Office buildings, malls face vacancy increase in a POST-COVID world
Even before the pandemic emptied downtown of workers, Edmonton’s office-space vacancy was at an alltime high, but the current surge of working from home is unlikely to disrupt the market in the near term, some analysts say.
“We’ve seen a lot of office vacancies but for the most part, corporate offices have higher margins, more retained earnings, and they’ve been in a better position to weather the storm than retail has,” said Chad Griffiths, a commercial real estate broker with NAI Commercial.
Just before physical distancing orders were issued in mid-march, Edmonton’s class-a office space, considered the newest and best space, had a vacancy rate of 17.9 per cent, while class-b space had a vacancy rate of 20.5 per cent, according to a Jones Lang Lasalle report. Downtown, the rate was a historically high 19.1 per cent.
Then during the second quarter, as work-from-home policies were adopted widely and businesses ordered closed, many tenants whose leases expire this year negotiated extensions, suggesting that the market is stable for the moment — although the downtown vacancy rate did rise to 19.7 per cent, according to a CBRE report at the end of June. The national average is 10.8 per cent.
“A lot of our leasing people have been having conversations with landlords about rent relief and coming up with some creative solutions like extending lease terms,” Jeff Mccammon, an Edmonton-based partner in investment sales at Cushman & Wakefield said.
“It’s worked well for both parties because the landlords get their full term and the tenants get a break when they need it.
“From a tenant perspective, some companies are going to be fine having people work remotely while others will find that they lose something without having people collaborate in the office. I don’t think we’re going to know where we’re at for the next three to six months. Employers will be letting people work from home if they’re not comfortable going back, or following safety guidelines for those who do go back to work.”
A recent report by Cushman & Wakefield found that 73 per cent of workers globally would like their employers to adopt “some level of working from home.”
However, Griffiths, the broker with NAI Commercial, is skeptical this is the end of the office as we know it. Commercial leases typically have a longer duration than residential agreements, often ranging from five to 10 years.
RETAIL BUST
Meanwhile, retailers have faced more significant financial challenges due to the pandemic shutdown, as well as the ongoing shift to online shopping.
While 57 per cent of Alberta businesses are open, only 21 per cent are matching their usual sales figures for this time of year, according to recent numbers from the Canadian Federation of Independent Business.
To comply with health orders during reopening and helping customers feel safe so retailers can start rebounding, shopping malls such as West Edmonton Mall and Southgate Centre have put in place enhanced safety measures. Floor decals and digital screens remind shoppers about physical distancing guidelines, hand sanitization stations are at mall entrances, and overnight deep cleaning help ensure public safety.
Patrons are discouraged from entering shopping centres if they have a cough, fever or difficulty breathing. Food court seating has been reduced to 50 per cent, elevator capacity is limited to two people at a time, and shoppers are asked to use a grab-and-go approach to reduce touch points.
“Retail has taken a hard hit, just because a lot of businesses have been forced to close for few months and a lot of them operate on thin margins at the best of times,” Griffiths said. “They’ve tried getting either rent relief or taken advantage of government subsidy programs but those can only carry you so far.”
Bill 23, the Commercial Tenancies Protection Act, prevents the eviction of commercial tenants who have lost more than 25 per cent of their revenue due to the pandemic, been forced to close due to public health orders, or those who would qualify for federal rental support but their landlords have not applied to the program.
About 18 per cent of retail tenants and 16 per cent of all Alberta commercial tenants failed to pay their rent in May, according to a recent Colliers Canada survey.
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