The office sector is still adjusting to lingering fallout from the pandemic and the effects of hybrid work policies, but savvy businesses should already be looking ahead to the next major wave of change.

That was a key message during a discussion at the recent Real Estate Forum in Toronto, which focused on what tenants want and how landlords are responding.

“Hybrid is here to stay as the cornerstone of any strong workplace strategy, and our research at C&W would tell you don't mandate, because it lowers engagement,” said Samantha Sannella, Cushman & Wakefield’s business lead for Total Workplace Americas and national managing director for Total Workplace Canada.

“People want to be where they want to be, and they want to be in exciting, interesting office buildings.”

Sannella said representatives from a company’s real estate, human resources, communications and information technology teams must be involved to make any workplace strategy successful.

She advises clients they should always be looking 10 to 15 years in the future when calculating their office space needs.

“We are in a hybrid workplace now, but we will be in a meta workplace soon,” Sannella explained. “So start to think about how AI and really insane technology is going to affect our workplaces.”

Office space is a strategic asset

Veni Iozzo, CIBC’s executive vice-president of enterprise real estate and workplace transformation, considers office space a strategic asset and not a cost centre. 

CIBC’s office footprint has dropped a bit, as it’s making more efficient use of space by emphasizing the hierarchy of work and not the hierarchy of the organization. Digitization and technology have also played important roles in increasing office efficiency, Iozzo noted.

“In most of the U.S., there is almost a manic focus on getting people back in the office,” Hines senior managing director and co-country head for Canada Avi Tesciuba said.

A location close to public transit is more critical than ever, as overcoming commuting times and removing friction from coming to the office is crucial. Tenants also want as many amenities as possible, and Tesciuba said access to the mostly underground PATH system that features more than 30 kilometres of restaurants, shopping, services and entertainment is seen as a big plus in downtown Toronto.

There’s a definite flight to quality and landlords have to be willing to look past making a profit on amenities they’re providing in order to attract and retain tenants. 

Things are looking up for the office sector

GWL Realty Advisors (GWLRA) leasing VP Devan Sloan believes the Canadian office market has reached the bottom of the cycle in terms of vacancy rates and building valuations. He expects it to outperform other asset classes during the next 24 to 36 months.

“The uncertainty is coming out of the marketplace and we're seeing more positive leading indicators that is likely going to lead to more deals,” Sloan observed. 

“We're going to see the first year in many of positive absorption in downtown Toronto and that will be great. We're seeing markets firing across the country, particularly Alberta.”

While GWLRA still believes in the strength of office buildings and has clients that feel the same way, it continues to examine its portfolio and consider what could potentially be converted or sold to recycle capital into something with better long-term prospects.

Improving existing buildings

Sloan estimates his company has spent $40 million over the past three years improving its Greater Toronto Area office portfolio, and that number will rise to about $65 million by the time it’s done.

“In assets where we have high conviction, we're invested,” Sloan said. “We're doing new lobbies, we're putting in amenities, we’re doing tenant gyms — and that's true across the country.”

Sloan is also spending more time on the retail component of office buildings, considered a tenant amenity. 

“Our owners are not numb to the fact that they've had a 15-year bull run which has been fantastic in the office space,” Sloan noted, “and now it's time where you’ve got to invest in the assets that you want to own long term.”

“We have elevated food and beverage, we have amenities, a wellness centre and a conference centre as much as possible,” Tesciuba said of his firm's properties. “We try to have outdoor spaces.” 

The intent is to make the office experience seem more like a luxury hotel or private club, and Hines is hiring hotel concierges instead of security people for its lobbies.

Technology plays a bigger role in making life easier for tenants in new buildings, and upgrades in that area can be made in older assets.

Landlords and tenants need to share values

“All these amenities are great, but the greatest amenities are people, and people like to be with people,” Iozzo said. “When we bring teams in, they like to be together and that's what's happening now.”

He noted CIBC is the anchor tenant in both Ivanhoé Cambridge and Hines' recently built 49-storey first tower at CIBC Square, the 50-storey second tower to be completed later this year, and has space in other office buildings. But, Iozzo said the company will still need room to grow in the future.

“I’m looking for landlords to have a value proposition that I can align with,” Iozzo said. “In the past, I would say it was more about the transaction. I saw everybody at the time of signing a lease and then didn't see them again until renewal. 

“Now it needs to be more of an integrated partnership. My scorecard for success in real estate is no longer just about square foot per employee, which is an important sub-component, but we also have vibrancy as a measure.”

CIBC also measures occupancy cost as a percentage of revenue, and it’s willing to pay more if it can demonstrate the value.