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Yesterday, today, tomorrow: COVID-19 office market snapshot

The desks in most Canadian office buildings sit largely empty these days, awaiting the easing of...

IMAGE: Downtown Toronto, a view looking northeast from the waterfront. (Google Street View)

Downtown Toronto, a view looking northeast from the waterfront. (Google Street View)

The desks in most Canadian office buildings sit largely empty these days, awaiting the easing of government work restrictions to slow the spread of COVID-19.

It has forced thousands of employees to work at home where feasible and has had a dramatic impact on the country’s 530-million-square-foot office market.

An April 29 Canadian Real Estate Forums webinar examined near- and longer-term implications for the sector. The panelists discussed conditions today and the challenges they are facing and also looked ahead to preparations for reopening their workplaces.

Part Two of an article examining the COVID-19 pandemic impact on Canada’s office sector. Part One focuses on co-working: Co-working takes hit, but still sees opportunity, IWG’s Berger

Webinar moderator Stefan Teague set the table by noting that as the pandemic struck, office vacancy rates were low in most markets, urban centres were densifying with new developments, and rents had been increasing.

Teague, Cushman & Wakefield‘s executive managing director and Greater Toronto Area market leader, added leasing activity was also up, though it had been slowing due to a lack of available space.

The current situation

Oxford Properties Group vice-president and head of the Toronto office Kevin Hardy said his office buildings have predominantly institutional tenants and there were minimal issues collecting rent in April.

Most of the retail tenants Hardy deals with are in downtown Toronto’s underground PATH system. He said some small and medium-sized businesses have had difficulty and some April rents were deferred. Similar conversations were happening for May.

Bank branches, pharmacies and some food and beverage retailers that were still operating as essential services in the PATH had more success than some other retailers.

Hardy said new leasing activity has definitely dropped off and there are no office tours happening, aside from some virtual tours.

Lease negotiations that began before the COVID-19 crisis are continuing, he added, and he remains optimistic about leasing activity for the rest of the year.

Dream Office REIT (D-UN-T) chief operating officer Gordon Wadley said more than 90 per cent of its office occupiers — primarily credit tenants and departments of various levels of government — paid April rent.

Street-level retail comprises six per cent of the REIT’s portfolio, however, and just 55 per cent of rents were collected from those tenants.

Wadley said the two key pillars needed now to deal with tenants are clear communication and empathy. Dream reallocated internal human resources to reach out to each tenant personally.

They discussed potential issues for the tenants and talked about the potential for rental deferrals and payment arrangements.

“We made it an absolute priority to deal with those main street tenants and independent operators first, to ensure that they have the support and a viable framework to manage the balance of their business in the hopes of taking the pressure off from a bricks-and-mortar perspective,” said Wadley.

Federal rent assistance program

Wadley expects May through July to be more difficult for rent collection. He said most building owners will carry larger accounts’ receivable balances if they participate in the federal government’s Canada Emergency Commercial Rent Assistance program.

WeirFoulds LLP executive partner Lisa Borsook, a lawyer specializing in commercial leasing and development, had hoped to have more definitive answers regarding how that program would work.

However, there’s still an “overwhelming sense of confusion” among landlords and tenants.

Borsook pointed out the “enormous amount of paperwork” that may have to be filed to be part of the program may make some landlords decide not to participate.

“Pre-COVID, most office leases didn’t provide for a lot of financial disclosure from tenants.”

While there’s been talk of another federal assistance program for larger-space occupiers, Borsook had no details about what it would entail or how it would roll out.

Working from home

Hardy said his Oxford team of about 160 has maintained surprisingly good communication while working from home, but he’s eager to get back to the office and work directly with colleagues.

“In talking to family members and friends across different industries, productivity is not even close to what it was beforehand,” said Hardy.

Wadley doesn’t believe the large number of people now working from home will have a significant long-term effect on the office market, because there’s a need for personal interaction and a desire to separate home and work.

Looking forward to when people start returning to offices, Borsook said many tenant clients are interested in their exposure to different types of employee claims in this unique environment, including: standard of care; disclosure obligations; risk mitigation; and what solutions will be provided by landlords to help mitigate risks.

Landlords seek similar answers and also want to know how they can minimize the risks associated with their various liabilities.

Considerations during the reopening phase

Borsook said matters to be considered during the reopening phase, which is beginning in several provinces, include the amount of physical distancing needed, keeping workplaces hygienic, and improving the quality of virtual meetings for employees still working remotely.

It’s also possible prospective tenants might be required to sign waivers before they’re allowed to tour a potential workspace for liability reasons.

Hardy said reconfiguring office space to decrease employee density will present an opportunity for landlords and tenants to cooperate, but it will be a very expensive process.

Wadley agreed, saying there may be a need to upgrade mechanical and heating, ventilation and air-conditioning systems, as well as operations and maintenance protocols.

“Inevitably, there’s going to be a growing emphasis and serious scrutiny on cleaning programs and materials, and what your security protocols are for people coming into the building.

“We’re all going to have to step up and make sure that we’re creating a safe environment for people that are paying rent.”

Wadley added that, in a triple-net-lease environment, many of these costs will be shared by tenants.

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