The Canadian office market will remain soft for the next 12 to 18 months as the industry continues to adjust to the hybrid work model, the latest report from Colliers Real Estate Management Services Canada says.

In Intent to decision making in office real estate, Colliers explores how companies have adjusted to the era of hybrid work and the medium-term outlook for the model.

It reports close to 90 per cent of tenant respondents to the survey expressed satisfaction with hybrid work (although many do have caveats), noted the amount of time employees are spending each week in their offices haas risen, and predicts the national office vacancy rate will rise another percentage point before it begins to fall.

“There is a clear push to get people back into the office,” John Duda, the president of real estate management services at Colliers Canada, said during an interview with RENX. “These trends have by no means halted or stopped.

"People are still trying to figure out what they can do on average, and how people are looking at space is starting to shift as well.”

Adapting to office vacancies and hybrid work 

National office vacancy has risen from eight per cent to 14 per cent since 2020 largely driven by the pandemic and resultant shift to hybrid work. Colliers anticipates that figure to reach 15 per cent before it begins to fall at the end of 2024.

The typical vacancy rate was under 10 per cent pre-COVID, Duda said – and some Canadian markets were much tighter.

Signs of recovery are expected to show in early 2025 because of business expansions and new entrants to the market.

There is the possibility of a major economic downturn in the next 18 months, but Duda said the economy has defied the recession forecasts.

“We have not seen a rash of bankruptcies across the country, nor is there a hint that there is going to be.”

Canada’s office sector is institutionalized and disciplined, he said, tempering the fears of the worst-case scenarios.

A little over half of respondents (51 per cent) said they intend to keep the same amount of office space, consistent with results over the past two years. Only eight per cent said they anticipate needing more space.

Eighty-six per cent of tenants across all business sizes in the survey said they were satisfied with the current state of hybrid work, with only 12 per cent wanting more in-person office hours from employees and two per cent wanting more remote hours from employees.

Duda said this figure does have limitations, as it talked only to single-tenant contacts and does not cover how staff view hybrid work versus management.

The sector is seeing the impact of employer return-to-work mandates. Employees are now in the office for three days, on average, per week compared to 2.5 days in Q2 2022.

The downsides of lacking physical connection in an office setting have became too pronounced to ignore, Duda said.

He referenced his own experience seeing frayed communication between co-workers, disconnection from peers and a decline in their understanding of their business. Training from home is more difficult and invaluable mentorship for newcomers is severely limited.

Lease renewals and opposition to open offices

The report found every extra day people are in the office significantly increases the likelihood for a company to renew its building lease(s).

Companies are 10 percentage points more likely to renew their lease for every additional day a majority of employees work at the office – from approximately 50 per cent when employees are at work two days per week, to over 80 per cent when thhey are in the office full-time.

Firms are most likely to keep their current square footage if employees work at the office at least four days per week.

Duda said if mandates reach four days, then it is “impossible to reduce your space, because at that point you have so many people and if they’re only in four days, well, you still need those seats.”

A surprising fact for Duda was that open-concept spaces are a big detractor to getting people back into offices.

Employees seem to prefer private offices: tenants with private offices covering close to 40 per cent of their overall space had the most employees working at the office one day per week, while those with closer to 50 per cent private offices were more likely to have employees working at the office five days per week.

It corroborates a previous Colliers report which found private spaces would keep employees in the office for an average of four extra hours each week.

“On a very practical level, if you’re working from home, you’re used to privacy, you don’t have distractions in general, you can put your head down and do work,” Duda said, but if you return to the office and find a packed open office, distractions amplify.

Office classes and their locations

Duda also noted a major difference in vacancy among the different classes of office space.

Most strikingly, C-class assets outperformed A- and B-class offices in virtually every major city market.

Small businesses in class-C assets have virtually all their employees back in offices, while large businesses in class-A assets still have many employees working from home.

“Who would have thought C-class would be outperforming A-class?” Duda said.

In general, however, AAA assets are expected to continue to perform well, but A- and B-class offices a kilometre or more from a transit hub could struggle more in the short term, Duda predicts.

With the pandemic’s impact softening, suburban offices held up but still saw a decline.

The short-term prognosis for office trends

Colliers also analyzed how environmental, social and governance (ESG) policies impact interest in office space, due to its increasing importance within the commercial real estate industry.

Fewer than one-in-three tenants (29 per cent) on average said they would pay a premium of up to eight per cent for a carbon-neutral building, which Duda found surprising.

“The desire to have something related to ESG at the asset level is very small,” he noted, though he anticipates the focus on ESG to increase in the future.

Duda expects more competition for tenants in the next six to 12 months because most offices have vacancy, inciting bigger inducements for tenants and landlords attempting to keep base rates up.

As for major markets, Toronto’s steady economic growth, driven by tech companies, will boost the need for space, he said.

Duda found great irony in tech companies pushing for office space, as they were the earliest adopters for work-from-home and yet now want a return to offices.

Such a move, like Zoom calling its workers back to offices, shows the importance of the asset class, according to Duda.

Wild cards such as a productivity decline in Canada and record-high immigration affecting the employee-employer balance can also alter office vacancy trends.