected to stabilize at around 95% of comparable market net rates.

Class A

A high-performing asset with 400,000 to 700,000 square feet that is well-located and may have smaller floor plate sizes, solid amenities, and less elaborate common areas. The majority of the tenants have signed 5- to 10-year leases. Occupancy levels are expected to stabilize at around 95% of comparable market net rates.

Class B

Older office space, typically ranging from 100,000 to 250,000 square feet. These buildings are typically occupied by a diverse tenant mix but lack a large anchor tenant. This asset class has shorter lease commitments, with the average term ranging between 5 and 10 years. The average floor plate size can be much smaller.

Converting offices into Residential space

Converting older office buildings into residential space is becoming more common in Canada, especially in major cities. However, this process can be challenging as it can result in unforeseen construction costs
and restrictive floor plans that lower the efficiency of the residential build-out, which in turn can compress development yields and increase re-development risk.

Additionally, it is important to consider that while remote working and the hybrid office space model have become more prevalent during the pandemic, these trends may have less impact in smaller Canadian markets due to the size, density, and cost of real estate.