When non-essential workers went on Work from Home in March of 2020, many left snacks and personal items in their desks, thinking that the situation would be temporary, probably lasting maybe one month or two. Little did they know that over a year later, those workers are looking at an uncertain in-office future and a transformation of work as we know it that could have lasting ripple effects on the Real Estate market.
Now, Canada is in the midst of its public vaccination program to get citizens into the “post-COVID era” and many Canadian workers are beginning to wonder what that might look like for their workplaces. Opinion on returning to offices is quite divided. A recent survey by Robert Half found that one third of workers surveyed said they would look for a different job if they were asked to return to the office full time and 51% of respondents said they would ideally prefer a hybrid arrangement, splitting their time between home and the office, citing their new work-life balance needs while at the same time recognizing that workplace relationships are important to them to maintain.
Only 19% of respondents emphatically wanted to return to an office full time. Working from Home is more popular than even employers had initially expected. Could where you live actually affect how readily you might be to return to the office? Interestingly, there are regional differences to these responses. Price Waterhouse Cooper recently drilled down on this issue and found the area with the highest number of respondents who wanted to partially or entirely work from home was Quebec with 40% and the area with the participants who least wanted to continue work from home was Atlantic Canada, at only 26%. We’re still trying to understand why the regional differences exist.
If only 30-40% of people return to offices, and those offices are often in high rent areas like large city downtowns, will that lead to a glut of rental space on the market? Will companies keep the same space and just spread employees out? The trends point to the former rather than the latter.
This echoes what experts had predicted at the beginning of the pandemic: that Commercial Real Estate demand would crater because of the new reality: workers like working from home, and those who don’t would take up less space, meaning offices in high rent downtowns across Canada could see a mass restructuring like we’ve never seen before.
In August of last year, Real Estate experts predicted a decline of Commercial Real Estate demand of about 10-25%, according to Macleans. While the prospect of reducing square footage to save money is really appealing, early in the pandemic, companies were taking a wait-and-see approach to see if that would be offset by decreased productivity before making decisions.
However, according to Statistics Canada, Canadian workers are at least as productive as they were in the office, if not more, with 58% of workers surveyed reporting same level of productivity and 32% of workers saying they accomplished more work per hour than at the office. This appears to be one of the motivating factors for workers and employers wanting to find a way for Work from Home to continue, while reaping the savings of lower mortgages, rent, taxes and utilities from downsizing an office.
It would appear that businesses are starting to recognize these gains reflected in their bottom lines and are making Real Estate decisions accordingly. Waterloo-based tech firm OpenText has given up 50% of their office space. Where tech companies move, more established firms often follow, and being able to offer flexible work options to potential new hires might be a way to attract and retain top talent.
Multinational companies with offices in Canada such as Twitter and Microsoft have also given workers the option to work from home indefinitely. Twitter and Facebook have made Real Estate decisions to reduce their Real Estate footprint as a result, and a lot of Silicon Valley players have done the same. Large traditional multinationals are taking these cues and running with them, too. Ford announced in March it was giving employees the option to work from home permanently or work out a flexible working arrangement. Will this become an established norm by the time the majority of offices have to make a decision? It’s looking more likely.
Still, there are companies bucking the trend. Google has worked out some hybrid back-to-work plans that don’t place work from home at the centre. By analyzing the effects of work from home, they’ve been able to dissect what makes their company culture work and what doesn’t. Their primary problem is their workforce is enormous and that can make open plan offices unwieldy and distracting for employees (which home was less likely to be.) The solution? They’re calling it “de-densifying.” They are looking at ways to rotate staff in and out of their offices, which they’re not only keeping, but adding to in 2021 and 2022. Companies like JP Morgan are looking at this type of model as well, recalling their workforce for July 2021. In Canada, while Shopify has given up its real estate in the Tech Corridor of Spadina Avenue in Toronto, it has already found a new tenant: Wealthsimple, a Canadian investment start-up.
While the flexibility to work is great for office workers, there is a hidden cost to these moves. When offices shrink or move out, that has a ripple effect to the businesses that are located in high rent areas that primarily serve commuters and downtown workers. In Toronto, Montréal and Vancouver in particular, enclosed malls are seeing a cratering of foot traffic, according to Price Waterhouse Cooper. Consider the PATH in Toronto or the “Underground City” of Montréal without retail, restaurants, and services like hair salons, dry cleaners, and shoe shine and repair stands. Suddenly an entire ecosystem is depressed. On the other side of this prospect, downtown dwellers expect plenty of on demand retail, food and services. That’s part of the reason to pay higher rents and live in certain neighbourhoods. Google’s 2021 Mobility report shows that visits to retail and recreation outlets decreased by 24% in 2020-2021 (to date.) That’s enough to make it unviable for many businesses to continue to pay rent or make payroll and they won’t have much choice but to vacate. With declining options for shopping and food, people might reconsider whether it’s worth the hefty price tag to live in cities at all, leading to a depression of residential real estate too.
