Understanding office in 2024 • RENX

March 5, 2024
4 mins read
Understanding office in 2024 • RENX


GWL Realty Advisors
Image of Vancouver Centre II courtesy of GWL Realty Advisors

Office markets have pronounced cycles. Most recently, a profound structural shift to the nature of work correlated with a cyclical slowing of office demand and a wave of new supply.

The result is higher vacancy rates than we have seen since the 1990s or early 2000s in most markets, globally and in Canada. 

The normalcy of office cycles

Because of building size, development timelines and capital costs, the office asset class experiences more pronounced cycles and greater fluctuations in vacancy than other asset types. Vacancy rates typically fall during times of economic expansion when growing organizations lease more space. Eventually low availability triggers new, large developments that take years to construct. When these open the economy has often slowed, reducing demand for office space. While the new buildings tend to be pre-leased, it is often from tenants vacating older buildings, which are then slower to re-lease during a sluggish economy, resulting in higher vacancy rates.

GWL Realty AdvisorsThe structural shift in workplace trends

Every high-vacancy cycle since the 1980s has coincided with structural changes to office work brought on by new technologies, such as personal computers, high-speed internet, smart phones, cloud computing, and finally powerful laptop machines with quality video-conferencing options.

The biggest difference between pre- and post-COVID office work is the final embrace of being fully digital. Paper is no longer king. The last fax machines are quiet as almost all contracts are edited in the cloud or via email. Digitally-signed documents—such as via “Docusign”—are now the master. Paper copies of contracts or other documents are now irrelevant–into the recycle bin they can go once the deal is done.

Removing paper has arguably impacted office demand as much or more than remote and hybrid work, although the two are related. Putting into the cloud all documents, files, software and reference materials needed to do one’s work tasks enables work from anywhere. As a result of not needing to store so much paper per person, this new era requires less office space per office worker.

Additional workplace efficiencies come from wifi-enabled laptops along with smart phones that have removed the need for physical cables and phone cords that previously tethered office workers to a single assigned desk.

GWL Realty AdvisorsAlthough COVID-19 accelerated the trends, reducing paper and becoming mobile began in the early 2000s. During these years the amount of office space leased per worker began to decline steadily, as Figure 2 illustrates. As leases expired, and technologies evolved, organizations looked to re-make their spaces often relocating and taking fewer square feet per person. Legal, accounting, and financial firms in particular could collectively shed tens of thousands of square feet across Canada previously used to store law libraries, other reference materials, case files, client ledgers, and other paper. Giving workers mobile laptops further enabled less square footage per person to be leased.

GWL Realty AdvisorsStrong office-oriented job growth through 2020 partially hid this transition to less space per worker. Office-oriented employment from 2010-2020 expanded 26% in the three largest Canadian metros, whereas total jobs only grew at 11%. Technology companies—especially those that develop software (including web applications)—grew their share of employment and office space particularly quickly. Their work often inherently requires less paper.   

The COVID-19 impact

Pre-COVID more people were working remotely occasionally or regularly. In a survey done in May of 2020, GWLRA found that 45% of downtown office workers, pre-COVID, had the option to work from home at least occasionally. Most rarely used it. COVID-19 required nearly every office worker to experiment with working from home, and most did so for months and even years. Both individuals and organizations acquired the skills and technologies to make this work. Many also learned that in-person presence has benefits. Post covid, most larger companies have asked employees to work from the office regularly, even if not five days per week. Three or more days is common, meaning most companies require enough space for all their employees, albeit often in new layout arrangements and without space for paper and clutter.  

Looking ahead

This shift to needing less space per person is a one-time structural change in office usage patterns. Within the next few years, as the last leases that allocated for vast amounts of paper end, the impact will be fully absorbed within the office markets. Continued expansion in office-oriented jobs will grow demand for office space, albeit at a lower pace than in the early 2000s.

In markets like Downtown Toronto, where the new supply wave has not finished, we anticipate elevated vacancy for longer. Vacancy historically and in this cycle fluctuates primarily with new supply waves. 

Combined, the new paperless and mobile workspace is a key reason why GWLRA Research anticipates that filling vacant space may be slower than in past cycles—each new office worker does not need as much space as in the past.  

Further implications

GWLRA is analyzing potential further implications of going mobile and digital, and using less space per person. Two possible related outcomes that could occur and we will be monitoring for: 

  1. Smaller average tenant sizes, resulting in more tenants per building.  This has the advantage of adding diversification as well as risk mitigation if leases from a variety of sectors are managed to be on different expiry cycles.
  2. More use of shorter lease terms in “turn key” space provided by the landlord. Already, GWLRA is noticing increased demand for pre-built space from smaller tenants using less than a full-floor. For tenants, this reduces the construction risk and timeline associated with building out their own space.  With workers mobile, and office layouts trending toward open plan, the same suite can work for a wide range of tenants over time.

Office space is changing. Demand for it is not disappearing. GWLRA is confident in the office asset class long-term and working with current and potential tenants to transform our office spaces into the places that will work for them.



Source link

curationteam

Curation Team will curate content from different sources and present for you. We will not edit any content. Source link is provided for the source from where its received .

Leave a Reply

Your email address will not be published.

Illegal dwellings near Butler Palace Colony demolished
Previous Story

Illegal dwellings near Butler Palace Colony demolished

Architectural Digest logo
Next Story

The 2024 Pritzker Architecture Prize Goes to Riken Yamamoto

Latest from Blog