post-pandemicoutlook
UNCONVENTIONAL RECESSION Projected Rapid Recovery Comes With New Context for Office Demand By Barbara Carss AN INFLUX of new office supply was always expected to shake up the status quo in Toronto’s downtown commercial r e a l e s t a t e m a r k e t g ive n t h a t approximately two-thirds of the more than 8 million square feet of space cu r r ent ly u nd e r c on st r uct ion is already preleased. However, prospects for backfilling were perhaps viewed with less trepidation entering 2020 when the downtown Class A vacancy rate floated around 2%. A year of pandemic-related upheaval, which saw a fourfold increase in sublet space and the Class A vacancy rate climb to 7.3% by spring of 2021 now ha s com mercia l la nd lord s more ner vously contemplating dema nd trends as many tenants look to retrench or at least reassess their future space needs. Although the source of this uncertainty may be extraordinary, 16 April/May 2021 | Canadian Property Management
industry veterans note the scenario itself is far from novel. “Too much new supply coming at the wrong time has always been the office sector’s Achilles heel,” Paul Morassutti, Vice Chair, Valuation and Advisory Services, with CBRE Canada, reflected during a recent online presentation accompanying the release of the firm’s 2021 market forecast. CBRE’s 2020 fourth quarter statistics for 10 major Canadian markets show that the vast proportion of in-progress office space is slated for Toronto, Vancouver and Montreal, with Toronto host to 9.1 million square feet or slightly more than half of what’s under construction. Toronto’s share of new downtown office space is even higher, representing more than 67% of downtown construction nationwide and equivalent to about 10% of the city’s existing downtown office inventory.
Vancouver has 61% less space under construction, but it’s set to make a bigger dent in the city’s smaller inventory. The approximately 3.5 million square feet of new office supply in progress is equivalent to 14.5% of the current net rentable area downtown. CBRE pegged the downtown Class A vacancy rate at 4.4% as of Q1 2021, up 20 basis points from Q4 2020 and 260 basis points from Q1 last year. With most informed analysis indicating that a portion of the pre-pandemic workforce will permanently vacate formal office accommodations, Morassutti warned there is likely to be a larger and longer-lasting glut than investors envisioned 12 to 18 months ago. Even with no new supply pending and complete employment recovery, economic growth and job creation would be needed to attain pre-pandemic occupancy levels. CBRE’s modelling concludes the dual impact of off-site work and new supply