Some companies have seen this as an opportunity to get into highly sought after locations without waiting or entering bidding wars, which would have happened pre-pandemic. These companies are not necessarily dependent upon foot traffic as much as being close to the subway system and higher density residential. Myodetox Physical Therapy, for instance just moved into the PATH to complement their Yorkville and Markham locations. Since their business relies on membership fees, which tend to be more stable than pure retail, and their business is primarily appointment-based, this location makes a lot of sense for them. It could be the case for similarly structured businesses too, making these commercial spaces an optimal choice.
Is the exodus just a media scare or is it real? We’ve seen the beginning of the answer in the form of official government statistics. The suburban shift had been underway before COVID hit. According to Statistics Canada, people were already fleeing urban areas of cities like Toronto and Montréal between July 2019-July 2020. Prices have been driven up in suburban areas, in some cases as far flung as cities 100-130 km away, including Kitchener-Waterloo, according to CTV.
Once people began to have more flexible work options, this trend appears to have continued. Re/Max, in its 2021 forecast report expects that the suburban migration will be a trend that lasts for 2021 if not beyond that. Many have cited anecdotally that the reasons for moving aren’t purely about “cheaper” Real Estate as such, but more space, access to school districts, and a lessened need to have access to the on-demand services that city life or commuting and a rigidly 9-5 job require. Flexible work means you can get groceries at 8 am and log in to your job at 9, because you don’t have to spend an hour fighting traffic or on a train.
This migration raises some questions we may not yet have the answers to: How long can suburban markets sustain their growth with less building happening due to lumber shortages and supply chain issues, and how long can buyers continue to pay rising prices to get what they want in suburban areas before it stops making sense to move?
Another question that remains to be answered is are these moves permanent or just temporary? A study by Pew of US Postal Service data gives us our first glimpse into an answer. The study collected data from the Postal Service’s Change of Address cards and while the Pew Study found that nearly 1/5 of all Americans moved during COVID, permanent moves only increased 1.9% over 2019, while temporary moves increased by 26.73%. There’s not enough data to understand what percentage of moves initially deemed temporary may become permanent as work and life changes. With historically low Prime interest rates, it’s easy to see how a temporary move might become permanent once people make friends and put down roots in their new cities.
How does this suburban migration work with what we’ve seen in recent years with malls being vacated at record rates? While Box Stores and online retail continue to increase their profits, chain stores who have historically relied on malls for their livelihoods have been lost to what has colloquially been called the “retail apocalypse”
What will become of the high ticket item retail rental spaces that malls are comprised of? A new book offers a clue. The book, Retrofitting Suburbia, written by Ellen Dunham Jones, an architect and urbanist, posits that the next big trend for abandoned malls and office space will be retrofitting them for spaces that are more needed, namely multi-generational family homes and other kinds of housing which are lacking in the traditionally cookie cutter single family detached suburbs. This means that there will likely be a need for smaller, local retail, likely independent retail, restaurants, and services to service those areas, meaning that the suburban idea of having to get into your car to get anything might be an idea whose time has come and gone.
We still can’t know how another layer of migration will fit into this in the future- immigration. When freedom of movement is expanded, Canada will see immigration tick up across the board, but first in its tech sector and other areas that rely heavily on immigration and have plenty of experience repatriating workers. Since the main offices of these companies tend to be in and around urban centres, that tends to mean that immigration will increase in those centres first. However, for newcomers from places like South Asia, they might gravitate toward less urban centres with higher South Asian populations and amenities, such as Brampton Ontario.
So much is still left to be known about how the Real Estate market will evolve toward the end of COVID and beyond, but with the once-in-a-generation tectonic shifts we’ve seen both before and then amplified during the COVID period, it is safe to say that our pre-COVID notions of what is urban living vs suburban living, what constitutes work, what constitutes city life, commuting, and work-life balance have all been upended and that we are unlikely to return to them fully, if at all.
What does remain constant is the market’s desire to constantly turn over, and with no end in sight to the lowest Prime lending rates in a generation, it’s unlikely that the housing market will stop being hot, though, it might cast a wider net for its heat sources. If Canada as a whole becomes a hot Real Estate market, it could have broad implications for wages, immigration, and more core societal issues. It is highly unlikely that as restrictions are lifted, the market would decline, as many who have been holding on to Real Estate may suddenly make a leap once they know they and their families are more physically safe. The remainder of 2021 and well into 2022 could very well be a wild ride.